As filed with the Securities and Exchange Commission on July 9, 2015
Registration Statement No. 333-194106
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 6 TO
FORM S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF CERTAIN REAL ESTATE COMPANIES
ETRE REIT, LLC
(Exact name of registrant as specified in its governing instruments)
44 Wall Street
New York, New York 10005
Tel (212) 596-7225
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices)
Copies to:
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Jay L. Bernstein, Esq. Per Chilstrom, Esq. Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 Tel (212) 878-8000 Fax (212) 878-8375 | Justin R. Salon, Esq. David P. Slotkin, Esq. Morrison & Foerster LLP 2000 Pennsylvania Ave N.W., Suite 6000 Washington, D.C. 20006 Tel (202) 887-1500 Fax (202) 785-7567 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, or SEC, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, Preliminary Prospectus Dated July 9, 2015
PRELIMINARY PROSPECTUS
11,500,000 Shares
ETRE REIT, LLC
Series A-1 Common Shares
Representing Series A-1 Limited Liability Company Interests
We are a newly organized Delaware series limited liability company that has been formed to permit public investment in individual commercial real estate properties, each of which will be held by a separate property-owning subsidiary owned by a separate series of limited liability company interests, or Series, that we intend to establish. As a Delaware series limited liability company, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series are segregated and enforceable only against the assets of such Series, as provided under Delaware law. We intend for each Series to elect and qualify to be taxed as a separate real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with the first taxable year ending after the completion of the initial public offering of shares of such Series.
This is the initial public offering of our Series A-1 common shares, which represent limited liability company interests of Series A-1 of our company, or the A-1 Series. We currently anticipate that the initial public offering price will be $15.00 per Series A-1 common share. Prior to this offering, there has been no public market for our Series A-1 common shares. We have applied to have our Series A-1 common shares listed on the NASDAQ Capital Market, or the NASDAQ, under the symbol "ESSF."
We are selling only our Series A-1 common shares in this offering. The A-1 Series has been established to allow persons who acquire Series A-1 common shares in this offering to own an interest in State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts, or the Property. Following the contribution transactions described herein, the A-1 Series will own an indirect 48.87% interest in the Property through a general partner interest in ETRE Property A-1, L.P., or the Property A-1 Subsidiary. Concurrently with the closing of this offering, we will sell 33,333 Series A-1 common shares (representing additional net proceeds of $500,000 based on the anticipated initial public offering price) in a concurrent private placement to our Administrative Agent at a price per share equal to the public offering price per share in this offering.
Concurrently with the closing of this offering, the A-1 Series and the Property A-1 Subsidiary will enter into an administrative services agreement with ETRE Asset Management, LLC, a Delaware limited liability company, or our Administrative Agent, a subsidiary of ETRE Financial, LLC, which, together with its subsidiaries, we refer to as ETRE. In addition, upon the closing of the contribution transactions, the Property A-1 Subsidiary will engage FPG Lincoln Manager, LLC, or the Asset Manager, an affiliate of Fortis Property Group, LLC, or Fortis, as asset manager for the Property.
We intend for the A-1 Series to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with its taxable year ending December 31, 2015. To assist the A-1 Series in qualifying as a REIT, our operating agreement, subject to certain exceptions, contains restrictions on the number of Series A-1 common shares and the number of shares of the A-1 Series that a person may own. Our operating agreement provides that generally no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, either more than 9.8% in value or in number, whichever is more restrictive, of the outstanding Series A-1 common shares, or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of the A-1 Series. See "Description of Series A-1 Common Shares—Operating Agreement and Bylaws—Restrictions on Ownership and Transfer."
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act. Investing in our Series A-1 common shares involves risks. See "Risk Factors" beginning on page 18 of this prospectus for a discussion of the material risks of investing in our Series A-1 common shares.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
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| Per Series A-1 Common Share | Total |
Public offering price................................................... | $ | $ |
Underwriting discounts and commissions(1)................ | $ | $ |
Proceeds, before expenses, to the A-1 Series.............. | $ | $ |
(1) See "Underwriting" on page 130 of this prospectus for a description of the compensation payable to the underwriters.
We have granted the underwriters the option to purchase up to an additional 1,150,000 Series A-1 common shares from us at the initial public offering price, less the underwriting discount, within 30 days after the date of this prospectus to cover over-allotments, if any.
The underwriters expect to deliver the Series A-1 common shares on or about , 2015
Joint Book-runners
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Sandler O'Neill + Partners, L.P. | Evercore ISI | Nomura |
Co-Managers
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BTIG | JMP Securities | LOYAL3 Securities | RCS Capital | SMBC Nikko |
The date of this Prospectus is , 2015
TABLE OF CONTENTS
Market Data
We use market data and industry forecasts and projections throughout this prospectus. We have obtained substantially all of this information from REIS, Inc. and Cushman & Wakefield, Inc., each a nationally recognized real estate consulting firm. In addition, we have obtained certain market and industry data from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.
Definitions
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A-1 Series | | Represents the series of ETRE REIT, LLC that will be the REIT General A-1 Partner, and which we expect will own, substantially concurrently with the completion of this offering and the concurrent private placement, a 48.87% partnership interest in the Property A-1 Subsidiary. |
Administrative Agent | | ETRE Asset Management, LLC, a Delaware limited liability company and a wholly-owned subsidiary of ETRE Financial, LLC, which will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, as well as each other Series and Property Subsidiary that we may establish in the future. |
Asset Manager | | FPG Lincoln Manager, LLC, which will provide asset management services to the Property A-1 Subsidiary. |
common shares | | Common shares of limited liability company interests in a Series. |
company | | ETRE REIT, LLC. |
concurrent private placement | | The separate private placement pursuant to which we will sell, concurrently with the closing of this offering, 33,333 Series A-1 common shares (representing additional net proceeds of $500,000 based on the anticipated initial public offering price) to our Administrative Agent at a price per share equal to the public offering price per share in this offering. |
contribution transactions | | Collectively, a series of transactions in which: (i) the A-1 Series will contribute substantially all of the net proceeds of this offering and the concurrent private placement in cash to Lincoln Street Mezz, LLC in exchange for 48.87% of the outstanding equity interests of Lincoln Street Mezz, LLC, (ii) Lincoln Street Mezz, LLC will distribute the net proceeds of this contribution to Lincoln Street Holdings, LLC, (iii) Lincoln Street Mezz, LLC will convert into the Property A-1 Subsidiary, and (iv) the REIT General A-1 Partner, the Fortis General A-1 Partner and the Limited A-1 Partner will enter into the limited partnership agreement for the Property A-1 Subsidiary. |
Delaware LLC Act | | Delaware Limited Liability Company Act. |
DGCL | | Delaware General Corporation Law. |
ETRE | | ETRE Financial, LLC and its subsidiaries. |
Exchange Act | | Securities Exchange Act of 1934, as amended. |
Fortis General A-1 Partner | | Lincoln Street Manager, LLC, in its capacity as one of the two general partners of the Property A-1 Subsidiary. |
General A-1 Partners | | The Fortis General A-1 Partner and the REIT General A-1 Partner, which will be the general partners of the Property A-1 Subsidiary. |
Internal Revenue Code | | Internal Revenue Code of 1986, as amended. |
JOBS Act | | Jumpstart Our Business Startups Act of 2012. |
Limited A-1 Partner | | Lincoln Street Holdings, LLC, in its capacity as a limited partner of the Property A-1 Subsidiary. |
Limited A-1 Partner Owners | | Lincoln Street Investors, LLC, RCG State Street Boston I, LLC and RCG State Street Boston II, LLC. |
Lincoln Street Holdings Limited Partner Group | | The Limited A-1 Partner and certain of its affiliates and permitted assignees of Series A-1 OP units. |
managing member | | ETRE Financial, LLC, as the managing member of our company. |
Other Property common shares | | Common shares of the Other Property Series. |
Other Property Series | | New Series that our company intends to establish in the future to acquire and participate exclusively in the economic returns derived from interests in other real properties. |
Other Property Subsidiaries | | Consolidated subsidiaries of Other Property Series that our company intends to organize in the future to be the direct or indirect owners of real property to be acquired by such Other Property Series. |
preferred shares | | A class or series of preferred shares of limited liability company interests in a Series. |
Property | | State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts. |
Property A-1 Subsidiary | | ETRE Property A-1, L.P., a Delaware limited partnership, which we expect, substantially concurrently with the completion of this offering and the concurrent private placement, will be owned 48.87% by the A-1 Series (through a general partner interest) and 51.13% by the Limited A-1 Partner (through a limited partner interest) and which is the indirect owner of the Property through its wholly-owned subsidiary, the Property Owner. |
Property common shares | | The Series A-1 common shares and the Other Property common shares. |
Property Owner | | Lincoln Street Property Owner, LLC, which currently owns the Property and is the landlord under the office and garage lease agreements with the Tenant. |
Property Series | | The A-1 Series and the Other Property Series. |
Property Subsidiaries | | The Property A-1 Subsidiary and the Other Property Subsidiaries. |
REIT | | A real estate investment trust for U.S. federal income tax purposes. |
REIT General A-1 Partner | | The A-1 Series, in its capacity as one of the two general partners of the Property A-1 Subsidiary. |
Securities Act | | The Securities Act of 1933, as amended. |
Series | | A series of limited liability company interests of our company, the assets and liabilities of which will be segregated from each other Series pursuant to Delaware law. |
Series A-1 common shares | | Series A-1 common shares of limited liability company interests of the A-1 Series, which we are selling in this offering. |
Series A-1 OP units | | Common units of limited partner interest in the Property A-1 Subsidiary, which, in the case of the units that will be held by the Limited A-1 Partner upon the completion of the contribution transactions, will be redeemable for cash or, at the option of the A-1 Series, may be exchanged for Series A-1 common shares on a one-for-one basis, subject to certain adjustments, after (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, or (ii) January 11, 2017. |
Tenant | | SSB Realty, LLC, a subsidiary of State Street Corporation. |
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our Series A-1 common shares. You should read carefully the detailed information set forth under "Risk Factors" and the other information included in this prospectus. Except where the context suggests otherwise, the terms "company," "we," "us" and "our" refer to ETRE REIT, LLC, a Delaware series limited liability company, and each series thereof, including Series A-1, or the "A-1 Series"; references in this prospectus to the "Property A-1 Subsidiary" refer to ETRE Property A-1, L.P., a Delaware limited partnership; references in this prospectus to "our Administrative Agent" refer to ETRE Asset Management, LLC, a Delaware limited liability company and a subsidiary of ETRE Financial, LLC; and references in this prospectus to "ETRE" refer to ETRE Financial, LLC, the managing member of our company, and its subsidiaries. Unless indicated otherwise, the information in this prospectus assumes (1) the Series A-1 common shares to be sold in this offering are to be sold at an initial public offering price of $15.00 per share, (2) the sale in a concurrent private placement to our Administrative Agent of 33,333 Series A-1 common shares at a price per share equal to the public offering price in this offering without the payment by us of any placement fees or underwriting discounts, and (3) no exercise by the underwriters of their over-allotment option to purchase up to an additional 1,150,000 Series A-1 common shares.
Overview
We are a newly organized Delaware series limited liability company that has been formed to permit public investment in individual commercial real estate properties, each of which will be held by a separate property-owning subsidiary owned by a separate series of limited liability company interests, or Series, that we intend to establish. Each Series we may establish in the future will be a separate Series and not itself a separate legal entity under Delaware law. As a separate Series, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Series are segregated and enforceable only against the assets of such Series, as provided under Delaware law. We intend for each Series to elect and qualify to be taxed as a separate real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with the first taxable year ending after the completion of the initial public offering of shares of such Series.
This is the initial public offering of our Series A-1 common shares, which represent limited liability company interests of Series A-1 of our company, or the A-1 Series. We are selling only our Series A-1 common shares in this offering. The A-1 Series has been established to allow persons who acquire Series A-1 common shares in this offering to own an interest in State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts, or the Property. Following the contribution transactions described herein, the A-1 Series will own an indirect 48.87% interest in the Property through a general partner interest in ETRE Property A-1, L.P., or the Property A-1 Subsidiary. We have applied to have our Series A-1 common shares listed on the NASDAQ under the symbol "ESSF."
In connection with the contribution transactions, the A-1 Series has executed a contribution agreement with the current owners of the Property. Pursuant to this contribution agreement, the A-1 Series will use substantially all of the net proceeds of this offering and the concurrent private placement to acquire the indirect 48.87% interest in the Property, and the net proceeds of this contribution will be distributed to the current owners of the Property, who will retain an indirect 51.13% interest in the Property through a limited partner interest in the Property A-1 Subsidiary. We and the current owners of the Property negotiated contribution consideration and related payments that reflect a valuation of approximately $1.11 billion for the Property. Based on the offering price of $15.00 per share, the total equity value of the Property A-1 Subsidiary would be approximately $354.0 million, with the current owner's interest representing approximately $181.0 million and the A-1 Series' interest representing approximately $173.0 million.
Following the completion of the contribution transactions, the objective of the A-1 Series will be to maximize total returns to holders of our Series A-1 common shares through the payment of consistent cash distributions and the achievement of long-term capital appreciation in the Property.
The A-1 Series, as the REIT General A-1 Partner, Lincoln Street Manager, LLC (an affiliate of Fortis Property Group, LLC, or Fortis), as the Fortis General A-1 Partner, and Lincoln Street Holdings, LLC, as the Limited A-1 Partner, will enter into the limited partnership agreement for the Property A-1 Subsidiary. Under the terms of the limited partnership agreement, for so long as the Limited A-1 Partner and certain of its affiliates and permitted assignees (which we collectively refer to as the Lincoln Street Holdings Limited Partner Group) own at least 25% of the combined issued and outstanding common units of limited partner interest in the Property A-1 Subsidiary, or Series A-1 OP units, and Series A-1 common shares, the Fortis General A-1 Partner, generally, will manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and the A-1 Series, as the REIT General A-1 Partner, generally will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. We have structured the terms of the limited partnership agreement in this manner in order to provide both the A-1 Series and the Property's current owners (for so long as they continue to maintain a significant ownership interest in the Property) with a voice in the management of the Property's operations. In addition, a Property Oversight Committee will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates, on the one hand, and the A-1 Series and its affiliates, on the other hand, with a majority of the members of this committee being designated by our board of directors. FPG Lincoln Manager, LLC, or the Asset Manager, an affiliate of the Fortis General A-1 Partner and Fortis, will also provide asset management services to the Property A-1 Subsidiary.
ETRE Asset Management, LLC, or our Administrative Agent, a subsidiary of ETRE Financial, LLC, or ETRE, will provide certain administrative and advisory services to each of our Series and Property Subsidiaries, including the A-1 Series and the Property A-1 Subsidiary. Through our Administrative Agent, we intend to utilize and leverage the extensive expertise and network of relationships of ETRE and its management team.
We intend to elect and qualify each Series, including the A-1 Series, as a REIT under the Internal Revenue Code commencing with, in the case of the A-1 Series, its taxable year ending December 31, 2015.
The Property
State Street Financial Center
State Street Financial Center is located in Boston, Massachusetts. The 36-story office tower features approximately 1,045,106 square feet of primarily office space as well as a five-level parking garage with approximately 325,000 square feet. The Property was developed in 2003 through a collaboration among the Gale Company, State Teachers Retirement System of Ohio and a Morgan Stanley real estate fund. Originally conceived as One Lincoln Street, the Property was fully leased to SSB Realty, LLC, a subsidiary of State Street Corporation (NYSE: STT), or the Tenant, prior to its completion. The Property was named "Boston Building of the Year" by the Building Owners and Managers Association International, or BOMA, in 2003. The Property is situated in the hub of Boston's financial, corporate and retail districts.
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PROPERTY SUMMARY |
Office Rentable Square Feet | 1,008,587 |
Retail Rentable Square Feet | 16,411 |
Storage Rentable Square Feet | 20,108 |
Parking Square Feet | 325,000 |
Total Property Square Feet | 1,370,106 |
% Occupied | 100%(1) |
Average Floor Plates | 22,500 SF |
Slab to Slab Avg. Ceiling Heights | 12'7" |
Stories | 36 |
Year Built | 2003 |
(1) As of March 31, 2015 | |
The Office and Garage Leases
Upon completion of the Property, the Tenant moved into its new global headquarters, which was customized to its needs, and signed a 20-year office lease expiring on September 23, 2023 (which originally did not include the garage) with two 10-year renewal options. The Tenant subsequently entered into a garage lease with Lincoln Street Property Owner, LLC, or the Property Owner, with the same expiration date and renewal options for the five-level parking garage beneath the office tower. The current rent that the Tenant pays under the office lease is approximately $63.9 million per year. The current rent that the Tenant pays under the garage lease is approximately $5.3 million per year, adjusted annually for changes in the consumer price index. With respect to each of the office lease and garage lease, State Street Corporation entered into a guaranty with the Property Owner to guarantee the full payment and performance of the Tenant as a present and continuing guaranty of payment and not of collection. The Tenant made its own substantial investment of over $250 per square foot in the Property to ensure that all technological, safety and security needs were met.
Boston, Massachusetts Market Information
The Economy
According to REIS, Inc. reports on the Boston market published in February 2015 and May 2015, or together, the REIS Report, the latest data shows recent increases in employment growth. Household-based data from the U.S. Bureau of Labor Statistics, or the BLS, on the number of employed residents of the Boston Metropolitan Statistical Area, or MSA, including the self-employed, showed an increase of 86,850 (3.6%) from March 2014 to February 2015. The unemployment rate for February 2015 was below 5.0%, indicating full employment for the metro area. The unemployment rate fell even though the labor force increased by 63,500 (2.5%) from March 2014 to February 2015. According to data from the BLS, which do not include the self-employed, total non-farm wage and salary employment in the Boston MSA increased by 18,700 (1.1%) from March 2014 to February 2015, with an increase of 15,700 (1.0%) in the private sector over the same period.
According to the REIS Report, the city of Boston and adjacent cities are one of a limited group of metro areas attracting talented young people in large numbers. According to the Boston Globe, including those who grew up in the area and those who moved there for work or college, “Boston is home to the largest proportion of young adults of any major U.S. city, passing famously young cities such as Austin and Washington. People age 20 to 34 make up more than a third of Boston’s population, with even higher percentages in Cambridge (44.5%) and Somerville (44.0%).” The REIS Report also claims that young people account for nearly half of eligible voters, and their preferences are driving the local economy. According to the U.S. Census, Boston’s 20- to 34-year old population increased by 11.0% between 2000 and 2010, compared with New York’s 3.9% increase and San Francisco’s 3.3% decline.
As stated in the REIS Report, data continue to show solid year-over-year employment growth in Boston’s key office-based and institutional sectors. From February 2014 to March 2015, according to BLS data, the Professional and Business Services sector added 6,700 jobs (2.1%), the Information sector added 1,800 (3.3%), and the Financial Activities sector added 1,700 jobs (1.2%), all of which increased office-based employment. Over the same period, the Institutional Educational and Health Services sector added 3,400 jobs (0.9%). Among the industrial sectors, over the same period, Construction added 1,200 jobs (2.3%), and Wholesale Trade added 1,300 jobs (2.3%), while Manufacturing lost 600 jobs (0.7%), and Transportation and Utilities lost 100 jobs (2.4%).
The Boston Office Market
According to the REIS Report, the 128-million-square-foot Boston general purpose, multi-tenant office market had rental gains over the course of 2014. The office market’s strength, however, lags the growing strength of the metro Boston economy. According to Newmark Grubb Knight Frank, vacancy rates in the greater Boston office market are at 10 year lows. The vacancy rate was 13.2% as of the first quarter of 2015, according to the REIS Report, down 30 basis points year-over-year. The Class A vacancy rate was 11.3%, down 50 basis points from the prior quarter and down 70 basis points year-over-year. Class A properties are defined as tending to be the best in the market, having above average design, construction and finish, achieving higher rents, and having tenants of strong credit quality. The Class B/C vacancy rate was 15.9%, unchanged from the prior quarter, and up 10 basis points year-over-year. Class B properties are defined as tending to be in good to above average condition and commanding average rents while Class C properties are defined as tending to be in average condition, having less desirable locations and commanding below average rents.
The REIS Report states that net absorption, which means the change in occupied space during a certain time period was strong in the first quarter of 2015 for the Boston office market, with 408,000 square feet of net absorption, offsetting the negative 350,000 square feet recorded during the fourth quarter of 2014. Although no new space was added, Class A net absorption totaled 388,000 square feet in the first quarter of 2015, following 1.1 million square feet of positive absorption in 2014. Class B/C net absorption, in contrast, was negative 256,000 square feet in 2014 and positive 20,000 for the first quarter of 2015. The commercial real estate boom of the 1980s nearly doubled the metro Boston office inventory, but due to more limited development and the conversion of older buildings to residences or mixed-use properties, the inventory expanded by only 2.5% from 2004 to the first quarter of 2015. The average annual completion total over the most recent decade was slightly under 900,000 square feet. Even so, Class A space accounts for about 60.0% of the metro Boston inventory, according to the REIS Report.The REIS Report states that over the course of 2014, 2.7 million square feet of space was under construction, a substantial total compared with most of the years since 2003 but a limited amount compared with development in the 1980s and around the year 2000. Developers and lenders have been cautious because 10.8 million square feet of negative net absorption was recorded in 2001 and 2002. According to the REIS Report, Jones Lang LaSalle reports that 51.0% of the space expected to complete construction in 2015 is pre-leased.
According to the REIS Report, although occupancy in the Boston office market did not improve much in 2014, rent gains increased 3.7% over the course of 2014 to $39.03 per square foot and the average effective rent rose 3.8% to $32.40 per square foot. The fourth quarter, which had the weakest occupancy, had the strongest rent gain at 1.8% by both measures, which may be a sign of tenant pushback in the face of increasing rents. The fourth quarter average asking rent for Class A space was $47.19 per square foot, up 3.3% during 2014 and 1.7% in the fourth quarter. The Class B/C average asking rent of $27.08 per square foot was up 3.9% over the course of 2014 and 1.8% over the prior quarter.
In the first quarter of 2015, the average asking rent increased 0.5% to $39.21 per square foot, and the average effective rent rose 0.6% to $32.59 per square foot. The year-over-year gains were 3.6% for asking rents and 3.8% for effective rents, well in excess of inflation, but rents by both measures remain slightly lower than at year-end 2007 and far lower than at year-end 2000. The first quarter average asking rent for Class A space was $47.51 per square foot, up 0.6% for the quarter and 3.6% year-over-year. The Class B/C average asking rent of $27.02 per square foot was up 0.1% for the quarter and up 3.2% year-over-year. Jones Lang LaSalle reports average asking rents of $32.03 per square foot in the Boston office market, up from $31.74 per square foot the prior quarter. According to Cushman & Wakefield, Inc., or Cushman & Wakefield, the direct asking rent is $48.20 per square foot in the Boston Central Business District, up 5.3% from a year earlier, $52.52 per square foot in Cambridge, and $20.53 per square foot in the suburbs, down 1.0%.
Boston Central Business District /Back Bay
The following are statistics about the Boston Central Business District and Back Bay from the REIS Report:
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• | The 32.8-million-square-foot Boston Central Business District submarket had a first quarter 2015 vacancy rate of 9.5% and an average asking rent of $55.40 per square foot, the highest among nine submarkets, according to the REIS Report. |
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• | Net absorption totaled 197,000 square feet in the first quarter, and the vacancy rate fell 60 basis points over the quarter and140 basis points from a year earlier. The average asking rent increased 0.3% during the quarter, with the average effective rent up 0.4% to $45.37 per square foot. The year-over-year gains are 4.3% and 4.5%, respectively. |
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• | Jones Lang LaSalle puts the vacancy rate for 34.9 million square feet in the Financial District at 11.6%, with a direct asking rent at $53.86 per square foot. |
Cushman & Wakefield’s Boston Rental Rate and Vacancy Rate Trends
According to Cushman & Wakefield's Marketbeat Office Snapshot for Boston, Massachusetts published in May 2015, Cushman & Wakefield believes that Boston can expect its asking rental rate increase to average 10.1% per year for the period between the end of 2014 and 2017. The following chart outlines Cushman & Wakefield’s projections for cumulative rent increase between the end of 2014 and 2017 for Boston, the United States and other major Central Business District markets throughout the United States:
Source: Cushman & Wakefield's Marketbeat Office Snapshot for Boston, Massachusetts (May 2015)
According to Cushman & Wakefield’s Best of Boston market report published in July 2015, the city of Boston is one of the United States’ most attractive gateway cities for investment. According to Cushman & Wakefield, in addition to State Street Financial Center, there are 10 premier office towers in Boston: four located in each of the Downtown and Back Bay submarkets and two in the Seaport District submarket. Cushman & Wakefield refers to this group of office buildings as the "Class A+ set" within these three submarkets. According to Cushman & Wakefield, asking rents for this Class A+ set of properties were $71.39 as of the second quarter of 2015 with a second quarter vacancy rate of 8.0%. This compares to second quarter 2015 asking rents of $59.28 and a vacancy rate of 9.5% for all Boston Central Business District Class A office properties.
The following chart from the Cushman & Wakefield Best of Boston market report shows both historical and projected rental rates and vacancy rates for the Class A+ set of properties and all Boston Central Business District Class A office properties for the periods shown:
Source: Cushman & Wakefield's Best of Boston market report (July 2015)
Our Administrative Agent and ETRE
Our Administrative Agent is a wholly-owned subsidiary of ETRE. Pursuant to the terms of an administrative services agreement among the A-1 Series, the Property A-1 Subsidiary and our Administrative Agent, our Administrative Agent will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, as well as a management team and appropriate support personnel. These services include, among others, investor relations and shareholder communications functions for the A-1 Series and assisting the A-1 Series in preparing, reviewing and filing all reports required to be filed by it or us with the SEC, NASDAQ, the Internal Revenue Service and other regulatory agencies. See "Our Administrative Agent-Administrative Services Agreement." Our Administrative Agent will at all times be subject to the supervision and oversight of our board of directors, the Property Oversight Committee and the General A-1 Partners. We do not expect to have any employees.
Concurrently with the closing of this offering, we will sell 33,333 Series A-1 common shares (representing additional net proceeds of $500,000 based on the anticipated initial public offering price) in a concurrent private placement to our Administrative Agent at a price per share equal to the public offering price per share in this offering.
Our Administrative Agent has access to ETRE's senior management team, which has extensive experience in identifying, acquiring, financing, analyzing and managing commercial real estate investments, as well as a broad spectrum of other investments related to commercial real estate. Each member of the ETRE management team has at least ten years of commercial real estate investment experience.
ETRE is a real estate financial services and information technology company focused on facilitating the public listing of individual commercial real estate assets to improve access, liquidity and transparency in commercial real estate. ETRE was founded in 2012 by a team of real estate and technology professionals who seek to bring the benefits of the public equities market to real estate investors through an ecosystem of services that incorporate capital markets advisory, asset management, information technology and tenant credit analysis services. In particular, ETRE's capital markets advisory business seeks to enhance access to the public markets with a comprehensive due diligence process to facilitate the public listing of commercial real estate; its asset management business provides investors with information on listed securities related to real estate; and its information technology business provides a web-based proprietary system with an extensive collection of market information that provides investors with analytics technology for listed securities related to real estate.
The Asset Management Agreement and the Asset Manager
The Property A-1 Subsidiary will engage the Asset Manager, an affiliate of the Fortis General A-1 Partner and Fortis, as asset manager for the Property upon the closing of the contribution transactions.
Subject to the supervision and oversight of the General A-1 Partners and the Property Oversight Committee, the Asset Manager will be responsible for, among other duties: (1) performing all day-to-day management and administrative functions of the Property A-1 Subsidiary in respect of the Property, and (2) arranging for financings and refinancings of property-level indebtedness. At the property level, the Asset Manager will be responsible for overseeing real property operations, including tenant leasing, property financing, renovations, budgeting, cash management and insurance, and for other functions and authority delegated to it by the Property A-1 Subsidiary. In performing its services, the Asset Manager will generally be subject to any applicable restrictions and conditions regarding the activities of the Property A-1 Subsidiary set forth in our governing documents and the governing documents of the Property A-1 Subsidiary. The Asset Manager generally will not be responsible for providing construction management or oversight services or leasing agent or broker services.
Fortis is a real estate investment, operating and development company. Its real estate projects include the ownership, development and management of Class A office, multi-family residential condominiums and rentals, and industrial properties. As a vertically integrated owner and operator, Fortis employs professionals from wide-ranging real estate disciplines, including acquisitions and dispositions, property and asset management, development and construction, capital markets, legal and accounting. Fortis' principals and senior management team have invested and operated in a variety of markets through all phases of the real estate cycle and have extensive and longstanding relationships with every type of stakeholder in the real estate community, including sales and leasing brokers, private and institutional lenders and investors, and investment banks.
The Property A-1 Subsidiary will pay for the fees, and certain costs and expenses, of the Asset Manager. See "Business and Property—The Asset Management Agreement and the Asset Manager."
Property Management
Under the terms of the office lease for the Property, the Tenant has exercised its right to self-manage the building. Under this arrangement, the Tenant is responsible for janitorial, security, general management, preventative maintenance, and other enumerated building services. The Property Owner is responsible for the repair and maintenance of the roof, exterior and load bearing walls, the foundation, the floor slabs and other structural elements of the building. The Tenant must perform its property management duties in a timely, complete and professional manner consistent with the highest level of property management services provided at comparable first class buildings in the Boston Central Business District. During the time that the Tenant is assuming responsibility for such services, the Tenant is required to directly engage and pay the applicable vendors for the costs and expenses of providing the services. If the Property Owner's operating expenses fall below a certain threshold, these costs are reimbursable to the Tenant by the Property Owner. The Tenant may again choose to have the Property Owner manage the Property, upon 60 days' prior notice.
Business Strategy
The objective of the A-1 Series is to maximize total returns to holders of our Series A-1 common shares through the payment of consistent cash distributions and the achievement of long-term capital appreciation in the Property. To achieve this objective, the General A-1 Partners will direct the Asset Manager to seek to maximize the cash flow from, and increase the value of, the Property by:
•refinancing the existing loan on the Property at favorable terms prior to January 11, 2017, its scheduled maturity date;
•actively managing operating expenses; and
•improving the Property.
We expect that the Asset Manager will seek to maximize value through the active management of the Property, participating in various aspects of the operations of the Property, including marketing, operations analysis, physical design, renovation, capital improvements, tenant experience and overall strategic direction.
Our Strengths
We believe that our competitive strengths include the following:
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• | Independent Board of Directors. Shareholders of Series A-1 common shares will benefit from the oversight provided by an independent board of directors with extensive experience in the real estate, equity and debt markets. |
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• | Experienced Management Team and Advisors. Holders of Series A-1 common shares will benefit from the administrative services of ETRE Asset Management, LLC, our Administrative Agent, a subsidiary of ETRE, its experienced management team and the asset management services of the Asset Manager, an affiliate of Fortis. |
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• | Investor Accessibility. Series A-1 common shares provide accessibility for individual investors to own interests in a high-quality, single-property commercial real estate asset in the form of a listed public security. |
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• | Investor Liquidity. We have applied to have our Series A-1 common shares listed on the NASDAQ under the symbol "ESSF" in order to provide liquidity to holders of our Series A-1 common shares. |
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• | Economies of Scale Model. Our Administrative Agent will oversee our SEC reporting and compliance obligations, including as each relates to the A-1 Series, and will provide similar or additional functions for the Other Property Series, achieving economies of scale for each of the Series. |
Our Financing Strategy
The Property is currently subject to a first mortgage loan, or the loan, in the principal amount of $775.0 million that was provided by Wachovia Bank National Association and UBS Real Estate Investments, Inc. in December 2006. The loan provides for interest-only payments of approximately $3.7 million each month for 10 years, bears interest at a fixed rate of 5.66% per annum and has a maturity date of January 11, 2017. We intend for the Property Owner to refinance the loan prior to the scheduled maturity. The loan allows for defeasance prior to December 1, 2016, subject to the terms and conditions of defeasance under the loan agreement. During the three months prior to the maturity of the loan, prepayment is permitted in whole, but not in part, without defeasance or a prepayment penalty, as of the last day of the interest accrual period in which such prepayment is being made upon not less than 30, and not more than 90, day's prior written notice.
Although our governing documents contain limitations related to certain types of debt financing and cross-subsidiary guarantees, in general, these limitations do not limit the amount of indebtedness that the A-1 Series may incur, directly or through the Property A-1 Subsidiary and its subsidiaries. We expect for the A-1 Series to maintain a flexible capital structure and intend to target a ratio of outstanding indebtedness to the A-1 Series' total assets of between 50% and 70%. Our board of directors will periodically review this target and may modify or eliminate it without the approval of holders of our Series A-1 common shares.
We will consider a number of factors when evaluating the A-1 Series' level of indebtedness and making financial decisions, including, among others, the following:
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• | the interest rate of the proposed financing; |
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• | the extent to which the financing impacts the flexibility of the Asset Manager to manage the Property; |
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• | prepayment penalties, defeasance and restrictions on refinancing; |
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• | our long-term objectives with respect to the financing; |
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• | the A-1 Series' target investment returns; |
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• | the ability of the Property to generate cash flow sufficient to cover budgeted capital expenditures, tenant improvements and expected debt service payments; |
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• | our overall level of consolidated indebtedness; |
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• | timing of debt maturities; |
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• | provisions that require recourse; |
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• | corporate credit ratios, including debt service or fixed charge coverage, debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, debt to total market capitalization and debt to undepreciated assets; and |
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• | the overall ratio of fixed- and variable-rate debt. |
Summary Risk Factors
An investment in our Series A-1 common shares involves various risks. You should consider carefully the risks discussed below and under "Risk Factors" before purchasing our Series A-1 common shares. If any of the following risks occur, the business, financial condition or results of operations of the A-1 Series could be materially and adversely affected. In that case, the trading price of our Series A-1 common shares could decline, and you may lose some or all of your investment.
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• | The A-1 Series will hold an interest in a single property, a non-diversified investment. |
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• | All of the Property's revenue is derived from a single tenant and the A-1 Series' financial condition, results of operations and ability to make distributions may be materially and adversely affected by a lease termination by this single tenant or a downturn in the business of this single tenant or its guarantor. |
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• | We are employing a novel business model, which may make an investment in the A-1 Series difficult to evaluate as it is unique to the real estate industry. |
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• | We, the Asset Manager and the Fortis General A-1 Partner may not be able to successfully operate the Property or generate sufficient operating cash flows to make or sustain distributions to the holders of our Series A-1 common shares. |
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• | If the A-1 Series is unable to timely complete the contribution transactions or at all, the A-1 Series will have no immediate designated use for substantially all of the net proceeds of this offering and the concurrent private placement and we may experience delays in locating and securing an attractive alternative investment and as a result, the A-1 Series will have incurred substantial expenses without the holders of our Series A-1 common shares realizing the expected benefits. |
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• | The A-1 Series' investment, leasing and other operational policies are subject to revision from time to time in our board's discretion, which could diminish shareholder returns below expectations. |
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• | The A-1 Series' debt service obligations could adversely affect its overall operating results, may jeopardize the A-1 Series' qualification as a REIT, and could adversely affect the ability of the A-1 Series to make distributions to the holders of our Series A-1 common shares and the market price of our Series A-1 common shares. |
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• | If the A-1 Series is unable to repay any of its debt obligations in the future, it may be forced to refinance debt or dispose of or further encumber the Property, which could adversely affect distributions to the holders of our Series A-1 common shares. |
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• | We depend on our Administrative Agent for the success of each Series and upon access to ETRE's investment professionals and contractors. We may not find a suitable replacement for our Administrative Agent if the applicable administrative services agreements are terminated, or if key personnel leave the employment of ETRE or otherwise become unavailable to us. |
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• | The termination of the administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary is generally limited to cause and certain disposition events related to the Property, which may make it difficult or costly to end our relationship with our Administrative Agent in respect of the A-1 Series and the Property A-1 Subsidiary. |
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• | Potential conflicts of interest may arise among our Administrative Agent and its affiliates, on the one hand, and our company and our shareholders, on the other hand. |
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• | The Property is located in Boston, Massachusetts, and adverse economic or regulatory developments in this area could materially and adversely affect the A-1 Series. |
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• | The terms of the limited partnership agreement of the Property A-1 Subsidiary will limit the A-1 Series' ability to take actions in respect of the Property's operations that are opposed by the Fortis General A-1 Partner. |
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• | We may be unable to renew the leases of the Property, lease vacant space or re-lease space on favorable terms or at all as the leases expire, which could materially and adversely affect the A-1 Series' financial condition, results of operations and cash flow. |
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• | The bankruptcy or insolvency of the Tenant may adversely affect the income produced by the Property. |
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• | We, the Asset Manager and the Fortis General A-1 Partner may not be able to control the A-1 Series' operating costs, or the A-1 Series' expenses may remain constant or increase, even if income from the Property decreases, causing the A-1 Series' results of operations to be adversely affected. |
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• | Our shareholders do not elect or vote on our board of directors or the managing member of our company and have limited ability to influence decisions regarding the businesses of the Series, including the A-1 Series. |
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• | The Series A-1 common shareholders will have limited voting rights and will be bound by a majority vote. |
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• | Limited partners of the Property A-1 Subsidiary may vote on dispositions of the Property, and the Lincoln Street Holdings Limited Partner Group may be able to control the outcome of any property disposition submitted to a vote of shareholders and unit holders. |
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• | Potential conflicts of interest may arise among the Fortis General A-1 Partner, the Asset Manager and their affiliates, on the one hand, and the A-1 Series and our Series A-1 common shareholders, on the other hand. |
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• | Potential conflicts of interest may arise with respect to certain transactions between the Lincoln Street Holdings Limited Partner Group, which will collectively own 100% of the Series A-1 OP units in the Property A-1 Subsidiary, on the one hand, and the A-1 Series and our Series A-1 common shareholders, on the other. |
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• | We have not established a minimum distribution payment level for the A-1 Series and the A-1 Series may be unable to generate sufficient cash flows from its operations to make distributions to holders of Series A-1 common shares at any time in the future. |
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• | Failure of each Series to be classified as a separate entity for U.S. federal income tax purposes could adversely affect the timing, amount and character of distributions to a holder of Series A-1 common shares. |
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• | The failure of the A-1 Series to qualify as a REIT would subject it to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to holders of our Series A-1 common shares. |
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• | If the Property A-1 Subsidiary is treated as corporation for U.S. federal income tax purposes, the A-1 Series will cease to qualify as a REIT. |
Our Administrative Services Agreement
Concurrently with the closing of this offering, the A-1 Series and the Property A-1 Subsidiary will enter into an administrative services agreement with our Administrative Agent, a wholly-owned subsidiary of ETRE Financial, LLC. Pursuant to the terms of the administrative services agreement, our Administrative Agent will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, as well as a management team and appropriate support personnel. These services include, among others, investor relations and shareholder communications functions for the A-1 Series and assisting the A-1 Series in preparing, reviewing and filing all reports required to be filed by it or us with the SEC, NASDAQ, the Internal Revenue Service and other regulatory agencies. See "Our Administrative Agent-Administrative Services Agreement."
Subject to the supervision and oversight of our board of directors, the Property Oversight Committee and the General A-1 Partners, our Administrative Agent will be responsible for, among other duties: performing financial, accounting and public reporting services. Our Administrative Agent may subcontract any or all of its responsibilities under the administrative services agreement.
Our Administrative Agent is expected to provide similar services for each of our Series and Property Subsidiaries, and we expect that each Series that we establish from time to time and the Property Subsidiary related to such Series will enter into an administrative services agreement on similar terms and conditions.
The administrative services agreement will have an indefinite term, but may be terminated by our Administrative Agent or the A-1 Series and the Property A-1 Subsidiary under certain circumstances. The A-1 Series and the Property A-1 Subsidiary may terminate the administrative services agreement with our Administrative Agent for cause at any time with 30 days prior written notice from our board of directors and the Fortis General A-1 Partner. Unsatisfactory financial performance of the Property does not constitute "cause" under the administrative services agreement. See "Our Administrative Agent and the Administrative Services Agreement—Administrative Services Agreement."
In addition, the administrative services agreement with respect to the A-1 Series and the Property A-1 Subsidiary will be terminated following either: (a) a distribution to holders of, or redemption of, outstanding Series A-1 common shares in connection with a disposition of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary, whether held directly or through subsidiaries of the A-1 Series, or the Property A-1 Subsidiary's interest in the Property, whether held directly or through subsidiaries of the Property A-1 Subsidiary, as described under "Description of Series A-1 Common Shares-Redemptions-Redemption in Connection with Sale of the Property A-1 Subsidiary or Property"; or (b) a redemption of outstanding Series A-1 common shares pursuant to our tender offer policy as described under "Description of Series A-1 Common Shares-Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares" (which we refer to, in each case, as a "Property Sale").
The following table summarizes the fees and expense reimbursements that the A-1 Series and the Property A-1 Subsidiary will pay to our Administrative Agent:
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Type | Description | Payment |
Administrative Services Fee | $1,730,000 one-time fee upon closing of this offering; $25,000 per quarter plus 1.00% of net operating income during the prior fiscal quarter.(1) | Upon closing of this offering; thereafter, quarterly in cash. |
Administrative Sale Fee | 1.00% of total capitalization at the end of the month immediately preceding a Property Sale.(2) No administrative sale fee shall be payable to our Administrative Agent in respect of any Property Sale that occurs during the first year following the closing of this offering if the total consideration paid by the purchaser (including any indebtedness assumed by the purchaser) in connection with the disposition of the A-1 Series' interest in the Property A-1 Subsidiary or the Property or in respect of the Series A-1 common shares tendered pursuant to the purchase offer, tender offer or exchange offer related to such Property Sale, as applicable, is less than the aggregate cash contribution paid by the A-1 Series in connection with the acquisition of its general partner interest in the Property A-1 Subsidiary pursuant to the contribution transactions. | Following a Property Sale, in cash. |
Expense reimbursement | The A-1 Series and the Property A-1 Subsidiary will pay all property-level fees, costs and expenses (other than those specifically required to be borne by our Administrative Agent under the administrative services agreement). However, to the extent our Administrative Agent advances the property-level fees, costs and expenses of the A-1 Series and the Property A-1 Subsidiary, the A-1 Series and the Property A-1 Subsidiary will reimburse our Administrative Agent for such fees, costs and expenses. | Monthly in cash. |
(1)For purposes of calculating the quarterly administrative services fee, net operating income means the A-1 Series' net income during the fiscal quarter (as determined in accordance with accounting principles generally accepted in the United States, or GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of a majority of our independent directors; provided, however, that, for so long as the A-1 Series' investment in the Property A-1 Subsidiary is accounted for under the equity method, net operating income shall mean the Property A-1 Subsidiary's net income during the applicable fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, and general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of the General A-1 Partners.
(2)For purposes of calculating the administrative sale fee, total capitalization is equal to the sum of the A-1 Series' total debt, members' capital, retained earnings and noncontrolling interests in the Property A-1 Subsidiary; provided, however, that, for so long as the A-1 Series' investment in the Property A-1 Subsidiary is accounted for under the equity method, total capitalization shall be calculated as if the Property A-1 Subsidiary were a consolidated subsidiary of the A-1 Series.
Our Structure
Overview
We were formed as a Delaware series limited liability company on April 22, 2013. The A-1 Series, a separate Series of our company, was established on February 13, 2014 to allow persons who acquire Series A-1 common shares in this offering to own an indirect interest in the Property. We intend for the A-1 Series to elect and qualify to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ending December 31, 2015.
In accordance with the Delaware LLC Act, the A-1 Series is, and each other Series we may establish in the future will be, a separate Series and not itself a separate legal entity. Section 18-215(b) of the Delaware LLC Act provides that the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series shall be enforceable only against the assets of such Series and not against the assets of the limited liability company generally or any other Series. Accordingly, the assets of the A-1 Series include only its interest in the Property and the other assets held by the A-1 Series, including funds delivered for the purchase of Series A-1 common shares.
In addition, Section 18-215(c) of the Delaware LLC Act provides that a series established in accordance with Section 18-215(b) may carry on any lawful business, purpose or activity, other than the business of banking, and has the power and capacity to, in its own name, contract, hold title to assets (including real, personal and intangible property), grant liens and security interests, and sue and be sued. We intend to have each Series, including the A-1 Series, invest in a separate Property Subsidiary that will hold the interests in the property to which such Series relates, and for each Series to otherwise conduct its business, enter into contracts and hold title to assets in its own name to the extent such activities are not undertaken through the applicable Property Subsidiary.
The Property is currently owned directly by the Property Owner, a direct subsidiary of Lincoln Street Mezz, LLC. On March 27, 2015, the A-1 Series executed a contribution agreement with Lincoln Street Mezz, LLC and Lincoln Street Holdings, LLC, the parent company of Lincoln Street Mezz, LLC. This contribution agreement provides for the contribution of substantially all of the net proceeds of this offering and the concurrent private placement by the A-1 Series to Lincoln Street Mezz, LLC in exchange for 48.87% of the outstanding equity interests of Lincoln Street Mezz, LLC, subject to adjustments set forth in the contribution agreement. In connection with this contribution, Lincoln Street Mezz, LLC will distribute the net proceeds of this contribution to Lincoln Street Holdings, LLC and will convert from a limited liability company into a limited partnership and become the Property A-1 Subsidiary. In addition, the A-1 Series, Lincoln Street Manager, LLC, an affiliate of Fortis, and Lincoln Street Holdings, LLC will then enter into the limited partnership agreement for the Property A-1 Subsidiary pursuant to which the A-1 Series will be admitted as a general partner (in such capacity, the REIT General A-1 Partner), the Lincoln Street Manager, LLC will also be admitted as a general partner (in such capacity, the Fortis General A-1 Partner) and Lincoln Street Holdings, LLC will be admitted as a limited partner (in such capacity, the Limited A-1 Partner). We refer to these transactions, collectively, as the contribution transactions.
Upon the completion of this offering, the concurrent private placement and the contribution transactions, the A-1 Series, as the REIT General A-1 Partner, will own a 48.87% partnership interest in the Property A-1 Subsidiary as a general partner and Lincoln Street Holdings, LLC, as the Limited A-1 Partner, will own 12,066,667 Series A-1 OP units, which will represent a 51.13% partnership interest in the Property A-1 Subsidiary as a limited partner. The partnership interests of the REIT General A-1 Partner and the Limited A-1 Partner will together represent all of the outstanding economic interests in the Property A-1 Subsidiary. The Fortis General A-1 Partner will not have an economic interest in the Property A-1 Subsidiary. Under the limited partnership agreement of the Property A-1 Subsidiary, the A-1 Series will receive preferential distributions equal to an annualized distribution of 5% of the initial public offering price in this offering on each outstanding Series A-1 common share before distributions are paid to the limited partners.
The following chart shows our anticipated structure immediately after giving effect to this offering, the concurrent private placement and the contribution transactions:
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(1) | Reflects an aggregate of 2,000 restricted Series A-1 common shares to be granted our independent directors upon the completion of this offering and the concurrent private placement under our 2015 Non-Management Director Compensation Plan, or the 2015 Director Plan. |
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(2) | After giving effect to this offering and the concurrent private placement, approximately 48.72% of the Series A-1 common shares outstanding initially will be held by public investors in this offering. Our Administrative Agent will hold 0.14% of the Series A-1 common shares and our independent directors will hold the balance. |
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(3) | ETRE Financial, LLC is the managing member of our company, and is the managing member, and controls 100%, of ETRE Asset Management, LLC, our Administrative Agent. ETRE Financial, LLC is partially owned and controlled by its founding members, Paul Frischer and Jesse Stein, who also serve as President and Chief Executive Officer and Chief Operating Officer and Secretary of our company, respectively, and Scott Panzer, who serves as a director of our company. Mr. Frischer, Mr. Stein, and Mr. Panzer represent a majority of the members of the Board of Managers of ETRE Financial LLC. Concurrently with the completion of this offering, we will sell 33,333 Series A-1 common shares in a concurrent private placement to our Administrative Agent at a price per share equal to the public offering price per share in this offering. |
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(4) | We intend to establish additional Series in the future to hold interests in other real properties. The Series A-1 common shares being sold in this offering will not represent interests in any such future Series. |
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(5) | The 12,066,667 Series A-1 OP units held by the Limited A-1 Partner may be tendered by the Limited A-1 Partner for cash or, at the option of the A-1 Series, may be exchanged for Series A-1 common shares on a one-for-one basis, subject to certain adjustments, after (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, which is expected to occur prior to January 11, 2017, or (ii) January 11, 2017. |
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(6) | The Limited A-1 Partner is owned by Lincoln Street Investors, LLC, RCG State Street Boston I, LLC and RCG State Street Boston II, LLC. Lincoln Street Investors, LLC is an affiliate of Fortis. |
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(7) | The Limited A-1 Partner has a 51.13% economic interest in the Property A-1 Subsidiary, and the REIT General A-1 Partner has a 48.87% economic interest in the Property A-1 Subsidiary. The Fortis General A-1 Partner has no economic interest in the Property A-1 Subsidiary. |
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(8) | The Fortis General A-1 Partner is an affiliate of Fortis. |
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(9) | The Asset Manager is an affiliate of Fortis. |
Following the contribution transactions, it is expected that the Limited A-1 Partner will distribute its Series A-1 OP units to the Limited A-1 Partner Owners, which will distribute the Series A-1 OP units to their respective members, subject to the transfer restrictions set forth in the limited partnership agreement of the Property A-1 Subsidiary.
Distribution Rights of the REIT General A-1 Partner and the Limited A-1 Partner
Under the limited partnership agreement of the Property A-1 Subsidiary, the A-1 Series, in its capacity as the REIT General A-1 Partner, will receive preferential distributions equal to an annualized distribution of 5% of the initial public offering price in this offering on each outstanding Series A-1 common share before distributions are paid to the holders of the Series A-1 OP units.
Redemption Rights of Series A-1 OP Units
Series A-1 OP units in the Property A-1 Subsidiary may be tendered for cash or, at the option of the A-1 Series, may be exchanged for Series A-1 common shares on a one-for-one basis, subject to certain adjustments, after (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, which is expected to occur prior to January 11, 2017, or (ii) January 11, 2017.
Voting Rights of Series A-1 OP Units
Series A-1 OP units generally will not carry a right to vote on any matter voted on by our Series A-1 common shareholders, except that (as described in more detail below) the holders of Series A-1 OP units issued in the contribution transactions will be entitled to vote, along with our Series A-1 common shareholders as a single class, on any proposal to dispose of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's interest in the Property. These voting rights have been designed to be equivalent to the voting rights these unit holders would hold if all Series A-1 OP units held by them were exchanged for our Series A-1 common shares.
The Governance Blueprint of the A-1 Series
Overview
Our Company and the A-1 Series
Our operating agreement vests most decisions relating to the A-1 Series and its business, affairs and operations in our board of directors, including decisions relating to its investment in the Property A-1 Subsidiary, decisions related to equity and debt financing and decisions related to our Administrative Agent and the Asset Manager. ETRE Financial, LLC, as the managing member of our company, will have the sole right to nominate, elect and remove the members of our board of directors. Other than our Series A-1 common shareholders participating, together with Series A-1 OP unit holders, in decisions relating to dispositions of the Property, entity level dispositions of the Property A-1 Subsidiary and its subsidiaries and tender offers as described below under "—Board Flexibility and Shareholder Influence Over Property Dispositions", the Series A-1 common shareholders will have limited voting rights and influence over such decisions.
The Property A-1 Subsidiary
Under the limited partnership agreement of the Property A-1 Subsidiary, Lincoln Street Manager, LLC will serve as the Fortis General A-1 Partner and the A-1 Series will serve as the REIT General A-1 Partner of the Property A-1 Subsidiary.
Pursuant to the terms of the limited partnership agreement, for so long as the Lincoln Street Holdings Limited Partner Group owns at least 25% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares, the Fortis General A-1 Partner, generally, will manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property.
The A-1 Series, as the REIT General A-1 Partner, will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. These major decisions relate to, among other things, indebtedness (including the refinancing of the existing loan that encumbers the Property, subject to certain exceptions), expenditures, legal proceedings, tenant bankruptcies, leases, zoning matters, easements, environmental matters and insurance. We have structured the terms of the limited partnership agreement in this manner in order to provide both the A-1 Series and the Property's current owners (for so long as they continue to maintain a significant ownership interest in the Property) with a voice in the management of the Property's operations.
In addition, the REIT General A-1 Partner has authority over, among other things, the disposition of the Property or the Property Owner (subject to the approval rights of the holders of our Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions as described in more detail below), the issuance of securities and additional capital contributions (subject to the consent of the Fortis General A-1 Partner) and actions related to the A-1 Series' REIT qualification.
In addition, the limited partnership agreement of the Property A-1 Subsidiary will provide the Fortis General A-1 Partner with certain additional rights that will expire upon the refinancing of the loan that currently encumbers the Property. The purpose of these additional provisions is to avoid triggering any potential default under or acceleration of the Property's existing loan.
The Property Oversight Committee
Our operating agreement will establish a Property Oversight Committee which will consist of five members. The Property Oversight Committee will initially be comprised of Scott Panzer, John Gregorits, Jay Anderson, Joseph Capezza and Jonathan Landau, each of whom, other than Mr. Landau is a director of our company.
The Property Oversight Committee will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates, on the one hand and the A-1 Series and its affiliates, on the other hand. Specifically, the Property Oversight Committee will have the authority to make the final determination as to whether any action constituting a major decision that requires the REIT General A-1 Partner's approval and on which the General A-1 Partners disagree shall be taken. In addition, the Property Oversight Committee will also have the authority to make the final determination as to whether any securities issuance that requires the Fortis General A-1 Partner's consent and on which the General A-1 Partners disagree shall occur.
Prior to the refinancing of the existing loan that encumbers the Property, in the event there is a disagreement between the REIT General A-1 Partner and the Fortis General A-1 Partner, the REIT General A-1 Partner and the Fortis General A-1 Partner may jointly refer a major decision or securities issuance to the Property Oversight Committee for resolution and the Fortis General A-1 Partner may unilaterally refer a major decision or a securities issuance to the Property Oversight Committee for resolution. From and after the refinancing of the existing loan, either General A-1 Partner may refer a major decision or securities issuance to the Property Oversight Committee for a binding resolution of the matter.
Impact of Governance on Certain Transactions
As a consequence of this governance arrangement, the following transactions will require the following consents and approvals to be consummated:
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• | Sales of Additional Securities. The issuance of additional securities associated with the A-1 Series will require the approval of our board of directors. In addition, although the REIT General A-1 Partner generally has the authority to cause the Property A-1 Subsidiary to issue additional securities, prior to the refinancing of the existing loan that encumbers the Property, subject to certain limited exceptions, the REIT General A-1 Partner will not be able to permit the Property A-1 Subsidiary or its subsidiaries to issue additional securities or our company to issue additional securities associated with the A-1 Series without the consent of the Fortis General A-1 Partner. These exceptions include the issuance of securities to prevent an imminent foreclosure of the existing loan on the Property. |
Furthermore, following the refinancing of the existing loan that encumbers the Property, the REIT General A-1 Partner will not be able to permit the Property A-1 Subsidiary or its subsidiaries to issue additional securities or our company to issue additional securities associated with the A-1 Series without the consent of the Fortis General A-1 Partner. . However, if the Fortis General A-1 Partner does not provide its consent, the REIT General A-1 Partner will nevertheless be entitled to cause the Property A-1 Subsidiary or its subsidiaries to issue additional securities or our company to issue additional securities associated with the A-1 Series with the approval of the Property Oversight Committee.
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• | Refinancing of the Existing Loan. The incurrence of additional debt by the Property A-1 Subsidiary or its subsidiaries is a major decision that requires the approval of the REIT General A-1 Partner. However, the Fortis General A-1 Partner is authorized to unilaterally cause the Property A-1 Subsidiary and its subsidiaries to refinance the loan in the event a material claim or liability arises for the existing guarantors of the loan and the Property A-1 Subsidiary has not reserved an amount to fully reimburse such claim or liability. |
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• | Property Operations. In general, the Fortis General A-1 Partner will have the authority to manage the operations of Property, subject to the REIT General A-1 Partner's right to approve certain major decisions with respect to the Property. |
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• | Sale of the Property or the Property Owner. Dispositions of the Property and the Property Owner will require the approval of our board of directors and the approval of the Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions voting together on the matter, as described below under "—Board Flexibility and Shareholder Influence Over Property Dispositions". These dispositions will not require the separate consent of the Fortis General A-1 Partner. |
Board Flexibility and Shareholder Influence Over Property Dispositions
We have structured the terms of our operating agreement and our Series A-1 common share tender offer policy to give our board of directors flexibility in structuring disposition transactions and to give holders of our Series A-1 common shares and holders of Series A-1 OP units an important role in property dispositions.
Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares
Dispositions of the Property and entity level dispositions of the Property A-1 Subsidiary and its subsidiaries require the approval of our board of directors, together with holders of more than 50% of the Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) voting together on the matter; provided, however, that, for so long as the A-1 Series' partnership interest in the Property A-1 Subsidiary represents less than a majority of the outstanding partnership interests, the required approval threshold for the holders of Series A-1 common shares and Series A-1 OP units will be equal to the A-1 Series' partnership interest in the Property A-1 Subsidiary. Accordingly, following the completion of this offering, the concurrent private placement and the contribution transactions, the required approval threshold will be equal to 48.87% of the Series A-1 common shares and Series A-1 OP units voting together. The necessary vote to effect such a disposition may be met by any combination of holders of Series A-1 common shares or Series A-1 OP units. We also expect our board of directors will approve dispositions of the Property and entity level dispositions of the Property A-1 Subsidiary and/or its subsidiaries based on its determination, subject to its fiduciary duties to the A-1 Series and the holders of our Series A-1 common shares, that the disposition is advisable and in the best interests of the A-1 Series and such holders of the Series A-1 common shares.
Our tender offer policy as to the Series A-1 common shares provides that our board of directors will reject any third‑party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares unless such offer is accompanied by an offer to the holders of the Series A-1 OP units (other than the A-1 Series and certain affiliates) that offers such holders consideration per Series A-1 OP unit that is substantially equivalent in value (as determined by our board of directors) to the consideration per share offered to the holders of the Series A-1 common shares.
In addition, our tender offer policy as to Series A-1 common shares provides that, in connection with any third‑party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares and the Series A-1 OP units that has been accepted by the holders of 75% or more of the aggregate outstanding Series A-1 common shares and Series A-1 OP units (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates), our board of directors will, subject to its fiduciary duties to the A-1 Series and the holders of our Series A-1 common shares, cooperate with the successful offeror in order to facilitate the completion of the third‑party purchase offer, tender offer or exchange offer, as applicable, subject to such conditions as our board of directors may determine are necessary to enable the A-1 Series to continue to qualify as a REIT, unless our board of directors determines that our continuing qualification as a REIT is no longer in the best interests of the A-1 Series and the holders of our Series A-1 common shares. Subject to the conditions described above, following the completion of the third‑party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares and the Series A-1 OP units that have been accepted by the holders of 75% or more of the aggregate outstanding Series A-1 common shares and Series A-1 OP units (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates), we will effect a redemption as described under "—Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of our Board of Directors."
In connection with the consummation of the redemptions described above, we will delist the Series A-1 common shares from the NASDAQ or other national securities exchange on which the shares are then listed.
This tender offer policy may be amended, modified or rescinded only by the unanimous approval of our board of directors.
Immediately following the completion of this offering, the concurrent private placement and the contribution transactions, there will be 11,535,333 Series A-1 common shares and 12,066,667 Series A-1 OP units outstanding, and holders of our Series A-1 common shares will own 48.87% and holders of Series A-1 OP units will own 51.13% of the total combined outstanding Series A-1 common shares and Series A-1 OP units.
The ability to consummate such dispositions or redemptions may be restricted by the terms of the A-1 Series' outstanding indebtedness, the terms of the office lease for the Property and the rights of the holders of Series A-1 OP units under the limited partnership agreement of the Property A-1 Subsidiary.
Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of our Board of Directors.
Our operating agreement provides that we may, at any time, redeem all outstanding Series A-1 common shares in exchange for equity interests in the Property A-1 Subsidiary, a subsidiary of the Property A-1 Subsidiary and/or any other subsidiary of the A-1 Series. The purpose of this provision is to provide our board of directors with a means by which it can spin off a subsidiary that is a direct or indirect owner of the Property to holders of the Series A-1 common shares. In connection with any such spin-off, we may first convert the applicable spin-off subsidiary into a REIT for U.S. federal income tax purposes or into a Delaware statutory trust, including an entity that has an operating partnership subsidiary. Our board of directors may in the future seek to effect such a redemption if our board of directors determines it is no longer in the best interests of our company or the A-1 Series for the Property to be within our company, including in situations where ownership of the Property may adversely affect the REIT status of the A-1 Series. In addition, as described above under "—Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares," our policy is to seek to effect such a redemption following certain tender offers in respect of the Series A-1 common shares and/or the Series A-1 OP units.
Redemption in Connection with Sale of the Property A-1 Subsidiary or Property.
Our operating agreement provides that in the event of a sale, transfer, assignment or other disposition in a transaction or series of related transactions of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary, whether held directly or through subsidiaries of the A-1 Series, or the Property A-1 Subsidiary's interest in the Property, whether held directly or through subsidiaries of the Property A-1 Subsidiary, we are generally required to take one of the following actions, as determined by our board of directors in its sole discretion:
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• | Declare and pay a distribution in cash and/or in securities or other property to holders of the outstanding Series A-1 common shares; |
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• | Redeem outstanding Series A-1 common shares in exchange for cash and/or securities or other property; or |
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• | Take a combination of the above actions. |
For additional information, see "Description of Series A-1 Common Shares—Redemptions—Redemption in Connection with Sale of the Property A-1 Subsidiary or Property."
Annual Review of Corporate Governance Structure
As part of our efforts to continuously monitor and improve the corporate governance profile applicable to the A-1 Series, the nominating and corporate governance committee of our board of directors, which is comprised solely of independent directors, will, on an annual basis, conduct a review of the corporate governance structure impacting the A-1 Series, taking into account, among other factors, the corporate governance structure and approaches applicable to other Series. In addition, where the nominating and corporate governance committee determines that changes to the corporate governance structure applicable to the A-1 Series are appropriate and in the best interests of the holders of our Series A-1 common shares, the committee will recommend such changes to our board of directors for adoption and, if required, for approval of the holders of our Series A-1 common shares.
Conflicts of Interest
Conflicts of interest exist and may arise in the future as a result of the relationships between our Administrative Agent and its affiliates (including ETRE Financial, LLC, the managing member of our company), on the one hand, and us, each Series and our shareholders, on the other hand.
Our operating agreement provides that the real property, affairs and business of each Series, including the A-1 Series, will be managed under the direction of our single board of directors. ETRE Financial, LLC, as the managing member of our company, will have the sole right to nominate, elect and remove the members of our board of directors. Accordingly, shareholders will have no right to nominate, elect or remove members of our board of directors and the managing member will have complete discretion in nominating, electing or removing members of our board of directors.
We do not expect to have any employees and we will rely completely on our Administrative Agent to provide each Series and the Property Subsidiary, including the A-1 Series and the Property A-1 Subsidiary, with administrative and certain advisory services. The administrative services agreement with our Administrative Agent related to the A-1 Series and the Property A-1 Subsidiary was prepared by related parties and its terms, including fees, expense reimbursements and other amounts payable to our Administrative Agent, may not be as favorable to the A-1 Series and the Property A-1 Subsidiary as if the agreement had been negotiated at arm's length between unaffiliated third parties.
Certain of our officers and directors also serve or may serve as officers, directors or employees of ETRE as well as other ETRE sponsored vehicles and other companies unaffiliated with ETRE. Accordingly, the ability of these persons to engage in other business activities may reduce the time they spend managing our business, including the business of the A-1 Series. In addition, these persons may have obligations to those entities, the fulfillment of which might not be in the best interests of us, any Series or any of our shareholders.
Moreover, our officers and directors will serve as officers and directors for, and our Administrative Agent and ETRE's personnel will provide similar services to, any other Series we establish in the future. The A-1 Series and any other Series we establish in the future may have overlapping investment strategies and objectives, and our board of directors, our officers and our Administrative Agent may face conflicts of interest in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series. To help alleviate any perceived or actual conflicts of interest, our board of directors has adopted an inter-series relationship, conflicts of interest and opportunity allocation policy (which we refer to as the "Inter-Series Policy"), which is administered by our Administrative Agent and has been designed to govern the operating relationships among the Series, address conflicts of interest among the Series and promote the fair allocation of sale, financing, leasing and other business opportunities among the real properties owned by the different Series. See "Management—Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy." The Inter-Series Policy provides our Administrative Agent with significant flexibility with respect to its ability to make decisions and pursue actions involving conflicts of interest among the Series. Given the significant flexibility afforded our Administrative Agent to resolve such conflicts of interest, our Administrative Agent may resolve conflicts of interests pursuant to the Inter-Series Policy in a manner that holders of Series A-1 common shares may not believe to be in their best interests or in the best interests of the A-1 Series. Neither holders of our Series A-1 common shares, the A-1 Series, the Property A-1 Subsidiary, nor the General A-1 Partners will have any recourse against our Administrative Agent if our Administrative Agent satisfies its obligations under the administrative services agreement with the A-1 Series and the Property A-1 Subsidiary.
The nominating and corporate governance committee of our board of directors, which is comprised solely of independent directors, will review specific matters that our Administrative Agent believes may involve conflicts of interest and that are not otherwise addressed by the Inter-Series Policy. These conflicts of interest may include conflicts between the interests of our company or any Series, on the one hand, and the interests of our Administrative Agent and its affiliates, on the other hand. The nominating and corporate governance committee will determine whether the resolution of any conflict of interest submitted to it is fair and reasonable to us and our shareholders. If our Administrative Agent obtains such approval of any matter, such matter will be conclusively deemed to be fair and reasonable to us and our shareholders and not a breach by us of any duties that we may owe to our shareholders.
We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics prohibits our directors and executive officers, as well as employees of our Administrative Agent or ETRE who provide services to us, from engaging in any transaction that involves an actual conflict of interest with us and that is not otherwise addressed by the Inter-Series Policy without the approval of the nominating and corporate governance committee.
In addition, the Fortis General A-1 Partner, the Lincoln Street Holdings Limited Partner Group and their respective affiliates may have interests, including economic interests, that are materially different than the interests of our Series A-1 common shareholders. In particular, upon the completion of this offering, the concurrent private placement and the contribution transactions, the Lincoln Street Holdings Limited Partner Group will own Series A-1 OP units in the Property A-1 Subsidiary, but will not own any of our Series A-1 common shares. Moreover, the Fortis General A-1 Partner, as the general partner managing the day-to-day business, affairs and operations of the Property A-1 Subsidiary and the Property, will be able to exert significant influence on the Property A-1 Subsidiary, and the Lincoln Street Holdings Limited Partner Group, through the voting rights and our tender offer policy described in more detail above, will be able to exert significant influence over Property dispositions and third party purchase offers in respect of our Series A-1 common shares. One of the Limited A-1 Partner Owners, Lincoln Street Investors, LLC, is an affiliate of the Fortis General A-1 Partner, the Asset Manager and Fortis, and the other two Limited A-1 Partner Owners, RCG State Street Boston I, LLC and RCG State Street Boston II, LLC, are managed by a fund for which Jay Anderson, one of our director nominees, serves as one of the managing members of the fund's general partner. The differing interests of the Fortis General A-1 Partner and the Lincoln Street Holdings Limited Partner Group could create conflicts of interest when the A-1 Series, on the one hand, and the Fortis General A-1 Partner or the Lincoln Street Holdings Limited Partner Group, on the other hand, are faced with decisions that could have different implications for the Fortis General A-1 Partner or the Lincoln Street Holdings Limited Partner Group and the A-1 Series.
REIT Qualification
In connection with this offering, we intend for the A-1 Series to elect and qualify to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ending December 31, 2015. We believe that the A-1 Series has been organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that its intended manner of operation will enable it to meet the requirements for qualification and taxation as a REIT for its taxable year ending December 31, 2015 and thereafter. To qualify as a REIT, the A-1 Series must meet on a continuing basis, through its organization and actual investment and operating results, various requirements under the Internal Revenue Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares. If the A-1 Series fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it failed to qualify as a REIT. Even if the A-1 Series qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income or property. Any distributions paid by the A-1 Series generally will not be eligible for taxation at the preferential U.S. federal income tax rates that currently apply to certain distributions received by individuals from taxable corporations.
Restrictions on Ownership of our Series A-1 Common Shares
To assist the A-1 Series in qualifying as a REIT, our operating agreement, subject to certain exceptions, contains restrictions on the number of Series A-1 common shares and the number of shares of the A-1 Series that a person may own. Our operating agreement provides that generally no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, either more than 9.8% in value or in number of Series A-1 common shares, whichever is more restrictive, of the outstanding Series A-1 common shares, or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of the A-1 Series. Our board of directors may, in its sole discretion, waive the 9.8% ownership limit with respect to a particular holder of Series A-1 common shares; provided, however, that our board of directors may only waive the 9.8% ownership limit after it is presented with evidence satisfactory to it that such ownership will not then or in the future jeopardize the A-1 Series' qualification as a REIT.
Our operating agreement also prohibits any person from, among other things:
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• | beneficially or constructively owning Series A-1 common shares that would result in the A-1 Series being "closely held" under Section 856(h) of the Internal Revenue Code, or otherwise cause the A-1 Series to fail to qualify as a REIT; and |
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• | transferring our Series A-1 common shares if such transfer would result in our Series A-1 common shares being owned by fewer than 100 persons. |
In addition, our operating agreement provides that any ownership or purported transfer of our Series A-1 common shares in violation of the foregoing restrictions will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary and the purported owner or transferee acquiring no rights in such shares. If a transfer to a charitable trust would be ineffective for any reason to prevent a violation of the restriction, the transfer resulting in such violation will be void from the time of such purported transfer.
Implications of being an Emerging Growth Company
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we intend to take advantage of certain exemptions from various disclosure and reporting requirements that are otherwise generally applicable to public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company on the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) December 31 of the fiscal year that we become a "large accelerated filer" as defined in Rule 12b‑2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the fair market value of our common shares that are held by non‑affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, (iii) the date on which we have issued more than $1.0 billion in non‑convertible debt securities during the preceding three-year period or (iv) the end of the fiscal year following the fifth anniversary of our initial public offering. We have irrevocably opted out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. As a result, we will comply with new or revised accounting standards on the same time frames as other public companies that are not emerging growth companies. If we take advantage of one or more of these exemptions, we do not know if investors will find our Series A-1 common shares or the common shares of any other Series we may establish in the future less attractive as a result. If they do, there would likely be a less active trading market for our securities than would otherwise be the case.
Our Company Information
Our principal executive offices are located at 44 Wall Street, New York, New York, 10005. Our telephone number is (212) 596-7225.
THE OFFERING
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The Property.............................................. | State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts. |
Series A-1 common shares offered by us | 11,500,000 shares (plus up to an additional 1,150,000 shares that we may issue and sell upon the exercise of the underwriters' over-allotment option). |
Series A-1 common shares and Series A-1 OP units to be outstanding after this offering and the concurrent private placement..................................................... | 11,535,333 shares and 12,066,667 units.(1) |
Use of proceeds............................................ | We estimate that the aggregate net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, and the concurrent private placement, without payment of any placement fee or underwriting discount, will be approximately $161.1 million (based on an offering price of $15.00 per share. We will allocate the net proceeds from this offering and the concurrent private placement exclusively to the A-1 Series, which, in connection with the contribution transactions, will use substantially all of the net proceeds of this offering and the concurrent private placement to acquire an indirect 48.87% interest in the Property, and the net proceeds of this contribution will be distributed to the current owners of the Property, who will retain an indirect 51.13% interest in the Property. The total transaction costs of this offering, the concurrent private placement and the contribution transactions to be paid by the A-1 Series consist of: |
| •_ __ _$155 million to be distributed to the current owners of the Property; |
| •__ __ approximately $4.7 million of closing costs related to this offering, the concurrent private placement and the contribution transactions; and |
| • _ _ _approximately $3.0 million to fund certain cash reserves associated with the existing loan on the Property |
Distribution policy.................................... | We intend for the A-1 Series to elect and qualify as a REIT under the Internal Revenue Code, commencing with its taxable year ending December 31, 2015. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains and determined without regard to the dividends-paid deduction, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend for the A-1 Series to make regular quarterly distributions to holders of Series A-1 common shares out of legally available funds. In certain cases, due to differences in timing between the inclusion of income and the receipt of cash with respect to the Property, the A-1 Series may be required to borrow or make a taxable share distribution to the holders of Series A-1 common shares in order to satisfy the distribution requirement. |
| The current policy of the A-1 Series is to distribute all cash available for distribution other than reserves on a quarterly basis. We expect that the first distribution following this offering will be declared in respect of the second quarter of 2015. We cannot assure you that we will make any distributions to holders of our Series A-1 common shares. Any distributions made to holders of our Series A-1 common shares will be at the discretion of our board of directors and will depend upon the earnings and financial condition of the A-1 Series and the Property A-1 Subsidiary, maintenance of the A-1 Series' REIT qualification, restrictions on making distributions under Delaware law and such other factors as our board of directors deem relevant. See "Distribution Policy." |
Proposed NASDAQ symbol................... | "ESSF" |
Ownership and transfer restrictions ...... | To assist the A-1 Series in qualifying as a REIT, our operating agreement, subject to certain exceptions, contains restrictions on the number of Series A-1 common shares and the number of shares of the A-1 Series that a person may own. Our operating agreement provides that generally no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, either more than 9.8% in value or in number of the Series A-1 common shares, whichever is more restrictive, of the outstanding Series A-1 common shares, or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of the A-1 Series. See "Description of Series A-1 Common Shares—Operating Agreement and Bylaws-Restrictions on Ownership and Transfer." |
Risk Factors............................................. | An investment in our Series A-1 common shares involves various risks. You should consider carefully the risks discussed below and under ‘‘Risk Factors’’ before purchasing our Series A-1 common shares. |
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(1) Series A-1 OP units may be tendered for cash or, at the option of the A-1 Series, may be exchanged for Series A-1 common shares, subject to certain adjustments, after (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, or (ii) January 11, 2017. As of the date of this prospectus, we have a total of 100 Series A-1 common shares outstanding, which were sold to Jesse Stein, one of our executive officers and an officer of ETRE Financial, LLC, in connection with the initial capitalization of the A-1 Series for total consideration of $1,000. At the closing of this offering, we will repurchase these shares from Mr. Stein for $1,000. Accordingly, the 100 Series A-1 common shares that we currently have outstanding are excluded from the number of Series A-1 common shares to be outstanding immediately after the closing of this offering. The number of Series A-1 common shares to be outstanding immediately after the closing of this offering also includes 33,333 Series A-1 common shares that our Administrative Agent has agreed to purchase in the concurrent private placement and an aggregate of 2,000 restricted Series A-1 common shares to be granted to our independent directors upon the completion of this offering and the concurrent private placement under our 2015 Director Plan, but excludes (i)1,150,000 Series A-1 common shares that we may issue and sell upon the exercise of the underwriters' overallotment option, and (ii) 12,066,667 Series A-1 common shares potentially issuable upon redemption of Series A-1 OP units. The number of Series A-1 OP units to be outstanding after the closing of this offering represents 12,066,667 Series A-1 OP units that will be held by the Limited A-1 Partner upon completion of this offering, the concurrent private placement and the contribution transactions.
RISK FACTORS
An investment in our Series A-1 common shares involves risks. In addition to other information contained elsewhere in this prospectus, you should carefully consider the following risks before acquiring our Series A-1 common shares offered by this prospectus. The occurrence of any of the following risks could materially and adversely affect the business, prospects, financial condition or results of operations of the A-1 Series, the ability of the A-1 Series to make cash distributions to the holders of Series A-1 common shares and the market price of our Series A-1 common shares, which could cause you to lose all or some of your investment in our Series A-1 common shares. Some statements in this prospectus, including statements in the following risk factors, constitute forward‑looking statements. See "Forward‑Looking Statements."
Risks Related to the Business of the A-1 Series
The A-1 Series will hold an interest in a single property, a non-diversified investment.
The A-1 Series will, through its 48.87% partnership interest in the Property A-1 Subsidiary, make an investment in a single property, a non-diversified investment. We intend for the Property A-1 Subsidiary, through its subsidiaries, to own and operate only the Property. The A-1 Series' return on its investment will depend on the revenues generated by the Property and the appreciation of the value of the Property over time. These, in turn, are determined by such factors as national and local economic cycles and conditions in the commercial office market, the real estate market in Boston, Massachusetts, financial markets and the economy, competition from existing rental space as well as future additional space and government regulation (such as tax and building code charges). The value of the Property may decline substantially after the A-1 Series purchases its interest in it.
All of the Property's revenue is derived from a single tenant and the A-1 Series' financial condition, results of operations and ability to make distributions may be materially and adversely affected by a downturn in the business of, or a lease termination by, this single tenant and its guarantor.
As of March 31, 2015, SSB Realty, LLC, a subsidiary of State Street Corporation, accounted for 100% of the Property's annualized revenue. Given that all of the Property's revenue is derived from this single tenant, the success of the Property is materially dependent on the financial stability of this tenant together with State Street Corporation, which is a joint and several guarantor of the Tenant's obligations under the leases. The Tenant and State Street Corporation may experience a material business downturn, and weakening of their financial condition, which could potentially result in their failure to make timely rental payments and/or a default under the office and garage leases. If the Tenant and State Street Corporation are unwilling or unable to perform their obligations under the office and garage leases and guaranties, the A-1 Series' revenues, results of operations, financial condition and liquidity could be materially and adversely affected. Lease payment defaults by the Tenant and State Street Corporation could cause the A-1 Series to reduce the amount of distributions it pays. A default of the Tenant and State Street Corporation on its lease payments to the A-1 Series would cause the A-1 Series to lose the revenue from the Property and force the A-1 Series to find an alternative source of revenue to meet its and its subsidiaries' outstanding indebtedness so that the A-1 Series could prevent a foreclosure on the Property. In the event of a default, the Property Owner may experience delays in enforcing its rights as landlord and may incur substantial costs in protecting the A-1 Series' investment and re-letting the property. If the office and garage leases with the Tenant are terminated or if the Tenant fails to renew its office and garage leases, there is no assurance that the A-1 Series will be able to lease the Property for the rent previously received or sell the Property without incurring a loss. A default by the Tenant and the failure of State Street Corporation, as guarantor, to fulfill its obligations or other premature termination of the office and garage leases or a failure of the Tenant to renew the office and garage leases, could have a material adverse effect on the A-1 Series' financial condition and its ability to pay distributions.
In addition, the Tenant relies on a sub-tenant to pay a portion of the rent covered by the leases. The Property Owner is not a party to the sublease agreement. In the event the sub-tenant does not perform under the terms of its sublease with the Tenant, the Tenant or State Street Corporation would be required to fulfill such obligations, which could have an adverse effect on the Tenant and State Street Corporation's ability to pay.
We are employing a novel business model, which may make an investment in the A-1 Series difficult to evaluate as it is unique to the real estate industry.
We were formed to permit public investment in commercial real estate on a single-asset basis. We are unaware of any public REIT that is currently attempting to implement a single-asset strategy and, as a result, no peer companies exist. We cannot predict the extent to which investor interest in the Property will lead to the development of an active trading market for our Series A-1 common shares on the NASDAQ or otherwise or how liquid that market might become. Similarly, we cannot predict the extent to which we will be able to successfully offer to investors shares of the Series we intend to establish in the future and, accordingly, there may be no comparable publicly-traded companies or shares against which you will be able to evaluate the performance of the A-1 Series and our Series A-1 common shares.
We, the Asset Manager and the Fortis General A-1 Partner may not be able to successfully operate the Property or generate sufficient operating cash flows to make or sustain distributions to the holders of our Series A-1 common shares.
We expect the A-1 Series will complete the contribution transactions substantially concurrently with the completion of this offering and the concurrent private placement. Following the completion of this contribution, we, the Asset Manager and the Fortis General A-1 Partner may not be able to successfully operate the Property or implement the operating policies and strategies of the A-1 Series successfully, which may affect our ability to make or sustain distributions to the holders of our Series A-1 common shares. Furthermore, there can be no assurance that we, the Asset Manager and the Fortis General A-1 Partner will be able to generate sufficient operating cash flows to pay operating expenses of the A-1 Series or the Property A-1 Subsidiary and make distributions to the holders of our Series A-1 common shares.
If the A-1 Series is unable to timely complete the contribution transactions or at all, the A-1 Series will have no immediate designated use for substantially all of the net proceeds of this offering and the concurrent private placement, and we may experience delays in locating and securing an attractive alternative investment and, as a result, the A-1 Series will have incurred substantial expenses without the holders of our Series A-1 common shares realizing the expected benefits.
We intend for the A-1 Series to contribute substantially all of the net proceeds from this offering and the concurrent private placement to the predecessor of the Property A-1 Subsidiary and acquire a 48.87% indirect interest in the Property through a general partner interest in the Property A-1 Subsidiary. We cannot assure you that the A-1 Series will acquire this interest because the contribution transactions are subject to a variety of factors, such as the satisfaction of closing conditions, including receipt of all necessary third‑party consents and approvals. If we are unable to complete the contribution transactions, the A-1 Series will have no specific designated use for the net proceeds from this offering and the concurrent private placement and investors will be unable to evaluate in advance the manner in which we invest, or the economic merits of the property the A-1 Series may ultimately acquire with, the net proceeds.
In addition, if the A-1 Series does not complete the contribution transactions within the anticipated time frame or at all, we may experience delays in locating and securing an attractive alternative investment. These delays could result in the A-1 Series' future operating results not meeting expectations and adversely affect its ability to make distributions to the holders of Series A-1 common shares.
We are a newly formed company and subject to the risks of any newly established business enterprise.
As a newly formed company, we are subject to the risks of any newly established business enterprise, including risks that we will be unable to create effective operating and financial controls and systems for our company and each Series we may establish in the future or effectively manage our anticipated growth, including in connection with the additional Series we expect to establish in the future, any of which could have a material adverse effect on the business and operating results of the A-1 Series.
The A-1 Series' investment, leasing and other operational policies are subject to revision from time to time in our board's discretion, which could diminish shareholder returns below expectations.
The A-1 Series' investment, leasing and other operational policies related to the day-to-day management of the A-1 Series' business may be amended or revised from time to time at the discretion of our board of directors, without a vote of our shareholders. Such discretion could result in our Series A-1 common shares failing to yield returns consistent with investors' expectations.
The consideration paid by us in exchange for our interests in the Property A-1 Subsidiary may exceed the valuation that would have been determined by a third-party valuation expert engaged to determine an estimate of the fair market value of the Property.
The amount of consideration we will pay for our indirect interest in the Property was negotiated on an arm's-length basis, but neither us nor the current owners of the Property engaged any third-party valuation experts to determine the fair market value of the Property. As a result, the consideration to be paid by us for the acquisition of the Property may exceed the valuation that would be determined by a third-party valuation expert engaged to determine an estimate of the fair market value of the Property.
The ability of the A-1 Series to make distributions to the holders of Series A-1 common shares is subject to fluctuations in its financial performance, operating results and unanticipated capital improvements requirements.
In order for the A-1 Series to qualify for taxation as a REIT, it will be required to distribute at least 90% of its REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains) each year to the holders of Series A-1 common shares. To the extent the A-1 Series satisfies the 90% distribution requirement but distributes less than 100% of its taxable income, it will be subject to federal income tax on the retained taxable income. In the event of downturns in its operating results, unanticipated capital improvements to the Property or other factors, the A-1 Series may be unable to declare or pay distributions to the holders of Series A-1 common shares. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, the A-1 Series' financial performance, any debt service obligations, any debt covenants, capital expenditure requirements and REIT distribution requirements. We cannot assure you that we and the Fortis General A-1 Partner will generate sufficient cash from the Property to fund distributions to holders of Series A-1 common shares.
The A-1 Series' debt service obligations could adversely affect its overall operating results, may jeopardize the A-1 Series' qualification as a REIT, and could adversely affect the ability of the A-1 Series to make distributions to the holders of our Series A-1 common shares and the market price of our Series A-1 common shares.
Following the contribution transactions, the Property will continue to be subject to the $775 million first mortgage loan that currently encumbers the Property. The loan provides for interest-only payments of $3,705,531 each month for 10 years. It bears interest at a fixed rate of 5.66% per annum and has a maturity date of January 11, 2017. In addition, in connection with the contribution transactions, the Property A-1 Subsidiary will agree to indemnify the existing guarantors of the loan for any and all losses subsequent to the completion of the contribution transactions resulting from their role as guarantors under the loan. After the loan is refinanced, which is expected to occur prior to January 11, 2017, the existing guarantors of the loan will be released from any and all obligations and liabilities existing in connection with the loan and will no longer be required to serve as guarantors.
Although our governing documents contain limitations related to certain types of debt financing and cross-subsidiary guarantees, in general, these limitations do not restrict the amount of debt that the A-1 Series can incur, directly or through the Property A-1 Subsidiary and its subsidiaries, and our board of directors may approve increases in the A-1 Series' leverage at any time without the approval of the holders of our Series A-1 common shares. As a result, the A-1 Series may be able to incur substantial additional debt, including secured debt, in the future. The Property's existing debt, including the Property A-1 Subsidiary's indemnification obligations in respect thereof, and the incurrence of any new debt could subject the A-1 Series to many risks, including the risk that:
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• | the A-1 Series' operating cash flow will be insufficient to make required payments of principal and interest; |
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• | the A-1 Series' leverage may increase its vulnerability to adverse economic and industry conditions; |
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• | the A-1 Series may be required to dedicate a substantial portion of its operating cash flow from operations to payments on its debt, thereby reducing cash available for distribution to the holders of our Series A-1 common shares, funds available for operations and capital expenditures or other purposes; and |
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• | the terms of the debt may limit the A-1 Series' ability to make distributions to the holders of our Series A-1 common shares, which may adversely affect the market price of our Series A-1 common shares. |
If the A-1 Series or its subsidiaries violate covenants in the loan or any other of the A-1 Series' or such subsidiaries debt agreements or related obligations, the A-1 Series or its subsidiaries could be required to repay all or a portion of its indebtedness before maturity at a time when the A-1 Series or its subsidiaries might be unable to arrange financing for such repayment on attractive terms, if at all.
If the A-1 Series is unable to repay any of its debt obligations in the future, it may be forced to refinance debt or dispose of or further encumber the Property, which could adversely affect distributions to the holders of our Series A-1 common shares.
If the A-1 Series or its subsidiaries do not have sufficient funds to repay any of its or their existing or future debt (including, in the case of the Property Owner, the loan) at maturity or before maturity in the event of a breach of its or their debt agreements and its or their lenders exercise their right to accelerate repayment, it may be necessary to refinance the debt through additional debt or equity financings. In particular, although we intend for the Property Owner to refinance the loan prior to the maturity date, the Property Owner may be unable to refinance it at maturity or the refinancing terms may be less favorable than the terms of the original loan. In addition, under the terms of the limited partnership agreement and the asset management agreement, respectively, the Fortis General A-1 Partner and the Asset Manager will generally be responsible for managing the Property's indebtedness. Although the A-1 Series will have the right to approve any proposed refinancing of the existing loan, the ability of the A-1 Series to refinance the loan without the consent of the Fortis General A-1 Partner will be limited, except to the extent necessary to prevent imminent foreclosure and then only through the issuance of securities of either the A-1 Series, the Property A-1 Subsidiary or the Property Owner. If the A-1 Series or its subsidiaries are unable to refinance its or their debt on acceptable terms, the A-1 Series may be forced to dispose of its interest in the Property, or its subsidiaries may be forced to dispose of the Property, on disadvantageous terms, potentially resulting in losses. To the extent the A-1 Series or its subsidiaries cannot meet any future debt service obligations, they will risk losing the Property or any interest therein. Adverse economic conditions could also cause the terms on which the A-1 Series or its subsidiaries borrow in the future to be unfavorable. The A-1 Series could be required to liquidate its interest in the Property or its subsidiaries could be required to liquidate the Property in order to meet their respective debt service obligations at times which may not permit the A-1 Series to receive an attractive return on its investment.
Interest expense on any debt incurred may limit cash available for distribution to the holders of our Series A-1 common shares.
The A-1 Series may incur, directly or through the Property A-1 Subsidiary or its subsidiaries, indebtedness that bears interest at variable rates. Higher interest rates could increase debt service requirements on any variable rate debt incurred and could reduce the amounts available for distribution to the holders of our Series A-1 common shares, as well as reduce funds available for operations, capital expenditure or other purposes.
Failure to hedge effectively against interest rate changes in the future may adversely affect the A-1 Series' results of operations and its ability to make distributions to the holders of our Series A-1 common shares.
To the extent consistent with our intention to qualify the A-1 Series as a REIT for federal income tax purposes, we may obtain in the future one or more forms of interest rate protection for the A-1 Series – in the form of swap agreements, interest rate cap contracts or similar agreements – to "hedge" against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will relieve the adverse effects of interest rate increases or that counterparties under these agreement will honor their obligations thereunder.
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our Administrative Agent's reliance on technology has increased, so have the risks posed to our Administrative Agent's systems, both internal and those our Administrative Agent has outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationships with our tenants, and private data exposure. Our Administrative Agent has implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as our increased awareness of a risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.
Risks Related to Our Relationship with Our Administrative Agent and the Managing Member
We depend on our Administrative Agent for the success of each Series and upon access to ETRE's investment professionals and contractors. We may not find a suitable replacement for our Administrative Agent if the applicable administrative services agreements are terminated, or if key personnel leave the employment of ETRE or otherwise become unavailable to us.
We do not expect to have any employees and we rely completely on our Administrative Agent to provide each Series, including the A-1 Series, and each Property Subsidiary, including the Property A-1 Subsidiary, with administrative and certain advisory services. We have no separate facilities and are completely reliant on our Administrative Agent, which has significant discretion as to the implementation of the operating policies and strategies of each Series, including the A-1 Series. We depend on the diligence, skill and network of business contacts of our Administrative Agent. We expect to benefit from the personnel, relationships and experience of the executive team and other personnel of ETRE. The executive officers and key personnel of ETRE will monitor and manage the properties of each Series, including the A-1 Series; therefore, the success of each Series will depend on their continued service.
The departure of any of the senior personnel of ETRE, or of a significant number of the personnel of ETRE, could have a material adverse effect on the ability of each Series, including the A-1 Series, to achieve its investment objectives. In addition, we offer no assurance that our Administrative Agent will remain the administrative agent to each Series, including the A-1 Series, or that we will continue to have access to ETRE's personnel. The administrative services agreement will have an indefinite term, but may be terminated by our Administrative Agent or the A-1 Series and the Property A-1 Subsidiary under certain circumstances. If the administrative services agreement related to the A-1 Series is terminated and no suitable replacement is found to manage the A-1 Series and the Property A-1 Subsidiary, we may not be able to execute the business plan of the A-1 Series.
The ability of our Administrative Agent and ETRE's officers and other personnel to engage in other business activities, including managing other Series, may reduce the time our Administrative Agent spends managing the business of the A-1 Series and may result in certain conflicts of interest.
Certain of our officers and directors also serve or may serve as officers, directors or employees of ETRE as well as other ETRE sponsored vehicles and other companies unaffiliated with ETRE. These other business activities may reduce the time these persons spend managing our business. In addition, these persons may have obligations to those entities, the fulfillment of which might not be in the best interests of us, any Series or any of our shareholders. Moreover, our officers and directors will serve as officers and directors for, and our Administrative Agent and ETRE's personnel will provide administrative services to, any other Series and the Property Subsidiaries we establish in the future. The A-1 Series and any other Series we establish in the future may have overlapping investment strategies and objectives, and our board of directors, our officers and our Administrative Agent may face conflicts of interest in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series.
The administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary was prepared by related parties and its terms, including fees payable to our Administrative Agent, may not be as favorable to the A-1 Series and the Property A-1 Subsidiary as if they had been negotiated with an unaffiliated third party.
The administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary was prepared by related parties and its terms, including fees payable by the A-1 Series and the Property A-1 Subsidiary to our Administrative Agent, may not be as favorable to the A-1 Series and the Property A-1 Subsidiary as if they had been negotiated with an unaffiliated third party.
The termination of the administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary is generally limited to cause and certain disposition events related to the Property, which may make it difficult or costly to end our relationship with our Administrative Agent in respect of the A-1 Series and the Property A-1 Subsidiary.
Termination of the administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary is generally limited to cause and certain disposition events related to the Property. The term "cause" is limited to those circumstances described under "Our Administrative Agent and the Administrative Services Agreement—Administrative Services Agreement," which include certain material breaches, certain acts constituting fraud, misappropriation of funds, embezzlement and gross negligence, certain bankruptcy matters and felony convictions involving our Administrative Agent and the dissolution of our Administrative Agent. Unsatisfactory financial performance does not constitute "cause" under the administrative services agreement. These provisions make it difficult to end the A-1 Series' and the Property A-1 Subsidiary's relationship with our Administrative Agent, even if we believe our Administrative Agent's performance is not satisfactory. In addition, following a Property Sale, the administrative services agreement with respect to the A-1 Series and the Property A-1 Subsidiary will be terminated, but the A-1 Series and the Property A-1 Subsidiary will be required to pay our Administrative Agent, subject to certain conditions, an administrative sale fee, in cash, in an amount equal to 1.00% of total capitalization (as defined in the Administrative Services Agreement) at the end of the month immediately preceding the Property Sale. This provision increases the effective cost to the A-1 Series of disposing of the Property and the effective cost to a bidder of conducting a tender offer for our Series A-1 common shares, which may adversely affect shareholders' and potential bidders' inclination to approve or engage in such a transaction.
Our Administrative Agent's liability to the A-1 Series and the Property A-1 Subsidiary is limited under the administrative services agreement, and the A-1 Series and the Property A-1 Subsidiary have agreed to indemnify our Administrative Agent against certain liabilities. As a result, the A-1 Series could experience poor performance or losses for which our Administrative Agent would not be liable.
Pursuant to the administrative services agreement, our Administrative Agent, its officers, stockholders, members, managers, directors, personnel, any person or entity controlling or controlled by our Administrative Agent and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our Administrative Agent are not liable to us, the A-1 Series, the Property A-1 Subsidiary, our directors, the General A-1 Partners, our shareholders or any subsidiary's shareholders or partners for acts or omissions performed in accordance with and pursuant to the administrative services agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the administrative services agreement, as determined by a final non-appealable order of a court of competent jurisdiction. The A-1 Series and the Property A-1 Subsidiary will indemnify our Administrative Agent, its officers, stockholders, members, managers, directors, personnel, any person or entity controlling or controlled by our Administrative Agent and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our Administrative Agent with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Administrative Agent not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the administrative services agreement.
Our operating agreement contains provisions that reduce or eliminate duties (including fiduciary duties) of the managing member.
Our operating agreement provides that the managing member, in exercising its rights in its capacity as the managing member, will be entitled to consider only such interests and factors as it desires, including its own interests, and will have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us, any Series or any of our shareholders and will not be subject to any different standards imposed by our operating agreement, the Delaware LLC Act or under any other law, rule or regulation or in equity. These modifications of fiduciary duties are expressly permitted by Delaware law.
We have agreed to limit remedies available to us and our shareholders for actions by our Administrative Agent and the managing member that might otherwise constitute a breach of duty.
We have agreed to limit the obligations of ETRE Financial, LLC, the managing member of our company, to us under our operating agreement. In addition, our Administrative Agent maintains a contractual, as opposed to a fiduciary relationship, with us, each Series and our shareholders. Accordingly, we and our shareholders will only have recourse and be able to seek remedies against the managing member and our Administrative Agent to the extent they breach their obligations pursuant to our operating agreement or administrative services agreement, as applicable. Furthermore, we have agreed to limit the liability of the managing member and our Administrative Agent and to indemnify the managing member and our Administrative Agent against certain liabilities. These provisions are detrimental to shareholders because they restrict the remedies available to them for actions that without those limitations might constitute breaches of duty, including fiduciary duties. By purchasing Series A-1 common shares, you will be treated as having consented to the provisions set forth in the operating agreement. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the administrative services agreement entered into by the A-1 Series and the Property A-1 Subsidiary or our operating agreement because of our desire to maintain our ongoing relationship with our Administrative Agent and the managing member.
Potential conflicts of interest may arise among our Administrative Agent and its affiliates, on the one hand, and our company and our shareholders, on the other hand.
Conflicts of interest may arise among our Administrative Agent and its affiliates, on the one hand, and us and our shareholders, on the other hand, including that our board of directors, our officers and our Administrative Agent and ETRE's personnel may face conflicts of interest in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series. See "Conflicts of Interest; Certain Relationships and Related Party Transactions" for a discussion of these conflicts. As a result, there may be times when our Administrative Agent and its affiliates have interests that differ from those of our company and our shareholders. In addition, our operating agreement and the administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary reduce or eliminate the duties (including fiduciary duties) of our Administrative Agent and its affiliates. As a result, our Administrative Agent and its affiliates may favor their own interests and the interests of their affiliates over the interests of our company and our shareholders, which may affect shareholders' investment returns.
It will be difficult for a shareholder to challenge the resolution by the nominating and corporate governance committee of certain conflicts of interest related to our Administrative Agent and its affiliates.
The nominating and corporate governance committee of our board of directors will review specific matters that our Administrative Agent believes may involve conflicts of interest and that are not otherwise addressed by the Inter-Series Policy (which addresses certain conflicts of interest among the different Series). These conflicts of interest may include conflicts between the interests of our company or any Series, on the one hand, and the interests of our Administrative Agent and its affiliates, on the other hand. The nominating and corporate governance committee will determine whether the resolution of any conflict of interest submitted to it is fair and reasonable to us and our shareholders. If our Administrative Agent obtains such approval of any matter, such matter will be conclusively deemed to be fair and reasonable to us and our shareholders and not a breach by us of any duties that we may owe to our shareholders. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of independent directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to the plaintiff. If you purchase Series A-1 common shares, you will be treated as having consented to the provisions set forth in the operating agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law.
Our Administrative Agent may resolve conflicts of interests among the different Series in a manner that shareholders may not believe to be in their best interests.
The A-1 Series and any other Series we may establish in the future may have overlapping investment strategies and objectives, and our board of directors, our officers and our Administrative Agent may face conflicts of interest in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series. Our board of directors has adopted the Inter-Series Policy, which is administered by our Administrative Agent and has been designed to govern the operating relationships among the Series, address conflicts of interest among the Series and promote the fair allocation of sale, financing, leasing and other business opportunities among the real properties owned by the different Series. See "Management—Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy." The Inter-Series Policy provides our Administrative Agent with significant flexibility with respect to its ability to make decisions and pursue actions involving conflicts of interest among the Series. Given the significant flexibility afforded our Administrative Agent to resolve such conflicts of interest, our Administrative Agent may resolve conflicts of interests pursuant to the Inter-Series Policy in a manner that shareholders may not believe to be in their best interests. Neither shareholders, any Series nor any Property Subsidiary will have any recourse against our Administrative Agent if our Administrative Agent satisfies its obligations under the applicable administrative services agreement.
We do not own the ETRE name, but we may use the name pursuant to a license agreement with ETRE. Use of the name by other parties or the termination of our license agreement may harm our business.
We have entered into a license agreement with ETRE, pursuant to which it has granted us a non-exclusive, royalty-free license to use the name "ETRE REIT, LLC." Under this agreement, we have a right to use this name for so long as our Administrative Agent serves as our Administrative Agent in respect of any Series. ETRE will retain the right to continue using the ETRE name. We will further be unable to preclude ETRE from licensing or transferring the ownership of the ETRE name to third parties, some of whom may compete with us. Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of ETRE or others. Furthermore, in the event that the license agreement is terminated, we will be required to change our name and cease using the name. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise harm our business. The license agreement will terminate if we no longer have any administrative services agreements with our Administrative Agent.
The managing member of our company and certain of our directors and officers are parties to certain litigation, which could have a material adverse effect on us.
ETRE Financial, LLC, our company's managing member, and certain of its members, including Messrs. Frischer and Stein, are parties to certain litigation relating to a dispute brought by one of the minority equity holders of ETRE Financial, LLC. We do not believe there is merit to any of these claims. In addition, none of our company, the administrative agent or the A-1 Series are parties to this litigation. Nevertheless, as a result of such litigation, it is possible that ETRE Financial, LLC and Messrs. Frischer and Stein could be required to devote time and attention to resolving or defending this litigation, and our business could otherwise be adversely affected.
Risks Related to the Property and Real Estate Investment Generally
The Property is located in Boston, Massachusetts, and adverse economic or regulatory developments in this area could materially and adversely affect the A-1 Series.
The Property is located in Boston, Massachusetts. As a result, the A-1 Series' business is dependent on the condition of the Boston economy in general and the market for office space in Boston in particular. The A-1 Series is susceptible to adverse developments in the Boston economic and regulatory environment (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation). Such adverse developments could materially reduce the value of the Property and its rental revenues, and thus materially and adversely affect the market price of our Series A-1 common shares or the A-1 Series' ability to service current debt and to pay distributions to the holders of Series A-1 common shares.
Because the Property is located in the greater Boston metro-area, we will be exposed to greater risks than if we owned properties in multiple geographic regions. The economic condition of the Boston metro-area may depend on one or more industries and, therefore, an economic downturn in one of these industry sectors may adversely affect our performance.
Adverse economic and geopolitical conditions in general and in the Boston, Massachusetts commercial office markets in particular could have a material adverse effect on the A-1 Series' results of operations, financial condition and the A-1 Series' ability to make distributions to holders of our Series A-1 common shares.
The A-1 Series' business may be affected by the volatility and illiquidity in the financial and credit markets, a general global economic recession, and other market or economic challenges experienced by the real estate industry or the U.S. economy as a whole. The A-1 Series' business may also be materially and adversely affected by local economic conditions, as substantially all of the A-1 Series' revenues are derived from the Property which is located in Boston, Massachusetts. Because the A-1 Series' sole asset will be its indirect interest in a commercial office building located in Boston (as compared to a diversified real estate portfolio), if economic conditions persist or deteriorate, then the A-1 Series' results of operations, financial condition and ability to service current debt and to make distributions to the holders of our Series A-1 common shares may be materially and adversely affected by the following, among other potential conditions:
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• | the financial condition of the Tenant may be adversely affected, which may result in defaults under the leases due to bankruptcy, lack of liquidity, operational failures or other reasons; |
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• | significant job losses in the Tenant's industry may occur, which may decrease demand for office space at the Property, causing market rental rates and property values to be impacted negatively; |
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• | the A-1 Series' ability to borrow, directly or through the Property A-1 Subsidiary and its subsidiaries, on terms and conditions that we find acceptable, or at all, may be limited, which could reduce the A-1 Series' ability to refinance existing debt, and increase the A-1 Series' future interest expense; and |
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• | reduced liquidity in debt markets and increased credit risk premiums for certain market participants may impair the A-1 Series' ability to access debt capital. |
These conditions may continue or worsen in the future, which could have materially and adversely affect the A-1 Series' results of operations, financial condition and ability to make distributions to the holders of our Series A-1 common shares.
The Tenant and State Street Corporation operate in the financial services industry and are subject to extensive government regulation and certain other risks particular to that industry.
The Tenant and State Street Corporation operate in the financial services industry and are subject to extensive government regulation and certain other risks particular to that industry. In particular, most of State Street Corporation's businesses are subject to extensive regulation by multiple regulatory bodies, and many of the clients to which State Street Corporation provide services are themselves subject to a broad range of regulatory requirements. These regulations may affect the scope of, and the manner and terms of delivery of, State Street Corporation's services. If State Street Corporation does not comply with governmental regulations, State Street Corporation may be subject to fines, penalties, lawsuits, delays, or difficulties in obtaining regulatory approvals or restrictions on its business activities or harm to its reputation, which may significantly and adversely affect its business operations, financial condition and results of operations. If State Street Corporation's financial condition and results of operations are adversely affected by these or other risks specific to the financial services industry it could adversely affect the Tenant's and State Street Corporation's ability to meet their obligations under the office and garage leases and the guaranties, which may materially and adversely affect the A-1 Series' results of operations, financial condition and ability to make distributions to holders of our Series A-1 common shares.
The terms of the limited partnership agreement of the Property A-1 Subsidiary will limit the A-1 Series' ability to take actions in respect of the Property's operations that are opposed by the Fortis General A-1 Partner.
Under the terms of the limited partnership agreement of the Property A-1 Subsidiary, for so long as the Lincoln Street Holdings Limited Partner Group owns at least 25% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares, the Fortis General A-1 Partner, generally, will manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and the A-1 Series, as the REIT General A-1 Partner, will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. These major decisions relate to, among other things, indebtedness, expenditures, legal proceedings, tenant bankruptcies, leases, zoning matters, easements, environmental matters and insurance. In addition, a Property Oversight Committee will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates on the one hand, and the A-1 Series and its affiliates, on the other hand. Although the A-1 Series will have the right to approve these major decisions, prior to the refinancing of the existing loan on the Property, in the event there is a disagreement between the A-1 Series and the Fortis General A-1 Partner, the A-1 Series generally will be unable to cause major decisions to be referred to the Property Oversight Committee for resolution. As a result, the A-1 Series generally will not be in a position to cause the Property A-1 Subsidiary to take actions in respect of the Property's operations without the consent of the Fortis General A-1 Partner. Any impasse between the A-1 Series and the Fortis General A-1 Partner could result in delays or inaction in respect of the Property's operations or decreased revenues or increased costs or may otherwise materially and adversely affect the A-1 Series' results of operations, financial condition and ability to make distributions to holders of our Series A-1 common shares. See "—Risks Related to Our Organization and Structure—Potential conflicts of interest may arise among the Fortis General A-1 Partner, the Asset Manager and their affiliates, on the one hand, and the A-1 Series and our Series A-1 common shareholders, on the other hand."
We may be unable to renew the leases of the Property, lease vacant space or re-lease space on favorable terms or at all as the leases expire, which could materially and adversely affect the A-1 Series' financial condition, results of operations and cash flow.
To the extent that the Property has above-market rental rates, we may be forced to renew the office and garage leases when they expire at a lower rate. We cannot assure you that the office and garage leases will be renewed or that the Property will be re-leased at net effective rental rates equal to or above the current net effective rental rates. If the rental rate of the Property decreases, the Tenant does not renew the office and garage leases or we do not re-lease a significant portion of the Property's available space, the A-1 Series' financial condition, results of operations, cash flow, and the A-1 Series' ability to satisfy its or its subsidiaries' principal and interest obligations and our ability to make distributions with respect to our Series A-1 common shares would be materially and adversely affected.
The actual rents we receive from the Property may be less than our asking rents, and the A-1 Series may experience a decline in realized rental rates from time to time, which could materially and adversely affect its financial condition, results of operations and cash flow.
As a result of various factors, including competitive pricing pressure in the Boston commercial office building market, a general economic downturn and the desirability of the Property compared to other properties in its market, we may be unable to realize our asking rent at the Property. In addition, the degree of discrepancy between our asking rent and the actual rent we are able to obtain may vary among different leased spaces within the Property. If we are unable to obtain a sufficient rental rate at the Property, then the A-1 Series' ability to generate cash flow growth will be negatively impacted. In addition, depending on market rental rates at any given time as compared to the office and garage leases when they expire, from time to time the rental rate for the leases may be higher than starting rental rates for new leases.
We may be required to make rent or other concessions and/or the A-1 Series may be required to incur significant capital expenditures to improve the Property in order to retain the Tenant or attract new tenants, which could materially and adversely affect the A-1 Series, including the A-1 Series' financial condition, results of operations and cash flow.
To the extent there are adverse economic conditions in the Boston real estate market and demand for office space decreases, upon expiration of the office and garage leases, we will be required to make rent or other concessions to the Tenant, accommodate increased requests for renovations, build-to-suit remodeling and other improvements or provide additional services to the Tenant. As a result, the A-1 Series may have to make significant capital or other expenditures in order to retain the Tenant or to attract new tenants in sufficient numbers. Additionally, we or the A-1 Series may need to raise capital to make such expenditures. If we or the A-1 Series are unable to do so or capital is otherwise unavailable, the A-1 Series may be unable to make the required expenditures. This could result in non-renewals by the Tenant upon expiration of the office and garage leases, which could materially and adversely affect the A-1 Series' financial condition, results of operations, cash flow and per share trading price of our Series A-1 common shares.
The bankruptcy or insolvency of the Tenant may adversely affect the income produced by the Property.
The bankruptcy or insolvency of the Tenant of the Property may adversely affect the income produced by the Property. If the Tenant becomes a debtor in a case under the United States Bankruptcy Code, we cannot evict the Tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the Tenant to reject and terminate the office and garage leases with the Property Owner. The bankruptcy of the Tenant or State Street Corporation, the guarantor, could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is rejected by the Tenant in bankruptcy, the Property Owner would have only a general unsecured claim for damages. Any unsecured claim the Property Owner holds may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim the Property Owner can make if a lease is rejected. The A-1 Series' revenue and cash flow could be materially adversely affected if the Property's single tenant were to become bankrupt or insolvent, or suffer a downturn in its business, default under its office and garage leases or fail to renew its leases at all or renew on terms less favorable to the A-1 Series than their current terms.
SSB Realty LLC, the Property's sole tenant, has a right of first offer with respect to the Property and the Property Owner in certain circumstances, which may limit our ability to obtain the highest price possible for the Property.
Pursuant to the terms of the office lease agreement between the Property Owner and the Tenant, if there is no event of default or pending event of default, the Tenant has a right of first offer to purchase the Property, the membership interests in the Property Owner, or a specified interest in either if the Property Owner proposes to (i) transfer 50% or more of the Property Owner's interest in the Property to an unaffiliated third party, (ii) transfer 50% or more of the membership interests in the Property Owner to an unaffiliated third party, (iii) enter into a master lease of the Property in a single transaction for a term of 60 years or more with an unaffiliated third party, or (iv) exchange the Property for a different property owned by an unaffiliated third party. In the event that the Property Owner chooses to dispose of, in one of the above ways, the Property, the membership interests in the Property Owner, or a specified interest in either, the Property Owner would be required to deliver to the Tenant an offer notice specifying the interest that the Property Owner has determined to dispose of, together with a proposed purchase price prior to offering the interest to any other potential buyer. The Tenant would then have the right, within 15 days of receiving such notice, to deliver a notice of interest together with a good faith deposit in an amount equal to 5% of the proposed purchase price. Upon doing so, Tenant would be afforded a 30 day due diligence period. Subject to the Tenant withdrawing its notice of interest during this time, both parties would become obligated to consummate the transaction at the proposed purchase price within thirty calendar days thereafter. If the Tenant fails to timely reply to the Property Owner's offer notice, withdraws its notice of interest, fails to timely close, or otherwise declines to purchase the specified interest, the Property Owner would be free to sell the specified interest to an unaffiliated third-party, but only on the conditions that the purchase price be at least equal to a cap of 103.5% of the proposed purchase price to the Tenant and that the Tenant accepts a bona fide offer with 12 months and closes the transaction within 18 months. Failure by the Property Owner to meet these conditions would revive the Tenant's right of first offer. The existence of this right of first offer together with the purchase price cap to third parties and other conditions could adversely impact our ability to obtain the highest possible price for the Property as, during the term of the office lease agreement, the Property Owner would not be able to offer the Property to potential purchasers through a competitive bid process or in a similar manner designed to maximize the value obtained for the Property without first offering to sell this property to the Tenant.
Competition may impede our ability to attract new tenants or retain the Tenant or re-let space at the Property, which could materially and adversely affect the A-1 Series' results of operations and cash flow.
Boston is one of the largest office markets in the United States and the leasing of real estate in Boston is highly competitive. The principal means of competition are rent charged, location, services provided and the nature and condition of the premises to be leased. We will directly compete with all lessors and developers of similar space in the area in which the Property is located as well as properties in other submarkets. The number of competitive office properties in Boston (which may be newer or better located than the Property) could have a material adverse effect on our ability to lease office space at the Property, and on the effective rents we are able to charge.
We, the Asset Manager and the Fortis General A-1 Partner may not be able to control the A-1 Series' operating costs, or the A-1 Series' expenses may remain constant or increase, even if income from the Property decreases, causing the A-1 Series' results of operations to be adversely affected.
The A-1 Series' financial results depend substantially on leasing space in the Property to the Tenant on terms favorable to the A-1 Series. Costs associated with real estate investment, such as real estate taxes, insurance and maintenance costs, generally are not reduced even when a property is not fully occupied, rental rates decrease or other circumstances cause a reduction in income from the property. As a result, cash flow from the operations of the Property may be reduced if the Tenant does not pay its rent or we are unable to rent the Property on favorable terms. Under those circumstances, we might not be able to enforce the Property Owner's rights as landlord without delays and the A-1 Series may incur substantial legal costs. The terms of the office and garage leases also limit the Property Owner's ability to charge the Tenant for all or a portion of these expenses.
The continuing threat of a terrorist event may materially and adversely affect the Property, its value and the A-1 Series' ability to generate cash flow.
There may be a decrease in demand for space in Boston because it is considered at risk for a future terrorist event, and this decrease may reduce the A-1 Series' revenues. In the aftermath of a terrorist event, the Tenant may choose to relocate its business to less populated, lower-profile areas of the United States that are not as likely to be targets of future terrorist activity. This in turn could trigger a decrease in the demand for space in Boston, which could increase vacancies in the Property and force us to lease the Property on less favorable terms. In addition, a terrorist event could cause insurance premiums at the Property to increase significantly. As a result, the value of the Property and the level of A-1 Series' revenues could materially decline.
Increases in property taxes would increase the A-1 Series' operating costs, reduce its income and adversely affect the A-1 Series' ability to make distributions to the holders of Series A-1 common shares.
The Property will be subject to real and personal property taxes, payable by the Property Owner as set forth in the office lease. These taxes may increase as tax rates change and as the Property is assessed or reassessed by taxing authorities. If property taxes increase, the A-1 Series' financial condition, results of operations and our ability to make distributions to the holders of our Series A-1 common shares could be materially and adversely affected and the market price of our Series A-1 common shares could decline.
Noncompliance with environmental laws and releases of hazardous substances could subject the A-1 Series to fines and liabilities, which could adversely affect its operating results.
The Property will be subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require the Property Owner, as owner or operator of a contaminated property, to clean up the Property and incur associated costs, even if we did not know of or were not responsible for the releases of the contamination. These laws also apply to persons who owned or operated a property at the time that it became contaminated, and therefore it is possible that the Property Owner could incur these costs even after it sells the Property. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner's ability to borrow funds using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean‑up of that property if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for personal injury, as well as for damage to property and to natural resources caused by contamination. For instance, a person exposed to asbestos while in a property may seek to recover damages if he or she suffers personal injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals (such as swimming pool treatment chemicals) to manage them carefully and to notify local officials that the chemicals are being used.
The Property Owner could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, to satisfy a judgment or pay a penalty, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to the holders of our Series A-1 common shares. We have obtained a Phase I environmental site assessment for the Property in connection with the contribution transactions. However, this Phase I environmental site assessment may not reveal all environmental costs that might have a material adverse effect on the business, assets, results of operations or liquidity of the A-1 Series and may not identify all potential environmental liabilities.
As a result, the Property Owner and the A-1 Series may become subject to material environmental liabilities. We can make no assurances that (1) future laws or regulations will not impose material environmental liabilities on the Property Owner or the A-1 Series, or (2) the environmental condition of the Property will not be affected by the condition of the properties in its vicinity or by third parties unrelated to us.
The Property Owner and the A-1 Series may incur significant costs complying with the ADA and similar laws, which could adversely affect the A-1 Series' financial condition, results of operations, cash flow and trading price of our Series A-1 common shares.
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. If the Property is not in compliance with the ADA, the A-1 Series would be required to incur additional costs to bring the Property into compliance. Additional federal, state and local laws also may require modifications to the Property, or restrict the ability to renovate the Property. We cannot predict the ultimate cost of compliance with the ADA or other legislation. If the Property Owner or the A-1 Series incurs substantial costs to comply with the ADA and any other legislation, the A-1 Series' financial condition, results of operations, cash flow, trading price of our Series A-1 common shares and the A-1 Series' or its subsidiaries' ability to satisfy its or their principal and interest obligations and our ability to make distributions to the holders of our Series A-1 common shares could be adversely affected.
Any secured debt obligations incurred will expose the A-1 Series to increased risk of property losses to foreclosure, which could adversely affect its financial condition, cash flow and ability to satisfy its other obligations and make distributions to the holders of Series A-1 common shares.
Incurring mortgage or other secured debt increases the risk of property losses, because any defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately the loss of the property securing the loan. For tax purposes, a foreclosure of the Property would be treated as a sale of the Property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds the A-1 Series' tax basis in the Property, the A-1 Series would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and the A-1 Series may be required to utilize other sources of cash for distributions of that income to the holders of Series A-1 common shares. Furthermore, we expect that any such sources of additional cash will be limited in light of the fact that we expect the Property to be the sole real estate asset owned and generated by the A-1 Series.
Capital expenditure requirements at the Property may be costly and require the A-1 Series to incur debt, postpone improvements, reduce distributions or otherwise adversely affect the results of its operations and the market price of our Series A-1 common shares.
The Property will have an ongoing need for renovations and other capital improvements, including replacement, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:
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• | possible environmental problems; |
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• | construction cost overruns and delays; |
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• | the possibility that revenues will be reduced while service elements are out of service due to capital improvement projects; |
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• | a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available on attractive terms; and |
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• | uncertainties as to market demand or a loss of market demand after capital improvements have begun. |
The costs of renovations and capital improvements could adversely affect the A-1 Series' financial condition, results of operations, the market price of our Series A-1 common shares and the A-1 Series' ability to make distributions to the holders of our Series A-1 common shares.
Real estate redevelopment is subject to timing, budgeting and other risks that may adversely affect the A-1 Series' financial condition and results of operations, the market price of our Series A-1 common shares and our ability to make distributions to the holders of our Series A-1 common shares.
Though not intended to be a primary focus of its initial investment strategy, we may have the Property A-1 Subsidiary engage in the redevelopment of the Property if suitable opportunities arise. Redevelopment involves a number of risks, including risks associated with:
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• | construction delays or cost overruns that may increase project costs; |
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• | the receipt of zoning, occupancy and other required governmental permits and authorizations; |
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• | development costs incurred for projects that are not pursued to completion; |
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• | acts of God such as hurricanes, floods or fires that could adversely impact a project; |
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• | the negative impact of construction on operating performance during and soon after the construction period; |
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• | the ability to raise capital; and |
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• | governmental restrictions on the nature or size of a project. |
We may not have control over the Property while it is under construction and the A-1 Series may be subject to risks in connection with a developer's ability to control construction costs and the timing of completion of construction or a developer's ability to build in conformity with plans, specifications and timetables.
We cannot assure you that any redevelopment project will be completed on time or within budget. The inability to complete a project on time or within budget could adversely affect the A-1 Series' financial condition and results of operations, the market price of our Series A-1 common shares and our ability to make distributions to the holders of our Series A-1 common shares.
The Property may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
Although the A-1 Series will obtain title insurance insuring against losses that may arise in connection with any liens, encumbrances or other title defects not listed as exceptions to coverage on the title policy,] the Property may be subject to other unknown or contingent liabilities which could cause the A-1 Series to incur substantial costs for which the A-1 Series may have no recourse, or only limited recourse, against Lincoln Street Holdings, LLC. Lincoln Street Holdings, LLC's representations and warranties provided under the contribution agreement relating to the contribution transactions are limited in scope and survive for a period of 180 days after the closing. In addition, the contribution agreement provides that Lincoln Street Holdings, LLC and affiliated or related parties will only be liable for breaches of Lincoln Street Holdings, LLC's representations and warranties if the amount of losses arising from such breaches, in aggregate, exceeds $5,000,000. Furthermore Lincoln Street Holdings, LLC's liability for such breaches is capped at $5,000,000. There is no guarantee that the A-1 Series will recover any amounts with respect to losses due to breaches by Lincoln Street Holdings, LLC of its representations and warranties or arising out of successor liability from pre-closing liabilities. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with the Property may exceed expectations, and the A-1 Series may experience other unanticipated adverse effects, all of which may adversely affect the A-1 Series' financial condition, results of operations, the market price of the Series A-1 common shares and the A-1 Series' ability to make distributions to the holders of the Series A-1 common shares.
Uninsured and underinsured losses could result in a loss of capital.
We intend for the Property Owner to maintain comprehensive insurance on the Property, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by office property owners. There are no assurances that coverage will be available at reasonable rates. Various types of catastrophic losses, such as floods and losses from terrorist activities, may not be insurable or may not be economically insurable. Further, lenders may require such insurance and the failure of the Property Owner to obtain such insurance could constitute a default under loan agreements of the A-1 Series or its subsidiaries.
In the event of a substantial loss, the Property Owner's insurance coverage may not be sufficient to cover the full current market value or replacement cost of its lost investment. Should an uninsured loss or a loss in excess of insured limits occur, the A-1 Series could lose all or a portion of the capital it has invested in the Property, as well as the anticipated future revenue from the Property. In that event, the A-1 Series or its subsidiaries might nevertheless remain obligated for any mortgage debt or other financial obligations related to the Property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds received by the Property Owner to replace or renovate the Property after it has been damaged or destroyed. Under those circumstances, the insurance proceeds the Property Owner receives might be inadequate to restore its economic position on the damaged or destroyed property.
We may be unable to sell the Property on favorable terms or at all.
We may decide to have the A-1 Series, the Property A-1 Subsidiary or its subsidiaries sell its interest in the Property in the future. We cannot predict whether the A-1 Series, the Property A-1 Subsidiary or such subsidiaries will be able to sell its interest in the Property for the price or on the terms set by us, or whether the price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of the Property. The A-1 Series, the Property A-1 Subsidiary or such subsidiaries may be required to expend funds to correct defects or to make improvements before the Property can be sold. We cannot assure you that the A-1 Series, the Property A-1 Subsidiary or such subsidiaries will have funds available to correct those defects or to make those improvements. These factors could adversely affect the A-1 Series' financial condition and results of operations, the market price of our Series A-1 common shares, the A-1 Series' ability to make distributions to the holders of Series A-1 common shares and the ability of holders of Series A-1 common shares to realize appreciation in the value of the Property.
Risks Related to Our Organization and Structure
Our shareholders do not elect or vote on our board of directors or the managing member of our company and have limited ability to influence decisions regarding the businesses of the Series, including the A-1 Series.
Our operating agreement provides that the real property, affairs and business of each Series, including the A-1 Series, shall be managed under the direction of our single board of directors, the members of which are nominated and elected by ETRE Financial, LLC, as the managing member of our company. Our shareholders do not elect or vote on the managing member of our company, and, unlike the holders of common stock in a corporation, have only limited voting rights on matters affecting the businesses of the Series, including the A-1 Series, and therefore limited ability to influence decisions regarding the businesses of the Series.
The Series A-1 common shareholders will have limited voting rights and will be bound by a majority vote.
The Series A-1 common shareholders will have voting rights only with respect to certain matters, primarily relating to the Property dispositions. Each outstanding common share (including our Series A-1 common shares) entitles the holder to one vote on all matters submitted to a vote of common shareholders generally. Holders of all classes of common shares of all Series vote together as a single class on all matters as to which all holders of common shares are entitled to vote. In addition, certain matters will require the separate approval of holders of the Series A-1 common shares, such as certain dispositions of the Property or of the Property A-1 Subsidiary. Generally, matters to be voted on by our shareholders must either be approved by a majority of the votes cast by all common shares present in person or represented by proxy, and matters requiring the separate approval of holders of the Series A-1 common shares must be approved by holders representing a majority of our Series A-1 common shares. If any such a vote occurs, you will be bound by the majority vote even if you did not vote with the majority.
Limited partners of the Property A-1 Subsidiary may vote on dispositions of the Property, and the Lincoln Street Holdings Limited Partner Group may be able to control the outcome of any property disposition submitted to a vote of shareholders and unit holders.
Series A-1 OP units generally will not carry a right to vote on any matter voted on by our Series A-1 common shareholders, although Series A-1 OP units in the Property A-1 Subsidiary may be tendered for cash or, at the option of the A-1 Series, exchanged for Series A-1 common shares on a one-for-one basis, subject to certain adjustments. However, the holders of Series A-1 OP units issued in the contribution transactions will be entitled to vote, along with our Series A-1 common shareholders as a single class, on any proposal to dispose of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's interest in the Property.
Immediately following the completion of this offering, the concurrent private placement and the contribution transactions, the ownership of Series A-1 OP units will provide the Limited A-1 Partner with a voting interest equal to 51.13% of the voting power, on a combined basis, of the total outstanding Series A-1 OP units and Series A-1 common shares. Following the contribution transactions, it is expected that the Limited A-1 Partner will distribute its Series A-1 OP units to the Limited A-1 Partner Owners, which will distribute the Series A-1 OP units to their respective members, subject to the transfer restrictions set forth in the limited partnership agreement of the Property A-1 Subsidiary. Consequently, following the completion of this offering, the concurrent private placement and the contribution transactions, the Lincoln Street Holdings Limited Partner Group will be entitled to cast a majority of the votes on any such Property disposition submitted to our Series A-1 common shareholders and thus may be able to control the outcome of such matters submitted for shareholder action. In addition, the Lincoln Street Holdings Limited Partner Group may acquire Series A-1 common shares in the future, which would give this group even greater ability to control the outcome of such matters. Furthermore, our tender offer policy as to the Series A-1 common shares provides that our board of directors will reject any third party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares unless such offer is accompanied by an offer to the holders of the Series A-1 OP units (other than the A-1 Series and certain affiliates) that offers such holders consideration per Series A-1 OP unit that is substantially equivalent in value (as determined by our board of directors) to the consideration per share offered to the holders of the Series A-1 common shares. The Lincoln Street Holdings Limited Partner Group may have interests, including economic interests, that are materially different than the interests of our Series A-1 common shareholders and the members of this group may base their votes or tender their Series A-1 OP units on the basis of these differing interests.
We expect to qualify for exceptions from certain corporate governance and other requirements under the rules of the NASDAQ, although we do not expect to rely on these exceptions following the completion of this offering.
We expect to qualify for exceptions from certain corporate governance and other requirements of the rules of the NASDAQ as a result of being a "controlled company" since more than 50% of the voting power for the election of our directors is held by ETRE. Pursuant to these exceptions, a "controlled company" may elect not to comply with certain corporate governance requirements of the NASDAQ, including the requirements (i) that the company have a majority of its board of directors consist of independent directors, (ii) that the company have a nominating and corporate governance committee that is composed entirely of independent directors and (iii) that the company have a compensation committee that is composed entirely of independent directors. These requirements will not apply to us as long as we remain a "controlled company." Although we do not expect to rely on these exceptions following the completion of this offering, if we were to utilize some or all of these exceptions in the future, our shareholders may not have the same protections afforded to equity holders of entities that are subject to all of the corporate governance requirements of the NASDAQ.
As we establish additional Series in the future, there may be conflicts of interests among the Series, which may result in opportunities that would benefit the Property being allocated to the properties owned by other Series.
We expect to establish additional Series and the Property Subsidiaries in the future that will acquire, own and operate other real properties. These additional Series or the Property Subsidiaries may own properties that compete with the Property. If a sale, financing, leasing or other business opportunity would be suitable for the real property owned by more than one Series, our Administrative Agent will allocate it using its business judgment. Any allocation of this type may involve the consideration of a number of factors that our Administrative Agent determines to be relevant. Except under the Inter-Series Policy and any other policies adopted by our board of directors, which policies will be designed to minimize conflicts among the Series, no Series will have any duty, responsibility or obligation to refrain from:
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• | engaging in the same or similar activities or lines of business as any other Series; |
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• | doing business with any potential or actual tenant, lender, purchaser, supplier, customer or competitor of any other Series; |
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• | engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual tenants, lenders, purchasers, suppliers or customers of any other Series; |
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• | establishing material commercial relationships with another Series; or |
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• | making operational and financial decisions that could be considered to be detrimental to another Series. |
In addition, any decisions by our board of directors or our Administrative Agent to renew, extend, modify or terminate an agreement or arrangement, or enter into similar agreements or arrangements in the future, may benefit one Series more than the other Series or limit or impair the ability of either Series to pursue business opportunities. In addition, third parties may require as a condition to their arrangements or agreements with or related to any one particular Series that such arrangements or agreements include or not include another Series, as the case may be. Any of these decisions may benefit one Series more than another Series.
The conflicts of interest policies we will adopt may not adequately address all of the conflicts of interest that may arise with respect to our activities and are subject to change or suspension.
In order to avoid any actual or perceived conflicts of interest among the Series and with our directors, officers or employees, we intend to adopt the Inter-Series Policy and a code of business conduct and ethics to specifically address some of the conflicts relating to our activities. There is no assurance that these policies will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to the A-1 Series. Our board of directors may modify, suspend or rescind the policies set forth in the Inter-Series Policy, including any resolution implementing the provisions of the Inter-Series Policy, in each case, without a vote of our shareholders.
Our operating agreement provides for mandatory redemptions of outstanding Series A-1 common shares, which could materially and adversely affect the value of your investment.
In the event of a sale, transfer, assignment or other disposition in a transaction or series of related transactions of substantially all the A-1 Series' interest in the Property A-1 Subsidiary, whether held directly or through subsidiaries of the A-1 Series, or the Property A-1 Subsidiary's interest in the Property, whether held directly or through subsidiaries of the Property A-1 Subsidiary, we may redeem a number of outstanding Series A-1 common shares in exchange for cash and/or securities or other property in an aggregate amount equal to the net proceeds of such disposition allocable to our Series A-1 common shares. In addition, our operating agreement provides that we may, at any time, redeem all outstanding Series A-1 common shares in exchange for equity interests in the Property A-1 Subsidiary, a subsidiary of the Property A-1 Subsidiary and/or any other subsidiary of the A-1 Series. If we utilize either of these redemption rights, you will no longer hold our Series A-1 common shares and, to the extent you receive securities or other property in connection with such redemption, shareholders will likely have less liquidity since the securities may not be listed on the NASDAQ or other national securities exchange. This could materially and adversely affect the value of your investment.
Certain provisions of our operating agreement and bylaws could hinder, delay or prevent a change of control of the Property.
Certain provisions of our operating agreement and bylaws could have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change of control of the Property. These provisions include the following:
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• | Authorization of additional shares, issuances of authorized shares and classification of shares without shareholder approval. Our operating agreement authorizes us to issue additional shares or other securities of the A-1 Series for the consideration and on the terms and conditions established by our board of directors without the approval of any holders of our shares. In particular, our board of directors is authorized to provide for the issuance of an unlimited amount of one or more classes or series of shares of the A-1 Series, including preferred shares, and to fix the number of shares, the relative powers, preferences and rights, and the qualifications, limitations or restrictions applicable to each class or series thereof by resolution authorizing the issuance of such class or series. Our ability to issue additional shares and other securities of the A-1 Series could render more difficult or discourage an attempt to obtain control over the Property or over the A-1 Series by means of a proxy contest, tender offer, merger or otherwise. |
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• | Appointment and removal of directors. Under our operating agreement, ETRE Financial, LLC, as the managing member of our company, will have the sole power to (i) nominate and elect all directors to our board of directors, (ii) set the number of directors of our board of directors, (iii) remove any director, with or without cause, at any time and (iv) fill any vacancies on our board of directors. Accordingly, shareholders will have limited ability to influence decisions regarding the businesses of the Series. |
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• | Limitation on shareholder requested special meetings. Our bylaws provide that, subject to the satisfaction of certain procedural and information requirements by the shareholders requesting the meeting, special meetings of Series A-1 common shareholders may only be called upon the written request of the shareholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. |
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• | Advance notice provisions for shareholder proposals. Our bylaws require advance written notice for shareholders to bring business before any meeting of our shareholders. This bylaw provision limits the ability of our shareholders to introduce proposals unless we are notified in a timely manner prior to the meeting. |
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• | Ownership limitations. To assist each Series in qualifying as a REIT, our operating agreement, subject to certain exceptions, provides that generally no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, either more than 9.8% in value or in number of common shares, whichever is more restrictive, of the outstanding common shares of any Series, or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any Series. Accordingly, no person may own, or be deemed to own, more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding Series A-1 common shares. The ownership limits could have the effect of discouraging a takeover or other transaction in which shareholders might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. |
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• | Exclusive authority of our board to amend our bylaws. Our bylaws provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of the bylaws or to make new bylaws. Thus, our shareholders may not affect any changes to our bylaws. |
A court could potentially conclude that the assets and liabilities of one Series are not segregated from those of another Series of our company and may thereby potentially expose assets in a Series to the liabilities of another Series.
In accordance with the Delaware LLC Act, the A-1 Series is, and each other Series we may establish in the future will be, a separate Series and not itself a separate legal entity. Section 18-215(b) of the Delaware LLC Act provides that, if certain conditions (as set forth in Section 18-215(b)) are met, including that certain provisions are in the formation and governing documents of the series limited liability company, and if the records maintained for any such series account for the assets associated with such series separately from the assets of the limited liability company, or any other series, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable only against the assets of such series and not against the assets of the limited liability company generally or any other series. Although the Delaware LLC Act provides that records maintained for a series that reasonably identify its assets, including by specific listing, category, type, quantity, computational or allocational formula or procedure (including a percentage or share of any asset or assets) or by any other method where the identity of such assets is objectively determinable, will be deemed to account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof, we are not aware of any court case that has interpreted Section 18-215(b) of the Delaware LLC Act or provided any further guidance as to what is required for compliance. We intend to maintain separate and distinct records for each Series and account for them separately, and to have each Series invest in a separate Property Subsidiary that will hold the interests in the property to which such Series relates; however, it is possible a court could conclude that the methods used did not satisfy Section 18-215(b) of the Delaware LLC Act and thus potentially expose the assets of the A-1 Series to the liabilities of another Series. In addition, we are not aware of any court case that has tested the limitations on inter-series liability provided by Section 18-215(b) in federal bankruptcy courts and it is possible that a bankruptcy court could determine that the assets of one Series should be applied to meet the liabilities of the other Series or the liabilities of our company generally where the assets of such other Series or of our company generally are insufficient to meet our liabilities.
Potential conflicts of interest may arise among the Fortis General A-1 Partner, the Asset Manager and their affiliates, on the one hand, and the A-1 Series and our Series A-1 common shareholders, on the other hand.
Under the terms of the limited partnership agreement of the Property A-1 Subsidiary, for so long as the Lincoln Street Holdings Limited Partner Group owns at least 25% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares, the Fortis General A-1 Partner will, generally, manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and the A-1 Series, as the REIT General A-1 Partner, will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. Under the terms of the asset management agreement, the Asset Manager will be responsible for overseeing the Property A-1 Subsidiary's real property operations. As a result, the Fortis General A-1 Partner and the Asset Manager will be able to exert significant influence on the Property A-1 Subsidiary and the Property.
The Fortis General A-1 Partner and the Asset Manager are affiliates of one of the Limited A-1 Partner Owners, Lincoln Street Investors, LLC, which will own 75.4% of the Series A-1 OP units upon consummation of the contribution transactions, but will not own any of our Series A-1 common shares upon consummation of this offering and the concurrent private placement. As a result of this affiliation, the Fortis General A-1 Partner and the Asset Manager may have interests, including economic interests, that are materially different than the interests of our Series A-1 common shareholders. The differing interests of the Fortis General A-1 Partner, the Asset Manager and their affiliates could create conflicts of interest when the A-1 Series, on the one hand, and the Fortis General A-1 Partner and the Asset Manager, on the other hand, are faced with decisions that could have different implications for the Fortis General A-1 Partner, the Asset Manager and their affiliates and the A-1 Series.
As a result, the A-1 Series' contractual arrangements with the Fortis General A-1 Partner and the Asset Manager involve risks, including the following:
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• | except in certain limited circumstances, the A-1 Series will not be in a position to exercise sole decision-making authority regarding the Property A-1 Subsidiary or its business, which may prevent the A-1 Series from taking actions that are opposed by the Fortis General A-1 Partner and could create an impasse on material decisions for the Property A-1 Subsidiary; |
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• | the Fortis General A-1 Partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with the A-1 Series' business interests or goals; |
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• | the Fortis General A-1 Partner may be in a position to take action contrary to the A-1 Series' instructions, requests, policies or objectives; and |
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• | disputes between the A-1 Series and the Fortis General A-1 Partner may result in litigation or arbitration, which would increase the A-1 Series' expenses and prevent our directors and officers from focusing their time and efforts on the A-1 Series' business, and could result in subjecting the Property to additional risk. |
If any of the foregoing risks materialize, the A-1 Series' results of operations or financial condition may be adversely affected.
In addition, the Fortis General A-1 Partner will be entitled to designate two of the five members of the Property Oversight Committee that will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates on the one hand, and the A-1 Series and its affiliates, on the other hand. Fortis members of the Property Oversight Committee who are not otherwise directors of our company will not owe any fiduciary duties to our company, the A-1 Series and our Series A-1 common shareholders. As a result, these Fortis members may favor their own interests and the interests of their affiliates over the interests of our company and our Series A-1 common shareholders.
Potential conflicts of interest may arise with respect to certain transactions between the Lincoln Street Holdings Limited Partner Group, which will collectively own 100% of the Series A-1 OP units in the Property A-1 Subsidiary, on the one hand, and the A-1 Series and our Series A-1 common shareholders, on the other.
Following completion of this offering and the concurrent private placement, conflicts of interest could arise with respect to the Lincoln Street Holdings Limited Partner Group, which will collectively own 100% of the Series A-1 OP units in the Property A-1 Subsidiary through the Limited A-1 Partner (representing a 51.13% partnership interest in the Property A-1 Subsidiary), on the one hand, and our company, the A-1 Series, and our Series A-1 common shareholders, on the other. In particular:
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• | Upon the completion of this offering, the concurrent private placement and the contribution transactions, the Lincoln Street Holdings Limited Partner Group will own Series A-1 OP units in the Property A-1 Subsidiary, but none of the members of this group will own any of our Series A-1 common shares. As a result, the economic and other interests of the Lincoln Street Holdings Limited Partner Group may differ materially from the interests of holders of our Series A-1 common shares. In particular, the sale, disposition or transfer of the Property or the repayment of the loan or other indebtedness may be desirable to the A-1 Series and the Series A-1 common shareholders, but could have adverse tax consequences to the Lincoln Street Holdings Limited Partner Group. |
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• | Our directors and officers have duties to our company and the A-1 Series under our operating agreement and applicable Delaware law in connection with their management of our company and the A-1 Series. At the same time, as one of the general partners of the Property A-1 Subsidiary, the REIT General A-1 Partner has fiduciary duties under Delaware law to the Property A-1 Subsidiary and to its limited partners in connection with the management of the Property A-1 Subsidiary. The REIT General A-1 Partners' duties as one of the general partners to the Property A-1 Subsidiary and its partners may come into conflict with the duties of our directors and officers to our company and the A-1 Series. |
There can be no assurance that any procedural protections we implement to address these or other conflicts of interest will result in optimal outcomes for us, the A-1 Series and our shareholders.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for "emerging growth companies," including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to (1) provide an auditor's attestation report on management's assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold shareholder advisory votes on executive compensation. We cannot predict if investors will find our Series A-1 common shares less attractive if we choose to rely on these exemptions. If some investors find our Series A-1 common shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our Series A-1 common shares and the share price may be more volatile.
If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine the financial results of any Series or prevent fraud. As a result, shareholders could lose confidence in the financial results of the A-1 Series, which could harm its business and the value of our Series A-1 common shares.
Effective internal controls are necessary for us to provide reliable financial reports for each Series and effectively prevent fraud. We are a newly formed company that will develop financial and operational reporting and control systems. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes‑Oxley Act of 2002 will require us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. While we intend to undertake substantial work to prepare for compliance with Section 404, we cannot be certain that we will be successful in implementing or maintaining adequate internal controls over our financial reporting and financial processes. Furthermore, as we establish additional Series, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness in our internal controls, the disclosure of that fact, even if quickly remedied, could reduce the market value of our Series A-1 common shares. Additionally, the existence of any material weakness or significant deficiency in respect of our internal controls would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner.
If we are deemed an investment company under the Investment Company Act, our business would be subject to applicable restrictions under the Investment Company Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our Series A-1 common shares.
We do not believe that we are an “investment company” under the Investment Company Act of 1940, or the 1940 Act, because we are not, and we do not hold ourselves out, as being engaged primarily in the business of investing, reinvesting or trading in securities, and thus we do not fall within the definition of investment company provided in Section 3(a)(1)(A) of the 1940 Act. If we were to be deemed an investment company, however, either because of SEC interpretational changes or otherwise, we could, among other things, be required either: (i) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company; or (ii) to register as an investment company, either of which could have an adverse effect on us and the market price of our Series A-1 common shares. If we are required to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.
Risks Related to this Offering
We have not established a minimum distribution payment level for the A-1 Series and the A-1 Series may be unable to generate sufficient cash flows from its operations to make distributions to holders of Series A-1 common shares at any time in the future.
We have not established a minimum distribution payment level for the A-1 Series and the A-1 Series' ability to make distributions to the holders of Series A-1 common shares may be adversely affected by the risk factors described in this prospectus. Because the A-1 Series will commence operations only upon completion of this offering and the concurrent private placement, the A-1 Series may not generate sufficient income to make distributions to the holders of Series A-1 common shares and we cannot predict when distributions, consisting primarily of cash flow from the Property will commence. To the extent the A-1 Series uses the net proceeds from this offering and the concurrent private placement to make distributions to the holders of Series A-1 common shares, the amount of cash the A-1 Series has available to invest in the Property or for other purposes would be reduced.
Our board of directors has the sole discretion to determine the timing, form and amount of any distributions to the holders of Series A-1 common shares and there can be no assurance as to the determinations our board of directors will make in respect of any of our future distributions.
Our board of directors has the sole discretion to determine the timing, form and amount of any distributions to the holders of Series A-1 common shares, subject to applicable law. Our board of directors will make determinations regarding distributions based upon, among other factors, financial performance of the A-1 Series, any debt service obligations, any debt covenants and capital expenditure requirements with respect to the Property. Among the factors that could impair our ability to make distributions to the holders of Series A-1 common shares are:
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• | the A-1 Series' inability to complete the contribution transactions; |
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• | unanticipated expenses or reduced revenues from the Property that reduce the A-1 Series cash flow or non‑cash earnings; and |
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• | decreases in the value of the Property. |
As a result, no assurance can be given that we will be able to make distributions to the holders of Series A-1 common shares at any time in the future or that the level of any distributions we make to the holders of Series A-1 common shares will increase or even be maintained over time, any of which could materially and adversely affect the market price of our Series A-1 common shares.
A portion of the distributions we make to the holders of the Series A-1 common shares may constitute a return of capital, which would have the effect of reducing the basis of a shareholder's investment in our Series A-1 common shares.
Distributions that we make to the holders of Series A-1 common shares generally will be taxable to holders of A-1 Series as ordinary income. However, a portion of these distributions may be designated by the A-1 Series as long‑term capital gains to the extent that they are attributable to capital gain income recognized by the A-1 Series or may constitute a return of capital to the extent that they exceed its accumulated earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a holder's investment in our Series A-1 common shares.
We cannot assure you that a public market for our Series A-1 common shares will develop and your ability to sell our Series A-1 common shares may be limited.
Prior to this offering, there has not been a public market for our Series A-1 common shares. We have applied to have our Series A-1 common shares listed on the NASDAQ. However, we cannot assure you that a regular trading market for our Series A-1 common shares will develop or, if one does develop, that any such market will be sustained. In the absence of a public trading market, an investor may be unable to liquidate an investment in our Series A-1 common shares. The initial public offering price will be determined by us and the representative of the underwriters. We cannot assure you that the price at which our Series A-1 common shares will sell in the public market after the closing of this offering will not be lower than the price at which they are sold by the underwriters.
Series A-1 common shares eligible for future sale may adversely affect the prevailing market prices for our Series A-1 common shares.
We cannot predict the effect, if any, of future sales of Series A-1 common shares, or the availability of Series A-1 common shares for future sale, on the market price of our Series A-1 common shares. Sales of substantial amounts of Series A-1 common shares (including shares issued to our directors and officers), or the perception that these sales could occur, may adversely affect prevailing market prices for our Series A-1 common shares or may impair our ability to raise capital through a sale of additional equity securities.
Your interest in us will be diluted by the issuance of Series A-1 common shares upon the one-for-one redemption of Series A-1 OP units in the Property A-1 Subsidiary for Series A-1 common shares.
The limited partnership agreement of the Property A-1 Subsidiary provides that, in the case of the Series A-1 OP units that will be held by the Lincoln Street Holdings Limited Partner Group following the completion of the contribution transactions, (a) after such units have been outstanding for six months and (b) following the earlier to occur of (i) the refinancing of the loan that currently encumbers the Property or (ii) January 11, 2017, the holders of these Series A-1 OP units may require the redemption of all or a portion of these units for cash or, at the option of the A-1 Series, Series A-1 common shares. Following the completion of this offering and the concurrent private placement, the Lincoln Street Holdings Limited Partner Group will collectively own 100% of the Series A-1 OP units of the Property A-1 Subsidiary, representing a 51.13% partnership interest in the Property A-1 Subsidiary. If the A-1 Series determines to satisfy a redemption request with Series A-1 common shares, the holder of a Series A-1 OP unit will be entitled to receive one Series A-1 common share for each Series A-1 OP unit, subject to adjustment. As a result, you will be diluted by the issuance of Series A-1 common shares in redemption of Series A-1 OP units and the issuance of Series A-1 common shares in redemption of Series A-1 OP units could have a material adverse impact on the price of our Series A-1 common shares.
The market price of our Series A-1 common shares may be volatile due to numerous circumstances beyond our control.
The trading prices of equity securities issued by REITs historically have been affected by changes in market interest rates. One of the factors that may influence the price of our Series A-1 common shares is the annual yield from distributions on our Series A-1 common shares as compared to yields available on other investments. An increase in market interest rates, or a decrease in our distributions to the holders of our Series A-1 common shares, may lead prospective purchasers of our Series A-1 common shares to demand a higher annual yield, which could reduce the market price of our Series A-1 common shares.
Other factors that could affect the market price of our Series A-1 common shares include the following:
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• | changes in market valuations of companies in the commercial office real estate industry; |
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• | changes in expectations of future financial performance of the A-1 Series or changes in estimates of securities analysts; |
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• | fluctuations in stock market prices and volumes; |
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• | issuances of Series A-1 common shares or other securities of the A-1 Series in the future; |
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• | the addition or departure of key personnel of ETRE; and |
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• | announcements by us or our competitors of acquisitions, investments or strategic alliances. |
Future offerings of debt or equity securities ranking senior to our Series A-1 common shares may limit the operating and financial flexibility of the A-1 Series and may adversely affect the market price of our Series A-1 common shares.
If we decide to issue debt or equity securities of the A-1 Series in the future ranking senior to our Series A-1 common shares or the A-1 Series otherwise incurs indebtedness, it is possible that these securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting the operating flexibility of the A-1 Series and limiting our ability to make distributions to the holders of Series A-1 common shares. Additionally, any convertible or exchangeable securities of the A-1 Series that we issue in the future may have rights, preferences and privileges, including with respect to distributions, more favorable than those of our Series A-1 common shares and may result in dilution to owners of our Series A-1 common shares. Because our decision to issue debt or equity securities of the A-1 Series in any future offering or otherwise incur indebtedness of the A-1 Series will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of future offerings or financings by or related to the A-1 Series, any of which could reduce the market price of our Series A-1 common shares and dilute the value of our Series A-1 common shares.
U.S. Federal Income Tax Risk Factors
Failure of each Series to be classified as a separate entity for U.S. Federal income tax purposes could adversely affect the timing, amount and character of distributions to a holder of Series A-1 common shares.
We intend to treat each Series as a separate business entity for U.S. federal income tax purposes and the series LLC organization as a non-entity for U.S. federal income tax purposes. Consistent with this approach, the IRS has issued proposed Treasury Regulations that provide that each individual series of a domestic series LLC organization will generally be treated as a separate entity formed under local law, with each such individual series' classification for U.S. federal income tax purposes determined under general tax principles and the entity classification ("check-the-box") rules. Although not expected based on the proposed Treasury Regulations, if the IRS were to adopt a different approach than the one adopted in the proposed Treasury Regulations and successfully challenge our treatment of each Series as a separate business entity and the series LLC organization as a non-entity for U.S. federal income tax purposes, we expect that the series LLC organization would be treated as a single corporation that has elected and operated to be taxed as a REIT for U.S. federal income tax purposes. In that event, the timing, amount and character of distributions to holders of Series A-1 common shares could be adversely impacted and the ability of the series LLC organization to be taxed as a REIT could be adversely impacted because the activity of each Series would be aggregated as the activities of a single REIT.
The failure of the A-1 Series to qualify as a REIT would subject it to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to holders of our Series A-1 common shares.
The A-1 Series has been organized and intends to operate in a manner that will enable it to qualify as a REIT for U.S. federal income tax purposes commencing with its taxable year ending December 31, 2015. The A-1 Series has not requested and does not intend to request a ruling from the Internal Revenue Service, or the IRS, that it will qualify as a REIT. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code and Treasury Regulations promulgated thereunder for which there are limited judicial and administrative interpretations. To qualify as a REIT, the A-1 Series must meet, on an ongoing basis, various tests regarding the nature and diversification of its assets and its income, the ownership of its outstanding shares, and the amount of its distributions. The ability of the A-1 Series to satisfy these asset tests depends upon an analysis of the characterization and fair market values of its assets, some of which are not susceptible to precise determination, and for which it will not obtain independent appraisals. The A-1 Series' compliance with the REIT income and quarterly asset requirements also depends upon its ability to manage successfully the composition of its income and assets on an ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the A-1 Series to qualify as a REIT. Thus, while the A-1 Series intends to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in circumstances, no assurance can be given that the A-1 Series will so qualify for any particular year.
If the A-1 Series fails to qualify as a REIT in any taxable year, and it does not qualify for certain statutory relief provisions, the A-1 Series would be required to pay U.S. federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates, and distributions to holders of Series A-1 common shares would not be deductible by it in determining its taxable income. In such a case, the A-1 Series might need to borrow money, sell assets, or reduce or even cease making distributions in order to pay its taxes. The A-1 Series' payment of income tax would reduce significantly the amount of cash available for distribution to holders of Series A-1 common shares. Furthermore, if the A-1 Series fails to maintain its qualification as a REIT, the A-1 Series no longer would be required to distribute substantially all of its net taxable income to holders of Series A-1 common shares. In addition, unless the A-1 Series is eligible for certain statutory relief provisions, it could not re-elect to qualify as a REIT until the fifth calendar year following the year in which it failed to qualify.
If the Property A-1 Subsidiary is treated as a corporation for U.S. federal income tax purposes, the A-1 Series will cease to qualify as a REIT.
We believe the Property A-1 Subsidiary qualifies as a partnership for U.S. federal income tax purposes. As a partnership for U.S. federal income tax purposes, the Property A-1 Subsidiary will not be subject to U.S. federal income tax on its income. Instead, each of its partners, including the A-1 Series, will be required to pay tax on its allocable share of the Property A-1 Subsidiary's income. No assurance can be provided, however, that the IRS will not challenge the Property A-1 Subsidiary's status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Property A-1 Subsidiary as a corporation for U.S. federal income tax purposes, the A-1 Series would fail to meet the gross income tests and certain of the asset tests applicable to REITs. As a result, the A-1 Series would cease to qualify as a REIT and the Property A-1 Subsidiary would become subject to U.S. federal, state and local income tax. The payment by the Property A-1 Subsidiary of income tax would reduce significantly the amount of cash available to the Property A-1 Subsidiary to satisfy obligations to make principal and interest payments on its debt and to make distribution to its partners, including the A-1 Series.
Complying with the REIT requirements may cause the A-1 Series to forego and/or liquidate otherwise attractive investments.
To qualify as a REIT, the A-1 Series must ensure that it meets the REIT gross income tests annually. In addition, the A-1 Series must ensure that, at the end of each calendar quarter, at least 75% of the value of its total assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and certain kinds of mortgage-backed securities. Any investment in securities (other than government securities, securities of corporations that are treated as taxable REIT subsidiaries or "TRSs" and qualified REIT real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of the assets of the A-1 Series (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of the total securities of the A-1 Series can be represented by securities of one or more TRSs. See "U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Asset Tests." If the A-1 Series fails to comply with these asset requirements at the end of any calendar quarter, it must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing its REIT qualification and suffering adverse tax consequences.
To meet these tests, the A-1 Series may be required to take or forgo taking actions that it otherwise would otherwise consider advantageous. For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Internal Revenue Code, the A-1 Series may be required to forego certain investments that it otherwise would make. Furthermore, the A-1 Series may be required to make distributions to holders of Series A-1 common shares at disadvantageous times or when it does not have funds readily available for distribution. These actions could have the effect of reducing the A-1 Series' income and amounts available for distribution to holders of Series A-1 common shares. Thus, compliance with the REIT requirements may hinder the investment performance of the A-1 Series.
The REIT distribution requirements could require the A-1 Series to borrow funds during unfavorable market conditions or subject it to tax, which would reduce the cash available for distribution to holders of Series A-1 common shares.
In order to qualify as a REIT, the A-1 Series must distribute to holders of Series A-1 common shares, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, the A-1 Series will be subject to U.S. federal income tax at regular corporate rates to the extent that it distributes less than 100% of its net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. The A-1 Series intends to distribute its net income to its shareholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax.
In addition, taxable income of the A-1 Series may exceed its net income as determined by generally accepted accounting principles, or GAAP, because, for example, the A-1 Series may incur nondeductible capital expenditures or be required to make debt or amortization payments. As a result of the foregoing, the A-1 Series may generate less cash flow than taxable income in a particular year and it may incur U.S. federal income tax and the 4% nondeductible excise tax on that income if it does not distribute such income to holders of Series A-1 common shares in that year. In that event, the A-1 Series may be required to use cash reserves, incur debt or liquidate assets at rates or times that it regards as unfavorable or make a taxable distribution of its shares in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year.
Even if the A-1 Series qualifies as a REIT, it may incur tax liabilities that reduce its cash flow.
Even if the A-1 Series qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income and assets, including taxes on any undistributed income, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. See "U.S. Federal Income Tax Considerations—Taxation of the A-1 Series—Taxation of REITs in General." In addition, any TRSs owned by the A-1 Series will be subject to U.S. federal, state and local corporate income taxes. Any taxes paid by the A-1 Series or its TRSs would decrease the cash available for distribution to holders of Series A-1 common shares.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of Series A-1 common shares.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. holders of Series A-1 common shares that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including Series A-1 common shares.
Complying with REIT requirements may limit the ability of the A-1 Series to hedge effectively and may cause it to incur tax liabilities.
The REIT provisions of the Internal Revenue Code may limit the ability of the A-1 Series to hedge its assets and operations. Under these provisions, any income that the A-1 Series generates from transactions intended to hedge its interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests. See "U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Gross Income Tests" and "U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Hedging Transactions." As a result of these rules, the A-1 Series may have to limit its use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of the hedging activities of the A-1 Series because its TRS would be subject to tax on gains or expose it to greater risks associated with changes in interest rates than the A-1 Series would otherwise want to bear. In addition, losses in a TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.
The ability of the board of directors to revoke the REIT election of the A-1 Series without the approval of holders of Series A-1 common shares may cause adverse consequences to holders of Series A-1 common shares.
Our operating agreement provides that the board of directors may revoke or otherwise terminate the REIT election of the A-1 Series, without the approval of holders of Series A-1 common shares, if the board determines that it is no longer in the best interest of the A-1 Series to continue to qualify as a REIT. If the A-1 Series ceases to qualify as a REIT, it would become subject to U.S. federal income tax on its net taxable income and it generally would no longer be required to distribute any of its net taxable income to holders of Series A-1 common shares, which may have adverse consequences on its total return to holders of Series A-1 common shares.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. The A-1 Series and holders of Series A-1 common shares could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
Your investment has various tax risks.
Although provisions of the Internal Revenue Code generally relevant to an investment in Series A-1 common shares are described in "U.S. Federal Income Tax Considerations," you should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in Series A-1 common shares.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business and Property," "Distribution Policy" and elsewhere in this prospectus constitute forward-looking statements. These forward-looking statements are based on our beliefs, assumptions and expectations of the future performance of the A-1 Series, taking into account information currently available to us. In some cases, you can identify forward‑looking statements by terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should" and "would" or the negative of these terms or other comparable terminology. Statements regarding the following subjects, among others, are forward-looking by their nature:
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• | use of proceeds of this offering and the concurrent private placement; |
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• | the A-1 Series' ability to complete the contribution transactions on the anticipated timeline or at all; |
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• | the A-1 Series' business strategy; |
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• | the A-1 Series' and the Property A-1 Subsidiary's ability to refinance the loan that currently encumbers the Property prior to its maturity date and to obtain future financing arrangements; |
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• | the A-1 Series' expected leverage; |
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• | estimates or statements relating to, and the A-1 Series' ability to make, future distributions; |
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• | the A-1 Series' ability to compete in the marketplace; |
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• | market, industry and economic trends; |
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• | the A-1 Series' ability to qualify and maintain its qualification as a REIT; and |
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• | availability of qualified personnel. |
Our beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If any such change occurs, the business, financial condition, liquidity and results of operations of the A-1 Series may vary materially from those expressed in, or implied by, our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our Series A-1 common shares, along with, among others, the following factors that could cause actual results to vary from our forward-looking statements:
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• | the factors referenced in this prospectus, including those set forth under "Risk Factors" and "Business and Property;" |
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• | our ability and the ability of the Asset Manager and the Fortis General A-1 Partner to successfully operate the Property and generate sufficient operating cash flows to make and sustain distributions to holders of our Series A-1 common shares; |
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• | general volatility of the capital markets; |
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• | changes in the A-1 Series' investment objectives and business strategy; |
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• | our dependence on our Administrative Agent and our ability to find a suitable replacement if the A-1 Series and the Property A-1 Subsidiary or our Administrative Agent were to terminate the administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary; |
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• | our dependence on the Asset Manager and our ability to find a suitable replacement if the Property A-1 Subsidiary or Asset Manager were to terminate the asset management agreement related to the Property; |
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• | limitations on the A-1 Series' business by the REIT requirements; and |
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• | the degree and nature of the A-1 Series' competition. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not rely on these forward-looking statements, which apply only as of the date of this prospectus. We are not obligated, and do not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
USE OF PROCEEDS
We estimate that the net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $160.6 million and that the net proceeds from the concurrent private placement, without payment of any placement fee or underwriting discount, will be approximately $500,000, representing aggregate net proceeds of approximately $161.1 million (in each case, based on an offering price of $15.00 per share). We estimate that the net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $176.8 million if the underwriters exercise their over-allotment option in full, representing aggregate net proceeds from this offering and the concurrent private placement of approximately $177.3 million.
We will allocate the net proceeds from this offering and the concurrent private placement exclusively to the A-1 Series, which, in connection with the contribution transactions, will use substantially all of the net proceeds of this offering and the concurrent private placement to acquire an indirect 48.87% interest in the Property, and the net proceeds of this contribution will be distributed to the current owners of the Property, who will retain an indirect 51.13% interest in the Property.
The total transaction costs of this offering, the concurrent private placement and the contribution transactions to be paid by the A-1 Series consist of:
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• | $155 million to be distributed to the current owners of the Property; |
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• | approximately $4.7 million of closing costs related to this offering, the concurrent private placement and the contribution transactions; and |
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• | approximately $3.0 million to fund certain cash reserves associated with the existing loan on the Property. |
The $4.7 million of closing costs to be paid by the A-1 Series include:
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• | approximately $500,000 to reimburse out-of-pocket expenses that ETRE and its affiliates have advanced on behalf of the A-1 Series in connection with the formation of the A-1 Series and this offering(approximately $300,000 of which was incurred in connection with this offering and $200,000 of which was incurred in connection with the contribution transactions); |
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• | approximately $2.5 million to reimburse costs incurred by ETRE in connection with this offering and the concurrent private placement and the contribution transactions (approximately $1.3 million of which was incurred in connection with this offering and $1.2 million of which was incurred in connection with the contribution transactions); and |
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• | approximately $1.7 million to pay the one-time portion of an administrative services fee to our Administrative Agent. |
If the underwriters exercise their over-allotment option in full, we expect the A-1 Series to use the additional net proceeds to it, which will be approximately $16.2 million in the aggregate after deducting the underwriting discount and estimated offering expenses payable by us, to invest in the Property A-1 Subsidiary, which will use such additional net proceeds for general working capital purposes, including funding cash reserves and for interest rate risk management in connection with the expected refinancing of the loan that currently encumbers the Property (including forward strategies to lock in future interest rates and swap rates and option strategies to hedge against rising interest rates).
In order to avoid potential defaults under or acceleration of the Property's existing loan, we expect the A-1 Series will lend such additional net proceeds to the Property A-1 Subsidiary and that, after the refinancing of the existing loan, the A-1 Series' loan will be converted into an additional partnership interest in the Property A-1 Subsidiary. In particular, we expect this loan will have (1) a principal amount equal to the gross proceeds attributable to the underwriters' exercise of their overallotment option, (2) an interest rate equal to 5% per annum, payable quarterly and (3) a maturity date that is the earlier of (i) the date of the full repayment of the existing loan on the Property or (ii) January 11, 2017. We further expect that on the maturity date, the principal amount will be converted into additional units of general partner interest of the Property A-1 Subsidiary and a conversion price of $15.00 per unit, which conversion price will be subject to adjustment in the event of share splits, share dividends, combinations rights offerings and similar events.
Pending the use of such additional net proceeds, we intend for the Property A-1 Subsidiary to invest the additional net proceeds in interest-bearing, short-term investment-grade securities, money-market accounts or other investments that are consistent with the A-1 Series' intention to elect and qualify to be taxed as a REIT.
DISTRIBUTION POLICY
We intend for the A-1 Series to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2015. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains and determined without regard to the dividends‑paid deduction, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.
To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend for the A-1 Series to make regular quarterly distributions to holders of Series A-1 common shares out of legally available funds.
The A-1 Series' current policy is to distribute all cash available for distribution other than reserves on a quarterly basis. We expect that the first distribution following this offering will be declared in respect of the second quarter of 2015. We cannot assure you that we will make any distributions to holders of our Series A-1 common shares. Any distributions we make to such holders will be at the discretion of our board of directors and will depend upon the earnings and financial condition of the A-1 Series, maintenance of the A-1 Series' REIT qualification, restrictions on making distributions under Delaware law or the documents governing the A-1 Series' or its subsidiaries' indebtedness, any debt service obligations, capital expenditure requirements and such other factors as our board of directors deems relevant. The A-1 Series' earnings and financial condition will be affected by various factors, including the revenue from the Property, its operating expenses and any other expenditures. For more information regarding risk factors that could materially adversely affect the A-1 Series' earnings and financial condition, see "Risk Factors."
We anticipate that REIT distributions generally will be taxable as ordinary income to holders of Series A-1 common shares. A portion of such distributions may be designated by us as qualified dividend income or capital gains or may constitute a return of capital. We will furnish annually to holders of Series A-1 common shares a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, qualified dividend income, capital gains or return of capital. For more information, see "U.S. Federal Income Tax Considerations."
The A-1 Series' cash available for distribution may be less than the amount required to meet the distribution requirements for REITs under the Internal Revenue Code, and in certain cases, the A-1 Series may be required to sell assets or borrow funds to make cash distributions, make a portion of the required distribution in the form of a taxable share distribution to holders of our Series A-1 common shares, or make a distribution of debt securities. For more information, see "U.S. Federal Income Tax Considerations—Taxation of Holders of Series A-1 Common Shares—Taxation of Taxable U.S. Holders of Series A-1 Common Shares."
CAPITALIZATION
The following table sets forth (1) the A-1 Series' actual capitalization at March 31, 2015, and (2) its capitalization, as adjusted on a pro forma basis to give effect to (i) the sale of our Series A-1 common shares in this offering and the concurrent private placement, (ii) the contribution transactions, and (iii) the application of the net proceeds as set forth in "Use of Proceeds". You should read this table together with "Use of Proceeds" included elsewhere in this prospectus.
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| | As of March 31, 2015 |
| | Actual | | Pro Forma (1)(2) |
| | (dollars in thousands) |
Cash................................................................................................. | | $ | 1 |
| | $ | 0 |
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Total debt........................................................................ | | $ | 0 |
| | $ | 0 |
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100 Series A-1 common shares outstanding, actual, and 11,535,333 Series A-1 common shares outstanding, pro forma.... | | $ | 0 |
| | $ | 173,000 |
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Total equity................................................................ | | $ | 1 |
| | $ | 173,000 |
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Total capitalization.................................................... | | $ | 1 |
| | $ | 173,000 |
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___________________
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(1) | Assumes 11,533,333 Series A-1 common shares will be sold in this offering and the concurrent private placement at an offering price of $15.00 per share, resulting in net proceeds of $160.6 million after deducting the underwriting discount of $10.4 million from this offering and estimated offering expenses of approximately $1.6 million. The concurrent private placement has no associated placement fees or underwriting discounts. See "Use of Proceeds." Also assumes 12,066,667 Series A-1 OP units will be held by the Limited A-1 Partner upon the completion of the contribution transactions. |
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(2) | Pro forma Series A-1 common shares outstanding includes (a) the 11,500,000 Series A-1 common shares to be issued in this offering (b)33,333 Series A-1 common shares that our Administrative Agent has agreed to purchase in the concurrent private placement and (c) an aggregate of 2,000 restricted Series A-1 common shares to be granted to our independent directors upon the completion of this offering and the concurrent private placement under our 2015 Director Plan, but excludes (i) up to 1,150,000 Series A-1 common shares that we may issue and sell upon exercise of the underwriters' over-allotment option in full, and (ii) 12,066,667 Series A-1 common shares potentially issuable upon redemption of Series A-1 OP units. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the information provided under the sections of this prospectus entitled "Risk Factors," "Forward-Looking Statements," and "Business and Property" and our and the A-1 Series' audited financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled "Risk Factors" and "Forward-Looking Statements" and elsewhere in this prospectus.
Overview
We are a newly organized Delaware series limited liability company that has been formed to permit public investment in individual commercial real estate properties, each of which will be held by a separate property-owning subsidiary owned by a separate Series of limited liability company interests, or Series, that we intend to establish. Each Series we may establish in the future will be a separate Series and not itself a separate legal entity under Delaware law. As a separate Series, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Series are segregated and enforceable only against the assets of such Series as provided under Delaware law. We intend for each Series to elect and qualify to be taxed as a separate REIT for U.S. federal income tax purposes, commencing with the first taxable year ending after the completion of the initial public offering of shares of such Series.
The A-1 Series has been established to allow persons who acquire Series A-1 common shares in this offering to own an interest in State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts. Following the contribution transactions described herein, the A-1 Series will own an indirect 48.87% interest in the Property through a general partner interest in the Property A-1 Subsidiary.
We intend to elect and qualify each Series, including the A-1 Series, as a REIT under the Internal Revenue Code commencing with, in the case of the A-1 Series, its taxable year ending December 31, 2015.
Critical Accounting Policies
Below is a discussion of the accounting policies that management believes will be critical once the A-1 Series commences operations. The A-1 Series' accounting policies have been established to conform with GAAP. We consider these policies critical because they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and are important for understanding and evaluating the A-1 Series' reported financial results. These judgments affect the reported amounts of assets and liabilities and the A-1 Series' disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in the A-1 Series' financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of the A-1 Series' results of operations to those of companies in similar businesses.
Investment in Property A-1 Subsidiary (Partially Owned Entity)
We account for our investment in partially owned entities under the equity method of accounting in accordance with Accounting Standard Codification (ASC) 323, Investments-Equity Method and Joint Ventures, in cases where we exercise significant influence over, but do not control, the entity and are not considered to be the primary beneficiary.
As indicated under “Risk Factors” herein, the A-1 Series has significant influence over the operations of the Property A-1 Subsidiary; however, the terms of the Property A-1 Subsidiary’s limited partnership agreement will limit the A-1 Series’ ability to take actions in respect of the Property’s operations that are opposed by the Fortis General A-1 Partner. Accordingly, the requirements for consolidation are not met and the A-1 Series will account for its investment in the Property A-1 Subsidiary under the equity method.
The A-1 Series’ judgment with respect to its level of influence over the Property A-1 Subsidiary involves the consideration of various factors including voting rights, forms of its ownership interest, representation in the Property A-1 Subsidiary’s governance, the size of its investment (including loans), its ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to sell the Property and liquidate the partnership, if applicable. The assessment of the A-1 Series’ influence over an entity affects the presentation of the investment in the financial statements.
Equity method investments are initially recorded at cost, including transaction costs, and subsequently adjusted for the A-1 Series’ share of net income or loss and cash contributions and distributions each period. To the extent the A-1 Series' investment cost exceeds its share of the underlying Property A-1 Subsidiary’s book value (“excess outside basis”), the excess outside basis portion of our investment is amortized over the anticipated useful lives of the Property A-1 Subsidiary’s underlying tangible and intangible assets acquired and liabilities assumed (based on an allocation of cost to the underlying tangible assets, identifiable intangibles and assumed liabilities based on their estimated fair values at the date of the A-1 Series' investment). The A-1 Series assesses its investment in the Property A-1 Subsidiary for recoverability, and if it is determined that a loss in value of the investment is other than temporary, will write down the investment to its fair value. The A-1 Series evaluates its investment for impairment based on the Property A-1 Series’ projected discounted cash flows.
Share Based Compensation
We will account for share-based compensation in accordance with the provisions of ASC 718, Share-based Payment. ASC 718 requires that compensation cost for share-based compensation be recognized ratably over the service period of the award. Because all of our share-based compensation will be issued to non-employees, the amount of compensation is to be adjusted, in each reporting period, based on the fair value of the award at the end of the reporting period. The award is re-marked until such time as the award has vested, the service being provided is substantially completed or, under certain circumstances, likely to be completed, whichever occurs first.
Income Taxes
We will operate in a manner intended to enable us to qualify as a REIT under Sections 856-859 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains and determined without regard to the dividends paid deduction, as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Compliance with the REIT Regulations can be complex and requires our management to exercise judgment.
Results of Operations
As of the date of this prospectus, the A-1 Series has no operations because it has been in its organizational stage. Substantially concurrently with the completion of this offering and the concurrent private placement, the A-1 Series will acquire an indirect 48.87% interest in the Property through a general partner interest in the Property A-1 Subsidiary and will commence operations. Thereafter, the A-1 Series' operations, through its interest in the Property A-1 Subsidiary, will consist primarily of its pro rata interest in revenues from the Tenant and its pro rata interest in operating expenses of the Property.
For the three months ended March 31, 2015, total revenue from the Property was approximately $17.7 million, consisting of rental revenue of approximately $17.3 million and escalations and recoveries from the Tenant of approximately $0.4 million, and operating expenses from the Property were approximately $4.5 million, consisting of approximately $3.3 million in real estate taxes and assessments, and approximately $1.2 million in other operating costs.
For the years ended December 31, 2014 and 2013, total revenue from the Property was approximately $70.9 million and $70.9 million, respectively, consisting of rental revenue of approximately $69.2 million and $69.0 million, respectively, and escalations and recoveries from the Tenant of approximately $1.7 million and $1.9 million, respectively, and operating expenses from the Property were approximately $17.3 million and $17.4 million, respectively, consisting of approximately $13.5 million and $13.6 million, respectively, in real estate taxes and assessments, and approximately $3.8 million and $3.8 million, respectively, in other operating costs. Following the completion of this offering, the A-1 Series will also incur administrative services fees payable to our Administrative Agent (estimated to be approximately $640,000 per annum) and its allocable portion of other general overhead expenses (estimated to be approximately $25,000 per annum), and the Property A-1 Subsidiary will also incur asset management fees payable to the Asset Manager (estimated to be approximately $540,000 per annum).
Summary Financial Information of State Street Corporation
The Property is subject to a net lease with a single tenant, SSB Realty, LLC, whereby the Tenant is responsible for all the operating costs of the Property, including real estate taxes, insurance, maintenance, management and other operating expenses in excess of approximately $16.4 million per year per the office lease agreement. State Street Corporation (NYSE: STT), the Tenant's guarantor, has audited financial information available by virtue of State Street Corporation being a public registrant with the SEC. Accordingly, we are providing summary financial information with respect to State Street Corporation as we believe the financial information specific to State Street Corporation is relevant and useful to investors. In addition, we have provided elsewhere in this prospectus audited financial information for the Property pursuant to Rule 3-14 under Regulation S-X.
State Street Corporation currently files audited financial reports with the SEC. The summary financial data below was obtained from State Street Corporation’s audited financial statements included in its most recent annual report on form 10-K and unaudited financial statements included in its most recent quarterly report on Form 10-Q, each filed with the SEC. The information presented is summarized and does not include all related disclosures, and therefore may not be a complete and accurate representation of the State Street Corporation’s results of operations or financial position. For additional information and to obtain a complete understanding of the financial statements and the related critical accounting policies and estimates used in the preparation of those financial statements, please refer to State Street Corporation’s most recent annual report on Form 10-K and Form 10-Q, each of which is available on the SEC’s website at www.sec.gov and/or State Street Corporation’s investor relations page on its website. Summary financial data for State Street Corporation is presented below for the most recent three fiscal years for income and cash flow information and the most recent two years for financial condition information (amounts in millions).
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| | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2015 | For the Year Ended |
| (unaudited) | 2014 | | 2013 | | 2012 |
Summary Income Information: | | | | | | |
Total revenue | $ | 2,605 |
| $ | 10,295 |
| | $ | 9,884 |
| | $ | 9,649 |
|
Provision for loan losses | 4 |
| 10 |
| | 6 |
| | (3 | ) |
Total expenses | 2,097 |
| 7,827 |
| | 7,192 |
| | 6,886 |
|
Income before income tax expense | 504 |
| 2,458 |
| | 2,686 |
| | 2,766 |
|
Income tax expense | 95 |
| 421 |
| | 550 |
| | 705 |
|
Net income | $ | 409 |
| $ | 2,037 |
| | $ | 2,136 |
| | $ | 2,061 |
|
| | | | | | |
Summary Cash Flow Information: | | | | | | |
Net cash (used in) provided by operating activities | $ | 397 |
| $ | (561 | ) | | $ | (2,024 | ) | | $ | 1,933 |
|
Net cash used in investing activities | (991 | ) | (28,492 | ) | | (14,085 | ) | | (4,591 | ) |
Net cash provided by financing activities | $ | 1,888 |
| $ | 27,688 |
| | $ | 16,739 |
| | $ | 3,055 |
|
| | | | | | |
| | For the Three Months Ended March 31, 2015 | | As of December 31, |
| | (unaudited) | | 2014 | | 2013 |
Summary Financial Condition Information: | | | | | | |
Investment securities | | $ | 112,857 |
| | $ | 112,636 |
| | $ | 116,914 |
|
Average total interest-earning assets | | 226,359 |
| | 209,054 |
| | 178,101 |
|
Total assets | | 279,476 |
| | 274,119 |
| | 243,291 |
|
Deposits | | 211,352 |
| | 209,040 |
| | 182,268 |
|
Long-term debt | | 9,174 |
| | 10,042 |
| | 9,699 |
|
Total liabilities | | 258,657 |
| | 252,646 |
| | 222,913 |
|
Total shareholders' equity | | 20,819 |
| | 21,473 |
| | 20,378 |
|
Total liabilities and shareholder's equity | | 279,476 |
| | $ | 274,119 |
| | $ | 243,291 |
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Liquidity and Capital Resources
The A-1 Series' short-term and long-term liquidity requirements consist primarily of funding its distributions and operating expenses and other expenditures directly associated with its interest in the Property, including:
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• | The acquisition of the A-1 Series' interest in the Property A-1 Subsidiary; |
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• | Distributions paid to holders of our Series A-1 common shares pursuant to the A-1 Series' distribution policy and to maintain its REIT status; and |
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• | Administrative services fees, administrative sale fees and expense reimbursements payable to our Administrative Agent; |
The Property A-1 Subsidiary's short-term and long-term liquidity requirements consist primarily of funding its distributions and operating expenses and other expenditures directly associated with the Property, including:
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• | Interest expense and scheduled principal payments on the Property's mortgage debt; |
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• | Capital expenditures to improve the Property; and |
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• | Recurring repairs and maintenance expenditures required to maintain the Property. |
We expect the A-1 Series will meet its short-term liquidity requirements generally through its share of net cash provided by the Property's operations, existing cash balances, the net proceeds of this offering and the concurrent private placement and, if necessary, short-term borrowings. We expect the A-1 Series will meet its long-term liquidity requirements through the issuance of additional equity securities or debt securities and the sources described above with respect to the A-1 Series' short-term liquidity.
Although our governing documents contain limitations related to certain types of debt financing and cross-subsidiary guarantees, in general, these limitations do not limit the amount of indebtedness that the A-1 Series may incur, directly or through the Property A-1 Subsidiary and its subsidiaries. We expect for the A-1 Series to maintain a flexible capital structure and intend to target a ratio of outstanding indebtedness to the A-1 Series' total assets of between 50% and 70%. Our board of directors will periodically review this target and may modify or eliminate it without the approval of holders of our Series A-1 common shares.
Contractual Obligations
The A-1 Series had no contractual obligations as of March 31, 2015. The A-1 Series, Lincoln Street Mezz, LLC and Lincoln Street Holdings, LLC have entered into a contribution agreement relating to the contribution transactions. In addition, prior to the completion of this offering, the A-1 Series and the Property A-1 Subsidiary will enter into an administrative services agreement with our Administrative Agent, and the Property A-1 Subsidiary will enter into the asset management agreement with the Asset Manager, each of which will be effective upon closing of this offering. Further, following the contribution transactions, the Property will continue to remain subject to the mortgage loan that currently encumbers the Property, as described below, and the Property A-1 Subsidiary will agree to indemnify the existing guarantors of the loan for certain losses. Other than these agreements, the A-1 Series does not have any other material contractual obligations.
Related Party Fees
The Administrative Agent, an affiliate of the managing member of our company, will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, as well as a management team and appropriate support personnel. The administrative services fee includes an approximate $1,730,000 one‑time fee upon closing of this offering. This one-time fee will be expensed as part of the formation and organization of the A-1 Series.
In addition, the A-1 Series and Property A-1 Subsidiary will pay the Administrative Agent $25,000 per quarter plus 1.0% of net operating income, as defined below, during the prior fiscal quarter under the administrative services agreement. For purposes of calculating the quarterly administrative services fee, net operating income means the A-1 Series' net income during the fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of a majority of our independent directors; provided, however, that, for so long as the A-1 Series' investment in the Property A-1 Subsidiary is accounted for under the equity method, net operating income shall mean the Property A-1 Subsidiary's net income during the applicable fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, and general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of the General A-1 Partners. These fees will be expensed by the A-1 Series and/or the Property A-1 Subsidiary, as applicable.
In addition, the Administrative Agent will be entitled to an administrative sales fee upon a future sale of the Property as provided in the administrative services agreement, which will be included as a cost of sale at such time.
Mortgage Indebtedness
The Property is currently subject to a first mortgage loan, or the loan, in the amount of $775,000,000 that was provided by Wachovia Bank, National Association, and UBS Real Estate Investments, Inc. in December 2006. The loan provides for interest-only payments of approximately $3.7 million per month for 10 years. It bears interest at a fixed rate of 5.66% per annum and has a maturity date of January 11, 2017. We expect for the Property Owner to refinance the loan prior to the scheduled maturity. The loan allows for defeasance prior to December 1, 2016, subject to the terms and conditions of defeasance under the loan agreement. During the three months prior to the maturity of the loan, prepayment is permitted in whole, but not in part, without defeasance or a prepayment penalty, as of the last day of the interest accrual period in which such prepayment is being made upon not less than 30, and not more than 90, day's prior written notice.
The loan also prohibits, subject to certain exceptions, any transfer of the Property or in any person having a legal or beneficial ownership interest in an entity owning the Property without lender consent. A transfer in breach of this prohibition would permit the lender to declare all principal and interest and all other monetary obligations under the loan immediately due and payable. For a further description this provision, see "Business and Property—Our Financing Strategy."
Off-Balance Sheet Arrangements
As of the date of this prospectus, the A-1 Series had no off-balance sheet transactions.
Funds from Operations
Management believes that FFO, a non-GAAP measure, is an additional and appropriate measure of the operating performance of REITs in general and the A-1 Series in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in accounting principles and real estate-related depreciation and amortization.
Our management utilizes FFO as a measure of the A-1 Series' operating performance, and believes FFO is also useful to investors, because it facilitates an understanding of the A-1 Series' operating performance after adjustment for certain non-cash expenses, such as real estate depreciation, which assumes that the value of real estate assets diminish predictably over time. Furthermore, although FFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO may provide us and investors with an additional useful measure to compare the A-1 Series' financial performance to certain other REITs.
FFO is not equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO does not represent amounts available for management's discretionary use because FFO excludes depreciation and amortization and captures neither the changes in the value of the Property that results from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of the Property, all of which have real economic effect and could materially impact the A-1 Series' results from operations. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.
The following table presents a reconciliation of the A-1 Series' pro forma net loss attributable to the A-1 Series, the most directly comparable GAAP measure, to pro forma FFO for the periods presented (in thousands):
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| For the Three Months Ended March 31, 2015 | | For the Year Ended December 31, 2014 |
| unaudited |
Net loss | (1,470 | ) | | $ | (5,512 | ) |
Add: | | | |
Depreciation and Amortization (1) | 3,660 |
| | 14,640 |
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Funds from operations | $ | 2,190 |
| | $ | 9,128 |
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(1) Reflects the A-1 Series' share of depreciation and amortization as disclosed in footnote C to the unaudited pro forma financial statements.
Quantitative and Qualitative Disclosures About Market Risks
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices and other market changes that affect market sensitive instruments. In pursuing its business plan, we expect that the primary market risk to which the A-1 Series will be exposed is interest rate risk.
The A-1 Series may be exposed to the effects of interest rate changes primarily as a result of the Property's long-term debt. Following the contribution transactions, the A-1 Series will not have any long-term floating rate debt, but the A-1 Series or its subsidiaries may incur long-term floating rate debt in the future, including in connection with the refinancing of the loan that currently encumbers the Property. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, the A-1 Series may borrow, directly or through the Property A-1 Subsidiary or its subsidiaries, at fixed rates or variable rates. The A-1 Series may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate its interest rate risk on a related financial instrument. The A-1 Series will not enter into derivative transactions for speculative purposes.
Inflation
We expect the A-1 Series will be exposed to inflation risk as income from the Property's long-term office and garage leases with the Tenant will be the sole source of its cash flows from operations. We expect the following provisions of the office and garage lease agreements will protect the A-1 Series from the impact of inflation: rent steps, reimbursement billings for operating expense pass-through charges, and real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the office and garage leases, they may not re-set frequently enough to cover inflation.
BUSINESS AND PROPERTY
Overview
We are a newly organized Delaware series limited liability company that has been formed to permit public investment in individual commercial real estate properties, each of which will be held by a separate property‑owning subsidiary owned by a separate series of limited liability company interests, or Series, that we intend to establish. Each Series we may establish in the future will be a separate Series and not itself a separate legal entity under Delaware law. As a separate Series, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Series are segregated and enforceable only against the assets of such Series as provided under Delaware law. We intend for each Series to elect and qualify to be taxed as a separate REIT for U.S. federal income tax purposes, commencing with the first taxable year ending after the initial public offering of shares of such Series has been completed.
The A-1 Series has been established to allow persons who acquire Series A-1 common shares in this offering to own an interest in State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts. Following the contribution transactions described herein, the A-1 Series will own an indirect 48.87% interest in the Property through a general partner interest in the Property A-1 Subsidiary.
In connection with the contribution transactions, the A-1 Series has executed a contribution agreement with the current owners of the Property. Pursuant to this contribution agreement, the A-1 Series will use substantially all of the net proceeds of this offering and the concurrent private placement to acquire the indirect 48.87% interest in the Property, and the net proceeds of this contribution will be distributed to the current owners of the Property, who will retain an indirect 51.13% interest in the Property through a limited partner interest in the Property A-1 Subsidiary. We and the current owners of the Property negotiated contribution consideration and related payments that reflect a valuation of approximately $1.11 billion for the Property. Based on an offering price of $15.00 per share, the total equity value of the Property A-1 Subsidiary would be approximately $354.0 million, with the current owner's interest representing approximately $181.0 million and the A-1 Series' interest representing approximately $173.0 million.
Following the completion of the contribution transactions, the objective of the A-1 Series will be to maximize total returns to holders of our Series A-1 common shares through the payment of consistent cash distributions and the achievement of long-term capital appreciation in the Property.
The A-1 Series, as the REIT General A-1 Partner, Lincoln Street Manager, LLC (an affiliate of Fortis), as the Fortis General A-1 Partner, and Lincoln Street Holdings, LLC, as the Limited A-1 Partner, will enter into the limited partnership agreement for the Property A-1 Subsidiary. Under the terms of the limited partnership agreement, for so long as the Lincoln Street Holdings Limited Partner Group owns at least 25% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares, the Fortis General A-1 Partner will, generally, manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and the A-1 Series, as the REIT General A-1 Partner, will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. We have structured the terms of the limited partnership agreement in this manner in order to provide both the A-1 Series and the Property's current owners (for so long as they continue to maintain a significant ownership interest in the Property) with a voice in the management of the Property's operations. In addition, a Property Oversight Committee will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates, on the one hand, and the A-1 Series and its affiliates, on the other hand, with a majority of the members of this committee being designated by our board of directors. The Asset Manager, an affiliate of the Fortis General A-1 Partner and Fortis, will also provide asset management services to the Property A-1 Subsidiary.
Each of our Series and Property Subsidiaries, including the A-1 Series and the Property A-1 Subsidiary, will enter into an administrative services agreement with our Administrative Agent, a subsidiary of ETRE Financial, LLC. Our Administrative Agent will provide certain administrative and advisory services to each of our Series and Property Subsidiaries, including the A-1 Series and the Property A-1 Subsidiary. Through our Administrative Agent, we intend to utilize and leverage the extensive expertise and extensive network of relationships of ETRE and its management team.
We intend to elect and qualify each Series, including the A-1 Series, as a REIT under the Internal Revenue Code commencing with, in the case of the A-1 Series, its taxable year ending December 31, 2015.
Business Strategy
The objective of the A-1 Series is to maximize total returns to holders of our Series A-1 common shares through the payment of consistent cash distributions and the achievement of long-term capital appreciation in the Property.
To achieve this objective, the General A-1 Partners will direct the Asset Manager to seek to maximize the cash flow from, and increase the value of, the Property by:
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• | refinancing the existing loan on the Property at favorable terms prior to January 11, 2017, its scheduled maturity date; |
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• | actively managing operating expenses; and |
We expect that the Asset Manager will seek to maximize value through the active management of the Property, participating in various aspects of the operations of the Property, including marketing, operations analysis, physical design, renovation, capital improvements, tenant experience and overall strategic direction.
Our Strengths
We believe that our competitive strengths include the following:
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• | Independent Board of Directors. Shareholders of Series A-1 common shares will benefit from the oversight of an independent board of directors with extensive experience in the real estate, equity and debt markets. John Gregorits will be retiring later this year from his position as head of the Specialized Funds Group at Prudential Real Estate Investors (PREI), the real estate investment management business of Prudential Financial. Jay Anderson serves as the chief operating officer of The Feil Organization, a private real estate development and management firm with over 26 million square feet of retail, commercial and industrial properties. Joseph C. Capezza, CPA,serves as executive vice president, chief financial officer and treasurer for Health Net, Inc. Mark Filanowski is a founding partner of Intrepid Shipping and was previously chief financial officer of Marine Transport Corporation. |
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• | Experienced Management Team and Advisors. Holders of Series A-1 common shares will benefit from the administrative services of ETRE Asset Management, LLC, our Administrative Agent, a subsidiary of ETRE, our experienced management team and the asset management services of the Asset Manager, an affiliate of Fortis. Paul Frischer, our president and chief executive officer and a founding member of ETRE, leads the development and implementation of ETRE and has extensive experience in the real estate industry, covering all aspects of commercial real estate investment, including equity, debt and trading. Jesse Stein, our chief operating officer, secretary and a founding member of ETRE, is the leading visionary and architect for ETRE, with extensive experience in real estate capital markets, financial modeling and equity trading. Fortis is a real estate investment, operating and development company. Its real estate projects include the ownership, development and management of Class A office, multi-family residential condominiums and rentals, and industrial properties. Today, Fortis manages millions of square feet of commercial and residential property in various U.S. locations. |
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• | Investor Accessibility. Series A-1 common shares provide accessibility for individual investors to own interests in a high-quality, single-property commercial real estate asset in the form of a listed public security. |
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• | Investor Liquidity. We have applied to have our Series A-1 common shares listed on the NASDAQ under the ticker "ESSF" in order to provide liquidity to holders of our Series A-1 common shares. |
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• | Economies of Scale Model. Our Administrative Agent will oversee our SEC reporting and compliance obligations, including as each relates to the A-1 Series. These functions include investor reporting and communication, periodic filings with the SEC, audit oversight and general compliance. The Administrative Agent will provide similar or additional functions for the Other Property Series, achieving economies of scale for each of the Series. |
The Property
State Street Financial Center
State Street Financial Center is located in Boston, Massachusetts. The 36-story office tower features approximately 1,045,106 square feet of primarily office space and a parking garage of five levels and approximately 325,000 square feet. The Property was developed in 2003 through a collaboration among the Gale Company, State Teachers Retirement System of Ohio and a Morgan Stanley real estate fund. Originally conceived as One Lincoln Street, the asset was fully leased to SSB Realty, LLC, a subsidiary of State Street Corporation , or the Tenant, prior to its completion. The Property was named "Boston Building of the Year" by the Building Owners and Managers Association International, or BOMA, in 2003. The Property is situated in the hub of Boston's financial, corporate and retail districts.
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PROPERTY SUMMARY |
Office Rentable Square Feet | 1,008,587 |
Retail Rentable Square Feet | 16,411 |
Storage Rentable Square Feet | 20,108 |
Parking Square Feet | 325,000 |
Total Property Square Feet | 1,370,106 |
% Occupied | 100%(1) |
Average Floor Plates | 22,500 SF |
Slab to Slab Avg. Ceiling Heights | 12' 7" |
Stories | 36 |
Year Built | 2003 |
(1) As of March 31, 2015 | |
The Office and Garage Leases
Upon completion of the Property, the Tenant moved into its new global headquarters, which was customized to its needs, and signed a 20-year office lease expiring on September 23, 2023 (which originally did not include the garage) with two 10-year renewal options. The Tenant subsequently entered into a garage lease with the Property Owner, with the same expiration date and renewal options for the five-level parking garage beneath the office tower. The current rent that the Tenant pays under the office lease is approximately $63.9 million per year. The current rent that the Tenant pays under the garage lease is approximately $5.3 million, adjusted annually for changes in the consumer price index. With respect to each of the office lease and garage lease, State Street Corporation entered into a guaranty with the Property Owner to guarantee the full payment and performance of the Tenant as a present and continuing guaranty of payment and not of collection. The Tenant made its own substantial investment of over $250 per square foot in the Property to ensure that all technological, safety and security needs were met.
Site Description
The site consists of a 70,906 square-foot, mostly rectangular-shaped parcel with frontage on Lincoln Street, Essex Street, Kingston Street and Bedford Street. The Property is located in close proximity to several Boston hotels as well as shopping and tourist attractions such as Faneuil Hall Marketplace/Quincy Market and Downtown Crossing shopping districts. Located in the immediate vicinity are the Boston Common, the Freedom Trail, the New England Aquarium and the expansive Rose Fitzgerald Kennedy Greenway.
Transportation & Access
The Property is situated in the hub of the city's financial, corporate and retail districts. Access to U.S. Interstate 93 and the Massachusetts Turnpike is within a few blocks while Logan International Airport is approximately four miles by car. South Station, the city's main transportation center, which offers commuter rail and subway services and Amtrak trains, is also nearby.
Amenities
The Property features a full-service cafeteria on the seventh floor and a five-level parking garage, which is located below grade. It is operated by VPNE Parking Solutions with two entrances that can accommodate 853 cars.
Zoning
The site is zoned within the South Station Economic Development Area, which has been designated to direct downtown development in a way that promotes balanced growth for Boston; to permit redevelopment which provides significant community benefits, in accordance with city land disposition policies; to create a mixed-use district which includes office, retail, hotel, research and development; and to improve vehicular access to the city by establishing parking facilities near major commuter arteries.
Architect/Structure
The Property was designed by the internationally renowned architectural firm, Jung/Brannen Associates, and was developed by a joint venture between State Teachers Retirement System of Ohio, a Morgan Stanley real estate fund, The Gale Company, and Columbia Plaza Associates.
Lobby and Layout
The Property provides the Tenant and visitors with four separate entrances: Lincoln Street, Essex Street, Bedford Terrace and Bedford/Kingston Streets. In the building's marble-appointed lobbies there is a sundry shop, café and bakery, and shoeshine stand. The lobby also features the State Street Corporation Visitor Center and the State Street Corporation Record, an interactive exhibit detailing the history of State Street Corporation.
Roof
The building has a fully and mechanically adhered ethylene, propylene, diene, and terpolyne, or EPDM, membrane roofing system.
Elevators
The building has a total of 25 elevators, including 20 high-speed gearless passenger elevators, three freight elevators and two passenger cabs for the garage.
HVAC
Heating and cooling is provided by separate Mammoth heating, ventilation and air conditioning, or HVAC, direct expansion units on each floor that feed a decentralized variable air volume, or VAV, system for independent floor control. Supplemental heat is provided by electrical elements in the perimeter diffusers.
Fire Life Safety
The Property features an automatic sprinkler system, state-of-the-art smoke, fire detection and alarm systems, pressurized, smoke-proof, fire-rated stairwells and spare water supply, fire pumps and emergency power sources for added system reliability.
Electrical
The primary electric service for the Property is supplied through four 13 Kilovolt feeders and four 2,500 Kilovolt amp transformers.
Emergency Generator
One Caterpillar building standby generator allows continued operation of all critical building services and safety systems with a 3,400 gallon, above-ground fuel tank. State Street Corporation has four additional generators located on the roof of the low-rise building with a 10,000-gallon above-ground fuel tank.
Security
Security features include ballards surrounding the perimeter of the building, bomb blast film on the lower floor windows and a security barrier system on the ramps of the parking garage. The building is protected by a 24-hour security program with uniformed guards, motion detection, card-access control and close circuit television monitoring.
Loading Dock
The Property has five loading bays with direct access from Kingston Street.
Tenant
SSB Realty LLC, an affiliate of State Street Corporation, leases from Property Owner, all office, retail and storage portions of the building, totaling approximately 1,045,106 square feet. The Tenant also leases the Property's five-level parking garage, containing approximately 325,000 square feet.
State Street Corporation guarantees both of the Tenant's leases. Organized in 1969, State Street Corporation is a financial holding company that offers, through its subsidiaries, investment servicing products and services, which include custody; product- and participant-level accounting; daily pricing and administration; master trust and master custody; record-keeping; cash management; foreign exchange, brokerage, and other trading services; securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; and performance, risk, and compliance analytics. State Street Corporation's investment management products and services include investment management, investment research and investment advisory services; strategies for managing passive and active financial assets, such as enhanced indexing and fixed-income securities; and exchange-traded funds. It serves mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers.
As of March 31, 2015, State Street Corporation had a market capitalization of more than $30 billion and in 2014 had total revenue of approximately $10.3 billion. For additional information about State Street Corporation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Summary Financial Information of State Street Corporation." The following table sets forth information regarding the Tenant as of March 31, 2015:
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Tenant | Type | Lease Expiration(1) | Remaining Lease Term (years) | Total Leased Square Feet(3) | Percent of Property Rentable Square Feet | Annualized Base Rent(4) | Annualized Base Rent per Total Leased Square Feet(4) | Percent of Property Annualized Base Rent |
SSB Realty LLC | Office, Retail, and Storage | 9/30/2023 | 8.59 | 1,045,106 | 76.3 | % | $63,888,125 | $61.13 | 92.3 | % |
SSB Realty LLC | Parking Garage | 9/30/2023 | 8.59 | 325,000 | 23.7 | % | 5,317,709(5) | $16.36 | 7.7 | % |
Total | | | 8.59(2) | 1,370,106 | 100.0 | % | $69,205,834 | $50.51 | 100.0 | % |
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(1) | Expiration dates are per lease and do not assume exercise of renewal or extension options. Both leases have two ten-year renewal options. |
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(2) | Represents the weighted average lease term based on square footage as of March 31, 2015. |
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(3) | Based on leases signed and commenced as of March 31, 2015. |
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(4) | Annualized base rent does not include expense reimbursements. |
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(5) | The current rent that the Tenant pays under the garage lease is adjusted annually for changes in the consumer price index. |
Subtenant
The Tenant, with the Property Owner's consent, entered into a sublease agreement with K&L Gates LLP, an international law firm, or the Subtenant, on March 11, 2005 for approximately 151,897 square feet of space located on six floors of the Property. The sublease is scheduled to terminate on August 31, 2023 and the Subtenant has no right to extend the term. In the event the Subtenant does not perform under the terms of the sublease agreement, the Tenant or its guarantor, State Street Corporation, would be required to fulfill such obligations. We are not a party to the sublease agreement.
Right of First Offer
Pursuant to the terms of the office lease agreement between the Property Owner and the Tenant, if there is no event of default or pending event of default, the Tenant has a right of first offer to purchase the Property, the membership interests in the Property Owner, or a specified interest in either if the Property Owner proposes to (i) transfer 50% or more of the Property Owner's interest in the Property to an unaffiliated third party, (ii) transfer 50% or more of the membership interests in the Property Owner to an unaffiliated third party, (iii) enter into a master lease of the Property in a single transaction for a term of 60 years or more with an unaffiliated third party, or (iv) exchange the Property for a different property owned by an unaffiliated third party. In the event that the Property Owner chooses to dispose of, in one of the above ways, the Property, the membership interests in the Property Owner, or a specified interest in either, the Property Owner would be required to deliver to the Tenant an offer notice specifying the interest that the Property Owner has determined to dispose of, together with a proposed purchase price prior to offering the interest to any other potential buyer. The Tenant would then have the right, within 15 days of receiving such notice, to deliver a notice of interest together with a good faith deposit in an amount equal to 5% of the proposed purchase price. Upon doing so, the Tenant would be afforded a 30 day due diligence period. Subject to the Tenant withdrawing its notice of interest during this time, both parties would become obligated to consummate the transaction at the proposed purchase price within thirty calendar days thereafter. If the Tenant fails to timely reply to the Property Owner's offer notice, withdraws its notice of interest, fails to timely close, or otherwise declines to purchase the specified interest, the Property Owner would be free to sell the specified interest to an unaffiliated third-party, but only on the conditions that the purchase price be at least equal to 103.5% of the proposed purchase price to the Tenant and that the Property Owner accepts a bona fide offer to purchase the specified interest within 12 months and closes the transaction within 18 months after the date which is the earlier of (a) the date by which the Tenant was required to reply to the Property Owner's offer notice or (b) the date of receipt by the Property Owner of a reply to the Property Owner's office notice in which the Tenant declines to purchase the specified interest. Failure by the Property Owner to meet these conditions would revive the Tenant's right of first offer.
Lease Expirations
The office and garage leases with Tenant each expire on September 23, 2023, but are each subject to two 10-year renewal options. The Tenant renewal option on the garage lease may only be exercised if the Tenant is concurrently exercising its renewal option under its office lease. The total square footage of the office and garage leases subject to expiration is 1,370,106 based on BOMA measurement standards. The annualized base rent under both leases, which does not include expense reimbursement, is $69,205,834, which is $50.51 per leased square foot. The current rent that the Tenant pays under the office lease is approximately $63.9 million per year. The current rent that the Tenant pays under the garage lease is approximately $5.3 million, adjusted annually for changes in the consumer price index.
Percent Leased and Base Rent
Between December 31, 2008 and March 31, 2015, 100% of the office and garage leases were leased based on leases commenced as of the dates indicated above and calculated as rentable square feet less available square feet divided by rentable square feet. The net effective annual base rent per leased square foot during this period was $50.51. Net effective annual base rent per leased square foot represents (i) the contractual base rent for leases in place as of the dates indicated above minus amortization of tenant improvements, leasing commissions and other concessions and costs, determined in accordance with GAAP, divided by net rentable square feet leased under commenced leases as of the same date.
Lease Distribution
As of March 31, 2015, the distribution of leases on the Property was limited to the office and garage leases. Based on net rentable square footage, as of March 31, 2015, the office and garage leases covered 1,370,106 square feet based on BOMA measurement standards, representing 100% of the Property.
Floor Plans
The following are representative floor plans of the Property:
Real Property Taxes
Real estate taxes in the city of Boston are based on real property assessments and the real property tax rate, which is set tri-annually by the Commissioner of Revenue. In Massachusetts, the assessment date is the 1st of January each year. It is the ownership, condition and value of the Property on this date that is critical to the assessment function. Any new structures, additions, demolitions, improvements or alterations that occur after January 1 will not be reflected in assessing records until the following 1st of January. The only exception is certain exempt property that has a date of determination of the 1st of July. In Massachusetts, the fiscal year commences on the 1st of July and ends on the following 30th of June. Property taxes are assessed for the fiscal year (July 1 through June 30) based on the value of the Property as of the previous 1st of January.
The following table sets forth a summary of real estate tax payments for the Property for the 2012, 2013 and 2014 fiscal years:
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| 2012 | | 2013 | | 2014 |
Assessed Value | $ | 398,495,400 |
| | $ | 406,613,400 |
| | $ | 435,627,900 |
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Real Estate Tax Rate | 3.19 | % | | 3.20 | % | | 3.12 | % |
Total Taxes Paid | $ | 12,719,973 |
| | $ | 12,995,364 |
| | $ | 13,582,878 |
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Total Taxes Paid per square foot(1) | $ | 9.28 |
| | $ | 9.48 |
| | $ | 9.91 |
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(1) Based on rentable square footage of 1,370,106. |
Depreciation
The federal tax basis, the depreciation rate, method of depreciation and the life claimed for purposes of depreciation of the Property will be determined based upon the completion of cost allocation study with respect to the Property.
Property Condition
The Property appears to be in overall good condition. No deficiencies that are considered significant and require immediate repair have been identified. Based on a review of building department permit records, there has been no extensive building renovation since the Property was developed in 2003.
Boston, Massachusetts Market Information
The Economy
According to REIS, Inc. reports on the Boston market published in February 2015 and May 2015, or together, the REIS Report, the latest data shows recent increases in employment growth. Household-based data from the U.S. Bureau of Labor Statistics, or the BLS, on the number of employed residents of the Boston Metropolitan Statistical Area, or MSA, including the self-employed, showed an increase of 86,850 (3.6%) from March 2014 to February 2015. The unemployment rate for February 2015 was below 5.0%, indicating full employment for the metro area. The unemployment rate fell even though the labor force increased by 63,500 (2.5%) from March 2014 to February 2015. According to data from the BLS, which do not include the self-employed, total non-farm wage and salary employment in the Boston MSA increased by 18,700 (1.1%) from March 2014 to February 2015, with an increase of 15,700 (1.0%) in the private sector over the same period.
According to the REIS Report, the city of Boston and adjacent cities are one of a limited group of metro areas attracting talented young people in large numbers. According to the Boston Globe, including those who grew up in the area and those who moved there for work or college, “Boston is home to the largest proportion of young adults of any major U.S. city, passing famously young cities such as Austin and Washington. People age 20 to 34 make up more than a third of Boston’s population, with even higher percentages in Cambridge (44.5%) and Somerville (44.0%).” The REIS Report also claims that young people account for nearly half of eligible voters, and their preferences are driving the local economy. According to the U.S. Census, Boston’s 20- to 34-year old population increased by 11.0% between 2000 and 2010, compared with New York’s 3.9% increase and San Francisco’s 3.3% decline.
As stated in the REIS Report, data continue to show solid year-over-year employment growth in Boston’s key office-based and institutional sectors. From February 2014 to March 2015, according to BLS data, the Professional and Business Services sector added 6,700 jobs (2.1%), the Information sector added 1,800 (3.3%), and the Financial Activities sector added 1,700 jobs (1.2%), all of which increased office-based employment. Over the same period, the Institutional Educational and Health Services sector added 3,400 jobs (0.9%). Among the industrial sectors, over the same period, Construction added 1,200 jobs (2.3%), and Wholesale Trade added 1,300 jobs (2.3%), while Manufacturing lost 600 jobs (0.7%), and Transportation and Utilities lost 100 jobs (2.4%).
The Boston Office Market
According to the REIS Report, the 128-million-square-foot Boston general purpose, multi-tenant office market had rental gains over the course of 2014. The office market’s strength, however, lags the growing strength of the metro Boston economy. According to Newmark Grubb Knight Frank, vacancy rates in the greater Boston office market are at 10 year lows. The vacancy rate was 13.2% as of the first quarter of 2015, according to the REIS Report, down 30 basis points year-over-year. The Class A vacancy rate was 11.3%, down 50 basis points from the prior quarter and down 70 basis points year-over-year. Class A properties are defined as tending to be the best in the market, having above average design, construction and finish, achieving higher rents, and having tenants of strong credit quality. The Class B/C vacancy rate was 15.9%, unchanged from the prior quarter, and up 10 basis points year-over-year. Class B properties are defined as tending to be in good to above average condition and commanding average rents while Class C properties are defined as tending to be in average condition, having less desirable locations and commanding below average rents.
The REIS Report states that net absorption, which means the change in occupied space during a certain time period was strong in the first quarter of 2015 for the Boston office market, with 408,000 square feet of net absorption, offsetting the negative 350,000 square feet recorded during the fourth quarter of 2014. Although no new space was added, Class A net absorption totaled 388,000 square feet in the first quarter of 2015, following 1.1 million square feet of positive absorption in 2014. Class B/C net absorption, in contrast, was negative 256,000 square feet in 2014 and positive 20,000 for the first quarter of 2015. The commercial real estate boom of the 1980s nearly doubled the metro Boston office inventory, but due to more limited development and the conversion of older buildings to residences or mixed-use properties, the inventory expanded by only 2.5% from 2004 to the first quarter of 2015. The average annual completion total over the most recent decade was slightly under 900,000 square feet. Even so, Class A space accounts for about 60.0% of the metro Boston inventory, according to the REIS Report.The REIS Report states that over the course of 2014, 2.7 million square feet of space was under construction, a substantial total compared with most of the years since 2003 but a limited amount compared with development in the 1980s and around the year 2000. Developers and lenders have been cautious because 10.8 million square feet of negative net absorption was recorded in 2001 and 2002. According to the REIS Report, Jones Lang LaSalle reports that 51.0% of the space expected to complete construction in 2015 is pre-leased.
According to the REIS Report, although occupancy in the Boston office market did not improve much in 2014, rent gains increased 3.7% over the course of 2014 to $39.03 per square foot and the average effective rent rose 3.8% to $32.40 per square foot. The fourth quarter, which had the weakest occupancy, had the strongest rent gain at 1.8% by both measures, which may be a sign of tenant pushback in the face of increasing rents. The fourth quarter average asking rent for Class A space was $47.19 per square foot, up 3.3% during 2014 and 1.7% in the fourth quarter. The Class B/C average asking rent of $27.08 per square foot was up 3.9% over the course of 2014 and 1.8% over the prior quarter.
In the first quarter of 2015, the average asking rent increased 0.5% to $39.21 per square foot, and the average effective rent rose 0.6% to $32.59 per square foot. The year-over-year gains were 3.6% for asking rents and 3.8% for effective rents, well in excess of inflation, but rents by both measures remain slightly lower than at year-end 2007 and far lower than at year-end 2000. The first quarter average asking rent for Class A space was $47.51 per square foot, up 0.6% for the quarter and 3.6% year-over-year. The Class B/C average asking rent of $27.02 per square foot was up 0.1% for the quarter and up 3.2% year-over-year. Jones Lang LaSalle reports average asking rents of $32.03 per square foot in the Boston office market, up from $31.74 per square foot the prior quarter. According to Cushman & Wakefield, the direct asking rent is $48.20 per square foot in the Boston Central Business District, up 5.3% from a year earlier, $52.52 per square foot in Cambridge, and $20.53 per square foot in the suburbs, down 1.0%.
Boston Central Business District /Back Bay
The following are statistics about the Boston Central Business District and Back Bay from the REIS Report:
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• | The 32.8-million-square-foot Boston Central Business District submarket had a first quarter 2015 vacancy rate of 9.5% and an average asking rent of $55.40 per square foot, the highest among nine submarkets, according to the REIS Report. |
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• | Net absorption totaled 197,000 square feet in the first quarter, and the vacancy rate fell 60 basis points over the quarter and140 basis points from a year earlier. The average asking rent increased 0.3% during the quarter, with the average effective rent up 0.4% to $45.37 per square foot. The year-over-year gains are 4.3% and 4.5%, respectively. |
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• | Jones Lang LaSalle puts the vacancy rate for 34.9 million square feet in the Financial District at 11.6%, with a direct asking rent at $53.86 per square foot. |
Cushman & Wakefield’s Boston Rental Rate and Vacancy Rate Trends
According to Cushman & Wakefield's Marketbeat Office Snapshot for Boston, Massachusetts published in May 2015, Cushman & Wakefield believes that Boston can expect its asking rental rate increase to average 10.1% per year for the period between the end of 2014 and 2017. The following chart outlines Cushman & Wakefield’s projections for cumulative rent increase between the end of 2014 and 2017 for Boston, the United States and other major Central Business District markets throughout the United States:
Source: Cushman & Wakefield's Marketbeat Office Snapshot for Boston, Massachusetts (May 2015)
According to Cushman & Wakefield’s Best of Boston market report published in July 2015, the city of Boston is one of the United States’ most attractive gateway cities for investment. According to Cushman & Wakefield, in addition to State Street Financial Center, there are 10 premier office towers in Boston: four located in each of the Downtown and Back Bay submarkets and two in the Seaport District submarket. Cushman & Wakefield refers to this group of office buildings as the "Class A+ set" within these three submarkets. According to Cushman & Wakefield, asking rents for this Class A+ set of properties were $71.39 as of the second quarter of 2015 with a second quarter vacancy rate of 8.0%. This compares to second quarter 2015 asking rents of $59.28 and a vacancy rate of 9.5% for all Boston Central Business District Class A office properties.
The following chart from the Cushman & Wakefield Best of Boston market report shows both historical and projected rental rates and vacancy rates for the Class A+ set of properties and all Boston Central Business District Class A office properties for the periods shown:
Source: Cushman & Wakefield's Best of Boston market report (July 2015)
Our Financing Strategy
The Property is currently subject to a first mortgage loan, or the loan, in the principal amount of $775.0 million that was provided by Wachovia Bank National Association and UBS Real Estate Investments, Inc. in December 2006. The loan provides for interest-only payments of approximately $3.7 million each month for 10 years, bears interest at a fixed rate of 5.66% per annum and has a maturity date of January 11, 2017. We intend for the Property Owner to refinance the loan prior to the scheduled maturity. The loan allows for defeasance prior to December 1, 2016, subject to the terms and conditions of defeasance under the loan agreement. During the three months prior to the maturity of the loan, prepayment is permitted in whole, but not in part, without defeasance or a prepayment penalty, as of the last day of the interest accrual period in which such prepayment is being made upon not less than 30, and not more than 90, day's prior written notice.
The loan also prohibits, subject to certain exceptions, any transfer of the Property or in any person having a legal or beneficial ownership interest in an entity owning the Property without lender consent. A transfer, in this context, is defined broadly to include any conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of all or any portion of any legal or beneficial interest:
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• | in all or any portion of the Property; |
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• | in the Property Owner; or |
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• | in any person having a legal or beneficial ownership in the Property Owner. |
Excluded from the third bullet above, however, is any transfer of a legal or beneficial interest in a non-managing member unless such interest:
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• | would, together with all other direct or indirect interests in the Property Owner which were previously transferred, aggregate 49% or more of the membership interest in the Property Owner; or |
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• | would result in any person who, as of December 27, 2006, did not own directly or indirectly 49% or more of the membership interest in the Property Owner, owning directly or indirectly 49% or more of the membership interest in the Property Owner; |
in each case, excluding any legal or beneficial interest in Lincoln Street Mezz LLC unless such interest would, together with all other direct or indirect interests in Lincoln Street Mezz LLC which were previously transferred, aggregate 49% or more of the membership interest in Lincoln Street Mezz LLC (or result in a change in control of the management of Lincoln Street Mezz LLC).
A transfer in breach of this prohibition would permit the lender to declare all principal and interest, and all other monetary obligations under the loan immediately due and payable.
Upon the completion of the offering, the Property A-1 Subsidiary will indemnify the existing guarantors of the loan for any and all losses subsequent to the completion of the offering resulting from their role as guarantors under the loan. After the loan is refinanced, which is expected to occur prior to January 11, 2017, the existing guarantors of the loan will be released from any and all obligations and liabilities existing in connection with the loan and will no longer be required to serve as guarantors.
Although our governing documents contain limitations related to certain types of debt financing and cross-subsidiary guarantees, in general, these limitations do not limit the amount of indebtedness that the A-1 Series may incur, directly or through the Property A-1 Subsidiary and its subsidiaries. We expect for the A-1 Series to maintain a flexible capital structure and intend to target a ratio of outstanding indebtedness to the A-1 Series' total assets of between 50% and 70%. Our board of directors will periodically review this target and may modify or eliminate it without the approval of holders of our Series A-1 common shares.
We will consider a number of factors when evaluating the A-1 Series' level of indebtedness and making financial decisions, including, among others, the following:
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• | the interest rate of the proposed financing; |
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• | the extent to which the financing impacts the flexibility of the Asset Manager to manage the Property; |
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• | prepayment penalties, defeasance and restrictions on refinancing; |
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• | our long-term objectives with respect to the financing; |
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• | the A-1 Series' target investment returns; |
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• | the ability of the Property to generate cash flow sufficient to cover budgeted capital expenditures, tenant improvements and expected debt service payments; |
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• | our overall level of consolidated indebtedness; |
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• | timing of debt maturities; |
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• | provisions that require recourse; |
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• | corporate credit ratios, including debt service and fixed charge coverage, debt to EBITDA, debt to total market capitalization and debt to undepreciated assets; and |
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• | the overall ratio of fixed- and variable-rate debt. |
Our Administrative Agent and ETRE
Our Administrative Agent is a wholly-owned subsidiary of ETRE. Pursuant to the terms of an administrative services agreement among the A-1 Series, the Property A-1 Subsidiary and our Administrative Agent, our Administrative Agent will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary as well as a management team and appropriate support personnel. These services include, among others, investor relations and shareholder communications functions for the A-1 Series and assisting the A-1 Series in preparing, reviewing and filing all reports required to be filed by it or us with the SEC, NASDAQ, the Internal Revenue Service and other regulatory agencies. See "Our Administrative Agent-Administrative Services Agreement." Our Administrative Agent will at all times be subject to the supervision and oversight of our board of directors, the Property Oversight Committee and the General A-1 Partners. We do not expect to have any employees.
Concurrently with the completion of this offering, we will sell 33,333 Series A-1 common shares (representing additional net proceeds of $500,000 based on the anticipated initial public offering price) in a concurrent private placement to our Administrative Agent at a price per share equal to the public offering price per share in this offering.
Our Administrative Agent has access to ETRE's senior management team, which has extensive experience in identifying, acquiring, financing, analyzing and managing commercial real estate investments, as well as a broad spectrum of other investments related to commercial real estate. Each of the ETRE team members has at least ten years of commercial real estate investment experience.
ETRE is a real estate financial services and information technology company focused on facilitating the public listing of individual commercial real estate assets to improve access, liquidity and transparency in commercial real estate. ETRE was founded in 2012 by a team of real estate and technology professionals who seek to bring the benefits of the public equities market to real estate investors through an ecosystem of services that incorporate capital markets advisory, asset management, information technology and tenant analysis services. In particular, ETRE's capital markets advisory business seeks to enhance access to the public markets with a comprehensive due diligence process to facilitate the public listing of commercial real estate; its asset management business provides investors with information on listed securities related to real estate; and its information technology business provides a web-based proprietary system with an extensive collection of market information that provides investors with analytics technology for listed securities related to real estate.
The Asset Management Agreement and the Asset Manager
The Property A-1 Subsidiary will engage the Asset Manager, an affiliate of the Fortis General A-1 Partner and Fortis, as asset manager for the Property upon the closing of the contribution transactions.
Subject to the supervision and oversight of the General A-1 Partners and the Property Oversight Committee, the Asset Manager will be responsible for, among other duties: (1) performing all day-to-day management and administrative functions of the Property A-1 Subsidiary in respect of the Property, and (2) arranging for financings and refinancings of property level indebtedness. At the property level, the Asset Manager will be responsible for overseeing real property operations, including tenant leasing, property financing, renovations, budgeting, cash management and insurance, and for other functions and authority delegated to it by the Property A-1 Subsidiary. In performing its services, the Asset Manager will generally be subject to any applicable restrictions and conditions regarding the activities of the Property A-1 Subsidiary set forth in our governing documents and the governing documents of the Property A-1 Subsidiary. The Asset Manager will not be responsible for providing (1) any construction management or oversight services that would customarily be provided by a third party construction manager for a fee, and (2) any leasing agent or broker services that would customarily be provided by a third party leasing agent or broker for a fee, unless the Asset Manager and the General A-1 Partners separately agree in writing the extent of such additional services and the additional fee, if any, that the Asset Manager will be entitled to in connection with such services.
Fortis is a real estate investment, operating and development company. Its real estate projects include the ownership, development and management of Class A office, multi-family residential condominiums and rentals, and industrial properties. As a vertically integrated owner and operator, Fortis employs professionals from wide-ranging real estate disciplines, including acquisitions and dispositions, property and asset management, development and construction, capital markets, legal and accounting. Fortis' principals and senior management team have invested and operated in a variety of markets through all phases of the real estate cycle and have extensive and longstanding relationships with every type of stakeholder in the real estate community, including sales and leasing brokers, private and institutional lenders and investors, and investment banks. Today, Fortis manages millions of square feet of commercial and residential property in various U.S. locations.
In New York City, Fortis' residential projects are concentrated in the boroughs of Manhattan and Brooklyn. Its office projects are located in Boston, Massachusetts, New York, New York, Bridgewater, New Jersey, Norwalk, Connecticut, and Dallas, Texas, and its industrial projects are located throughout the United States. Fortis affiliates also hold a significant portfolio of properties overseas, with a focus in the United Kingdom. Overall, in the last several years, Fortis has acquired, developed, managed or invested in more than eight million square feet of properties across the United States. The company's headquarters is located in Brooklyn, New York.
Pursuant to the asset management agreement, the Asset Manager will provide the asset management services in exchange for a quarterly asset management fee of 1.0% of the Property A-1 Subsidiary's Net Operating Income (as defined in the asset management agreement). Prior to the earlier of (i) the refinancing of the loan that currently encumbers the Property or (ii) January 11, 2017, installments of the quarterly asset management fee payable in respect of a fiscal quarter will accrue in arrears, but will not be paid, unless and until the Property A-1 Subsidiary has distributed to the A-1 Series an amount of available cash generated by the Property A-1 Subsidiary during such fiscal quarter equal to or greater than (a) the Series A-1 Common Share Preference Amount in respect of any prior quarters and (b) the Series A-1 Common Share Preference Amount in respect of the current quarter. For a description of the Series A-1 Common Share Preference Amount, see "ETRE Property A-1, L.P. Partnership Agreement." In the event that, following any fiscal quarter, the Property A-1 Subsidiary does not have sufficient funds to pay the entire accrued and unpaid quarterly asset management fee to the Asset Manager under the asset management agreement and the entire accrued and unpaid quarterly administrative services fee to the Administrative Agent under the administrative services agreement, then any amounts that will be paid by the Property A-1 Subsidiary in respect of such fees will be paid pro rata, based on the accrued and unpaid amounts of such fees as of the end of such quarter.
The Property A-1 Subsidiary will also reimburse the Asset Manager for expenses of the Asset Manager incurred on the Property A-1 Subsidiary's behalf; provided, however, that expenses will only be reimbursed (1) to the extent such expenses are reimbursable by the Tenant pursuant to the terms of the office and garage leases for the Property, and (2) if an expense is not reimbursable by the Tenant then only to the extent that such expenses do not exceed $25,000 per year in the aggregate.
The initial term of the asset management agreement expires on the date on which the Lincoln Street Holdings Limited Partner Group owns less than 7.5% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares; provided, however, that if the refinancing of the loan that currently encumbers the Property has not occurred as of such date, the initial term will expire on the date the loan is refinanced. During the initial term, the Asset Manager may terminate the asset management agreement upon 30 days prior written notice to the Property A-1 Subsidiary, and the Property A-1 Subsidiary may terminate the asset management agreement upon 30 days prior written notice in connection with certain cause events involving the Asset Manager. Notwithstanding the foregoing, the Property A-1 Subsidiary will not be entitled to terminate the asset management agreement for cause unless the existing guarantors of the loan that currently encumbers the Property have been released from their obligations under their guarantee of the loan.
Following the initial term, the asset management agreement will be automatically renewed for one year renewal terms, and may be terminated by either party upon 30 days prior written notice to the other party.
In addition the asset management agreement will be terminated following either: (a) a distribution to holders of, or redemption of, outstanding Series A-1 common shares in connection with a disposition of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary, whether held directly or through subsidiaries of the A-1 Series, or the Property A-1 Subsidiary's interest in the Property, whether held directly or through subsidiaries of the Property A-1 Subsidiary, as described under "Description of Series A-1 Common Shares-Redemption-Redemption in Connection with Sale of Property A-1 Subsidiary or Property"; or (b) a redemption of outstanding Series A-1 common shares pursuant to our tender offer policy as described under "Description of Series A-1 Common Shares-Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares (which we refer to, in each case, as a "Property Sale").
Property Management
Under the terms of the office lease for the Property, the Tenant has exercised its right to self-manage the building. Under this arrangement, the Tenant is responsible for janitorial, security, general management, preventative maintenance and other enumerated building services. The Property Owner is responsible for the repair and maintenance of the roof, exterior and load bearing walls, the foundation, the floor slabs and other structural elements of the building. The Tenant must perform its property management duties in a timely, complete and professional manner consistent with the highest level of property management services provided at comparable first class buildings in the Boston Central Business District. During the time that the Tenant is assuming responsibility for such services, the Tenant is required to directly engage and pay the applicable vendors for the costs and expenses of providing the services. If the Property Owner's operating expenses fall below a certain threshold, these costs are reimbursable to the Tenant by the Property Owner. The Tenant may again choose to have the Property Owner manage the Property, upon 60 days' prior notice.
Competition
The leasing of real estate is highly competitive in Boston, Massachusetts. The A-1 Series and the Property A-1 Subsidiary will compete with numerous acquirers, developers, owners and operators of commercial real estate, many of which own or may seek to acquire or develop properties similar to the Property in the same market in which the Property is located. The principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be leased. In addition, the A-1 Series and the Property A-1 Subsidiary will face competition from other real estate companies including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than the A-1 Series and the Property A-1 Subsidiary. If the A-1 Series' and the Property A-1 Subsidiary's competitors offer space at rental rates below current market rates, below the rental rate that the A-1 Series and the Property A-1 Subsidiary, through the Property Owner, currently charges the Tenant, in better locations within the Property's market or in higher quality facilities, the A-1 Series and the Property A-1 Subsidiary may lose potential tenants and we may be pressured to reduce the Property's rental rate below the rate that the A-1 Series and the Property A-1 Subsidiary currently charges, through the Property Owner, or offer other concessions in order to retain the Tenant when the Tenant's office and garage leases expire.
Insurance
The Property A-1 Subsidiary and the A-1 Series will maintain all applicable lines of insurance on the Property and its operations. The amount and scope of insurance coverage provided by the policies maintained will be customary for similarly situated office properties in Boston, Massachusetts. We believe the amount of insurance coverage the Property A-1 Subsidiary and the A-1 Series will have on the Property will be adequate. We cannot assure you that in the future insurance will be available at a reasonable cost or that the Property A-1 Subsidiary or the A-1 Series will be able to maintain adequate levels of insurance coverage on the Property. In addition, we cannot give any assurances as to the future financial viability of their insurers or that the insurance coverage provided will fully cover all losses on the Property upon the occurrence of a catastrophic event.
Our Policies with Respect to Certain Other Activities
If our board of directors determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities of the A-1 Series or by the retention of cash flow (subject to provisions in the Internal Revenue Code concerning distribution requirements and the taxability of undistributed REIT taxable income) or a combination of these methods. In the event that our board of directors determines to raise additional equity capital in respect of the A-1 Series, it has the authority, without shareholder approval, to authorize us to issue additional Series A-1 common shares or other classes of shares of the A-1 Series, including preferred shares, in any manner (including in exchange for cash or property) and on such terms and for such consideration as it deems appropriate, at any time.
We may repurchase or otherwise reacquire our Series A-1 common shares and may engage in such activities in the future. The A-1 Series does not intend to engage in trading, underwriting or agency distribution or sale of securities of other issuers. The A-1 Series has not in the past, and is not expected in the future, to invest in the securities of other issuers for the purpose of exercising control over such issuers. The A-1 Series has not made any loans to third parties, although the A-1 Series may in the future make loans to third parties, including, without limitation, to the Property A-1 Subsidiary. The A-1 Series intends to make investments in such a way that we will not be treated as an investment company under the Investment Company Act of the 1940, or the 1940 Act.
The primary business of the A-1 Series will be to own its interest in the Property A-1 Subsidiary, which will own and operate the Property through the Property Owner.
In our quarterly and annual reports and earnings releases, we intend to provide investors with price per square foot information and other information regarding the Property.
Our board of directors may change any of these policies at any time without prior notice to, or a vote of, our shareholders.
Distribution Reinvestment Plan
In the future, we may adopt a distribution reinvestment plan that will permit holders of Series A-1 common shares who elect to participate in the plan to have their cash distributions reinvested in additional Series A-1 common shares. As a result, if our board of directors authorizes, and we declare, a cash distribution, then such shareholders who have elected to participate in our distribution reinvestment plan will have their cash distribution reinvested in additional Series A-1 common shares, rather than receiving the cash distribution.
Staffing
The A-1 Series is managed by our Administrative Agent pursuant to the administrative services agreement among our Administrative Agent, the A-1 Series and the Property A-1 Subsidiary. All of our officers are employees of our Administrative Agent or its affiliates. We will have no employees upon completion of this offering. See "Our Administrative Agent and the Administrative Services Agreement—Administrative Services Agreement."
Operating and Regulatory Structure
General
The Property is subject to various laws, ordinances and regulations, including regulations relating to common areas. Upon acquisition, we believe the Property will have the necessary permits and approvals to operate its business.
Americans with Disabilities Act
The Property must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that the Property is a "public accommodation" as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of the Property where such removal is readily achievable. We believe the Property is in substantial compliance with the ADA and that neither the A-1 Series nor its subsidiaries will be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess the Property and to make alterations as appropriate in this respect.
Environmental Matters
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real property, the A-1 Series may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum products at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. The Property may be impacted by contamination arising from current or prior uses of the Property or adjacent properties for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. The A-1 Series also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on the Property may adversely affect the ability to attract and/or retain tenants, and the ability to develop or sell or borrow against the Property. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on the Property, environmental laws may impose restrictions on the manner in which the Property may be used or how businesses may be operated on the Property.
In addition, the Property is subject to various federal, state and local environmental and health and safety laws and regulations. Noncompliance with these environmental and health and safety laws and regulations could subject the A-1 Series or the Tenant to liability. These liabilities could affect the Tenant's ability to make rental payments to the A-1 Series. Moreover, changes in laws could increase the potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect the A-1 Series' operations, or those of the Tenant, which could in turn have a material adverse effect on the A-1 Series. The A-1 Series may require the Tenant to comply with environmental and health and safety laws and regulations and to indemnify the A-1 Series for any related liabilities in its leases with them. But in the event of the bankruptcy or inability of the Tenant to satisfy such obligations, the A-1 Series may be required to satisfy such obligations. We are not presently aware of any instances of material non-compliance with environmental or health and safety laws or regulations at the Property, and, upon acquisition, we believe that the A-1 Series and/or the Tenant will have all material permits and approvals necessary under current laws and regulations to operate the Property.
As the owner or operator of real property, the A-1 Series may also incur liability based on various building conditions. For example, buildings and other structures on the Property may contain, or may have contained, asbestos-containing material, or ACM. Environmental and health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, the A-1 Series may be subject to liability for personal injury or property damage sustained as a result of releases of ACM into the environment. We are not presently aware of any material liabilities related to building conditions, including any instances of material non-compliance with asbestos requirements or any material liabilities related to asbestos.
In addition, the Property may contain or develop harmful mold or suffer from other indoor air quality issues, which could lead to liability for adverse health effects or property damage or costs for remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at the Property could require the A-1 Series to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the Property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose the A-1 Series to liability from the Tenant, employees of the Tenant or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at the Property.
Implications of Being an Emerging Growth Company
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we intend to take advantage of certain exemptions from various disclosure and reporting requirements that are otherwise generally applicable to public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an "emerging growth company." We will cease to be an "emerging growth company" on the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) December 31 of the fiscal year in which we become a "large accelerated filer" as defined in Rule 12b‑2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the fair market value of our common shares that are held by non‑affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, (iii) the date on which we have issued more than $1.0 billion in non‑convertible debt securities during the preceding three-year period or (iv) the end of the fiscal year following the fifth anniversary of our initial public offering. We have irrevocably opted out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As a result, we will comply with new or revised accounting standards on the same time frames as other public companies that are not "emerging growth companies." If we take advantage of one or more of these exemptions, we do not know if investors will find our Series A-1 common shares or the common shares of any other Series we may establish in the future less attractive as a result. If they do, there would likely be a less active trading market for our securities than would otherwise be the case.
Legal Proceedings
Neither we nor our Administrative Agent is currently subject to any legal proceedings.
OUR ADMINISTRATIVE AGENT AND THE ADMINISTRATIVE SERVICES AGREEMENT
Set forth below is certain information regarding our Administrative Agent, the personnel of ETRE and the administrative services agreement related to the A-1 Series and the Property A-1 Subsidiary. The A-1 Series and the Property A-1 Subsidiary will enter into an administrative services agreement with our Administrative Agent, a wholly-owned subsidiary of ETRE Financial, LLC. Our Administrative Agent is member-managed and controlled by ETRE Financial, LLC. Pursuant to the terms of the administrative services agreement among the A-1 Series, the Property A-1 Subsidiary and our Administrative Agent, our Administrative Agent will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, as well as a management team and appropriate support personnel. Our Administrative Agent will at all times be subject to the supervision and oversight of our board of directors, the Property Oversight Committee and the General A-1 Partners. We do not expect to have any employees.
Concurrently with the completion of this offering, we will sell 33,333 Series A-1 common shares (representing additional net proceeds of $500,000 based on the anticipated initial public offering price) in a concurrent private placement to our Administrative Agent at a price per share equal to the public offering price per share in this offering.
General
All of our officers are employees of our Administrative Agent or its affiliates. The executive offices of our Administrative Agent are located at 44 Wall Street, New York, New York, 10005, and the telephone number of our Administrative Agent's executive offices is (212) 596-7225.
Executive Officers and Key Personnel of ETRE
The following table sets forth certain information with respect to each of the executive officers:
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Executive officer | Age | Position held with ETRE | Position held with our Company |
Paul Frischer | 55 | Founding Member; President and Chief Executive Officer; member of Board of Managers | President and Chief Executive Officer; Director |
Jesse Stein | 36 | Founding Member; Chief Operating Officer; member of Board of Managers | Chief Operating Officer, and Secretary; Director |
Darren Glickman | 47 | Chief Financial Officer | Chief Accounting Officer |
Biographical Information
Set forth below is biographical information for the key personnel of ETRE.
Paul Frischer is a founding member of ETRE Financial, LLC, and has served as its President and Chief Executive Officer and as a member of its Board of Managers since August 2012. Mr. Frischer serves as our President and Chief Executive Officer and as a member of our board of directors. Prior to joining ETRE Financial, LLC, Mr. Frischer was Executive Managing Director of Research and Real Estate Strategies at Newmark Knight Frank, a commercial real estate advisory firm, from January 2009 to February 2012, and was responsible for directing Newmark Knight Frank's national research platform and providing market and property analysis for various operating units. Mr. Frischer is also the Founder and managing member of Rexx Index LLC, formed in 2006, a leading benchmark provider in the emerging real estate derivatives market that utilizes algorithmic and econometric models to standardize commercial real estate in premier U.S. markets. Earlier in his career, from 2002 to 2005, Mr. Frischer was with UBS Financial Services, where he specialized in a self-employed 401K platform to service leading residential real estate firms in New York and Connecticut. As part of his involvement with portfolio management at UBS, Mr. Frischer also worked on structured ABS investments for alternative energy and shipping interests. In addition to these activities, Mr. Frischer has been the President and Chief Executive Officer of Frischer Kranz, Inc., since 1999, and has been involved with numerous industries inclusive of printing, logistics, and real estate. Mr. Frischer holds an E.M.B.A. from the Stern School of Business at New York University and is a graduate of Bucknell University. Mr. Frischer was selected to serve as a member of our board of directors because of his leadership qualities and extensive real estate experience.
Jesse Stein is a founding member of ETRE Financial, LLC and has served as a member of its Board of Managers since August 2012. Mr. Stein serves as our Chief Operating Officer and Secretary and as a member of our board of directors and, prior to Mr. Glickman's appointment, served as our Interim Chief Accounting Officer. Mr. Stein previously served as the Executive Vice President of Acquisitions for United Realty Advisors, LP, an affiliate of United Realty Partners, LLC, or United Realty Partners, a privately held real estate investment and advisory firm from September 2011 through June 2013. Prior to joining United Realty Partners, Mr. Stein was a Managing Director at Multi Capital Group, a boutique real estate and investment banking firm that specializes in equity and debt placement, capital structuring, and principal investment activity. Mr. Stein was employed by Multi Capital Group from September 2005 until December 2008 and from March 2011 until September 2011. From January 2009 to March 2011, Mr. Stein was a Principal at The FoxStone Group, a real estate advisory firm that provides services such as capital structuring, financial analysis, market research, due diligence, and investment sourcing. Mr. Stein spent five years as a proprietary equities trader at JGM Securities (September 2000 to July 2001), Numina Capital (August 2001 to June 2003), and Spectrum Capital Partners (August 2003 to September 2005). Mr. Stein holds a Bachelor's Degree in Industrial and Labor Relations from Cornell University and a Masters Degree in Real Estate Investments from New York University. Mr. Stein was selected to serve as a member of our board of directors because of his significant real estate capital markets experience.
Darren Glickman is the Chief Financial Officer of ETRE Financial, LLC and serves as our Chief Accounting Officer. Mr. Glickman came to ETRE Financial, LLC from Paramount Group, Inc. in November of 2014, where he was a Vice President responsible for financial and investor reporting for a series of private real estate funds. Mr. Glickman joined Paramount in January of 2012 from Aetos Capital, LLC, where he was the Chief Financial Officer for a series of opportunity funds with $10 billion of real estate investments in Japan, China and South Korea. Prior to joining Aetos Capital, LLC in January of 2003, Mr. Glickman was a Vice President in the Investment Accounting division of Goldman, Sachs & Co., where he focused primarily on accounting and reporting for the Whitehall Funds. Prior to joining Goldman, Sachs & Co. in June of 1998, Mr. Glickman was an audit manager in the Real Estate Services division of Deloitte & Touche, LLP, where he began his real estate finance career in 1993. Mr. Glickman is a Certified Public Accountant in New York State and holds a Bachelor of Business Administration in Accounting from Baruch College.
Inter-Series Conflict Resolution Committee
Our board of directors has adopted the Inter-Series Policy, which is administered by our Administrative Agent and has been designed to govern the operating relationships among the Series, address conflicts of interest among the Series and promote the fair allocation of sale, financing, leasing and other business opportunities among the real properties owned by the different Series. See "Management—Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy." Upon completion of this offering, our Administrative Agent will establish an inter-series conflict resolution committee, the purpose of which will be to administer, on behalf of the Administrative Agent, certain provisions of the Inter-Series Policy. The inter-series conflict resolution committee will be comprised of Scott Panzer, Jay Anderson and John Gregorits, two of whom are independent directors. The inter-series conflict resolution committee will meet as frequently as it believes is necessary.
Administrative Services Agreement
The A-1 Series and the Property A-1 Subsidiary will enter into the administrative services agreement with our Administrative Agent effective upon the closing of this offering. Pursuant to the terms of the administrative services agreement, our Administrative Agent will perform certain services for the A-1 Series and the Property A-1 Subsidiary, subject to oversight by our board of directors, the Property Oversight Committee and the General A-1 Partners.
These services include, among others, investor relations and shareholder communications functions for the A-1 Series and assisting the A-1 Series in preparing, reviewing and filing all reports required to be filed by it or us with the SEC, NASDAQ, the Internal Revenue Service and other regulatory agencies.
Specifically, our Administrative Agent will perform (or cause to be performed) the services and activities relating to our assets and operations described below:
(i) (A) investigating, selecting and, on behalf of the A-1 Series, engaging and conducting business with and supervising the performance of such persons as our Administrative Agent deems necessary to the proper performance of its obligations under the administrative services agreement (including consultants, accountants, correspondents, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, banks, securities investment advisors, the registrar and the transfer agent and any and all agents for any of the foregoing), including affiliates of our Administrative Agent and persons acting in any other capacity deemed by our Administrative Agent to be necessary or desirable for the performance of any of the foregoing services (including entering into contracts in the name of the A-1 Series with any of the foregoing); and (B) upon any termination or expiration of the term of the asset management agreement between the Property A-1 Subsidiary and the Asset Manager, providing the services listed in clause (A) above on behalf of the A-1 Series' subsidiaries;
(ii) consulting with our officers and directors and assisting the directors in the formulation and implementation of the A-1 Series' financial policies and, as necessary, furnishing our board of directors with advice and recommendations with respect to the investment objectives and policies of the A-1 Series and in connection with any borrowings (or refinancing of borrowings) proposed to be undertaken by the A-1 Series or its subsidiaries;
(iii) (A) arranging for financing and refinancing and making other changes in the asset or capital structure of the A-1 Series; (B) entering into service contracts for the A-1 Series, and to the extent necessary, performing all other operational functions for the maintenance and administration of the A-1 Series; (C) actively overseeing and managing the A-1 Series for purposes of meeting the A-1 Series' investment objectives; (D) overseeing affiliated and non-affiliated persons with whom our Administrative Agent contracts to perform certain of the services required to be performed under the administrative services agreement; and (E) managing accounting and other recordkeeping functions for the A-1 Series and overseeing accounting and other recordkeeping functions for its subsidiaries, including reviewing and analyzing the capital and operating budgets and generating an annual budget for the A-1 Series;
(iv) upon any termination or expiration of the term of the asset management agreement between the Property A-1 Subsidiary and the Asset Manager, (A) arranging for financing and refinancing and making other changes in the asset or capital structure of the A-1 Series' subsidiaries; (B) entering into leases and service contracts for the A-1 Series' subsidiaries and, to the extent necessary, performing all other operational functions for the maintenance and administration of the A-1 Series' subsidiaries; (C) overseeing, supervising and evaluating affiliated and non-affiliated asset managers and property managers who perform services for the A-1 Series and its subsidiaries; and (D) managing accounting and other recordkeeping functions for the A-1 Series' subsidiaries;
(v) (A) negotiating on behalf of the A-1 Series with banks or other lenders for loans to be made to the A-1 Series, and negotiating with investment banking firms and broker-dealers on behalf of the A-1 Series, or negotiating private sales of the Series A-1 common shares or obtaining loans for the A-1 Series, but in no event in such a manner that our Administrative Agent shall be acting as broker-dealer or underwriter; and (B) upon any termination or expiration of the term of the asset management agreement between the Property A-1 Subsidiary and the Asset Manager, providing the services listed in clause (A) above on behalf of the A-1 Series' subsidiaries; provided, however, that any fees and costs payable to third parties incurred by our Administrative Agent in connection with the foregoing shall be the responsibility of the A-1 Series, in the case of clause (A), and its subsidiaries, in the case of clause (B);
(vi) from time to time, or at any time reasonably requested by the board of directors or the General A-1 Partners, making reports to our board of directors, the General A-1 Partners or the Property Oversight Committee on its performance of services to the A-1 Series and the Property A-1 Subsidiary under the administrative services agreement, including reports with respect to potential conflicts of interest involving our Administrative Agent or any of its affiliates;
(vii) performing investor relations and shareholder communications functions for the A-1 Series;
(viii) rendering such services as may be reasonably determined (i) in relation to the A-1 Series, by the board of directors and (ii) in relation to the Property A-1 Subsidiary, the General A-1 Partners, acting jointly, in each case, consistent with the terms and conditions in the administrative services agreement;
(ix) maintaining the A-1 Series' and its subsidiaries accounting and other records and assisting the A-1 Series in preparing, reviewing and filing all reports required to be filed by it or us with the SEC, NASDAQ, the Internal Revenue Service and other regulatory agencies;
(x) doing all things reasonably necessary to assure its ability to render the services described in the administrative services agreement; and
(xi) making recommendations to our board of directors with respect to follow-on offerings, tender offers in respect of the Series A-1 common shares, dispositions of the Property and other significant transactions.
Notwithstanding the foregoing, (i) during the term of the asset management agreement between the Property A-1 Subsidiary and the Asset Manager, the Asset Manager will be responsible for performing all day-to-day management and administrative functions at the property level and arranging for financings and refinancing of property-level indebtedness, including overseeing real property operations of the A-1 Series' subsidiaries (i.e. tenant leasing, property financing, construction and renovation, budgeting, cash management and insurance), subject to and in accordance with the terms of the asset management agreement, (ii) during the term of the asset management agreement, to the extent that any services under the administrative services agreement overlap with or conflict with the services to be provided by and delegated to the Asset Manager, then the asset management agreement shall apply to such services and the Administrative Agent will not provide such services, and (iii) notwithstanding any other provision in this the administrative services agreement to the contrary, our Administrative Agent shall at all times be subject to any applicable restrictions and conditions regarding the activities of the A-1 Series and/or its subsidiaries set forth in the governing documents of our company, the Property A-1 Subsidiary and/or any other subsidiary.
Pursuant to the administrative services agreement, our Administrative Agent does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our board of directors or the General A-1 Partners in following or declining to follow its advice or recommendations. In addition, to the extent that officers of our Administrative Agent also serve as our officers, these officers owe us duties under Delaware law in their capacity as our officers. Under the administrative services agreement, our Administrative Agent, its officers, stockholders, members, managers, directors, personnel, any person or entity controlling or controlled by our Administrative Agent and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our Administrative Agent are not liable to us, the A-1 Series, the Property A-1 Subsidiary, our directors, the General A-1 Partners, our shareholders or any subsidiary's shareholders or partners for acts or omissions performed in accordance with and pursuant to the administrative services agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the administrative services agreement, as determined by a final non-appealable order of a court of competent jurisdiction. The A-1 Series and the Property A-1 Subsidiary will indemnify our Administrative Agent, its officers, stockholders, members, managers, directors, personnel, any person or entity controlling or controlled by our Administrative Agent and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our Administrative Agent with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Administrative Agent not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the administrative services agreement. Our Administrative Agent indemnifies us, the A-1 Series, the Property A-1 Subsidiary, the General A-1 Partners, our shareholders, members and partners with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Administrative Agent constituting bad faith, willful misconduct, gross negligence, or reckless disregard of its duties under the administrative services agreement, as determined by a final non-appealable order of a court of competent jurisdiction, or any claims by ETRE's personnel relating to the terms and conditions of their employment by our Administrative Agent or ETRE. Notwithstanding the foregoing, our Administrative Agent carries errors and omissions and other customary insurance. Our Administrative Agent is expected to provide similar services for each of our Series and Property Subsidiaries, and we expect that each Series that we establish from time to time and the Property Subsidiary related to such Series will enter into an administrative services agreement on similar terms and conditions.
The administrative services agreement may be amended or modified by written agreement among the A-1 Series, the Property A-1 Subsidiary and our Administrative Agent.
The administrative services agreement will have an indefinite term, but may be terminated by our Administrative Agent or the A-1 Series and the Property A-1 Subsidiary under certain circumstances. The A-1 Series and the Property A-1 Subsidiary may terminate the administrative services agreement with our Administrative Agent at any time with 30 days prior written notice from our board of directors and the Fortis General A-1 Partner for cause, which is defined as:
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• | our Administrative Agent's continued material breach of any provision of the administrative services agreement following a period of 30 days after written notice thereof, unless (i) such material breach, by its nature, is not capable of being cured within such 30 day period and (ii) within such 30 day period, our Administrative Agent commences to cure such material breach and thereafter diligently pursues the cure of such material breach and (iii) our Administrative Agent causes such material breach to be cured within a reasonable period of time thereafter; |
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• | our Administrative Agent's fraud, misappropriation of funds, or embezzlement against any Series of our company; |
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• | our Administrative Agent's gross negligence of duties under the administrative services agreement; |
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• | the commencement of any proceeding relating to our Administrative Agent's Bankruptcy (as defined below) or insolvency, including an order for relief in an involuntary bankruptcy case or our Administrative Agent authorizing or filing a voluntary bankruptcy petition; |
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• | our Administrative Agent is convicted (including a plea of nolo contendere) of a felony; and |
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• | the dissolution of our Administrative Agent. |
For purposes of the above, "Bankruptcy" means (a) the filing by our Administrative Agent of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment, in any form, of its debts under Title 11 of the United States Code or any other federal, state or foreign insolvency law, or our Administrative Agent's filing an answer consenting to or acquiescing in any such petition, (b) the making by our Administrative Agent of any assignment for the benefit of its creditors, (c) the expiration of 60 days after the filing of an involuntary petition under Title 11 of the Unites States Code, an application for the appointment of a receiver for a material portion of the assets of our Administrative Agent, or an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal, state or foreign insolvency law, provided that the same shall not have been vacated, set aside or stayed within such 60-day period or (d) the entry against our Administrative Agent of a final and non-appealable order for relief under any bankruptcy, insolvency or similar law.
Unsatisfactory financial performance does not constitute "cause" under the administrative services agreement.
In addition, the administrative services agreement and the asset management agreement with respect to the A-1 Series and the Property A-1 Subsidiary will be terminated following either: (a) a distribution to holders of, or redemption of, outstanding Series A-1 common shares in connection with a disposition of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary, whether held directly or through subsidiaries of the A-1 Series, or the Property A-1 Subsidiary's interest in the Property, whether held directly or through subsidiaries of the Property A-1 Subsidiary, as described under "Description of Series A-1 Common Shares-Redemption-Redemption in Connection with Sale of Property A-1 Subsidiary or Property"; or (b) a redemption of outstanding Series A-1 common shares pursuant to our tender offer policy as described under "Description of Series A-1 Common Shares-Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares (which we refer to, in each case, as a "Property Sale"), the administrative services agreement and the asset management agreement with respect to the A-1 Series and the Property A-1 Subsidiary will be terminated.
Our Administrative Agent may also terminate the administrative services agreement if we become required to register as an investment company under the 1940 Act, with such termination deemed to occur immediately before such event. In addition, if the A-1 Series or the Property A-1 Subsidiary defaults in the performance of any material term of the agreement and the default continues for a period of 30 days after written notice to the A-1 Series and the Property A-1 Subsidiary (unless (i) such default, by its nature, is not capable of being cured within such 30 day period and (ii) within such 30 day period, the A-1 Series or the Property A-1 Subsidiary commences to cure such default and thereafter diligently pursues the cure of such default and (iii) the A-1 Series or the Property A-1 Subsidiary causes such default to be cured within a reasonable period time thereafter), our Administrative Agent may terminate the management agreement upon 60 days' written notice.
Our Administrative Agent may assign the administrative services agreement to an affiliate with the approval of a majority of the board of directors (including a majority of the independent directors and the Fortis General A-1 Partner. The Administrative Agent may assign any rights to receive fees or other payments under the administrative services agreement to any person without obtaining the approval of the board of directors or the Fortis General A-1 Partner. The A-1 Series and the Property A-1 Subsidiary generally cannot assign the administrative services agreement without the consent of our Administrative Agent. In connection with a redemption of all outstanding Series A-1 common shares in exchange for equity interests in the Property A-1 Subsidiary as described under "Description of Series A-1 Common Shares Redemptions—Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of Our Board of Directors," all rights and obligations of the A-1 Series under the administrative services agreement will be automatically assigned to the Property A-1 Subsidiary, unless our Administrative Agent elects to terminate the agreement in connection with such redemption.
Administrative Services Fees and Expenses
Neither we nor the A-1 Series maintains an office or employs personnel. Instead, we rely on the facilities and resources of our Administrative Agent to provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary.
Administrative Services Fee and Administrative Sale Fee
The A-1 Series and the Property A-1 Subsidiary will pay a $1,730,000 one-time administrative services fee to our Administrative Agent upon the closing of this offering. Thereafter, the A-1 Series and the Property A-1 Subsidiary will pay our Administrative Agent a quarterly administrative services fee in an amount equal to $25,000 per quarter plus 1.0% of net operating income during the prior fiscal quarter. The administrative services fee shall be payable upon the closing of this offering, and quarterly thereafter in cash. For purposes of calculating the quarterly administrative services fee, the net operating income means the A-1 Series' net income during the fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of a majority of our independent directors; provided, however, that, for so long as the A-1 Series' investment in the Property A-1 Subsidiary is accounted for under the equity method, net operating income shall mean the Property A-1 Subsidiary's net income during the applicable fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of the General A-1 Partners.
Prior to the earlier of (i) the refinancing of the loan that currently encumbers the Property or (ii) January 11, 2017, installments of the quarterly administrative services fee payable in respect of a fiscal quarter will accrue in arrears, but will not be paid, unless and until the Property A-1 Subsidiary has distributed to the A-1 Series an amount of available cash generated by the Property A-1 Subsidiary during such fiscal quarter equal to or greater than (a) the Series A-1 Common Share Preference Amount in respect of any prior quarters and (b) the Series A-1 Common Share Preference Amount in respect of the current quarter. For a description of the Series A-1 Common Share Preference Amount, see "ETRE Property A-1, L.P. Partnership Agreement." In the event that, following any fiscal quarter, the Property A-1 Subsidiary does not have sufficient funds to pay the entire accrued and unpaid quarterly administrative services fee to the Administrative Agent under the administrative services agreement and the entire accrued and unpaid quarterly asset management fee to the Asset Manager under the asset management agreement, then any amounts that will be paid by the Property A-1 Subsidiary in respect of such fees will be paid, pro rata, based on the accrued and unpaid amounts of such fees as of the end of such quarter.
Following a Property Sale, the A-1 Series and the Property A-1 Subsidiary will pay our Administrative Agent an administrative sale fee, in cash, in an amount equal to 1.00% of total capitalization at the end of the month immediately preceding a Property Sale. For purposes of calculating the administrative sale fee, total capitalization is equal to the sum of the A-1 Series' total debt, members' capital, retained earnings and noncontrolling interests in the Property Subsidiary; provided, however, that, for so long as the A-1 Series' investment in the Property A-1 Subsidiary is accounted for under the equity method, total capitalization shall be calculated as if the Property A-1 Subsidiary were a consolidated subsidiary of the A-1 Series. No administrative sale fee shall be payable to our Administrative Agent in respect of any Property Sale that occurs during the first year following the closing of this offering if the total consideration paid by the purchaser (including any indebtedness assumed by the purchaser) in connection with the disposition of the A-1 Series' interest in the Property A-1 Subsidiary or the Property or in respect of the Series A-1 common shares tendered pursuant to the purchase offer, tender offer or exchange offer related to such Property Sale, as applicable, is less than the aggregate cash contribution paid by the A-1 Series in connection with the acquisition of its general partner interest the Property A-1 Subsidiary pursuant to the contribution transactions.
Our Administrative Agent will use the proceeds from its administrative services fee, and expects to use the proceeds from any administrative sale fee, in part to pay compensation to ETRE's officers and personnel who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us. The A-1 Series and the Property A-1 Subsidiary do not reimburse our Administrative Agent or its affiliates for the salaries and other compensation of ETRE's personnel to the extent that such personnel perform services for which our Administrative Agent receives the administrative services fee. Our Administrative Agent will also use the proceeds from its administrative services fee to pay certain non-property level expenses associated with the ordinary course of business and operations of the A-1 Series and its subsidiaries, including:
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• | accounting and other expenses related to the administration of non-property-level audits (including the fees and expenses of the accountants of the A-1 Series); |
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• | the preparation, printing and mailing of all filings made under the Exchange Act, including Forms 10-K, 10-Q and 8-K, and proxy statements (except as set forth below under "-Reimbursement of Property-Level Expenses"); and |
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• | insurance for our directors and officers (unless such director or officer is associated solely with the A-1 Series). |
Reimbursement of Property-Level Expenses
The A-1 Series and the Property A-1 Subsidiary will pay (i) all fees, costs and expenses related to non-ordinary course business and operations of ETRE REIT, LLC and the A-1 Series; provided, however, that any such expenses that are not consistent with the Property A-1 Subsidiary's then-approved annual operating budget will not be reimbursable with cash generated by the Property's operations without the approval of each of the General A-1 Partners and (ii) all property-level fees, costs and expenses consistent with the Property A-1 Subsidiary's then approved annual operating budget or as otherwise approved by each of the General A-1 Partners, in each case, other than those specifically required to be borne by our Administrative Agent under the administrative services agreement. These expenses include, but are not limited to:
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• | the actual cost of goods and services used by the A-1 Series or any subsidiary thereof and obtained from entities not affiliated with the Administrative Agent; |
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• | fees, costs and expenses of the asset managers and property managers performing property management and leasing services for the Property, including the fees, costs and expenses of the Asset Manager; |
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• | costs associated with property-level insurance required in connection with the business of the A-1 Series; |
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• | expenses associated with the listing of the Series A-1 common shares (or any other securities of our company associated with the A-1 Series or of any subsidiary of our company or any subsidiary of the A-1 Series) on a national securities exchange, if applicable, or with the formation of the A-1 Series or any subsidiary thereof and the offering, issuance and distribution of the Series A-1 common shares (or any other securities of our company associated with the A-1 Series or of any subsidiary of our company or any subsidiary of the A-1 Series), such as selling commissions and fees, advertising expenses, taxes, legal and accounting fees, listing and registration fees; |
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• | expenses of organizing, revising, amending, converting, modifying or terminating the A-1 Series or any subsidiary thereof; |
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• | expenses related to the preparation, printing and mailing of any proxy statements or other SEC filings in connection with any shareholder proposal, disposition, tender offer or redemption relating to the Property, the Property A-1 Subsidiary or the A-1 Series; |
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• | expenses related to the preparation, printing and mailing of other property-level reports required by governmental entities; |
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• | property-level service expenses, including all costs and expenses incurred by our Administrative Agent or its affiliates in fulfilling its duties hereunder at the property level, including reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of such services; provided, however, that no reimbursement shall be made for costs of such employees of our Administrative Agent or its affiliates to the extent that such employees perform services for which our Administrative Agent receives a separate fee; and |
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• | property-level accounting and legal fees. |
However, to the extent our Administrative Agent advances the fees, costs and expenses related to non-ordinary course of business and operations of ETRE REIT, LLC or the A-1 Series or the property-level fees, costs and expenses of our company, the A-1 Series and/or its subsidiaries, the A-1 Series and the Property A-1 Subsidiary will reimburse our Administrative Agent for such fees, costs and expenses. Expense reimbursements shall be payable monthly in cash.
To the extent any of the foregoing expenses are allocable to both the A-1 Series and any other Series we establish in the future, such expenses will be allocated to the respective Series in accordance with the inter-series relationship, conflicts of interest and opportunity allocation policy. See "Management—Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy."
License Agreement
Prior to the completion of the offering, we will enter into a license agreement with ETRE pursuant to which ETRE will grant us a non-exclusive, royalty free license to use the name "ETRE REIT, LLC." Other than with respect to this license, we will have no legal right to use the "ETRE" name. In the event we no longer have any administrative services agreements with our Administrative Agent, we would be required to change our name to eliminate the use of "ETRE."
MANAGEMENT
Our Directors, Director Nominees and Officers
ETRE Financial, LLC, an affiliate of our Administrative Agent, as the managing member of our company, will have the sole power to (i) nominate and elect all directors to our board of directors, (ii) set the number of directors of our board of directors, (iii) remove any director, with or without cause, at any time and (iv) fill any vacancies on our board of directors. ETRE Financial, LLC has nominated and elected our initial board of directors. ETRE Financial, LLC is partially owned and controlled by its founding members, Paul Frischer and Jesse Stein, who also serve as President and Chief Executive Officer and Chief Operating Officer and Secretary, respectively, of our company, and Scott Panzer, who serves as a director of our company. Each of our directors holds office for an annual term, or until his or her resignation or removal by ETRE Financial, LLC. Our officers serve at the pleasure of our board of directors.
Our Board is currently comprised of three members. Effective upon completion of this offering, ETRE Financial, LLC will increase the size of the board to seven directors and will appoint four additional directors who are independent within the criteria established by the NASDAQ for independent board members. Following these appointments, we expect that our board of directors will consist of seven directors.
In addition, effective upon completion of this offering, our board of directors will establish an audit committee, compensation committee and nominating and corporate governance committee that have the responsibilities described below under "—Corporate Governance—Board of Directors and Committees."
The following table sets forth certain information about our director nominees, executive officers and other key personnel.
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Name | Age | Position Held with Our Company |
Paul Frischer | 55 | President and Chief Executive Officer; Director |
Jesse Stein | 36 | Chief Operating Officer; Secretary; Director |
Darren Glickman | 47 | Chief Accounting Officer |
Scott Panzer | 56 | Director |
Jay Anderson (1) | 58 | Director Nominee |
Mark Filanowski (1) | 61 | Director Nominee |
Joseph Capezza (1) | 59 | Director Nominee |
John Gregorits (1) | 60 | Director Nominee |
(1) Independent within the criteria established by the NASDAQ. |
Each of Mr. Frischer, Mr. Stein and Mr. Panzer may be deemed to be a promoter with respect to this offering, within the meaning of such terms under the Securities Act, by virtue of their having co-founded our company. Mr. Frischer, Mr. Stein and Mr. Panzer are our only promoters.
Biographical Information
Directors and Officers
For biographical information on Paul Frischer, Jesse Stein, and Darren Glickman see "Our Administrative Agent and the Administrative Services Agreement—Executive Officers and Key Personnel of ETRE." Additional biographical information of the directors and director nominees of our company is outlined below.
Jay Anderson. Mr. Anderson serves as the Chief Operating Officer of The Feil Organization, a private real estate development and management firm with over 26 million square feet of retail, commercial, and industrial properties, more than 5,000 residential units, as well as hundreds of net-leased properties and thousands of acres of undeveloped land under management. Mr. Anderson has served in this position for over five years and has been with The Feil Organization for over 34 years in numerous positions. Mr. Anderson is also a founding partner of RCG Longview, a real estate finance company. He is responsible for RCG Longview's acquisition and financing functions as well as managing the lending and investment process for the organization's entire investment portfolio. His prior experience includes positions with Deloitte Haskins & Sells as well as W.R. Grace & Company's Consumer Services Group. Mr. Anderson has a BS in Accounting from Brooklyn College and an MBA in Finance & Taxation from New York University. He is a member of the M&T Real Estate Advisory Board and a Trustee of Kean University and The Starlight Children's Foundation. Mr. Anderson was selected to serve as a member of our board of directors because of his significant private real estate and debt market experience.
Joseph C. Capezza, CPA. Mr. Capezza is recently retired after having served from 2007 to 2014 as executive vice president, chief financial officer and treasurer for Health Net, Inc., a publicly traded managed care organization that delivers managed healthcare services through health plans and government-sponsored managed care plans. He was responsible for all financial activities of the company, including financial reporting, accounting, finance, risk management, treasury, investments, business and financial planning, and investor relations. Prior to joining Health Net in November 2007, Mr. Capezza was the chief financial officer of Harvard Pilgrim Health Care in Wellesley, Massachusetts. His earlier professional experience includes CFO responsibilities at Group Health Incorporated in New York and Reliance Reinsurance Corp. in Philadelphia. Previous positions also include executive responsibilities at Willcox Incorporated Reinsurance Intermediaries and Skandia America Reinsurance Corporation. Mr. Capezza also worked for Coopers & Lybrand. Mr. Capezza is a member of the American Institute of Certified Public Accountants and serves on the board of directors of the Society of Insurance Financial Management (SIFM). He served as president of SIFM from 1999 to 2001 and is the former chairman of SIFM's Reinsurance Committee (1992 to 1993) and Accounting Committee (1987 to 1988). Mr. Capezza received a Bachelor of Science in Accounting from Fordham University in Bronx, New York. Mr. Capezza was selected to serve as a member of our board of directors because of his significant corporate real estate market and accounting experience.
Mark Filanowski. Mr. Filanowski is a founding partner of Intrepid Shipping, LLC which was formed in 2002. Intrepid Shipping manages a fleet of six ocean-going vessels employed in dry bulk and chemical parcel businesses, and also manages a portfolio of residential mortgages and participates in investments in the medical technology field. Mr. Filanowski was previously a Director, Senior Vice President and Chief Financial Officer of Marine Transport Corporation from 1998 until 2001. Prior thereto, Mr. Filanowski was Senior Vice President of Marine Transport Lines, Inc. (MTL), a predecessor company of Marine Transport Corporation, where he served as MTL's Chief Financial Officer, and headed vessel operations and ship management from 1994 to 1998, and as Chief Financial Officer from 1989 to 1994. From 1984 to 1988, Mr. Filanowski served as Vice President and Controller of Armtek Corporation, and from 1976 to 1984 he was a Certified Public Accountant and served as Audit and Tax Manager at Ernst & Young. Mr. Filanowski is also a director at Pangaea Logistics Solutions Ltd. Mr. Filanowski graduated from the University of Connecticut and received an M.B.A. from New York University. Mr. Filanowski was selected to serve as a member of our board of directors because of his extensive public market and accounting experience.
John Gregorits. Mr. Gregorits retired in 2014 from his position as head of the Specialized Funds Group at Prudential Real Estate Investors (PREI), the real estate investment management business of Prudential Financial. PREI has been investing in real estate on behalf of institutional clients since 1970 and had gross assets under management of $53.9 billion as of September 30, 2013. Mr. Gregorits is responsible for several of PREI's higher-returning funds, totaling nearly $10 billion in gross assets. Before joining PREI in October, 1998, Mr. Gregorits managed a variety of multi-billion dollar equity and debt portfolios on behalf of Prudential Financial's General Account, gaining extensive experience in portfolio and asset management, development, acquisitions, sales, leasing, and joint venture management. His 36 years in real estate includes serving on a variety of industry associations as well as the Board of Directors of several privately held companies. Mr. Gregorits holds a BA in Economics and Psychology from Duke University and an MA in Organizational Behavior from Fairleigh Dickinson University. Mr. Gregorits was selected to serve as a member of our board of directors because of his significant institutional real estate market experience and asset management experience.
Scott Panzer. Mr. Panzer is a founding member of ETRE Financial, LLC, has served as a member of its Board of Managers since August 2012 and has served as a member of our board of directors since April 2013. Mr. Panzer is also a Vice Chairman at Jones Lang LaSalle, a financial and professional services firm that specializes in commercial real estate services and investment management, where he provides advising services to clients across all facets of real estate. He has, during the past 20 years, advised major corporate clients for their headquarter requirements including Bloomberg, AXA Equitable, Comcast NBCU and Health Net. Since becoming a service provider in 1992, he has completed over 30 million square feet of assignments. Mr. Panzer was Jones Lang LaSalle's global MVP for 2011 and has been in the top five for the last three years. Prior to joining Jones Lang LaSalle in 2009, Mr. Panzer spent 15 years at Newmark Knight Frank, where he initiated the pursuit of the Corporate Advisory Services platform and built the infrastructure required to support it. During his last 10 years at Newmark Knight Frank, he was a senior principal in the firm and head of its Corporate Services platform. Mr. Panzer holds an M.B.A. in Finance/Accounting from the University of Miami. Mr. Panzer is also an Adjunct Professor at Saint John's University in New York City. At present he is teaching a course on Managerial Strategy and Policy. Mr. Panzer was selected to serve as a member of our board of directors based on his significant experience and deep relationships in the real estate industry.
For biographical information on Paul Frischer and Jesse Stein, see "Our Administrative Agent and the Administrative Services Agreement—Executive Officers and Key Personnel of ETRE."
Executive and Director Compensation
Executive Compensation
Because the administrative services agreement provides that our Administrative Agent is responsible for providing certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, our officers, who are employees of ETRE, do not receive cash compensation from us for serving as our officers. ETRE compensates each of our officers. We pay our Administrative Agent an administrative services fee and our Administrative Agent will use the proceeds from the administrative services fee in part to pay compensation to ETRE's officers and personnel.
Compensation of Directors
We will pay a $75,000 annual base fee to each of our independent directors. Each independent director's annual base fee will be paid 50% in cash and 50% in awards under our 2015 Director Plan. See "—Non-Management Director Compensation Plan." We will also reimburse all members of our board of directors for their travel expenses incurred in connection with their attendance at full board of directors and committee meetings. Initially, such fees and reimbursements will be borne by the A-1 Series. As we establish additional Series in the future, we expect to allocate such fees and reimbursements among the Series, and the compensation committee may determine to increase such fees at the time such Series are established.
Initial Grants of Equity Compensation to Independent Directors
Under our 2015 Director Plan, our board of directors is authorized to approve grants of equity-based awards to our non-management directors. Our board of directors will approve an initial grant of restricted Series A-1 common shares to our independent directors. See "—2015 Non-Management Director Compensation Plan."
Corporate Governance — Board of Directors and Committees
Our operating agreement provides that the real property, affairs and business of each Series shall be managed under the direction of our single board of directors, the members of which are nominated and elected by ETRE Financial, LLC, as the managing member of our company. Subject to the supervision and oversight of our board of directors, the Property Oversight Committee and the General A-1 Partners, our Administrative Agent will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary. Our board of directors currently consists of three members. Effective upon completion of this offering, ETRE Financial, LLC will increase the size of the board to seven directors and will appoint four additional directors who are independent within the criteria established by the NASDAQ for independent board members. Our directors keep informed about our business by attendance at meetings of our board and its committees and through supplemental reports and communications. Our independent directors meet regularly in executive session without the presence of our corporate officers, our Administrative Agent, ETRE's personnel or our non-independent directors.
Upon completion of this offering, our board of directors will establish an audit committee and will adopt a charter for the audit committee that complies with current U.S. federal and NASDAQ rules relating to corporate governance matters. In addition, upon completion of this offering, our board of directors will establish a compensation committee and nominating and corporate governance committee, as described below. Our board of directors may establish other committees from time to time. Moreover, upon completion of this offering, our Administrative Agent will establish an inter-series conflict resolution committee. See "Our Administrative Agent and the Administrative Services Agreement—Inter-Series Conflict Resolution Committee."
Audit Committee
The audit committee will be comprised of Jay Anderson, Mark Filanowski and Joseph Capezza, each of whom is an independent director and "financially literate" under the rules of the NASDAQ. We expect Joseph Capezza will chair the audit committee. The audit committee will be responsible for engaging independent certified public accountants, preparing audit committee reports, reviewing with the independent certified public accountants the plans and results of the audit engagement, approving professional services provided by the independent certified public accountants, reviewing the independence of the independent certified public accountants, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls.
Compensation Committee
The compensation committee will be comprised exclusively of independent members of our board of directors. The initial members of this committee will be Mark Filanowski (who we expect will serve as chair of this committee), Joseph Capezza, and John Gregorits. The principal functions of the compensation committee will be to review the compensation and fees payable to our Administrative Agent under the administrative services agreement, evaluate the performance of our Administrative Agent and prepare compensation committee reports.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee will be comprised exclusively of independent members of our board of directors. The initial members of this committee will be John Gregorits (who we expect will serve as chair of this committee), Mark Filanowski, and Jay Anderson. The nominating and corporate governance committee will be responsible for seeking, considering and recommending to the managing member of our company qualified candidates for election as directors. The committee also periodically will prepare and submit to the managing member for adoption its selection criteria for director nominees and annually recommends to our board of directors nominees for each committee of the board. In addition, the committee annually will facilitate the assessment of the board of directors' performance as a whole and of the individual directors and reports thereon to the board.
The nominating and corporate governance committee will also review and make recommendations on matters involving general operation of the board and our corporate governance. In this regard, the nominating and corporate governance committee will, on an annual basis, conduct a review of the corporate governance structure impacting the A-1 Series, taking into account, among other factors, the corporate governance structure and approaches applicable to the other Series. In addition, where the nominating and corporate governance committee determines that changes to the corporate governance structure applicable to the A-1 Series are appropriate and in the best interests of the holders of our Series A-1 common shares, the committee will recommend such changes to our board of directors for adoption and, if required, for approval of the holders of our Series A-1 common shares.
In addition, the nominating and corporate governance committee will review specific matters that our Administrative Agent believes may involve conflicts of interest and that are not otherwise addressed by the inter-series relationship, conflicts of interest and opportunity allocation policy described below. These conflicts of interest may include conflicts between the interests of our company or any Series, on the one hand, and the interests of our Administrative Agent and its affiliates, on the other hand. The nominating and corporate governance committee will determine whether the resolution of any conflict of interest submitted to it is fair and reasonable to us and our shareholders. Any matters approved by the nominating and corporate governance committee will be conclusively deemed to be fair and reasonable to us and our shareholders and not a breach by us of any duties that we may owe to our shareholders. In addition, the nominating and corporate governance committee may review and approve any related person transactions, including those that are approved pursuant to our related person policy, as described under "Conflicts of Interest; Certain Relationships and Related Party Transactions-Statement of Policy Regarding Transactions with Related Persons," and may establish guidelines or rules to cover specific categories of transactions.
Property Oversight Committee
Our operating agreement will establish a Property Oversight Committee to resolve potential disputes between the Fortis General A-1 Partner and its affiliates and the A-1 Series and its affiliates.
Under the terms of the limited partnership agreement of the Property A-1 Subsidiary, for so long as the Lincoln Street Holdings Limited Partner Group owns at least 25% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares, the Fortis General A-1 Partner generally will manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and the A-1 Series, as the REIT General A-1 Partner, will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. These major decisions relate to, among other things, indebtedness (including the refinancing of the existing loan that encumbers the Property, subject to certain exceptions), expenditures, legal proceedings, tenant bankruptcies, leases, zoning matters, easements, environmental matters and insurance. In addition, the REIT General A-1 Partner has authority over, among other things, the issuance of securities and additional capital contributions (subject to the consent of the Fortis General A-1 Partner). Prior to the refinancing of the existing loan on the Property, in the event there is a disagreement between the REIT General A-1 Partner, on the one hand, and the Fortis General A-1 Partner, on the other hand, the REIT General A-1 Partner and the Fortis General A-1 Partner may jointly refer a major decision or securities issuance to the Property Oversight Committee for resolution and the Fortis General A-1 Partner may unilaterally refer a major decision or a securities issuance to the Property Oversight Committee for resolution. From and after the refinancing of the existing loan, either General A-1 Partner may refer a major decision or securities issuance to the Property Oversight Committee for a binding resolution on the matter. The Property Oversight Committee will have the authority to make the final determination as to whether any major decision or securities issuance will be taken or occur.
Our operating agreement will establish a Property Oversight Committee, which will consist of five members, three of which will be designated by our board of directors, or the A-1 Series members, and two of which will be designated by the Fortis General A-1 Partner, or the Fortis members. The Property Oversight Committee will initially be comprised of Scott Panzer, John Gregorits, Jay Anderson, Joseph Capezza and Jonathan Landau, each of whom, other than Mr. Landau, is a director of our company. Mr. Landau is the chief executive officer of Fortis.
For additional information, see "Description of Series A-1 Common Shares—Operating Agreement and Bylaws-Board Committees and Property Oversight Committee of the A-1 Series."
Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy
We expect that the A-1 Series and each other Series we establish in the future will have certain ongoing, operating relationships with each other. We expect that the operating relationships among the Series will primarily include the coordination and use of company overhead and support services. In addition, the A-1 Series and each other Series we establish in the future may have overlapping investment strategies and objectives, and our board of directors, our officers and our Administrative Agent and ETRE's personnel may face conflicts of interest in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series.
In an effort to govern these operating relationships, address these conflicts of interest and promote the fair allocation of sale, financing, leasing and other business opportunities, our board of directors has adopted an inter-series relationship, conflicts of interest and opportunity allocation policy (which we refer to as the "Inter-Series Policy"), which is administered by our Administrative Agent. Our Administrative Agent's adherence to this policy is expected to be reviewed quarterly by our board of directors. Our board of directors may modify, suspend or rescind the policies set forth in the Inter-Series Policy without shareholder approval. Our board may also adopt additional or other policies or make exceptions with respect to the application of the policies described in the Inter-Series Policy in connection with particular facts and circumstances, all as our board may determine, consistent with its fiduciary duties to our company and all of our shareholders.
General Policy
Under the Inter-Series Policy, all material matters in which holders of Series A-1 common shares and common shares of any other Series may have divergent interests will be generally resolved in a manner that is in the best interests of our company and all of such common shareholders after giving fair consideration to the potentially divergent interests and all other relevant interests of the holders of such separate classes of common shares. Under the Inter-Series Policy, the relationship between the A-1 Series and each other Series and the means by which the terms of any material transaction between them will be determined will be governed by a process of fair dealing.
Relationship Among the Series
The Inter-Series Policy provides that our Administrative Agent will seek to manage each Series in a manner designed to maximize the operations, assets and value of all Series.
General. The Inter-Series Policy provides that, except as otherwise provided in the Inter‑Series Policy, all material commercial transactions between a Series and any other Series will be on commercially reasonable terms taken as a whole.
Allocation of company overhead and support services. Each Series will have access to the support services of any other Series. For shared company services, costs (other than those specifically required to be borne by our Administrative Agent under the administrative services agreement)relating to these services will be:
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• | allocated directly to the Series utilizing those services, and |
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• | if not directly allocable to a Series, allocated among all of the then existing Series on a pro rata basis. |
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• | For other support services the Inter-Series Policy provides that the Series will seek to achieve efficiencies to minimize the aggregate costs incurred by the Series combined, although any Series also will be entitled to negotiate and procure support services on its own. |
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• | Our board of directors may, without shareholder approval, modify or amend the method of allocation of support services and shared company services. |
Financing arrangements. No Series will be obligated to provide financial support to any other Series. To the extent a Series (the "lending Series") loans money to any other Series (the "borrowing Series"), such loans will be made at interest rates and on other terms and conditions designed to be substantially equivalent to the interest rates and other terms and conditions that the borrowing Series would be able to obtain from third parties, including the public markets, as a non-affiliate of our company or any other Series without the benefit of any guarantee by our company or any other Series. This policy contemplates that these loans will be made on the basis set forth above regardless of the interest rates and other terms and conditions on which the lending Series may have acquired the funds. If, however, the lending Series incurs any fees or charges in order to keep available funds for use by the borrowing Series, those fees or charges will be allocated to the borrowing Series.
Business Opportunities
The Inter-Series Policy provides that our Administrative Agent will allocate any sale, financing, leasing and other business opportunities among the Series, in whole or in part, as it considers to be in the best interests of our company and its shareholders as a whole and as contemplated by the other provisions of the Inter-Series Policy. If a sale, financing, leasing or other business opportunity would be suitable for the real property owned by more than one Series, our Administrative Agent will allocate it using its business judgment. Any allocation of this type may involve the consideration of a number of factors that our Administrative Agent determines to be relevant, including concepts of fairness over time, cash flows from the properties owned by the respective Series, the properties' respective tenant bases and lease rental rates, the Series' available cash and existing leverage, the type and condition of the properties, local market conditions where the properties are located, whether a property is jointly owned by a Series with other investors, potential tax consequences associated with the business opportunity and whether a Series or property is otherwise better positioned to undertake or have allocated to it the business opportunity.
Except under the Inter-Series Policy and any other policies adopted by our board of directors, which policies will be designed to minimize conflicts among the Series, no Series will have any duty, responsibility or obligation to refrain from:
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• | engaging in the same or similar activities or lines of business as any other Series, |
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• | doing business with any potential or actual tenant, lender, purchaser, supplier, customer or competitor of any other Series, or |
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• | engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual tenants, lenders, purchasers, suppliers or customers of any other Series. |
Determinations by our Administrative Agent and the Inter-Series Conflict Resolution Committee
Our Administrative Agent maintains a contractual as opposed to a fiduciary relationship with us, each Series and our shareholders. In making determinations in connection with the policies set forth in the Inter-Series Policy, the inter-series conflict resolution committee and our Administrative Agent will act in accordance with our Administrative Agent's obligations under the administrative services agreement with the A-1 Series and the Property A-1 Subsidiary (and any other administrative services agreements our Administrative Agent enters into with the other Series we establish in the future and their related Property Subsidiaries). For a description of the administrative services agreement with the A-1 Series and the Property A-1 Subsidiary, see "Our Administrative Agent and the Administrative Services Agreement."
Review and Amendment and Modification of the Inter-Series Policy
Our board of directors expects on a quarterly basis to review our Administrative Agent's adherence to the Inter-Series Policy and on an annual basis to assess the Inter-Series Policy and consider policy changes. Our board of directors may modify, suspend, waive or rescind the policies set forth in the Inter-Series Policy, including any resolution implementing the provisions of the Inter-Series Policy, without the approval of our shareholders. Our board may also adopt additional or other policies or make exceptions with respect to the application of the policies described in the Inter-Series Policy in connection with particular facts and circumstances, all as our board may determine, consistent with its fiduciary duties to our company and all of our shareholders.
2015 Non-Management Director Compensation Plan
Prior to the completion of this offering, we will adopt the 2015 Director Plan to provide incentive compensation to attract and retain qualified non-management directors. The 2015 Director Plan will be administered by a committee (which may be the compensation committee) appointed by our board of directors. The 2015 Director Plan will permit the granting of restricted Series A-1 common shares, restricted common shares of Other Property Series, share options, restricted share units, phantom shares, dividend equivalent rights, and other equity-based awards. Prior to the completion of this offering, our board of directors will approve an initial grant of restricted Series A-1 common shares to our independent directors. The terms of the limited partnership agreement of the Property A-1 Subsidiary may restrict our ability to issue Series A-1 common shares pursuant to the 2015 Director Plan. See "ETRE Property A-1, L.P. Partnership Agreement."
Administration
The committee appointed by our board of directors to administer the 2015 Director Plan will have the full authority to administer and interpret the 2015 Director Plan, authorize the granting of awards, determine the eligibility of non-management directors to receive an award, determine the number of our common shares to be covered by each award (subject to the individual participant limitations provided in the 2015 Director Plan), determine the terms, provisions and conditions of each award (which may not be inconsistent with the terms of the 2015 Director Plan), prescribe the form of instruments evidencing awards and take any other actions and make all other determinations that it deems necessary or appropriate in connection with the 2015 Director Plan or the administration or interpretation thereof. In connection with this authority, the committee may, among other things, establish performance goals that must be met in order for awards to be granted or to vest, or for the restrictions on any such awards to lapse. From and after the consummation of this offering, the 2015 Director Plan will be administered by a committee consisting of two or more directors, each of whom is intended to be, to the extent required by Rule 16b-3 under the Exchange Act, a non-employee director and will, at such times as we are subject to Section 162(m) of the Internal Revenue Code and intend that grant be exempt from the restriction of Section 162(m), qualify as an outside director for purposes of Section 162(m) of the Internal Revenue Code, or, if no committee exists, the board of directors. References below to the committee include a reference to the board for those periods in which the board is acting.
Available Shares
Our 2015 Director Plan provides for grants of our Series A-1 common shares, and other equity-based awards up to an aggregate of 0.25% of the issued and outstanding Series A-1 common shares and the common shares of Other Property Series (on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities into Series A-1 common shares and the common shares of Other Property Series) and including our Series A-1 common shares to be sold pursuant to the underwriters' exercise of their overallotment option) at the time of the award. If an option or other award granted under the 2015 Director Plan expires or terminates, the shares subject to any portion of the award that expires, forfeits or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless previously terminated by our board of directors, no new award may be granted under the 2015 Director Plan after the first anniversary of the earlier of the date that such plan was initially approved by (i) our board of directors or (ii) our shareholders. No award may be granted under our 2015 Director Plan to any person who, assuming exercise of all options and payment of all awards held by such person would own or be deemed to own more than 9.8% of the outstanding Series A-1 common shares. Prior to the completion of this offering, our board of directors will approve an initial grant of restricted Series A-1 common shares to each of our independent directors. In addition, 50% of each independent director's annual base director fee will be paid in awards under our 2015 Director Plan.
Awards Under the Plan
Restricted Shares. A restricted share award is an award of our Series A-1 common shares or the common shares of Other Property Series as applicable, that is subject to restrictions on transferability and such other restrictions, if any, as the committee may impose at the date of grant. Grants of restricted shares will be subject to vesting schedules as determined by the committee. The restrictions may lapse separately or in combination at such times, under such circumstances, including, without limitation, a specified period of service or the satisfaction of pre-established criteria, in such installments or otherwise, as the committee may determine. A participant granted restricted shares will have all of the rights of a shareholder, including, without limitation, the right to vote and the right to receive distributions on the Series A-1 common shares or the common shares of Other Property Series, as applicable. Although dividends will be paid on restricted Series A-1 common shares or the common shares of Other Property Series, whether or not vested, at the same rate and on the same date as on Series A-1 common shares or the common shares of Other Property Series, as applicable, holders of such restricted shares are prohibited from selling such shares until they vest.
Stock Options. The terms of specific options, including whether options shall constitute "incentive stock options" for purposes of Section 422(b) of the Internal Revenue Code, shall be determined by the committee. The exercise price of an option shall be determined by the committee and reflected in the applicable award agreement. The exercise price with respect to incentive stock options may not be lower than 100% (110% in the case of an incentive stock option granted to a 10% shareholder, if permitted under the plan) of the fair market value of our Series A-1 common shares or the common shares of Other Property Series, as applicable, on the date of grant. Each option will be exercisable after the period or periods specified in the award agreement, which will generally not exceed ten years from the date of grant (or five years in the case of an incentive stock option granted to a 10% shareholder, if permitted under the plan). Options will be exercisable at such times and subject to such terms as determined by the committee.
Phantom Shares. Phantom shares, when issued, will reduce the number of shares available for grant under the 2015 Director Plan and will vest as provided in the applicable award agreement. A phantom share represents a right to receive the fair market value of a Series A-1 common share or common share of Other Property Series, as applicable, or, if provided by the committee, the right to receive the fair market value of a Series A-1 common share or the common share of Other Property Series, as applicable, in excess of a base value established by the committee at the time of grant. Phantom shares may generally be settled in cash or by transfer of Series A-1 common shares or the common shares of Other Property Series, as applicable, (as may be elected by the participant or the committee as may be provided by the committee at grant). The committee may, in its discretion and under certain circumstances, permit a participant to receive as settlement of the phantom shares installments over a period not to exceed ten years.
Dividend Equivalents. A dividend equivalent is a right to receive (or have credited) the equivalent value (in cash or Series A-1 common shares or the common shares of Other Property Series) of dividends paid on Series A-1 common shares or the common shares of Other Property Series, as applicable, otherwise subject to an award. The committee may provide that amounts payable with respect to dividend equivalents shall be converted into cash or additional Series A-1 common shares or the common shares of Other Property Series, as applicable. The committee will establish all other limitations and conditions of awards of dividend equivalents as it deems appropriate.
Restricted Share Units. Restricted share units represent a promise to pay Series A-1 common shares or the common shares of Other Property Series (or a cash amount equal to the value thereof) upon the completion of a vesting period. Dividend equivalents generally are granted with restricted share units and are earned during the vesting period, and paid in the year following the year to which they relate.
Other Share-Based Awards. The 2015 Director Plan authorizes the granting of other awards based upon Series A-1 common shares or the common shares of Other Property Series (including the grant of securities convertible into Series A-1 common shares, the common shares of Other Property Series and share appreciation rights), subject to terms and conditions established at the time of grant.
Change in Control
Upon a change in control (as defined in the 2015 Director Plan), the committee may make such adjustments as it, in its discretion, determines are necessary or appropriate in light of the change in control, but only if the committee determines that the adjustments do not have a substantial adverse economic impact on the participants (as determined at the time of the adjustments) and provided that any discretionary increase in the aggregate number of shares issuable under the 2015 Director Plan must be approved by our board of directors.
Other Changes
Our board of directors may amend, alter, suspend or discontinue the 2015 Director Plan but cannot take any action that would impair the rights of a participant's existing grants. To the extent necessary and desirable (including, as required by law or any stock exchange rules), the board of directors must obtain approval of our shareholders for any amendment that would:
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• | other than through adjustment as provided in the 2015 Director Plan, increase the total number of shares reserved for issuance under the 2015 Director Plan; or |
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• | change the class of directors eligible to participate in the 2015 Director Plan. |
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• | The committee or our board of directors may amend the terms of any award granted under the 2015 Director Plan, prospectively or retroactively, but, generally may not impair the rights of any participant without his or her consent. |
Code of Business Conduct and Ethics
Our code of business conduct and ethics applies to our officers and directors, our Administrative Agent and to ETRE's personnel when such individuals are acting for or on our behalf. Among other matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:
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• | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
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• | full, fair, accurate, timely and understandable disclosure in our public communications; |
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• | compliance with applicable governmental laws, rules and regulations; |
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• | prompt internal reporting of violations of the code to appropriate persons identified in the code; and |
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• | accountability for adherence to the code. |
Any waiver of the code of business conduct and ethics for our officers or directors may be made only by our board of directors or one of our board of directors committees and will be promptly disclosed if and to the extent required by law or stock exchange regulations.
PRINCIPAL SHAREHOLDERS
We currently have outstanding 100 Series A-1 common shares, all of which are owned by Mr. Stein. Upon completion of this offering and the concurrent private placement, we will repurchase all 100 Series A-1 common shares from Mr. Stein at his cost of $10.00 per share.
The following table sets forth certain information following the closing of this offering and the concurrent private placement, regarding the ownership of our Series A-1 common shares by:
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• | each of our directors and director nominees; |
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• | each of our executive officers; |
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• | each holder of more than 5% of our Series A-1 common shares; and |
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• | all of our director, director nominees and executive officers as a group. |
In accordance with SEC rules, each listed person's beneficial ownership includes:
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• | all shares the investor actually owns beneficially or of record; |
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• | all shares over which the investor has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund); and |
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• | all shares the investor has the right to acquire within 60 days (such as restricted common shares that are currently vested or which are scheduled to vest within 60 days). |
Unless otherwise indicated, all shares are owned directly and the indicated person has sole voting and investment power. Except as indicated in the footnotes to the table below, the business address of the shareholders listed below is the address of our principal executive office, 44 Wall Street, New York, New York, 10005.
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| | Series A-1 Common Shares Outstanding |
| | Immediately Prior to
Offering and Concurrent Private Placement | | Immediately After
Offering and Concurrent Private Placement |
Name and Address | | Number of Series A-1 Common Shares Beneficially Owned | | Percentage of All Series A-1 Common Shares(1) | | Number of Series A-1 Common Shares Beneficially Owned | | Percentage of
All Series A-1 Common Shares(2) |
Paul Frischer | | - | | - | | 33,333(4) | | * |
Jesse Stein | | 100(3) | | 100% | | 33,333(4) | | * |
Darren Glickman | | - | | - | | - | | - |
Scott Panzer | | - | | - | | 33,333(4) | | * |
Jay Anderson | | - | | - | | 500 | | * |
John Gregorits | | - | | - | | 500 | | * |
Joseph Capezza | | - | | - | | 500 | | * |
Mark Filanowski | | - | | - | | 500 | | * |
All of our directors, director nominees and executive officers as a group | | 100 | | 100% | | 35.333 | | * |
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* | Represents less than 1% of the Series A-1 common shares outstanding at the closing of this offering. |
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(1) | Based on a total of 100 Series A-1 common shares outstanding as of the date of this prospectus, which does not give effect to this offering. |
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(2) | Assumes the issuance of 11,533,333 Series A-1 common shares offered hereby and in the concurrent private placement and an aggregate of 2,000 restricted Series A-1 common shares to be granted to our independent directors upon the completion of this offering and the concurrent private placement under our 2015 Director Plan. Does not reflect (a) Series A-1 common shares reserved for issuance upon exercise of the underwriters' over-allotment option in full, (b) 12,066,667 Series A-1 common shares potentially issuable upon redemption of the Series A-1 OP units, which Series A-1 OP units may be tendered for cash or, at the option of the A-1 Series, exchanged into Series A-1 common shares, subject to certain adjustments, after (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, or (ii) January 11, 2017. See "ETRE Property A-1, L.P. Partnership Agreement—Exchange of Series A-1 OP Units." |
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(3) | We sold these shares to Jesse Stein in connection with the initial capitalization of the A-1 Series for total consideration of $1,000. At the closing of this offering, we will repurchase these shares from Mr. Stein for $1,000. Accordingly, the 100 Series A-1 common shares that we currently have outstanding are excluded from the number of Series A-1 common shares to be outstanding immediately after the closing of this offering. |
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(4) | Represents 33,333 Series A-1 common shares to be sold to our Administrative Agent in the concurrent private placement. Our Administrative Agent is a subsidiary of ETRE Financial, LLC, which is the managing member of our company and is partially owned and controlled by Messrs. Frischer, Stein and Panzer. Each of Messrs. Frischer, Stein and Panzer disclaims beneficial ownership of the Series A-1 common shares held by our Administrative Agent, except to the extent of his indirect proportionate pecuniary interest in such shares. |
CONFLICTS OF INTEREST; CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Conflicts of Interest
Conflicts of interest exist and may arise in the future as a result of the relationships between our Administrative Agent and its affiliates (including ETRE Financial, LLC, the managing member of our company), on the one hand, and us, each Series and our shareholders, on the other hand.
Our operating agreement provides that the real property, affairs and business of each Series, including the A-1 Series, will be managed under the direction of our single board of directors. ETRE Financial, LLC, as the managing member of our company, will have the sole right to nominate, elect and remove the members of our board of directors. Accordingly, shareholders will have no right to nominate, elect or remove members of our board of directors and the managing member will have complete discretion in nominating, electing or removing members of our board of directors.
We do not expect to have any employees and we will rely completely on our Administrative Agent to provide each Series and the Property Subsidiary, including the A-1 Series and the Property A-1 Subsidiary, with administrative and certain advisory services. The administrative services agreement with our Administrative Agent related to the A-1 Series and the Property A-1 Subsidiary was prepared by related parties and its terms, including fees, expense reimbursements and other amounts payable to our Administrative Agent, may not be as favorable to the A-1 Series and the Property A-1 Subsidiary as if the agreement had been negotiated at arm's length between unaffiliated third parties.
Certain of our officers and directors also serve or may serve as officers, directors or employees of ETRE as well as other ETRE sponsored vehicles and other companies unaffiliated with ETRE. Accordingly, the ability of these persons to engage in other business activities may reduce the time they spend managing our business, including the business of the A-1 Series. In addition, these persons may have obligations to those entities, the fulfillment of which might not be in the best interests of us, any Series or any of our shareholders.
Moreover, our officers and directors will serve as officers and directors for, and our Administrative Agent and ETRE's personnel will provide similar services to, any other Series we establish in the future. The A-1 Series and any other Series we establish in the future may have overlapping investment strategies and objectives, and our board of directors, our officers and our Administrative Agent may face conflicts of interest in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series. To help alleviate any perceived or actual conflicts of interest, our board of directors has adopted an inter-series relationship, conflicts of interest and opportunity allocation policy (which we refer to as the "Inter-Series Policy"), which is administered by our Administrative Agent and has been designed to govern the operating relationships among the Series, address conflicts of interest among the Series and promote the fair allocation of sale, financing, leasing and other business opportunities among the real properties owned by the different Series. See "Management—Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy." The Inter-Series Policy provides our Administrative Agent with significant flexibility with respect to its ability to make decisions and pursue actions involving conflicts of interest among the Series. Given the significant flexibility afforded our Administrative Agent to resolve such conflicts of interest, our Administrative Agent may resolve conflicts of interests pursuant to the Inter-Series Policy in a manner that holders of Series A-1 common shares may not believe to be in their best interests or in the best interests of the A-1 Series. Neither holders of our Series A-1 common shares, the A-1 Series, the Property A-1 Subsidiary nor the General A-1 Partner will have any recourse against our Administrative Agent if our Administrative Agent satisfies its obligations under the administrative services agreement with the A-1 Series and the Property A-1 Subsidiary.
The nominating and corporate governance committee of our board of directors, which is comprised solely of independent directors, will review specific matters that our Administrative Agent believes may involve conflicts of interest and that are not otherwise addressed by the Inter-Series Policy. These conflicts of interest may include conflicts between the interests of our company or any Series, on the one hand, and the interests of our Administrative Agent, and its affiliates, on the other hand. The nominating and corporate governance committee will determine whether the resolution of any conflict of interest submitted to it is fair and reasonable to us and our shareholders. If our Administrative Agent obtains such approval of any matter, such matter will be conclusively deemed to be fair and reasonable to us and our shareholders and not a breach by us of any duties that we may owe to our shareholders.
We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics prohibits our directors and executive officers, as well as employees of our Administrative Agent or ETRE who provide services to us, from engaging in any transaction that involves an actual conflict of interest with us and that is not otherwise addressed by the Inter-Series Policy without the approval of the nominating and corporate governance committee. See "Risk Factors—Potential conflicts of interest may arise among our Administrative Agent and its affiliates, on the one hand, and our company and our shareholders, on the other hand."
In addition, the Fortis General A-1 Partner, the Lincoln Street Holdings Limited Partner Group and their respective affiliates may have interests, including economic interests, that are materially different than the interests of our Series A-1 common shareholders. In particular, upon the completion of this offering, the concurrent private placement and the contribution transactions, the Lincoln Street Holdings Limited Partner Group will own Series A-1 OP units in the Property A-1 Subsidiary, but will not own any of our Series A-1 common shares.
Moreover, the Fortis General A-1 Partner, as the general partner managing the day-to-day business, affairs and operations of the Property A-1 Subsidiary and the Property, will be able to exert significant influence on the Property A-1 Subsidiary, and the Limited A-1 Partner, through the voting rights and our tender offer policy described in more detail under "Description of Series A-1 Common Shares", will be able to exert significant influence over Property dispositions and third party purchase offers in respect of our Series A-1 common shares. One of the Limited A-1 Partner Owners, Lincoln Street Investors, LLC, is an affiliate of the Fortis General A-1 Partner, the Asset Manager and Fortis, and the other two Limited A-1 Partner Owners, RCG State Street Boston I, LLC and RCG State Street Boston II, LLC, are managed by a fund for which Jay Anderson, one of our director nominees, serves as one of the managing members of the fund's general partner. The differing interests of the Fortis General A-1 Partner and the Lincoln Street Holdings Limited Partner Group could create conflicts of interest when the A-1 Series, on the one hand, and the Fortis General A-1 Partner or the Lincoln Street Holdings Limited Partner Group, on the other hand, are faced with decisions that could have different implications for the Fortis General A-1 Partner or the Lincoln Street Holdings Limited Partner Group and the A-1 Series.
Administrative Services Agreement
The A-1 Series and the Property A-1 Subsidiary will enter into the administrative services agreement with our Administrative Agent effective upon the closing of this offering. Pursuant to the terms of an administrative services agreement, our Administrative Agent will provide certain administrative and advisory services to the A 1 Series and the Property A 1 Subsidiary, as well as a management team and appropriate support personnel. Our Administrative Agent will at all times be subject to the supervision and oversight of our board of directors, the Property Oversight Committee and the General A-1 Partners. The administrative services agreement will have an indefinite term, but may be terminated by our Administrative Agent or the A-1 Series and the Property A-1 Subsidiary under certain circumstances. Our Administrative Agent is entitled to receive from the A-1 Series and the Property A-1 Subsidiary an administrative services fee and, under certain circumstances, an administrative sale fee. The A-1 Series and the Property A-1 Subsidiary are also obligated to reimburse certain expenses incurred by our Administrative Agent. See "Our Administrative Agent and the Administrative Services Agreement—Administrative Services Agreement."
Asset Management Agreement
The Property A-1 Subsidiary will enter into an asset management agreement with FPG Lincoln Manager, LLC, the Asset Manager and an affiliate of the Fortis General A-1 Partner and Lincoln Street Investors, LLC, one of the Limited A-1 Partner Owners, in connection with the contribution transactions. Pursuant to the asset management agreement, the Asset Manager will provide asset management services in exchange for a quarterly asset management fee. See "Business and Property—The Asset Management Agreement and the Asset Manager."
Contribution Agreement and Related Transactions
The A-1 Series has executed a contribution agreement with Lincoln Street Mezz, LLC, the parent company of the Property Owner, and Lincoln Street Holdings, LLC, the parent company of Lincoln Street Mezz, LLC, which provides for the contribution of substantially all of the net proceeds of the offering and the concurrent private placement by the A-1 Series to Lincoln Street Mezz, LLC in exchange for 48.87% of the outstanding equity interests of Lincoln Street Mezz, LLC, subject to adjustments set forth in the contribution agreement. In connection with this contribution, Lincoln Street Mezz, LLC will distribute the net proceeds of this contribution to Lincoln Street Holdings, LLC and will convert from a limited liability company into a limited partnership and become the Property A-1 Subsidiary, and the A-1 Series, as the REIT General A-1 Partner, Lincoln Street Manager, LLC, as the Fortis General A-1 Partner, and Lincoln Street Holdings, LLC, as the Limited A-1 Partner, will enter into the limited partnership agreement for the Property A-1 Subsidiary.
The A-1 Series' acquisition of its indirect interest in the Property is on an "as is, where is, with all faults" basis. The contribution agreement is subject to certain customary conditions precedent, including that closing of the contribution transactions shall be conditioned on the simultaneous completion of this offering, the receipt of all necessary third-party consents, and the A-1 Series being satisfied, in its sole discretion, with its due diligence review. It also contains customary representations, warranties, covenants and other conditions. The contribution agreement contains limitations on the A-1 Series' right to make claims for breaches of representations and warranties and other defaults by Lincoln Street Holdings, LLC under the contribution agreement, including a 180-day survival period of the representations and warranties and a cap of $5 million on the aggregate amount of the claims that the A-1 Series can bring within the survival period.
In addition, upon the completion of the contribution transactions, the Property A-1 Subsidiary will agree to indemnify the existing guarantors of the loan that currently encumbers the Property for any and all losses subsequent to the completion of the contribution resulting from their role as guarantors under the loan. After the loan is refinanced, which is expected to occur prior to January 11, 2017, the existing guarantors of the loan will be released from any and all obligations and liabilities existing in connection with the loan and will no longer be required to serve as guarantors.
One of the Limited A-1 Partner Owners, Lincoln Street Investors, LLC, is an affiliate of the Fortis General A-1 Partner, the Asset Manager and Fortis. The other two Limited A-1 Partner Owners, RCG State Street Boston I, LLC and RCG State Street Boston II, LLC, are managed by RCG Longview II, L.P. Jay Anderson, one of our director nominees, is one of five managing members of RCG Longview Partners II, LLC, the general partner of RCG Longview II, L.P.
Following the contribution transactions, it is expected that the Limited A-1 Partner will distribute its Series A-1 OP units to the Limited A-1 Partner Owners, which will distribute the Series A-1 OP units to their respective members, subject to the transfer restrictions set forth in the limited partnership agreement of the Property A-1 Subsidiary.
Registration Rights Agreement
We have granted registration rights to the Limited A-1 Partner and its permitted assignees of Series A-1 OP units in respect of the Series A-1 common shares issuable upon exchange of their respective Series A-1 OP units. See ''Shares Eligible for Future Sale-Registration Rights Agreement."
Concurrent Private Placement
We will sell 33,333 Series A-1 common shares to our Administrative Agent in the concurrent private placement at a price per share equal to the public offering price in this offering. We will agree to register the resale of the Series A-1 common shares purchased by our Administrative Agent in the concurrent private placement once we have become eligible to file a registration statement on Form S-3 or another short-form of registration available to us. We will bear expenses incident to the registration of these shares.
ETRE License Agreement
Prior to the completion of the offering, we will enter into a license agreement with ETRE, pursuant to which ETRE will grant us a non-exclusive, royalty free license to use the name "ETRE REIT, LLC." See "Our Administrative Agent and the Administrative Services Agreement—License Agreement."
Initial Capitalization
In connection with the formation and initial capitalization of the A-1 Series, Mr. Stein purchased 100 Series A-1 common shares for a purchase price of $1,000. We will use $1,000 of the net proceeds of this offering and the concurrent private placement to repurchase the shares Mr. Stein acquired.
Indemnification and Limitation of the Managing Member's, Directors' and Officers' Liability
Our operating agreement provides that to the fullest extent permitted by applicable law ETRE Financial, LLC, the managing member of our company, and our directors or officers will not be liable to us. In addition, pursuant to our operating agreement, we have agreed to indemnify the managing member and each of our directors and officers, to the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with the approval of the company and counsel fees and disbursements on a solicitor and client basis) arising from the performance of any of their obligations or duties in connection with their service to us or the operating agreement, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person may hereafter be made party by reason of being or having been the managing member or one of our directors or officers.
Prior to completion of this offering, we intend to enter into separate indemnification agreements with our directors and officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our operating agreement against any and all expenses, judgments, fines, penalties and amounts paid in settlement of any claim. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our operating agreement.
Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Statement of Policy Regarding Transactions with Related Persons
Our board of directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our "related person policy." Our related person policy requires that a "related person" (as defined in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our chief financial officer any "related person transaction" (defined as any transaction that is reportable by us under Item 404(a) of Regulation S-K in which we (including any Series) were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. Our chief financial officer will then promptly communicate that information to our Administrative Agent. No related person transaction will be consummated without the approval or ratification of our Administrative Agent or the inter-series conflict resolution committee, in the case of transactions addressed by the Inter-Series Policy, or any committee of our board of directors consisting exclusively of disinterested directors, in the case of transactions not otherwise addressed by such policy. It is our policy that persons interested in a related person transaction will recuse themselves from any vote of a related person transaction in which they have an interest.
DESCRIPTION OF SERIES A-1 COMMON SHARES
The following descriptions of the Series A-1 common shares, and the A-1 Series, certain provisions of Delaware law and certain provisions of our certificate of formation and operating agreement and our bylaws, which will be in effect upon consummation of this offering, are summaries and are qualified by reference to Delaware law and our certificate of formation, operating agreement and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. See "Where You Can Find More Information."
General
We are a Delaware series limited liability company organized on April 22, 2013 under the Delaware LLC Act issuing different series ("Series") of limited liability company interests. In accordance with the Delaware LLC Act, the A-1 Series is, and each other Series we may establish in the future will be, a separate series and not itself a separate legal entity. Section 18-215(b) of the Delaware LLC Act provides that, if certain conditions (as set forth in Section 18-215(b)) are met, including that certain provisions are in the formation and governing documents of the series limited liability company, and if the records maintained for any such series account for the assets associated with such series separately from the assets of the limited liability company, or any other series, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable only against the assets of such series and not against the assets of the limited liability company generally or any other series. Accordingly, the real property and other assets of one Series include only the real property, related assets and other assets that are held by that Series, including funds delivered for the purchase of shares in that Series. However, the limitations on inter-series liability provided by Section 18-215(b) have never been tested in federal bankruptcy courts and it is possible that a bankruptcy court could determine that the assets of one Series should be applied to meet the liabilities of the other Series or the liabilities of our company generally where the assets of such other Series or of our company generally are insufficient to meet our liabilities.
Each Series will be treated as a separate legal entity for U.S. federal income tax purposes and will elect and qualify to be taxed as a REIT for U.S. federal income tax purposes.
The limited liability company interests in each Series will be denominated in common shares of limited liability company interests ("common shares") and, if created in the future, preferred shares of limited liability company interests . Only Series A-1 common shares are being offered and sold pursuant to this prospectus. Our operating agreement provides that we may issue an unlimited number of Series A-1 common shares with the approval of a majority of our entire board of directors and without shareholder approval.
All of the Series A-1 common shares offered by this prospectus will be duly authorized and validly issued. Upon payment in full of the consideration payable with respect to the Series A-1 common shares, as determined by our board of directors, the holders of such shares will not be liable to us to make any additional capital contributions with respect to such shares (except for the return of distributions under certain circumstances as required by Sections 18-215, 18-607 and 18-804 of the Delaware LLC Act). Holders of Series A-1 common shares have no conversion, exchange, sinking fund, redemption or appraisal rights, no pre-emptive rights to subscribe for any securities of our company and no preferential rights to distributions.
In general, the A-1 Series participates exclusively in 48.87% of the economic returns derived from the Property. Upon completion of the contribution transactions substantially concurrently with the completion of this offering and the concurrent private placement, the Property will be indirectly owned through the Property A-1 Subsidiary 48.87% by the A-1 Series through its general partner interest and 51.13% by the Limited A-1 Partner through its limited partner interest. The partnership interests of the REIT General A-1 Partner and the Limited A-1 Partner will represent all of the outstanding economic interests in the Property A-1 Subsidiary. The distribution provisions of the limited partnership agreement of the Property A-1 Subsidiary provide, however, that the Property A-1 Subsidiary's cash flow from operations will be distributed first to the A-1 Series, in its capacity as the REIT General A-1 Partner, in an amount equal to the Series A-1 Common Share Preference Amount, then to the limited partners in amount sufficient to result in the limited partners having received the same amount of cash flow on a per Series A-1 OP unit basis equal to the amount of distributions paid by the A-1 Series per Series A-1 common share, and thereafter to the A-1 Series and the limited partners in accordance with their percentage interests. See "ETRE Property A-1, L.P. Limited Partnership Agreement-Distributions." The Fortis General A-1 Partner will not have an economic interest in the Property A-1 Subsidiary.
We intend for the A-1 Series to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2015.
We expect that our board of directors will authorize the creation of new Series that will acquire and participate exclusively in the economic returns derived from the interests in other real properties (each, an "Other Property Series" and, together with the A-1 Series, the "Property Series"). We expect each such Series to hold the interests in these other real properties through newly-organized Delaware limited liability companies or limited partnerships (each, an "Other Property Subsidiary" and, together with the Property A-1 Subsidiary, the "Property Subsidiaries"), which will be owned and controlled by the applicable Property Series. Our board of directors may also authorize the creation of a new Series that will acquire from the A-1 Series and the Other Property Series we expect will be created in the future minority interests in the various Property Subsidiaries respectively owned by such Property Series.
Each Property Series will invest funds, directly or indirectly, in the corresponding Property Subsidiary, and the assets and liabilities of each Property Subsidiary will be segregated from each other Property Subsidiary. Each Series and the related Property Subsidiary will have a separate administrative services agreement with our Administrative Agent, which will manage such Property Subsidiary's real property and make the decisions with respect to the assets of each Series invested in such Property Subsidiary, subject to the oversight and supervision of our board of directors. We will maintain separate, distinct records for each Series, and account for its assets separately from the other Series and the other assets of our company.
In addition, Section 18-215(c) of the Delaware LLC Act provides that a series established in accordance with Section 18-215(b) may carry on any lawful business, purpose or activity, other than the business of banking, and has the power and capacity to, in its own name, contract, hold title to assets (including real, personal and intangible property), grant liens and security interests, and sue and be sued. We intend for each Series to otherwise conduct its business, enter into contracts and hold title to assets in its own name to the extent such activities are not undertaken through the applicable Property Subsidiary and/or its subsidiaries.
Distributions
General. We intend to make regular quarterly distributions to holders of Series A-1 common shares and common shares of the Other Property Series ("Other Property common shares" and, together with the Series A-1 common shares, the "Property common shares"). U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its net taxable income, excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.
Subject to the preferential rights, if any, of holders of any other class of shares of the A-1 Series and to the provisions of our operating agreement regarding the restrictions on ownership and transfer of shares, holders of outstanding Series A-1 common shares are entitled to receive distributions on such Series A-1 common shares out of assets legally available for such purposes if, as and when authorized by our board of directors and declared by us.
Types of Distributions and Distribution Policy. Distributions in respect of the common shares of any Property Series may be made, as determined by our board of directors, (1) in cash, (2) in common shares of such Property Series or (3) in other securities of such Property Series or the related Property Subsidiary (or other subsidiaries of such Property Series or Property Subsidiary). The value of distributions payable in any such securities shall be determined by our board of directors deploying the methodology described below under "—Valuations of Share Distributions."
Our policy will generally be to distribute all cash available for distribution, other than reserves, of each Property Series to the holders of shares that correspond to such Property Series on a quarterly basis. However, our board of directors has discretion over the actual amount of distributions made by each Property Series, which will depend upon the earnings and financial condition of such Property Series, maintenance of the Property Series' REIT qualification, restrictions on making distributions under Delaware law and such other factors as our board of directors deems relevant.
Sale of Property Subsidiary or Underlying Properties. Upon the sale of all or substantially all of a Property Series' interest in the related Property Subsidiary, whether held directly or through subsidiaries of the Property Series, or all or substantially all of such Property Subsidiary's interest in the related underlying real property, whether held directly or through subsidiaries of the Property Subsidiary, our operating agreement generally provides that our board of directors will either declare and pay as a distribution on or redeem the common shares of such Property Series with the cash, securities or other property available for distribution or redemption from such sale, less any amounts paid as distributions on any class of preferred shares of such Property Series or amounts that our board of directors in its discretion sets aside to fund the Property Series' reserves, debts, liabilities or expenses. See "—Redemptions—Redemption in Connection with Sale of the Property A-1 Subsidiary or Property" for the applicable redemption provisions related to the Series A-1 common shares.
Share Distributions. Subject to the preferential rights, if any, of holders of any other class of shares of a Property Series, our board of directors may declare and pay distributions to holders of Property common shares of such Property Series that consist of (1) such Property common shares on an equal per-share basis to all holders and (2) other securities of such Property Series or the related Property Subsidiary (or other subsidiaries of such Property Series or Property Subsidiary) on an equal per-share basis. The terms of the Series A-1 common shares restrict our board of directors from declaring distributions on any other common shares payable in Series A-1 common shares.
Valuations of Share Distributions. In the case of distributions of shares or other securities for which there is an existing trading market, the value of the shares or other securities included in such distribution will be calculated based on the average market price per share or security over a three‑day trading period immediately preceding the distribution payment date. In the case of distributions of shares or other securities for which there is no existing trading market, the value of the shares or other securities included in such distribution will be determined by the board of directors in good faith.
Voting Rights
Subject to the provisions of our operating agreement regarding the restrictions on ownership and transfer of shares and except as may otherwise be specified in the terms of any class of common shares of any Series, each outstanding common share (including our Series A-1 common shares) entitles the holder to one vote on all matters submitted to a vote of common shareholders generally. Holders of all classes of common shares of all Series vote together as a single class on all matters as to which all holders of common shares are entitled to vote.
Generally, all matters to be voted on by our shareholders must be approved by a majority of the votes cast by all common shares present in person or represented by proxy.
Each outstanding Series A-1 common share will have one vote per share. No separate class vote of Series A-1 common shares will be required for any matter, except as required by the Delaware LLC Act and except as described below.
The following circumstances will require the separate approval of holders representing a majority of the Series A-1 common shares:
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• | any amendment to our operating agreement that would adversely change the rights of the Series A-1 common shares; |
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• | subject to certain exceptions, mergers, consolidations or conversions of our company; |
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• | the termination and winding up of the A-1 Series, following an election by our board of directors to terminate the A-1 Series; |
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• | any incurrence or issuance of external indebtedness or preferred shares by or that otherwise corresponds to the A-1 Series, the Property A-1 Subsidiary and/or the subsidiaries of the A-1 Series or the Property A-1 Subsidiary that does not satisfy the conditions described under "-Restrictions on Debt Financing and Cross-Subsidiary Guarantees;" and |
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• | all such other matters as our board of directors, in its sole discretion, determines will require the approval of the holders of the outstanding Series A-1 common shares voting as a separate class. |
Furthermore, our operating agreement provides that our board of directors may grant the holders of equity interests in entities controlled by a Series to vote with the shareholders associated with such Series on certain matters, either as a separate class or with such shareholders and on any such basis as our board of directors may determine. Our board of directors will grant the holders of the Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) the right to vote together with the holders of the Series A-1 common shares under certain circumstances. In particular, under the terms of our operating agreement and the partnership agreement of the Property A-1 Subsidiary, the following circumstance will require the approval of holders representing a majority of the Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) voting together on the matter:
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• | a sale or other disposition in a transaction or series of related transactions of all or substantially all the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's interest in the Property as described under "-Redemptions-Redemption in Connection with Sale of the Property A-1 Subsidiary or Property". |
Notwithstanding the foregoing, for so long as the A-1 Series' partnership interest in the Property A-1 Subsidiary represents less than a majority of the outstanding partnership interests, the required approval threshold for the holders of Series A-1 common shares and Series A-1 OP units in respect of any such a sale or disposition will be equal to the A-1 Series' partnership interest in the Property A-1 Subsidiary. Accordingly, following the completion of this offering, the concurrent private placement and the contribution transactions, the required approval threshold for such a sale or disposition will be equal to 48.87% of the Series A-1 common shares and Series A-1 OP units voting together. The necessary vote to effect such a sale or disposition may be met by any combination of holders of Series A-1 common shares or Series A-1 OP units. See "ETRE Property A-1, L.P. Partnership Agreement."
Furthermore, notwithstanding the foregoing, neither the separate approval of the holders of Series A-1 common shares nor the approval of the holders of Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions voting together is required in the case of a redemption described under "- Redemptions -Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of our Board of Directors," or for any of the other matters specified under "Amendment of Our Operating Agreement and Bylaws-No Shareholder Approval."
Our bylaws provide that special meetings of holders of Series A-1 common shares may be called by our board of directors, the chairman of our board, our chief executive officer or president. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and information requirements by the shareholders requesting the meeting, a special meeting of the holders of Series A-1 common shares must be called by our secretary upon the written request of the holders of Series A-1 common shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
ETRE Financial, LLC, as the managing member of our company, will have the sole power to (i) nominate and elect all directors to our board of directors, (ii) set the number of directors of our board of directors, (iii) remove any director, with or without cause, at any time and (iv) fill any vacancies on our board of directors. Each of our directors will hold office for an annual term, or until his or her resignation or removal by ETRE Financial, LLC. See "—Operating Agreement and Bylaws—Election and Removal of Members of Our Board of Directors; Size of Board of Directors" below.
Restrictions on Debt Financing and Cross-Subsidiary Guarantees
As described above, the debts, liabilities, obligations and expenses of each Series will generally be enforceable only against the assets of such Series and not against the assets of any other Series. In addition, we plan to hold the Series' real property interests in separate Property Subsidiaries in order to isolate further the legal liabilities and legal risks arising out of the ownership, operation and financing of each of the real properties.
In order to reinforce the legal separateness of our different Series, our operating agreement generally restricts the incurrence or issuance of external indebtedness or preferred shares by or that otherwise corresponds to a Property Series and/or any subsidiary of such Property Series; provided, however, that we, a Property Series and/or a subsidiary of a Property Series may so incur or issue external debt (including through any guarantee of external debt) or preferred shares if the Property Series and/or a subsidiary of such Property Series receive the net proceeds of such incurrence or issuance. In general, these restrictions can only be waived with the approval of a majority of the outstanding Property common shares of the applicable Property Series.
Board Flexibility and Shareholder Influence Over Property Dispositions
We have structured the terms of our operating agreement, the partnership agreement of the Property A-1 Subsidiary and our Series A-1 common share tender offer policy to give our board of directors flexibility in structuring disposition transactions and to give holders of our Series A-1 common shares and holders of Series A-1 OP units an important role in property dispositions.
Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares
Dispositions of the Property and entity-level dispositions of the Property A-1 Subsidiary and/or its subsidiaries require the approval of our board of directors, together with holders of more than 50% of the Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) voting together on the matter; provided, however, that, for so long as the A-1 Series' partnership interest in the Property A-1 Subsidiary represents less than a majority of the outstanding partnership interests, the required approval threshold for the holders of Series A-1 common shares and Series A-1 OP units will be equal to the A-1 Series' partnership interest in the Property A-1 Subsidiary. Accordingly, following the completion of this offering, the concurrent private placement and the contribution transactions, the required approval threshold will be equal to 48.87% of the Series A-1 common shares and Series A-1 OP units voting together. The necessary vote to effect such a disposition may be met by any combination of holders of Series A-1 common shares or Series A-1 OP units. We also expect our board of directors will approve dispositions of the Property and entity level dispositions of the Property A-1 Subsidiary and/or its subsidiaries based on its determination, subject to its fiduciary duties to the A-1 Series and the holders of our Series A-1 common shares, that the disposition is in the best interests of such Series and such holders.
Our tender offer policy as to the Series A-1 common shares provides that our board of directors will reject any third‑party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares unless such offer is accompanied by an offer to the holders of the Series A-1 OP units (other than the A-1 Series and certain affiliates) that offers such holders consideration per Series A-1 OP unit that is substantially equivalent in value (as determined by our board of directors) to the consideration per share offered to the holders of the Series A-1 common shares.
In addition, our tender offer policy as to the Series A-1 common shares generally provides that, if our board, in its sole discretion, has waived the 9.8% ownership limit or established a different ownership limit for an offeror, we will seek to effect a redemption as described under "-Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of our Board of Directors" following the completion of any third‑party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares and the Series A-1 OP units that has been accepted by the holders of more than 50% of the aggregate outstanding Series A-1 common shares and/or Series A-1 OP units (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates).
Moreover, our tender offer policy as to Series A-1 common shares provides that, in connection with any third‑party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares and the Series A-1 OP units that has been accepted by the holders of 75% or more of the aggregate outstanding Series A-1 common shares and Series A-1 OP units (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates), our board of directors will, subject to its fiduciary duties to the A-1 Series and the holders of our Series A-1 common shares, cooperate with the successful offeror in order to facilitate the completion of the third‑party purchase offer, tender offer or exchange offer, as applicable, including, by way of example, waiving or establishing an excepted holder limit to the 9.8% ownership limit with respect to the successful offeror, subject to such conditions as our board of directors may determine are necessary to enable the A-1 Series to continue to qualify as a REIT, unless our board of directors determines that our continuing qualification as a REIT is no longer in the best interests of the A-1 Series, and the holders of our A-1 Series common shares. See "—Operating Agreement and Bylaws—Restrictions on Ownership and Transfer" below. Subject to the conditions described above, following the completion of the third-party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares and the Series A-1 OP units that has been accepted by the holders of 75% or more of the aggregate outstanding Series A-1 common shares and Series A-1 OP units (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates), we will effect a redemption as described under "—Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of our Board of Directors."
In connection with the consummation of the transactions described above, we will delist the Series A-1 common shares from the NASDAQ or other national securities exchange on which the shares are then listed.
In addition, upon the disposition of the Property or the Property A-1 Subsidiary and its subsidiaries under certain circumstances the Administrative Sale Fee will be payable, but all other fees and expense reimbursements with respect to the A-1 Series and the Property A-1 Subsidiary payable to the Administrative Agent will terminate.
This tender offer policy may be amended, modified or rescinded only by the unanimous approval of our board of directors.
Immediately following the completion of this offering, the concurrent private placement and the contribution transactions, there will be 11,535,333 Series A-1 common shares and 12,066,667 Series A-1 OP units outstanding, and holders of our Series A-1 common shares will own 48.87% and holders of Series A-1 OP units will own 51.13% of the total combined outstanding Series A-1 common shares and Series A-1 OP units.
The ability to consummate such dispositions or redemptions may be restricted by the terms of the A-1 Series' outstanding indebtedness, the terms of the office lease for the Property and the rights of the holders of Series A-1 OP units under the limited partnership agreement of the Property A-1 Subsidiary.
Redemptions
Redemption in Exchange for Interests of the Property A-1 Subsidiary at Option of our Board of Directors. Our operating agreement provides that we may, at any time, redeem all outstanding Series A-1 common shares in exchange for equity interests in the Property A-1 Subsidiary, a subsidiary of the Property A-1 Subsidiary and/or any other subsidiary of the A-1 Series. The purpose of this provision is to provide our board of directors with a means by which it can spin off a subsidiary that is a direct or indirect owner of the Property to holders of the Series A-1 common shares. In connection with any such spin-off, we may first convert the applicable spin-off subsidiary into a REIT for U.S. federal income tax purposes or into a Delaware statutory trust, including an entity that has an operating partnership subsidiary. Our board of directors may in the future seek to effect such a redemption if our board of directors determines it is no longer in the best interests of our company or the A-1 Series for the Property to be within our company, including in situations where ownership of the Property may adversely affect the REIT status of the A-1 Series. In addition, as described above under "-Property Dispositions and Tender Offer Policy as to Series A-1 Common Shares," our policy is to seek to effect such a redemption following certain tender offers in respect of the Series A-1 common shares and/or the Series A-1 OP units.
This type of redemption may only be made on a pro rata basis to the holders of Series A-1 common shares, with the holders of Series A-1 OP units being required to receive or retain securities or consideration of substantially equivalent value (as determined by our board of directors) to the securities being exchanged to the holders of our Series A-1 common shares.
In connection with such a redemption of the Series A-1 common shares, we would, subject to the preferential rights, if any, of holders of any other class of shares of the A-1 Series, exchange the Series A-1 common shares for 100% of the A-1 Series' ownership interest in the applicable spin-off subsidiary.
Redemption in Connection with Sale of the Property A-1 Subsidiary or Property. In the event of a sale, transfer, assignment or other disposition in a transaction or series of related transactions of all or substantially all the A-1 Series' interest in the Property A-1 Subsidiary, whether held directly or through subsidiaries of the A-1 Series, or Property A-1 Subsidiary's interest in the Property, whether held directly or through subsidiaries of the Property A-1 Subsidiary, we are generally required to take one of the following actions, which will be selected in the sole discretion of our board of directors:
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• | Subject to limitations, we may declare and pay a distribution in cash and/or in securities or other property to holders of the outstanding Series A-1 common shares equally on a share-for-share basis in an aggregate amount equal to the net proceeds of the disposition, less any amounts paid as distributions on any class of preferred shares of the A-1 Series and amounts that our board of directors in its discretion sets aside to fund the A-1 Series' reserves, debts, liabilities or expenses. |
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• | Subject to limitations, if the disposition involves the disposition of all, not merely substantially all, of the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's interest in the Property, we may redeem all outstanding Series A-1 common shares in exchange for cash and/or securities or other property in an aggregate amount equal to the net proceeds of such disposition allocable, as described above in the first bullet, to the Series A-1 common shares. |
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• | Subject to limitations, if the disposition involves substantially all, but not all, of the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's direct or indirect interest in the Property, we may redeem a number of outstanding Series A-1 common shares in exchange for cash and/or securities or other property in an aggregate amount equal to the net proceeds of such disposition allocable, as described above in the first bullet, to the Series A-1 common shares. The number of Series A-1 common shares to be redeemed would be equal to the lesser of (1) a number determined by dividing the aggregate amount allocated to the redemption of these shares by the average market price of one Series A-1 common share during the 10-trading day period beginning on the 15th trading day following the completion of that disposition and (2) the total number of outstanding Series A-1 common shares. |
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• | Subject to limitations, we may take a combination of the actions described in the preceding bullets whereby we may use an amount equal to a portion of the net proceeds of the disposition allocable to Series A-1 common shares to either (1) declare and pay a distribution as described in the first bullet above, or (2) redeem part or all of the remaining Series A-1 common shares as described in the second or third bullet above. |
For purposes of these provisions, "substantially all" of the A-1 Series' interest in the Property A-1 Subsidiary as of any date means at least 80% of the outstanding equity interests in the Property A-1 Subsidiary held by the A-1 Series, whether held directly or through subsidiaries of the A-1 Series, and "substantially all" of the Property A-1 Subsidiary's interest in the Property means a portion of such real property that represents at least 80% of the fair value of such real property attributed to the Property A-1 Subsidiary, whether held directly or through subsidiaries of the Property A-1 Subsidiary, as of such date.
General Procedures
Public Announcements; Notices. In the case of specified dispositions or a redemption, we will publicly announce or otherwise provide specified information to holders of Series A-1 common shares.
Fractional Shares. Our board of directors will not have to issue or deliver any fractional shares to any holder of Series A-1 common shares upon any redemption or distribution under the provisions described under "—Redemptions." Instead of issuing fractional shares, we will pay cash for the fractional share in an amount equal to the fair market value of the fractional share, without interest.
No Adjustments for Distributions. No adjustments for distributions will be made upon the exchange of any Series A-1 common shares; except that, if a redemption date with respect to Series A-1 common shares comes after the record date for the payment of a distribution to be paid on those shares but before the payment or distribution, the registered holders of those shares at the close of business on such record date will be entitled to receive the distribution on the payment date, notwithstanding the redemption of those shares or our default in payment of the distribution.
Payment of Taxes. If any person exchanging a certificate representing Series A-1 common shares wants us to issue a certificate in a different name than the registered name on the old certificate, that person must pay any transfer or other taxes required by reason of the issuance of the certificate in another name or establish, to the satisfaction of us or our agent, that the tax has been paid or is not applicable.
Liquidation Rights
In the event of a liquidation, termination or winding up of the A-1 Series, whether voluntary or involuntary, we will first pay or provide for payment of debts and other liabilities of the A-1 Series, including the liquidation preferences of any class of preferred shares of the Series. Thereafter, holders of the Series A-1 common shares will share in the funds of the A-1 Series remaining for distribution pro rata in accordance with their respective interests in the A-1 Series.
Preferred Shares
Section 215(e) of the Delaware LLC Act also specifically authorizes the creation of ownership interests of different classes of limited liability company interests within each Series, having such relative rights, powers and duties as the limited liability company agreement may provide, and may make provision for the future creation in the manner provided in the limited liability company agreement of additional classes of membership interests. In accordance with this provision, our operating agreement provides that a majority of our entire board of directors is authorized to provide for the issuance from time to time of an unlimited amount of one or more classes or series of preferred shares of limited liability company interests ("preferred shares") in a Series, including the A-1 Series. Subject to the restrictions described above under "—Restrictions on Debt and Financing and Cross-Subsidiary Guarantees," and unless otherwise required by law or by any stock exchange, if applicable, any such authorized preferred shares will be available for issuance without further action by our common shareholders. Our board of directors is authorized to fix the number of preferred shares, the relative powers, preferences and rights, and the qualifications, limitations or restrictions applicable to each class or series thereof by resolution authorizing the issuance of such class or series and without shareholder approval. As of the date of this prospectus, no preferred shares are outstanding and we have no current plans to issue any preferred shares.
We could issue a class or series of preferred shares that could, depending on the terms of the class or series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of holders of Series A-1 common shares might believe to be in their best interests or in which holders of Series A-1 common shares might receive a premium for their Series A-1 common shares.
Transfer Agent and Registrar
The transfer agent and registrar for our Series A-1 common shares is American Stock Transfer & Trust Company, LLC.
Operating Agreement and Bylaws
Managing Member
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• | Our operating agreement designates ETRE Financial, LLC, an affiliate of our Administrative Agent, as the managing member of our company. As described below under "—Election and Removal of Members of Our Board of Directors; Size of Board of Directors," the managing member will have the sole right to appoint, remove and nominate directors, set the number of directors and fill vacancies on our board of directors. The managing member will generally not be entitled to vote on matters submitted to our shareholders, although its approval will be required with respect to certain amendments to the operating agreement that would adversely affect its rights in respect of our board of directors. The managing member will not have any distribution, redemption, conversion or liquidation rights by virtue of its status as the managing member. |
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• | Our operating agreement further provides that the managing member, in exercising its rights in its capacity as the managing member, will be entitled to consider only such interests and factors as it desires, including its own interests, and will have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us, any Series or any of our shareholders and will not be subject to any different standards imposed by our operating agreement, the Delaware LLC Act or under any other law, rule or regulation or in equity. |
Organization and Duration
Our company was formed on April 22, 2013 as ETRE REIT, LLC, a Delaware series limited liability company, and will remain in existence until dissolved in accordance with our operating agreement.
Purpose
Under our operating agreement, we are permitted to engage in any business activity that lawfully may be conducted by a limited liability company organized under Delaware law and, in connection therewith, to exercise all of the rights and powers conferred upon us pursuant to the agreement relating to such business activity; provided, however, that, our board of directors may only authorize a Property Series to revoke or otherwise terminate such Property Series' REIT election, without approval of our shareholders, if it determines that it is no longer in such Series' best interests to continue to qualify as a REIT.
Agreement to be Bound by our Operating Agreement; Power of Attorney
By purchasing a Series A-1 common share, you will be admitted as a member of our company associated with the A-1 Series and will be bound by the provisions of, and deemed to be a party to, our operating agreement. Pursuant to this agreement, each shareholder and each person who acquires a common share from a shareholder grants to our chief executive officer and our secretary a power of attorney to, among other things, execute and file documents required for our qualification, continuance or dissolution. The power of attorney also grants our chief executive officer and our secretary the authority to make certain amendments to, and to execute and deliver such other documents as may be necessary or appropriate to carry out the provisions or purposes of, our operating agreement.
Election and Removal of Members of Our Board of Directors; Size of Board of Directors
Our operating agreement and bylaws provide that ETRE Financial, LLC, as the managing member of our company, will have the sole power to (i) nominate and elect all directors to our board of directors, (ii) set the number of directors of our board of directors, (iii) remove any director, with or without cause, at any time and (iv) fill any vacancies on our board of directors. The number of directors may not be fewer than one. Each of our directors will hold office for an annual term, or until his or her resignation or removal by ETRE Financial, LLC.
Duties of Officers and Directors
Our operating agreement provides that, except as may otherwise be provided by the operating agreement or by our bylaws, the property, affairs and business of each Series shall be managed under the direction of our board of directors. Pursuant to our bylaws, our board of directors has the power to appoint our officers and such officers have the authority and exercise the powers and perform the duties specified in our bylaws or as may be specified by our board of directors.
Our operating agreement further provides that the authority and function of our board of directors and officers shall be identical to the authority and functions of a board of directors and officers of a corporation organized under the Delaware General Corporation Law (the "DGCL"), except as expressly modified by the terms of the operating agreement. Further, our operating agreement provides that except as specifically provided therein, the fiduciary duties and obligations owed to our limited liability company and to our members shall be the same as the respective duties and obligations owed by officers and directors of a corporation organized under the DGCL to their corporation and stockholders, respectively.
Finally, because a single board of directors will oversee the operations of each Series, our operating agreement provides that the fiduciary duties of our board of directors extend to each Series separately. Our operating agreement also provides our board of directors should, in the event of any conflicts of interest among the different Series, be able to take into account the competing interests of the different Series in discharging its fiduciary duties and taking action on behalf of each Series. To address conflicts of interest that may arise in allocating sale, financing, leasing and other business opportunities among the real properties owned by the different Series, our board of directors has adopted the Inter-Series Policy which is administered by our Administrative Agent. See "Management—Inter-Series Relationship, Conflicts of Interest and Opportunity Allocation Policy." In the future, we may determine to have separate classes of directors oversee the operations of different Series.
Our operating agreement does not expressly modify the duties and obligations owed by officers and directors under the DGCL. However, there are certain provisions in our operating agreement regarding exculpation and indemnification of our officers and directors that differ from the DGCL. First, our operating agreement provides that to the fullest extent permitted by applicable law our directors or officers will not be liable to us. Under the DGCL, a director or officer would be liable to us for (i) breach of duty of loyalty to us or our shareholders; (ii) intentional misconduct or knowing violations of the law that are not done in good faith; (iii) improper redemption of stock or declaration of a dividend; or (iv) a transaction from which the director derived an improper personal benefit. Second, our operating agreement provides that we indemnify our directors and officers for acts or omissions to the fullest extent permitted by law. Under the DGCL, a corporation can only indemnify directors and officers for acts or omissions if the director or officer acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation, and, in a criminal action, if the officer or director had no reasonable cause to believe his conduct was unlawful.
Prior to completion of this offering and the concurrent private placement, we intend to enter into separate indemnification agreements with our directors and officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our operating agreement against any and all expenses, judgments, fines, penalties and amounts paid in settlement of any claim. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our operating agreement.
Board Committees and Property Oversight Committee of the A-1 Series
Our operating agreement authorizes our board of directors to establish committees from among the members of the board of directors as well as other natural persons and provides that our board of directors may delegate to such committees any of the powers of the board directors, except as prohibited by law. Our operating agreement further provides that a committee and its members may be specifically associated with a Series. Unless otherwise provided by our board of directors, each committee member will owe the same duties to our company, our Series and our shareholders as our directors, whether or not such committee member is a director.
Our operating agreement provides for a Property Oversight Committee that will be associated with the A-1 Series. The Property Oversight Committee will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates, on the one hand, and the A-1 Series and its affiliates, on the other hand.
Under the terms of the limited partnership agreement of the Property A-1 Subsidiary, for so long as the Lincoln Street Holdings Limited Partner Group owns at least 25% of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares, the Fortis General A-1 Partner generally will manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and the A-1 Series, as the REIT General A-1 Partner, will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. These major decisions relate to, among other things, indebtedness (including the refinancing of the existing loan that encumbers the Property, subject to certain exceptions), expenditures, legal proceedings, tenant bankruptcies, leases, zoning matters, easements, environmental matters and insurance. In addition, the REIT General A-1 Partner has authority over, among other things, the issuance of securities and additional capital contributions (subject to the consent of the Fortis General A-1 Partner). Prior to the refinancing of the existing loan on the Property, in the event there is a disagreement between the REIT General A-1 Partner, on the one hand, and the Fortis General A-1 Partner, on the other hand, the REIT General A-1 Partner and the Fortis General A-1 Partner may jointly refer a major decision or securities issuance to the Property Oversight Committee for resolution and the Fortis General A-1 Partner may unilaterally refer a major decision or a securities issuance to the Property Oversight Committee for resolution. From and after the refinancing of the existing loan, either General A-1 Partner may refer a major decision or securities issuance to the Property Oversight Committee for a binding resolution on the matter. The Property Oversight Committee will have the authority to make the final determination as to whether any major decision or securities issuance will be taken or occur.
Our operating agreement will establish a Property Oversight Committee, which will consist of five members, three of which will be designated by our board of directors, or the A-1 Series members, and two of which will be designated by the Fortis General A-1 Partner, or the Fortis members. The Property Oversight Committee will initially be comprised of Scott Panzer, John Gregorits, Jay Anderson, Joseph Capezza and Jonathan Landau, each of whom, other than Mr. Landau, is a director of our company. In the event of vacancy, the party who appointed the vacating committee member will generally have the right to designate an individual to fill the vacancy; provided that all A-1 Series members must either be (i) a real estate professional with at least 10 years' experience in the capital, asset and property management of an asset similar to the Property, or (ii) a person consented to by the Fortis General A-1 Partner.
Fortis members of the Property Oversight Committee who are not otherwise directors of our company will not owe any fiduciary duties to our company, the A-1 Series and our Series A-1 common shareholders. As a result, these Fortis members may favor their own interests and the interests of their affiliates over the interests of our company and our Series A-1 common shareholders.
A majority of the members of the Property Oversight Committee will constitute a quorum for the transaction of business at any meeting of the Property Oversight Committee, and the act of a majority of the committee members present at a meeting where a quorum is present will be the act of the committee.
Advance Notice of New Business
Our bylaws provide that special meetings of shareholders may be called by our board of directors, the chairman of our board, our chief executive officer or president. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and information requirements by the shareholders requesting the meeting, a special meeting of shareholders must be called by our secretary upon the written request of shareholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. See "—Voting Rights" for a discussion of certain voting requirements with respect to the Series A-1 common shares.
Our bylaws provide that with respect to an annual meeting of shareholders, the proposal of business to be considered by shareholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of our board of directors, or (3) by any shareholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws. Our bylaws provide that with respect to special meetings of shareholders, only the business specified in our notice of meeting may be brought before the meeting. The purpose of requiring shareholders to give advance notice of proposals is to afford our board of directors the opportunity to consider the advisability of the proposals and, to the extent considered necessary by our board of directors, to inform shareholders and make recommendations regarding the proposals. The advance notice procedures also permit a more orderly procedure for conducting our shareholder meetings.
Limited Liability
In the case of a Delaware series limited liability company, the Delaware LLC Act provides that a member who receives a distribution with respect to a series and knew at the time of the distribution that the distribution was in violation of the Delaware LLC Act shall be liable to the series for the amount of the distribution for three years. Under the Delaware LLC Act, a series limited liability company may not make a distribution with respect to a series to a member if, after the distribution, all liabilities of such series, other than liabilities to members on account of their limited liability company interests with respect to such series and liabilities for which the recourse of creditors is limited to specific property of such series, would exceed the fair value of the assets of such series. For the purpose of determining the fair value of the assets of the series, the Delaware LLC Act provides that the fair value of property of the series subject to liability for which recourse of creditors is limited shall be included in the assets of such series only to the extent that the fair value of that property exceeds the nonrecourse liability. Under the Delaware LLC Act, an assignee who becomes a substituted member of a company is liable for the obligations of his assignor to make contributions to the company, except the assignee is not obligated for liabilities unknown to him at the time the assignee became a member and that could not be ascertained from the operating agreement.
Limitations on Liability and Indemnification of the Managing Member, our Directors and Officers, Board Committee Members and our Administrative Agent
Our operating agreement provides that to the fullest extent permitted by applicable law the managing member, our directors or officers and members of committees of our board of directors will not be liable to us. In addition, pursuant to our operating agreement, we have agreed to indemnify the managing member, each of our directors and officers and each member of a committee of our board of directors, to the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with the approval of the company and counsel fees and disbursements on a solicitor and client basis) arising from the performance of any of their obligations or duties in connection with their service to us or the operating agreement, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person may hereafter be made party by reason of being or having been the managing member, one of our directors or officers or a member of a committee of our board of directors.
Prior to completion of this offering and the concurrent private placement, we intend to enter into separate indemnification agreements with our directors and officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our operating agreement against any and all expenses, judgments, fines, penalties and amounts paid in settlement of any claim. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our operating agreement.
In addition, our operating agreement provides that our Administrative Agent maintains a contractual as opposed to a fiduciary relationship with us, each Series and our shareholders. Pursuant to the terms of the administrative services agreement, the liability of our Administrative Agent and certain of its affiliates to the A-1 Series is limited and the A-1 Series has agreed to indemnify our Administrative Agent and such affiliates against certain liabilities. See "Our Administrative Agent and the Administrative Services Agreement."
Amendment of Our Operating Agreement and Bylaws
Amendments to our operating agreement may be proposed only by or with the consent of our board of directors. To adopt a proposed amendment, our board of directors is required to seek written approval of the holders of the number of shares required to approve the amendment or call a meeting of our shareholders to consider and vote upon the proposed amendment. Except as set forth below, an amendment must be approved by holders representing a majority of the common shares and, in general, to the extent that such amendment would have a material adverse effect on the holders of any class or series of shares of a Series, by the holders of a majority of the holders of such class or series.
Prohibited Amendments. No amendment may be made that would:
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• | enlarge the obligations of any shareholder without such shareholder's consent, unless approved by at least a majority of the type or class of shares so affected; |
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• | provide that we are not dissolved upon an election to dissolve our limited liability company by our board of directors that is approved by holders representing a majority of the common shares; |
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• | change the term of existence of our company; or |
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• | give any person the right to dissolve our limited liability company other than our board of directors' right to dissolve our limited liability company with the approval by holders representing a majority of the common shares. |
The provision of our operating agreement preventing the amendments having the effects described in any of the clauses above can be amended upon the approval by holders representing at least two-thirds of the common shares.
In addition, certain amendments to our operating agreement require the separate approval of holders representing a majority of the Series A-1 common shares. See "—Voting Rights"
No Shareholder Approval. Our board of directors may generally make amendments to our operating agreement without the approval of any shareholder or assignee to reflect:
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• | a change in our name, the location of our principal place of our business, our registered agent or our registered office; |
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• | the admission, substitution, withdrawal or removal of shareholders in accordance with our operating agreement; |
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• | the merger of our company or any of its subsidiaries into, or the conveyance of all of our assets to, a newly-formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity; |
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• | a change that our board of directors determines to be necessary or appropriate for us to qualify or continue our qualification as a company in which our members have limited liability under the laws of any state or to ensure that each Series will continue to qualify as a REIT for U.S. federal income tax purposes or otherwise not taxed as an entity for U.S. federal income tax purposes other than as we specifically so designate; |
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• | an amendment that our board of directors determines, based upon the advice of counsel, to be necessary or appropriate to prevent us, members of our board, or our officers, agents or trustees from in any manner being subjected to the provisions of the Investment Company Act, the Advisers Act or "plan asset" regulations adopted under ERISA, whether or not substantially similar to plan asset regulations currently applied or proposed; |
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• | an amendment that our board of directors determines to be necessary or appropriate for the issuance of any additional Series A-1 common shares, the authorization, establishment, creation or issuance of any additional classes or series of shares or other securities of the A-1 Series to be issued by us, or for the establishment or creation of other Series or the authorization or issuance of additional securities of such Series by us; |
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• | any other amendment expressly permitted in our operating agreement to be made by our board of directors acting alone; |
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• | an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our operating agreement; |
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• | any amendment that our board of directors determines to be necessary or appropriate for the formation by us of, or our investment in, any corporation, partnership or other entity, as otherwise permitted by our operating agreement; |
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• | a change in our fiscal year or taxable year and related changes; and |
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• | any other amendments substantially similar to any of the matters described in the clauses above. |
In addition, our board of directors may make amendments to our operating agreement without the approval of any shareholder if our board of directors determines that those amendments:
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• | do not adversely affect the shareholders (including any particular class or series of shares of a Series as compared to other classes or series of shares) in any material respect; |
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• | are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute; |
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• | are necessary or appropriate to facilitate the trading of shares or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the shares are or will be listed for trading, compliance with any of which our board of directors deems to be in the best interests of us and our shareholders; |
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• | are necessary or appropriate for any action taken by our board of directors relating to splits or combinations of shares under the provisions of our operating agreement; |
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• | are necessary to preserve the managing member's right to appoint, remove or nominate directors, set the number of directors or fill vacancies on our board of directors; or |
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• | are required to effect the intent expressed in this prospectus or the intent of the provisions of our operating agreement or are otherwise contemplated by our operating agreement. |
Our bylaws generally provide that our board of directors has the exclusive power to adopt, alter or repeal the bylaws or make new bylaws.
Managing Member Approval. Notwithstanding the foregoing, no amendment to our operating agreement or bylaws may be made without the prior approval of the managing member that would adversely affect the managing member's right to appoint, remove or nominate directors, set the number of directors or fill vacancies on our board of directors.
Fortis General A-1 Partner Approval. Notwithstanding the foregoing, no amendment to the provisions in our operating agreement related to the establishment and operation of the Property Oversight Committee may be made without the prior written approval of the Fortis General A-1 Partner.
Merger, Sale or Other Disposition of Assets
Our board of directors is generally prohibited, without the prior separate approval of holders of the common shares of each Series entitled to vote thereon, from causing us to, among other things, sell, exchange or otherwise dispose of all or substantially all of the assets of the Series in a single transaction or a series of related transactions, or approving on our behalf the sale, exchange or other disposition of all or substantially all of the assets of the Series. In this regard, subject to the exceptions described below, mergers, consolidations or conversions of our company, and certain dispositions of all or substantially all of the assets of the A-1 Series, require either the separate approval of holders representing a majority of the Series A-1 common shares or the approval of holders representing either a majority or, under certain circumstances, less than a majority of the Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) voting together. See "—Voting Rights."
Subject to the restrictions described above under "—Restrictions on Debt and Financing and Cross-Subsidiary Guarantees," our board of directors may mortgage, pledge, hypothecate or grant a security interest in all or substantially all the assets of the Series without the approval of any shareholder. Our board of directors may also sell all or substantially all of the assets of the Series under a foreclosure or other realization upon the encumbrances above without that approval.
If the conditions specified in our operating agreement are satisfied, our board of directors may merge our company or any of its subsidiaries into, or convey all of the assets of the Series to, a newly-formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity, in each case without any approval of our shareholders. The shareholders are not entitled to dissenters' rights of appraisal under the operating agreement or applicable Delaware law in the event of a merger or consolidation, a sale of all or substantially all of the assets of the Series or any other similar transaction or event.
Termination and Dissolution
We will continue as a limited liability company until terminated under our operating agreement. We will dissolve upon: (1) the election of our board of directors to dissolve us, if separately approved by holders of the common shares of each Series entitled to vote thereon; (2) the sale, exchange or other disposition of all or substantially all of the assets of the Series; (3) the entry of a decree of judicial dissolution of our limited liability company; or (4) at any time that we no longer have any shareholders, unless our business is continued in accordance with the Delaware LLC Act.
In this regard, a termination of the A-1 Series requires the separate approval of holders representing a majority of the Series A-1 common shares. See "—Voting Rights".
Books and Reports
We are required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on a basis that permits the preparation of financial statements in accordance with GAAP. For financial reporting purposes and tax purposes, our fiscal year and our tax year are the calendar year, unless otherwise determined by our board of directors in accordance with the Internal Revenue Code.
Determinations by our Board of Directors
Any determinations made by our board of directors under any provision described in our operating agreement will be final and binding on our shareholders, except as may otherwise be required by law. We will prepare a statement of any determination by our board of directors respecting the fair market value of any properties, assets or securities, and will file the statement with our company secretary.
Restrictions on Ownership and Transfer
In order for each Series to qualify as a REIT under the Internal Revenue Code, shares of the Series must be owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of the Series may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). To qualify as a REIT, each Series must satisfy other requirements as well. See "U.S. Federal Income Tax Considerations—Requirements for Qualification-General."
To assist each Series in qualifying as a REIT, our operating agreement, subject to certain exceptions, contains restrictions on the number of common shares of any Series and the number of shares of any Series that a person may own. Our operating agreement provides that generally no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, either more than 9.8% in value or in number of common shares, whichever is more restrictive, of the outstanding common shares of any Series, or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any Series. Accordingly, no person may own, or be deemed to own, more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding Series A-1 common shares. We refer to these limits collectively as the "ownership limit." An individual or entity that becomes subject to the ownership limit or any of the other restrictions on ownership and transfer of the shares of any Series described below is referred to as a "prohibited owner" if, had the violative transfer or other event been effective, the individual or entity would have been a beneficial owner or, if appropriate, a record owner of shares.
The constructive ownership rules under the Internal Revenue Code are complex and may cause shares of any Series owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% by value or number of common shares, whichever is more restrictive, of the outstanding common shares of our any Series, or 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of any Series (or the acquisition of an interest in an entity that owns, actually or constructively, shares of any Series by an individual or entity), could, nevertheless, cause that individual or entity, or another individual or entity, to own constructively in excess of the ownership limit.
Our board may, in its sole discretion, subject to such conditions as it may determine and the receipt of certain representations and undertakings, prospectively or retroactively, waive the ownership limit or establish a different limit on ownership, or excepted holder limit, for a particular shareholder if the shareholder's ownership in excess of the ownership limit would not result in a Series being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise would result in a Series failing to qualify as a REIT. As a condition of its waiver or grant of excepted holder limit, our board of directors may, but is not required to, require an opinion of counsel or IRS ruling satisfactory to our board of directors in order to determine or ensure a Series' qualification as a REIT.
In connection with granting a waiver of the ownership limit, creating an excepted holder limit or at any other time, our board of directors may from time to time increase or decrease the ownership limit for all other individuals and entities unless, after giving effect to such increase, five or fewer individuals could beneficially or constructively own in the aggregate, more than 49.9% in value of the shares then outstanding of a Series or such Series would otherwise fail to qualify as a REIT. Prior to the modification of the ownership limit, our board of directors may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Series' qualification as a REIT. A reduced ownership limit will not apply to any person or entity whose percentage ownership of common shares or shares of a Series, as applicable, is in excess of such decreased ownership limit until such time as such individual's or entity's percentage ownership of common shares or shares of a Series, as applicable, equals or falls below the decreased ownership limit, but any further acquisition of common shares or shares of a Series, as applicable, in excess of such percentage ownership of common shares or shares of a Series will be in violation of the ownership limit.
Our operating agreement further prohibits:
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• | any person from beneficially or constructively owning, applying certain attribution rules of the Internal Revenue Code, shares of a Series that would result in the Series being "closely held" under Section 856(h) of the Internal Revenue Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause the Series to fail to qualify as a REIT; and |
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• | any person from transferring shares of a Series if such transfer would result in shares of the Series being owned by fewer than 100 persons (determined without reference to any rules of attribution). |
Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of a Series that will or may violate the ownership limit or any of the other foregoing restrictions on ownership and transfer of shares of such Series, or who would have owned shares of such Series transferred to a trust as described below, must immediately give us written notice of the event, or in the case of an attempted or proposed transaction, must give at least 15 days' prior written notice to us and provide us with such other information as we may request in order to determine the effect of such transfer on such Series' qualification as a REIT. The foregoing restrictions on ownership and transfer of shares of a Series will not apply if our board of directors determines that it is no longer in the best interests of the Series to attempt to qualify, or to continue to qualify, as a REIT or that compliance with the restrictions and limitations on ownership and transfer of shares of the Series as described above is no longer required in order for the Series to qualify as a REIT.
If any transfer of shares of a Series would result in shares of the Series being beneficially owned by fewer than 100 persons, such transfer will be null and void and the intended transferee will acquire no rights in such shares. In addition, if any purported transfer of shares of a Series or any other event would otherwise result in any person violating the ownership limit or an excepted holder limit established by our board of directors or in the Series being "closely held" under Section 856(h) of the Internal Revenue Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT, then that number of shares (rounded up to the nearest whole share) that would cause the Series to violate such restrictions will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected by us and the intended transferee will acquire no rights in such shares. The automatic transfer will be effective as of the close of business on the business day prior to the date of the violative transfer or other event that results in a transfer to the trust. Any dividend or other distribution paid to the prohibited owner, prior to our discovery that the shares had been automatically transferred to a trust as described above, must be repaid to the trustee upon demand for distribution to the beneficiary by the trust. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the applicable ownership limit or the Series being "closely held" under Section 856(h) of the Internal Revenue Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT, then our operating agreement provides that the transfer of the shares will be null and void.
Shares of a Series transferred to the trustee are deemed offered for sale to us, or our designee, at a price per share equal to the lesser of (1) the price paid by the prohibited owner for the shares (or, if the event that resulted in the transfer to the trust did not involve a purchase of such shares at market price, the last reported sales price on the NASDAQ (or other applicable exchange) on the day of the event which resulted in the transfer of such shares to the trust) and (2) the market price on the date we accept, or our designee accepts, such offer. We may reduce the amount payable by the amount of any dividend or other distribution that we have paid to the prohibited owner before we discovered that the shares had been automatically transferred to the trust and that are then owed to the trustee as described above, and we may pay the amount of any such reduction to the trustee for the benefit of the charitable beneficiary. We have the right to accept such offer until the trustee has sold the shares held in the trust as discussed below. Upon a sale to us, the interest of the charitable beneficiary in the shares sold terminates, the trustee must distribute the net proceeds of the sale to the prohibited owner and any dividends or other distributions held by the trustee with respect to such shares will be paid to the charitable beneficiary.
If we do not buy the shares, the trustee must, within 20 days of receiving notice from us of the transfer of shares to the trust, sell the shares to a person or entity designated by the trustee who could own the shares without violating the ownership limit or the other restrictions on ownership and transfer of shares of the Series. After the sale of the shares, the interest of the charitable beneficiary in the shares transferred to the trust will terminate and the trustee must distribute to the prohibited owner an amount equal to the lesser of (1) the price paid by the prohibited owner for the shares (or, if the event which resulted in the transfer to the trust did not involve a purchase of such shares at market price, the last reported sales price on the NASDAQ (or other applicable exchange) on the day of the event which resulted in the transfer of such shares to the trust) and (2) the sales proceeds (net of commissions and other expenses of sale) received by the trust for the shares. The trustee may reduce the amount payable to the prohibited owner by the amount of any dividend or other distribution that we paid to the prohibited owner before we discovered that the shares had been automatically transferred to the trust and that are then owed to the trustee as described above. Any net sales proceeds in excess of the amount payable to the prohibited owner will be immediately paid to the beneficiary of the trust, together with any dividends or other distributions thereon. In addition, if, prior to discovery by us that shares a Series have been transferred to a trust, such shares are sold by a prohibited owner, then such shares will be deemed to have been sold on behalf of the trust and to the extent that the prohibited owner received an amount for or in respect of such shares that exceeds the amount that such prohibited owner was entitled to receive, such excess amount will be paid to the trustee upon demand. The prohibited owner has no rights in the shares held by the trustee.
The trustee will be designated by us and will be unaffiliated with us and with any prohibited owner. Prior to the sale of any shares by the trust, the trustee will receive, in trust for the beneficiary of the trust, all dividends and other distributions paid by us with respect to the shares held in trust and may also exercise all voting rights with respect to the shares held in trust. These rights will be exercised for the exclusive benefit of the beneficiary of the trust. Any dividend or other distribution paid prior to our discovery that shares of a Series have been transferred to the trust will be paid by the recipient to the trustee upon demand.
Subject to Delaware law, effective as of the date that the shares have been transferred to the trust, the trustee will have the authority, at the trustee's sole discretion:
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• | to rescind as void any vote cast by a prohibited owner prior to our discovery that the shares have been transferred to the trust; and |
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• | to recast the vote in accordance with the desires of the trustee acting for the benefit of the beneficiary of the trust. |
However, if we have already taken irreversible company action, then the trustee may not rescind and recast the vote.
In addition, if our board of directors determines in good faith that a proposed transfer or other event would violate the restrictions on ownership and transfer of the shares of a Series, our board of directors may take such action as it deems advisable to refuse to give effect to or to prevent such transfer, including, but not limited to, causing us to redeem the shares of such Series, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.
Every owner of 5% or more (or such lower percentage as required by the Internal Revenue Code or the regulations promulgated thereunder) of shares of a Series, within 30 days after the end of each taxable year, must give us written notice, stating the shareholder's name and address, the number of shares of each class of a Series that the shareholder beneficially owns and a description of the manner in which the shares are held. Each such owner must provide to us in writing such additional information as we may request in order to determine the effect, if any, of the shareholder's beneficial ownership on the Series' qualification as a REIT and to ensure compliance with the ownership limit. In addition, each shareholder must provide to us in writing such information as we may request in good faith in order to determine the Series' qualification as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.
Any certificates representing shares of a Series will bear a legend referring to the restrictions described above.
These restrictions on ownership and transfer could delay, defer or prevent a transaction or a change in control that might involve a premium price for the Series A-1 common shares or otherwise be in the best interest of the holders of the Series A-1 common shares.
Anti-Takeover Effects, Our Operating Agreement and Bylaws
The following is a summary of certain provisions of our operating agreement and bylaws that may be deemed to have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change of control of the Property. These provisions include the following:
Authorized but Unissued Shares
Our operating agreement authorizes us to establish additional shares or other securities of the A-1 Series and to issue an unlimited number of shares or other securities of the A-1 Series for the consideration and on the terms and conditions established by our board of directors without the approval of any holders of our shares. In particular, our board of directors is authorized to provide for the issuance by us of an unlimited amount of one or more classes or series of shares of the A-1 Series, including preferred shares, and to fix the number of shares, the relative powers, preferences and rights, and the qualifications, limitations or restrictions applicable to each class or series thereof by resolution authorizing the issuance of such class or series. Our ability to establish additional shares and other securities of the A-1 Series could render more difficult or discourage an attempt to obtain control over the Property by means of a proxy contest, tender offer, merger or otherwise.
Delaware Business Combination Statute—Section 203
We are a limited liability company organized under Delaware law. Some provisions of Delaware law may delay or prevent a transaction that would cause a change in our control.
Section 203 of the DGCL, which restricts certain business combinations with interested stockholders in certain situations, does not apply to limited liability companies unless they elect to utilize it. Our operating agreement does not currently elect to have Section 203 of the DGCL apply to us. In general, this statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction by which that person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an interested stockholder is a person who, together with affiliates and associates, owns, or within three years prior did own, 15% or more of voting stock.
Other Provisions of Our Operating Agreement and Bylaws
Certain provisions of our operating agreement and bylaws may make a change in control of our company or any Series more difficult to effect. For example, shareholders will not have the right to vote to elect or remove directors or fill vacancies on our board of directors.
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to this offering, the concurrent private placement, and the other transactions described in this prospectus, there will be 11,535,333 Series A-1 common shares outstanding (or 12,340,333 Series A-1 common shares outstanding if the underwriters' option to purchase additional shares is exercised in full), including 33,333 Series A-1 common shares that our Administrative Agent has agreed to purchase in the concurrent private placement and 2,000 restricted Series A-1 common shares to be granted to our independent directors upon the completion of this offering and the concurrent private placement under our 2015 Director Plan, and 12,066,667 Series A-1 OP units outstanding, which may be tendered for cash or, at the option of the A-1 Series, exchanged on a one-for-one basis into Series A-1 common shares, subject to certain adjustments, after (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, or (ii) January 11, 2017. See "ETRE Property A-1, L.P. Partnership Agreement-Exchange of Series A-1 OP Units." We expect that the Limited A-1 Partner will own 12,066,667 Series A-1 OP units upon the completion of the offering, and that, following the contribution transactions, the Limited A-1 Partner will distribute these Series A-1 OP units to the Limited A-1 Partner Owners, which will distribute these Series A-1 OP units to their respective members, subject to the transfer restrictions set forth in the limited partnership agreement of the Property A-1 Subsidiary. Our Series A-1 common shares are newly issued securities for which there is no established trading market. No assurance can be given as to (1) the likelihood that an active market for our Series A-1 common shares will develop, (2) the liquidity of any such market, (3) the ability of the shareholders to sell the shares or (4) the prices that shareholders may obtain for any of the shares. No prediction can be made as to the effect, if any, that future sales of Series A-1 common shares or the availability of Series A-1 common shares for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of Series A-1 common shares, or the perception that such sales could occur, may affect adversely prevailing market prices of our Series A-1 common shares.
For a description of certain restrictions on ownership and transfer of Series A-1 common shares, see "Description Series A-1 Common Shares—Operating Agreement and Bylaws—Restrictions on Ownership and Transfer."
Upon completion of this offering and the concurrent private placement, we will have reserved for issuance up to an aggregate of 0.25% of the issued and outstanding Series A-1 common shares and the common shares of Other Property Series (on a fully diluted basis, assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities into our Series A-1 common shares and the common shares of Other Property Series) and including Series A-1 common shares to be sold pursuant to the underwriters' exercise of their overallotment option) at the time of the award for future awards under our 2015 Director Plan. In connection with this offering, our board of directors has approved an aggregate of 2,000 restricted Series A-1 common shares to be granted to our independent directors upon the completion of this offering and the concurrent private placement under our 2015 Director Plan.
Rule 144
In general, under Rule 144 under the Securities Act, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding Series A-1 common shares or the average weekly trading volume of the Series A-1 common shares during the four calendar weeks preceding such sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us (which requires that we are current in our periodic reports under the Exchange Act).
Registration Rights
We and the A-1 Series have granted registration rights to the Limited A-1 Partner and its permitted assignees in respect of the Series A-1 common shares issuable upon exchange of their Series A-1 OP units. After (a) such units have been outstanding for six months and (b) the earlier of (i) the refinancing of the loan that currently encumbers the Property, or (ii) January 11, 2017, the holders of such units shall be entitled to, upon the written request of holders holding a majority of the Series A-1 OP units, one demand registration right per calendar quarter with respect to any and all Series A-1 common shares issued or issuable to the holders upon redemption of their Series A-1 OP units. We are required to use all reasonable best efforts to cause such registration statements to be declared effective by the SEC as soon as practicable after the filing thereof, and to keep such registration statements continuously effective for a period ending 180 days after effectiveness or when all Series A-1 common shares covered by the registration statements have been sold. The A-1 Series will bear the expenses incident to these registration requirements except that the A-1 Series will not bear the costs of (i) any underwriting fees, discounts or commissions, (ii) fees, expenses and disbursements of legal counsel to the persons exercising the registration rights or (iii) transfer taxes.
In addition, we will agree to register the resale of the Series A-1 common shares purchased by our Administrative Agent in the concurrent private placement once we have become eligible to file a registration statement on Form S-3 or another short-form of registration available to us. We will bear expenses incident to the registration of these shares.
Lock-Up Agreements
The A-1 Series, our Administrative Agent, ETRE and each of our directors and officers have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of the underwriters, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any Series A-1 common shares or any securities convertible into or exercisable or exchangeable for Series A-1 common shares. These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without public notice, the underwriters may in their sole discretion releases some or all of the securities from these lock-up agreements.
In addition, pursuant to the terms of the registration rights agreement, the Limited A-1 Partner has agreed not to effect any public sale or distribution of Series A-1 common shares, or any securities, options or rights convertible into or exchangeable or exercisable for Series A-1 common shares (including, without limitation, Series A-1 OP units), during the 180-day period beginning on the effective date of this offering, unless expressly authorized by the underwriters managing this offering.
ETRE PROPERTY A-1, L.P. PARTNERSHIP AGREEMENT
The following is a summary of material provisions in the limited partnership agreement of Property A-1 Subsidiary, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
General
ETRE Property A-1, L.P., or the Property A-1 Subsidiary, is the indirect owner of the Property. The A-1 Series is considered to be an UPREIT in which all of its assets are owned in a limited partnership of which Lincoln Street Manager, LLC, an affiliate of Fortis (in its capacity as a general partner, the "Fortis General A-1 Partner") and the A-1 Series (in its capacity as a general partner, the "REIT General A-1 Partner"), are the sole general partners.
Pursuant to the terms of the limited partnership agreement of the Property A-1 Subsidiary, prior to the Fortis Stepdown Date (as defined below), the Fortis General A-1 Partner will manage generally the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property.
The REIT General A-1 Partner will have the right to approve certain major decisions with respect to the Property A-1 Subsidiary and the Property. These major decisions relate to, among other things, indebtedness (including the refinancing of the existing loan that encumbers the Property, subject to certain exceptions), expenditures, legal proceedings, tenant bankruptcies, leases, zoning matters, easements, environmental matters and insurance. We have structured the terms of the limited partnership agreement in this manner in order to provide both the A-1 Series and the Property's current owners (for so long as they continue to maintain a significant ownership interest in the Property) with a voice in the management of the Property's operations.
In addition, the REIT General A-1 Partner has authority over, among other things, the disposition of the Property or the Property Owner (subject to the approval rights of the holders of our Series A-1 common shares and the Series A-1 OP units issued in the contribution transactions), the issuance of securities and additional capital contributions (subject to the consent of the Fortis General A-1 Partner) and actions related to the A-1 Series' REIT qualification. On and after the Fortis Stepdown Date, the Fortis General A-1 Partner will cease to be a general partner and all management and control shall vest in the REIT General A-1 Partner.
The "Fortis Stepdown Date" means the first day that either (i) Lincoln Street Holdings, LLC (in its capacity as a limited partner, the "Limited A-1 Partner") and certain of its affiliates and permitted assignees (collectively, the "Lincoln Street Holdings Limited Partner Group") cease to own, in the aggregate, 25% or more of the combined issued and outstanding Series A-1 OP units and Series A-1 common shares or (ii) the Fortis General A-1 Partner withdraws as a general partner of the Property A-1 Subsidiary.
In addition, the limited partnership agreement of the Property A-1 Subsidiary will provide the Fortis General A-1 Partner with certain additional rights that will expire upon the refinancing of the loan that currently encumbers the Property. The purpose of these additional provisions is to avoid triggering any potential default under or acceleration of the Property's existing loan.
Furthermore, our operating agreement will establish a Property Oversight Committee to resolve potential disputes between the Fortis General A-1 Partner and its affiliates and the A-1 Series and its affiliates, with a majority of the members of this committee being designated by our board of directors.
Upon the completion of this offering, the concurrent private placement and the contribution transactions, the REIT General A-1 Partner will own a 48.87% partnership interest in the Property A-1 Subsidiary as a general partner and the Limited A-1 Partner will own a 51.13% partnership interest in the Property A-1 Subsidiary by virtue of its ownership of 12,066,667 Series A-1 OP units. The A-1 Series will not own any Series A-1 OP units upon completion of this offering, the concurrent private placement and the contribution transactions. The partnership interests of the REIT General A-1 Partner and the Limited A-1 Partner will together represent all of the outstanding economic interests in the Property A-1 Subsidiary. The Fortis General A-1 Partner, which is an affiliate of Lincoln Street Investors, LLC, one of the owners of the Limited A-1 Partner, will not have an economic interest in the Property A-1 Subsidiary. Under the limited partnership agreement of the Property A-1 Subsidiary, the A-1 Series, in its capacity as the REIT General A-1 Partner, will receive preferential distributions equal to an annualized distribution of 5% of the initial public offering price in this offering on each outstanding Series A-1 common share before distributions are paid to the holders of the Series A-1 OP units.
Following the contribution transactions, it is expected that the Limited A-1 Partner will distribute its Series A-1 OP units to the Limited A-1 Partner Owners, which will distribute the Series A-1 OP units to their respective members, subject to the transfer restrictions set forth in the limited partnership agreement of the Property A-1 Subsidiary.
Series A-1 OP units generally will not carry a right to vote on any matter voted on by our Series A-1 common shareholders, although Series A-1 OP units may, under certain circumstances, be redeemed for our Series A-1 common shares. However, the holders of Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) will be entitled to vote, along with our Series A-1 common shareholders as a single class, on any proposal to dispose of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's interest in the Property. These voting rights have been designed to be equivalent to the voting rights these unit holders would hold if all Series A-1 OP units held by them were exchanged for our Series A-1 common shares.
Securities Issuances by Our Company and the Property A-1 Subsidiary and Fortis General A-1 Partner Approval Rights
In general, the REIT General A-1 Partner is authorized to cause the Property A-1 Subsidiary to issue additional partnership units and accept additional capital contributions, subject to certain approval rights of the Fortis General A-1 Partner.
In particular, prior to the refinancing of the loan that currently encumbers the Property, without the consent of the Fortis General A-1 Partner, the REIT General A-1 Partner will not:
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• | permit (x) the Property A-1 Subsidiary, the Property Owner or any other subsidiary to issue any additional partnership units or other partnership, membership or beneficial ownership interests or any other securities convertible into or exercisable for partnership units, or (y) our company to issue any Series A-1 common shares or preferred shares or other securities associated with the A-1 Series, unless our board of directors, including a majority of our independent directors, has determined in good faith that it is necessary to issue partnership units (or other securities) to prevent an imminent foreclosure under the loan that currently encumbers the Property or foreclosure upon collateral pledged to secure such loan; |
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• | permit (x) the Property A-1 Subsidiary, the Property Owner or any other subsidiary to issue any additional partnership units or other partnership, membership or beneficial ownership interests or any other securities convertible into or exercisable for partnership units, or (y) our company to issue any Series A-1 common shares or preferred shares or other securities associated with the A-1 Series to the extent that the issuance could cause a default under the loan that currently encumbers the Property; and |
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• | permit (x) the Property A-1 Subsidiary, the Property Owner or any other subsidiary to issue any additional partnership units or other partnership, membership or beneficial ownership interests or any other securities convertible into or exercisable for partnership units, or (y) our company to issue any Series A-1 common shares or preferred shares or other securities associated with the A-1 Series to the extent that any such issuance could in any way reasonably be deemed to have the effect of diluting in a non-de minimis way (other than any "straight" dilution arising solely out of the change in relative ownership caused by the issuance of any such securities) the relative ownership of the Lincoln Street Holdings Limited Partner Group in the Property A-1 Subsidiary disproportionately in comparison to the other holders of partnership units in the Property A-1 Subsidiary. |
Furthermore, on and after the refinancing of the loan that currently encumbers the Property, and prior to the Fortis Stepdown Date, without the consent of the Fortis General A-1 Partner, the REIT General A-1 Partner will not permit (x) the Property A-1 Subsidiary, the Property Owner or any other subsidiary to issue any additional partnership units or other partnership, membership or beneficial ownership interests or any other securities convertible into or exercisable for partnership units, or (y) our company to issue any Series A-1 common shares or preferred shares or other securities associated with the A-1 Series.
Management of the Property A-1 Subsidiary's Business
Authority of Fortis General A-1 Partner
Prior to the occurrence of the Fortis Stepdown Date, the Fortis General A-1 Partner generally will have the sole power and authority to manage the day to day business, affairs and operations of the Property A-1 Subsidiary and the Property, and other than in connection the Approval Matters described below and such matters that are expressly delegated to the authority of the REIT General A-1 Partner under the limited partnership agreement, the Fortis General A-1 Partner will have the responsibility and sole authority to:
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• | generally, singularly manage and control (and make determinations of the Property A-1 Subsidiary with respect to) the management of the Property in accordance with the business plan and the then approved annual operating budget of the Property A-1 Subsidiary, including managing and addressing "emergency circumstances" such as imminent risk of personal injury to occupants or material damage to the Property, which circumstances shall not be contemplated by the business plan or approved annual operating budget; |
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• | monitor and manage the capital of the Property A-1 Subsidiary, and provide reports, advice and recommendations to the REIT General A-1 Partner regarding financing needs and options; |
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• | develop and recommend strategy with respect to the marketing and leasing of the Property to tenants to be reflected in the business plan and the then approved annual operating budget, including the development of leasing guidelines to be implemented in connection with the marketing and leasing program for the Property; and |
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• | evaluate, develop, and recommend whether and what capital expenditures, renovation, or redevelopment of the Property is desired for the Property A-1 Subsidiary; |
Dispositions of the Property or the Property Owner
The REIT General A-1 Partner will have the responsibility and sole authority to pursue or negotiate any sale, transfer, assignment or other disposition of the Property or of the Property Owner or enter into (on behalf of the Property A-1 Subsidiary) a binding agreement providing for any such sale, transfer, assignment or other disposition, provided that any such binding agreement must be conditioned upon the receipt of the requisite consents under the limited partnership agreement of the Property A-1 Subsidiary and our operating agreement.
Approval Matters
Prior to the occurrence of the Fortis Stepdown Date, the Fortis General A-1 Partner will not be authorized to, and will not cause the Property A-1 Subsidiary to take, or omit to take, any of the following actions ("Approval Matters") without the joint written consent of the REIT General A-1 Partner:
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• | incur indebtedness (other than trade payables incurred in the ordinary course operation of the business and affairs of the Property A-1 Subsidiary and its subsidiaries); provided that the Fortis General A-1 Partner will be authorized to unilaterally cause the Property A-1 Subsidiary and its subsidiaries to enter into a refinancing transaction for the loan that currently encumbers the Property in the event that a material claim or liability has arisen for either of the existing guarantors of such loan under their guarantees and the Property A-1 Subsidiary has not reserved an amount to fully reimburse such claim or liability; |
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• | enter into, amend, modify, extend or terminate any agreement, or otherwise engage in any transaction between the Property A-1 Subsidiary or its subsidiaries, on the one hand, and any affiliate or controlling person of (x) either of the General A-1 Partners, or (y) ETRE, on the other hand; |
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• | amend the limited partnership agreement of the Property A-1 Subsidiary (except to the extent the REIT General A-1 Partner is expressly authorized to do so under the limited partnership agreement); |
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• | the commitment by the Property A-1 Subsidiary, as lender, to make or accept, or the making or acceptance by the Property A-1 Subsidiary as lender of, any loan, and any material modification or amendment thereof or material waiver of any rights thereunder; |
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• | issue guaranties on behalf of the Property A-1 Subsidiary or its subsidiaries of obligations of any other person or entity; |
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• | approve the annual operating budget and any material changes thereto (including the amount of available cash for distribution by the Property A-1 Subsidiary and any reserves contemplated thereby); provided that in the event that the General A-1 Partners do not jointly approve, or the Property Oversight Committee does not approve, an annual operating budget, then the most recently approved annual operating budget will apply with certain deemed increases or decreases; |
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• | incur or permit or cause the Property A-1 Subsidiary or its subsidiaries to incur any expenditure or take or permit or cause the Property A-1 Subsidiary or its subsidiaries to take any action which is inconsistent with the then approved annual operating budget, subject to certain limited exceptions; |
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• | institute, prosecute, defend or settle any legal, arbitration or administrative actions or proceedings on behalf of the Property A-1 Subsidiary or its subsidiaries with an amount at issue or risk in excess of $250,000 in the aggregate (excluding certain claims arising in the ordinary course of business); |
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• | take or cause the Property A-1 Subsidiary or its subsidiaries to take any action in order to enforce the rights of the Property A-1 Subsidiary or its subsidiaries as (a) landlord under any lease, or (b) seller under any binding agreement of sale for all or any portion of the Property or any direct or indirect interest therein; |
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• | settle any lawsuit or proceeding if the settlement requires a payment in excess of $250,000 or requires an admission of liability on the part of the Property A-1 Subsidiary or its subsidiaries; |
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• | approve or disapprove or cause or permit its subsidiaries to approve or disapprove a creditors' plan or any bankruptcy or similar proceeding involving any tenant under a lease or any guarantor of a tenant's obligations under a lease; |
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• | enter into or cause or permit its subsidiaries to enter into any lease or any material amendment, modification or termination of any lease, or accepting the surrender of any lease; |
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• | initiate, join in, acquiesce in, or consent to any change in any material private restrictive covenant, zoning law or other public or private restriction, relating to the Property or cause or permit its subsidiaries to do any of the foregoing; |
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• | approve any easement agreements, restrictive covenants or any encumbrances or servitudes to be put on record or affecting the title of the Property; |
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• | approve of any material or non-ordinary course matters relating to compliance with environmental laws, or regarding any environmental or ecological matter relating to the Property, including selection of consultants in regard thereto and adoption of and implementation of any operation and maintenance program or any other program to remove or otherwise remediate hazardous materials; |
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• | any merger or consolidation of the Property A-1 Subsidiary with or into any other entity or person; |
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• | the filing of any insurance claim or any insurance settlement involving a claim which could reasonably be expected to exceed $250,000; |
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• | cause the formation of any corporation or other subsidiary entity owned or controlled by the Property A-1 Subsidiary; |
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• | make any significant accounting decision for the Property A-1 Subsidiary which adversely affects a partner; |
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• | designate banks or trust companies (other than those expressly required by the documents relating to the loan that currently encumbers the Property) for the deposit and disbursement of all funds related to the Property A-1 Subsidiary and make any decisions with respect to the maintenance of such funds; |
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• | refrain from making distributions of all then available cash on a quarterly basis, or create reserves in excess of the amounts set forth in the then approved annual operating budget; |
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• | cause the Property A-1 Subsidiary to issue any partnership interests or any other securities under or in connection with any equity incentive plan to the extent that the fair market value (measured as of the date of issuance) of the aggregate units of such interests or securities issued in any calendar year exceeds $33,000 in the aggregate; |
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• | change the name of the Property A-1 Subsidiary; |
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• | make material tax elections or decisions on behalf of the Property A-1 Subsidiary or Property Owner; and |
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• | take any action on behalf of any subsidiary of the Property A-1 Subsidiary, or approve or consent to any action or decision of any subsidiary, which in either case would be an item listed in these bullet points above if such action or decision were made or taken by, or with respect to, the Property A-1 Subsidiary. |
Property Oversight Committee
Our operating agreement will establish a Property Oversight Committee that will be associated with the A-1 Series. The Property Oversight Committee will be established to resolve potential disputes between the Fortis General A-1 Partner and its affiliates, on the one hand, and the A-1 Series and its affiliates, on the other hand. See "Description of Series A-1 Common Shares-Operating Agreement and Bylaws-Board Committees and Property Oversight Committee of the A-1 Series."
Under the terms of the limited partnership agreement of the Property A-1 Subsidiary, prior to the Fortis Stepdown Date, the Property Oversight Committee will have the authority to make the final determination as to whether any Approval Matter shall be taken. In addition to the Approval Matters described above under "-Approval Matters", the Property Oversight Committee will also have the authority to make the final determination in respect of any securities issuance that requires the Fortis General A-1 Partner's consent (as described above under "-Securities Issuances by Our Company and the Property A-1 Subsidiary and Fortis General A-1 Partner Approval Rights"). Any such securities issuance is deemed to be an Approval Matter under the limited partnership agreement.
Prior to the refinancing of the loan that currently encumbers the Property, the Fortis General A-1 Partner and the REIT General A-1 Partner may jointly agree to present any action that is or is deemed to be an Approval Matter to the Property Oversight Committee for the final determination of whether the action is to be taken. However, prior to the refinancing of the loan, to the extent the Fortis General A-1 Partner and the REIT General A-1 Partner are not able to reach agreement with respect to any action that is or is deemed to be an Approval Matter, the Fortis General A-1 Partner may unilaterally present such action to the Property Oversight Committee for the final determination of whether the requested action is to be taken. From and after the refinancing of the loan that currently encumbers the Property, to the extent that the Fortis General A-1 Partner and the REIT General A-1 Partner are not able to reach agreement with respect to any action that is or is deemed to be an Approval Matter, either General A-1 Partner may present such action to the Property Oversight Committee for the final determination of whether the requested action is to be taken.
Additional Covenants and Restrictions Related to the Existing Loan
Prior to the refinancing of the loan that currently encumbers the Property:
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• | without the prior written consent of the Fortis General A-1 Partner, neither the Property A-1 Subsidiary, the Property Owner, the A-1 Series or any subsidiary thereof nor the REIT General A-1 Partner will take or omit to take any action that could reasonably be expected to cause any of the existing guarantors of the loan that currently encumbers the Property to incur any actual liability in respect of their guarantee of the loan; and |
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• | the REIT General A-1 Partner will not be authorized to take any action without the prior consent of the Fortis General A-1 Partner if such action could be one of the enumerated "bad boy" actions in the existing guarantee of the loan. |
In addition, the Property A-1 Subsidiary will use commercially reasonable efforts to cause the Property Owner to refinance the loan that currently encumbers the Property prior to January 11, 2017, and will use commercially reasonable efforts to cause the existing guarantee of the loan to be released in connection with any such refinancing.
Fiduciary Responsibilities
In general, each of the General A-1 Partners will consider the interests of the other partners in deciding whether to cause the Property A-1 Subsidiary to take (or decline to take) any actions. However, the limited partners will expressly acknowledge that the REIT General A-1 Partner is acting for the benefit of the Property A-1 Subsidiary, the limited partners and our company's members associated with the A-1 Series collectively. The REIT General A-1 Partner is under no obligation to give priority to the separate interests of the limited partners of the Property A-1 Subsidiary over the interests of the REIT General A-1 Partner and its subsidiaries or our company's members associated with the A-1 Series (including, without limitation, the tax consequences to limited partners, assignees or our company's members associated with the A-1 Series) in deciding whether to cause the Property A-1 Subsidiary to take (or decline to take) any actions. Furthermore, the limited partners of the Property A-1 Subsidiary will expressly acknowledge that, (i) if there is a conflict or inconsistency between the interests of the members of our company associated with the A-1 Series on one hand and the limited partners on the other, the REIT General A-1 Partner will be free to act solely in the best interests of the members of our company associated with the A-1 Series, and (ii) if there is a conflict or inconsistency between the interests of the Lincoln Street Holdings Limited Partner Group on one hand and the other partners on the other, the Fortis General A-1 Partner will be free to act solely in the best interests of the members of the Lincoln Street Holdings Limited Partner Group.
REIT Compliance
The partnership agreement of the Property A-1 Subsidiary provides that the Property A-1 Subsidiary is to be operated in a manner that will (1) enable the A-1 Series to satisfy the requirements for qualification as a REIT for U.S. federal income tax purposes, (2) avoid any U.S. federal income or excise tax liability and (3) ensure that Property A-1 Subsidiary will not be classified as a "publicly traded partnership" taxable as a corporation for purposes of Section 7704 of the Internal Revenue Code.
In furtherance of the foregoing, the REIT General A-1 Partner, in its sole and absolution discretion, may cause the Property A-1 Subsidiary not to take, or to refrain from taking, any action that, in the commercially reasonable judgment of the REIT General A-1 Partner, (i) could adversely affect the ability of the A-1 Series to qualify as a REIT, (ii) could subject the A-1 Series to any additional taxes under Section 857 of the Internal Revenue Code or Section 4981 of the Internal Revenue Code or any other related or successor provision of the Code or (iii) could violate any law or regulation of any governmental body or governmental agency having jurisdiction over the REIT General A-1 Partner, our company or the Property A-1 Subsidiary or any of their respective securities.
Voting Rights of Series A-1 OP Units
Holders of Series A-1 OP units generally will have no right to vote on any matter voted on by holders of our Series A-1 common shares except holders of the Series A-1 OP units issued in the contribution transactions (excluding any Series A-1 OP units held by the A-1 Series and certain affiliates) will be entitled to vote, along with our Series A-1 common shareholders as a single class, on any proposal to dispose of all or substantially all of the A-1 Series' interest in the Property A-1 Subsidiary or the Property A-1 Subsidiary's interest in the Property. If the holders of our Series A-1 common shares vote on such a transaction and holders of Series A-1 OP units are to vote thereon, each Series A-1 OP unit will be entitled to one vote for each Series A-1 common share issuable by us upon the redemption of the Series A-1 OP unit and the necessary vote to effect such action shall be the sum of an absolute majority of the outstanding Series A-1 OP units issued in the contribution transactions and the applicable vote of the holders of our outstanding Series A-1 common shares, which such vote may be met by any combination of holders of Series A-1 OP units or Series A-1 common shares. However, for so long as the A-1 Series' partnership interest in the Property A-1 Subsidiary represents less than a majority of the outstanding partnership interests, the necessary vote threshold for the holders of Series A-1 OP units and Series A-1 common share will be equal to the A-1 Series' partnership interest in the Property A-1 Subsidiary.
Redemption and Exchange of Series A-1 OP Units
Subject to the provisions of any agreement to which Series A-1 OP units are issued, the Property A-1 Subsidiary is structured to permit each Series A-1 OP unit holder, through the exercise of its redemption rights to redeem its Series A-1 OP units in the Property A-1 Subsidiary for cash in an amount equal to the product of the per share market value of our Series A-1 common shares multiplied by the number of Series A-1 OP units in the Property A-1 Subsidiary to be redeemed by such holder, subject to certain adjustments, as described in the limited partnership agreement of the Property A-1 Subsidiary; provided that (i) such Series A-1 OP units have been outstanding for at least one year (or such lesser time as determined by the REIT General A-1 Partner in its sole and absolute discretion) or (ii) in the case of any Series A-1 OP units issued to the Limited A-1 Partner in connection with the contribution transactions, such Series A-1 OP units have been outstanding for at least six months and the Redemption Right Date (as defined below) has occurred. The "Redemption Right Date" means the earlier of the first to occur of (i) the refinancing of the loan that currently encumbers the Property or (ii) January 11, 2017. The market value of the Series A-1 common shares for this purpose will be equal to the average of the closing trading price of a Series A-1 common share on a U.S. national securities exchange for the ten trading days before the day on which the redemption notice is given to the Property A-1 Subsidiary. However, the A-1 Series may determine, in its sole and absolute discretion, to satisfy any such redemption request in exchange for Series A-1 common shares equal to the number of Series A-1 OP units in the Property A-1 Subsidiary to be redeemed, subject to certain adjustments as described in the limited partnership agreement of the Property A-1 Subsidiary, in lieu of cash.
We anticipate that rather than pay cash, we will normally elect to issue Series A-1 common shares in exchange for Series A-1 OP units offered for redemption. Redemption rights of Series A-1 OP unit holders may not be exercised, however, if and to the extent that the delivery of shares upon such exercise would (1) violate the restrictions on ownership and transfer of the Series A-1 common shares set forth in our operating agreement or (2) would cause a default under the loan that currently encumbers the Property.
Distributions
The partnership agreement of the Property A-1 Subsidiary provides that, prior to the Redemption Right Date, the Property A-1 Subsidiary will distribute at least quarterly all or a portion, as will be determined in a manner consistent with the then approved annual operating budget, of available cash for distribution generated by the Property A-1 Subsidiary during such quarter, to the partners of the Property A-1 Subsidiary as follows:
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• | first, in respect of any issued and outstanding units of general partner interest held by the REIT General A-1 Partner or any subsidiary of the A-1 Series, an amount equal to (i) the Series A-1 Common Share Preference Amount (as defined below) in respect of any prior quarters and (ii) the Series A-1 Common Share Preference Amount in respect of the current quarter; |
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• | second, in respect of all issued and outstanding Series A-1 OP units, an amount equal to the distributions paid pursuant to clause (ii) above in respect of such quarter to a unit of general partner interest entitled to receive distributions pursuant to the bullet point above; and |
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• | thereafter, pro rata, in respect of all issued and outstanding units of general partner and limited partner interest. |
On and after the Redemption Right Date, the Property A-1 Subsidiary distribute at least quarterly all or a portion, as will be determined in a manner consistent with the then approved annual operating budget, of available cash for distribution generated by the Property A-1 Subsidiary during such quarter, to the partners of the Property A-1 Subsidiary, pro rata, in respect of all issued and outstanding units of general partner and limited partner interest.
In the event the Property A-1 Subsidiary does not distribute the available cash generated by the Property A-1 Subsidiary during a quarter in the manner required under the partnership agreement, then either the REIT General A-1 Partner or the Fortis General A-1 Partner may cause the Property A-1 Subsidiary to so distribute such available cash to the holders of partnership units, but solely in a manner consistent with the then approved annual operating budget.
In addition, after the Redemption Right Date, the Fortis General A-1 Partner will have the right to cause the Property A-1 Subsidiary, as determined by it in its sole and absolute discretion, to cause the Property A-1 Subsidiary to distribute to the partners of the Property A-1 Subsidiary, pro rata, in respect of all issued and outstanding units of general partner and limited partner interest, a special distribution of any unused proceeds remaining from the underwriters' exercise of their over-allotment option in this offering, provided that (i) the unused proceeds are not committed to be applied under the then approved annual operating budget and (ii) any such special distribution could not adversely affect the ability of the A-1 Series' qualify as a REIT.
Notwithstanding anything in the partnership agreement to the contrary, the REIT General A-1 Partner will make such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with the A-1 Series' qualification as a REIT, to cause the Property A-1 Subsidiary to distribute sufficient amounts to enable us to pay A-1 Series member distributions that will (i) satisfy the requirements for the A-1 Series' qualification as a REIT under the Internal Revenue Code and related regulations and (ii) except to the extent otherwise determined by the REIT General A-1 Partner, in its sole and absolute discretion, avoid any federal income or excise tax liability of the A-1 Series.
For purposes of the foregoing, the "Series A-1 Common Share Preference Amount" means, with respect to any quarterly distribution date, an amount that together with the amounts of quarterly distributions previously paid in respect units of general partner interest held by the REIT General A-1 Partner and its subsidiaries is sufficient to enable us to have declared and paid to all Series A-1 common shareholders cumulative distributions through such quarterly payment date, sufficient to represent an annualized distribution yield of 5% of the initial public offering price in this offering on each outstanding Series A-1 common share.
Transferability of Interests
General Partner Interests
Without the consent of the REIT General A-1 Partner, the Fortis General A-1 Partner will not be able to transfer its general partner interest in the Property A-1 Subsidiary and the direct and indirect owners of the Fortis General A-1 Partner will not be able to transfer their ownership interests in the Fortis General A-1 Partner, except that a transfer of an ownership interest in Fortis Property Group, LLC will not require the consent of the REIT General A-1 Partner to the extent such transfer does not result in a change of control of Fortis Property Group, LLC. In addition, the Fortis General A-1 Partner will not be able to withdraw as a general partner of the Property A-1 Subsidiary if, in the judgment of the REIT General A-1 Partner, the withdrawal would cause a default under the loan that currently encumbers the Property.
The REIT General A-1 Partner will not be able to transfer its general partner interest in the Property A-1 Subsidiary except in connection with the following:
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• | any merger or sale of all or substantially all of the assets or shares of the REIT General A-1 Partner, or any third-party purchase offer, tender offer or exchange offer in respect of the Series A-1 common shares and Series A-1 OP units that has been accepted by the holders of more than 50% of the aggregate outstanding Series A-1 common shares and Series A-1 OP units (other than Series A-1 OP units held by the Company, the A-1 Series and their respective subsidiaries), subject however to the voting rights of the holders of Series A-1 OP units described above under "-Voting Rights of Series A-1 OP Units"; |
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• | any merger (including a triangular merger), consolidation or other combination with or into another person following the consummation of which the equity holders of the surviving entity are substantially identical to the members of the REIT General A-1 Partner immediately prior to the consummation; |
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• | a transfer to any person that is a successor to the REIT General A-1 Partner; |
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• | a transfer to any subsidiary of the REIT General A-1 Partner; |
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• | any transaction or series of related or similar transactions in which the partnership interests of the REIT General A-1 Partner or its subsidiaries are transferred to one or more subsidiaries of the REIT General A-1 Partner with a view to the distribution of the ownership interests of the transferee subsidiary or subsidiaries to the holders of limited liability company interests associated with the A-1 Series; or |
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• | as otherwise expressly permitted under limited partnership agreement of the Property A-1 Subsidiary. |
In addition, the REIT General A-1 Partner will not be able to withdraw as a general partner of the Property A-1 Subsidiary except in connection with the transactions set forth in the first and second bullets points in the paragraph above.
Limited Partner Interests
The limited partners will not be able to transfer their Series A-1 OP units, in whole or in part, without the REIT General A-1 Partner's written consent except to any one of the following permitted transferees:
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• | any family member or affiliate of such partner; |
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• | any trusts formed for the benefit of such partner and/or the family members of such partner; |
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• | any partnership, limited liability company, corporation or entity the interests in which are held, directly or indirectly, by persons described in first and second bullet points above; |
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• | a person that is a partner of the Property A-1 Subsidiary; |
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• | a person that is an accredited investor (within the meaning of Regulation D under the Securities Act) that affirms certain representations and warranties at the time of any transfer and is not, is not an affiliate of, and is not acting on behalf of, certain ineligible investors; or |
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• | the Limited A-1 Partner and each direct and indirect member, partner, and equity holder in the Limited A-1 Partner as of the date of the limited partnership agreement of the Property A-1 Subsidiary, |
provided, that any such transferee is an accredited investor (within the meaning of Regulation D under the Securities Act).
No transfer by a limited partner of its Series A-1 OP units (excluding in connection with a redemption of Series A-1 OP units as described above "-Redemption and Exchange of Series A-1 OP Units") may be made to or by any person (including a transfer to a permitted transferee), without the consent of the REIT General A-1 Partner in its sole discretion, if, in the opinion of legal counsel for the Property A-1 Subsidiary such transfer would result in certain adverse tax events, or, in the judgment of the REIT General A-1 Partner, the transfer would cause a default under the loan that currently encumbers the Property.
General Provisions Regarding Transfers
In addition, transfers and assignments of partnership interests are subject to certain additional restrictions that are designed to prevent certain adverse legal consequences for the Property A-1 Subsidiary, including if a transfer could cause a default under the loan that currently encumbers the Property.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax consequences relating to the A-1 Series' qualification and taxation as a REIT and the acquisition, holding, and disposition of Series A-1 common shares. For purposes of this section, "we," "our," and "us" mean only the A-1 Series. You are urged to both review the following discussion and to consult your tax advisor to determine the effects of ownership and disposition of Series A-1 common shares on your individual tax situation, including any state, local or non-U.S. tax consequences.
This summary is based upon the Internal Revenue Code, the regulations promulgated by the U.S. Treasury Department, or the Treasury Regulations, current administrative interpretations and practices of the IRS, (including administrative interpretations and practices expressed in private letter rulings which are binding on the IRS only with respect to the particular taxpayers who requested and received those rulings) and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this summary.
This summary is also based upon the assumption that the operation of the A-1 Series, and of its subsidiaries and other lower-tier and affiliated entities, will in each case be in accordance with its applicable organizational documents or partnership agreements. This summary does not discuss the effect that U.S. state and local taxes and taxes imposed by non-U.S. jurisdictions could have on the matters discussed in this summary. In addition, this summary assumes that holders of Series A-1 common shares hold such Series A-1 common shares as a capital asset, which generally means as property held for investment. This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular holder of Series A-1 common shares in light of the holder's investment or tax circumstances, or to holders of Series A-1 common shares subject to special tax rules, such as:
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• | persons who mark-to-market Series A-1 common shares; |
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• | subchapter S corporations; |
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• | U.S. holders of Series A-1 common shares, as defined below, whose functional currency is not the U.S. dollar; |
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• | regulated investment companies, or "RICs;" |
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• | persons holding Series A-1 common shares as part of a "straddle," "hedge," "conversion transaction," "synthetic security" or other integrated investment; |
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• | holders who receive Series A-1 common shares through the exercise of employee stock options or otherwise as compensation; |
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• | persons subject to the alternative minimum tax provisions of the Internal Revenue Code; |
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• | persons holding their interest through a partnership or similar pass-through entity; |
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• | persons holding a 10% or more (by vote or value) beneficial interest in the A-1 Series; |
and, except to the extent discussed below:
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• | tax-exempt organizations; and |
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• | non-U.S. holders of Series A-1 common shares, as defined below. |
For purposes of this summary, a U.S. holder of Series A-1 common shares is a beneficial owner of Series A-1 common shares who for U.S. federal income tax purposes is:
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• | a citizen or resident of the U.S.; |
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• | a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or of a political subdivision thereof (including the District of Columbia); |
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• | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
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• | any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person. |
A non-U.S. holder of Series A-1 common shares is a beneficial owner of Series A-1 common shares who is neither a U.S. holder of Series A-1 common shares nor an entity that is treated as a partnership for U.S. federal income tax purposes.
THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF SERIES A-1 COMMON SHARES DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING SERIES A-1 COMMON SHARES TO ANY PARTICULAR HOLDER WILL DEPEND ON THE HOLDER'S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSITION OF SERIES A-1 COMMON SHARES.
Taxation of the A-1 Series
ETRE REIT, LLC intends to treat each Series as a separate business entity for U.S. federal income tax purposes and the series LLC organization as a non-entity for U.S. federal income tax purposes. The IRS has issued proposed Treasury Regulations that provide that each individual series of a domestic series LLC organization will generally be treated as a separate entity formed under local law, with each such individual series' classification for U.S. federal income tax purposes determined under general tax principles and the entity classification ("check-the-box") rules. Even though the proposed Treasury Regulations are not currently effective, they would require taxpayers that do not adopt their approach with respect to a series LLC formed after the date of the proposed Treasury Regulations to change their treatment of such series LLC once such regulations are finalized, potentially subjecting those taxpayers to substantial costs. Although the proposed Treasury Regulations effectively penalize taxpayers that do not adopt this approach there can be no assurance as to whether the proposed Treasury Regulations will be finalized in their current form or at all. Although not expected based on the proposed Treasury Regulations, if the IRS were to adopt a different approach than the one adopted in the proposed Treasury Regulations and successfully challenge ETRE REIT, LLC's treatment of each Series as a separate business entity and the series LLC organization as a non-entity for U.S. federal income tax purposes, ETRE REIT, LLC expects that the series LLC organization would be treated as a single corporation that has elected and operated to be taxed as a REIT because ETRE REIT, LLC will have made an election for each Series to be taxed as a corporation and each Series will be organized and operated so as to qualify as a REIT for U.S. federal income tax purposes. If the series LLC organization were so treated, the timing, amount and character of distributions to holders of Series A-1 common shares could be adversely impacted and the ability of the series LLC organization to be taxed as a REIT could be adversely impacted because the activity of each Series would be aggregated as the activities of a single REIT. See "Failure to Qualify," below, for a discussion of the effect of a failure to qualify as a REIT for a taxable year.
The A-1 Series intends to elect and qualify to be taxed as a REIT under the Internal Revenue Code, commencing with its taxable year ending December 31, 2015. The A-1 Series believes it has been organized and intends to operate in a manner that will allow it to qualify for taxation as a REIT under the Internal Revenue Code commencing with its taxable year ending December 31, 2015.
The law firm of Clifford Chance US LLP has acted as counsel to ETRE REIT, LLC in connection with this offering. The A-1 Series will receive the opinion of Clifford Chance US LLP prior to effectiveness of the registration statement of which this prospectus forms a part to the effect that, commencing with the A-1 Series' taxable year ending December 31, 2015, the A-1 Series will be organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. The opinion of Clifford Chance US LLP will be based on various assumptions relating to the A-1 Series' and future Series' organization and operation, including that all factual representations and statements set forth in all relevant documents, records and instruments are true and correct, all actions described herein are completed in a timely fashion and that the A-1 Series will at all times operate in accordance with the method of operation described in its organizational documents and registration statement. Additionally, the opinion of Clifford Chance US LLP is conditioned upon factual representations and covenants made by the Company, the A-1 Series, the Administrative Agent and the Asset Manager regarding the series LLC organization's and the A-1 Series' organization, assets, and present and future conduct of the A-1 Series' and future Series' business operations and other items regarding the A-1 Series' and future Series' ability to meet the various requirements for qualification as a REIT, and assumes that such representations and covenants are accurate and complete and that the A-1 Series and future Series' will take no action that could adversely affect its qualification as a REIT. Although the A-1 Series believes it will be organized and intends to operate so that it will qualify as a REIT commencing with its taxable year ending December 31, 2015, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the A-1 Series' circumstances or applicable law, no assurance can be given by Clifford Chance US LLP or the A-1 Series that it will so qualify for any particular year. Clifford Chance US LLP will have no obligation to advise the A-1 Series or holders of Series A-1 common shares of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. You should be aware that opinions of counsel are not binding on the IRS or any court, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions.
Qualification and taxation as a REIT depend on the A-1 Series' ability to meet, on a continuing basis, through actual operating results, distribution levels, and diversity of stock ownership, various qualification requirements imposed upon REITs by the Internal Revenue Code, the compliance with which will not be reviewed by Clifford Chance US LLP. In addition, the A-1 Series' ability to qualify as a REIT depends in part upon the operating results, organizational structure and entity classification for U.S. federal income tax purposes of certain entities in which the A-1 Series invests, including the Property A-1 Subsidiary. The A-1 Series' ability to qualify as a REIT for a particular year also requires that the A-1 Series satisfy certain asset and income tests during such year, some of which depend upon the fair market values of assets in which the A-1 Series directly or indirectly owns an interest. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of the A-1 Series' operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.
Taxation of REITs in General
As indicated above, the A-1 Series' qualification and taxation as a REIT for a particular year depend upon the A-1 Series' ability to meet, on a continuing basis during such year, through actual results of operations, distribution levels, diversity of share ownership and various qualification requirements imposed upon REITs by the Internal Revenue Code. The material qualification requirements are summarized below under "—Requirements for Qualification—General." While the A-1 Series intends to operate so that it will qualify as a REIT, no assurance can be given that the IRS will not challenge the A-1 Series' qualification as a REIT, or that the A-1 Series will be able to operate in accordance with the REIT requirements in the future. See "—Failure to Qualify."
Provided that the A-1 Series qualifies as a REIT, it will generally be entitled to a deduction for dividends that it pays and therefore will not be subject to U.S. federal corporate income tax on its net taxable income that is currently distributed to holders of Series A-1 common shares. This treatment substantially eliminates the "double taxation" at the corporate and shareholder levels that generally results from investment in a corporation. Rather, income generated by a REIT generally is taxed only at the shareholder level upon a distribution of dividends by the REIT.
Holders of Series A-1 common shares who are noncorporate U.S. holders of Series A-1 common shares are generally taxed on corporate dividends at a maximum rate of 20% (the same as long-term capital gains). With limited exceptions, however, ordinary dividends received by noncorporate U.S. holders of Series A-1 common shares from the A-1 Series or from other entities that are taxed as REITs will continue to be taxed at rates applicable to ordinary income, which are as high as 39.6%. Net operating losses, foreign tax credits and other tax attributes of a REIT generally do not pass through to the shareholders of a REIT, subject to special rules for certain items such as capital gains recognized by REITs. See "—Taxation of Holders of Series A-1 Common Shares."
If the A-1 Series qualifies as a REIT, it will nonetheless be subject to U.S. federal income tax as follows:
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• | The A-1 Series will be taxed at regular corporate rates on any undistributed income, including undistributed net capital gains. |
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• | The A-1 Series may be subject to the "alternative minimum tax" on its items of tax preference, if any. |
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• | If the A-1 Series has net income from prohibited transactions, which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, as described below, such income will be subject to a 100% tax. See "—Requirements for Qualification—General—Prohibited Transactions" and "—Requirements for Qualification—General—Foreclosure Property" below. |
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• | If the A-1 Series elects to treat property that it acquires in connection with a foreclosure of a mortgage loan or leaseshold as "foreclosure property," it may thereby avoid (1) the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), and (2) the inclusion of any income from such property not qualifying for purposes of the REIT gross income tests discussed below, but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate (currently 35%). |
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• | If the A-1 Series fails to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but nonetheless maintains its qualification as a REIT because other requirements are met, it will be subject to a 100% tax on an amount equal to (1) the greater of (A) the amount by which it fails the 75% gross income test or (B) the amount by which it fails the 95% gross income test, as the case may be, multiplied by (2) a fraction intended to reflect its profitability. |
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• | If the A-1 Series fails to satisfy any of the REIT asset tests, as described below, other than a failure of the 5% or 10% REIT asset tests that does not exceed a statutory de minimis amount as described more fully below, but its failure is due to reasonable cause and not due to willful neglect and it nonetheless maintains its REIT qualification because of specified cure provisions, it will be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate (currently 35%) of the net income generated by the non-qualifying assets during the period in which the A-1 Series failed to satisfy the asset tests. |
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• | If the A-1 Series fails to satisfy any provision of the Internal Revenue Code that would result in its failure to qualify as a REIT (other than a gross income or asset test requirement) and that violation is due to reasonable cause, it may retain its REIT qualification, but it will be required to pay a penalty of $50,000 for each such failure. |
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• | If the A-1 Series fails to distribute on an annual basis at least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT capital gain net income for such year and (3) any undistributed taxable income from prior periods, or the "required distribution," it will be subject to a 4% excise tax on the excess of the required distribution over the sum of (A) the amounts actually distributed (taking into account excess distributions from prior years), plus (B) retained amounts on which U.S. federal income tax is paid at the corporate level. |
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• | The A-1 Series may be required to pay monetary penalties to the IRS in certain circumstances, including if it fails to meet record-keeping requirements intended to monitor its compliance with rules relating to the composition of the holders of Series A-1 common shares, as described below in "—Requirements for Qualification—General." |
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• | The A-1 Series may be subject to a 100% excise tax on some items of income and expense that are directly or constructively paid between it, its Tenants and/or any TRSs if and to the extent that the IRS successfully adjusts the reported amounts of these items. |
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• | If the A-1 Series acquires appreciated assets from a subchapter C corporation (generally a corporation that is not a REIT, a RIC or an S corporation) in a transaction in which the adjusted tax basis of the assets in its hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, it will be subject to tax on such appreciation at the highest corporate income tax rate then applicable if it subsequently recognizes gains on a disposition of any of the assets during the 10-year period following its acquisition of the assets from the subchapter C corporation. The results described in this paragraph assume that the subchapter C corporation will not elect, in lieu of this treatment, to be subject to an immediate tax when the A-1 Series acquires the assets. |
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• | The A-1 Series may elect to retain and pay income tax on its net long-term capital gain. In that case, a holder of Series A-1 common shares would include the holder's proportionate share of the A-1 Series' undistributed long-term capital gain (to the extent the A-1 Series makes a timely designation of such gain to the holder of such Series A-1 common shares) in the holder of such Series A-1 common share's income, would be deemed to have paid the tax that the holder of such Series A-1 common shares paid on such gain, and would be allowed a credit for the holder of such Series A-1 common share's proportionate share of the tax deemed to have been paid, and an adjustment would be made to increase the holder of Series A-1 common share's basis in such Series A-1 common shares. Holders of Series A-1 common shares that are U.S. corporations will also appropriately adjust their earnings and profits for the retained capital gain in accordance with Treasury Regulations to be promulgated. |
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• | The A-1 Series may have subsidiaries or own interests in other lower-tier entities that are taxable C corporations, including any TRSs, the earnings of which could be subject to U.S. federal corporate income tax. |
In addition, the A-1 Series and its subsidiaries may be subject to a variety of taxes other than U.S. federal income tax, including payroll taxes and state, local, and foreign income, transfer, franchise, property and other taxes. The A-1 Series could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification—General
In connection with this offering, ETRE REIT, LLC intends for the A-1 Series to elect and qualify to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ending December 31, 2015. ETRE REIT, LLC believes that the A-1 Series has been organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that its intended manner of operation will enable it to meet the requirements for qualification and taxation as a REIT for its taxable year ending December 31, 2015 and thereafter. To qualify as a REIT, the A-1 Series must meet on a continuing basis, through its organization and actual investment and operating results, various requirements under the Internal Revenue Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares. If the A-1 Series fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it failed to qualify as a REIT. Even if the A-1 Series qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income or property. Any distributions paid by the A-1 Series generally will not be eligible for taxation at the preferential U.S. federal income tax rates that currently apply to certain distributions received by individuals from taxable corporations.
The Internal Revenue Code defines a REIT as a corporation, trust or association:
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(1) | that is managed by one or more trustees or directors; |
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(2) | the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; |
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(3) | that would be taxable as a domestic corporation but for the special Internal Revenue Code provisions applicable to REITs; |
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(4) | that is neither a financial institution nor an insurance company subject to specific provisions of the Internal Revenue Code; |
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(5) | the beneficial ownership of which is held by 100 or more persons during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months; |
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(6) | in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer "individuals" (as defined in the Internal Revenue Code to include specified entities); |
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(7) | that makes an election to be a REIT for the current taxable year or has made such an election for a previous taxable year that has not been terminated or revoked; |
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(8) | that has no earnings and profits from any non-REIT taxable year as of a successor to any subchapter C corporation at the close of any taxable year; |
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(9) | that uses the calendar year for U.S. federal income tax purposes; and |
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(10) | that meets other tests described below, including with respect to the nature of its income and assets and the amount of its distributions. |
The Internal Revenue Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do not need to be satisfied for the first taxable year for which an election to become a REIT has been made. Our operating agreement provides restrictions regarding the ownership and transfer of Series A-1 common shares, which are intended, among other purposes, to assist the A-1 Series in satisfying the share ownership requirements described in conditions (5) and (6) above. The A-1 Series intends to monitor the beneficial owners of the shares to ensure that its shares are at all times beneficially owned by 100 or more persons, but no assurance can be given that the A-1 Series will be successful in this regard. For purposes of condition (6), an "individual" generally includes a supplemental unemployment compensation benefit plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit sharing trust.
To monitor compliance with the share ownership requirements, the A-1 Series is required to maintain records regarding the actual ownership of its shares. To do so, the A-1 Series must demand written statements each year from the record holders of significant percentages of its shares in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the dividends paid by us). A list of those persons failing or refusing to comply with this demand must be maintained as part of its records. Failure by the A-1 Series to comply with these record-keeping requirements could subject the A-1 Series to monetary penalties. If the A-1 Series satisfies these requirements and after exercising reasonable diligence would not have known that condition (6) is not satisfied, it will be deemed to have satisfied such condition. A holder of shares Series A-1 common shares that fails or refuses to comply with the demand is required by Treasury Regulations to submit a statement with the holder's tax return disclosing the actual ownership of the shares and other information.
With respect to condition (8), the A-1 Series believes it will not initially have any earnings and profits from any non-REIT taxable year or as a successor to any subchapter C corporation.
With respect to condition (9), the A-1 Series intends to adopt December 31 as its taxable year-end and thereby satisfy this requirement.
Effect of Subsidiary Entities
Ownership of Partnership Interests. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT is deemed to own its proportionate share of the partnership's assets and to earn its proportionate share of the partnership's gross income based on its pro rata share of capital interests in the partnership for purposes of the asset and gross income tests applicable to REITs, as described below. However, solely for purposes of the 10% value test described below, the determination of a REIT's interest in partnership assets will be based on the REIT's proportionate interest in any securities issued by the partnership, excluding, for these purposes, certain excluded securities as described in the Internal Revenue Code. In addition, the assets and gross income of the partnership generally are deemed to retain the same character in the hands of the REIT. Thus, the A-1 Series' proportionate share of the assets and items of income of a partnership in which it owns an equity interest, including the Property A-1 Subsidiary, is treated as the A-1 Series' assets and items of income for purposes of applying the REIT requirements described below. Consequently, to the extent that the A-1 Series directly or indirectly holds a preferred or other equity interest in a partnership, including the Property A-1 Subsidiary, the partnership's assets and operations may affect the A-1 Series' ability to qualify as a REIT, even though it may have no control, or only limited influence, over the partnership.
An investment in a partnership involves special tax considerations. For example, it is possible that the IRS could treat a subsidiary partnership as a corporation for U.S. federal income tax purposes. In this case, the subsidiary partnership would be subject to entity-level tax and the character of the A-1 Series' assets and items of gross income would change, possibly causing us to fail the requirements to qualify as a REIT. See "—Failure to Qualify" below. In addition, special rules apply in the case of appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership. In general terms, these rules require that certain items of income, gain, loss and deduction associated with the contributed property be allocated to the contributing partner for U.S. federal income tax purposes. These rules could adversely affect the A-1 Series, for example, by requiring that a lower amount of depreciation deductions be allocated to the A-1 Series, which in turn would cause it to have a greater amount of taxable income without a corresponding increase in cash and result in a greater portion of the A-1 Series' distributions being taxed as dividend income.
Disregarded Subsidiaries. If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary," that subsidiary is disregarded for U.S. federal income tax purposes, and all assets, liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of income, deduction and credit of the REIT, including for purposes of the gross income and asset tests applicable to REITs as summarized below. A qualified REIT subsidiary is any corporation, other than a TRS, as described below under "—Requirements for Qualification—General—Effect of Subsidiary Entities—Taxable REIT Subsidiaries," that is wholly owned by a REIT, or by other disregarded subsidiaries, or by a combination of the two. Single member limited liability companies that are wholly owned by a REIT are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT gross income and asset tests. Disregarded subsidiaries, along with partnerships in which the A-1 Series holds an equity interest, are sometimes referred to herein as "pass-through subsidiaries."
In the event that a disregarded subsidiary ceases to be wholly owned by the A-1 Series —for example, if any equity interest in the subsidiary is acquired by a person other than the A-1 Series or another disregarded subsidiary of the A-1 Series —the subsidiary's separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, the subsidiary would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect the A-1 Series' ability to satisfy the various asset and gross income tests applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the value or voting power of the outstanding securities of another corporation. See "—Requirements for Qualification—General—Asset Tests" and "—Requirements for Qualification—General—Gross Income Tests."
Taxable REIT Subsidiaries. A REIT generally may jointly elect with a subsidiary corporation, whether or not wholly owned, to treat the subsidiary corporation as a TRS. The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for U.S. federal income tax purposes. Accordingly, such an entity would generally be subject to corporate U.S. federal, state, local and income and franchise taxes on its earnings, which may reduce the cash flow generated by the A-1 Series and its subsidiaries in the aggregate, and the A-1 Series' ability to make distributions to holders of Series A-1 common shares. The A-1 Series' TRSs may invest in assets and engage in activities that could not be held or conducted directly by it without jeopardizing its qualification as a REIT.
For purposes of the gross income and asset tests applicable to REITs, a REIT is not treated as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by the subsidiary is an asset in the hands of the REIT, and the REIT recognizes as income the dividends that it receives from the subsidiary. This treatment can affect the gross income and asset test calculations that apply to the REIT, as described below. Because a REIT does not include the assets and income of such subsidiary corporations in determining the REIT's compliance with the REIT requirements, such entities may be used by the parent REIT to undertake indirectly activities that a REIT, due to the requirements applicable to REITs, might otherwise not be able to undertake directly or through pass-through subsidiaries (or, if such activities could be undertaken, it would only be in a commercially unfeasible manner) such as, for example, activities that give rise to certain categories of income such as management fees. If dividends are paid to the A-1 Series by one or more TRSs it may own, then a portion of the dividends that it distributes to the holders of Series A-1 common shares who are taxed at individual rates generally will be eligible for taxation at preferential qualified dividend income tax rates rather than at ordinary income rates. See "—Taxation of Holders of Series A-1 Common Shares—Taxation of Taxable U.S. Holders of Series A-1 Common Shares" and "—Requirements for Qualification—General—Annual Distribution Requirements."
Certain restrictions imposed on TRSs are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income taxation. First, if a TRS has a debt to equity ratio as of the close of the taxable year exceeding 1.5 to 1, it may not deduct interest payments made in any year to an affiliated REIT to the extent that such payments exceed, generally, 50% of the TRS's adjusted taxable income for that year (although the TRS may carry forward to, and deduct in, a succeeding year the disallowed interest amount if the 50% test is satisfied in that year). In addition, if amounts are paid to a REIT or deducted by a TRS due to transactions between a REIT, its Tenants and/or a TRS, that exceed the amount that would be paid to or deducted by a party in an arm's-length transaction, the REIT generally will be subject to an excise tax equal to 100% of such excess.
Rents received by the A-1 Series that include amounts for services furnished by a TRS to any of its tenants will not be subject to the excise tax if such amounts qualify for the safe harbor provisions contained in the Internal Revenue Code. Safe harbor provisions are provided where (1) amounts are excluded from the definition of impermissible tenant service income as a result of satisfying a 1% de minimis exception; (2) a TRS renders a significant amount of similar services to unrelated parties and the charges for such services are substantially comparable; (3) rents paid to the A-1 Series by tenants leasing at least 25% of the net leasable space at a property that are not receiving services from the TRS are substantially comparable to the rents paid to the A-1 Series by tenants leasing comparable space at such property and that are receiving such services from the TRS (and the charge for the services is separately stated); or (4) the TRS's gross income from the service is not less than 150% of the TRS's direct cost of furnishing the service.
Gross Income Tests
In order to maintain the A-1 Series' qualification as a REIT, the A-1 Series annually must satisfy two gross income tests. First, at least 75% of the A-1 Series' gross income for each taxable year, excluding gross income from sales of inventory or dealer property in "prohibited transactions" and certain hedging and foreign currency transactions, must be derived from investments relating to real property or mortgages on real property, including "rents from real property," dividends received from and gain from the disposition of shares of other REITs, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as income from certain kinds of temporary investments. Second, at least 95% of the A-1 Series' gross income in each taxable year, excluding gross income from prohibited transactions and certain hedging and foreign currency transactions, must be derived from some combination of income that qualifies under the 75% income test described above, as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.
For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any limited liability company treated as a partnership for U.S. federal income tax purposes, in which it owns an interest, which share is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary.
Rents received by the A-1 Series will qualify as "rents from real property" in satisfying the 75% gross income test described above only if several conditions are met, including the following. The rent must not be based in whole or in part on the income or profits of any person. However, an amount will not be excluded from rents from real property solely by reason of being based on a fixed percentage or percentages of receipts or sales or being based on the net income or profits of a tenant which derives substantially all of its income with respect to such property from subleasing of substantially all of such property, to the extent that the rents paid by the sublessees would qualify as rents from real property, if earned directly by the A-1 Series. If rent is partly attributable to personal property leased in connection with a lease of real property, the portion of the total rent that is attributable to the personal property will not qualify as rents from real property unless it constitutes 15% or less of the total rent received under the lease. Moreover, for rents received to qualify as rents from real property, the A-1 Series generally must not operate or manage the property or furnish or render certain services to the tenants of such property, other than through an "independent contractor" who is adequately compensated and from which the A-1 Series derives no income, or through a TRS. The A-1 Series is permitted, however, to perform services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, the A-1 Series may directly or indirectly provide non-customary services to tenants of the A-1 Series' property if the gross income from such services does not exceed 1% of the total gross income from the property for the relevant taxable year. In such a case, only the amounts for non-customary services are not treated as rents from real property and the provision of the services does not disqualify the rents from treatment as rents from real property. If, however, the gross income from such non-customary services exceeds this 1% threshold, none of the gross income derived from the property for the relevant property is treated as rents from real property. For purposes of this test, the gross income received from such non-customary services is deemed to be at least 150% of the direct cost of providing the services. Moreover, the A-1 Series is permitted to provide services to tenants through a TRS without disqualifying the rental income received from tenants as rents from real property. Also, rental income will qualify as rents from real property only to the extent it is not treated as "related party rent," which generally includes rent from a tenant if the A-1 Series directly or indirectly (through application of certain constructive ownership rules) owns, (1) in the case of any tenant which is a corporation, stock possessing 10% or more of the total combined voting power of all classes of stock entitled to vote, or 10% or more of the total value of shares of all classes of stock of such tenant or (2) in the case of any tenant which is not a corporation, an interest of 10% or more in the assets or net profits of such tenant. However, rental payments from a TRS will qualify as rents from real property even if the A-1 Series owns more than 10% of the total value or combined voting power of the TRS if at least 90% of the property is leased to unrelated tenants and the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space.
Unless the A-1 Series determines that the resulting non-qualifying income under any of the following situations, taken together with all other non-qualifying income earned by it in the taxable year, will not jeopardize its qualification as a REIT, it does not intend to:
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• | charge rent for property that is based in whole or in part on the income or profits of any person, except by reason of being based on a fixed percentage or percentages of receipts or sales, as described above; |
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• | rent property to a related party tenant, including any TRS, unless the rent from the lease to the TRS would qualify for the special exception from the related party tenant rule applicable to certain leases with a TRS; |
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• | derive rental income attributable to personal property other than personal property leased in connection with the lease of property, the amount of which is no more than 15% of the total rent received under the lease; or |
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• | directly perform services considered to be non-customary or rendered to the occupant of the Property. |
The A-1 Series may receive distributions from its TRSs or other C corporations that are neither REITs nor qualified REIT subsidiaries. These distributions will be classified as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. Any dividends received by the A-1 Series from a REIT, however, will be qualifying income for purposes of both the 95% and 75% gross income tests.
Hedging Transactions
The A-1 Series may enter into hedging transactions with respect to one or more of its assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swap agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by Treasury Regulations, any income from a hedging transaction the A-1 Series enters into (1) in the normal course of the A-1 Series' business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which the A-1 Series clearly identifies as specified in Treasury Regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, or (2) primarily to manage risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into, will not constitute gross income for purposes of the 75% or 95% gross income tests. To the extent that the A-1 Series enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the 75% and 95% gross income tests. The A-1 Series intends to structure any hedging transactions in a manner that does not jeopardize its qualification as a REIT.
Failure to Satisfy the Gross Income Tests
The A-1 Series intends to monitor its sources of income, including any non-qualifying income received by it, so as to ensure its compliance with the gross income tests. If the A-1 Series fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may still qualify as a REIT for the year if it is entitled to relief under applicable provisions of the Internal Revenue Code. These relief provisions will generally be available if the failure of the A-1 Series to meet these tests was due to reasonable cause and not due to willful neglect and, following the identification of such failure, the A-1 Series sets forth a description of each item of its gross income that satisfies the gross income tests in a schedule for the taxable year filed in accordance with the Treasury Regulations. It is not possible to state whether the A-1 Series would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving the A-1 Series, the A-1 Series will not qualify as a REIT. As discussed above under "—Taxation of the A-1 Series—Taxation of REITs in General," even where these relief provisions apply, a tax would be imposed upon the profit attributable to the amount by which the A-1 Series fails to satisfy the particular gross income test.
Asset Tests
At the close of each calendar quarter the A-1 Series must also satisfy four tests relating to the nature of its assets. First, at least 75% of the value of the A-1 Series' total assets must be represented by some combination of "real estate assets," cash, cash items, U.S. government securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate assets include interests in real property, such as land, buildings, leaseshold interests in real property, stock of other REITs, and certain kinds of mortgage-backed securities and mortgage loans. Assets that do not qualify for purposes of the 75% asset test are subject to the additional asset tests described below.
Second, the value of any one issuer's securities owned by the A-1 Series may not exceed 5% of the value of its total assets. Third, the A-1 Series may not own more than 10% of any one issuer's outstanding securities, as measured by either voting power or value. Fourth, the aggregate value of all securities of any TRSs held by the A-1 Series may not exceed 25% of the value of its total assets.
The 5% and 10% asset tests do not apply to securities of TRSs, qualified REIT subsidiaries or securities that are "real estate assets" for purposes of the 75% asset test described above. In addition, the 10% value test does not apply to certain "straight debt" and other excluded securities, as described in the Internal Revenue Code including, but not limited to, any loan to an individual or estate, any obligation to pay rents from real property and any security issued by a REIT. For these purposes, (1) a REIT's interest as a partner in a partnership is not considered a security; (2) any debt instrument issued by a partnership (other than straight debt or another security that is excluded from the 10% value test) will not be considered a security issued by the partnership if at least 75% of the partnership's gross income is derived from sources that would qualify for the 75% gross income test; and (3) any debt instrument issued by a partnership (other than straight debt or another excluded security) will not be considered a security issued by the partnership to the extent of the REIT's interest as a partner in the partnership. For purposes of the 10% value test, "straight debt" means a written unconditional promise to pay on demand on a specified date a sum certain in money if (i) debt is not convertible, directly or indirectly, into stock, (ii) the interest rate and interest payment dates are not contingent on profits, the borrower's discretion, or similar factors other than certain contingencies relating to the timing and amount of principal and interest payments, as described in the Internal Revenue Code and (iii) in the case of an issuer that is a corporation or a partnership, securities that otherwise would be considered straight debt will not be so considered if the A-1 Series, and any of its "controlled taxable REIT subsidiaries," as defined in the Internal Revenue Code, hold any securities of the corporate or partnership issuer which (a) are not straight debt or other excluded securities (prior to the application of this rule), and (b) have an aggregate value greater than 1% of the issuer's outstanding securities (including, for the purposes of a partnership issuer, its interest as a partner in the partners).
Failure to Satisfy the Asset Tests
After initially meeting the asset tests at the close of a quarter, the A-1 Series will not lose its qualification as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values (including a failure caused solely by change in the foreign currency exchange rate used to value a foreign asset). If the A-1 Series fails to satisfy the asset tests because the A-1 Series acquires or increases its ownership interest in securities during a quarter, the A-1 Series can cure this failure by disposing of the non-qualifying assets within 30 days after the close of that quarter. If the A-1 Series fails the 5% asset test, the 10% vote test, or the 10% value test at the end of any quarter, and such failure is not cured within 30 days thereafter, the A-1 Series may dispose of sufficient assets (generally, within six months after the last day of the quarter in which its identification of the failure to satisfy those asset tests occurred) to cure the violation, provided that the non-permitted assets do not exceed the lesser of 1% of its assets at the end of the relevant quarter or $10,000,000. If the A-1 Series fails any of the other asset tests, or its failure of the 5% and 10% asset tests is in excess of the de minimis amount described above, as long as the failure was due to reasonable cause and not willful neglect, the A-1 Series is permitted to avoid disqualification as a REIT, after the 30-day cure period, by taking steps including the disposition of sufficient assets to meet the asset tests (generally within six months after the last day of the quarter in which its identification of the failure to satisfy the REIT asset test occurred), and paying a tax equal to the greater of $50,000 or 35% of the net income generated by the non-qualifying assets during the period in which the A-1 Series failed to satisfy the relevant asset test.
The A-1 Series believes its holding of the property, temporary investments, cash and any TRSs the A-1 Series may form will comply with the foregoing REIT asset requirements, and the A-1 Series intends to monitor compliance with such tests on an ongoing basis. There can be no assurance, however, that the A-1 Series will be successful in this effort. Moreover, the values of some of the A-1 Series' assets, including the securities of its TRSs or other non-publicly traded investments, may not be susceptible to a precise determination and are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset tests. Accordingly, there can be no assurance that the IRS will not contend that the A-1 Series' assets do not meet the requirements of the REIT asset tests.
Annual Distribution Requirements
In order to qualify as a REIT, the A-1 Series is required to distribute dividends, other than capital gain dividends, to holders of Series A-1 common shares in an amount at least equal to:
(1)the sum of:
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a) | 90% of its "REIT taxable income" (computed without regard to its deduction for dividends paid and its net capital gains), and |
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b) | 90% of the net income from foreclosure property (after tax) as described below, and recognized built-in gain, as discussed above, minus |
(2)the sum of specified items of non-cash income that exceeds a percentage of its income.
These distributions must be paid in the taxable year to which they relate, or in the following taxable year if such distributions are declared in October, November or December of the taxable year, are payable to holders of Series A-1 common shares of record on a specified date in any such month, and are actually paid before the end of January of the following year. Such distributions are treated as both paid by the A-1 Series and received by each holder of Series A-1 common shares on December 31 of the year in which they are declared. In addition, at the A-1 Series' election, a distribution for a taxable year may be declared before the A-1 Series timely files its tax return for the year, provided the A-1 Series pays such distribution with or before its first regular dividend payment after such declaration, provided that such payment is made during the 12-month period following the close of such taxable year. These distributions are taxable to holders of Series A-1 common shares in the year in which paid, even though the distributions relate to its prior taxable year for purposes of the 90% distribution requirement.
In order for distributions to be counted towards the A-1 Series' distribution requirement, and to give rise to a tax deduction to the A-1 Series, they must not be "preferential dividends." A dividend is not a preferential dividend if it is pro rata among all outstanding shares of stock within a particular class, and is in accordance with the preferences among its different classes of stock as set forth in the A-1 Series' organizational documents.
To the extent that the A-1 Series distributes at least 90%, but less than 100%, of its REIT taxable income, as adjusted, the A-1 Series will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, the A-1 Series may elect to retain, rather than distribute, its net long-term capital gains and pay tax on such gains. In this case, the A-1 Series would elect to have holders of Series A-1 common shares include their proportionate share of such undistributed long-term capital gains in their income and receive a corresponding credit for their proportionate share of the tax paid by the A-1 Series. Holders of Series A-1 common shares would then increase their adjusted basis in such Series A-1 common shares by the difference between the designated amounts included in their long-term capital gains and the tax deemed paid with respect to their proportionate shares.
If the A-1 Series fails to distribute on an annual basis at least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT capital gain net income for such year and (3) any undistributed taxable income from prior periods, the A-1 Series will be subject to a nondeductible 4% excise tax on the excess of such amount over the sum of (A) the amounts actually distributed (taking into account excess distributions from prior periods) and (B) the amounts of income retained on which the A-1 Series has paid corporate income tax. The A-1 Series intends to distribute its net income to its shareholders in a manner that satisfies the REIT 90% distribution requirement and that protects it from being subject to U.S. federal income tax on its income and the 4% nondeductible excise tax.
It is possible that the A-1 Series, from time to time, may not have sufficient cash to meet the REIT distribution requirements due to timing differences between (1) the actual receipt of cash, including the receipt of distributions from any partnership subsidiaries and (2) the inclusion of items in income by it for U.S. federal income tax purposes. In the event that such timing differences occur, in order to meet the distribution requirements, it might be necessary to arrange for short-term, or possibly long-term, borrowings, or to pay dividends in the form of taxable in-kind distributions of property, including taxable stock dividends. In the case of a taxable stock dividend, holders of Series A-1 common shares would be required to include the dividend as income and would be required to satisfy the tax liability associated with the distribution with cash from other sources including sales of Series A-1 common shares. Both a taxable stock distribution and sale of Series A-1 common shares resulting from such distribution could adversely affect the price of Series A-1 common shares.
The A-1 Series may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to holders of Series A-1 common shares in a later year, which may be included in its deduction for dividends paid for the earlier year. In this case, the A-1 Series may be able to avoid losing its REIT qualification. However, the A-1 Series will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements
The A-1 Series is required to maintain records and request on an annual basis information from specified holders of Series A-1 common shares. These requirements are designed to assist the A-1 Series in determining the actual ownership of its outstanding stock and maintaining its qualification as a REIT.
Prohibited Transactions
Net income the A-1 Series derives from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held as inventory or primarily for sale to customers in the ordinary course of a trade or business by a REIT, by a lower-tier partnership in which the REIT holds an equity interest or by a borrower that has issued a shared appreciation mortgage or similar debt instrument in the REIT. The A-1 Series intends to conduct its operations so that the Property and any other asset owned by it or its pass-through subsidiaries will not be held as inventory or primarily for sale to customers, and that a sale of any such assets will not be in the ordinary course of business. However, whether property is held as inventory or "primarily for sale to customers in the ordinary course of a trade or business" depends on the particular facts and circumstances. No assurance can be given that any particular property in which the A-1 Series holds a direct or indirect interest will not be treated as property held as inventory or primarily for sale to customers, or that certain safe-harbor provisions of the Internal Revenue Code discussed below that prevent such treatment will apply. The 100% tax will not apply to gains from the sale of property by the A-1 Series' TRSs or other taxable corporations, although such income will be subject to tax in the hands of the corporation at regular corporate income tax rates.
The Internal Revenue Code provides a safe harbor that, if met, allows the A-1 Series to avoid being treated as engaged in a prohibited transaction. In order to meet the safe harbor, among other things, (i) the A-1 Series must have held the property for at least two years for the production of rental income (and, in the case of property which consists of land or improvements not acquired through foreclosure, the A-1 Series must have held the property for two years for the production of rental income), (ii) the A-1 Series capitalized expenditures on the property in the two years preceding the sale that are less than 30% of the net selling price of the property, and (iii) the A-1 Series (a) has seven or fewer sales of property (excluding certain property obtained through foreclosure) for the year of sale or (b) either (I) the aggregate tax basis of property sold during the year of sale is 10% or less of the aggregate tax basis of all of its assets as of the beginning of the taxable year, or (II) the aggregate fair market value of property sold during the year of sale is 10% or less of the aggregate fair market value of all of its assets as of the beginning of the taxable year, and (III) in the case of either (I) or (II), substantially all of the marketing and development expenditures with respect to the property sold are made through an independent contractor from whom the A-1 Series derives no income. For these purposes, the sale of more than one property to one buyer as part of one transaction constitutes one sale.
Foreclosure Property
Foreclosure property is real property (including interests in real property) and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid on the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was made, entered into or acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes a proper election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property in the hands of the selling REIT.
Although not currently expected, to the extent that the A-1 Series acquires non-performing or distressed debt secured by a real estate asset with a view to subsequently taking control of the collateral (i.e., loan-to-own investments), any property that the A-1 Series acquires through such a transaction will not qualify to be treated as foreclosure property because it will not satisfy condition (2) in the preceding paragraph. However, provided that the income generated by such property is qualifying income for purposes of the 75% gross income test, such income will not be subject to tax at the maximum corporate rate assuming that it is currently distributed to holders of Series A-1 common shares. See "—Requirements for Qualification—General—Annual Distribution Requirements."
Failure to Qualify
In the event that the A-1 Series violates a provision of the Internal Revenue Code that would result in its failure to qualify as a REIT, the A-1 Series may nevertheless continue to qualify as a REIT. Specified relief provisions will be available to the A-1 Series to avoid such disqualification if (1) the violation is due to reasonable cause and not due to willful neglect, (2) the A-1 Series pays a penalty of $50,000 for each failure to satisfy a requirement for qualification as a REIT and (3) the violation does not include a violation under the gross income or asset tests described above (for which other specified relief provisions are available). This cure provision reduces the instances that could lead to its disqualification as a REIT for violations due to reasonable cause. If the A-1 Series fails to qualify for taxation as a REIT in any taxable year and none of the relief provisions of the Internal Revenue Code apply, the A-1 Series will be subject to tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. Distributions to holders of Series A-1 common shares in any year in which the A-1 Series is not a REIT will not be deductible by it, nor will they be required to be made. In this situation, to the extent of current and accumulated earnings and profits, and, subject to limitations of the Internal Revenue Code, distributions to holders of Series A-1 common shares will generally be taxable in the case of noncorporate U.S. holders of Series A-1 common shares at a maximum rate of 20% and dividends in the hands of its corporate U.S. holders of Series A-1 common shares may be eligible for the dividends received deduction. Unless the A-1 Series is entitled to relief under the specific statutory provisions, the A-1 Series will also be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether the A-1 Series will be entitled to statutory relief in all circumstances. Even if the A-1 Series qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income or property. Any distributions paid by the A-1 Series generally will not be eligible for taxation at the preferential U.S. federal income tax rates that currently apply to certain distributions received by individuals from taxable corporations.
Tax Aspects of Investments in Partnerships
General
The A-1 Series will hold the Property through the Property A-1 Subsidiary, which intends to be taxed as a partnership for U.S. federal income tax purposes and may hold other property through an entity that is classified as a partnership for U.S. federal income tax purposes. In general, partnerships are "pass-through" entities that are not subject to U.S. federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are subject to tax on these items without regard to whether the partners receive a distribution from the partnership. The A-1 Series will include in its income its proportionate share of these partnership items for purposes of the various REIT income tests, based on its capital interest in such partnership, and in the computation of the A-1 Series' REIT taxable income. Moreover, for purposes of the REIT asset tests, the A-1 Series includes its proportionate share of assets held by subsidiary partnerships, based on its capital interest in such partnerships (other than for purposes of the 10% value test, for which the determination of its interest in partnership assets will be based on the A-1 Series' proportionate interest in any securities issued by the partnership excluding, for these purposes, certain excluded securities as described in the Internal Revenue Code). Consequently, to the extent that the A-1 Series holds an equity interest in a partnership, such as the Property A-1 Subsidiary, the partnership's assets and operations may affect its ability to continue to qualify as a REIT, even though it may have no control, or only limited influence, over the partnership.
Entity Classification
The ownership by the A-1 Series of equity interests in a partnership involves special tax considerations, including the possibility of a challenge by the IRS of the status of a subsidiary partnership as a partnership, as opposed to an association taxable as a corporation, for U.S. federal income tax purposes. If a subsidiary partnership were treated as an association for U.S. federal income tax purposes, it would be taxable as a corporation and, therefore, generally would be subject to an entity-level tax on its income. In such a situation, the character of the A-1 Series' assets and items of its gross income would change and would preclude it from satisfying the REIT asset tests (particularly the tests generally preventing a REIT from owning more than 10% of the voting securities, or more than 10% of the value of the securities, of a corporation) or the gross income tests as discussed in "—Asset Tests" and "—Gross Income Tests" above, and in turn would prevent the A-1 Series from qualifying as a REIT. See "—Failure to Qualify," above, for a discussion of the effect of the A-1 Series' failure to meet these tests for a taxable year.
In addition, any change in the status of a subsidiary partnership for tax purposes might be treated as a taxable event, in which case the A-1 Series could have taxable income that is subject to the REIT distribution requirements without receiving any cash.
Tax Allocations with Respect to an Investment in a Partnership
Under the Internal Revenue Code and the Treasury Regulations, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for tax purposes in a manner such that the contributing partner is charged with, or benefits from, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of the unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution, and the adjusted tax basis of such property at the time of contribution, or a book-tax difference. Such allocations are solely for U.S. federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners.
Under Section 704(c) of the Internal Revenue Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership or partnership property that has been revalued on the books of the partnership, must be allocated in a manner so that the contributing partners, or partners who held an interest in the partnership at the time of such revaluation, are charged with the unrealized gain or benefit from the unrealized loss associated with the property at the time of such contribution or revaluation. The Property A-1 Subsidiary will use the "traditional method" (without remedial or curative allocations or adjustments to other items to offset the effect of the "ceiling rule") for making Section 704(c) allocations with respect to any contributed or revalued property of the Property A-1 Subsidiary in which the A-1 Series invests. As a result of our investment in the Property A-1 Subsidiary, the Property will be revalued on the books of the Property A-1 Subsidiary. Under the traditional method, which is the least favorable method from the perspective of the A-1 Series, the A-1 Series may be allocated reduced depreciation deductions for tax purposes as a result of such revaluation. In addition, the traditional method could cause the A-1 Series to be allocated taxable gain in excess of its corresponding economic or book gain (or taxable loss that is less than its economic or book loss) with respect to a sale of the Property by the Property A-1 Subsidiary. Therefore, the use of the traditional method could result in the A-1 Series having taxable income that is in excess of economic income and its cash distributions from the Property A-1 Subsidiary. This excess taxable income is sometimes referred to as "phantom income" and will be subject to the REIT distribution requirements as described in "-Annual Distribution Requirements." Because the A-1 Series may rely on cash distributions from the Property A-1 Subsidiary to meet the REIT distributions requirements, the phantom income could adversely affect the A-1 Series' ability to comply with the REIT distribution requirements discussed above and result in holders of Series A-1 common shares recognizing additional dividend income without an increase in distributions.
Taxation of Holders of Series A-1 Common Shares
Taxation of Taxable U.S. Holders of Series A-1 Common Shares
This section summarizes the taxation of U.S. holders of Series A-1 common shares that are not tax-exempt organizations.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Series A-1 common shares, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding Series A-1 common shares should consult its tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition of Series A-1 common shares by the partnership.
Distributions. Provided that the A-1 Series qualifies as a REIT, distributions made to taxable U.S. holders of Series A-1 common shares out of its current or accumulated earnings and profits, and not designated as capital gain dividends, will generally be taken into account by such holders as ordinary dividend income and will not be eligible for the dividends received deduction for corporations. In determining the extent to which a distribution with respect to Series A-1 common shares constitutes a dividend for U.S. federal income tax purposes, its earnings and profits will be allocated first to distributions with respect to its preferred stock, if any is outstanding, and then to its common stock. Dividends received from REITs are generally not eligible to be taxed at the preferential qualified dividend income rates currently applicable to noncorporate U.S. holders of Series A-1 common shares who receive dividends from taxable subchapter C corporations.
In addition, distributions from the A-1 Series that are designated as capital gain dividends will be taxed to taxable U.S. holders of Series A-1 common shares as long-term capital gains, to the extent that they do not exceed the A-1 Series' actual net capital gain for the taxable year, without regard to the period for which the U.S. holder has held such Series A-1 common shares. To the extent that the A-1 Series elects under the applicable provisions of the Internal Revenue Code to retain its net capital gains, U.S. holders of Series A-1 common shares will be treated as having received, for U.S. federal income tax purposes, its undistributed capital gains as well as a corresponding credit for taxes paid by us on such retained capital gains.
U.S. holders of Series A-1 common shares will increase their adjusted tax basis in such Series A-1 common shares by the difference between their allocable share of such retained capital gain and their share of the tax paid by the A-1 Series. Corporate U.S. holders of Series A-1 common shares may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at maximum U.S. federal rates of 20% in the case of noncorporate U.S. holders of Series A-1 common shares, and 35% for corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for noncorporate U.S. holders of Series A-1 common shares, to the extent of previously claimed depreciation deductions.
A portion of the A-1 Series' distributions may be treated as a return of capital for U.S. federal income tax purposes. As a general matter, a portion of the A-1 Series' distributions will be treated as a return of capital for U.S. federal income tax purposes if the aggregate amount of its distributions for a year exceeds its current and accumulated earnings and profits for that year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder's adjusted tax basis in the holder's Series A-1 common shares, and to the extent that it exceeds the holder's adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. As a general matter, any such gain will be long-term capital gain if Series A-1 common shares have been held for more than one year. In addition, any dividend declared by the A-1 Series in October, November or December of any year and payable to a U.S. holder of Series A-1 common shares of record on a specified date in any such month will be treated as both paid by the A-1 Series and received by a U.S. holder of Series A-1 common shares on December 31 of such year, provided that the dividend is actually paid by the A-1 Series before the end of January of the following calendar year.
With respect to noncorporate U.S. holders of Series A-1 common shares, the A-1 Series may elect to designate a portion of its distributions paid to such U.S. holders of Series A-1 common shares as "qualified dividend income." A portion of a distribution that is properly designated as qualified dividend income is taxable to noncorporate U.S. holders of Series A-1 common shares as capital gain, provided that the U.S. holder of Series A-1 common shares has held such Series A-1 common shares with respect to which the distribution is made for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which such Series A-1 common shares became ex-dividend with respect to the relevant distribution. The maximum amount of the A-1 Series' distributions eligible to be designated as qualified dividend income for a taxable year is equal to the sum of:
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(1) | the qualified dividend income received by the A-1 Series during such taxable year from subchapter C corporations (including any TRSs); |
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(2) | the excess of any "undistributed" REIT taxable income recognized during the immediately preceding year over the U.S. federal income tax paid by the A-1 Series with respect to such undistributed REIT taxable income; and |
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(3) | the excess of any income recognized during the immediately preceding year attributable to the sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a non-REIT corporation or had appreciated at the time its REIT election became effective over the U.S. federal income tax paid by the A-1 Series with respect to such built-in gain. |
Generally, dividends that the A-1 Series receives will be treated as qualified dividend income for purposes of (1) above if the dividends are received from a domestic subchapter C corporation, such as any TRSs, and specified holding period and other requirements are met.
To the extent that the A-1 Series has available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that must be made in order to comply with the REIT distribution requirements. See "—Requirements for Qualification—General—Annual Distribution Requirements." Such losses, however, are not passed through to U.S. holders of Series A-1 common shares and do not offset income of U.S. holders of Series A-1 common shares from other sources, nor do they affect the character of any distributions that are actually made by the A-1 Series, which are generally subject to tax in the hands of U.S. holders of Series A-1 common shares to the extent that the A-1 Series has current or accumulated earnings and profits.
Dispositions of Series A-1 Common Shares. In general, a U.S. holder of Series A-1 common shares will realize gain or loss upon the sale, redemption or other taxable disposition of Series A-1 common shares in an amount equal to the difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. holder's adjusted tax basis in Series A-1 common shares at the time of the disposition. A U.S. holder's adjusted tax basis in Series A-1 common shares generally will equal the U.S. holder's acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. holder of Series A-1 common shares (as discussed above), less tax deemed paid on it and reduced by returns of capital. In general, capital gains recognized by individuals and other noncorporate U.S. holders of Series A-1 common shares upon the sale or disposition of Series A-1 common shares will be subject to a maximum U.S. federal income tax rate of 20% if such Series A-1 common shares were held for more than 12 months, and will be taxed at ordinary income rates (of up to 39.6%) if such Series A-1 common shares are held for 12 months or less. Gains recognized by U.S. holders of Series A-1 common shares that are corporations are subject to U.S. federal income tax at a maximum rate of 35%, whether or not classified as long-term capital gains. The IRS has the authority to prescribe, but has not yet prescribed, regulations that would apply a capital gain tax rate of 25% (which is generally higher than the long-term capital gain tax rates for noncorporate holders) to a portion of capital gain realized by a noncorporate holder on the sale of REIT stock or depositary shares that would correspond to the REIT's "unrecaptured Section 1250 gain."
Prospective U.S. holders of Series A-1 common shares are advised to consult their tax advisors with respect to their capital gain tax liability. Capital losses recognized by a U.S. holder of Series A-1 common shares upon the disposition of Series A-1 common shares held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the U.S. holder but not ordinary income (except in the case of noncorporate taxpayers, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of Series A-1 common shares by a U.S. holder who has held such Series A-1 common shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from the A-1 Series that were required to be treated by the U.S. holder of such Series A-1 common shares as long-term capital gain.
If a U.S. holder of Series A-1 common shares recognizes a loss upon a subsequent disposition of its Series A-1 common shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of recently adopted Treasury Regulations involving "reportable transactions" could apply, with a resulting requirement to separately disclose the loss generating transactions to the IRS. Although these regulations are directed towards "tax shelters," they are written quite broadly and apply to transactions that would not typically be considered tax shelters. Significant penalties apply for failure to comply with these requirements. You should consult your tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of Series A-1 common shares, or transactions that might be undertaken directly or indirectly by us. Moreover, you should be aware that the A-1 Series and other participants in transactions involving the A-1 Series (including its advisors) might be subject to disclosure or other requirements pursuant to these regulations.
Passive Activity Losses and Investment Interest Limitations
Distributions made by the A-1 Series and gain arising from the sale or exchange by a U.S. holder of Series A-1 common shares will not be treated as passive activity income. As a result, U.S. holders of Series A-1 common shares will not be able to apply any "passive losses" against income or gain relating to Series A-1 common shares. Distributions made by the A-1 Series, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation. A U.S. holder of Series A-1 common shares that elects to treat capital gain dividends, capital gains from the disposition of stock or qualified dividend income as investment income for purposes of the investment interest limitation will be taxed at ordinary income rates on such amounts.
Expansion of Medicare Tax on Unearned Income
Federal legislation requires certain U.S. holders of Series A-1 common shares that are individuals, estates, or trusts to pay an additional 3.8% tax on "net investment income," which includes, among other things, dividends on and gains from the sale or other disposition of stock. Prospective U.S. holders of Series A-1 common shares should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of Series A-1 common shares.
Foreign Accounts
Dividends, and beginning July 1, 2017, gross proceeds from the sale or other disposition of Series A-1 common shares paid, to "foreign financial institutions" may be subject to withholding at a rate of 30%. U.S. holders of Series A-1 common shares that hold their Series A-1 common shares through "foreign financial institutions" should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of Series A-1 common shares.
Taxation of Tax-Exempt U.S. Holders of A-1 Series Common Shares
U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. However, they are subject to taxation on their unrelated business taxable income, which is referred to in this registration statement as unrelated business taxable income, or "UBTI." Although many investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt U.S. holder has not held Series A-1 common shares as "debt financed property" within the meaning of the Internal Revenue Code (i.e., where the acquisition or ownership of the property is financed through a borrowing by the tax-exempt U.S. holder of Series A-1 common shares), and (2) Series A-1 common shares are not otherwise used in an unrelated trade or business, distributions from the A-1 Series and income from the sale of Series A-1 common shares generally should not give rise to UBTI to a tax-exempt U.S. holder.
Tax-exempt U.S. holders of Series A-1 common shares that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, are subject to different UBTI rules, which generally will require them to characterize distributions from us as UBTI unless they are able to properly claim a deduction for amounts set aside or placed in reserve for specific purposes so as to offset the income generated by their investment in Series A-1 common shares. These prospective investors should consult their tax advisors concerning these "set aside" and reserve requirements.
In certain circumstances, a pension trust (1) that is described in Section 401(a) of the Internal Revenue Code, (2) is tax exempt under Section 501(a) of the Internal Revenue Code, and (3) that owns more than 10% of the A-1 Series could be required to treat a percentage of the dividends from the A-1 Series as UBTI if the A-1 Series is a "pension-held REIT." The A-1 Series will not be a pension-held REIT unless (1) either (A) one pension trust owns more than 25% of the value of its stock or (B) a group of pension trusts, each individually holding more than 10% of the value of its stock, collectively owns more than 50% of such stock and (2) the A-1 Series would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code provides that stock owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of the value of the outstanding stock of a REIT is owned, directly or indirectly, by five or fewer "individuals" (as defined in the Internal Revenue Code to include certain entities), as owned by the beneficiaries of such trusts.
Tax-exempt U.S. holders of Series A-1 common shares are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign tax consequences of the acquisition, ownership and disposition of its stock.
Taxation of Non-U.S. Holders of Series A-1 Common Shares
The following is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of Series A-1 common shares applicable to non-U.S. holders. The discussion is based on current law and is for general information only. It addresses only selective and not all aspects of U.S. federal income taxation.
Ordinary Dividends. The portion of dividends received by non-U.S. holders of Series A-1 common shares payable out of the A-1 Series' earnings and profits that are not attributable to gains from sales or exchanges of U.S. real property interests and which are not effectively connected with a U.S. trade or business of the non-U.S. holder of Series A-1 common shares generally will be treated as ordinary income and will be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or eliminated by an applicable income tax treaty. Under some treaties, however, lower rates generally applicable to dividends do not apply to dividends from REITs.
In general, non-U.S. holders of Series A-1 common shares will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of Series A-1 common shares. In cases where the dividend income from a non-U.S. holder's investment in its Series A-1 common shares is treated as effectively connected with the non-U.S. holder's conduct of a U.S. trade or business, the non-U.S. holder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. holders of Series A-1 common shares are taxed with respect to such dividends, and may also be subject to the 30% branch profits tax (unless reduced or eliminated by an applicable income tax treaty) on the income after the application of the income tax in the case of a non-U.S. holder of Series A-1 common shares that is a corporation.
Non-Dividend Distributions. Unless (1) the Series A-1 common shares constitute U.S. real property interests, or "USRPIs," or (2) either (A) the non-U.S. holder's investment in Series A-1 common shares is effectively connected with a U.S. trade or business conducted by such non-U.S. holder of Series A-1 common shares (in which case the non-U.S. holder will be subject to the same treatment as U.S. holders of Series A-1 common shares with respect to such gain) or (B) the non-U.S. holder of Series A-1 common shares is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States (in which case the non-U.S. holder will be subject to a 30% tax on the individual's net capital gain for the year), distributions by us which are not treated as dividends for U.S. federal income tax purposes (i.e., not treated as being paid out of the A-1 Series' current and accumulated earnings and profits) will not be subject to U.S. federal income tax. If it cannot be determined at the time at which a distribution is made whether or not the distribution will constitute a dividend for U.S. federal income tax purposes, the distribution will be subject to withholding at the rate applicable to dividends. However, the non-U.S. holder of Series A-1 common shares may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of its current and accumulated earnings and profits and, therefore, did not constitute a dividend for U.S. federal income tax purposes. In addition, if the Series A-1 common shares constitute USRPIs, as described below, distributions by the A-1 Series in excess of the sum of its earnings and profits plus the non-U.S. holder's adjusted tax basis in its Series A-1 common shares will be taxed under the Foreign Investment in Real Property Tax Act of 1980, or "FIRPTA," at the rate of tax, including any applicable capital gains rates, that would apply to a U.S. holder of Series A-1 common shares of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax will be enforced by a withholding tax (at a rate of 10%) of the amount by which the distribution exceeds the holder of Series A-1 common share's share of the A-1 Series' earnings and profits plus the holder's adjusted basis in its stock. As discussed below, the A-1 Series expects that the Series A-1 common shares will not be treated as USRPIs in the hands of a non-U.S. holder who holds less than 5% of the Series A-1 common shares.
Because it will not generally be possible for us to determine the extent to which a distribution will be from the A-1 Series' current or accumulated earnings and profits at the time the distribution is made, the A-1 Series intends to withhold and remit to the IRS 30% of distributions to non-U.S. holders of Series A-1 common shares (other than distributions that are deemed to be attributable to USRPI capital gains, as described in greater detail below) unless (i) a lower treaty rate applies and the non-U.S. holder of Series A-1 common shares provides an IRS Form W-8BEN or W-8BEN-E evidencing eligibility for that reduced treaty rate with us or (ii) the non-U.S. holder of Series A-1 common shares files an IRS Form W‑8ECI with the A-1 Series claiming that the distribution is income effectively connected with the non-U.S. holder's trade or business. However, if the A-1 Series determines that any of the shares held by a non-U.S. holder is likely to be treated as a USRPI, the A-1 Series intends to withhold and remit to the IRS at least 10% of distributions on such shares even if a lower rate would apply under the preceding discussion.
Capital Gain Dividends. Under FIRPTA, a distribution made by the A-1 Series to a non-U.S. holder of Series A-1 common shares, to the extent attributable to gains from dispositions of USRPIs held by us directly or through pass-through subsidiaries, or "USRPI capital gains," will be considered effectively connected with a U.S. trade or business of the non-U.S. holder of Series A-1 common shares and will be subject to U.S. federal income tax at the rates applicable to U.S. holders of Series A-1 common shares, without regard to whether the distribution is designated as a capital gain dividend. In addition, the A-1 Series will be required to withhold tax equal to 35% of the amount of any distribution to the extent it is attributable to USRPI capital gains. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder of Series A-1 common shares that is a corporation. However, this 35% withholding tax will not apply to any distribution with respect to any class of the A-1 Series stock which is "regularly traded" on an established securities market located in the United States (as defined by applicable Treasury Regulations) if the non-U.S. holder did not own more than 5% of such class of stock at any time during the one-year period ending on the date of such dividend. Instead, any such distribution will be treated as a distribution subject to the rules discussed above under "—Taxation of Holders of Series A-1 Common Shares—Taxation of Non-U.S. Holders of Series A-1 Common Shares—Ordinary Dividends." Also, the branch profits tax will not apply to such a distribution.
Capital gain dividends received by a non-U.S. holder from a REIT that are not attributable to USRPI capital gains, if any, are generally not subject to U.S. federal income or withholding tax, unless either (1) the non-U.S. holder's investment in Series A-1 common shares is effectively connected with a U.S. trade or business conducted by such non-U.S. holder (in which case the non-U.S. holder will be subject to the same treatment as U.S. holders of Series A-1 common shares with respect to such gain) or (2) the non-U.S. holder of Series A-1 common shares is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States (in which case the non-U.S. holder will be subject to a 30% tax on the individual's net capital gain for the year). The A-1 Series intends to withhold and remit to the IRS 35% of a distribution to a non-U.S. holder of Series A-1 common shares only to the extent that such distribution is attributable to USRPI capital gains. The amount withheld is creditable against the non-U.S. holder of Series A-1 common share's U.S. federal income tax liability or refundable when the non-U.S. holder properly and timely files a tax return with the IRS.
Dispositions of Series A-1 Common Shares. Unless the Series A-1 common shares constitute a USRPI, a sale of Series A-1 common shares by a non-U.S. holder generally will not be subject to U.S. federal income taxation under FIRPTA. The Series A-1 common shares will not be treated as a USRPI if less than 50% of the A-1 Series' assets throughout a prescribed testing period consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. Even if this test is not met, the Series A-1 common shares nonetheless will not constitute a USRPI if the A-1 Series is a "domestically controlled qualified investment entity." A REIT is a domestically controlled qualified investment entity if, at all times during a specified testing period (generally the lesser of the five-year period ending on the date of disposition of Series A-1 common shares or the period of existence), less than 50% in value of its outstanding stock is held directly or indirectly by non-U.S. holders of Series A-1 common shares. The A-1 Series expects to be a domestically controlled qualified investment entity and, therefore, the sale of Series A-1 common shares should not be subject to taxation under FIRPTA. Because the Series A-1 common shares will be publicly traded, however, no assurance can be given that the A-1 Series will be a domestically controlled qualified investment entity.
Specific "wash sale" rules applicable to sales of shares in a REIT could result in gain recognition, taxable under FIRPTA, upon the sale of Series A-1 common shares. These rules would apply if a non-U.S. holder (1) disposes of Series A-1 common shares within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been taxable to such non-U.S. holder as gain from the sale or exchange of a USRPI, (2) is treated as acquiring, or as entering into a contract or option to acquire, other Series A-1 common shares during the 61-day period that begins 30 days prior to such ex-dividend date, and (3) if Series A-1 common shares are "regularly traded" on an established securities market in the United States, such non-U.S. holder has owned more than 5% of the Series A-1 common shares at any time during the one-year period ending on the date of such distribution.
In the event that the A-1 Series does not constitute a domestically controlled qualified investment entity, a non-U.S. holder's sale of Series A-1 common shares nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (1) the Series A-1 common shares are "regularly traded on an established securities market located in the United States" (as defined by applicable Treasury Regulations) and (2) the selling non-U.S. holder owned, actually or constructively, 5% or less of the outstanding Series A-1 common shares at all times during the five-year period ending on the date of sale. The A-1 Series believes that the Series A-1 common shares will be regularly traded on an established securities market located in the United States; however, no assurance can be given that the Series A-1 common shares will continue to be regularly traded on an established securities market located in the United States.
If gain on the sale of Series A-1 common shares were subject to taxation under FIRPTA, the non-U.S. holder would be subject to the same treatment as a U.S. holder of Series A-1 common shares with respect to such gain, including applicable alternative minimum tax (and a special alternative minimum tax in the case of non-resident alien individuals), and the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.
Gain from the sale of Series A-1 common shares that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. holder in two cases: (1) if the non-U.S. holder's investment in the Series A-1 common shares is effectively connected with a U.S. trade or business conducted by such non-U.S. holder, the non-U.S. holder of Series A-1 common shares will be subject to the same treatment as a U.S. holder of Series A-1 common shares with respect to such gain or (2) if the non-U.S. holder of Series A-1 common shares is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, the nonresident alien individual will be subject to a 30% tax on the individual's capital gain.
Backup Withholding and Information Reporting
The A-1 Series will report to U.S. holders of Series A-1 common shares and the IRS the amount of dividends paid during each calendar year and the amount of any tax withheld. Under the backup withholding rules, a U.S. holder of Series A-1 common shares may be subject to backup withholding (the current rate is 28%) with respect to dividends paid, unless the holder (1) is a corporation or comes within other exempt categories and, when required, demonstrates this fact or (2) provides a taxpayer identification number or social security number, certifies under penalties of perjury that such number is correct and that such holder is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A U.S. holder of Series A-1 common shares that does not provide his or her correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. In addition, the A-1 Series may be required to withhold a portion of capital gain distribution to any U.S. holder of Series A-1 common shares who fails to certify its non-foreign status.
The A-1 Series must report annually to the IRS and to each non-U.S. holder of Series A-1 common shares the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder of Series A-1 common shares resides under the provisions of an applicable income tax treaty. A non-U.S. holder of Series A-1 common shares may be subject to backup withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of Series A-1 common shares within the United States is subject to both backup withholding and information reporting requirements unless the beneficial owner certifies under penalties of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person) or the holder otherwise establishes an exemption. Payment of the proceeds of a sale of Series A-1 common shares conducted through certain United States related financial intermediaries is subject to information reporting requirements (but not backup withholding) unless the financial intermediary has documentary evidence in its records that the beneficial owner is a non-U.S. holder and specified conditions are met or an exemption is otherwise established.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder's U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Foreign Accounts
Withholding taxes may be imposed on U.S. source payments made to "foreign financial institutions" and certain other non-U.S. entities and beginning January 1, 2017, to the disposition proceeds of U.S. securities. Under these withholding rules, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to U.S. holders of Series A-1 common shares who own Series A-1 common shares through foreign accounts or foreign intermediaries and to certain non-U.S. holders of Series A-1 common shares. The legislation imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, Series A-1 common shares paid to a foreign financial institution (that is not otherwise exempt) or to a foreign entity other than a financial institution, unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign entity that is not a financial institution either certifies it does not have any substantial United States owners or furnishes identifying information regarding each substantial United States owner. If the payee is a foreign financial institution (that is not otherwise exempt) it must either enter into an agreement with the U.S. Treasury requiring, among other things, that it undertake to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these reporting and other requirements, or in the case of a foreign financial institution that is resident in a jurisdiction that has entered into an intergovernmental agreement to implement this legislation, comply with the revised diligence and reporting obligations of such intergovernmental agreement. Prospective holders of Series A-1 common shares should consult their tax advisors regarding this legislation.
State, Local and Foreign Taxes
The A-1 Series and its subsidiaries and holders of Series A-1 common shares may be subject to state, local and foreign taxation in various jurisdictions, including those in which holders or the A-1 Series transact business, own property or reside. The state, local or foreign tax treatment of the A-1 Series and holders of Series A-1 common shares may not conform to the U.S. federal income tax treatment discussed above. Any foreign taxes incurred by us would not pass through to holders of Series A-1 common shares as a credit against their U.S. federal income tax liability. Prospective investors should consult their tax advisor regarding the application and effect of state, local and foreign income and other tax laws on an investment in Series A-1 common shares.
Proposed Legislation or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to the A-1 Series and holders of Series A-1 common shares may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in Series A-1 common shares.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement or other employee benefit plan (or a plan), subject to the Employee Retirement Income Security Act of 1974, as amended (or ERISA), should consider the fiduciary standards under ERISA in the context of the plan's particular circumstances before authorizing an investment of a portion of such plan's assets in the common shares. Accordingly, among other things, such fiduciary should consider (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA, (ii) whether the investment is in accordance with the documents and instruments governing the plan as required by Section 404(a)(1)(D) of ERISA, and (iii) whether the investment is prudent under ERISA. In addition to the imposition of general fiduciary standards of investment prudence and diversification, ERISA, and the corresponding provisions of the Internal Revenue Code, prohibit a wide range of transactions involving the assets of the plan and persons who have certain specified relationships to the plan ("parties in interest" within the meaning of ERISA, "disqualified persons" within the meaning of the Internal Revenue Code). A party in interest or disqualified person who engages in a prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Internal Revenue Code. In addition, the fiduciary of the plan that is engaged in such a non‑exempt prohibited transaction may be subject to penalties under ERISA and the Internal Revenue Code. Thus, a plan fiduciary considering an investment in the common shares also should consider whether the acquisition or the continued holding of the common shares might constitute or give rise to a direct or indirect prohibited transaction that is not subject to an exemption issued by the Department of Labor (or the DOL).
The DOL has issued final regulations (or the DOL Regulations) as to what constitutes assets of an employee benefit plan under ERISA. Under the DOL Regulations, if a plan acquires an equity interest in an entity, which interest is neither a "publicly offered security" nor a security issued by an investment company registered under the 1940 Act, the plan's assets would include, for example, for purposes of the fiduciary responsibility provision of ERISA, both the equity interest and an undivided interest in each of the entity's underlying assets unless certain specified exceptions apply. The DOL Regulations define a publicly offered security as a security that is "widely held," "freely transferable," and either part of a class of securities registered under the Exchange Act or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the public offering occurred). The common shares are being sold in an offering registered under the Securities Act and will be registered under the Exchange Act.
The DOL Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. We expect the Series A-1 common shares to be "widely held" upon completion of the initial public offering.
The DOL Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The DOL Regulations further provide that when a security is part of an offering in which the minimum investment is $10,000 or less, as is the case with this offering, certain restrictions ordinarily will not, alone or in combination, affect the finding that such securities are "freely transferable." We believe that the restrictions imposed under our charter on the transfer of our common shares are limited to the restrictions on transfer generally permitted under the DOL Regulations and are not likely to result in the failure of common shares to be "freely transferable." The DOL Regulations only establish a presumption in favor of the finding of free transferability, and, therefore, no assurance can be given that the DOL will not reach a contrary conclusion.
Assuming that the common shares will be "widely held" and "freely transferable," we believe that our common shares will be publicly offered securities for purposes of the DOL Regulations and that our assets will not be deemed to be "plan assets" of any plan that invests in our common shares.
Certain individuals, including us, ETRE Financial, LLC, our Administrative Agent and any of their respective affiliates may be parties in interest and disqualified persons with respect to plans subject to ERISA or the Internal Revenue Code. Prohibited transactions within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code may arise if common shares are acquired or held by a plan with respect to which we, ETRE Financial, LLC, our Administrative Agent or any of their respective affiliates is a party in interest or a disqualified person. Certain exemptions from the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Internal Revenue Code may be applicable, however, in certain cases, depending in part on the type of plan fiduciary making the decision to acquire the common shares and the circumstances under which such decision is made. Accordingly, each holder of our common shares will be deemed to have represented and agreed that its purchase and holding of such common shares (or any interest therein) will not constitute or result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Internal Revenue Code.
UNDERWRITING
Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Sandler O'Neill & Partners, L.P. is acting as representative, have severally agreed to purchase, and we, on behalf of the A-1 Series, have agreed to sell to them, severally, the number of Series A-1 common shares indicated below:
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Name | Number of shares |
Sandler O'Neill & Partners, L.P. | |
Evercore Group L.L.C. | |
Nomura Securities International, Inc. | |
BTIG, LLC | |
JMP Securities LLC | |
LOYAL3 Securities, Inc. | |
Realty Capital Securities, LLC | |
SMBC Nikko Securities America, Inc. | |
Total | 11,500,000 |
The underwriters and the representative are collectively referred to as the "underwriters" and the "representative," respectively. The underwriters are offering the Series A-1 common shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the Series A-1 common shares offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the Series A-1 common shares offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the Series A-1 common shares directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers. Certain of the underwriters may sell shares to the public through one or more of their affiliates as selling agents. After the initial offering of the Series A-1 common shares, the offering price and other selling terms may from time to time be varied by the representative.
We, on behalf of the A-1 Series, have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 1,150,000 additional Series A-1 common shares at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the Series A-1 common shares by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional Series A-1 common shares as the number listed next to the underwriter's name in the preceding table bears to the total number of Series A-1 common shares listed next to the names of all underwriters in the preceding table. The underwriters have advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority.
The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to the A-1 Series. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional 1,150,000 Series A-1 common shares.
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| Per Share | | No Exercise | | Full Exercise |
Public offering price | | | | | |
Underwriting discounts and commissions | | | | | |
Proceeds, before expenses | | | | | |
The estimated offering expenses payable by us to the underwriters, exclusive of underwriting discounts and commissions, are approximately $250,000.
For up to twenty-four (24) months from the effective date of this offering, the representative has a right of first offer to participate as either the lead book-running manager or a joint book-running manager, subject to certain conditions, in a subsequent offering of Other Property Series by the Company. The representative will not have more than one opportunity to waive or terminate the right of first offer in exchange for any payment or fee, and any such payment or fee will be in compliance with the rules of the Financial Industry Regulatory Authority, Inc.
We have applied to have our Series A-1 common shares listed on the NASDAQ under the trading symbol "ESSF."
The A-1 Series, our Administrative Agent, ETRE and each of our directors and officers have agreed that, without the prior written consent of the representatives on behalf of the underwriters, they will not, during the period ending 180 days after the date of this prospectus:
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• | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase lend or otherwise transfer or dispose of, directly or indirectly, any Series A-1 common shares or any securities convertible into or exercisable or exchangeable for Series A-1 common shares; |
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• | file any registration statement with the SEC relating to the offering of any Series A-1 common shares or any securities convertible into or exercisable or exchangeable for Series A-1 common shares; or |
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• | enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Series A-1 common shares, whether any such transaction described above is to be settled by delivery of Series A-1 common shares or such other securities, in cash or otherwise. |
In addition, the A-1 Series, our Administrative Agent, ETRE and each of our directors and officers have agreed that, without the prior written consent of the representative on behalf of the underwriters, they will not, during the period ending 180 days after the date of this prospectus, make any demand for, or exercise any right with respect to, the registration of any Series A-1 common shares or any security convertible into or exercisable or exchangeable for Series A-1 common shares.
The restrictions described in the immediately preceding paragraph do not apply to:
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• | the sale of Series A-1 common shares to the underwriters; or |
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• | transactions by any person other than us relating to the Series A-1 common shares or other securities acquired in open market transactions after the completion of the offering of the Series A-1 common shares. |
In order to facilitate the offering of the Series A-1 common shares, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Series A-1 common shares. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Series A-1 common shares in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, Series A-1 common shares in the open market to stabilize the price of the Series A-1 common shares. These activities may raise or maintain the market price of the Series A-1 common shares above independent market levels or prevent or retard a decline in the market price of the Series A-1 common shares. The underwriters are not required to engage in these activities and may end any of these activities at any time.
We, on behalf of the A-1 Series, and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representative may agree to allocate a number of Series A-1 common shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.
Pricing of the Offering
Prior to this offering, there has been no public market for the Series A-1 common shares. The price was determined by negotiations between us and the representative. Among the factors considered in determining the price were the A-1 Series' future prospects and those of its industry in general, the Property's revenues, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to the A-1 Series' activities.
Affiliations
The underwriters and their affiliates may from time to time in the future engage in transactions with us and perform services for us in the ordinary course of business.
The LOYAL3 Platform
At our request, the underwriters have reserved up to 8% of the Series A-1 common shares offered by this prospectus to be offered to our partners and individual investors, through a platform administered by LOYAL3 Securities, Inc., which we refer to in this prospectus as the “LOYAL3 Platform.” Such purchases of Series A-1 common shares in this offering through the LOYAL3 Platform will be at the initial public offering price, will be otherwise fee-free to investors and will be in dollar amounts that may include fractional shares. The LOYAL3 Platform is designed to facilitate participation of individual purchasers in initial public offerings in amounts starting at $100. Individual investors in the United States who are interested in purchasing Series A-1 common shares in this offering though the LOYAL3 platform may go to LOYAL3’s website for information about how to become a customer of LOYAL3, which is required to purchase shares through the LOYAL3 Platform. Sales of our Series A-1 common shares by investors using the LOYAL3 Platform will be completed through a batch or combined order process typically only once per day. The LOYAL3 Platform and information on the LOYAL3 website do not form a part of this prospectus. LOYAL3 Securities, Inc. is a U.S.-registered broker-dealer unaffiliated with our company and is acting as a co-manager of this offering.
LEGAL MATTERS
Certain legal matters relating to this offering will be passed upon for us by Clifford Chance US LLP, New York, New York. In addition, the description of U.S. federal income tax consequences contained in the section of the prospectus entitled "U.S. Federal Income Tax Considerations" is based on the opinion of Clifford Chance US LLP. Certain legal matters relating to this offering will be passed upon for the underwriters by Morrison & Foerster LLP, Washington, D.C.
EXPERTS
The balance sheet of ETRE REIT, LLC, Series A-1, as of December 31, 2014, appearing in this Prospectus has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein. Such balance sheet is included in reliance upon such report upon their authority as experts in accounting and auditing.
The combined balance sheet of ETRE REIT, LLC, ETRE REIT, LLC Series A-1, and ETRE REIT, LLC Series A-2 as of December 31, 2014, appearing in this Prospectus has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein. Such balance sheet is included in reliance upon such report given upon their authority as experts in accounting and auditing.
The Statement of Revenues and Certain Operating Expenses of State Street Financial Center for the year ended December 31, 2014 (which report expresses an unmodified opinion and includes an emphasis-of-matter paragraph referring to the purpose and basis of presentation of the Statement) included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and is included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S‑11, including exhibits and schedules filed with the registration statement of which this prospectus is a part, under the Securities Act with respect to the Series A-1 common shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to us, the A-1 Series and the Series A-1 common shares to be sold in this offering, reference is made to the registration statement, including the exhibits and schedules to the registration statement. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at 1‑800‑SEC‑0300. Copies of all or a portion of the registration statement may be obtained from the public reference room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you, free of charge, on the SEC's website at www.sec.gov.
As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and will file periodic reports, proxy statements and will make available to our shareholders annual reports containing audited financial information for each year and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.
INDEX TO FINANCIAL STATEMENTS
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ETRE REIT, LLC, Series A-1 Pro Forma Financial Statements | |
Summary Historical and Unaudited Pro Forma Financial and Other Data | F-2 |
Unaudited Pro Forma Balance Sheet as of March 31, 2015 | F-3 |
Unaudited Pro Forma Statement of Operations for the Three Months Ended March 31, 2015 | F-4 |
Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 2014 | F-5 |
Notes to Unaudited Pro Forma Financial Statements | F-6 |
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State Street Financial Center Statements of Revenue and Certain Operating Expenses | |
Independent Auditors’ Report | F-10 |
Statements of Revenues and Certain Operating Expenses for the Three Months Ended March 31, 2015 (Unaudited) and for the Year Ended December 31, 2014 | F-11 |
Notes to Statements of Revenue and Certain Operating Expenses | F-12 |
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ETRE REIT, LLC, ETRE REIT, LLC Series A-1, ETRE REIT, LLC, Series A-2 | |
Report of Independent Registered Public Accounting Firm | F-14 |
Combined Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014 | F-15 |
Notes to the Combined Balance Sheets | F-16 |
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ETRE REIT, LLC, Series A-1 | |
Report of Independent Registered Public Accounting Firm | F-18 |
Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014 | F-19 |
Notes to the Balance Sheets | F-20 |
ETRE REIT, LLC, SERIES A-1
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL AND OTHER DATA
The following sets forth ETRE REIT, LLC, Series A-1’s (“A-1 Series”) unaudited pro forma balance sheet as of March 31, 2015 and its unaudited pro forma statements of operations for the three months ended March 31, 2015 and for the year ended December 31, 2014. The unaudited pro forma financial information is being presented as if this offering, including application of the net proceeds therefrom as set forth under “Use of Proceeds,” all had occurred on March 31, 2015 for balance sheet purposes and as of January 1, 2014 for the purpose of the statements of operations. The pro forma balance sheet and statements of operations are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor are they indicative of future operating results.
Concurrently with the completion of this offering, the A-1 Series will use the net proceeds from this offering to acquire an indirect 48.87% interest in State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts (the “Property”).
The Property is currently owned directly by Lincoln Street Property Owner, LLC (the “Property Owner”). The A-1 Series has executed a contribution agreement with Lincoln Street Mezz, LLC, the parent company of the Property Owner, and Lincoln Street Holdings, LLC, the parent company of Lincoln Street Mezz, LLC, which provides for the contribution of $155 million of the net proceeds of this offering to Lincoln Street Mezz, LLC in exchange for 48.87% of the outstanding equity interests of Lincoln Street Mezz, LLC, subject to adjustments set forth in the contribution agreement. In connection with this contribution, Lincoln Street Mezz, LLC will distribute the net proceeds of this contribution to Lincoln Street Holdings, LLC and convert from a limited liability company into a limited partnership and become ETRE Property A-1, L.P (the “Property A-1 Subsidiary”).
The pro forma financial statements are based upon available information, preliminary estimates and certain assumptions that we believe are reasonable under the circumstances, as set forth in the notes to the pro forma financial statements. You should read the following information together with the information contained under the captions “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations”, the A-1 Series’ audited balance sheet and the notes thereto included in this prospectus, the Property's audited statement of revenues and certain operating expenses and the notes thereto included in this prospectus, and the financial statements of State Street Corporation, the ultimate parent of the lessee of the State Street Financial Center, which can be found at www.sec.gov.
ETRE REIT, LLC, SERIES A-1
UNAUDITED PRO FORMA BALANCE SHEET
March 31, 2015
|
| | | | | | | | | | | | | | | | | | | |
| | | Pro Forma Adjustments | | |
(US$) | ETRE REIT, LLC, Series A-1 | | Proceeds from Offering | | Repurchase of Initial 100 Shares | | Acquisition of Partnership Interest | | ETRE REIT, LLC, Series A-1 Pro Forma |
Assets: | | | | | | | | | |
Cash | $ | 1,000 |
| | $ | 160,006,000 |
| [A] | $ | (1,000 | ) | [A] | $ | (160,006,000 | ) | [A] | — |
|
Investment in ETRE Property A-1, L.P. | — |
| | — |
|
| — |
| | 160,006,000 |
| [A] | 160,006,000 |
|
Total assets | $ | 1,000 |
| | $ | 160,006,000 |
| | $ | (1,000 | ) | | $ | — |
| | $ | 160,006,000 |
|
| | | | | | | | | |
Equity: | | | | | | | | | |
Class A common shares | $ | 1,000 |
| | $ | 173,000,000 |
| [A] | $ | (1,000 | ) | | $ | — |
| | $ | 173,000,000 |
|
| — |
| | (11,264,000 | ) | [B] | — |
| | — |
| | (11,264,000 | ) |
| — |
| | (1,730,000 | ) | [B] | — |
| | — |
| | (1,730,000 | ) |
Total Equity | $ | 1,000 |
| | $ | 160,006,000 |
| | $ | (1,000 | ) | | $ |
| | $ | 160,006,000 |
|
The accompanying notes are an integral part of these unaudited pro forma financial statements.
ETRE REIT, LLC SERIES A-1
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2015
|
| | | | | | | | | |
(US$) | ETRE REIT, LLC, Series A-1 | | Pro Forma Adjustments | | ETRE REIT, LLC, Series A-1 Pro Forma |
Equity in (loss) of ETRE Property A-1, L.P. | $ | | $ | (1,469,729 | ) | [C] | $ | (1,469,729 | ) |
Net loss | $ | | $ | (1,469,729 | ) | | $ | (1,469,729 | ) |
| | | | | |
Pro forma weighted average common shares outstanding - basic and diluted | [D] | 11,535,333 |
|
Pro forma basic (loss) per share | | | | [E] | $ | (0.13 | ) |
Pro forma diluted (loss) per share | | | | [F] | $ | (0.13 | ) |
The accompanying notes are an integral part of these unaudited pro forma financial statements.
ETRE REIT, LLC SERIES A-1
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
|
| | | | | | | | | | | | |
(US$) | ETRE REIT, LLC, Series A-1 | | Pro Forma Adjustments | | ETRE REIT, LLC, Series A-1 Pro Forma |
Equity in (loss) of ETRE Property A-1, L.P. | | | $ | (5,510,495 | ) | [C] | | $ | (5,510,495 | ) |
Net loss | $ | — |
| | $ | (5,510,495 | ) | | | $ | (5,510,495 | ) |
| | | | | | |
Pro forma weighted average common shares outstanding - basic and diluted | [D] | | 11,535,333 |
|
Pro forma basic earnings (loss) per share | [E] | | $ | (0.48 | ) |
Pro forma diluted earnings (loss) per share | | [F] | | $ | (0.48 | ) |
The accompanying notes are an integral part of these unaudited pro forma financial statements.
ETRE REIT, LLC, SERIES A-1
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
The pro forma balance sheet and statements of operations adjust the ETRE REIT, LLC, Series A-1 (the “A-1 Series”) financial statements to give effect to the purchase of a 48.87% interest in ETRE Property A-1, L.P. (the “Property A-1 Subsidiary), which following the IPO (as defined below), will own the State Street Financial Center, a one million square foot, 36-story office tower located in Boston, Massachusetts (the “Property”). The remaining 51.13% interest in Property A-1 Subsidiary will be owned by the current Property owners (the “Contributors”). The Property is encumbered with a $775.0 million first mortgage.
The A-1 Series is a separate series of ETRE REIT, LLC, a newly organized Delaware series limited liability company. The A-1 Series intends to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes. To facilitate this transaction, ETRE REIT, LLC will issue common shares in the A‑1 Series ("Series A-1 common shares") in an initial public offering (the "IPO") and a concurrent private placement to the Administrative Agent (as defined below). To summarize, the transaction will be structured as follows:
(A) 11,535,333 Series A-1 common shares totaling approximately $173.0 million (the "Equity") will be issued and approximately 23,602,000 units of partnership interest ("OP Units") will be issued by the Property A-1 Subsidiary, comprised of 11,535,333 OP Units, representing a general partner interest, to the A-1 Series and 12,066,667 OP Units, representing a limited partner interest, to the Contributors.
The proceeds from the offering and the concurrent private placement will be used approximately as follows:
•$155 million towards the acquisition of the 48.87% interest in the Property A-1 Subsidiary,
•$3 million of cash to be held by the Property A-1 Subsidiary to be utilized for tenant improvements, leasing commissions, capital expenditures, and other operating expenses,
•$2 million of transaction due diligence and related costs in connection with the acquisition of the 48.87% interest in the Property A-1 Subsidiary, and
• $13 million in offering and related costs (further discussed in note (B) below).
In addition, $1,000 will be utilized towards the repurchase of 100 previously issued and outstanding Series A-1 common shares from the initial member of the A-1 Series.
(B) Transaction Costs
The A-1 Series anticipates total transaction costs of approximately $13 million, including the following:
|
| | | |
Underwriting fee and other IPO and private placement costs(1) | $ | 11,264,000 |
|
Administrative services fee (at acquisition)(2) | 1,730,000 |
|
Total transaction costs | $ | 12,994,000 |
|
(1) These amounts are included as a reduction to equity in the pro forma balance sheet.
(2) Due to the non-recurring nature of these costs, they are not included in the pro forma income statement. Such amounts are included as a reduction to equity in the pro forma balance sheet. See Note (C1).
(C) Equity in (Loss) of the Property A-1 Subsidiary
Following the IPO and the concurrent private placement, the A-1 Series’ operations, through its interest in the Property A-1 Subsidiary, will consist primarily of its pro rata interest in revenues and operating expenses of the Property, and the A-1 Series will utilize the equity method of accounting for its interest in the Property A-1 Subsidiary. The difference in the A-1 Series’ cost basis of the investment and the A-1 Series’ proportional interest in the equity of the Property A-1 Subsidiary will be tracked separately for purposes of calculating depreciation, amortization, revenue and expense, as applicable (see Note C2).
In calculating the A-1 Series’ 48.87% share of equity in net loss and the net loss of ETRE Property A-1 L.P. in the accompanying pro forma statements of operations for the three months ended March 31, 2015 and for the year ended December 31, 2014, the Property Owner's financial statements were used as the source of information. Total revenues and total operating expenses included in the Property Owner’s financial statements were adjusted by management of the A-1 Series to reflect the following: (1) adjustments to total revenues in accordance with accounting principles generally accepted in the United States (“GAAP”) and (2) pro forma adjustments to total operating expenses for (i) depreciation and amortization, (ii) the administrative services fee, (iii) the asset management fee, and (iv) interest expense, as further summarized in the following table:
|
| | | | | | | | |
(US$) | For the Three Months Ended March 31, 2015 | | For the Year Ended December 31, 2014 | |
Total revenues | $ | 17,735,768 |
| | $ | 70,948,675 |
| |
Total operating expenses | (4,520,392 | ) | | (17,317,920 | ) | |
Depreciation and amortization | (7,486,615 | ) | [C2] | (29,946,460 | ) | [C2] |
Income from operations | 5,728,761 |
| | 23,684,295 |
| |
Interest | (8,446,875 | ) | [C4] | (33,787,500 | ) | [C4] |
Administrative services fee | (157,154 | ) | [C1] | (636,308 | ) | [C1] |
Asset management fees | (132,154 | ) | [C3] | (536,308 | ) | [C3] |
Net loss | $ | (3,007,422 | ) | | $ | (11,275,821 | ) | |
| | | | |
Net loss attributable to A-1 Series (48.87%) | $ | (1,469,729 | ) | | $ | (5,510,495 | ) | |
The basis for all estimates made by management in connection with the above adjustments are discussed in Notes C1 through C4, which follow.
(C1) Administrative Services Fee
ETRE Asset Management, LLC (the “Administrative Agent”), an affiliate of the managing member of ETRE REIT, LLC, will provide certain administrative and advisory services to the A-1 Series and the Property A-1 Subsidiary, and will provide a management team and appropriate support personnel. The administrative services fee includes an approximate $1,730,000 one‑time fee upon closing of the IPO. Thereafter, the A-1 Series and Property A-1 Subsidiary will pay the Administrative Agent $25,000 per quarter plus 1.0% of net operating income during the prior fiscal quarter under the agreement. Total net operating income of approximately $13 million and $54 million was used to calculate the pro forma administrative services fee in arriving at the A-1 Series’ equity in loss of the Property A-1 Subsidiary for the three months ended March 31, 2015 and for the year ended December 31, 2014, respectively.
For purposes of calculating the quarterly administrative services fee, net operating income means the A-1 Series' GAAP net income during the fiscal quarter plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of a majority of ETRE REIT, LLC’s independent directors; provided, however, that, for so long as the A-1 Series’ investment in the Property A-1 Subsidiary is accounted for under the equity method, net operating income shall mean the Property A-1 Subsidiary’s net income during the applicable fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, and general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of the general partners of the Property A-1 Subsidiary.
In addition, upon a future sale of the Property, the Administrative Agent will be entitled to an administrative sale fee equal to 1.00% of the total capitalization at the end of the month preceding the sale. Total capitalization is equal to the sum of the A-1 Series' total debt, members' capital, retained earnings and non-controlling interests in the Property A-1 Subsidiary; provided, however, that, for so long as the A-1 Series' investment in the Property A-1 Subsidiary is accounted for under the equity method, total capitalization shall be calculated as if the Property A-1 Subsidiary were a consolidated subsidiary of the A-1 Series.
(C2) Purchase Price Allocation
The A-1 Series will estimate the fair value of the underlying acquired assets and liabilities of its 48.87% partner interest in the Property A-1 Subsidiary for the purpose of allocating and tracking its excess outside basis. This outside basis portion will be amortized and depreciated over the anticipated useful lives of the Property A-1 Subsidiary’s underlying tangible and intangible assets acquired and liabilities assumed. Depreciation and amortization has been adjusted to reflect the pro forma depreciation and amortization for the three months ended March 31, 2015 and the year ended December 31, 2014.
The amounts and estimated remaining useful lives included in the table below were used to calculate (a) depreciation attributable to land improvements and the building, and (b) amortization attributable to tenant improvements and in-place leases (both amortized over the life of the underlying remaining lease term).
|
| | | | | | |
Description | Estimated Allocated Purchase Price | Estimated Depreciable Life |
Estimated for the Three Months Ended March 31, 2015 |
Estimated for the Year Ended December 31, 2014 |
Land improvements | $ 12,779,000 |
| 10 | $ 319,475 | $ 1,277,900 |
Building | 890,011,000 |
| 50 | 4,450,055 | 17,800,220 |
Tenant improvements | 24,840,000 |
| 8.75 | 709,715 | 2,838,855 |
In-place leases | 70,258,000 |
| 8.75 | 2,007,370 | 8,029,485 |
Subtotal | 997,888,000 |
| | $ 7,486,615 | $ 29,946,460 |
Land | 123,112,000 |
| | | |
Grand Total | $ | 1,121,000,000 |
| | | |
The allocation of the purchase price and the assessment of the estimated depreciable life has been performed on a preliminary basis and will not be finalized until subsequent to the closing of the acquisition and is based on management’s preliminary estimate of fair value of the identifiable assets and liabilities.
(C3) Asset Management Fees
Upon closing of the acquisition of the Property, the Property A-1 Subsidiary will enter into an asset management agreement with an affiliate of Fortis Property Group, LLC, which is an affiliate of one of the Contributors. Pursuant to the asset management agreement, the asset manager will provide all day-to-day asset management services at the Property in exchange for a monthly management fee of 1.0% of the Property A-1 Subsidiary’s Net Operating Income (as defined in the asset management agreement).
(C4) Interest Expense
The Property is currently subject to a first mortgage loan (the “Loan”) with a principal outstanding balance of $775 million and a maturity date of January 11, 2017. Management of the A-1 Series has adjusted the carrying amount of the Loan to its estimated fair value in connection with the transaction resulting in an accrued mortgage note premium of $20 million.
Management of the A-1 Series has evaluated interest rates of comparable loans in the current market and has determined that an interest rate of 4.25% is appropriate for calculating interest expense as a pro forma adjustment in arriving at the A-1 Series’ equity in loss of the Property A-1 Subsidiary for the three months ended March 31, 2015 and for the year ended December 31, 2014 (thereby amortizing the mortgage note premium against interest expense on an effective interest method over the remaining mortgage term). The actual current interest rate on the Loan is 5.66%.
Loss Per Share
(D) Assuming an offering price of $15.00 per share, approximately 11,535,333 Series A-1 common shares, totaling approximately $173.0 million, will be issued.
Approximately 23,602,000 OP Units will be issued by the Property A-1 Subsidiary; 11,535,333 OP Units, representing a general partner interest, to the A-1 Series and 12,066,667 OP Units, representing a limited partner interest, to the Contributors. At the earlier of refinancing of the existing Property mortgage or January 11, 2017, the Contributors' OP Units will be redeemable for cash or, at the option of the A-1 Series, exchangeable, at the option of the A-1 Series, on a one for one basis for Series A-1 common shares, subject to certain adjustments.
(E) Pro forma basic loss per share equals pro forma net loss attributable to Series A-1 equity owners divided by the number of Series A-1 common shares to be outstanding after the IPO and the concurrent private placement and the unvested restricted Series A-1 common shares, which qualify as participating securities, to be granted upon the closing of the IPO and the concurrent private placement.
(F) Pro forma diluted loss per share equals pro forma net loss divided by the sum of the number of Series A-1 common shares and the Contributors' OP Units to be outstanding after the IPO and the concurrent private placement and the unvested restricted Series A-1 common shares, which qualify as participating securities, and which will be granted upon the closing of the IPO and the concurrent private placement. There is no effect for dilutive shares for the three months ended March 31, 2015 and the year ending December 31, 2014 due to the net loss in each respective period.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Members of
ETRE REIT, LLC, Series A-1
44 Wall Street
New York, New York
We have audited the accompanying statement of revenue and certain operating expenses of State Street Financial Center (the “Property”), for the year ended December 31, 2014 and the related notes to the statement of revenues and certain operating expenses (the “Statement”).
Management’s Responsibility for the Statement
Management is responsible for the preparation and fair presentation of the Statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Statement that is free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the Statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Statement is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Property’s preparation and fair presentation of the Statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Property’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the Statement. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the Statement referred to above presents fairly, in all material respects, the revenue and certain operating expenses described in Note 1 of the Property for the year ended December 31, 2014, in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
We draw attention to Note 1 to the Statement, which describes that the accompanying Statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the Registration Statement on Form S-11, as amended, of ETRE REIT, LLC) and is not intended to be a complete presentation of the Property’s revenues and expenses. Our opinion is not modified with respect to this matter.
/s/ Deloitte & Touche LLP
New York, New York
July 6, 2015
STATE STREET FINANCIAL CENTER
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 2015 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 2014
|
| | | | | | | | |
(US$) | For the Three Months Ended March 31, 2015 (Unaudited) | | For the Year Ended December 31, 2014
|
| Revenues: | | | |
| Base office rents | $ | 15,972,031 |
| | $ | 63,888,125 |
|
| Garage rents | 1,356,016 |
| | 5,317,709 |
|
| Escalations and recoveries from tenants | 407,721 |
| | 1,742,841 |
|
Total revenues | 17,735,768 |
| | 70,948,675 |
|
| | | | |
| Certain operating expenses: | | | |
| Real estate taxes | 3,326,012 |
| | 13,492,695 |
|
| Utilities | 918,630 |
| | 2,748,343 |
|
| Insurance | 186,973 |
| | 754,652 |
|
| Property operating expenses | 43,414 |
| | 213,068 |
|
| Salaries and related expenses | 45,364 |
| | 109,162 |
|
Total certain operating expenses | 4,520,393 |
| | 17,317,920 |
|
Revenues in excess of certain operating expenses | $ | 13,215,375 |
| | $ | 53,630,755 |
|
The accompanying notes are an integral part of these statements of revenue and certain operating expenses.
STATE STREET FINANCIAL CENTER
NOTES TO STATEMENTS OF REVENUE AND CERTAIN OPERATING EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 2015 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 2014
| |
1. | FORMATION AND ORGANIZATION |
The accompanying statements of revenue and certain operating expenses includes the operations of the State Street Financial Center, a 36-story office tower consisting of 1,045,016 square feet of primarily office space as well as a five-level parking garage with approximately 325,000 square feet, also known as One Lincoln Street, located in Boston, Massachusetts (the “Property”).
The accompanying statements of revenue and certain operating expenses have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, these statements are not intended to be a complete representation of the Property's actual operations for the periods. Material amounts that would not be directly attributable to future operating results of the Property are excluded. Items excluded consist primarily of depreciation, amortization, management fees, and interest expense, as well as certain property operating expenses as described in Note 2 below.
The accompanying statement of revenues and certain operating expenses for the three months ended March 31, 2015 is unaudited. In the opinion of management, all adjustments (which are of normal and recurring nature) considered necessary, for the fair and consistent presentation of the statement of revenues and certain operating expenses for the three months ended March 31, 2015, have been included.
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The statements of revenue and certain operating expenses have been prepared using the accrual method of accounting. As such, revenue is recorded when earned and expenses are recognized when incurred.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the respective leases. Escalations and recoveries from tenants are received from tenants for certain costs as provided in the lease agreements. These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs. Expected reimbursements are recorded as the related expenses are incurred.
Property Operating Expenses
Under the terms of the office lease for the Property, SSB Realty, LLC (the “Tenant”), a subsidiary of State Street Corporation, the guarantor under the lease, has exercised its right to self-manage the building. Under this arrangement, the Tenant is responsible for janitorial, security, general management, preventative maintenance, and other enumerated building services. The Tenant must perform its property management duties in a timely, complete and professional manner consistent with the highest level of property management services provided at comparable first class buildings in the Boston Central Business District, and during the time that the Tenant is assuming responsibility for such services, the Tenant is required to directly engage and pay the applicable vendors for the costs and expenses of providing the services. Accordingly, any amounts incurred by the Tenant for such services are not included in the accompanying statements of revenue and certain operating expenses.
Property operating expenses represent direct expenses of operating the Property which consist primarily of administrative costs and other miscellaneous operating expenses that are expected to continue in the on-going operation of the Property.
Lincoln Street Property Owner, LLC (the “Property Owner”), is responsible for the repair and maintenance of the roof, exterior and load bearing walls, the foundation, the floor slabs and other structural elements of the building. However, no amounts were incurred for such items during the three months ended March 31, 2015 or the twelve months ended December 31, 2014.
Salaries and Related Expenses
The Property receives an expense allocation as determined by an affiliate of the Property Owner, for salaries and other miscellaneous operating expenses incurred on behalf of the Property. For the three months ended March 31, 2015 (unaudited) and for the year ended December 31, 2014, the Property was allocated $45,364 and $109,162, respectively, in respect of such amounts.
Use of Estimates
The preparation of the accompanying statements of revenue and certain operating expenses in accordance with accounting principles generally accepted in the United States of America requires management of the Property to make certain estimates and assumptions that affect the reported amounts of revenue and certain operating expenses during the reporting period. Actual results could differ from those estimates.
3. TENANT LEASES
The Property, including the entirety of the office and garage space, is leased to a single tenant, SSB Realty, LLC, a subsidiary of State Street Corporation under two operating leases with expiration dates through September 2023. The leases, which account for 100% of the Property's revenues, provide for annual base rents, and the office lease also provides for recoveries and escalation charges based upon the Tenant’s proportionate share of and/or increases in certain operating costs, as defined, and the pass-through of certain charges.
Future minimum rental revenue to be received under the non-cancellable commercial operating leases as of March 31, 2015 and December 31, 2014 are as follows:
|
| | | | | | |
For the year ended December 31, | As of March 31, 2015 (Unaudited) | As of December 31, 2014
|
2015 | $ | 51,904,376 |
| $ | 69,205,834 |
|
2016 | 69,205,834 |
| 69,205,834 |
|
2017 | 69,205,834 |
| 69,205,834 |
|
2018 | 69,205,834 |
| 69,205,834 |
|
2019 | 69,205,834 |
| 69,205,834 |
|
Thereafter | 258,080,089 |
| 258,080,089 |
|
Total | $ | 586,807,801 |
| $ | 604,109,259 |
|
Minimum future rental revenue does not include additional rent that may be received under leases arising from reimbursement of certain operating expenses and/or escalation charges.
Upon the expiration of the leases for the entirety of the office and garage space of the Property in September 2023, the Tenant may exercise two 10-year renewal options.
4. COMMITMENTS AND CONTINGENCIES
The Property, from time-to-time, is involved with lawsuits arising in the ordinary course of business. In the opinion of the Property's management, any liability resulting from such litigation would not be material in relation of the Property's results of operations.
The Property has evaluated subsequent events through July 6, 2015, which is the date these financial statements were available to be issued and has not identified any events that require additional disclosure.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members of
ETRE REIT, LLC
44 Wall Street
New York, New York
We have audited the accompanying combined balance sheet of ETRE REIT, LLC, ETRE REIT, LLC Series A-1 and ETRE REIT, LLC Series A-2 (the "Company"), all of which operate under common control as of December 31, 2014. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this combined balance sheet based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such combined balance sheet presents fairly, in all material respects, the combined financial position of ETRE REIT, LLC, ETRE REIT, LLC Series A-1 and ETRE REIT, LLC Series A-2 as of December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 28, 2015
ETRE REIT, LLC, ETRE REIT, LLC SERIES A-1 AND ETRE REIT, LLC SERIES A-2
COMBINED BALANCE SHEETS
AS OF MARCH 31, 2015 (UNAUDITED) AND DECEMBER 31, 2014
|
| | | | | | | |
| As of | | As of |
| March 31, 2015 | | December 31, 2014 |
| (Unaudited) | | |
Assets | | | |
Cash | $ | 2,000 |
| | $ | 162,623 |
|
Liabilities | | | |
Due to affiliates | $ | — |
| | $ | 160,623 |
|
Members' Equity | | | |
Common stock, par value $10 per share; 100 Series A-1 and 100 Series A-2 shares authorized and outstanding | 2,000 |
| | 2,000 |
|
Total liabilities and members' equity | $ | 2,000 |
| | $ | 162,623 |
|
See notes to the combined balance sheets.
ETRE REIT, LLC, ETRE REIT, LLC SERIES A-1 AND ETRE REIT, LLC SERIES A-2
NOTES TO THE COMBINED BALANCE SHEETS
AS OF MARCH 31, 2015 (UNAUDITED) AND DECEMBER 31, 2014
ETRE REIT, LLC (the “Company”) was formed April 22, 2013 pursuant to, and in accordance with, the Delaware Limited Liability Company Act (the "Act"). The Company is formed as a series limited liability company under the Act. Each series that the Company may establish in the future will be a separate series and not itself a separate legal entity under Delaware law. As a separate series, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the series are segregated and enforceable only against the assets of such series, as provided under Delaware law. As of March 31, 2015 and December 31, 2014, the Company has created two series, the A-1 Series (the “A-1 Series”) and the A-2 Series (the “A-2 Series”), which were capitalized on February 18, 2014 and March 3, 2014, respectively. The Company, the A-1 Series and the A-2 Series operate under common control, and therefore, have presented combined balance sheets for the Company on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). As of March 31, 2015 and December 31, 2014, neither the Company nor either of the Series had commenced operations.
The combined balance sheet of the Company as of March 31, 2015 is unaudited. In the opinion of management, the unaudited interim combined balance sheet includes all adjustments, which are of normal and recurring nature necessary for a fair and consistent presentation of the Company's financial position.
ETRE Financial, LLC, an affiliate of the Company, is the sole managing member of the Company. The Company is authorized to create an unlimited number of separate series, and to issue an unlimited number of common shares and an unlimited number of preferred shares in respect of each such series. Each series intends to qualify as a real estate investment trust (“REIT”) for U.S federal income tax purposes. The Company will be subject to the risks involved with owning real estate. These include, among others, the risks normally associated with changes in the general economic climate, changes in the real estate and mortgage markets, changes in tax laws, interest rate levels, and the availability of financing. In order to maintain its qualification as a REIT, each series plans to distribute at least 90% of its taxable income to its shareholders.
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2. | FORMATION OF THE SERIES AND INITIAL PUBLIC OFFERING |
The A-1 Series
The A-1 Series was capitalized with $1,000 and has 100 Series A-1 common shares issued and outstanding.
In connection with the contribution transactions, in March of 2015, the A-1 Series executed a contribution agreement (the “Contribution Agreement”) with the current owners of the State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts (the “Property”). Pursuant to the Contribution Agreement, the A-1 Series will use $155 million of the net proceeds of this offering to acquire the indirect 48.87% interest in the Property, and the net proceeds of this contribution will be distributed to the current owners of the Property, who will retain a 51.13% indirect interest in the Property through a limited partner interest in ETRE Property A-1, L.P (or the Property A-1 Subsidiary). The Property is encumbered by a $775 million first mortgage. To facilitate this transaction, the Company will issue common shares in the A-1 Series (“Series A-1 common shares”) in an initial public offering (the “A-1 Series IPO”) which is anticipated to be finalized in 2015.
The A-2 Series
The A-2 Series was capitalized with $1,000 and has outstanding 100 Series A-2 common shares issued and outstanding.
Due to Affiliates
During 2014, the Company’s affiliate, ETRE Financial, LLC, advanced $160,623 to the A-2 Series for the purpose of establishing cash reserves and liquidity on behalf of the Company. Subsequent to December 31, 2014, the entire amount was repaid to ETRE Financial, LLC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Reporting and Use of Estimates
The preparation of the balance sheets in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheets. Actual results could differ from those estimates. Separate statements of operations, changes in members' equity and cash flows have not been presented as there have been no activities for this entity.
Recently Issued Accounting Pronouncements
In June 2013, the FASB issued Accounting Standards Update No. 2013‑08, Amendments to the Scope, Measurement, and Disclosure Requirements for Investment Companies. The amendments change the assessment of whether an entity is an investment company, require an investment company to measure non-controlling ownership interests in other investment companies at fair value, and require additional disclosures. The amendments in this update were effective for the Company on January 1, 2014 and did not have an impact on the Company's balance sheets.
Underwriting commissions and offering costs
Underwriting commissions and offering costs to be incurred in connection with the IPO will be reflected as a reduction of additional paid‑in‑capital. Costs incurred that are not directly associated with the completion of the IPO will be expensed as incurred.
As of March 31, 2015 (unaudited), ETRE Financial, LLC has incurred $362,532 (unaudited) of costs related to the A-1 Series IPO. Upon successful completion of the A-1 Series IPO, the Company will reimburse ETRE Financial, LLC for any costs associated with the offering from the proceeds of the offering.
No costs related to the A-2 Series have been incurred through March 31, 2015.
Subsequent to March 31, 2015 and through July 6, 2015, which is the date the balance sheet was available for issuance, ETRE Financial, LLC has incurred an additional $146,351 (unaudited) of costs related to the A-1 Series IPO.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members of
ETRE REIT, LLC, Series A-1
44 Wall Street
New York, New York
We have audited the accompanying balance sheet of ETRE REIT, LLC, Series A-1 (the "Company") as of December 31, 2014. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects, the financial position of ETRE REIT, LLC, Series A-1 as of December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
April 28, 2015
ETRE REIT, LLC, SERIES A-1
BALANCE SHEETS
AS OF MARCH 31, 2015 (UNAUDITED) AND AS OF DECEMBER 31, 2014
|
| | | |
| As of March 31, 2015 (Unaudited) | | As of December 31, 2014 |
Assets | | | |
Cash | $1,000 | | $1,000 |
Members’ Equity | | | |
Common stock, par value $10 per share; 100 shares authorized and outstanding | $1,000 | | $1,000 |
See notes to the balance sheets.
ETRE REIT, LLC, SERIES A-1
NOTES TO THE BALANCE SHEETS
AS OF MARCH 31, 2015 (UNAUDITED) AND DECEMBER 31, 2014
ETRE REIT, LLC (the “Company”) was formed April 22, 2013 pursuant to, and in accordance with, the Delaware Limited Liability Company Act (the “Act”). The Company is formed as a series limited liability company under the Act. ETRE REIT, LLC, Series A-1 (the “A-1 Series”) was established February 13, 2014 and capitalized on February 18, 2014.
The A-1 Series is a separate series of the Company, a newly organized Delaware series limited liability company. The A-1 Series intends to qualify as a real estate investment trust (“REIT”) for U.S federal income tax purposes commencing with the year ending on December 31, 2015. The Company will be subject to the risks involved with owning real estate. These include, among others, the risks normally associated with changes in the general economic climate, changes in the real estate and mortgage markets, changes in tax laws, interest rate levels, and the availability of financing. In order to maintain its qualification as a REIT, the A-1 Series plans to distribute at least 90% of its taxable income to its shareholders. The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares.
The A-1 Series’ balance sheets are presented on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). As of March 31, 2015 and December 31, 2014, neither the Company nor the A-1 Series had commenced operations.
The balance sheet for the Company as of March 31, 2015 is unaudited. In the opinion of management, the unaudited interim balance sheet includes all adjustments, which are of normal and recurring nature necessary for a fair and consistent presentation of the Company's financial position.
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2. | FORMATION OF THE A-1 SERIES AND INITIAL PUBLIC OFFERING |
The A-1 Series was capitalized with $1,000 and has 100 Series A-1 common shares issued and outstanding.
In connection with the contribution transactions, in March of 2015, the A-1 Series executed a contribution agreement (the “Contribution Agreement”) with the current owners of the State Street Financial Center, a 36-story office tower, also known as One Lincoln Street, located in Boston, Massachusetts (the “Property”). Pursuant to the Contribution Agreement, the A-1 Series will use $155 million of the net proceeds of this offering to acquire the indirect 48.87% interest in the Property, and the net proceeds of this contribution will be distributed to the current owners of the Property, who will retain a 51.13% indirect interest in the Property through a limited partner interest in ETRE Property A-1, L.P. (or the Property A-1 Subsidiary). The Property is encumbered by a $775 million first mortgage. To facilitate this transaction, the Company will issue common shares in the A-1 Series (or Series A-1 common shares) in an initial public offering (the “A-1 Series IPO”) which is anticipated to be finalized in 2015.
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3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Reporting and Use of Estimates
The preparation of the balance sheets in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheets. Actual results could differ from those estimates. Separate statements of operations, changes in members' equity and cash flows have not been presented as there have been no activities for this entity.
Recently Issued Accounting Pronouncements
In June 2013, the FASB issued Accounting Standards Update No. 2013‑08, Amendments to the Scope, Measurement, and Disclosure Requirements for Investment Companies. The amendments change the assessment of whether an entity is an investment company, require an investment company to measure non-controlling ownership interests in other investment companies at fair value, and require additional disclosures. The amendments in this update were effective for the Company on January 1, 2014 and did not have an impact on the balance sheets.
Underwriting commissions and offering costs
Underwriting commissions and offering costs to be incurred in connection with the A-1 Series IPO will be reflected as a reduction of additional paid‑in‑capital. Costs incurred that are not directly associated with the completion of the A-1 Series IPO will be expensed as incurred.
As of March 31, 2015, ETRE Financial, LLC has incurred $362,532 (unaudited) of costs related to the A-1 Series IPO. Upon successful completion of the A-1 Series IPO, the A-1 Series will reimburse ETRE Financial, LLC for any costs associated with the offering from the proceeds of the offering.
Subsequent to March 31, 2015 and through July 6, 2015, which is the date the balance sheet was available for issuance, ETRE Financial, LLC has incurred an additional $146,351 (unaudited) of costs related to the A-1 Series IPO.
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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, Series A-1 common shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Series A-1 common shares. Until , 2015 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
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| | | | |
| | ETRE REIT, LLC | | |
| | | | |
| | Series A-1 | | |
| | Common Shares | | |
| | | | |
| | Prospectus | | |
| | , 2015 | | |
Joint Book-runners
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Sandler O'Neill + Partners, L.P. | Evercore ISI | Nomura |
Co-Managers
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BTIG | JMP Securities | LOYAL3 Securities | RCS Capital | SMBC Nikko |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other expenses of issuance and distribution.
The following table shows the fees and expenses, other than underwriting discounts and commissions, to be paid by the A-1 Series in connection with the sale and distribution of the securities being registered hereby. All amounts except the SEC registration fee and the Financial Industry Regulatory Authority, Inc. ("FINRA") filing fee are estimated.
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Securities and Exchange Commission registration fee.................................................................... | $20,862 |
FINRA filing fee.............................................................................................................................. | $26,465 |
NASDAQ listing fee......................................................................................................................... | $50,000 |
Legal fees and expenses (including Blue Sky fees).......................................................................... | $1,100,000 |
Accounting fees and expenses.......................................................................................................... | $150,000 |
Printing and engraving expenses....................................................................................................... | $20,000 |
Transfer agent fees and expenses...................................................................................................... | $5,000 |
Miscellaneous.................................................................................................................................... | $197,673 |
Total................................................................................................................................................... | $1,570,000 |
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Item 32. Sales to Special Parties.
None.
Item 33. Recent sales of unregistered securities.
Jesse Stein has purchased 100 Series A-1 common shares issued on February 13, 2014 for a purchase price of $1,000 in a private offering. Such issuance was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof and/or Regulation D thereunder.
Jesse Stein has purchased 100 Series A-2 common shares issued on February 25, 2014 for a purchase price of $1,000 in a private offering. Such issuance was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof and/or Regulation D thereunder.
We will sell 33,333 Series A-1 common shares to our Administrative Agent in a private placement concurrently with the completion of this offering at a price per share equal to the public offering price in the offering. Such issuance will be exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof and/or Regulation D thereunder.
Item 34. Indemnification of directors and officers.
Pursuant to our operating agreement, we have agreed to indemnify ETRE Financial, LLC, the managing member of our company, and each of our directors and officers, to the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with the approval of the company and counsel fees and disbursements on a solicitor and client basis) arising from the performance of any of their obligations or duties in connection with their service to us or the operating agreement, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person may hereafter be made party by reason of being or having been the managing member or one of our directors or officers.
Prior to completion of this offering, we intend to enter into separate indemnification agreements with our directors and officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our operating agreement against any and all expenses, judgments, fines, penalties and amounts paid in settlement of any claim. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our operating agreement.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We maintain directors' and officers' liability insurance for our officers and directors.
Item 35. Treatment of proceeds from shares being registered.
None of the proceeds will be credited to an account other than the appropriate capital share account.
Item 36. Financial statements and exhibits.
(a)Financial Statements. See page F‑1 for an index of the financial statements that are being filed as part of this Registration Statement.
(b)Exhibits. The following is a complete list of exhibits filed as part of the registration statement, which are incorporated herein:
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Exhibit number | Exhibit description |
1.1* | Form of Underwriting Agreement among ETRE REIT, LLC, on behalf of itself and Series A-1 of ETRE REIT, LLC, and the underwriters named therein |
3.1** | Certificate of Formation of ETRE REIT, LLC |
3.1.1** | Certificate of Amendment of ETRE REIT, LLC |
3.2** | Amended and Restated Limited Liability Company Agreement of ETRE REIT, LLC |
3.3** | Bylaws of ETRE REIT, LLC |
3.4* | Amended and Restated Limited Partnership Agreement of ETRE Property A-1, L.P. |
4.1** | Specimen Series A-1 Common Share Certificate of ETRE REIT, LLC |
4.2* | Registration Rights Agreement by and among ETRE REIT, LLC, on behalf of itself and Series A-1 of ETRE REIT, LLC, and Lincoln Street Holdings, LLC |
5.1* | Opinion of Clifford Chance US LLP (including consent of such firm) |
8.1* | Tax Opinion of Clifford Chance US LLP (including consent of such firm) |
10.1 | Administrative Services Agreement by and among Series A-1 of ETRE REIT, LLC, ETRE Property A-1, L.P. and ETRE Asset Management, LLC. |
10.2** | Form of Indemnification Agreement among ETRE REIT, LLC and its proposed directors and officer |
10.3** | Form of License Agreement |
10.4** | Form of Asset Management Agreement by and between ETRE Property A-1, L.P. and FPG Lincoln Manager, LLC |
10.5 | 2015 Non-Management Director Compensation Plan |
10.6** | Contribution Agreement dated March 27, 2015 among Series A-1 of ETRE REIT, LLC, Lincoln Street Holdings, LLC and Lincoln Street Mezz, LLC. |
10.7 | Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated May 9, 2001 |
10.8 | First Amendment to the Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated as of August 15, 2003 |
10.9 | Second Amendment to the Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated as of February 13, 2004 |
10.10 | Third Amendment to the Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated as of December 22, 2004 |
10.11 | Guaranty between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, SSB Realty, LLC as tenant, and State Street Corporation, as guarantor, dated as of May 9, 2001 |
10.12 | Loan and Security Agreement between Lincoln Street Property Owner, LLC, as Borrower, and Wachovia Bank, N.A and UBS Real Estate Investments, Inc., as Lenders, dated as of December 27, 2006 |
10.13 | Form of Indemnification Agreement by and among ETRE Property A-1, L.P., Margaret Kestenbaum and Joel Kestenbaum |
10.14 | Form of Restricted Share Award Agreement |
10.15* | Form of Subscription Agreement |
21.1** | List of Subsidiaries of ETRE REIT, LLC |
23.1* | Consent of Clifford Chance US LLP (included in Exhibit 5.1) |
23.2* | Consent of Clifford Chance US LLP (included in Exhibit 8.1) |
23.3 | Consent of Deloitte & Touche LLP |
23.4 | Consent of Deloitte & Touche LLP |
23.5 | Consent of Deloitte & Touche LLP |
24.1** | Power of Attorney (included on signature page) |
99.1** | Consent of Jay Anderson to be named as a proposed director |
99.2** | Consent of Joseph Capezza to be named as a proposed director |
99.3** | Consent of Mark Filanowski to be named as a proposed director |
* To be filed by amendment.
** Previously filed.
Item 37. Undertakings.
(a)The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b)Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (or the Securities Act), may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c)The undersigned registrant hereby further undertakes that:
(1)For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2)For the purpose of determining any liability under the Securities Act, each post‑effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S‑11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on July 9, 2015.
ETRE REIT, LLC
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By: /s/ Paul Frischer |
Name: | Paul Frischer |
Title: | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
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Signatures | Title | Date |
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By:/s/ Paul Frischer Paul Frischer | President, Chief Executive Officer and Director (Principal Executive Officer) | July 9, 2015 |
By:/s/ Darren Glickman Darren Glickman | Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) | July 9, 2015 |
By:* Jesse Stein | Director | July 9, 2015 |
By:* Scott Panzer | Director | July 9, 2015 |
Paul Frischer
Attorney-in-fact
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Exhibit number | Exhibit description |
1.1* | Form of Underwriting Agreement among ETRE REIT, LLC, on behalf of itself and Series A-1 of ETRE REIT, LLC, and the underwriters named therein |
3.1** | Certificate of Formation of ETRE REIT, LLC |
3.1.1** | Certificate of Amendment of ETRE REIT, LLC |
3.2** | Amended and Restated Limited Liability Company Agreement of ETRE REIT, LLC |
3.3** | Bylaws of ETRE REIT, LLC |
3.4* | Amended and Restated Limited Partnership Agreement of ETRE Property A-1, L.P. |
4.1** | Specimen Series A-1 Common Share Certificate of ETRE REIT, LLC |
4.2* | Registration Rights Agreement by and among ETRE REIT, LLC, on behalf of itself and Series A-1 of ETRE REIT, LLC, and Lincoln Street Holdings, LLC |
5.1* | Opinion of Clifford Chance US LLP (including consent of such firm) |
8.1* | Tax Opinion of Clifford Chance US LLP (including consent of such firm) |
10.1 | Administrative Services Agreement by and among Series A-1 of ETRE REIT, LLC, ETRE Property A-1, L.P. and ETRE Asset Management, LLC. |
10.2** | Form of Indemnification Agreement among ETRE REIT, LLC and its proposed directors and officer |
10.3** | Form of License Agreement |
10.4** | Form of Asset Management Agreement by and between ETRE Property A-1, L.P. and FPG Lincoln Manager, LLC |
10.5 | 2015 Non-Management Director Compensation Plan |
10.6** | Contribution Agreement dated March 27, 2015 among Series A-1 of ETRE REIT, LLC, Lincoln Street Holdings, LLC and Lincoln Street Mezz, LLC. |
10.7 | Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated May 9, 2001 |
10.8 | First Amendment to the Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated as of August 15, 2003 |
10.9 | Second Amendment to the Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated as of February 13, 2004 |
10.10 | Third Amendment to the Indenture of Lease between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, and SSB Realty, LLC as tenant, dated as of December 22, 2004 |
10.11 | Guaranty between Lincoln Street Property Owner, LLC, as successor-in-interest landlord, SSB Realty, LLC as tenant, and State Street Corporation, as guarantor, dated as of May 9, 2001 |
10.12 | Loan and Security Agreement between Lincoln Street Property Owner, LLC, as Borrower, and Wachovia Bank, N.A and UBS Real Estate Investments, Inc., as Lenders, dated as of December 27, 2006 |
10.13 | Form of Indemnification Agreement by and among ETRE Property A-1, L.P., Margaret Kestenbaum and Joel Kestenbaum |
10.14 | Form of Restricted Share Award Agreement |
10.15* | Form of Subscription Agreement |
21.1** | List of Subsidiaries of ETRE REIT, LLC |
23.1* | Consent of Clifford Chance US LLP (included in Exhibit 5.1) |
23.2* | Consent of Clifford Chance US LLP (included in Exhibit 8.1) |
23.3 | Consent of Deloitte & Touche LLP |
23.4 | Consent of Deloitte & Touche LLP |
23.5 | Consent of Deloitte & Touche LLP |
24.1** | Power of Attorney (included on signature page) |
99.1** | Consent of Jay Anderson to be named as a proposed director |
99.2** | Consent of Joseph Capezza to be named as a proposed director |
99.3** | Consent of Mark Filanowski to be named as a proposed director |
99.4** | Consent of John Gregorits to be named as a proposed director |
* To be filed by amendment.
** Previously filed.
FORM OF ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT is made as of [●], 2015 to be effective as of [●], 2015 by and among the SERIES A-1 (the "A-1 Series") of ETRE REIT, LLC, a Delaware series limited liability company (the "Company"), ETRE PROPERTY A-1, L.P., a Delaware limited partnership and a subsidiary of the A-1 Series (the "Property LP"), and ETRE ASSET MANAGEMENT, LLC, a Delaware limited liability company (together with its permitted assignees, the "Administrative Agent").
WHEREAS, the Company is a Delaware series limited liability company;
WHEREAS, the A-1 Series is a separate series of the Company that intends to elect and qualify to be taxed as a REIT for federal income tax purposes; and
WHEREAS, the A-1 Series and the Property LP desire to retain the Administrative Agent to provide administrative services to them on the terms and conditions hereinafter set forth, and the Administrative Agent wishes to be retained to provide such services.
NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Definitions. The following terms have the following meanings assigned to them:
(a) "A-1 Series" shall have the meaning set forth in the introductory paragraph of this Agreement.
(b) "A-1 Series Account" shall have the meaning set forth in Section 5 of this Agreement.
(c) "Administrative Agent" shall have the meaning set forth in the introductory paragraph of this Agreement.
(d) "Administrative Agent Indemnified Party" shall have the meaning set forth in Section 11(a) of this Agreement.
(e) "Administrative Sale Fee" means a fee equal to 1.00% of the Total Capitalization at the end of the month immediately preceding a Property Sale, payable (in cash) upon the consummation of such Property Sale.
(f) "Administrative Services" shall have the meaning set forth in Section 2(d) of this Agreement.
(g) "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified.
(h) "Agreement" means this Administrative Services Agreement, as amended, restated or supplemented from time to time.
(i) "Approval Matters Conflicts Committee" shall have the meaning set forth in the LPA.
(j) "Asset Management Agreement" means the Asset Management Agreement dated as of [●], 2015 by and between the Asset Manager and the Property LP, as amended, restated or supplemented from time to time.
(k) "Asset Manager" shall mean FPG Lincoln Manager, LLC, a Delaware limited liability company.
(l) "Bankruptcy" means, with respect to any Person, (a) the filing by such Person of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment, in any form, of its debts under Title 11 of the United States Code or any other federal, state or foreign insolvency law, or such Person's filing an answer consenting to or acquiescing in any such petition, (b) the making by such Person of any assignment for the benefit of its creditors, (c) the expiration of 60 days after the filing of an involuntary petition under Title 11 of the Unites States Code, an application for the appointment of a receiver for a material portion of the assets of such Person, or an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal, state or foreign insolvency law, provided that the same shall not have been vacated, set aside or stayed within such 60‑day period or (d) the entry against it of a final and non-appealable order for relief under any bankruptcy, insolvency or similar law now or hereinafter in effect.
(m) "Board of Directors" means the board of directors of the Company; provided, however, that, if the Company's Governing Instruments designate a specific director to be associated with one or more series of the Company but not the A-1 Series, such director shall not be deemed to be a part of the Board of Directors for purposes of this Agreement.
(n) "Code" means the Internal Revenue Code of 1986, as amended.
(o) "Company" shall have the meaning set forth in the introductory paragraph of this Agreement.
(p) "Company Indemnified Party" shall have the meaning set forth in Section 11(b) of this Agreement.
(q) "Contribution Agreement" means the Contribution Agreement dated as of March 27, 2015 by and among the A-1 Series, Lincoln Street Holdings, LLC, a Delaware limited liability company, and Lincoln Street Mezz, LLC, a Delaware limited liability company.
(r) "Director" means a member of the Board of Directors; provided, however, that, if the Company's Governing Instruments designate a specific director to be associated with a series of the Company other than the A-1 Series, such director shall not be deemed to be a Director for purposes of this Agreement.
(s) "ETRE Financial" shall have the meaning set forth in Section 2(b) of this Agreement;
(t) "Excess Funds" shall have the meaning set forth in Section 2(k) of this Agreement. (u) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(v) "Expenses" shall have the meaning set forth in Section 9 of this Agreement. (w) "Fortis General Partner" means Lincoln Street Manager, LLC, in its capacity as one of the two general partners of the Property LP.
(x) "Fortis Stepdown Date" shall have the meaning set forth in the LPA.
(y) "GAAP" means generally accepted accounting principles, as applied in the United States.
(z) "General Partners" means the REIT General Partner and, prior to the Fortis Stepdown Date, the Fortis General Partner.
(aa) "Governing Instruments" means the certificate of formation, the limited liability company agreement and the bylaws (if applicable) in the case of a limited liability company, the certificate of incorporation and bylaws in the case of a corporation, the certificate of limited partnership (if applicable) and the partnership agreement in the case of a general or limited partnership, the trust instrument in the case of a trust, or similar governing documents, in each case as amended from time to time.
(bb) "Indemnitee" means any Administrative Agent Indemnified Party or Company Indemnified Party.
(cc) "Indemnitor" shall have the meaning set forth in Section 11(c) of this Agreement. (dd) "Independent Directors" means the members of the Board of Directors who are not officers, personnel or employees of the Administrative Agent or any Person directly or indirectly controlling or controlled by the Administrative Agent, and who are otherwise "independent" in accordance with the Company's Governing Instruments and, if applicable, the rules of any national securities exchange on which the Series A-1 Common Shares are listed.
(ee) "Initial Administrative Services Fee" means a one-time fee equal to $[●], payable (in cash) upon the effective date of this Agreement.
(ff) "Initial Public Offering" means the initial public offering of the Series A-1 Common Shares.
(gg) "Inter-Series Policy" means any inter-series relationship, conflicts of interest and opportunity allocation policy of the Company adopted by the Company in accordance with the Company's Governing Instruments.
(hh) "Investment Company Act" means the Investment Company Act of 1940, as amended.
(ii) "LPA" means the Amended and Restated Agreement of Limited Partnership of the Property LP, dated as of [__], 2015, as amended, restated and supplemented from time to time.
(jj) "NASDAQ" means the NASDAQ Capital Market.
(kk) "Net Operating Income" means the A-1 Series' net income during the applicable fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of a majority of the Independent Directors; provided, however, that, for so long as the A-1 Series' investment in the Property LP is accounted for under the equity method, Net Operating Income shall mean the Property LP's net income during the applicable fiscal quarter (as determined in accordance with GAAP), plus (i) total depreciation and amortization, net interest expense and marketing, general and administrative expenses during such fiscal quarter, and (ii) one-time events pursuant to changes in GAAP and certain non-cash items during such fiscal quarter with the approval of the General Partners.
(ll) "Officer" means an officer of the Company; provided, however, that, if the Company's Governing Instruments designate a specific officer to be associated with one or more series of the Company but not the A-1 Series, such officer shall not be deemed to be an Officer for purposes of this Agreement.
(mm) "OP Unit" shall have the meaning set forth in the LPA.
(nn) "Person" means any individual, corporation, partnership, joint venture, limited liability company, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.
(oo) "Property" means the real property located at One Lincoln Street, Boston, MA 02111, together with the improvements thereon.
(pp) "Property LP" shall have the meaning set forth in the introductory paragraph of this Agreement.
(qq) "Property Sale" means either (a) a distribution to holders of, or redemption of, outstanding Series A-1 Common Shares in connection with a disposition of all or substantially all of the A-1 Series' interest in the Property LP, whether held directly or through Subsidiaries, or the Property LP's interest in the Property, whether held directly or through subsidiaries of the Property LP, in accordance with the Company's Governing Instruments or (b) a redemption of outstanding Series A-1 Common Shares in accordance with the Company's Governing Instruments and pursuant to the Company's Tender Offer Policy.
(rr) "Quarterly Administrative Services Fee" means a fee equal to $25,000 per quarter plus 1.0% of the Net Operating Income during the prior fiscal quarter, calculated and paid (in cash) quarterly in arrears.
(ss) "Quarterly Asset Management Fee" shall have the meaning set forth in the Asset Management Agreement.
(tt) "Redemption" means a redemption of all outstanding Series A-1 Common Shares in exchange for equity interests in the Property LP and/or any other Subsidiary in accordance with the Company's Governing Instruments, other than a redemption pursuant to the Company's Tender Offer Policy.
(uu) "Redemption Right Date" shall have the meaning set forth in the LPA.
(vv) "REIT" means a "real estate investment trust", as defined under the Code.
(ww) "REIT General Partner" means the A-1 Series, in its capacity as one of the two general partners of the Property LP.
(xx) "SEC" means the Securities and Exchange Commission.
(yy) "Securities Act" means the Securities Act of 1933, as amended.
(zz) "Series A-1 Common Shares" means the Company's A-1 Series common shares of limited liability company interest that represent ownership interests in the A-1 Series.
(aaa) "Series A-1 Common REIT Share Preference Amount" shall have the meaning set forth in the LPA.
(bbb) "Services" shall have the meaning set forth in Section 2(c) of this Agreement.
(ccc) "Subsidiary" means any direct or indirect subsidiary of the A-1 Series, including, without limitation, the Property LP; any partnership, the general partner of which is the A-1 Series or any direct or indirect subsidiary of the A-1 Series; any limited liability company, the managing member of which is the A-1 Series or any direct or indirect subsidiary of the A-1 Series; and any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by the A-1 Series or any direct or indirect subsidiary of the A-1 Series.
(ddd) "Tender Offer Policy" means any tender offer policy as to Series A-1 Common Shares adopted by the Company.
(eee) "Total Capitalization" means the sum of the A-1 Series' total debt, members' capital, retained earnings and noncontrolling interests in the Property LP; provided, however, that, for so long as the A-1 Series' investment in the Property LP is accounted for under the equity method, Total Capitalization shall be calculated as if the Property LP were a consolidated subsidiary of the A-1 Series.
Section 2. Appointment and Duties of the Administrative Agent.
(a) Each of the A-1 Series and the Property LP hereby appoints the Administrative Agent to provide administrative and advisory services to the A-1 Series and the Property LP on the terms, and subject to the conditions, set forth in this Agreement. The Administrative Agent hereby agrees to use its commercially reasonable efforts to perform its duties as specified in this Agreement. The appointment of the Administrative Agent shall be exclusive to the Administrative Agent except to the extent that the Administrative Agent otherwise agrees, and except to the extent that the Administrative Agent elects, pursuant to the terms of this Agreement, to cause the duties of the Administrative Agent hereunder to be provided by third parties.
(b) The parties acknowledge that (i) the Administrative Agent is a special purpose vehicle formed for the principal purpose of providing administrative and advisory services to the series of the Company and their respective subsidiaries; (ii) the Administrative Agent is an affiliate of ETRE Financial, LLC, a Delaware limited liability company ("ETRE Financial"); (iii) the Administrative Agent performs its services for the A-1 Series and the Property LP through the management team, support personnel, and facilities of ETRE Financial; (iv) the Administrative Agent has no, and will have no, employees or other persons acting on its behalf other than (A) officers, managers and employees of ETRE Financial, or (B) other persons who are subject to the supervision and control of ETRE Financial; and (v) the Administrative Agent has been delegated the authority to interpret, make determinations under and oversee the implementation of the policies set forth in the Inter-Series Policy.
(c) The Administrative Agent, in its capacity as administrative agent, at all times will be subject to the supervision of the Board of Directors and the Approval Matters Conflict Committee and, in relation to the Property LP and its subsidiaries, the General Partners, and will have only such functions and authority as the A-1 Series or the Property LP may delegate to it including, without limitation, the functions and authority identified herein and delegated to the Administrative Agent hereby. The Administrative Agent will perform (or cause to be performed) such services and activities relating to the assets and operations of the A-1 Series and the Subsidiaries described below (such services and activities, together with the Administrative Services, and any and all other services contemplated to be performed by the Administrative Agent hereunder, collectively, the "Services"):
(i) (A) investigating, selecting and, on behalf of the A-1 Series, engaging and conducting business with and supervising the performance of such persons as the Administrative Agent deems necessary to the proper performance of its obligations under this Agreement (including consultants, accountants, correspondents, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries custodians, agents for collection, insurers, insurance agents, banks, securities investment advisors, the registrar and the transfer agent and any and all agents for any of the foregoing), including affiliates of the Administrative Agent and persons acting in any other capacity deemed by the Administrative Agent to be necessary or desirable for the performance of any of the Services (including entering into contracts in the name of the A-1 Series relating to any of the foregoing); and (B) upon any termination or expiration of the term of the Asset Management Agreement, providing the services listed in clause (A) above on behalf of the Subsidiaries;
(ii) consulting with the Officers and Directors and assisting the Directors in the formulation and implementation of the A-1 Series' financial policies and, as necessary, furnishing the Board of Directors with advice and recommendations with respect to the investment objectives and policies of the A-1 Series and in connection with any borrowings (or refinancing of borrowings) proposed to be undertaken by the A-1 Series or the Subsidiaries;
(iii) (A) arranging for financing and refinancing and making other changes in the asset or capital structure of the A-1 Series; (B) entering into service contracts for the A-1 Series and, to the extent necessary, performing all other operational functions for the maintenance and administration of the A-1 Series; (C) actively overseeing and managing the A-1 Series for purposes of meeting the A-1 Series' investment objectives; (D) overseeing affiliated and non-affiliated persons with whom the Administrative Agent contracts to perform certain of the Services; and (E) managing accounting and other recordkeeping functions for the A-1 Series and overseeing accounting and other recordkeeping functions for the Subsidiaries, including reviewing and analyzing the capital and operating budgets and generating an annual budget for the A-1 Series;
(iv) upon any termination or expiration of the term of the Asset Management Agreement, (A) arranging for financing and refinancing and making other changes in the asset or capital structure of the Subsidiaries; (B) entering into leases and service contracts for the Subsidiaries and, to the extent necessary, performing all other operational functions for the maintenance and administration of the the Subsidiaries; (C) overseeing, supervising and evaluating affiliated and non-affiliated asset managers and property managers who perform services for the A-1 Series and the Subsidiaries; and (D) managing accounting and other recordkeeping functions for the Subsidiaries;
(v) (A) negotiating on behalf of the A-1 Series with banks or other lenders for loans to be made to the A-1 Series, and negotiating with investment banking firms and broker-dealers on behalf the A-1 Series, or negotiating private sales of the Series A-1 Common Shares or obtaining loans for the A-1 Series, but in no event in such a manner that the Administrative Agent shall be acting as broker-dealer or underwriter; and (B) upon any termination or expiration of the term of the Asset Management Agreement, providing the services listed in clause (A) above on behalf of the Subsidiaries; provided, however, that any fees and costs payable to third parties incurred by the Administrative Agent in connection with the foregoing shall be the responsibility of the A-1 Series, in the case of clause (A), and the Subsidiaries, in the case of clause (B);
(vi) from time to time, or at any time reasonably requested by the Board of Directors or the General Partners, making reports to the Board of Directors, the General Partners or the Approval Matters Conflicts Committee on its performance of the Services, including reports with respect to potential conflicts of interest involving the Administrative Agent or any of its affiliates;
(vii) performing investor relations and shareholder communications functions for the A-1 Series;
(viii) rendering such services as may be reasonably determined (i) in relation to the A-1 Series, by the Board of Directors and (ii) in relation to the Property LP and its subsidiaries, prior to the Fortis Stepdown Date, by the REIT General Partner and the Fortis General Partner, acting jointly, in each case, consistent with the terms and conditions hereof;
(ix) maintaining the A-1 Series' and the Subsidiaries' accounting and other records and assisting the A-1 Series in preparing, reviewing and filing all reports required to be filed by it or the Company with the SEC, NASDAQ, the Internal Revenue Service and other regulatory agencies or self-regulatory organizations;
(x) doing all things reasonably necessary to assure its ability to render the Services; and
(xi) making recommendations to the Board of Directors with respect to follow-on offerings, tender offers in respect of the Series A-1 Common Shares, dispositions of the Property and other significant transactions.
Notwithstanding the foregoing, (i) during the term of the Asset Management Agreement, the Asset Manager will be responsible for performing all day-to-day management and administrative functions at the property level and arranging for financings and refinancing of property-level indebtedness, including overseeing real property operations of the Subsidiaries (i.e. tenant leasing, property financing, construction and renovation, budgeting, cash management and insurance), subject to and in accordance with the terms of the Asset Management Agreement, (ii) during the term of the Asset Management Agreement, to the extent that any Services hereunder (including, without limitation, the Administrative Services) overlap with or conflict with the services to be provided by and delegated to the Asset Manager, then the Asset Management Agreement shall apply to such services and the “Services” hereunder shall be expressly be deemed to be modified to exclude such services (such that, for the avoidance of doubt, the Asset Manager shall be the sole provider of the services described and set forth in the Asset Management Agreement), and (iii) notwithstanding any other provision in this Agreement to the contrary, the Administrative Agent shall at all times be subject to any applicable restrictions and conditions regarding the activities of the A-1 Series and/or the Subsidiaries set forth in the Governing Documents of the Company, the Property LP and/or any other Subsidiary.
(d) Without limiting the foregoing, the Administrative Agent will perform certain administrative and advisory services (the "Administrative Services") on behalf of the A-1 Series and the Subsidiaries with respect to their business, assets and operations. Such services will include, but not be limited to consulting with the Directors and Officers on sale and other opportunities related to the Property, the collection of information and the submission of reports pertaining to the Property, interest rates and general economic conditions; periodic review and evaluation of the performance of the Property; acting as liaison between the A-1 Series and investment banking and other parties with respect to the disposition of the Property; and other customary functions related to administrative services.
(e) For the period and on the terms and conditions set forth in this Agreement, the A-1 Series hereby appoints and authorizes the Administrative Agent as its true and lawful agent and attorney-in-fact, in its name, place and stead, to negotiate, execute, deliver and enter into such agreements, instruments and authorizations on its behalf, on such terms and conditions as the Administrative Agent, in its discretion, deems necessary or appropriate. This power of attorney is deemed to be coupled with an interest and, as a result, is irrevocable and will survive events of Bankruptcy of the A-1 Series.
(f) The Administrative Agent may enter into agreements with other parties, including its Affiliates, for the purpose of engaging one or more parties for and on behalf, of (A) the Administrative Agent to provide services to the A-1 Series (including Administrative Services) and (B) upon any termination or expiration of the term of the Asset Management Agreement, the Subsidiaries to provide asset management, property management, leasing and other services to the Subsidiaries, in each case, pursuant to agreement(s) with terms which are then customary for agreements regarding the provision of services to companies that have assets similar in type, quality and value to the Property; provided that (i) any such agreements entered into with Affiliates of the Administrative Agent shall be on terms no more favorable to such Affiliate than would be obtained from a third party on an arm's-length basis and approved by a majority of the Independent Directors and, prior to the Fortis Stepdown Date, in the case of any such agreements related to the Property LP and its subsidiaries, the Fortis General Partner and (ii) with respect to Administrative Services, any such agreements shall be subject to the A-1 Series' and the Property LP's prior approval and the Administrative Agent shall remain liable for the performance of such Administrative Services. Notwithstanding the foregoing, during the term of the Asset Management Agreement, the Administrative Agent shall not engage parties to provide services that overlap with or conflict with the services to be provided by and delegated to the Asset Manager.
(g) In addition, to the extent that the Administrative Agent deems necessary or advisable, the Administrative Agent may, from time to time, propose to retain one or more additional entities for the provision of supporting services to the Administrative Agent in order to enable the Administrative Agent to provide the Services to the A-1 Series and the Subsidiaries specified by this Agreement; provided that any such agreement (i) shall be on terms and conditions substantially identical to the terms and conditions of this Agreement or otherwise not adverse to the A-1 Series and the Subsidiaries, and (ii) shall be approved by the Independent Directors of the Company and, prior to the Fortis Stepdown Date, in the case of any such agreements related to the Property LP and its subsidiaries, the Fortis General Partner.
(h) The Administrative Agent may retain, for and on behalf of the A-1 Series and the Subsidiaries, such services of accountants, legal counsel, appraisers, insurers, brokers, transfer agents, registrars, developers, investment banks, valuation firms, financial advisors, due diligence firms, underwriting review firms, banks and other lenders and others as the Administrative Agent deems necessary or advisable in connection with the Services. Notwithstanding anything contained herein to the contrary, the Administrative Agent shall have the right to cause any such services to be rendered by its personnel or Affiliates; provided, however, that, prior to the Fortis Stepdown Date, any such services to be rendered by such Affiliates to the Property LP and its subsidiaries shall be subject to the Fortis General Partner's prior approval. Except as otherwise provided herein, the A-1 Series and the Subsidiaries shall pay or reimburse the Administrative Agent or its Affiliates performing such services for the cost thereof; provided that, subject to Section 9 of this Agreement, such costs and reimbursements are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm's-length basis. (i) As frequently as the Administrative Agent may deem necessary or advisable, or at the direction of the Board of Directors or the General Partners, as applicable, the Administrative Agent shall prepare, or cause to be prepared, with respect to the Property, reports and other information with respect to the Property as may be reasonably requested by the Board of Directors, the General Partners or any Officer.
(j) The Administrative Agent shall prepare, or cause to be prepared, all reports, financial or otherwise with respect to the A-1 Series and the Subsidiaries reasonably required by the Board of Directors in order for the A-1 Series and the Subsidiaries to comply with their Governing Instruments or any other materials required to be filed with any governmental body or agency or with the NASDAQ (or other principal securities exchange on which the Series A-1 Common Shares are then listed), and shall prepare, or cause to be prepared, all materials and data necessary to complete such reports and other materials including, without limitation, an annual audit of the Company's, the A-1 Series' and the Subsidiaries' books of account by a nationally recognized registered independent public accounting firm.
(k) Notwithstanding anything contained in this Agreement to the contrary, except to the extent that the payment of additional moneys is proven by the A-1 Series to have been required as a direct result of the Administrative Agent's acts or omissions which result in the right of the A-1 Series and the Subsidiaries to terminate this Agreement pursuant to Section 15 of this Agreement, the Administrative Agent shall not be required to expend money ("Excess Funds") in connection with any expenses that are required to be paid for or reimbursed by the A-1 Series and the Subsidiaries pursuant to Section 9 in excess of that contained in any applicable A-1 Series Account or otherwise made available by the A-1 Series and the Subsidiaries to be expended by the Administrative Agent hereunder. (l) In performing its duties under this Section 2, the Administrative Agent shall be entitled to rely reasonably on qualified experts and professionals (including, without limitation, accountants, legal counsel and other service providers) hired by the Administrative Agent. (m) The cost and expense of the foregoing shall be allocated between the parties as provided in Section 9.
Section 3. Devotion of Time; Additional Activities.
(a) The Administrative Agent and its Affiliates will provide the A-1 Series and the Subsidiaries with appropriate support personnel. The Administrative Agent is not obligated to dedicate any of its personnel exclusively to the A-1 Series, nor is the Administrative Agent or its personnel obligated to dedicate any specific portion of its or their time to the A-1 Series.
(b) The Administrative Agent agrees to offer the A-1 Series and the Subsidiaries sale, financing, leasing and other business opportunities in accordance with the Inter-Series Policy. Nothing in this Agreement shall (i) prevent the Administrative Agent or any of its Affiliates, officers, directors, employees or personnel, from engaging in other businesses or from rendering services of any kind to any other series of the Company or any other Person, including investing in, or rendering administrative services to any other series of the Company or others investing in, any type of business, whether or not the objectives or policies of any such series, other Person or entity are similar to those of the A-1 Series or the Property LP or (ii) in any way bind or restrict the Administrative Agent or any of its Affiliates, officers, directors, employees or personnel from buying, selling or trading any securities or assets for their own accounts or for the account of others for whom the Administrative Agent or any of its Affiliates, officers, directors, employees or personnel may be acting. When making decisions where a conflict of interest may arise between the A-1 Series and any other series of the Company, the Administrative Agent will allocate sale, financing, leasing and other business opportunities in accordance with the Inter-Series Policy. In the event the Administrative Agent believes that a matter may involve a conflict of interest that is not otherwise addressed by the Inter-Series Policy, the Administrative Agent shall submit such decision to, and shall be required to follow the decision taken by, the nominating and corporate governance committee of the Board of Directors (the "Nominating and Corporate Governance Committee") with respect to such matter. The Administrative Agent shall not have liability hereunder if it follows any such decision taken or direction given by the Nominating and Corporate Governance Committee.
(c) Managers, partners, officers, employees, personnel and agents of the Administrative Agent or Affiliates of the Administrative Agent may serve as directors, officers, employees, personnel, agents, nominees or signatories for the Company, the A-1 Series and/or any Subsidiary, to the extent permitted by their Governing Instruments or by any resolutions duly adopted by the Board of Directors pursuant to the Company's or such Subsidiary's Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, the A-1 Series or the Subsidiaries, such persons shall use, as applicable, their respective titles in the Company, the A-1 Series or the Subsidiaries.
Section 4. Agency. The Administrative Agent shall act as agent of the A-1 Series and the Subsidiaries in disposing of the Property, disbursing and collecting the funds of the A-1 Series, paying the debts and fulfilling the obligations of the A-1 Series, supervising the performance of professionals engaged by or on behalf of the A-1 Series and the Subsidiaries and handling, prosecuting and settling any claims of or against the A-1 Series, the Board of Directors, holders of the Company's securities associated with the A-1 Series or representatives or property of the A-1 Series. Upon any termination or expiration of the term of the Asset Management Agreement, the Administrative Agent shall act as agent of the Subsidiaries in leasing and financing the Property, disbursing and collecting the funds of the Subsidiaries, paying the debts and fulfilling the obligations of the Subsidiaries, supervising the performance of professionals engaged by or on behalf of the Subsidiaries and handling, prosecuting and settling any claims of or against the Subsidiaries or representatives or property of the Subsidiaries. Notwithstanding the foregoing, during the term of the Asset Management Agreement, the Administrative Agent shall not act as agent for the Property LP and its subsidiaries in connection with any of the foregoing activities that overlap with or conflict with the services to be provided by and delegated to the Asset Manager.
Section 5. Bank Accounts. At the direction of the Board of Directors, in the case of the A-1 Series, or the REIT General Partner and the Fortis General Partner, in the case of the Property LP and its subsidiaries, the Administrative Agent may establish and maintain one or more bank accounts in the name of the A-1 Series or any Subsidiary, as applicable (any such account, an "A-1 Series Account"), and may collect and deposit funds into any such A-1 Series Account or A-1 Series Accounts, and disburse funds from any such A-1 Series Account or A-1 Series Accounts, under such terms and conditions as the Board of Directors and the General Partners, as applicable, may approve; and the Administrative Agent shall from time to time render appropriate accountings of such collections and payments to the Board of Directors and the General Partners, as applicable, and, upon request, to the auditors of the Company, the A-1 Series or any Subsidiary.
Section 6. Records; Confidentiality. The Administrative Agent shall maintain appropriate books of accounts and records relating to the Services, and such books of account and records shall be accessible for inspection by representatives of the Company, the A-1 Series, the General Partners or any Subsidiary at any time during normal business hours upon reasonable advance notice. The Administrative Agent shall keep confidential any and all information obtained in connection with the Services and shall not disclose any such information (or use the same except in furtherance of its duties under this Agreement) to unaffiliated third parties except (i) with the prior written consent of the Board of Directors or the General Partners, as applicable; (ii) to legal counsel, accountants and other professional advisors engaged to provide services to the A-1 Series or the Subsidiaries; (iii) to appraisers, financing sources and others in the ordinary course of the A-1 Series' or the Subsidiaries' business; (iv) to governmental officials having jurisdiction over the Company, the A-1 Series, the General Partners or any Subsidiary; (v) in connection with any governmental or regulatory filings of the Company, the A-1 Series, the General Partners or any Subsidiary or disclosure or presentations to the Company's shareholders or prospective shareholders; (vi) as required by law or legal process to which the Administrative Agent or any Person to whom disclosure is permitted hereunder is a party; or (vii) to the extent such information is otherwise publicly available. The foregoing shall not apply to information which has previously become publicly available through the actions of a Person other than the Administrative Agent not resulting from the Administrative Agent's violation of this Section 6. The provisions of this Section 6 shall survive the expiration or earlier termination of this Agreement for a period of one year.
Section 7. Obligations of Administrative Agent; Restrictions.
(a) The Administrative Agent shall refrain from any action that, in its sole judgment made in good faith, (i) is not in compliance with the Inter-Series Policy, (ii) would adversely and materially affect the status of the A-1 Series as a REIT under the Code, (iii) would adversely and materially affect the Company's or any Subsidiary's status as an entity intended to be exempted or excluded from investment company status under the Investment Company Act or (iv) would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the Company, the A‑1 Series, the General Partners or any Subsidiary or that would otherwise not be permitted by the Company's or any Subsidiary's Governing Instruments. If the Administrative Agent is ordered to take any such action by the Board of Directors or the General Partners, as applicable, the Administrative Agent shall promptly notify the Board of Directors or the General Partners, as applicable, of the Administrative Agent's judgment that such action would adversely and materially affect such status or violate any such law, rule or regulation or the Governing Instruments. Notwithstanding the foregoing, the Administrative Agent, its directors, members, officers, stockholders, managers, personnel, employees and any Person controlling or controlled by the Administrative Agent and any Person providing supporting services to the Administrative Agent shall not be liable to the A-1 Series or any Subsidiary, the Board of Directors, the General Partners, or the Company's or any Subsidiary's shareholders, members or partners, for any act or omission by the Administrative Agent, its directors, officers, stockholders, personnel or employees except as provided in Section 11 of this Agreement.
(b) The Administrative Agent shall at all times during the term of this Agreement maintain "errors and omissions" insurance coverage and other insurance coverage which is customarily carried by administrative agents performing functions similar to those of the Administrative Agent under this Agreement with respect to properties similar to the Property, in an amount which is comparable to that customarily maintained by other administrative agents of similar properties.
Section 8. Compensation.
(a) The A-1 Series and the Property LP shall be jointly responsible for paying the Administrative Agent the Initial Administrative Services Fee upon the effective date of this Agreement.
(b) The A-1 Series and the Property LP shall be jointly responsible for paying the Administrative Agent the Quarterly Administrative Services Fee quarterly in arrears commencing with the fiscal quarter in which this Agreement was executed (with such initial payment pro-rated based on the number of days during such quarter that this Agreement was in effect).
(c) The Administrative Agent shall compute each installment of the Quarterly Administrative Services Fee within 45 days after the end of the fiscal quarter with respect to which such installment is payable. A copy of the computations made by the Administrative Agent to calculate such installment shall thereafter promptly be delivered to the Board of Directors and the General Partners and, upon such delivery, payment of such installment of the Quarterly Administrative Services Fee shown therein shall be due and payable in cash no later than the date which is five business days after the date of delivery of such computations to the Board of Directors and the General Partners. Notwithstanding the foregoing:
(i) prior to the Redemption Right Date, installments of the Quarterly Administrative Services Fee payable in respect of a fiscal quarter shall accrue in arrears, but shall not be paid, unless and until the Property LP has distributed, in respect of any issued and outstanding OP Units held by the REIT General Partner, an amount of available cash generated by the Property LP during such fiscal quarter equal to or greater than (i) the Series A-1 Common REIT Share Preference Amount in respect of any prior quarters and (ii) the Series A-1 Common REIT Share Preference Amount in respect of the current quarter; and
(ii) in the event that, following any fiscal quarter, the Property LP does not have sufficient funds to pay the entire accrued and unpaid Quarterly Administrative Services Fee to the Administrative Agent hereunder and the entire accrued and unpaid Quarterly Asset Management Fee to the Asset Manager under the Asset Management Agreement, then any amounts that shall be paid by the Property LP in respect of such fees shall be paid, pro rata, based on the accrued and unpaid amounts of such fees as of the end of such quarter.
(d) Following a Property Sale, the A-1 Series and the Property LP, jointly and severally, shall pay the Administrative Agent the Administrative Sale Fee; provided, however, that no Administrative Sale Fee shall be payable to the Administrative Agent in respect of any Property Sale that occurs during the first year following the effective date of this Agreement if the total consideration paid by the purchaser (including any indebtedness assumed by the purchaser) in connection with the disposition of the A-1 Series' interest in the Property LP or the Property or in respect of the Series A-1 Common Shares tendered pursuant to the purchase offer, tender offer or exchange offer related to such Property Sale, as applicable, is less than the aggregate cash contribution paid by the A-1 Series in connection with the acquisition of its equity interest in Lincoln Street Mezz, LLC, the predecessor to the Property LP, pursuant to the Contribution Agreement.
Section 9. Expenses.
(a) The A-1 Series and the Property LP, jointly and severally, shall pay (i) all fees, costs and expenses related to non-ordinary course business and operations of the Company and the A-1 Series; provided, however, that any such expenses that are not consistent with the Property LP's then approved annual operating budget shall not be reimbursable with cash generated by the Property's operations without the approval of each of the General Partners; and (ii) all property-level fees, costs and expenses of the Company, the A-1 Series and the Subsidiaries consistent with the Property LP's then approved annual operating budget or as otherwise approved by each of the General Partners (provided that, to the extent the Administrative Agent causes such fees, costs and expenses to be incurred by the Company, the A-1 Series or the Subsidiaries (or advances such fees, costs and expenses on behalf of the Company, the A-1 Series or the Subsidiaries), such fees, costs and expenses are incurred in accordance with the allocation of authority between the Administrative Agent and the Asset Manager in the manner provided in the last paragraph of Section 2(d) above), in each case, other than those specifically required to be borne by the Administrative Agent under this Agreement ("Expenses"). Subject to the foregoing, Expenses shall include, but not be limited to:
(i) the actual cost of goods and services used by the A-1 Series and any of the Subsidiaries, obtained from entities that are not Affiliates of the Administrative Agent
(ii) fees, costs and expenses of asset managers and property managers performing property management and leasing services for the Property, including the fees, costs and expenses of the Asset Manager pursuant to the Asset Management Agreement;
(iii) costs associated with property-level insurance required in connection with the business of the A-1 Series;
(iv) expenses associated with the listing of the Series A-1 Common Shares (or any other securities of the Company associated with the A-1 Series or of any Subsidiary) on the NASDAQ or other national securities exchange;
(v) expenses associated with the formation of the A-1 Series and any of the Subsidiaries;
(vi) expenses associated with the offering, issuance and distribution of Series A-1 Common Shares (or any other any other securities of the Company associated with the A-1 Series or of any Subsidiary), such as selling commissions and fees, advertising expenses, taxes, legal and accounting fees, listing and registration fees;
(vii) expenses of organizing, revising, amending, converting, modifying or terminating the A-1 Series and any Subsidiary;
(viii) expenses related to the preparation, printing and mailing of any proxy statements or other SEC filings in connection with any shareholder proposal, disposition, tender offer or redemption relating to the Property, the Property LP or the A-1 Series.
(ix) expenses related to the preparation, printing and mailing of other property-level reports required by governmental entities;
(x) property-level service expenses, including all costs and expenses incurred by the Administrative Agent or its Affiliates in fulfilling its duties hereunder at the property level, including reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of such services; provided, however, that no reimbursement shall be made for costs of such employees of the Administrative Agent or its Affiliates to the extent that such employees perform services for which the Administrative Agent receives compensation in accordance with the terms of this Agreement; and
(xi) property-level accounting and legal fees.
(b) To the extent the Administrative Agent advances any Expenses, the A-1 Series and the Property LP shall, jointly and severally, reimburse the Administrative Agent for all documented Expenses incurred on behalf of the A-1 Series and/or the Subsidiaries in accordance with Section 10 hereof.
(c) To the extent any Expenses are allocable to both the A-1 Series and any other series of the Company, such Expenses shall be allocated to the A-1 Series and such other series in accordance with the Inter-Series Policy.
(d) The Administrative Agent may, at its option, elect not to seek reimbursement for certain Expenses during a given month, which determination shall not be deemed to construe a waiver of reimbursement for similar Expenses in future periods.
(e) Notwithstanding anything to the contrary in Section 9(a) or Section 9(b), the A-1 Series and the Property LP shall not pay, and shall not be obligated to reimburse, the Administrative Agent for non-property level expenses of the A-1 Series or the Subsidiaries associated with the ordinary course business and operations of the Company and the A-1 Series, including the fees, costs and expenses of third parties and Affiliates of the Administrative Agent associated with such non-property level expenses, and the Administrative Agent will pay such non-property level expenses on behalf of the A-1 Series or the Subsidiaries. Such non-reimbursed expenses shall include (i) accounting and other expenses related to the administration of non-property-level audits (including the fees and expenses of the accountants of the A-1 Series); (ii) except as set forth above in Section 9(a)(viii), the preparation, printing and mailing of all filings made by the Company under the Exchange Act, including Forms 10-K, 10-Q and 8-K, and proxy statements; and (iii) insurance for the Company's directors and officers (unless any such director or officer of the Company is associated solely with the A-1 Series).
(f) The provisions of this Section 9 shall survive the expiration or earlier termination of this Agreement to the extent such Expenses have previously been incurred or are incurred in connection with such expiration or termination.
Section 10. Calculation and Reimbursement of Expenses. The Administrative Agent shall prepare a statement documenting the Expenses of the A-1 Series and the Subsidiaries and the Expenses incurred by the Administrative Agent on behalf of the A-1 Series and the Subsidiaries during each month, and shall deliver such statement to the Company and the Property LP within 45 days after the end of each month. Reimbursable Expenses incurred by the Administrative Agent on behalf of the A-1 Series and the Subsidiaries, including reimbursable Expenses allocated to the A-1 Series and the Property LP pursuant to Section 9 above, shall be reimbursed by the A-1 Series and the Property LP to the Administrative Agent on the fifth business day immediately following the date of delivery of such statement; provided, however, that such reimbursements may be offset by the Administrative Agent against amounts due to the A-1 Series and the Subsidiaries. The provisions of this Section 10 shall survive the expiration or earlier termination of this Agreement.
Section 11. Limits of Administrative Agent Responsibility; Indemnification.
(a) The Administrative Agent assumes no responsibility under this Agreement other than to render the Services and shall not be responsible for any action of the Board of Directors or the General Partners in following or declining to follow any advice or recommendations of the Administrative Agent, including as set forth in Section 7(a) of this Agreement. The Administrative Agent, its officers, stockholders, members, managers, directors, employees, consultants, personnel, any Person controlling or controlled by the Administrative Agent and any of such Person's officers, stockholders, members, managers, directors, employees, consultants and personnel, and any Person providing supporting services to the Administrative Agent (each an "Administrative Agent Indemnified Party") will not be liable to the Company, the A-1 Series or any Subsidiary, to the Board of Directors or the General Partners, or the Company's or any Subsidiary's shareholders, members or partners for any acts or omissions by any such Person, pursuant to or in accordance with this Agreement, except by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence or reckless disregard of the Administrative Agent's duties under this Agreement, as determined by a final non-appealable order of a court of competent jurisdiction. The A-1 Series and the Property LP shall, jointly and severally, to the full extent lawful, reimburse, indemnify and hold each Administrative Agent Indemnified Party harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys' fees) in respect of or arising from any acts or omissions of such Administrative Agent Indemnified Party made in good faith in the performance of the Administrative Agent's duties under this Agreement and not constituting such Administrative Agent Indemnified Party's bad faith, willful misconduct, gross negligence or reckless disregard of the Administrative Agent's duties under this Agreement. (b) The Administrative Agent shall, to the full extent lawful, reimburse, indemnify and hold the Company, the A-1 Series, any Subsidiary, the General Partners, the shareholders, members and partners of the Company and any Subsidiary and each other Person, if any, controlling the Company (each, a "Company Indemnified Party") harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys' fees) in respect of or arising from the Administrative Agent's bad faith, willful misconduct, gross negligence or reckless disregard of its duties under this Agreement, as determined by a final non-appealable order of a court of competent jurisdiction, or any claims by ETRE Financial's personnel relating to the terms and conditions of their employment by the Administrative Agent or ETRE Financial, as applicable.
(c) An Indemnitee will promptly notify the party against whom indemnity is claimed (the "Indemnitor") of any claim for which it seeks indemnification; provided, however, that the failure to so notify the Indemnitor will not relieve the Indemnitor from any liability which it may have hereunder, except to the extent such failure actually prejudices the Indemnitor. The Indemnitor shall have the right to assume the defense and settlement of such claim; provided, that the Indemnitor notifies the Indemnitee of its election to assume such defense and settlement within 30 days after the Indemnitee gives the Indemnitor notice of the claim. In such case, the Indemnitee will not settle or compromise such claim, and the Indemnitor will not be liable for any such settlement made without its prior written consent. If the Indemnitor is entitled to, and does, assume such defense by delivering the aforementioned notice to the Indemnitee, the Indemnitee will (i) have the right to approve the Indemnitor's counsel (which approval will not be unreasonably withheld, delayed or conditioned), (ii) be obligated to cooperate in furnishing evidence and testimony and in any other manner in which the Indemnitor may reasonably request and (iii) be entitled to participate in (but not control) the defense of any such action, with its own counsel and at its own expense.
Section 12. No Joint Venture. Nothing in this Agreement shall be construed to make the A-1 Series, the Property LP and the Administrative Agent partners or joint venturers or impose any liability as such on any of them.
Section 13. Term; Termination.
(a) This Agreement shall have an indefinite term; provided, however, that this Agreement may be terminated as provided in Section 13(b) below and in Section 15.
(b) In the event of a Property Sale, this Agreement shall terminate upon payment in full of the applicable Administrative Sale Fee. In the event of a Redemption, the Administrative Agent may terminate this Agreement, with such termination deemed to have occurred upon the consummation of such redemption.
Section 14. Assignment.
(a) Except as set forth in Section 14(b) of this Agreement, this Agreement may not be assigned, in whole or in part, by the Administrative Agent, unless such assignment is consented to in writing by the A-1 Series and the Property LP with the approval of a majority of the Board of Directors (including a majority of the Independent Directors) and, prior to the Fortis Stepdown Date, the Fortis General Partner. Any such permitted assignment shall bind the assignee under this Agreement in the same manner as the Administrative Agent is bound. In addition, the assignee shall execute and deliver to the A-1 Series and the Property LP a counterpart of this Agreement naming such assignee as Administrative Agent. Except as set forth in Section 14(c) of this Agreement, this Agreement shall not be assigned by the A-1 Series or the Property LP without the prior written consent of the Administrative Agent, except in the case of assignment by the A-1 Series or the Property LP to another entity which is a successor (by merger, consolidation, purchase of assets, or similar transaction) to the A-1 Series or the Property LP, as applicable, in which case such successor entity shall be bound under this Agreement and by the terms of such assignment in the same manner as the A-1 Series or the Property LP, as applicable, is bound under this Agreement. (b) Notwithstanding any provision of this Agreement, the Administrative Agent may subcontract and assign any or all of its responsibilities under Section 2(c), Section 2(e) and Section 2(f) of this Agreement to any of its Affiliates in accordance with the terms of this Agreement applicable to any such subcontract or assignment, and each of the A-1 Series and, to the extent the prior approval of the Fortis General Partner is not otherwise required in connection with such assignment or subcontracting, the Property LP hereby consents to any such assignment and subcontracting. In addition, provided that the Administrative Agent provides prior written notice to the A-1 Series for informational purposes only, nothing contained in this Agreement shall preclude any pledge, hypothecation or other transfer of any amounts payable to the Administrative Agent under this Agreement. In addition, the Administrative Agent may assign this Agreement to any of its Affiliates with the approval of a majority of the Board of Directors and a majority of the Independent Directors and, prior to the Fortis Stepdown Date, the Fortis General Partner. In addition, the Administrative Agent may assign any rights to receive fees or other payments under this Agreement to any Person without obtaining the approval of the Board of Directors or the Fortis General Partner. (c) In connection with a Redemption, all rights and obligations of the A-1 Series under this Agreement shall be automatically assigned to the Property LP, unless the Administrative Agent elects to terminate this Agreement in connection with such redemption.
Section 15. Termination for Cause.
(a) The A-1 Series and the Property LP may terminate this Agreement effective upon 30 days' prior written notice of termination from the Board of Directors and, prior to the Fortis Stepdown Date, the Fortis General Partner to the Administrative Agent if (i) the Administrative Agent or its agents or its assignees materially breaches any provision of this Agreement and such breach shall continue for a period of 30 days after written notice thereof specifying such breach and requesting that the same be remedied in such 30‑day period, unless (a) such material breach, by its nature, is not capable of being cured within such 30-day period and (b) within such 30-day period, the Administrative Agent commences to cure such material breach and thereafter diligently pursues the cure of such material breach and (c) the Administrative Agent causes such material breach to be cured within a reasonable period of time thereafter, (ii) the Administrative Agent engages in any act of fraud, misappropriation of funds, or embezzlement against any series of the Company or their respective subsidiaries, (iii) there is an event of any gross negligence on the part of the Administrative Agent in the performance of its duties under this Agreement, (iv) there is a commencement of any proceeding relating to the Administrative Agent's Bankruptcy, (v) the Administrative Agent is convicted (including a plea of nolo contendere) of a felony, or (vi) there is a dissolution of the Administrative Agent; provided, however, that unsatisfactory financial performance of the Property shall in no event constitute Cause under this Agreement.
(b) The Administrative Agent may terminate this Agreement effective upon 60 days’ prior written notice of termination to the A-1 Series in the event that the A-1 Series or the Property LP shall default in the performance or observance of any material term, condition or covenant contained in this Agreement and such default shall continue for a period of 30 days after written notice thereof specifying such default and requesting that the same be remedied in such 30-day period, unless (a) such material breach, by its nature, is not capable of being cured within such 30-day period and (b) within such 30-day period, the A-1 Series or the Property LP commences to cure such material breach and thereafter diligently pursues the cure of such material breach and (c) the A-1 Series or the Property LP causes such material breach to be cured within a reasonable period of time thereafter.
(c) The Administrative Agent may terminate this Agreement in the event the Company becomes regulated as an "investment company" under the Investment Company Act, with such termination deemed to have occurred immediately prior to such event.
Section 16. Action Upon Termination. From and after the effective date of termination of this Agreement, pursuant to Section 13 or Section 15 of this Agreement, the Administrative Agent shall not be entitled to compensation for further services under this Agreement, but shall be paid all compensation accruing to the date of termination. Upon such termination, the Administrative Agent shall forthwith: (a) after deducting any accrued compensation and reimbursement for its Expenses to which it is then entitled, pay over to the A-1 Series or a Subsidiary all money collected and held for the account of the A-1 Series or a Subsidiary pursuant to this Agreement;
(b) deliver to the Board of Directors and, prior to the Fortis Stepdown Date, the Fortis General Partner a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors and/or the General Partners with respect to the A-1 Series or a Subsidiary; and
(c) deliver to the Board of Directors and, prior to the Fortis Stepdown Date, the Fortis General Partner all property and documents of the A-1 Series or any Subsidiary then in the custody of the Administrative Agent.
Section 17. Release of Money or Other Property Upon Written Request. The Administrative Agent agrees that any money or other property of the A-1 Series or any Subsidiary held by the Administrative Agent under this Agreement shall be held by the Administrative Agent as custodian for the A-1 Series or Subsidiary, and the Administrative Agent's records shall be appropriately marked clearly to reflect the ownership of such money or other property by the A-1 Series or such Subsidiary. Upon the receipt by the Administrative Agent of a written request signed by a duly authorized Officer requesting the Administrative Agent to release to the A-1 Series or any Subsidiary any money or other property then held by the Administrative Agent for the account of the A-1 Series or any Subsidiary under this Agreement, the Administrative Agent shall release such money or other property to the A-1 Series or any Subsidiary within a reasonable period of time, but in no event later than 30 days following such request. The Administrative Agent shall not be liable to the Company, the A-1 Series, any Subsidiary, the Board of Directors, the General Partners, or the Company's or a Subsidiary's members, shareholders or partners or their respective Affiliates for any acts performed or omissions to act by the A-1 Series or any Subsidiary in connection with the money or other property released to the A-1 Series or any Subsidiary in accordance with the second sentence of this Section 17. The A-1 Series, the Property LP and any other Subsidiary shall, jointly and severally, indemnify the Administrative Agent and its officers, directors, personnel, agents, and officers and against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Administrative Agent's release of such money or other property to the A-1 Series or any Subsidiary in accordance with the terms of this Section 17. Indemnification pursuant to this provision shall be in addition to any right of the Administrative Agent Indemnified Parties to indemnification under Section 11 of this Agreement. Section 18. Amendment. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties hereto or, in the case of a waiver, by the party waiving compliance.
Section 19. Notices. Unless expressly provided otherwise in this Agreement, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of (i) personal delivery, (ii) delivery by reputable overnight courier, (iii) delivery by facsimile transmission with telephonic confirmation or (iv) delivery by registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below:
(a) If to the A-1 Series:
ETRE REIT, LLC, Series A-1
44 Wall Street
New York, New York 10005
Tel (212) 596-7225
with a copy to:
Jay L. Bernstein, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
212 878-8527 (tele.)
(212) 878-8375 (fax)
(b) If to the Property LP:
ETRE Property A-1, L.P.
44 Wall Street
New York, New York 10005
Tel (212) 596-7225
with a copy to:
Jay L. Bernstein, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
212 878-8527 (tele.)
(212) 878-8375 (fax)
(c) If to the Administrative Agent:
ETRE Asset Management, LLC
44 Wall Street
New York, New York 10005
Tel (212) 596-7225
with a copy to:
Jay L. Bernstein, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
212 878-8527 (tele.)
(212) 878-8375 (fax)
Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 18 for the giving of notice. Section 20. Binding Nature of Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns as provided in this Agreement.
Section 21. Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter of this Agreement, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter of this Agreement. The express terms of this Agreement control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms of this Agreement. This Agreement may not be modified or amended other than by an agreement in writing signed by the parties hereto.
Section 22. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES TO THE CONTRARY.
Section 23. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of any party hereto, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. No waiver of any provision hereunder shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
Section 24. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed part of this Agreement.
Section 25. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts of this Agreement, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.
Section 26. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
Section 27. Gender. Words used herein regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires.
Section 28. Effect of Fortis Stepdown Date. After the occurrence of the Fortis Stepdown Date, the REIT General Partner shall have the sole authority to unilaterally take all actions generally described in this Agreement as actions to be taken by, requiring the consent of, or under the authority of, the General Partners, the Fortis General Partner or the REIT General Partner.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
ETRE REIT, LLC,
a Delaware series limited liability company, with respect to Series A-1, a separate series thereof
| |
By: | _____________________________
Name: Paul Frischer
Title: Authorized Person |
ETRE PROPERTY A-1, L.P., a Delaware limited partnership
By: Lincoln Street Manager, LLC, its general partner
| |
By: | _______________________________
Name:
Title: |
ETRE ASSET MANAGEMENT, LLC, a Delaware limited liability company
By: ___________________________________
Name: Paul Frischer
Title: Authorized Person
Exhibit 10.5
ETRE REIT, LLC
2015 NON-MANAGEMENT DIRECTOR COMPENSATION PLAN
1. PURPOSE. The Plan is intended to provide incentives to non-management directors of the Company, to encourage a proprietary interest in the Company, to encourage the non-management directors to remain in the service of the Company, to attract new directors with outstanding qualifications, and to afford additional incentive to non-management directors to increase their efforts in providing significant services to the Company and the Series. In furtherance thereof, the Plan permits awards of equity-based incentives to Directors of the Company.
2. DEFINITIONS. As used in this Plan, the following definitions apply:
"Act" shall mean the Securities Act of 1933, as amended.
"Administrative Agent" shall mean ETRE Asset Management LLC, a Delaware limited liability company, together with its successors and assigns.
"Award Agreement" shall mean a written agreement evidencing a Grant pursuant to the Plan.
"Board" shall mean the Board of Directors of the Company and each Series.
"Cause" shall mean, with respect to a Director, unless otherwise provided in an applicable Award Agreement, a termination of service, based upon a finding by the Company, acting in good faith, after the occurrence of any of the following: (1) the Director is convicted or charged with a criminal offense; (2) the Director's intentional violation of law in connection with any transaction involving the purchase, sale, loan or other disposition of, or the rendering of investment advice with respect to, any security, futures or forward contract, insurance contract, debt instrument, financial instrument or currency; (3) the Director's dishonesty, bad faith, gross negligence, willful misconduct, fraud or willful or reckless disregard of duties in connection with the performance of any services on behalf of the Company or any Series or the Director's engagement in conduct which is injurious to the Company or any Series, monetarily or otherwise; (4) the Director's intentional breach of any material provision of an Award Agreement or any other agreements of the Company or any Series; (5) the Director's material violation of any written policies adopted by the Company governing the conduct of persons performing services on behalf of the Company or any Series or the Director's non-adherence to the Company's policies and procedures or other applicable Company compliance manuals; (6) the taking of or omission to take any action that has caused or substantially contributed to a material deterioration in the business or reputation of the Company or any Series, or that was otherwise materially disruptive of their business or affairs; provided, however, that the term Cause shall not include for this purpose any mistake of judgment made in good faith with respect to any transaction respecting an investment made by any Series; (7) the failure by the Director to devote a sufficient portion of time to performing services for the Company or any Series without the prior written consent of the Company, other than by reason of death or Disability; (8) the obtaining by the Director of any material improper personal benefit as a result of a breach by the Director of any covenant or agreement (including, without limitation, a breach by the Director of the Company's code of ethics or a material breach by the Director of other written policies furnished to the Director relating to personal investment transactions or of any covenant, agreement, representation or warranty contained in any limited liability company agreement); or (9) the Director's suspension or other disciplinary action against the Director by an applicable regulatory authority; provided, however, that if a failure, breach, violation or action or omission described in any of clauses (4) to (6) is capable of being cured, the Director has failed to do so after being given notice and a reasonable opportunity to cure. As used in this definition, "material" means more than de minimis.
"Change in Control" means unless otherwise provided in an Award Agreement the happening of any of the following:
(i) any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding the Company, any entity controlling, controlled by or under common control with the Company, any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any such entity, and, with respect to any particular Director, the Director and any "group" (as such term is used in Section 13(d)(3) of the Exchange Act) of which the Director is a member), is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of either (A) the combined voting power of the Company's then outstanding securities or (B) the then outstanding Shares of all Series (in either such case other than as a result of an acquisition of securities directly from the Company); or
(ii) any consolidation or merger of the Company where the shareholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, shares representing in the aggregate 50% or more of the combined voting power of the securities of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any); or
(iii) there shall occur (A) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by "persons" (as defined above) in substantially the same proportion as their ownership of the Company immediately prior to such sale or (B) the approval by shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company.
Notwithstanding the foregoing, no event or condition shall constitute a Change in Control to the extent that, if it were, a 20% tax would be imposed under Section 409A of the Code; provided that, in such a case, the event or condition shall continue to constitute a Change in Control to the maximum extent possible (e.g., if applicable, in respect of vesting without an acceleration of distribution) without causing the imposition of such 20% tax.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee of the Company or any subcommittee of the Board as appointed by the Board in accordance with Section 4 of the Plan; provided, however, that the Committee shall at all times consist of two or more persons who, at the time of their appointment, each qualified as a "Non-Employee Director" under Rule 16b-3(b)(3)(i) promulgated under the Exchange Act.
"Common Shares" shall mean any common shares of any Series of the Company, either currently existing or designated hereafter pursuant to the Operating Agreement.
"Company" shall mean ETRE REIT, LLC, a Delaware series limited liability company.
"DER" shall mean a right awarded under Section 10 of the Plan to receive (or have credited) the equivalent value (in cash or Shares) of dividends paid on Common Shares of a Series.
"Director" shall mean a Non-Management Director to whom Options, Restricted Shares, Phantom Shares, DERs, or other equity-based awards are granted hereunder.
"Disability" shall mean, unless otherwise provided by the Committee in the Director's Award Agreement, the occurrence of an event which would entitle the Director to the payment of disability income under an approved long-term disability income plan or a long-term disability as determined by the Committee in its absolute discretion pursuant to any other standard as may be adopted by the Committee. Notwithstanding the foregoing, no circumstances or condition shall constitute a Disability to the extent that, if it were, a 20% tax would be imposed under Section 409A of the Code; provided that, in such a case, the event or condition shall continue to constitute a Disability to the maximum extent possible (e.g., if applicable, in respect of vesting without an acceleration of distribution) without causing the imposition of such 20% tax.
"Dividend" shall mean a distribution on or in respect of any Shares.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exercise Price" shall mean the price per Common Share, determined by the Board or the Committee, at which an Option may be exercised.
"Fair Market Value" shall mean the value of one Common Share of a Series, determined as follows:
(i) If the Shares of such Series are then listed on a national stock exchange, the closing sales price per Share on the exchange on the date in question (or, if no such price is available for such date, for the last preceding date on which there was a sale of Shares on such exchange), as determined by the Committee.
(ii) If the Shares of such Series are not then listed on a national stock exchange but are then traded on an over-the-counter market, the average of the closing bid and asked prices on the date in question for the Shares in such over-the-counter market (or, if no such average is available for such date, for the last preceding date on which there was a sale of Shares in such market), as determined by the Committee.
(iii) If neither (i) nor (ii) applies, such value as the Committee in its discretion may in good faith determine. Notwithstanding the foregoing, where the Shares of such Series are listed or traded, the Committee may make discretionary determinations in good faith where the Shares have not been traded for 10 trading days.
Notwithstanding the foregoing, with respect to any "stock right" within the meaning of Section 409A of the Code, Fair Market Value shall not be less than the "fair market value" of the Common Shares of such Series determined in accordance with the final regulations promulgated under Section 409A of the Code.
"Grant" shall mean the issuance of a Non-qualified Share Option, Restricted Share, Phantom Share, DER, or other equity-based grant as contemplated herein or any combination thereof as applicable to a Director. The Committee will determine the eligibility of Directors based on, among other factors, the position and responsibilities of such individuals, the nature and value to the Company or a Series of such individuals' accomplishments and potential contribution to the success of the Company or a Series whether directly or through its subsidiaries.
"Non-Management Director" shall mean (a) (i) a member of the Board and (ii) with respect to a Series, any person who has been designated pursuant to the terms of the Operating Agreement as a specific director to be associated with such Series, in each case, that is (b) not an officer of (i) the Company or (ii) the Administrative Agent or its affiliates.
"Non-qualified Share Option" shall mean an Option not described in Section 422(b) of the Code.
"Operating Agreement" shall mean the First Amended and Restated Limited Liability Company Agreement of the Company, as it may be amended, modified, supplemented or restated from time to time.
"Option" shall mean a Non-qualified Share Option, to purchase, at a price and for the term fixed by the Committee in accordance with the Plan, and subject to such other limitations and restrictions in the Plan and the applicable Award Agreement, a number of Shares of a Series determined by the Committee.
"Optionee" shall mean any Director to whom an Option is granted, or the Successors of the Optionee, as the context so requires.
"Performance Goals" has the meaning set forth in Section 12.
"Phantom Share" shall mean a right, pursuant to the Plan, of the Director to payment of the Phantom Share Value.
"Phantom Share Value", per Phantom Share, shall mean the Fair Market Value of a Share of the applicable Series or, if so provided by the Committee, such Fair Market Value to the extent in excess of a base value established by the Committee at the time of grant.
"Plan" shall mean the Company's 2015 Non-Management Director Compensation Plan, as set forth herein, and as the same may from time to time be amended.
"Purchase Price" shall mean the Exercise Price times the number of Shares with respect to which an Option is exercised.
"Restricted Share" shall mean an award of Shares of a Series that are subject to restrictions hereunder.
"Series" shall mean a series of the Company, either currently existing or designated hereafter pursuant to the Operating Agreement.
"Shares" shall mean Common Shares of the Company, adjusted in accordance with Section 14 of the Plan (if applicable).
"Subsidiary" shall mean any corporation, partnership, limited liability company or other entity at least 50% of the economic interest in the equity of which is owned, directly or indirectly, by the Company, any Series or by another subsidiary.
"Successors of the Optionee" shall mean the legal representative of the estate of a deceased Optionee or the person or persons who shall acquire the right to exercise an Option by bequest or inheritance or by reason of the death of the Optionee.
"Termination of Service" shall mean the time when the directorship between the Director and the Company and/or the Series is terminated for any reason, with or without Cause, including, but not limited to, any termination by resignation, discharge, death or retirement. The Committee, in its absolute discretion, shall determine the effects of all matters and questions relating to Termination of Service, including, but not limited to, the question of whether any Termination of Service was for Cause and all questions of whether particular leaves of absence constitute Terminations of Service. For this purpose, the service relationship shall be treated as continuing intact while the Director is on military leave, sick leave or other bona fide leave of absence (to be determined in the discretion of the Committee).
3. EFFECTIVE DATE. The effective date of the Plan is ____, 2015. The Plan shall not become effective unless and until it is approved on or prior to the effective date by the requisite percentage of the holders of the Common Shares of the Company then outstanding. The Plan shall terminate on, and no award shall be granted hereunder on or after, the one-year anniversary of the earlier of the approval of the Plan by (i) the Board or (ii) the shareholders of the Company; provided, however, that the Board may at any time prior to that date terminate the Plan.
4. ADMINISTRATION.
(a) Membership on Committee. The Plan shall be administered by the Committee appointed by the Board. If no Committee is designated by the Board to act for those purposes or the Board otherwise so elects, the full Board shall have the rights and responsibilities of the Committee hereunder and under the Award Agreements.
(b) Committee Meetings. The acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by a majority of the entire Committee, shall be the acts of the Committee for purposes of the Plan. If and to the extent applicable, no member of the Committee may act as to matters under the Plan specifically relating to such member.
(c) Grant of Awards.
(i) The Committee shall from time to time at its discretion select the Directors who are to be issued Grants and determine the number and type of Grants to be issued under any Award Agreement to a Director. In particular, the Committee shall (A) determine the terms and conditions, not inconsistent with the terms of the Plan, of any Grants awarded hereunder (including, but not limited to the performance goals and periods applicable to the award of Grants); (B) determine the time or times when and the manner and condition in which each Option shall be exercisable and the duration of the exercise period; and (C) determine or impose other conditions to the Grant or exercise of Options under the Plan as it may deem appropriate. The Committee may establish such rules, regulations and procedures for the administration of the Plan as it deems appropriate, determine the extent, if any, to which Options, Phantom Shares, Shares (whether or not Restricted Shares), DERs or other equity-based awards shall be forfeited (whether or not such forfeiture is expressly contemplated hereunder), and take any other actions and make any other determinations or decisions that it deems necessary or appropriate in connection with the Plan or the administration or interpretation thereof. The Committee shall also cause each Option to be designated a Non-qualified Share Option. The Director shall take whatever additional actions and execute whatever additional documents the Committee may in its reasonable judgment deem necessary or advisable in order to carry or effect one or more of the obligations or restrictions imposed on the Director pursuant to the express provisions of the Plan and the Award Agreement. DERs will be exercisable separately or together with Options, and paid in cash or other consideration at such times and in accordance with such rules, as the Committee shall determine in its discretion. Unless expressly provided hereunder, the Committee, with respect to any Grant, may exercise its discretion hereunder at the time of the award or thereafter. The Committee shall have the right and responsibility to interpret the Plan and the interpretation and construction by the Committee of any provision of the Plan or of any Grant thereunder, including, without limitation, in the event of a dispute, shall be final and binding on all Directors and other persons to the maximum extent permitted by law. Without limiting the generality of Section 23, no member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Grant hereunder.
(ii) Notwithstanding clause (i) of this Section 4(c), unless otherwise required by law or exchange listing rules, any award under the Plan to a Director who is a member of the Committee shall be made by the full Board, but for these purposes the directors of the Company who are on the Committee shall be required to be recused in respect of such awards and shall not be permitted to vote.
(d) Awards.
(i) Agreements. Grants to Directors shall be evidenced by written Award Agreements in such form as the Committee shall from time to time determine (which Award Agreements need not be in the same form as any other Award Agreement evidencing Grants under the Plan and need not contain terms and conditions identical to those applicable to any other Grant under the Plan or to those applicable to any other Directors). Such Award Agreements shall comply with and be subject to the terms and conditions set forth below.
(ii) Number of Shares and Specification of Series. Each Grant issued to a Director shall state the number of Shares to which it pertains or which otherwise underlie the Grant and shall provide for the adjustment thereof in accordance with the provisions of Section 14 hereof. Each Grant issued to a Director shall state the Series to which it pertains.
(iii) Grants. Subject to the terms and conditions of the Plan and consistent with the Company's intention for the Committee to exercise the greatest permissible flexibility under Rule 16b-3 under the Exchange Act in awarding Grants, the Committee shall have the power:
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(1) | to determine from time to time the Grants to be issued to Directors under the Plan and to prescribe the terms and provisions (which need not be identical) of Grants issued under the Plan to such persons; |
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(2) | to construe and interpret the Plan and the Grants thereunder and to establish, amend and revoke the rules, regulations and procedures established for the administration of the Plan. In this connection, the Committee may correct any defect or supply any omission, or reconcile any inconsistency in the Plan, in any Award Agreement, or in any related agreements, in the manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. All decisions and determinations by the Committee in the exercise of this power shall be final and binding upon the Company, the Series and the Directors; |
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(3) | to amend any outstanding Grant, subject to Section 16, and to accelerate or extend the vesting or exercisability of any Grant (in compliance with Section 409A of the Code, if applicable) and to waive conditions or restrictions on any Grants, to the extent it shall deem appropriate; |
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(4) | to determine the circumstances, if any, upon which an award made under the Plan shall be subject to forfeiture in whole or in part as a result of a breach by the Director of a provision or covenant to which the Director is subject; and |
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(5) | generally to exercise such powers and to perform such acts as are deemed necessary or expedient to promote the best interests of the Company with respect to the Plan. |
(iv) Any Grant awarded after the effective date of this Plan is subject to mandatory repayment by the Director to the Company and/or the applicable Series to the extent the Director is or in the future becomes subject to any Company and/or Series "clawback" or recoupment policy or as otherwise required by applicable law.
5. PARTICIPATION.
(a) Eligibility. Only Directors shall be eligible to receive Grants under the Plan.
(b) Limitation of Ownership. No Grants shall be issued under the Plan to any person who after such Grant would beneficially own more than 9.8% of the outstanding Common Shares of a Series of the Company, unless the foregoing restriction is expressly and specifically waived by action of the independent directors of the Board.
(c) Share Ownership. For purposes of Section 5(b) above, in determining share ownership a Director shall be considered as owning the shares owned, directly or indirectly, by or for his brothers, sisters, spouses, ancestors and lineal descendants. Shares owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries. Shares with respect to which any person holds an Option shall be considered to be owned by such person.
(d) Outstanding Shares. For purposes of Section 5(b) above, "outstanding Common Shares of a Series" shall include all shares actually issued and outstanding immediately after the issue of the Grant to the Director. With respect to the share ownership of any Director, "outstanding Common Shares of a Series" shall include shares authorized for issue under outstanding Options held by such Director, but not options held by any other person.
6. SHARES. Subject to adjustments pursuant to Section 14, no Grant may cause the total number of Common Shares subject to all outstanding awards to exceed 0.25% of the issued and outstanding Common Shares of all Series on a fully diluted basis (assuming, if applicable, the exercise of all outstanding Options and the conversion of all warrants and convertible securities into Common Shares). Notwithstanding the first sentence of this Section 6, (i) Shares that have been granted as Restricted Shares or that have been reserved for distribution in payment for Options or Phantom Shares but are later forfeited or for any other reason are not payable under the Plan; and (ii) Shares as to which an Option is granted under the Plan that remains unexercised at the expiration, forfeiture or other termination of such Option, may be the subject of the issue of further Grants. Common Shares issued hereunder may consist, at the applicable time, in whole or in part, of authorized and unissued shares, treasury shares or previously issued Shares under the Plan. The certificates for Shares issued hereunder may include any legend which the Committee deems appropriate to reflect any restrictions on transfer hereunder or under the Award Agreement, or as the Committee may otherwise deem appropriate. Shares subject to DERs, other than DERs based directly on the dividends payable with respect to Shares subject to Options or the dividends payable on a number of Shares corresponding to the number of Phantom Shares awarded, shall be subject to the limitation of this Section 6. Notwithstanding the limitations above in this Section 6, there shall be no limit on the number of Phantom Shares or DERs to the extent they are paid out in cash that may be granted under the Plan. If any Phantom Shares or DERs are paid out in cash, the underlying Shares may again be made the subject of Grants under the Plan, notwithstanding the first sentence of this Section 6.
7. TERMS AND CONDITIONS OF OPTIONS.
(a) Each Award Agreement with a Director shall state the Exercise Price. The Exercise Price for any Option shall not be less than the Fair Market Value of a Share of the applicable Series on the date of Grant.
(b) Medium and Time of Payment. Except as may otherwise be provided below, the Purchase Price for each Option granted to a Director shall be payable in full in United States dollars upon the exercise of the Option. In the event the Company determines that it and/or the applicable Series is required to withhold taxes as a result of the exercise of an Option, as a condition to the exercise thereof, a Director may be required to make arrangements satisfactory to the Company to enable it and/or the applicable Series to satisfy such withholding requirements in accordance with Section 20. If the applicable Award Agreement so provides, or the Committee otherwise so permits, the Purchase Price may be paid in one or a combination of the following, taking into account the desired accounting treatment and compliance with applicable law:
(i) by a certified or bank cashier's check;
(ii) by the surrender of Common Shares in good form for transfer, owned by the person exercising the Option and having a Fair Market Value on the date of exercise equal to the Purchase Price, or in any combination of cash and Common Shares, as long as the sum of the cash so paid and the Fair Market Value of the Common Shares so surrendered equals the Purchase Price;
(iii) by reduction of the Shares issuable upon exercise of the Option;
(iv) by cancellation of indebtedness owed by the applicable Series to the Director;
(v) subject to Section 16(e), by broker-assisted cashless exercise using a broker reasonably acceptable to the Company, pursuant to which the Director delivers to the Company, on or prior to the exercise date, the Director's instruction directing and obligating the broker to (a) sell Shares (or a sufficient portion of the Shares) acquired upon exercise of the Option and (b) remit to the Company a sufficient portion of the sale proceeds to pay the aggregate purchase price, no later than the third trading day after the exercise date;
(vi) subject to Section 16(e), by a loan or extension of credit from the applicable Series evidenced by a full recourse promissory note executed by the Director. The interest rate and other terms and conditions of such note shall be determined by the Committee (in which case the Committee may require that the Director pledge his or her Shares to the applicable Series for the purpose of securing the payment of such note, and in no event shall the share certificate(s) representing such Shares be released to the Director until such note shall have been paid in full); or
(vii) by any combination of such methods of payment or any other method acceptable to the Committee in its discretion.
Except in the case of Options exercised by certified or bank cashier's check, the Committee may impose such limitations and prohibitions on the exercise of Options as it deems appropriate, including, without limitation, any limitation or prohibition designed to avoid accounting consequences which may result from the use of Common Shares as payment upon exercise of an Option. Any fractional Common Shares resulting from a Director's election that are accepted by the Company shall in the discretion of the Committee be paid in cash.
(c) Term and Nontransferability of Grants and Options.
(i) Each Option under this Section 7 shall state the time or times which all or part thereof becomes exercisable, subject to the restrictions set forth in clauses (ii) through (v) below.
(ii) No Option shall be exercisable except by the Director or a transferee permitted hereunder.
(iii) No Option shall be assignable or transferable, except by will or the laws of descent and distribution of the state wherein the Director is domiciled at the time of his death; provided, however, that the Committee may (but need not) permit other transfers, where the Committee concludes that such transferability (i) does not result in accelerated taxation and (ii) is otherwise appropriate and desirable.
(iv) No Option shall be exercisable until such time as set forth in the applicable Award Agreement (but in no event after the expiration of such Grant).
(v) No modification of an Option shall, without the consent of the Optionee or as required by applicable law or regulation or to meet the requirements of any accounting standard or to correct an administrative error, materially impair the rights of an Optionee under any Option previously granted.
(d) Termination of Service, other than by Death, Disability, or for Cause. Unless otherwise provided in the applicable Award Agreement, upon any Termination of Service for any reason other than his or her death or Disability, an Optionee shall have the right, subject to the restrictions of Section 4(c) above, to exercise his or her Option at any time within 90 days after Termination of Service, but only to the extent that, at the date of Termination of Service, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable Award Agreement and had not previously been exercised or forfeited; provided, however, that, unless otherwise provided in the applicable Award Agreement, if there occurs a Termination of Service for Cause, any Option not exercised in full prior to such termination shall be canceled.
(e) Death of Optionee. Unless otherwise provided in the applicable Award Agreement, if the Optionee of an Option dies while a Director or within 90 days after any Termination of Service other than for Cause, and has not fully exercised the Option, subject to the restrictions of Section 4(c) above, the Option may be exercised at any time within 12 months after the Optionee's death (or 12 months after the Optionee's Termination of Service, if sooner) by the Successor of the Optionee, but only to the extent that, at the date of death, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable Award Agreement and had not previously been exercised or forfeited.
(f) Disability of Optionee. Unless otherwise provided in the Award Agreement, upon any Termination of Service for reason of his or her Disability, an Optionee shall have the right, subject to the restrictions of Section 4(c) above, to exercise the Option at any time within 12 months after Termination of Service, but only to the extent that, at the date of Termination of Service, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable Award Agreement and had not previously been exercised or forfeited.
(g) Rights as a Shareholder. An Optionee, a Successor of the Optionee, or the holder of a DER shall have no rights as a shareholder with respect to any Shares covered by his or her Grant until, in the case of an Optionee, the date of the issuance of a share certificate for such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such share certificate is issued, except as provided in Section 14.
(h) Modification, Extension and Renewal of Option. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options or accept the cancellation of outstanding Options (to the extent not previously exercised) for the granting of new Options in substitution therefor (but not including repricings, in the absence of shareholder approval). The Committee may modify, extend or renew any Option granted to any Director, taking into consideration Rule 16b-3 under the Exchange Act and Section 409A of the Code. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted.
(i) Stock Appreciation Rights. The Committee, in its discretion, may (taking into account, without limitation, the application of Section 409A of the Code, as the Committee may deem appropriate), also permit the Optionee to elect to exercise an Option by receiving Shares, cash or a combination thereof, in the discretion of the Committee and as may be set forth in the applicable Award Agreement, with an aggregate Fair Market Value (or, to the extent of payment in cash, in an amount) equal to the excess of the Fair Market Value of the Shares with respect to which the Option is being exercised over the aggregate Purchase Price, as determined as of the day the Option is exercised.
(j) Deferral. The Committee may establish a program (taking into account, without limitation, the application of Section 409A of the Code, as the Committee may deem appropriate) under which Optionees will have Phantom Shares subject to Section 9 credited upon their exercise of Options, rather than receiving Shares at that time.
(k) Other Provisions. The Award Agreement authorized under the Plan may contain such other provisions not inconsistent with the terms of the Plan (including, without limitation, restrictions upon the exercise of the Option) as the Committee shall deem advisable.
8. PROVISIONS APPLICABLE TO RESTRICTED SHARES.
(a) Vesting Periods. In connection with the grant of Restricted Shares, whether or not Performance Goals apply thereto, the Committee shall establish one or more vesting periods with respect to the Restricted Shares granted, the length of which shall be determined in the discretion of the Committee and set forth in the applicable Award Agreement. Subject to the provisions of this Section 8, the applicable Award Agreement and the other provisions of the Plan, restrictions on Restricted Shares shall lapse if the Director satisfies all applicable service requirements through the end of the applicable vesting period.
(b) Grant of Restricted Shares. Subject to the other terms of the Plan, the Committee may, in its discretion as reflected by the terms of the applicable Award Agreement: (i) authorize the granting of Restricted Shares to Directors; (ii) provide a specified purchase price for the Restricted Shares (whether or not the payment of a purchase price is required by any state law applicable to the Company); (iii) determine the restrictions applicable to Restricted Shares and (iv) determine or impose other conditions to the grant of Restricted Shares under the Plan as it may deem appropriate.
(c) Certificates.
(i) Each Director granted Restricted Shares may be issued a share certificate in respect of Shares of Restricted Shares awarded under the Plan. Any such certificate shall be registered in the name of the Director. Without limiting the generality of Section 6, in addition to any legend that might otherwise be required by the Board or the Company's Operating Agreement, bylaws or other applicable documents, the certificates for Restricted Shares issued hereunder may include any legend which the Committee deems appropriate to reflect any restrictions on transfer hereunder or under the applicable Award Agreement, or as the Committee may otherwise deem appropriate, and, without limiting the generality of the foregoing, shall bear a legend referring to the terms, conditions, and restrictions applicable to such Grant, substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE ETRE REIT, LLC 2015 NON-MANAGEMENT DIRECTOR COMPENSATION PLAN, AND AN AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND ETRE REIT, LLC. COPIES OF SUCH PLAN AND AWARD AGREEMENT ARE ON FILE IN THE OFFICES OF ETRE REIT, LLC, 44 WALL STREET, NEW YORK, NY 10005.
(ii) The Committee may require that any share certificates evidencing such Shares be held in custody by the Company until the restrictions hereunder shall have lapsed and that, as a condition of any grant of Restricted Shares, the Director shall have delivered a stock power, endorsed in blank, relating to the shares covered by such Grant. If and when such restrictions so lapse, the share certificates shall be delivered by the Company to the Director or his or her designee as provided in Section 8(d).
(iii) For purposes of clarity, nothing contained in the Plan shall preclude the use of non-certficated evidence of ownership that the Committee determines to be appropriate, including book entry.
(d) Restrictions and Conditions. Unless otherwise provided by the Committee in an Award Agreement, the Restricted Shares awarded pursuant to the Plan shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the applicable Award Agreement, during a period commencing with the date of such Grant and ending on the date the period of forfeiture with respect to such Shares lapses, the Director shall not be permitted voluntarily or involuntarily to sell, transfer, pledge, anticipate, alienate, encumber or assign Restricted Shares awarded under the Plan (or have such Shares attached or garnished). Subject to the provisions of the applicable Award Agreement, the period of forfeiture with respect to Shares granted hereunder shall lapse as provided in the applicable Award Agreement. Notwithstanding the foregoing, unless otherwise expressly provided by the Committee, the period of forfeiture with respect to such Shares shall only lapse as to whole Shares.
(ii) Except as provided in the foregoing clause (i), or in Section 14, the Director shall have, in respect of the Restricted Shares, all of the rights of a shareholder of such Shares of the Company, including the right to vote the Shares and receive dividends. Certificates for Shares (not subject to restrictions hereunder) shall be delivered to the Director or his or her designee (or where permitted, transferee) promptly after, and only after, the period of forfeiture shall lapse without forfeiture in respect of such Restricted Shares.
(iii) Termination of service. Unless otherwise provided in the applicable Award Agreement, if the Director has a Termination of Service for any reason, then (A) all Restricted Shares still subject to restriction shall thereupon, and with no further action, be forfeited by the Director, and (B) the applicable Series shall pay to the Director as soon as practicable (and in no event more than 30 days) after such termination an amount equal to the lesser of (x) the amount paid by the Director, if any, for such forfeited Restricted Shares as contemplated by Section 8(b), and (y) the Fair Market Value on the date of termination of the forfeited Restricted Shares.
9. PROVISIONS APPLICABLE TO PHANTOM SHARES.
(a) Grant of Phantom Shares. Subject to the other terms of the Plan, the Committee shall, in its discretion as reflected by the terms of the applicable Award Agreement: (i) authorize the Granting of Phantom Shares to Directors and (ii) determine or impose other conditions to the grant of Phantom Shares under the Plan as it may deem appropriate.
(b) Term. The Committee may provide in an Award Agreement that any particular Phantom Share shall expire at the end of a specified term.
(c) Vesting.
(i) Subject to the provisions of the applicable Award Agreement and Section 9(c)(ii), Phantom Shares shall vest as provided in the applicable Award Agreement.
(ii) Unless otherwise determined by the Committee in an applicable Award Agreement, in the event that a Director has a Termination of Service, any and all of the Director's Phantom Shares which have not vested prior to or as of such termination shall thereupon, and with no further action, be forfeited and cease to be outstanding, and the Director's vested Phantom Shares shall be settled as set forth in Section 9(d).
(d) Settlement of Phantom Shares.
(i) Except as otherwise provided by the Committee, each vested and outstanding Phantom Share shall be settled by the transfer to the Director of one Share of the applicable Series; provided, however, that, the Committee at the time of grant (or, in the appropriate case, as determined by the Committee, thereafter) may provide that a Phantom Share may be settled (A) in cash at the applicable Phantom Share Value, (B) in cash or by transfer of Shares as elected by the Director in accordance with procedures established by the Committee (if any) or (C) in cash or by transfer of Shares as elected by the Company and the applicable Series.
(ii) Each Phantom Share shall be settled with a single-sum payment by the applicable Series; provided, however, that, with respect to Phantom Shares of a Director which have a common Settlement Date (as defined below), the Committee may permit the Director to elect in accordance with procedures established by the Committee (taking into account, without limitation, Section 409A of the Code, as the Committee may deem appropriate) to receive installment payments over a period not to exceed 10 years.
(iii) (1) Except as otherwise provided by the Committee, the settlement date with respect to a Director is the first day of the month to follow the Director's Termination of Service ("Settlement Date").
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(2) | Notwithstanding Section 9(d)(iii)(1), the Committee may provide that distributions of Phantom Shares can be elected at any time in those cases in which the Phantom Share Value is determined by reference to Fair Market Value of the applicable Shares to the extent in excess of a base value, rather than by reference to unreduced Fair Market Value. |
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(3) | Notwithstanding the foregoing, the Settlement Date, if not earlier pursuant to this Section 9(d)(iii), is the date of the Director's death. |
(iv) Notwithstanding any other provision of the Plan (taking into account, without limitation, Section 409A of the Code, as the Committee may deem appropriate), a Director may receive any amounts to be paid in installments as provided in Section 9(d)(ii) or deferred by the Director as provided in Section 9(d)(iii) in the event of an Unforeseeable Emergency. For these purposes, an "Unforeseeable Emergency" shall have the meaning provided in Section 409A of the Code and the regulations thereunder, as determined by the Committee in its sole discretion, provided that such Unforeseeable Emergency must cause a severe financial hardship to the Director resulting from (x) a sudden and unexpected illness or accident of the Director or "dependent," as defined in Section 152(a) of the Code, of the Director, (y) loss of the Director's property due to casualty, or (z) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director. The circumstances that will constitute an Unforeseeable Emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved:
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(1) | through reimbursement or compensation by insurance or otherwise; |
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(2) | by liquidation of the Director's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or |
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(3) | by future cessation of the making of additional deferrals with respect to Phantom Shares. |
Without limitation, the need to send a Director's child to college or the desire to purchase a home shall not constitute an Unforeseeable Emergency. Distributions of amounts because of an Unforeseeable Emergency shall be permitted to the extent reasonably needed to satisfy the emergency need.
(e) Other Phantom Share Provisions.
(i) Except as permitted by the Committee, rights to payments with respect to Phantom Shares granted under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment, levy, execution, or other legal or equitable process, either voluntary or involuntary; and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, attach or garnish, or levy or execute on any right to payments or other benefits payable hereunder, shall be void.
(ii) A Director may designate in writing, on forms to be prescribed by the Committee, a beneficiary or beneficiaries to receive any payments payable after his or her death and may amend or revoke such designation at any time. If no beneficiary designation is in effect at the time of a Director's death, payments hereunder shall be made to the Director's estate. If a Director with a vested Phantom Share dies, such Phantom Share shall be settled and the Phantom Share Value in respect of such Phantom Shares paid, and any payments deferred pursuant to an election under Section 9(d)(iii) shall be accelerated and paid, as soon as practicable (but no later than 60 days) after the date of death to such Director's beneficiary or estate, as applicable.
(iii) The Committee may (taking into account, without limitation, Section 409A of the Code, as the Committee may deem appropriate) establish a program under which distributions with respect to Phantom Shares may be deferred for periods in addition to those otherwise contemplated by the foregoing provisions of this Section 9. Such program may include, without limitation, provisions for the crediting of earnings and losses on unpaid amounts and, if permitted by the Committee, provisions under which Directors may select from among hypothetical investment alternatives for such deferred amounts in accordance with procedures established by the Committee.
(iv) Notwithstanding any other provision of this Section 9, any fractional Phantom Share will be paid out in cash at the Phantom Share Value as of the Settlement Date.
(v) No Phantom Share shall give any Director any rights with respect to Shares or any ownership interest in the Company associated with any Series. Except as may be provided in accordance with Section 10, no provision of the Plan shall be interpreted to confer upon any Director of a Phantom Share any voting, dividend or derivative or other similar rights with respect to any Phantom Share.
(f) Claims Procedures.
(i) The Director, or his beneficiary hereunder or authorized representative, may file a claim for payments with respect to Phantom Shares under the Plan by written communication to the Committee or its designee. A claim is not considered filed until such communication is actually received. Within 90 days (or, if special circumstances require an extension of time for processing, 180 days, in which case notice of such special circumstances should be provided within the initial 90-day period) after the filing of the claim, the Committee will either:
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(1) | approve the claim and take appropriate steps for satisfaction of the claim; or |
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(2) | if the claim is wholly or partially denied, advise the claimant of such denial by furnishing to him or her a written notice of such denial setting forth (A) the specific reason or reasons for the denial; (B) specific reference to pertinent provisions of the Plan on which the denial is based and, if the denial is based in whole or in part on any rule of construction or interpretation adopted by the Committee, a reference to such rule, a copy of which shall be provided to the claimant; (C) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of the reasons why such material or information is necessary; and (D) a reference to this Section 9(f) as the provision setting forth the claims procedure under the Plan. |
(ii) The claimant may request a review of any denial of his or her claim by written application to the Committee within 60 days after receipt of the notice of denial of such claim. Within 60 days (or, if special circumstances require an extension of time for processing, 120 days, in which case notice of such special circumstances should be provided within the initial 60-day period) after receipt of written application for review, the Committee will provide the claimant with its decision in writing, including, if the claimant's claim is not approved, specific reasons for the decision and specific references to the Plan provisions on which the decision is based.
10. PROVISIONS APPLICABLE TO DIVIDEND EQUIVALENT RIGHTS.
(a) Grant of DERs. Subject to the other terms of the Plan, the Committee shall, in its discretion as reflected by the terms of the Award Agreements, authorize the granting of DERs to Directors based on the dividends declared on Common Shares of a Series, to be credited as of the dividend payment dates, during a specified period determined by the Committee, which may be, for example, between the date a Grant is issued or vests, and the date such Grant is exercised, vests or expires. Such DERs shall be converted to cash or additional Shares by such formula and at such time and subject to such limitation as may be determined by the Committee. If a DER is granted in respect of another Grant hereunder, then, unless otherwise stated in the Award Agreement, or, in the appropriate case, as determined by the Committee, in no event shall the DER be in effect for a period beyond the time during which the applicable related portion of the underlying Grant has been exercised or otherwise settled, or has expired, been forfeited or otherwise lapsed, as applicable.
(b) Certain Terms.
(i) The term of a DER shall be set by the Committee in its discretion.
(ii) Payment of the amount determined in accordance with Section 10(a) shall be in cash, in Common Shares or a combination of the both, as determined by the Committee at the time of grant.
(c) Other Types of DERs. The Committee may establish a program under which DERs of a type whether or not described in the foregoing provisions of this Section 10 may be granted to Directors. For example, without limitation, the Committee may grant a DER in respect of each Share subject to an Option or with respect to a Phantom Share, which right would consist of the right (subject to Section 10(d)) to receive a cash payment in an amount equal to the dividend distributions paid on a Share from time to time.
(d) Deferral.
(i) The Committee may (taking into account, without limitation, Section 409A of the Code, as the Committee may deem appropriate) establish a program under which Directors (i) will have Phantom Shares credited, subject to the terms of Sections 9(d) and 9(e) as though directly applicable with respect thereto, upon the granting of DERs, or (ii) will have payments with respect to DERs deferred.
(ii) The Committee may establish a program under which distributions with respect to DERs may be deferred. Such program may include, without limitation, provisions for the crediting of earnings and losses on unpaid amounts, and, if permitted by the Committee, provisions under which Directors may select from among hypothetical investment alternatives for such deferred amounts in accordance with procedures established by the Committee.
11. OTHER EQUITY-BASED AWARDS. The Board shall have the right to grant other awards based upon the Common Shares of a Series having such terms and conditions as the Board may determine, including, without limitation, the grant of Shares of a Series based upon certain conditions, the grant of securities convertible into Common Shares of a Series, and the grant of restricted stock units.
12. PERFORMANCE GOALS. The Committee, in its discretion, may grant performance-based grants ("Performance-Based Grants") and (i) establish one or more performance goals ("Performance Goals") as a precondition to the issuance or vesting of Grants, and (ii) provide, in connection with the establishment of the Performance Goals, for predetermined Grants to those Directors (who continue to meet all applicable eligibility requirements) with respect to whom the applicable Performance Goals are satisfied. The Performance Goals may be based upon the criteria set forth in Exhibit A hereto which is hereby incorporated herein by reference as though set forth in full.
13. TERM OF PLAN. Grants may be granted pursuant to the Plan until the expiration of one year from the effective date of the Plan.
14. RECAPITALIZATION AND CHANGES OF CONTROL.
(a) Subject to any required action by shareholders and to the specific provisions of Section 15, if (i) the Company shall at any time be involved in a merger, consolidation, dissolution, liquidation, reorganization, exchange of shares, sale of all or substantially all of the assets or shares of the Company or a transaction similar thereto, (ii) any share dividend, share split, reverse share split, share combination, reclassification, recapitalization or other similar change in the capital structure of the Company, or any distribution to holders of Common Shares of a Series other than cash dividends, shall occur or (iii) any other event shall occur which in the judgment of the Committee necessitates action by way of adjusting the terms of the outstanding Grants, then:
(i) the maximum aggregate number of Shares which may be made subject to Options and DERs under the Plan, the maximum aggregate number and kind of Restricted Shares that may be granted under the Plan, the maximum aggregate number of Phantom Shares and other Grants which may be granted under the Plan shall be appropriately adjusted by the Committee in its discretion; and
(ii) the Committee shall take any such action as in its discretion shall be necessary to maintain each Directors' rights hereunder (including under their applicable Award Agreements) so that they are, in their respective Options, Phantom Shares and DERs (and, as appropriate, other Grants under Section 11), substantially proportionate to the rights existing in such Options, Phantom Shares and DERs (and other Grants under Section 11) prior to such event, including, without limitation, adjustments in (A) the number of Options, Phantom Shares and DERs (and other Grants under Section 11) granted, (B) the number and kind of shares or other property to be distributed in respect of Options, Phantom Shares and DERs (and other Grants under Section 11, as applicable, (C) the Exercise Price, Purchase Price and Phantom Share Value, and (D) performance-based criteria established in connection with Grants; provided that, in the discretion of the Committee, the foregoing clause (D) may also be applied in the case of any event relating to a Subsidiary if the event would have been covered under this Section 14(a) had the event related to the Company.
To the extent that such action shall include an increase or decrease in the number of Shares (or units of other property then available) subject to all outstanding Grants, the number of Shares (or units) available under Section 6 above shall be increased or decreased, as the case may be, proportionately.
(b) Any Shares or other securities distributed to a Director with respect to Restricted Shares or otherwise issued in substitution of Restricted Shares pursuant to this Section 14 shall be subject to the applicable restrictions and requirements imposed by Section 8, including depositing the certificates therefor with the Company together with a stock power and bearing a legend as provided in Section 8(c)(i).
(c) If the Company shall be consolidated or merged with a corporation or other entity, each Director who has received Restricted Shares that is then subject to restrictions imposed by Section 8(d) may be required to deposit with the successor corporation the certificates for the stock or securities or the other property that the Director is entitled to receive by reason of ownership of Restricted Shares in a manner consistent with Section 8(c)(ii), and such stock, securities or other property shall become subject to the restrictions and requirements imposed by Section 8(d), and the certificates therefor or other evidence thereof shall bear a legend similar in form and substance to the legend set forth in Section 8(c)(i).
(d) The judgment of the Committee with respect to any matter referred to in this Section 14 shall be conclusive and binding upon each Director without the need for any amendment to the Plan.
(e) Subject to any required action by shareholders, if the Company is the surviving company in any merger or consolidation, the rights under any outstanding Grant shall pertain and apply to the securities to which a holder of the number of Shares subject to the Grant would have been entitled. Subject to the terms of any applicable Award Agreement, in the event of a merger or consolidation in which the Company is not the surviving company, the date of exercisability of each outstanding Option and settling of each Phantom Share or, as applicable, other Grant under Section 11 (in each case whether or not vested), shall be accelerated to a date prior to such merger or consolidation, unless the agreement of merger or consolidation provides for the assumption of the Grant by the successor to the Company.
(f) To the extent that the foregoing adjustment related to securities of the Company, such adjustments shall be made by the Committee, whose determination shall be conclusive and binding on all persons.
(g) Except as expressly provided in this Section 14, a Director shall have no rights by reason of subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation, and any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to a Grant or the Exercise Price of Shares subject to an Option.
(h) Grants made pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business assets.
(i) Upon the occurrence of a Change in Control:
(i) The Committee as constituted immediately before the Change in Control may make such adjustments as it, in its discretion, determines are necessary or appropriate in light of the Change in Control (including, without limitation, the substitution of stock other than shares of the Company as the stock optioned hereunder, and the acceleration of the exercisability or vesting of awards granted under the Plan, cancellation of any Options or stock appreciation rights in return for payment equal to the Fair Market Value of Shares subject to an Option or stock appreciation right as of the date of the Change in Control less the Exercise Price applicable thereto (which amount may be zero) and settling of each vested Phantom Share or, as applicable, other Grant under Section 11 (in each case whether or not vested)), if any, provided that the Committee determines that such adjustments do not have a substantial adverse economic impact on the Director as determined at the time of the adjustments.
(ii) Notwithstanding the provisions of Section 9, the Settlement Date for Phantom Shares shall be the date of such Change in Control and all amounts due with respect to Phantom Shares to a Director hereunder shall be paid as soon as practicable (but in no event more than 30 days) after such Change in Control, unless such Director elects otherwise in accordance with procedures established by the Committee.
15. EFFECT OF CERTAIN TRANSACTIONS. In the case of (i) the dissolution or liquidation of the Company, (ii) a merger, consolidation, reorganization or other business combination in which the Company is acquired by another entity or in which the Company is not the surviving entity, or (iii) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company, the Plan and the Grants issued hereunder shall terminate upon the effectiveness of any such transaction or event, unless provision is made in connection with such transaction for the assumption of Grants theretofore granted, or the substitution for such Grants of new Grants, by the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and the per share exercise prices, as provided in Section 14. In the event of such termination, all outstanding Options and Grants shall be exercisable to the extent then vested (taking into account any accelerated vesting provided by the Committee) for at least ten days prior to the date of such termination.
16. SECURITIES LAW REQUIREMENTS.
(a) Legality of Issuance. The issuance of any Shares pursuant to Grants under the Plan and the issuance of any Grant shall be contingent upon the following:
(i) the obligation of the Company to sell Shares with respect to Grants issued under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee;
(ii) the Committee may make such changes to the Plan as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain tax benefits applicable to stock options; and
(iii) each grant of Options, Restricted Shares, Phantom Shares (or issuance of Shares in respect thereof), DERs (or issuance of Shares in respect thereof), or other Grant under Section 11 (or issuance of Shares in respect thereof), is subject to the requirement that, if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance of Options, Restricted Shares, Phantom Shares, DERs, other Grants or other Shares, no payment shall be made, or Phantom Shares or Shares issued or grant of Restricted Shares or other Grant made, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions in a manner acceptable to the Committee.
(b) Restrictions on Transfer. Regardless of whether the offering and sale of Shares under the Plan has been registered under the Act or has been registered or qualified under the securities laws of any state, the Company may impose restrictions on the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on share certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state or any other law. In the event that the sale of Shares under the Plan is not registered under the Act but an exemption is available which requires an investment representation or other representation, each Director shall be required to represent that such Shares are being acquired for investment, and not with a view to the sale or distribution thereof, and to make such other representations as are deemed necessary or appropriate by the Company and its counsel. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 16 shall be conclusive and binding on all persons. Without limiting the generality of Section 6, share certificates evidencing Shares acquired under the Plan pursuant to an unregistered transaction shall bear a restrictive legend, substantially in the following form, and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law:
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT."
(c) Registration or Qualification of Securities. The Company may, but shall not be obligated to, register or qualify the issuance of Grants and/or the sale of Shares under the Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the issuance of Grants or the sale of Shares under the Plan to comply with any law.
(d) Exchange of Certificates. If, in the opinion of the Company and its counsel, any legend placed on a share certificate representing Shares sold under the Plan is no longer required, the holder of such certificate shall, with the permission of the Committee, be entitled to exchange such certificate for a certificate representing the same number of Shares but lacking such legend.
(e) Certain Loans. Notwithstanding any other provision of the Plan, the Company and the Series shall not be required to take or permit any action under the Plan or any Award Agreement which, in the good-faith determination of the Company, would result in a material risk of a violation by the Company of Section 13(k) of the Exchange Act.
17. COMPLIANCE WITH SECTION 409A OF THE CODE.
(a) Any Award Agreement issued under the Plan that is subject to Section 409A of the Code shall include such additional terms and conditions as may be required to satisfy the requirements of Section 409A of the Code.
(b) Notwithstanding any other provision of the Plan, the Board and the Committee shall administer the Plan, and exercise authority and discretion under the Plan, to satisfy the requirements of Section 409A of the Code or any exemption thereto. Nothing contained herein is intended to provide assurances or an indemnity to any Director regarding his personal tax treatment.
(c) Notwithstanding anything in the Plan or in any Award Agreement to the contrary, to the extent that any amount or benefit that would constitute non-exempt "deferred compensation" for purposes of Section 409A of the Code would otherwise be payable or distributable, or a different form of payment (e.g., lump sum or installment) would be effected, under the Plan or any Award Agreement by reason of the occurrence of a Termination of Service, such amount or benefit will not be payable or distributable to the Director, and/or such different form of payment will not be effected, by reason of such circumstance unless the circumstances giving rise to such Termination of Service meets the description or definition of "separation from service" in Section 409A of the Code. This provision does not prohibit the vesting of any Award upon a Termination of Service, however defined. If this provision prevents the payment or distribution of any amount or benefit, or the application of a different form of payment of any amount or benefit, such payment or distribution shall be made at the time and in the form that would have applied absent the Termination of Service.
(d) Notwithstanding anything in the Plan or in any Award Agreement to the contrary, if any amount or benefit that would constitute non-exempt "deferred compensation" for purposes of Section 409A would otherwise be payable or distributable under this Plan or any Award Agreement by reason of a Termination of Service during a period in which the Director is a "specified employee" (as defined in Section 409A of the Code), then, subject to any permissible acceleration of payment by the Committee under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes): (i) the amount of such non-exempt deferred compensation that would otherwise be payable during the six-month period immediately following the Termination of Service will be accumulated through and paid or provided on the first day of the seventh month following the Termination of Service (or, if the Director dies during such period, within 30 days after the Director's death); and (ii) the normal payment or distribution schedule for any remaining payments or distributions will resume at the end of such delay period.
(e) If, pursuant to an Award, a Director is entitled to a series of installment payments, such Director's right to the "series of installment payments" (as described in Treas. Reg. Section 1.409A-2(b)(2)(iii)) shall be treated as a right to a series of separate payments and not to a single payment.
18. AMENDMENT OF THE PLAN. The Board may from time to time, with respect to any Shares at the time not subject to Grants, suspend or discontinue the Plan or revise or amend it in any respect whatsoever, taking into account applicable laws, regulations, exchange and accounting rules. The Board may otherwise amend the Plan as it shall deem advisable, except that no amendment may materially impair the rights of a Director under an award previously granted without the Director's consent, unless effected to comply with applicable law or regulation or to meet the requirements of any accounting standard or to correct an administrative error.
19. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Shares pursuant to the exercise of an Option, the sale of Restricted Shares or in connection with other Grants under the Plan will be used for general corporate purposes.
20. TAX WITHHOLDING. Each Director shall, no later than the date as of which the value of any Grant first becomes includable in the gross income of the Director for federal income tax purposes, pay to the Company and/or the applicable Series, or make arrangements satisfactory to the Company regarding payment of any federal, state or local taxes of any kind that are required by law to be withheld with respect to such income. To the extent permitted by the Committee from time to time and as otherwise required by law, a Director may elect to have such tax withholding satisfied, in whole or in part, by (i) authorizing the Company and/or the applicable Series to withhold a number of Shares to be issued pursuant to a Grant equal to the Fair Market Value thereof as of the date withholding is effected that would satisfy the withholding amount due or (ii) transferring to the Company and/or the applicable Series Shares owned by the Director with a Fair Market Value equal to the amount of the required withholding tax. Notwithstanding anything contained in the Plan to the contrary, the Director's satisfaction of any tax-withholding requirements imposed by the Committee (if any) shall be a condition precedent to the Company's and/or the applicable Series' obligation as may otherwise by provided hereunder to provide Shares to the Director, and the failure of the Director to satisfy such requirements with respect to a Grant shall cause such Grant to be forfeited.
21. NOTICES. All notices under the Plan shall be in writing, and if to the Company, shall be delivered to the Board or mailed to its principal office, addressed to the attention of the Board; and if to the Director, shall be delivered personally or mailed to the Director at the address appearing in the records of the Company. Such addresses may be changed at any time by written notice to the other party given in accordance with this Section 21.
22. RIGHTS TO EMPLOYMENT OR OTHER SERVICE. Nothing in the Plan or in any Grant issued pursuant to the Plan shall confer on any individual any right to continue in the service of the Company or a Series or interfere in any way with the right of the Company, the Series and the members of the Company to terminate the individual's service at any time.
23. EXCULPATION AND INDEMNIFICATION. To the maximum extent permitted by law, the Company and the Series shall indemnify and hold harmless the members of the Board and the members of the Committee, in each case as constituted from time to time, from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act or omission to act in connection with the performance of such person's duties, responsibilities and obligations under the Plan, other than such liabilities, costs and expenses as may result from the gross negligence, bad faith, willful misconduct or criminal acts of such persons.
24. NO FUND CREATED. Any and all payments hereunder to any Director under the Plan shall be made from the general funds of the applicable Series, no special or separate fund shall be established or other segregation of assets made to assure such payments, and the Phantom Shares (including for purposes of this Section 24 any accounts established to facilitate the implementation of Section 9(d)(iii)) and any other similar devices issued hereunder to account for Plan obligations do not constitute Common Shares and shall not be treated as (or as giving rise to) property or as a trust fund of any kind; provided, however, that the Company may establish a mere bookkeeping reserve to meet its or the Series' obligations hereunder or a trust or other funding vehicle that would not cause the Plan to be deemed to be funded for tax purposes or for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. The obligations of the Company and the Series under the Plan are unsecured and constitute a mere promise by the Company and the Series to make benefit payments in the future and, to the extent that any person acquires a right to receive payments under the Plan from the Company or a Series, such right shall be no greater than the right of a general unsecured creditor of the Company or such Series. Without limiting the foregoing, Phantom Shares and any other similar devices issued hereunder to account for Plan obligations are solely a device for the measurement and determination of the amounts to be paid to a Director under the Plan, and each Director's right in the Phantom Shares and any such other devices is limited to the right to receive payment, if any, as may herein be provided.
25. NO FIDUCIARY RELATIONSHIP. Nothing contained in the Plan (including without limitation Section 9(e)(iii)), and no action taken pursuant to the provisions of the Plan, shall create or shall be construed to create a trust of any kind, or a fiduciary relationship between the Company, the Series, or the officers of the Company and/or associated with a Series or the Committee, on the one hand, and the Director, the Company, the Series or any other person or entity, on the other.
26. CAPTIONS. The use of captions in the Plan is for convenience. The captions are not intended to provide substantive rights.
27. GOVERNING LAW. THE PLAN SHALL BE GOVERNED BY THE LAWS OF DELAWARE, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS.
28. REGIONAL VARIATION. The Committee reserves the right to authorize the establishment of, and to grant Awards pursuant to, annexes, sub-plans or other supplementary documentation as the Committee deems appropriate in light of local law, rules and customs.
29. INVALIDITY OF PROVISIONS. If any provision of the Plan is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.
EXHIBIT A
PERFORMANCE CRITERIA
Performance Based Grants may be payable upon the attainment of objective performance goals that are established by the Committee and relate to one or more Performance Criteria, in each case on specified date or over any period, up to 10 years, as determined by the Committee. Performance Criteria may be based on the achievement of the specified levels of performance under one or more of the measures set out below relative to the performance of one or more other corporations or indices.
"Performance Criteria" means the following business criteria (or any combination thereof) with respect to one or more of the Company, any Series or any division or operating unit thereof:
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iii) | net income (meaning net income as reflected in the Company's or the Series' financial reports for the applicable period, on an aggregate, diluted and/or per share basis, or economic net income), |
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iv) | operating income or profit, |
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v) | cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital, |
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vi) | earnings per share (basic or diluted), |
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viii) | returns on sales or revenues, |
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ix) | return on invested capital or assets (gross or net), |
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x) | cash, funds or earnings available for distribution, |
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xi) | appreciation in the fair market value of the Common Shares of a Series, |
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xiii) | implementation or completion of critical projects or processes, |
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xiv) | return on investment, |
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xv) | total return to shareholders associated with a Series (meaning the aggregate Common Share price appreciation and dividends paid (assuming full reinvestment of dividends) during the applicable period), |
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xvi) | net earnings growth, |
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xvii) | stock appreciation (meaning an increase in the price or value of the Common Shares of a Series after the date of grant of an award and during the applicable period), |
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xviii) | related return ratios, |
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xix) | increase in revenues, |
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xx) | the Company's or a Series' published ranking against its peer group of real estate investment trusts based on total shareholder return, |
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xxii) | changes (or the absence of changes) in the per share or aggregate market price of the Common Shares of a Series, |
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xxiii) | number of securities sold, |
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xxiv) | earnings before or after any one or more of the following items: interest, taxes, depreciation or amortization, as reflected in the Company's or a Series' financial reports for the applicable period, |
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xxv) | total revenue growth (meaning the increase in total revenues after the date of grant of an award and during the applicable period, as reflected in the Company's or a Series' financial reports for the applicable period), |
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xxvi) | economic value created, |
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xxvii) | operating margin or profit margin, |
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xxviii) | cost targets, reductions and savings, productivity and efficiencies, |
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xxix) | strategic business criteria, consisting of one or more objectives based on meeting objectively determinable specified market penetration, geographic business expansion, investor satisfaction, employee satisfaction, human resources management, supervision of litigation, information technology, and goals relating to acquisitions, divestitures, joint ventures and similar transactions, and budget comparisons, |
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xxx) | objectively determinable personal professional objectives, including any of the foregoing performance goals, the implementation of policies and plans, the negotiation of transactions, the development of long term business goals, formation of joint ventures, research or development collaborations, and the completion of other corporate transactions, and |
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xxxi) | any combination of, or a specified increase or improvement in, any of the foregoing. |
Where applicable, the Performance Goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the Company, a Series, or a division or operating unit thereof, or may be applied to the performance of the Company or a Series relative to a market index, a group of other companies or a combination thereof, all as determined by the Committee.
The Performance Goals may include a threshold level of performance below which no payment shall be made (or no vesting shall occur), levels of performance at which specified payments shall be made (or specified vesting shall occur), and a maximum level of performance above which no additional payment shall be made (or at which full vesting shall occur).
Except as otherwise expressly provided, all financial terms are used as defined under U.S. Generally Accepted Accounting Principles ("GAAP") and all determinations shall be made in accordance with GAAP, as applied by the Company in the preparation of its periodic reports to shareholders.
Unless the Committee provides otherwise at the time of establishing the performance goals, for each fiscal year of the Company or a Series, the Committee shall have the authority to make equitable adjustments to the Performance Goals in recognition of unusual or non-recurring events affecting the Company or a Series or the financial statements of the Company or such Series and may provide for objectively determinable adjustments, as determined in accordance with GAAP, to any of the Performance Criteria described above for one or more of the items of gain, loss, profit or expense: (A) determined to be extraordinary or unusual in nature or infrequent in occurrence, (B) related to the disposal of a segment of a business, (C) related to a change in accounting principle under GAAP or a change in applicable laws or regulations, (D) related to discontinued operations that do not qualify as a segment of a business under GAAP, and (E) attributable to the business operations of any entity acquired by the Company or a Series during the fiscal year.
Exhibit 10.7
KINGSTON BEDFORD JOINT VENTURE LLC
Landlord
TO
SSB REALTY LLC
Tenant
LEASE
____________________________________________________
Premises at:
One Lincoln Street
Boston, Massachusetts
TABLE OF CONTENTS
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ARTICLE 1 BASIC LEASE PROVISIONS AND ENUMERATION OF EXHIBITS | | 1 |
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1.1 |
| | INTRODUCTION | | 1 |
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1.2 |
| | BASIC DATA | | 1 |
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1.3 |
| | ENUMERATION OF EXHIBITS | | 5 |
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1.4 |
| | OTHER DEFINITIONS | | 6 |
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ARTICLE 2 PREMISES | | 10 |
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2.1 |
| | DEMISE PREMISES | | 10 |
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2.2 |
| | APPURTENANT RIGHTS AND RESERVATIONS | | 10 |
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ARTICLE 3 LEASE TERM; IP LEASES | | 11 |
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3.1 |
| | LEASE TERM | | 11 |
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3.2 |
| | IP LEASES | | 12 |
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3.3 |
| | LANDLORD'S RESPONSIBILITY FOR DELAYS | | 13 |
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3.4 |
| | STEEL ERECTION OUTSIDE DATES | | 17 |
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ARTICLE 4 COMPLETION OF THE BUILDING AND THE PREMISES | | 18 |
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4.1 |
| | BASE BUILDING CONSTRUCTION AND LANDLORD'S WORK | | 18 |
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4.2 |
| | REMEASUREMENT | | 19 |
|
4.3 |
| | SPECIFICATION OF SHELL COMPLETION DATE | | 19 |
|
4.4 |
| | QUALITY AND PERFORMANCE OF WORK | | 19 |
|
4.5 |
| | TENANT COMPLIANCE WITH AGREEMENTS | | 20 |
|
| |
ARTICLE 5 ANNUAL FIXED RENT AND FIRST MONTH'S RENT | | 21 |
|
| | |
5.1 |
| | FIXED RENT | | 21 |
|
5.2 |
| | PAYMENT OF FIRST MONTH'S RENT | | 21 |
|
5.3 |
| | ADDITIONAL RENT | | 22 |
|
5.4 |
| | LATE PAYMENT | | 22 |
|
5.5 |
| | RENT CONCESSION | | 22 |
|
| |
ARTICLE 6 ESCALATION | | 24 |
|
| | |
6.1 |
| | TAX ESCALATION | | 24 |
|
6.2 |
| | OPERATING EXPENSE ESCALATION | | 26 |
|
6.3 |
| | AUDIT RIGHTS | | 34 |
|
| |
ARTICLE 7 REPAIRS AND SERVICES | | 35 |
|
| | |
7.1 |
| | LANDLORD'S OBLIGATION TO REPAIR | | 35 |
|
7.2 |
| | TENANT'S REPAIRS AND MAINTENANCE | | 36 |
|
7.3 |
| | SERVICES | | 38 |
|
7.4 |
| | LANDLORD'S FAILURE TO REPAIR OR PROVIDE SERVICES | | 38 |
|
7.5 |
| | LIMITED REQUIREMENT FOR OVERTIME WORK | | 39 |
|
7.6 |
| | FAILURE OF BUILDING MANAGER OR GARAGE MANAGER TO PERFORM | | 40 |
|
| |
ARTICLE 8 ALTERATIONS | | 40 |
|
| | |
8.1 |
| | TENANT'S RIGHTS | | 40 |
|
8.2 |
| | CONFORMITY WITH LAW | | 42 |
|
8.3 |
| | PERFORMANCE OF WORK, GOVERNMENTAL APPROVALS AND INSURANCE | | 42 |
|
8.4 |
| | LIENS | | 43 |
|
8.5 |
| | VIOLATIONS; DISRUPTION | | 44 |
|
8.6 |
| | TENANT'S PROPERTY | | 44 |
|
8.7 |
| | SURVIVAL | | 45 |
|
|
| | | | | | |
ARTICLE 9 LAWS, ORDINANCES, REQUIREMENTS OF PUBLIC AUTHORITIES | | 45 |
|
| | |
9.1 |
| | CERTIFICATE OF OCCUPANCY | | 45 |
|
9.2 |
| | TENANT'S OBLIGATIONS | | 45 |
|
9.3 |
| | TENANT'S RIGHT TO CONTEST | | 45 |
|
| |
ARTICLE 10 USE | | 46 |
|
| | |
10.1 |
| | OFFICE USE | | 46 |
|
10.2 |
| | RETAIL SPACE | | 46 |
|
10.2 |
| | ADDITIONAL PERMITTED USES | | 46 |
|
10.3 |
| | RESTRICTIONS | | 47 |
|
10.4 |
| | PROHIBITED USES | | 47 |
|
10.5 |
| | LICENSES AND PERMITS | | 48 |
|
10.6 |
| | LOBBY USE | | 48 |
|
| |
ARTICLE 11 TENANT'S INDEMNITY AND INSURANCE | | 49 |
|
| | |
11.1 |
| | TENANT'S INDEMNITY | | 49 |
|
11.2 |
| | TENANT'S INSURANCE | | 50 |
|
11.3 |
| | LANDLORD'S INDEMNITY | | 51 |
|
11.4 |
| | LANDLORD'S INSURANCE | | 52 |
|
11.5 |
| | TENANT'S FIRE INSURANCE | | 52 |
|
11.6 |
| | CERTIFICATES OF INSURANCE | | 52 |
|
11.7 |
| | NO VIOLATION OF BUILDING POLICIES | | 53 |
|
11.8 |
| | TENANT TO PAY PREMIUM INCREASES | | 53 |
|
11.9 |
| | WAIVER OF SUBROGATION | | 53 |
|
11.10 |
| | REQUIREMENTS FOR INSURANCE CARRIERS | | 54 |
|
| |
ARTICLE 12 FIRE, CASUALTY OR TAKING | | 54 |
|
| | |
12.1 |
| | RIGHT TO TERMINATE LEASE | | 54 |
|
12.2 |
| | RESTORATION OF THE PREMISES | | 55 |
|
12.3 |
| | PAYMENT OF RENT FOLLOWING CASUALTY | | 56 |
|
12.4 |
| | UNINSURED CASUALTY | | 56 |
|
12.5 |
| | LANDLORD NOT TO INSURE TENANT'S PROPERTY | | 57 |
|
12.6 |
| | EMINENT DOMAIN ' COMPLETE OR SUBSTANTIAL TAKING | | 57 |
|
12.7 |
| | EMINENT DOMAIN ' PARTIAL TAKING | | 58 |
|
12.8 |
| | LANDLORD TO RECEIVE ENTIRE AWARD | | 59 |
|
| |
ARTICLE 13 ASSIGNMENT, SUBLETTING, MORTGAGING | | 59 |
|
| | |
13.1 |
| | LANDLORD'S CONSENT REQUIRED | | 59 |
|
13.2 |
| | OFFER NOTICE | | 60 |
|
13.3 |
| | LANDLORD'S RIGHT TO UNDERLET | | 62 |
|
13.4 |
| | LANDLORD'S RIGHT TO TERMINATE | | 64 |
|
13.5 |
| | CONDITIONS ON SUBLETTING | | 64 |
|
13.6 |
| | CONSENT TO ASSIGNMENT; LANDLORD MAY COLLECT RENT FROM ASSIGNEE | | 66 |
|
13.7 |
| | ASSUMPTION OF LEASE | | 66 |
|
13.8 |
| | TENANT'S INDEMNIFICATION | | 67 |
|
13.9 |
| | TIME LIMITATION; AMENDMENTS | | 67 |
|
13.10 |
| | ADDITIONAL RENT DUE UPON ASSIGNMENT OR SUBLETTING | | 67 |
|
13.11 |
| | LIABILITY NOT DISCHARGED | | 68 |
|
13.12 |
| | EFFECT OF LISTING OF NAMES | | 68 |
|
13.13 |
| | EXCEPTIONS TO SECTIONS 13.3, 13.4, AND 13.10 | | 68 |
|
13.14 |
| | RECAPTURE OF RETAIL SPACE | | 69 |
|
| |
ARTICLE 14 NO LIABILITY OR REPRESENTATIONS BY LANDLORD; FORCE MAJEURE | | 69 |
|
| | |
14.1 |
| | NO LIABILITY | | 69 |
|
14.2 |
| | NO REPRESENTATIONS BY LANDLORD | | 70 |
|
|
| | | | | | |
14.3 |
| | FORCE MAJEURE | | 70 |
|
| |
ARTICLE 15 ENTRY, RIGHT TO CHANGE PUBLIC PORTIONS OF THE BUILDING | | 72 |
|
| | |
15.1 |
| | LANDLORD'S RIGHT OF ENTRY | | 72 |
|
15.2 |
| | LANDLORD'S RIGHT TO CHANGE ENTRIES, ETC. | | 73 |
|
15.3 |
| | EXCAVATION | | 73 |
|
| |
ARTICLE 16 ELECTRICITY | | 73 |
|
| | |
16.2 |
| | LANDLORD NOT LIABLE | | 74 |
|
16.3 |
| | TENANT NOT TO OVERLOAD CIRCUITS | | 74 |
|
16.4 |
| | TENANT NOT TO EXCEED CAPACITY; LIGHT BULBS | | 74 |
|
| |
ARTICLE 17 SUBORDINATION; ASSIGNMENT OF RENTS | | 76 |
|
| | |
17.1 |
| | SUBORDINATION TO MORTGAGES, ETC. | | 76 |
|
17.2 |
| | RIGHTS OF MORTGAGEES, ETC. | | 76 |
|
17.3 |
| | MODIFICATIONS REQUIRED BY LENDERS | | 76 |
|
17.4 |
| | ASSIGNMENT OF LEASE TO MORTGAGEE, ETC. | | 77 |
|
17.5 |
| | SUBORDINATION OF MORTGAGE, ETC, TO LEASE | | 77 |
|
17.6 |
| | NON-DISTURBANCE AND ATTORNMENT | | 77 |
|
| |
ARTICLE 18 CERTAIN ADDITIONAL TENANT COVENANTS | | 79 |
|
| |
ARTICLE 19 TENANT'S DEFAULT; LANDLORD'S REMEDIES | | 80 |
|
| | |
19.1 |
| | TENANT'S DEFAULT | | 80 |
|
19.2 |
| | TERMINATION | | 82 |
|
19.3 |
| | RE-ENTRY; CONTINUED LIABILITY; RELETTING. | | 84 |
|
19.4 |
| | LIQUIDATED DAMAGES | | 85 |
|
19.5 |
| | RIGHTS IN THE EVENT OF TENANT'S BANKRUPTCY | | 86 |
|
19.6 |
| | WAIVER OF REDEMPTION, ETC. | | 86 |
|
19.7 |
| | ADDITIONAL RIGHTS OF LANDLORD | | 87 |
|
19.8 |
| | LANDLORD'S DEFAULT | | 87 |
|
| |
ARTICLE 20 MISCELLANEOUS | | 88 |
|
| | |
20.1 |
| | WAIVER | | 88 |
|
20.2 |
| | CONSENTS | | 89 |
|
20.3 |
| | QUIET ENJOYMENT | | 89 |
|
20.4 |
| | SURRENDER | | 89 |
|
20.5 |
| | BROKER | | 90 |
|
20.6 |
| | INVALIDITY OF PARTICULAR PROVISIONS | | 90 |
|
20.7 |
| | PROVISIONS BINDING, ETC. | | 90 |
|
20.8 |
| | RECORDING | | 90 |
|
20.9 |
| | NOTICES | | 91 |
|
20.10 |
| | WHEN LEASE BECOMES BINDING | | 91 |
|
20.11 |
| | HEADINGS | | 91 |
|
20.12 |
| | SUSPENSION OF SERVICES | | 92 |
|
20.13 |
| | RULES AND REGULATIONS | | 92 |
|
20.14 |
| | TENANT'S SET-OFF RIGHT | | 93 |
|
20.15 |
| | ESTOPPEL CERTIFICATES | | 93 |
|
20.16 |
| | SELF-HELP | | 93 |
|
20.17 |
| | HOLDING OVER | | 94 |
|
20.18 |
| | COUNTERPARTS | | 95 |
|
20.19 |
| | ENTIRE AGREEMENT | | 95 |
|
20.20 |
| | NO PARTNERSHIP | | 95 |
|
20.21 |
| | GUARANTY | | 95 |
|
20.22 |
| | FINANCIAL STATEMENTS | | 96 |
|
20.23 |
| | GOVERNING LAW | | 96 |
|
20.24 |
| | NAME OF BUILDING, SIGNAGE | | 97 |
|
20.25 |
| | DEEMED APPROVAL | | 98 |
|
20.26 |
| | TENANT'S SECURITY SYSTEM | | 99 |
|
20.27 |
| | STORAGE SPACE | | 99 |
|
20.28 |
| | RETAIL TENANT APPROVAL | | 99 |
|
20.29 |
| | TENANT'S OPTION TO PROVIDE SERVICES | | 100 |
|
| |
ARTICLE 21 OPTION TO EXTEND | | 100 |
|
| | |
21.1 |
| | TENANT'S OPTION | | 100 |
|
21.2 |
| | EXTENDED TERM RENT | | 101 |
|
21.3 |
| | FAIR MARKET RENT | | 101 |
|
21.4 |
| | RETROACTIVE ADJUSTMENTS | | 104 |
|
| |
ARTICLE 22 OPTIONS TO EXPAND | | 104 |
|
| | |
22.1 |
| | EXPANSION | | 104 |
|
22.2 |
| | RENT FOR EXPANSION OPTION SPACE | | 107 |
|
22.3 |
| | FAIR MARKET RENT | | 107 |
|
22.4 |
| | RETROACTIVE ADJUSTMENTS | | 107 |
|
22.5 |
| | TERM OF OPTION SPACE | | 107 |
|
| |
ARTICLE 23 OPTION TO ADD GARAGE SPACE | | 108 |
|
| | |
23.1 |
| | TENANT'S RIGHTS | | 108 |
|
|
| | | | | | |
23.2 |
| | CONDITION OF GARAGE | | 108 |
|
23.3 |
| | GARAGE COMMENCEMENT DATE | | 108 |
|
23.4 |
| | RENT FOR THE GARAGE | | 108 |
|
23.5 |
| | FAIR MARKET RENT | | 109 |
|
23.6 |
| | RETROACTIVE ADJUSTMENTS | | 109 |
|
23.7 |
| | TERM OF THIS LEASE WITH RESPECT TO THE GARAGE | | 109 |
|
23.8 |
| | TENANT' SELECTION NOT TO LEASE | | 109 |
|
| |
ARTICLE 24 RIGHT OF FIRST OFFER ON SALE | | 110 |
|
| | |
24.1 |
| | GRANT OF RIGHT OF FIRST OFFER | | 110 |
|
24.2 |
| | SALE AND REPLY NOTICES | | 110 |
|
24.3 |
| | TENANT'S PURCHASE OFFER | | 111 |
|
24.4 |
| | PURCHASE AND SALE AGREEMENT | | 111 |
|
24.5 |
| | CLOSING DATE | | 112 |
|
24.6 |
| | REJECTION OF TENANT'S PURCHASE OFFER | | 112 |
|
| |
ARTICLE 25 COMMUNICATIONS EQUIPMENT | | 113 |
|
| | |
25.1 |
| | RIGHT TO INSTALL COMMUNICATIONS EQUIPMENT | | 113 |
|
25.2 |
| | REMOVAL | | 115 |
|
25.3 |
| | TENANT'S CONTRACTORS | | 115 |
|
25.4 |
| | LICENSE | | 116 |
|
| |
ARTICLE 26 PARKING | | 116 |
|
| | |
26.1 |
| | NUMBER OF PARKING SPACES | | 116 |
|
26.2 |
| | VALET-PARKING | | 117 |
|
26.3 |
| | PARKING RULES AND REGULATIONS | | 117 |
|
26.4 |
| | HOURS OF OPERATION | | 117 |
|
26.5 |
| | LANDLORD NOT RESPONSIBLE | | 117 |
|
| |
ARTICLE 27 TENANT'S EMERGENCY GENERATORS | | 117 |
|
| | |
27.1 |
| | RIGHT TO INSTALL GENERATORS | | 117 |
|
27.2 |
| | INDEMNITY BY TENANT | | 118 |
|
27.3 |
| | TENANT'S RESPONSIBILITIES REGARDING GENERATORS | | 118 |
|
27.4 |
| | ACCESS | | 119 |
|
27.5 |
| | TESTING | | 119 |
|
| |
ARTICLE 28 FIRST RIGHT TO LEASE | | 119 |
|
| | |
28.1 |
| | TENANT'S RIGHTS | | 119 |
|
28.2 |
| | CONFIRMATION OF OFFERED SPACE COMMENCEMENT DATE | | 119 |
|
28.3 |
| | TENANT'S ELECTION NOT TO LEASE | | 119 |
|
28.4 |
| | RE-OFFER | | 120 |
|
28.5 |
| | DELAY IN DELIVERY OF POSSESSION | | 120 |
|
28.6 |
| | SPACE DELIVERED | | 120 |
|
| |
ARTICLE 29 RETAIL SPACE OPTION TO EXPAND | | 120 |
|
| |
ARTICLE 30 RESOLUTION OF DISPUTES | | 121 |
|
| | |
30.1 |
| | DISPUTE NOTICE | | 121 |
|
30.2 |
| | SELECTION OF ARBITRATORS | | 121 |
|
30.3 |
| | ARBITRATION PROCEDURE | | 121 |
|
THIS INSTRUMENT IS AN INDENTURE OF LEASE in which the Landlord and the Tenant are the parties hereinafter named, and which relates to space in the building (the "Building") known as, and with an address at, One Lincoln Street, Boston, Massachusetts.
The parties to this instrument hereby agree with each other as follows:
ARTICLE 1
BASIC LEASE PROVISIONS AND ENUMERATION OF EXHIBITS
1.1 INTRODUCTION. The following sets forth the basic data and identifying Exhibits, elsewhere hereinafter referred to in this Lease, and, where appropriate, constitutes definitions of the terms hereinafter listed.
1.2 BASIC DATA.
|
| | |
Date: | | May 9, 2001 |
| |
Landlord: | | KINGSTON BEDFORD JOINT VENTURE LLC a Delaware limited liability company |
| |
Present Mailing Address of Landlord: | | c/o Gale & Wentworth, LLC 70 Federal Street, 3rd Floor Boston, MA 02110 Attn:John B. Hynes, III Senior Vice President |
| |
Landlord's Construction Representative: | | John B. Hynes, III Senior Vice President c/o Gale & Wentworth, LLC 70 Federal Street, 3rd Floor Boston, MA 02110 |
| |
Tenant: | | SSB REALTY LLC a Delaware limited liability company |
| |
Present Mailing Address of Tenant: | | 1776 Heritage Drive Quincy, MA 02171 Attn.: President |
|
| | |
| |
Tenant's Construction Representative: | | Thomas F. Cataldo or Suzanne Leblanc (either shall have full authority to act) |
| |
Commencement Date: | | As defined in Article 3 hereof. |
| |
Rent Commencement Date: | | As defined in Section 5.5 hereof. |
| |
Expiration Date: | | As defined in Article 3 hereof. |
| |
Lease Term: | | As defined in Article 3 hereof. |
| |
Lease Year: | | A period of twelve (12) consecutive calendar months, commencing on the first day of January in each year, except that the first Lease Year of the Lease Term shall be the period commencing on the Commencement Date with respect to the first floor of the Premises as to which the Commencement Date shall have occurred (the "Base Rent Commencement Date"), and ending on the succeeding December 31, and the last Lease Year of the Lease Term shall be the period commencing on January 1 of the calendar year in which the Lease Term ends and ending on the Expiration Date. |
| |
Building: | | The building to be erected on the Land known as and by the street number One Lincoln Street, Boston, MA 02111. |
| |
Premises: | | Subject to initial phase-in as set forth in Article 4, that portion of the Building depicted in Exhibit B hereto and consisting of floors 1 through 36, inclusive, as the same may change in accordance with Articles 2, 3 and 4, plus any Option Space added in accordance with Article 22, and any Offered Space added in accordance with Article 28. |
| |
Lease Anniversary Date: | | If the Base Rent Commencement Date occurs on the first day of a calendar month, then each anniversary (i) of the Base Rent Commencement Date, or, (ii) if the Base Rent Commencement Date does not occur on the first day of a calendar month, then on the first day of the calendar month following the month in which each anniversary of the Base Rent Commencement Date occurs. |
| |
Annual Fixed Rent: | | Years 1-5. For the period commencing on the Base Rent Commencement Date through the day preceding the fifth (5th) Lease Anniversary Date, at a rate per annum equal to the product of |
|
| | |
| | (a) Fifty-Six ($56.00) Dollars and |
| |
| | (b) the number of Rentable Square Feet of space included within the Premises, adjusted to reflect the initial phase-in of each floor of the Premises, and |
| |
| | Years 6-10. For the period from the fifth (5th) Lease Anniversary Date, through the day preceding the tenth (10th) Lease Anniversary Date, at a rate per annum equal to the product of |
| |
| | (a) Sixty-Two ($62.00) Dollars and |
| |
| | (b) the number of Rentable Square Feet of space then included within the Premises, and |
| |
| | Years 11-15. For the period from the tenth (10th) Lease Anniversary Date through the day preceding the fifteenth (15th) Lease Anniversary Date, at a rate per annum equal to the product of |
| |
| | (a) Sixty-Seven ($67.00) Dollars and |
| |
| | (b) the number of Rentable Square Feet of space then included within the Premises, and |
| |
| | Years 16-20. For the period from the fifteenth (15th) Lease Anniversary Date through the day preceding the twentieth (20th) Lease Anniversary Date, at a rate per annum equal to the product of |
| |
| | (a) Seventy-Two ($72.00) Dollars and |
| |
| | (b) the number of Rentable Square Feet of space then included within the Premises. |
| |
| | Expansion Option Space. The amount of Annual Fixed Rent for the Expansion Option Space shall be determined in accordance with Article 22. |
| |
| | Extended Term(s). For the period of either the First Extended Term or the Second Extended Term, the amount of the Annual Fixed Rent determined in accordance with Article 21. |
|
| | |
Additional Rent: | | All charges and other sums payable by Tenant as set forth in this Lease, other than and in addition to Annual Fixed Rent. |
| |
Tenant's Share: | | The percentage determined by dividing (x) the number of Rentable Square Feet in the Premises as of the applicable time or time period, by (y) the number of Rentable Square Feet of Office Space and Retail Space in the Building, all as finally determined in accordance with Section 4.2 below, and multiplying the result by 100. |
| |
Broker: | | John P. Barry Trammell Crow Company 125 High Street Boston, MA 02110 |
| |
Guarantor: | | State Street Corporation 225 Franklin Street Boston, MA 02110 |
| |
Rentable Square Foot (or plural Rentable Square Feet): | | The rentable area of the Building or any portion thereof, computed consistently with respect to the entire Building using a modified Real Estate Board of New York Standard method of floor measurements as defined in Exhibit M. |
| |
Boston Central Business District | | The downtown area of Boston generally known by commercial real estate brokers as the Financial District and South Station area. |
| |
Base Operating Expenses | | $16.00 times the number of Rentable Square Feet of space included in the Office Space and the Retail Space (both as defined below), less the cost to insure Tenant's Work, Tenant's Restoration Work, and Tenant's Alterations, which Landlord shall not be required to insure, and which cost shall not be included in Operating Expenses. |
| |
Landlord's Contribution | | Forty-Three ($43.00) Dollars for each Rentable Square Foot of space included within the Premises (which includes $1.00 per Rentable Square Foot for a sprinkler allowance), subject to the requirements and limitations contained in Exhibit C. |
1.3 ENUMERATION OF EXHIBITS. The following Exhibits are a part of this Lease, are incorporated herein by reference, attached hereto, and are to be treated as a part of this Lease for all purposes. Undertakings contained in such Exhibits are agreements on the part of Landlord and Tenant, as the case may be, to perform the obligations stated therein.
|
| | |
Exhibit A | – | Description of the Land. |
| | |
Exhibit B | – | Floor Plans of Premises |
| | |
Exhibit B-1 | – | Floor Plan of Storage Space |
| | |
Exhibit C | – | Work Letter |
| | |
Schedule C-1 | – | Base Building Design and Technical Specifications |
| | |
Schedule C-2 | – | Responsibility for Interior Improvements |
| | |
Schedule C-3 | – | Construction Procedures |
| | |
Schedule C-4 | – | Information Technology Provisions |
| | |
Exhibit D | – | Landlord's Services |
| | |
Schedule D-1 | – | General Cleaning Specifications |
| | |
Exhibit E | – | Rules and Regulations |
| | |
Exhibit F | – | Form of Commencement Date Agreement |
| | |
Exhibit G | – | Schedule of Critical Activities |
| | |
Exhibit H | – | Building Alteration Rules and Regulations |
| | |
Exhibit I | – | Form of Guaranty |
| | |
Exhibit J | – | Form of SNDA Agreement |
| | |
Exhibit K | – | Form of Estoppel Certificate |
| | |
Exhibit L | – | Intentionally Deleted |
| | |
Exhibit M | – | New York Standard of Measurement |
| | |
Exhibit N | – | Delivery Conditions |
| | |
Exhibit O | – | Plan Showing Location of the Park |
1.4 DEFINITIONS. The following list of terms includes the definitions contained in Section 1.2 and certain other definitions which are defined elsewhere in the Lease. Wherever used in this Lease (unless the context requires otherwise), these defined terms shall have the respective meanings specified in the Sections of this Lease set forth below after such terms:
|
| | |
| | |
'Additional Insureds' | | Section 11.2 |
"Additional Rent" | | Section 1.2 |
"Additional Space" | | Section 5.5(b) |
"Additional Space Delivery Date Notice" | | Exhibit C |
"Affiliate" | | Section 13.1 |
"Alterations" | | Section 8.1 |
"Annual Fixed Rent" | | Section 1.2 |
"Communications Equipment" | | Article 25 |
"Appraisal" | | Section 21.3 |
"ASP" | | Section 16.5 |
"Average Daily Piece Count" | | Exhibit G |
"Base Building Construction" | | Exhibit C |
"Base Building Modifications" | | Exhibit C |
"Base Building Plans" | | Exhibit C |
"Base Building Work Schedule" | | Exhibit C |
"Base Operating Expenses" | | Section 1.2 |
"Boston Central Business District" | | Section 1.2 |
"Broker" | | Section 1.2 |
"Building" | | Recital |
"Cleaning Services" | | Section 20.29 |
"C/O" | | Section 3.1 |
"C/O Date" | | Exhibit C |
"Communications Equipment User" | | Section 25.1 |
"Competitor" | | Section 20.28 |
"Commencement of Steel Erection" | | Section 3.4.1 |
"Critical Activities" | | Exhibit G |
"Date of the taking" | | Section 12.6 |
"Delivery Conditions" | | Exhibit N |
"Decorative Alterations" | | Section 8.1 |
"Depository" | | Section 12.5 |
"Designated Overtime Work" | | Section 7.5 |
"Dispute Notice" | | Article 30 |
"due date" | | Section 5.4 |
"Environmental Law" | | Section 7.2 |
"Event of Default" | | Section 19.1 |
"Excess Operating Expenses" | | Section 6.2 |
"Expansion Option" | | Section 22.1 |
"Expansion Option Delivery Date" | | Section 22.1 |
"Expansion Option Rent Commencement Date" | | Section 22.2 |
"Expansion Option Space" | | Section 22.1 |
"Extended Term" | | Section 21.1 |
"Fair Market Rent" | | Section 21.3 |
"First Extended Term" | | Section 21.1 |
"First Steel Erection Outside Date" | | Section 3.4.1 |
"Force Majeure" | | Section 14.3 |
"Free Rent Floors" | | Section 5.5 |
"Garage" | | Section 26.1 |
"Generators" | | Section 27.1 |
"Guarantor" | | Section 1.2 |
"Guaranty" | | Section 20.21 |
"Hazardous Materials Activities" | | Section 7.2 |
"Hazardous Materials" | | Section 7.2 |
"Holdover Damages" | | Section 3.3.1 |
"Initiating Party" | | Section 21.3 |
"International Place" | | Section 3.2.1 |
"International Place Space" | | Section 3.2.1 |
"IP Equivalent Space" | | Section 13.13 |
"IP Extension Deletion Option" | | Section 3.3.6 |
"IP Lease Extension Notice" | | Section 3.3.6 |
"IP Leases" | | Section 3.2.1 |
"Land" | | Section 2.1 |
"Landlord" | | Section 1.2 |
"Landlords Architect" | | Section 4.2; Exhibit C |
"Landlord's Construction Representative" | | Section 1.2 |
"Landlord's Contribution" | | Section 1.2; Exhibit C |
"Landlord's Design and Construction Team" | | Exhibit C |
"Landlord's Delay Notice" | | Section 3.3.3(a) |
"Landlord's Electric Consultant" | | Exhibit C |
"Landlord's Expedition Response Notice" | | Section 3.3.3(b) |
"Landlord's Mitigation Measures" | | Section 3.3.3(a) |
"Landlord's Restoration Work" | | Section 11.4 |
"Landlord's Restoration Work Schedule" | | Section 12.1 |
"Landlord's Work" | | Exhibit C |
"Latent Defects" | | Exhibit C |
"Lease Interest Rate" | | Section 5.4 |
"Lease Year" | | Section 1.2 |
"Leeway Period" | | Section 22.1 |
"Lien" | | Section 8.4 |
"Main Lobby" | | Section 10.6 |
"Maximum Landlord Delay Cost" | | Section 3.3.4 |
"Milestone Dates | | Exhibit G |
"Minimum Area" | | Section 3.3 |
"Mortgagee" | | Section 17.1 |
"Non-Standard Alterations" | | Section 8.1 |
"Notice" | | Section 20.9; Exhibit C |
"NYSE" | | Exhibit D |
"Occupancy Requirement" | | Section 24.1 |
"Offer Decision Notice" | | Section 24.4 |
"Offered Space" | | Article 28 |
"Offered Space Commencement Date" | | Article 28 |
"Office Space" | | Section 6.2.1 |
"One IP Lease" | | Section 3.2.1 |
"Operating Budget" | | Section 6.2.4 |
"Operating Days" | | Exhibit D |
"Operating Expenses" | | Section 6.2 |
"Operating Hours" | | Exhibit D |
"Operating Year" | | Section 6.2 |
"Outside Completion Date" | | Exhibit C |
"Outside Delivery Date" | | Section 3.3.1 |
"Outside Occupancy Date" | | Section 3.3.1 |
"Overlandlord" | | Section 17.1 |
"Overtime Costs" | | Section 7.5 |
"Overtime Service" | | Exhibit D |
"Park" | | Section 6.2.1(d) |
"Plans and Specifications" | | Exhibit C |
"Premises" | | Section 1.2 |
"Prime Rate" | | Section 5.4 |
"Property" | | Section 6.2 |
"Punch List" | | Exhibit C |
"Punch List Items" | | Exhibit C |
"Qualified Appraiser" | | Section 21.3 |
"rent" | | Section 5.3 |
"Rentable Square Foot (Feet)" | | Section 1.2 |
"Reply Notice" | | Section 24.3 |
"Responsible Persons" | | Section 14.3 |
"Retail Space" | | Section 6.2 |
"Responding Party" | | Section 21.3 |
"Retail Tenant" | | Section 20.28 |
"Retail Tenant Notice" | | Section 20.28 |
"Right of First Offer" | | Section 24.1 |
"Rules and Regulations" | | Section 20.13 |
"Sale Notice" | | Article 24 |
"Schedule of Critical Activities" | | Exhibit G, Section 3.4.1 |
"Second Extended Term" | | Section 21.1 |
"Second Steel Erection Outside Date" | | Section 3.4.2 |
"Secured Areas" | | Section 15.1 |
"Shell Completion Date" | | Exhibit C |
"Storage Space" | | Section 20.27 |
"Storage Space Commencement Date" | | Section 20.27 |
"Tanks" | | Section 27.1 |
"Taxes" | | Section 6.1 |
"Tax Expenses" | | Section 6.1 |
"Tax Year" | | Section 6.1 |
"Tenant" | | Section 1.2 |
"Tenant's Construction Representative" | | Section 1.2 |
"Tenant Delays" | | Exhibit C |
"Tenant Mitigation Costs" | | Section 3.3.2 |
"Tenant's Architect" | | Section 4.2 |
"Tenant's Audit" | | Section 6.3 |
"Tenant's Cost" | | Exhibit C |
"Tenant's Delay Response Notice" | | Section 3.3.3(a) |
"Tenant's Electric Consultant" | | Exhibit C |
"Tenant's Expedition Costs" | | Section 3.3.3(b) |
"Tenant's Expedition Notice" | | Section 3.3.3(b) |
"Tenant's Personal Property" | | Section 11.5 |
"Tenant's Property" | | Section 8.6 |
"Tenant's Proposed Expedition Costs" | | Section 3.3.3(b) |
"Tenant's Proposed Expedition Measures" | | Section 3.3.3(b) |
"Tenant's Purchase Offer" | | Article 24 |
"Tenant's Share" | | Section 1.2 |
"Tenant's Restoration Work" | | Section 11.5 |
"Tenant's Restoration Work Schedule" | | Section 12.1 |
"Tenant's Work" | | Exhibit C |
"Third Party Costs" | | Section 3.4.1 |
"Third Qualified Appraiser" | | Section 21.3 |
"Transaction Expenses" | | Section 13.10 |
"Two IP Lease" | | Section 3.2.1 |
"Underlying Lease" | | Section 17.1 |
"Warranties" | | Exhibit C |
"Work Letter" | | Exhibit C |
ARTICLE 2
PREMISES
2.1 DEMISE OF PREMISES. Landlord hereby demises and leases to Tenant, and Tenant hereby takes and hires from Landlord, a portion of the Building erected on the land (the "Land") more particularly described in Exhibit A hereto, which portion of the Building (the "Premises") contains approximately 1,034,292 Rentable Square Feet (including 15,000 square feet of Storage Space, as to which there is no Annual Fixed Rent payable, in accordance with Section 20.27 of the Lease), and is depicted in the floor plans annexed hereto as part of Exhibit B, for the term hereinafter stated, for the rent hereinafter reserved and upon and subject to the covenants, agreements, terms, conditions, limitations, exceptions and reservations contained in this Lease. Subject to Section 4.2, Landlord and Tenant agree that the attached Exhibit B is a schedule setting forth the Rentable Square Feet of each floor of the Premises.
2.2 APPURTENANT RIGHTS AND RESERVATIONS.
(a) Tenant shall have, as appurtenant to the Premises, the non-exclusive right to use in common with others, subject to reasonable rules of general applicability to tenants of the Building from time to time made by Landlord of which Tenant is given notice: (i) the common lobbies, corridors, stairways and elevators of the Building, and (ii) if the Premises includes less than the rentable floor area of any floor, the common toilets, corridors and elevator lobby of such floor.
(b) Landlord reserves the right from time to time: (i) to install, use, maintain, repair, replace and relocate, for service to the Premises and/or other parts of the Building, shafts, pipes, ducts, conduits, wires, risers and other facilities and appurtenant fixtures, in the Premises or in other parts of the Building, and (ii) to alter or relocate other common facilities, whether located in the Premises or in other parts of the Building; provided that, with respect to clauses (i) and (ii): (A) any replacements, substitutions or alterations are substantially equivalent to or better than then-existing facilities, (B) installations, replacements and relocations shall be located so far as practicable in the central core area of the Building, above ceiling surfaces, below floor surfaces, within perimeter walls of the Premises or otherwise in boxed enclosures, (C) all such work within the Premises shall be performed at such times and in such manner, after consultation with Tenant, as to create the least practicable interference with Tenant"s use of the Premises (it being understood that the foregoing shall in no event obligate Landlord to do such work on an "overtime" basis except as provided in Section 7.5), (D) Landlord shall reimburse Tenant for any reasonable out-of-pocket costs incurred by Tenant to relocate computer or communications cabling/fiber optics required as a result of such work by Landlord, (E) unless required by law or insurance requirements, no changes shall be made by Landlord in entrances, doorways or corridors on the floors on which the Premises are located without Tenant's express consent, which shall not be unreasonably withheld, (F) Landlord shall consult with Tenant before making any changes in the immediate vicinity of the Premises which could reasonably be anticipated to jeopardize the security of the Premises for the conduct of Tenant's business, and (E) no such work shall reduce the Rentable Square Footage of the floor area of the Premises (unless Landlord shall make an appropriate reduction in Annual Fixed Rent to reflect such reduction in the Rentable Square Footage of the Premises). If any such work (after the initial completion of the Premises) shall increase the Rentable Square Footage of the Premises (whether through an increase in the amount of square footage in the Premises or through an adjustment in the common areas of the Building) then if such work shall increase the Rentable Square Footage of the Premises, Annual Fixed Rent and Additional Rent shall be appropriately increased to reflect such increase in the square footage of the Premises.
ARTICLE 3
LEASE TERM
3.1 LEASE TERM. (a) The term of this Lease and the estate hereby granted (the "Lease Term") shall commence, with respect to each floor of the Premises, on the first to occur of:
(i) six (6) months after the respective Shell Completion Dates for each floor in the Premises; and
(ii) the date upon which Tenant, or anyone associated with Tenant, commences beneficial use of such floor of the Premises (as opposed to use by Tenant's personnel or contractors in the space preparing the same for occupancy, occupancy by persons administering Tenant's relocation, including the installation or testing of telephones, computers and other equipment, cabling, wiring, furnishings, fixtures, furniture and other property of Tenant).
On such date, either (i) the Inspectional Services Department of the City of Boston shall have issued a temporary or permanent certificate of occupancy (a "C/O") permitting Tenant to occupy the Premises or any floor or floors thereof as to which the Shell Completion Date shall have occurred, or (ii) the Base Building Construction shall have been completed to such a condition that Landlord would be able to obtain a temporary or permanent C/O but for the incomplete performance of Tenant's Work which is required to be completed in order for a C/O to be issued, unless such incomplete performance of Tenant's Work is directly attributable to delays caused by Landlord in which case such date shall be delayed one day for each day that the incompletion of Tenant's Work is so directly attributed to delays caused by Landlord. If a C/O has not been obtained by the date which would otherwise have been the date for commencement of the Lease Term, then such date shall be delayed until a temporary or permanent C/O for the Base Building Construction has been obtained.
(b) Such date of commencement as to any floor is hereinafter called the "Commencement Date". Tenant shall, in all events, be treated as having commenced beneficial use of each floor of the Premises when it first occupies all or any portion of such floor of the Premises for the conduct of its business operations.
(c) Each Shell Completion Date and each Commencement Date shall be confirmed in writing by Landlord and Tenant. As soon as may be convenient after the final determination of all Shell Completion Dates and Commencement Dates with respect to the Premises, Landlord and Tenant agree to join with each other in the execution of a written agreement, in the form of Exhibit F hereto, in which the Commencement Date and specified Lease Term shall be stated, but the failure by either party to so execute or deliver such agreement shall not in any way reduce the respective obligations or rights of Landlord or Tenant under this Lease.
(d) The Lease Term shall end on the last day of the calendar month in which occurs the twentieth (20th) Lease Anniversary Date, which ending date is hereinafter called the "Expiration Date". or shall end on such earlier date upon which the Lease Term may expire or be terminated pursuant to any of the conditions of limitation or other provisions of this Lease or pursuant to law.
3.2 IP LEASES.
3.2.1 DESCRIPTION. Tenant is currently in occupancy of approximately 214,546 rentable square feet of space (the "International Place Space") located in the two office tower buildings known as and comprising "International Place" in Boston, Massachusetts ("International Place"). Tenant occupies the International Place Space pursuant to two leases (collectively, the "IP Leases"), as follows:
(i) Lease dated January 1, 1997 (as amended by First Amendment dated as of July 1, 1997) regarding approximately 86,874 rentable square feet of space at One International Place (the "One IP Lease"); and
(ii) Lease dated March 5, 1993 (as amended by First Amendment to Lease dated as of January 28, 1994; Second Amendment to Lease dated as of April 1, 1994; Third Amendment to Lease dated as of September 1, 1995; Fourth Amendment to Lease dated as of January 1, 1997; Fifth Amendment to Lease dated as of July 1, 1997; Sixth Amendment to Lease dated as of September 11, 1998; and Seventh Amendment to Lease dated as of July 21, 1999) regarding approximately 127,672 rentable square feet of space at Two International Place (the "Two IP Lease").
3.2.2 TENANT WARRANTIES. Tenant warrants and represents that (i) the IP Leases are in full force and effect and have not been amended, modified or terminated except as specified in Section 3.2.1; (ii) there are no defaults by the landlord or Tenant pursuant to the IP Leases; (iii) there is no litigation pending or, to the best of Tenant's knowledge, threatened with respect to the IP Leases; (iv) there are no other payments or amounts due or payable to the landlord under the IP Leases except for payments of fixed annual rent, taxes and operating expenses as provided therein, and (v) the copies of the IP Leases heretofore provided to Landlord are true complete and correct. After the date hereof, Tenant shall not amend the IP Leases without the prior written consent of Landlord, which consent shall not be unreasonably withheld, delayed or conditioned. Any decision by Tenant to extend the term of either one or both of the IP Leases, in accordance with the terms thereof shall be within Tenant's sole discretion, provided that Tenant notifies Landlord before such extension as provided in Section 3.3.6.
3.3 LANDLORD'S RESPONSIBILITY FOR DELAYS.
3.3.1 HOLDOVER DAMAGES.
If (i) the Shell Completion Date with respect to approximately 406,085 Rentable Square Feet of the Premises (the "Minimum Area", which shall in all events include Floors 2 through 4, inclusive, 13 through 16, inclusive, 21, 22, 26 through 29, inclusive, and 31 through 36, inclusive) shall not have occurred on or before the date which is thirty (30) days after notice from Tenant to Landlord that Landlord has failed to achieve the applicable Outside Completion Date as to a particular portion or portions of the Minimum Area as provided in Section 1.4 of Exhibit C (the "Outside Delivery Date"), which date shall be extended day for day for any period of Force Majeure (as defined in Section 14.3), or Tenant Delays (as defined in Exhibit C), and
if (ii) as a result thereof, the substantial completion of Tenant's Work with respect to a portion of the Premises containing at least the Minimum Area shall be delayed, and
if (iii) as a result thereof, Tenant's occupancy of a portion of the Premises containing at least the Minimum Area shall be delayed beyond the date which is six (6) months after the Outside Delivery Date (the "Outside Occupancy Date"),
then, subject to the limitation hereinafter set forth, to the extent that Tenant's occupancy of space containing the Minimum Area shall be delayed beyond the Outside Occupancy Date, Tenant shall receive (being referred to herein as the "Holdover Damages") an amount equal to the reasonable costs and expenses incurred by Tenant as a result of such delay, including, without limitation, attorney's fees required to defend eviction proceedings at International Place and to negotiate a settlement or other arrangement with the owner of the International Place Space; the excess, if any of rent at International Place over the rent payable under this Lease as to the Minimum Area for the period after the Outside Occupancy Date during which Tenant is not able to occupy a portion of the Premises containing at least the Minimum Area; any consequential or other damages payable to the owner of the International Place Space as a result of Tenant holding over at International Place; costs and expenses attributable to Tenant's being reasonably required to obtain substitute space in order to avoid a holdover at International Place (such as legal fees, broker's fees, set up, demolition, renovation, removal and restoration costs at the substitute space), and moving costs from International Place to such substitute space. The Holdover Damages so calculated shall be subject to the limit imposed by the Maximum Landlord Delay Cost as provided in Subsection 3.3.4. At Landlord's election, the Holdover Damages shall be paid either in the form of (A) a credit against rent next coming due under this Lease, or (B) a payment directly to Tenant, in either case in the amount described below in this Subsection 3.3.1.
3.3.2. TENANT'S MITIGATION. Tenant shall use reasonable and diligent efforts to mitigate the Holdover Damages for which Landlord is liable to Tenant hereunder, including working in good faith with Landlord to explore reasonable opportunities to mitigate such Holdover Damages. Landlord may require Tenant to use overtime labor and/or to take other time saving measures specified by Landlord to expedite the completion of Tenant's Work with respect to the Minimum Area. If Landlord shall so require Tenant to use overtime labor and/or to take other time saving measures, then Landlord shall reimburse Tenant for all additional costs ("Tenant Mitigation Costs") reasonably incurred by Tenant as a result thereof.
3.3.3 LANDLORD'S MITIGATION.
(a) From and after February 1, 2002, if the periodic reports provided to Tenant in accordance with Exhibit C disclose that in order to complete the Delivery Conditions so that the Shell Completion Date for the Minimum Area will occur on or before the applicable Outside Delivery Dates, it would be necessary to use overtime labor and/or to take other measures to expedite the completion of such Delivery Conditions, then Landlord shall so notify Tenant ("Landlord's Delay Notice") of the reasons for the delay and the then estimated Shell Completion Dates for the Minimum Area. Landlord shall give such notice notwithstanding the fact that the applicable Outside Delivery Dates may have been extended by reason of Force Majeure, if any delay caused by Force Majeure is of such a nature that Landlord can reasonably make up or reduce the period of the delay caused by Force Majeure, in order to cause the Shell Completion Date for at least the Minimum Area to occur on or before the applicable Outside Delivery Dates as provided above. Landlord's Delay Notice shall also specify the estimated time savings to be realized by utilizing overtime labor and/or by taking other specified time savings measures (collectively, "Landlord's Mitigation Measures"), and the estimated cost thereof ("Landlord Mitigation Costs"). Within ten (10) days after Landlord's Delay Notice, Tenant shall give notice ("Tenant's Delay Response Notice") as to whether or not Tenant wishes Landlord to utilize the Landlord's Mitigation Measures described in Landlord's Delay Notice. If Tenant elects in Tenant's Delay Response Notice that Landlord shall utilize the Landlord's Mitigation Measures described in Landlord's Delay Notice, then Landlord shall proceed to take such Landlord's Mitigation Measures, and the Landlord's Mitigation Costs relating thereto which are incurred by Landlord (and without regard to whether or not, in hindsight, the taking of Landlord's Mitigation Measures shall have been required) shall be included in the Maximum Landlord Delay Cost. If Tenant either specifically responds that Landlord shall not utilize the Landlord's Mitigation Measures described in Landlord's Delay Notice, of if Tenant fails to give a Tenant Delay Response Notice within ten (10) days after Landlord's Delay Notice, Tenant shall be deemed to have elected that Landlord shall not take such Landlord's Mitigation Measures. If Landlord elects to take such Landlord's Mitigation Measures notwithstanding the fact that Tenant has elected (or is deemed to have elected) otherwise, then the Landlord's Mitigation Costs associated with such Landlord's Mitigation Measures shall not be included in the Maximum Landlord Delay Cost.
(b) From and after February 1, 2002, if the periodic reports provided to Tenant in accordance with Exhibit C disclose that there is a substantial likelihood that Landlord will be unable to complete the Delivery Conditions so that the Shell Completion Date for the respective portions of the Minimum Area will occur on or before the applicable Outside Delivery Date, but Landlord shall have failed to give a Landlord Delay Notice as provided in Section 3.3.3(a) above, or if the Landlord Delay Notice shall indicate that it is not necessary to use overtime labor and/or to take other measures to expedite the completion of such Delivery Conditions but Tenant does not concur, then Tenant shall have the right to specify which, if any, measures Tenant believes are necessary to assure that such conditions will be timely satisfied, by giving Landlord a notice ("Tenant's Expedition Notice") setting forth in reasonable detail what time saving measures Tenant believes should reasonably be undertaken by Landlord in order to satisfy the foregoing conditions. Tenant's Expedition Notice shall also specify the estimated time savings to be realized by utilizing overtime labor and/or by taking other specified time savings measures (collectively, "Tenant's Proposed Expedition Measures"), and the estimated cost thereof ("Tenant's Proposed Expedition Costs"). Within three (3) Operating Days after Tenant's Expedition Notice, Landlord shall give notice ("Landlord's Expedition Response Notice") as to whether or not Landlord agrees to undertake some or all of the Tenant's Proposed Expedition Measures described in Tenant's Expedition Notice. If within five (5) Operating Days after Tenant's Expedition Notice, Landlord and Tenant cannot agree on which, if any, of Tenant's Proposed Expedition Measures will in fact save time and are commercially reasonable to undertake, then upon the request of either party the dispute shall be resolved by submitting the same to a disinterested third party expert mutually acceptable to Landlord and Tenant, or in the event of inability to agree upon such a third party by arbitration in accordance with the provisions of Article 30 of this Lease. The actual cost to Landlord of undertaking any of Tenant's Proposed Expedition Measures, and which are actually undertaken by Landlord, are referred to as "Tenant's Expedition Costs".
3.3.4 MAXIMUM LANDLORD DELAY COST. The maximum amount (the "Maximum Landlord Delay Cost") for which Landlord shall be liable in connection with or arising out of any delays in delivery of the Premises to Tenant, including Landlord's payments for the aggregate of the Holdover Damages and Landlord Mitigation Costs and Tenant's Expedition Costs (but shall not include Tenant Mitigation Costs), shall in no event exceed Five Million ($5,000,000) Dollars. Landlord shall in no event be liable for any other costs, damages or liability incurred by Tenant as a result of any such delay, including any liability of Tenant under any other lease which is cross-defaulted with one or both of the IP Leases.
3.3.5 Landlord's RIGHT TO PARTICIPATE IN DISCUSSIONS. Tenant agrees that if Landlord is or may be liable for damages in connection with Tenant's holding over under the IP Leases, then Landlord and/or Landlord's counsel shall have the right to participate with Tenant and its counsel, at Landlord's cost, in any negotiations with respect to holdover penalties and/or holdover damages relating to the IP Leases, to attend all meetings or telephone conferences at which such holdover penalties and/or damages may be discussed, and to provide input in connection with any holdover proceedings brought by the owner thereof to obtain possession of the International Place Space. Tenant shall notify Landlord a reasonable time in advance of the commencement of any such negotiations and promptly upon notice of commencement of any holdover proceedings and shall, in good faith, keep Landlord reasonably apprised of the progress of the same, including reasonable notice of any scheduled meetings or telephone conferences so that Landlord and/or Landlord's counsel may attend or participate. Tenant agrees to act in good faith and in a commercially reasonable manner in connection with any agreement in settlement of any such holdover or in declining to enter into any such agreement. Tenant shall not agree to any settlement with the IP Landlord as to a holdover at International Place which results in Holdover Damages for which Landlord is liable under Subsection 3.3.1 without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed.
3.3.6 REDUCTION IN SIZE OF PREMISES'IP LEASE EXTENSION.
(a) If following and as a result of Project Delays (as hereinafter defined) in the completion of the Base Construction of the Building Tenant reasonably believes that the Delivery Conditions will not be met for the Minimum Area by the applicable Outside Delivery Dates, and if Tenant shall intend to elect to exercise its rights to extend the term of the IP Leases (or one or the other of them) in accordance with the provisions of Section 2.4.2 of each of the IP Leases, then Tenant shall give notice to Landlord at least thirty (30) days prior to Tenant's giving an extension notice to the owner of International Place which extends the term (an "IP Lease Extension Notice") of one or both of the IP Leases. "Project Delays" means actual (or reasonably anticipated) material delays (not caused by Tenant Delays, but inclusive of delays due to Force Majeure) in the completion of the Base Building Construction and deviation from the schedule of construction.
(b) In the event that Tenant shall thereafter elect to give the IP Lease Extension Notice, Tenant shall have the option ("IP Extension Deletion Option"), as Tenant's sole and exclusive remedy (except for Tenant's rights and Landlord's obligations contained in other subsections of this Section 3.3, and subject to the Maximum Landlord Delay Cost as provided in Section 3.3.4) exercisable by notice to Landlord given within sixty (60) days after the date of the IP Lease Extension Notice, to reduce the Premises by one or more contiguous full floors, which floors (the "IP Extension Deleted Space") shall be designated in Tenant's notice. The IP Extension Deleted Space shall be all or a portion of the Additional Space (as defined in Section 5.5(b).
3.3.7. REDUCTION IN PREMISES' SHELL COMPLETION. If Landlord shall not have completed the Delivery Conditions with respect to at least the Minimum Area by the date which is twelve (12) months after the Outside Completion Dates set forth in Exhibit C (unless such delay was caused by any event or occurrence of Tenant Delays, which shall extend day for day the period for Landlord to complete the Delivery Conditions), then Tenant shall have the option, as Tenant's sole and exclusive remedy (except for Tenant's rights and Landlord's obligations contained in other Subsections of this Section 3.3, and subject to the Maximum Landlord Delay Cost as provided in Subsection 3.3.4), exercisable by notice to Landlord given on or before thirty (30) days after the expiration of such twelve (12) month period, to reduce the Premises by any one or more contiguous full floors as to which the Delivery Conditions shall not have occurred, which full floors shall be designated in Tenant's notice to Landlord, unless within thirty (30) days after Landlord receives such notice, Landlord shall have caused the Delivery Conditions with respect to such floor(s) to have occurred.
3.3.8 REDUCTION IN SIZE OF PREMISES'MINIMUM AREA.
If (i) Landlord shall not have completed the Delivery Conditions with respect to at least the Minimum Area by the applicable Outside Delivery Dates (as set forth in Exhibit C), which dates shall be extended day for day for any period of Force Majeure or Tenant Delays; and
if (ii) Tenant shall not have exercised the IP Extension Deletion Option as provided in Section 3.3.6; and
if (iii) Tenant shall not have elected to extend either or both of the IP Leases in accordance with the provisions of Section 2.4.2 of each of the IP Leases,
then, Tenant shall have the option ("Minimum Area Deletion Option"), as Tenant's sole and exclusive remedy (except for Tenant's rights and Landlord's obligations contained in other subsections of this Section 3.3, and subject to the Maximum Landlord Delay Cost as provided in Section 3.3.4), exercisable by notice to Landlord given within sixty (60) days after the applicable Outside Delivery Date, to reduce the Premises by one or more contiguous full floors (the "Minimum Area Deleted Space") constituting up to 274,819 Rentable Square Feet, which may be all or any portion of the Additional Space (as defined in Section 5.5(b)), which full floors shall be designated in Tenant's notice to Landlord. Notwithstanding the foregoing, (a) if Floors 2, 3 and 4 shall not have been completed by the applicable Outside Delivery Date, then Tenant shall have the right to delete up to fifty (50%) percent of the Rentable Square Feet of space permitted to be deleted as Minimum Area Deleted Space, and (b) if the balance of the Minimum Area is not completed by the applicable Outside Delivery Date, then Tenant shall have the right to delete the balance (or all, if not previously deleted by Tenant) of the Rentable Square Feet of space permitted to be deleted as Minimum Area Deleted Space.
3.4. STEEL ERECTION OUTSIDE DATES; SCHEDULES OF CRITICAL ACTIVITIES; TENANT'S TERMINATION RIGHTS.
3.4.1. SEPTEMBER 1, 2001.
(a) On or before August 24, 2001 Landlord shall submit to Tenant a report on the status of steel erection in reasonable detail, including the number of shop drawings produced and approved, the number of pieces of steel fabricated, the number of pieces of steel erected to date, and the number of ironworkers on site. If Landlord has not commenced and thereafter diligently continued the erection of steel for the Building on or before September 1, 2001 (the "First Steel Erection Outside Date"), which date shall be extended for a period equal to the aggregate of delays caused by any event or occurrence of Force Majeure or Tenant Delays, Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by giving notice to Landlord of Tenant's desire to do so within thirty (30) days after the First Steel Erection Outside Date (as the same may have been so extended) and, upon the giving of such notice, this Lease and the Lease Term shall cease and come to an end without further liability or obligation on the part of either party (provided that Landlord shall reimburse Tenant for its Third Party Costs (as defined below), unless, within thirty (30) days after Landlord receives such notice, Landlord shall have caused the erection of steel for the Building to have commenced. For the purposes of this Section 3.4, Landlord shall be deemed to have "commenced" the erection of steel for the Building ("Commencement of Steel Erection") when (i) the primary tower crane which is to erect the high rise tower of the Building is in place and a column above the P-5 level has been erected, and (ii) at least thirty percent (30%) of the total tonnage of steel shall have been fabricated (exclusive of any steel for Base Building Modifications). Landlord shall provide reasonable evidence confirming the foregoing. Thereafter, Landlord shall proceed diligently to erect steel in accordance with Landlord's steel fabrication and erection plans and in conformity with the "Schedule of Critical Activities" attached hereto as Exhibit G. "Third Party Costs" shall mean the reasonable actual out-of pocket third party costs for legal, architectural, engineering and consultant's fees incurred with respect to the Premises to the date of such termination, and the cost of penalties or non-refundable deposits relating to long lead time items and specially fabricated items which Tenant has paid with respect to the Premises to the date of such termination, and is unable, using reasonable efforts, to recover.
3.4.2 DECEMBER 1, 2001.
(a) On or before November 23, 2001 Landlord shall submit to Tenant a report on the status of steel erection in reasonable detail, including the number of shop drawings produced and approved, the number of pieces of steel fabricated, the number of pieces of steel erected to date, and the number of ironworkers on site. If Tenant shall not have exercised the option to terminate this Lease set forth in Section 3.4.1, but nevertheless, thereafter, Landlord has not commenced and thereafter diligently continued the erection of steel for the Building on or before December 1, 2001 (the "Second Steel Erection Outside Date"), which date shall be extended for a period equal to the aggregate of delays caused by any event or occurrence of Force Majeure or Tenant Delays, Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by giving notice to Landlord of Tenant's desire to do so within thirty (30) days after the Second Steel Erection Outside Date (as the same may have been so extended) and, upon the giving of such notice, this Lease and the Lease Term shall cease and come to an end without further liability or obligation on the part of either party (provided that Landlord shall reimburse Tenant for its Third Party Costs), unless, within thirty (30) days after Landlord receives such notice, Landlord shall have caused the erection of steel for the Building to have commenced.
3.4.3 SCHEDULE OF CRITICAL ACTIVITIES. If, by ninety (90) days after Commencement of Steel Erection, Landlord is not erecting steel (as defined in Exhibit G), Landlord shall submit to Tenant its plan to make up any delay so as to again comply with the Schedule of Critical Activities, including but not limited to increasing worker count on site, working additional hours, Saturdays, Sundays and overtime. At any time that Landlord completes a floor two (2) weeks or more later than the Milestone Dates (as defined in Exhibit G), Landlord shall likewise submit a recovery plan. Landlord shall submit to Tenant updated reports on all Critical Activities (as defined in Exhibit G) monthly, and at Tenant's request weekly, as provided in Exhibit C.
ARTICLE 4
COMPLETION OF THE BUILDING AND THE PREMISES
4.1 BASE BUILDING CONSTRUCTION AND Landlord's WORK. Landlord agrees to complete the Base Building Construction and Landlord's Work, and Tenant agrees to complete Tenant's Work, all as defined in and in accordance with Exhibit C.
4.2 REMEASUREMENT. Within sixty (60) days after the Shell Completion Date (as defined in Exhibit C) Landlord, at Landlord's expense, shall cause the architect that designed the Building (or such other architect as Landlord shall designate ("Landlord's Architect") to calculate the Rentable Square Feet in the Building and Premises. Landlord shall submit to Tenant Landlord's Architect's detailed calculation by written notice, which shall include CAD drawings. If Tenant shall dispute the Rentable Square Feet calculation of the Building or the Premises, Tenant may send a Dispute Notice (as defined in Article 30) disputing Landlord's Architect's calculation to Landlord within sixty (60) days after the delivery of such Landlord's Architect's calculation to Tenant, which Dispute Notice shall specify the respects in which Tenant's Architect believes Landlord's Architect's calculation is incorrect, and the dispute resolution mechanism of Article 30 shall become applicable. If Tenant does not send a Dispute Notice to Landlord within the sixty (60) day period after the delivery of Landlord's Architect's calculation to Tenant, then the amount of Rentable Square Feet stated in Landlord's Architect's calculations shall be deemed correct for all purposes of this Lease and shall no longer be subject to change. Landlord and Tenant hereby agree that all measures of Rentable Square Feet set forth in this Lease shall be deemed conclusive and binding on Landlord and Tenant, unless altered in accordance with Section 2.2 (b) of this Lease. Upon finalization of the Rentable Square Feet of the Building, the parties agree to enter into an amendment to this Lease specifying the final plans of each of the floors of the Premises, the Lease Term, the rent hereunder, floor by floor Rentable Square Feet measurements, Tenant's Share and other items that are based on the Rentable Square Feet in the Premises and the Building. During the pendency of any such dispute Tenant shall pay Annual Fixed Rent to Landlord based on Landlord's determination, with an appropriate adjustment once such dispute has been resolved.
4.3 SPECIFICATION OF SHELL COMPLETION DATE.
If Tenant shall dispute Landlord's determination of the Shell Completion Date with respect to any floor of the Premises, Tenant shall give a Dispute Notice to Landlord on or before ten (10) days after the date which shall have been specified by Landlord as the Shell Completion Date. Such Dispute Notice shall specify in reasonable detail such respects in which Tenant believes the Delivery Conditions (as defined in Exhibit N) have not been fulfilled and the dispute resolution mechanism of Article 30 shall become applicable. If Tenant shall fail to give a Dispute Notice to Landlord within such time period, then the Shell Completion Date specified by Landlord shall be conclusive and binding upon Landlord and Tenant.
4.4 QUALITY AND PERFORMANCE OF WORK.
(a) All construction work required or permitted by this Lease, whether by Landlord or by Tenant, shall be done in a good and workmanlike manner and in compliance with all applicable laws and all ordinances, regulations and orders of governmental authorities and insurers of the Building. Each party may inspect the work of the other at reasonable times, and the Construction Representative of each party shall promptly give notice of any approvals and other actions on the party's behalf required to be given in connection with design and construction. Landlord's obligations under this Article 4 and Exhibit C shall be deemed to have been performed on the earlier of (i) the Rent Commencement Date with respect to any floor, or (ii) the date on which Tenant commences to occupy any portion of such floor of the Premises for the purpose of conducting its business therein, except for items which are incomplete or do not conform with the requirements of this under this Article 4 and Exhibit C, and as to which in either case Tenant shall have given Landlord notice as provided in the next sentence or Exhibit C. Except to the extent to which Tenant shall have given Landlord notice (y) no later than one (1) year after the date when Landlord's obligations under this Article 4 and Exhibit C shall be deemed to have been performed as provided in the preceding sentence, in the case of defects not discoverable on a reasonable inspection within the three (3) month period provided for below because of the season of the year then in progress, or (z) no later than the end of the third full calendar month next beginning after the date when Landlord's obligations under this Article 4 and Exhibit C shall be deemed to have been performed as provided in the preceding sentence, in the case of any other defects, of specific construction items as to which Landlord has failed to perform or has improperly performed the Base Building Work or Landlord's Work under this Article 4 and Exhibit C, Tenant shall be deemed conclusively to have approved all such work and shall have no claim that Landlord has failed to perform or has improperly performed any of Landlord's obligations under this Article 4 and Exhibit C. Landlord agrees to exercise any rights Landlord may have against its contractor on account of any latent defects which may be discovered after such one (1) year period, and any recovery resulting therefrom net of the reasonable costs and expenses incurred to obtain the same shall be credited against any Operating Expenses relating to correction of such latent defect. Landlord agrees to promptly complete, correct or repair at its expense those items of Base Building Work or Landlord's Work which are then incomplete or which Landlord has failed to perform or has improperly performed and as to which, in any case, Tenant shall have given notice to Landlord within such one (1) year or three (3) month period, as applicable, as aforesaid.
(b) Landlord represents that to the best of its knowledge:
(i) Construction of the base Building and the common areas therein will be in full compliance with Americans with Disabilities Act standards in effect as of the Base Rent Commencement Date.
(ii) The Building will be in compliance with all applicable laws and regulations governing environmental hazards or violations in or around the Building that pose a danger to health, life or safety, in effect as of the Base Rent Commencement Date.
(iii) The Building will comply with all applicable building codes on the Base Rent Commencement Date.
(iv) The total load, including live, hung, and partition, of the Building is designed to be 95 pounds per Rentable Square Foot.
4.5 TENANT COMPLIANCE WITH AGREEMENTS. In the conduct of Tenant's Work, Alterations, or any other work performed by or on behalf of Tenant in the Premises or the Building, Tenant shall require every contractor engaged by or on behalf of Tenant, and all subcontractors of every tier, to comply with the following requirements by which the Landlord is bound, by including such requirements in its contracts:
(a) Boston Residents Construction Employment Plan For One Lincoln Street dated December 20, 1989;
(b) Boston Residents Permanent Jobs Employment Opportunity Plan for One Lincoln Street, dated July 17, 1990;
(c) Amended and Restated Cooperation Agreement for Planned Development Area No. 35 One Lincoln Street, dated May 31, 1991;
(d) Transportation Access Plan Agreement between The City of Boston Transportation Department and Kingston Bedford Joint Venture, dated November 30, 1990.
(e) Tenant shall require its contractors and subcontractors to provide to Landlord or Landlord's designee all documentary and statistical information required by the foregoing plans. Tenant agrees that any fines or sanctions imposed upon Landlord by reason of the failure of Tenant to comply herewith shall be the sole responsibility of Tenant, and Tenant shall indemnify and defend Landlord, its members, managers, their agents, employees, officers and contractors against any and all such sanctions.
Tenant shall comply with any of the requirements of the foregoing which may be applicable to a tenant with respect to the leasing of the Retail Space (as defined in Section 6.2.1).
If Tenant exercises the Garage Addition Option as provided in Article 23, Tenant shall comply with all of the requirements of the foregoing which are applicable to an operator of the Garage.
ARTICLE 5
ANNUAL FIXED RENT AND FIRST MONTH'S RENT
5.1 FIXED RENT. Tenant agrees to pay to Landlord, or as directed by Landlord, at Landlord's Present Mailing Address or at such other place as Landlord shall from time to time designate by notice, on the applicable Rent Commencement Dates (defined in Section 5.5 below, but subject to the provisions of Section 5.2) and thereafter monthly, in advance, on the first day of each and every calendar month during the Lease Term, a sum equal to one-twelfth of the Annual Fixed Rent specified in Section 1.2 hereof with respect to all space for which a Rent Commencement Date has occurred, in lawful money of the United States, without any set-off or deduction whatsoever, except as specifically provided in Section 20.14. Until notice of some other designation is given, Annual Fixed Rent and all other charges for which provision is herein made shall be paid by remittance to or to the order of "Escrow Bank, USA, as Agent," at the Present Mailing Address of Landlord, and all remittances received by Escrow Bank, USA, as Agent as aforesaid, or by any subsequently designated recipient, shall be treated as payments to Landlord. Landlord may in the alternative require that payments be made by wire transfer of funds to a bank account designated by Landlord.
5.2 PAYMENT OF FIRST MONTH'S RENT. Tenant shall, on the Rent Commencement Date with respect to each floor of the Premises, pay to Landlord an amount equal to one-twelfth of the Annual Fixed Rent, calculated on the basis of such floor of the Premises. If a Rent Commencement Date is other than the first day of a calendar month, Annual Fixed Rent for such month shall be prorated on a daily basis to the end of said calendar month, and shall be payable, together with the payment of one-twelfth of the Annual Fixed Rent with respect to each floor, on the applicable Rent Commencement Date.
5.3 ADDITIONAL RENT. All amounts over and above, or in addition to, the Annual Fixed Rent which are payable by Tenant to Landlord under the terms of this Lease shall be deemed Additional Rent hereunder and shall be paid by Tenant in lawful money of the United States, without any set-off or deduction whatsoever, except as specifically provided in Section 20.14, and otherwise in the same manner as an installment of the Annual Fixed Rent as elsewhere provided in this Lease; and Landlord shall have all the rights and remedies in the event of the non-payment thereof as it would have had in the event of the non-payment of any installment of the Annual Fixed Rent. Tenant's obligation to pay any Annual Fixed Rent or any Additional Rent which shall have theretofore become due and payable shall survive the expiration or earlier termination of this Lease. (The Annual Fixed Rent and Additional Rent are sometimes collectively referred to in this Lease as "rent.") Rent for any partial months during the Lease Term shall be prorated on a per diem basis.
5.4 LATE PAYMENT. All payments of Fixed Rent are due on the first day of each calendar month as described in Section 5.1. Tenant shall use its best efforts to instruct its personnel to schedule payment to Landlord by a wire transfer as directed by Landlord in the regular and ordinary course of business, on or before the first day of each month, in the amount of the Fixed Rent. If Landlord shall not have received any payment or installment of rent on or before four (4) days after the date (the "due date") on which the same first becomes payable under this Lease, other remedies for nonpayment notwithstanding,
(a) Tenant shall pay to Landlord a late charge of one (1%) percent of such overdue payment for the purpose of defraying Landlord's administrative expenses incident to the handling of such overdue payment, and
(b) the amount of such payment or installment shall bear interest from the due date through and including the date such payment or installment is received by Landlord, at a rate (the "Lease Interest Rate") equal to the lesser of (i) the Prime Rate (defined below), plus two (2%) percent, or (ii) the maximum applicable legal rate, if any. "Prime Rate" shall mean the rate (or the average of rates, if more than one rate appears) inserted in the blank of the "Money Rate" section of the Wall Street Journal (Eastern Edition) in the Section reading "Prime Rate %." Landlord may credit payments received first against rent and other charges currently due, before crediting payments against rent and other charges which are unpaid from prior periods, unless Landlord determines in its sole discretion to make a different allocation.
(c) Such late charge and interest shall both be deemed Additional Rent and shall be paid by Tenant to Landlord upon demand.
5.5 RENT COMMENCEMENT DATE; RENT CONCESSIONS.
(a) Provided that, and only so long as, an Event of Default does not exist with respect to the payment of any Annual Fixed Rent or Excess Operating Expenses with respect to any other portion of the Premises, Landlord hereby waives payment of Annual Fixed Rent and Excess Operating Expenses, solely with respect to floors 3 and 4 containing approximately 119,601 Rentable Square Feet (collectively, the "Free Rent Floors"), of the Premises, and solely for the period from and including the Commencement Date for each of the Free Rent Floors for a period of twelve (12) months thereafter. Landlord's waiver of Annual Fixed Rent and Excess Operating Expenses shall terminate, and payment of Annual Fixed Rent and Excess Operating Expenses with respect to the Free Rent Floors shall commence, on the first day after the expiration of such twelve (12) month period (the "Rent Commencement Date"). If an Event of Default occurs with respect to the payment of any Annual Fixed Rent or Excess Operating Expenses with respect to any portion of the Premises (other than the Free Rent Floors), then Landlord's waiver of rent with respect to the Free Rent Floors shall immediately and automatically be rescinded, and Tenant shall forthwith thereafter pay to Landlord all rent which would have been paid if Landlord had not waived payment of such rent with respect to the Free Rent Floors from the date of the initial waiver to the date of such Default, and thereafter, Tenant shall continue to pay all rent for the Free Rent Floors as if Landlord had never waived payment of rent with respect thereto.
(b) The following provisions of this Section 5.5(b) shall apply only as to any portion of the area described herein which shall not have been deleted, if applicable, pursuant to the Minimum Area Deletion Option as provided in Section 3.3.8. Provided that, and only so long as, an Event of Default does not exist with respect to the payment of any Annual Fixed Rent or Excess Operating Expenses with respect to any other portion of the Premises, Landlord hereby waives payment of that portion of Annual Fixed Rent, solely with respect to floors 8 through 11, inclusive, 17 through 20, inclusive, and 23 through 25, inclusive (collectively, the "Additional Space"), which is in excess of Twenty-Two ($22.00) Dollars per Rentable Square Foot, and solely with respect to the period from and including the Rent Commencement Date for each floor of the Additional Space until September 30, 2004. Landlord's waiver of such portion of Annual Fixed Rent shall terminate, and payment of the full Annual Fixed Rent of Fifty-Six ($56.00) Dollars per Rentable Square Foot with respect to the Additional Space shall commence, on October 1, 2004. If an Event of Default occurs with respect to the payment of any Annual Fixed Rent or Excess Operating Expenses with respect to any portion of the Premises, then Landlord's waiver of such portion of the Annual Fixed Rent with respect to the Additional Space shall immediately and automatically be rescinded, and Tenant shall forthwith thereafter pay to Landlord the full Annual Fixed Rent which would have been paid if Landlord had not waived payment of such portion of the Annual Fixed Rent with respect to the Additional Space from the date of the initial reduction to the date of such Default, and thereafter, Tenant shall continue to pay the full amount of Annual Fixed Rent for the Additional Space as if Landlord had never waived payment of any portion of the Annual Fixed Rent with respect thereto. Tenant shall pay any Excess Operating Expenses with respect to the Additional Space notwithstanding the reduction hereby given in the amount of Annual Fixed Rent with respect to the Additional Space.
(c) The Rent Commencement Date with respect to the Retail Space shall be January 1, 2004.
(d) The Rent Commencement Date with respect to all of the Premises except for the Free Rent Floors and the Retail Space shall be the Commencement Date with respect to each of such floors. In the event of any Tenant Delay causing delay in the Shell Completion Date with respect to any floor of the Premises, the applicable Rent Commencement Date shall be the date which would have been the applicable Rent Commencement Date had such Tenant Delay not occurred.
ARTICLE 6
ESCALATION
6.1 TAXES.
6.1.1 DEFINITIONS. For the purposes of this Article 6, the following terms shall have the respective meanings set forth below:
(a) "Taxes" shall mean the aggregate amount of all real estate and personal property taxes and any general or special assessments (exclusive of penalties thereon but inclusive of interest on assessments payable in installments) assessed or imposed upon or with respect to the Building and the Land and including, without limitation, (i) taxes or assessments made upon or with respect to any development rights now appurtenant to or used in connection with the construction of the Building, (ii) any fee, tax or charge imposed by any governmental authority for, on or in respect of any vaults, vault space or other space within or outside the boundaries of the Land which are not leased to other tenants, (iii) any assessments for public improvement or benefit to the Building, the Land, or the locality in which the Land is situated, including, without limitation, all amounts payable by Landlord as a result of the Land and/or the Building being located within a business improvement district, (iv) any tax, assessment or charge imposed on or with respect to any fixtures, equipment or personal property serving or used in connection with the Building or the Land, and (v) Garage Taxes, as defined in subsection (b). There shall be excluded from Taxes all income, estate, succession, inheritance, transfer and franchise taxes imposed upon Landlord; provided, however, that if at any time during the Lease Term the method of taxation of real estate shall be changed and as a result any other tax or assessment, however denominated and including, without limitation, any franchise, income, profit, use, occupancy, gross receipts or rental tax, shall be imposed upon Landlord or the owner of the Building and the Land, or the rents or income therefrom, in substitution for or in addition to, in whole or in part, any of the taxes or assessments listed in the preceding sentence, such other tax or assessment shall be included in and deemed part of Taxes, but only to the extent that the same would be applicable to owners of real estate generally, and would be payable if the Building, the Land and all appurtenances thereto (including development rights) were the only property of Landlord. The amount of any special assessments for public improvements or benefits to be included in Taxes for any year, in the case where the same may, at the option of the taxpayer, be paid in installments, shall be included only to the extent of payments that would be incurred if such assessment or betterment were spread over the longest period allowable by law without penalty or over such shorter period as may be required by any Mortgagee or Overlandlord, and shall be limited to the amount of the installment due in respect of such year, together with any interest payable in connection therewith (other than interest payable by reason of the delinquent payment of such installment). Taxes shall also not include any late fees or penalties due to Landlord's failure to make tax payments when and as due, unless as a result of Tenant's nonpayment or failure to make payments when due.
(b) "Garage Taxes" shall mean the portion of the Taxes which is fairly allocable to the Garage, which shall conclusively be deemed to be an amount equal to two and one-half percent (2 '%) of the total Taxes attributable to the entire Land and Building.
(c) "Tax Year" shall mean each period from July 1 through June 30 (or such other fiscal period as may hereafter be adopted by the City of Boston as the fiscal year for any tax, levy or charge included in Taxes), any part or all of which occurs during the Lease Term.
(d) "Tax Expenses" shall mean all expenses, including, without limitation, attorney's fees and disbursements and fees and expenses of experts, appraisers and other witnesses, actually incurred by Landlord in seeking to reduce the amount of any assessed valuation of the Land and/or Building, in contesting the amount or validity of any Taxes, or in seeking a refund of Taxes.
Tenant shall pay to Landlord, as Additional Rent, Tenant's Share of Tax Expenses within thirty (30) days after receipt of Landlord's invoice, which shall include such documentation of the calculation of Tenant's Share of Tax Expenses as Tenant may reasonably request.
6.1.2 It is understood that the provisions of this Article 6 are based upon the method of payment of City of Boston real property taxes in effect at the date of this Lease, to wit, in quarterly installments in advance on the first days of July, October, January and April of each Tax Year. If such method of payment is hereafter changed, Landlord shall have the right to change the method of calculating Taxes for inclusion in Operating Expenses so that the amount which shall be paid to Landlord in respect of any installment of Taxes shall not be reduced as a result of the change in the method of payment of Taxes to the City of Boston. Landlord shall furnish to Tenant copies of the applicable tax bills promptly after receipt of such bills by Landlord.
6.1.3 (a) Except as provided in Section 6.1.3(b) hereof, only Landlord shall have the right to institute tax reduction or other proceedings to reduce the assessed valuation of the Land and Building. Should Landlord be successful in any such reduction proceedings and obtain a refund of Taxes for any Operating Year or Years in respect of which Tenant shall have made a payment to Landlord pursuant to this Article 6, Landlord shall credit Tenant's Share of such refund (or, in the case of a refund of Taxes for an Operating Year, only a fraction of which is included in the Lease Term, such fraction thereof) against the monthly installment or installments of Annual Fixed Rent next falling due under this Lease, or if the Lease Term has then expired and Tenant has no further obligations to Landlord, such amount shall be refunded by Landlord to Tenant. In calculating the amount of any such credit or payment, Landlord shall have the right to deduct from such refund all Tax Expenses incurred by Landlord in obtaining the same, but only to the extent that the Tax Expenses incurred by Landlord in obtaining the same have not previously been paid by Tenant. The provisions of this subsection 6.1.3 shall survive the expiration of the Lease Term.
(b) Anything in this Section 6.1.3 to the contrary notwithstanding, provided that Tenant meets the Occupancy Requirement (defined in Section 24.1 below) and requests Landlord in writing to do so (which request is received not less than thirty (30) days prior to the last date on which real estate tax abatement proceedings for a particular Tax Year may be commenced), Landlord will commence proceedings for an abatement of Taxes for such Tax Year. The manner and method of conducting such proceedings shall be solely within the judgment of Landlord, provided that Landlord shall not compromise, settle, cancel or withdraw any such proceedings unless Landlord shall, at least fifteen (15) days prior thereto, have notified Tenant of its intention to do so and Tenant shall have failed during such period to notify Landlord of its intention to continue such proceedings at its cost and expense. Tenant's rights under this Section 6.1.3(b) may be exercised after the date hereof only in respect of Tax Years commencing subsequent to the Tax Year in which the Commencement Date of this Lease occurs, and then only upon the condition that Tenant continues to meet the Occupancy Requirement (as defined in Section 24.1) and that no Event of Default then exists. From time to time, within thirty (30) days after notice from Landlord, Tenant shall pay to Landlord, as an additional charge, Tenant's Share of the estimated Tax Expenses of such proceedings. If Tenant shall fail to make any such payment within such 30-day period, Landlord shall thereafter be free from any further obligations under this paragraph; provided, however, that Tenant may make any such payment "under protest" and such payment shall not preclude Tenant from thereafter disputing the appropriate amount of any Tax Expense. Should Landlord be successful in obtaining a refund for any Tax Year in respect of which Tenant shall have made a payment to Landlord pursuant to this Article 6, Landlord shall credit or pay to Tenant, Tenant's Share of such refund (or, in the case of a refund of Taxes for an Operating Year, only a fraction of which is included in the Lease Term, such fraction thereof). In calculating the amount of any such credit or refund, Landlord shall have the right to deduct from such refund or credit all Tax Expenses incurred by Landlord in obtaining same (less all payments, if any, on account thereof paid previously by Tenant). If either party prosecutes an application for an abatement, the other party shall cooperate and promptly furnish any pertinent information reasonably required by the party prosecuting the application for an abatement.
6.2 OPERATING EXPENSE ESCALATION.
6.2.1 DEFINITIONS. For the purposes of this Section 6.2, the following terms shall have the respective meanings set forth below:
(a) "Base Operating Expenses" is defined in Section 1.2.
(b) "Operating Expenses" shall mean the aggregate of all costs and expenses (including taxes, if any, thereon) and including Taxes, as defined above, and Tax Expenses, actually paid or incurred by or on behalf of Landlor (whether directly or through independent contractors) in connection with the operation and maintenance of the Property (as hereinafter defined), including all expenses incurred by Landlord as a result of its compliance with any of its obligations under Sections 7.1 and 7.3 hereof, but excluding those items set forth as excluded from Operating Expenses at the end of this subsection 6.2.1(b). Operating Expenses shall be calculated on the accrual basis of accounting in accordance with accounting practices generally applicable to commercial real estate and applied consistently from year to year (but subject to the further provisions of this Section 6.2) and shall include, without limitation, the following expenses:
(i) salaries, wages, medical, surgical and general welfare benefits (including group life insurance), pension and welfare payments or contributions and all other fringe bene fits paid to, for or with respect to all persons (whether they be employees of Landlord or its managing agent) for their services in the operation (including, without limitation, security services), maintenance, repair, or cleaning of the Property, and payroll taxes, workers' compensation, uniforms and dry cleaning costs for such persons. To the extent that Landlord's personnel perform services at other buildings, such costs shall be pro-rated;
(ii) payments under service contracts with independent contractors for operating (including, without limitation, providing security services), maintaining, repairing or cleaning of the Property or any portion thereof or any fixtures or equipment therein;
(iii) all costs or charges for steam, heat, ventilation, air conditioning and water (including sewer charges) furnished to the Property and/or used in the operation of the Property and all costs or charges for electricity furnished to the public and service areas of the Property and/or used in the operation of the service facilities of the Property, including any taxes on any such utilities;
(iv) repairs and replacements which are appropriate to the continued operation of the Property as a first-class Boston Central Business District office building, provided that to the extent the cost of any such repair and/or replacement is required to be capitalized for federal income tax purposes, such cost shall be amortized on a straight-line basis over the useful life thereof required to be utilized for federal income tax purposes, and the annual amortization of such repair and/or replacement, together with interest on the unamortized balance of such cost at a fixed interest rate equal to the rate then being charged by commercial banks for loans for a term equivalent to the amortization period, shall be included in Operating Expenses;
(v) costs of lobby decoration, painting and decoration of non-tenant areas;
(vi) cost of snow removal and landscaping in and about the Property, including, without limitation, with respect to the Park (defined in Section 6.2.1(d) below);
(vii) cost of building and cleaning supplies and equipment, cost of replacements for tools and equipment used in the operation, maintenance and repair of the Property, and the actual charges for communications services for the management office for the Property;
(viii) financial expenses incurred in connection with the operation of the Property, such as insurance premiums and deductibles (including, without limitation, liability insurance, fire and casualty insurance, rent interruption insurance and any other insurance that is then generally carried by owners of major first-class office buildings in the Boston Central Business District or may be required by the holder of any mortgage on the Property, except for the cost of to insure Tenant's Work, Tenant's Restoration Work, and Tenant's Alterations, which Landlord is not required to insure), attorneys fees and disbursements (exclusive of any such fees and disbursements incurred in connection with the leasing of space in the Property, or any such fees and disbursements which have been paid by Tenant as a part of Tax Expenses), auditing and other professional fees and expenses, Landlord's reasonable home office accounting charges, association dues and any other ordinary and customary financial expenses incurred in connection with the operation of the Property;
(ix) management fees at a rate not to exceed one (1%) percent of gross receipts from the Property, and all costs of maintaining a management office in the Building, including, without limitation, either (x) the actual rent paid for the management office under a lease or sublease in effect with respect thereto from time to time, or (y) if no lease or sublease for the management office is in effect at any time, an imputed rental at the rate per Rentable Square Foot equal to the Fixed Rent and Additional Rent per Rentable Square Foot being paid by Tenant for the Premises from time to time, for the number of Rentable Square Feet in the Building being utilized for the management office;
(x) the cost of capital improvements made by Landlord either (1) for the purpose of reducing Operating Expenses, which expense is undertaken in good faith by Landlord based upon information upon which Landlord could reasonably conclude that the cost of such capital improvement(s) would be likely to result in a reduction of Operating Expenses equal to or greater than the cost of such capital improvements, whether or not such a reduction does in fact occur, or (2) pursuant to a requirement of law, ordinance, order, rule or regulation of any public authority having jurisdiction or the requirement of any insurance carrier or insurance rating organization or underwriting board first effective after the Date of this Lease, whether or not such requirement is valid or mandatory, in either case calculated as follows: the cost of any such capital improvement shall be included in Operating Expenses for the Operating Year in which such improvement was made, provided that to the extent the cost of such capital improvement is required to be capitalized for federal income tax purposes, such cost shall be amortized over the useful life thereof required to be utilized by Landlord for federal income tax purposes (or, in the event that Landlord is not required to pay federal income taxes, the useful life thereof that would be required to be utilized if the Landlord were required to pay federal income taxes), and the annual amortization of such capital improvement, together with interest on the unamortized balance of such cost at a fixed interest rate equal to the rate then being charged by commercial banks for loans for a term equivalent to the amortization period, shall be included in Operating Expenses. If a capital improvement which was anticipated to result in a reduction in Operating Expenses does not in fact result in such a reduction, Landlord shall provide a reasonably detailed explanation to Tenant of the reason why the anticipated savings did not occur;
(xi) rental payments made for equipment used in the operation and maintenance of the Property; and
(xii) the cost of governmental licenses and permits, or renewals thereof, necessary for the operation of the Property;
(xiii) Taxes with respect to the portion of any Tax Year included within an Operating Year. For example, the 2004 Operating Year, which commences January 1, 2004 and ends December 31, 2004, shall include the Taxes with respect to the second half of the 2004 Tax Year (i.e., the period from January 1, 2004 to June 30, 2004), and the Taxes for the first half of the 2005 Tax Year (i.e., the period from July 1, 2004 to December 31, 2004); and
(xiv) all other reasonable and necessary expenses paid in connection with the operation, maintenance, repair and cleaning of the Property which are properly chargeable against income.
To the extent Landlord utilizes the services of independent contractors as provided in (ii) hereinabove, Landlord shall, whenever possible attempt to contract the services of such independent contractors on the basis of the useable rather than rentable square feet of the Building.
Any cost or expenses of the nature described above shall be included in Operating Expenses for any Operating Year no more than once, notwithstanding that such cost or expenses may fall under more than one of the categories listed above. Landlord may use related or affiliated entities to provide services or furnish materials for the Property, subject to the limitation contained in subsection (ix) with respect to management fees, and with respect to other services furnished or materials provided for the Property, subject to the limitation that the rates or fees charged by such entities are competitive with those charged by unrelated or unaffiliated entities in the Boston Central Business District for the same services or materials.
The following costs and expenses shall be specifically excluded from Operating Expenses:
(1) Tax Expenses to the extent separately paid or reimbursed to Landlord;
(2) franchise and income taxes imposed upon Landlord;
(3) debt service under any mortgage on the Property and any financing or refinancing costs related thereto;
(4) leasing commissions, brokerage fees and other costs incurred to lease space in the Building (including advertising, marketing and legal expenses);
(5) capital improvements to the Property other than those provided in clause (iv) and clause (x) above;
(6) the cost of electrical energy furnished directly to tenants of the Property;
(7) the cost of tenant installations and decorations incurred in connection with preparing space for any tenant, and tenant improvement allowances granted to any tenant;
(8) salaries or fringe benefits of personnel above the grade of building or asset manager;
(9) rent payable under any Underlying Lease;
(10) the cost of any items to the extent to which such cost is reimbursed to Landlord by tenants of the Property (other than pursuant to this Section 6.2), insurance or condemnation proceeds or third parties;
(11) depreciation of the building, amortization (except as provided in clauses (iv) and (x) above) and other non-cash charges
(12) legal expenses and other costs incurred in enforcing the terms of any lease or in connection with disputes with tenants or occupants, prospective tenants or occupants, or purchasers or prospective purchasers;
(13) expenses incurred in connection with (x) correction of any defects in the construction of any portion of the Base Building Work or Landlord's Work within one (1) year of the date such portion of the Base Building Work or Landlord's Work is placed in service, and (y) compliance with any requirement of law, ordinance, order, rule or regulation of any public authority having jurisdiction in effect during and applicable to the initial construction and equipping of the Building which is not Tenant's obligation to comply with under Section 9.2 hereof;
(14) lease payments for rental equipment, the cost of which equipment would constitute a capital expenditure if the equipment were purchased (except with respect to equipment falling within the scope of clause (x) above of this Section 6.2.1);
(15) costs to remove or remediate any Hazardous Materials which are released during the Term by Landlord or any of Landlord's agents, employees or contractors;
(16) contributions to political, charitable or civic organizations in excess of the amounts thereof charged to tenants by owners of other comparable office buildings in the Boston Central Business District;
(17) if and only if Landlord has terminated this Lease with respect to all or a portion of the Retail Space pursuant to Section 13.4, the costs incurred in performing work or furnishing services to the portion of the Retail Space as to which this Lease has been so terminated, to the extent that such work or services are materially in excess of any work or services that Landlord is obligated to furnish to the Office Space;
(18) Garage Taxes and all costs solely with respect to operation and maintenance of the Garage (as defined in Section 26.1) which are either paid directly, or are reimbursed to Landlord, by the operator of the Garage;
(19) costs of the initial construction of the Park (as defined in Section 6.2.1(d) below);
(20) costs to defend any action by any person or entity claiming an ownership interest in the Building and/or challenging Landlord's right to enter into this Lease.
Operating Expenses shall be net of rebates, credits and similar items with respect to which Landlord receives the benefit.
If Landlord is not furnishing any particular work or service (the cost of which if performed by Landlord would constitute an Operating Expense) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses for any Operating Year during all or any part of which such work or service is not so furnished by Landlord shall be increased by an amount equal to the additional Operating Expenses which reasonably would have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant.
With respect to any period prior to the second (2nd) anniversary Commencement Date, Landlord expressly agrees that Operating Expenses shall not be extrapolated or increased by reason of the fact that the Building may not be fully occupied. Notwithstanding any other provision herein contained, and except as expressly set forth above, if, during any Operating Year for which Operating Expenses are being computed, the average level of occupancy in the Building for such year is less than ninety-five (95%) percent or if services are being undertaken by tenants in lieu of performance by Landlord as aforesaid, Operating Expenses shall be extrapolated, on an item by item basis, to an amount equal to the amount of Operating Expenses that reasonably would have been incurred if the level of occupancy were to have been ninety-five (95%) percent for such year (or the portion thereof for which the such occupancy level was applicable) or such services were performed, or both. For the purposes hereof, such extrapolated amounts shall be deemed to be the actual Operating Expenses for such year only. It is understood that such extrapolation will be based on the net incremental cost increase which would have been incurred, if any, for each item of Operating Expenses reasonably attributable to the applicable expenses and to the period attributable to the applicable level of occupancy. Accordingly, it is acknowledged that it is possible that certain components of Operating Expenses (e.g., insurance) may not increase or may increase at a lesser rate per square foot than would be applicable to occupied portions of the Building. In no event shall Operating Expenses for a particular line item of expenses be extrapolated unless the services to which such expense item relates actually shall have been furnished to the Premises and/or the Building, as applicable.
It is understood that such extrapolation will result in the inclusion within Operating Expenses of expenses which are not actually paid or incurred, but in no event shall Landlord be entitled to receive, from Tenant, on account of any individual line item of extrapolated Operating Expenses, an amount in excess of the total amount actually incurred by Landlord for the Building with respect to such item. In the event that Tenant leases the entire Building so that Tenant's Share is one hundred (100%) percent, then Tenant shall be responsible for all Excess Operating Expenses actually paid or incurred by Landlord, and no extrapolation or increase shall be made for a vacancy.
(c) "Operating Year" shall mean the calendar year within which the Commencement Date occurs and each subsequent calendar year, any part or all of which falls within the Lease Term.
(d) "Property" shall mean the Land, the Building and any other land contiguous or adjacent to the Land, including, without limitation, that certain parcel of land (the "Park") known as Parcel 23(d) located on the westerly side of the existing surface artery between Essex Street and Beach Street in Boston, Massachusetts, and any improvements constructed on such land, whether above or below ground, which Landlord may operate or maintain or may contribute to the cost of the operation or maintenance thereof. Attached as Exhibit O is a plan showing the location of the Park.
(e) "Retail Space" shall mean the portion of the Building leased or available for lease for retail purposes, which includes the first floor of the Building, containing approximately 16,579 Rentable Square Feet.
(f) "Office Space" shall mean all of the Rentable Square Feet in the Building, less the Retail Space.
6.2.2 Tenant's SHARE OF OPERATING EXPENSES. If the Operating Expenses for any full Operating Year falling within the Lease Term shall exceed the Base Operating Expenses, or if, in the case of an Operating Year only a fraction of which is included in the Lease Term, the amount of the Operating Expenses for such Operating Year multiplied by such fraction exceeds the Base Operating Expenses multiplied by such fraction (the amount of such excess in either case being hereafter referred to as the "Excess Operating Expenses"), then Tenant shall pay to Landlord, as Additional Rent, Tenant's Share of the Excess Operating Expenses for such Operating Year or portion thereof. Such amount payable by Tenant with respect to the Excess Operating Expenses for each Operating Year shall be payable in monthly installments as follows:
(a) Estimated payments by Tenant on account of Excess Operating Expenses shall be made on the first day of each and every calendar month during the Lease Term, and otherwise in the same fashion herein provided for the payment of Annual Fixed Rent. The monthly amount so to be paid to Landlord shall be sufficient to provide Landlord by the end of each Operating Year with a sum equal to Tenant's required payments, as reasonably estimated by Landlord from time to time, on account of Excess Operating Expenses for such Operating Year. Within one hundred twenty (120) days after the end of each Operating Year, Landlord shall submit to Tenant a reasonably detailed accounting of Operating Expenses for such Operating Year, showing a breakdown by major line items. If estimated payments theretofore made for such Year by Tenant exceed Tenant's required payment on account therefore for such Operating Year, according to such accounting, Landlord shall credit the amount of overpayment against subsequent obligations of Tenant with respect to Excess Operating Expenses, or, if the amount of such overpayment exceeds five (5%) percent of the amount paid by Tenant with respect to Excess Operating Expenses for the Operating Year in question, at Tenant's election, Landlord shall refund the amount of such overpayment to Tenant, rather than crediting the amount of such overpayment against subsequent obligations of Tenant. In any event, Landlord shall refund such overpayment if the Lease Term has ended and Tenant has no further obligation to Landlord. If the required payments on account thereof for such Operating Year are greater than the estimated payments (if any) theretofore made on account thereof for such Operating Year, Tenant shall make payment to Landlord within thirty (30) days after being so advised by Landlord.
(b) If the Operating Expenses for any Operating Year (as adjusted, if applicable, pursuant to the last two (2) paragraphs of subsection 6.2.1(b)) shall equal or be less than the Base Operating Expenses, Tenant shall not be obligated to make any payments to Landlord pursuant to this Section 6.2 in respect of such Operating Year, but in no event shall Tenant be entitled to any refund or reduction in the Annual Fixed Rent by reason of such fact.
6.2.3 LANDLORD'S OBLIGATIONS INCLUDED. The imposition on Landlord by any portion of this Lease of an obligation to perform any work, repairs or other acts with respect to the Property shall not be construed as preventing Landlord from including the cost of such work, repairs or other acts in Operating Expenses, to the extent the same is otherwise properly includible therein pursuant to this Section 6.2.
6.2.4 OPERATING BUDGET. Not later than one hundred twenty (120) days prior to the start of each Operating Year, Landlord shall submit to Tenant a proposed operating budget (the "Operating Budget") for the coming Operating Year, and Landlord shall update the Operating Budget on a quarterly basis and provide such updates to Tenant. Tenant shall have the right to review with Landlord the proposed Operating Budget, and the results shown in the quarterly updates. Landlord shall give fair and reasonable consideration to (but shall not be obligated to employ), any reasonable recommendations made by Tenant with respect to (i) additional services to be provided by Landlord as a part of Operating Expenses, (ii) any recommended vendors or providers of services proposed by Tenant, or (iii) any methods to reduce Operating Expenses. Notwithstanding the foregoing, if Tenant is leasing all of the Office Space, and the resulting costs are includible in Operating Expenses, Landlord shall provide or cause to be provided such additional building services as Tenant shall request.
6.3 AUDIT RIGHTS.
6.3.1 Tenant's RIGHT TO AUDIT.
(a) Tenant, within one (1) year after the receipt of any accounting with respect to Excess Operating Expenses, by giving written notice to Landlord, shall have the right to review Landlord's books and records relating to such accounting. Except as expressly set forth below, if and to the extent that Tenant, within one hundred twenty (120) days after Landlord makes such books and records available, fails to dispute in reasonable detail the correctness of any item included in such accounting, such accounting shall constitute a final determination, as between Landlord and Tenant, of Taxes, Operating Expenses and Tenant's Share of Excess Operating Expenses for the Operating Year to which such accounting relates and shall be conclusive and binding upon Landlord and Tenant. Notwithstanding the foregoing, in the event that an audit for any Operating Year discloses an error in Operating Expenses for that Operating Year, then Tenant shall have the right to review that same line item for the previous two (2) Operating Years to see if the same error was made in those years, and if so an appropriate adjustment shall be made with respect to those prior years. Except as expressly set forth above, Tenant shall not have the right to examine the books and records for any particular Operating Year more than once. Landlord agrees cooperate with Tenant so that Tenant's audit may be conducted efficiently and fairly, and to grant Tenant, its accountants and representatives, reasonable access to so much of Landlord's books and records, at the place where they are regularly maintained in Boston, Massachusetts, and during the one-year period provided for above, as may be required for the purposes of verifying the Operating Expenses incurred by Landlord for the Operating Year then just ended and for any previous Operating Year, if applicable. In connection with examining Landlord's books and records hereunder, Tenant covenants and agrees that Tenant will (a) not employ any person or firm who is to be compensated, in whole or in part, on a contingency fee basis and (b) maintain the information obtained from such examination in strict confidence; provided, however, that notwithstanding such confidentiality requirement, Tenant may disclose so much of Landlord's confidential information as is reasonably required to Tenant's attorneys and accountants, who shall be subject to the same confidentiality requirement as Tenant, and, if required pursuant to an order of a court or other governmental regulatory body, Tenant may also disclose so much of Landlord's confidential information as may be required by such order, and to the parties specified in such order. Landlord shall retain its books and records relating to Operating Expense for at least three (3) years after the expiration of each Operating Year.
(b) If an audit of Operating Expenses for any Operating Year prepared by an independent certified public accountant ("Tenant's Audit") shall reveal that Tenant has paid more than the amount it properly should have paid for Excess Operating Expenses, Tenant shall provide Landlord with a copy of Tenant's Audit. If, within the sixty (60) day period after receipt from Tenant of a copy of Tenant's Audit, Landlord provides Tenant with its notice disputing the correctness of Tenant's Audit, and if such dispute shall not have been settled by agreement, either party may submit the dispute to a court of competent jurisdiction within one hundred twenty (120) days after receipt of Tenant's Audit by Landlord; and pending the determination of such dispute by agreement or court proceeding as aforesaid, Tenant shall pay the disputed amounts in question, without prejudice to Tenant's position.
(c) If Landlord agrees with the results of Tenant's Audit, or a court determines that Tenant has overpaid, Landlord shall credit the amount of overpayment against subsequent obligations of Tenant with respect to Excess Operating Expenses, or, if the amount of such overpayment exceeds five (5%) percent of the amount paid by Tenant with respect to Excess Operating Expenses for the Operating Year in question, at Tenant's election, Landlord shall refund the amount of such overpayment to Tenant, rather than crediting the amount of such overpayment against subsequent obligations of Tenant. In any event, Landlord shall refund such overpayment if the Lease Term has ended and Tenant has no further obligation to Landlord. If the required payments on account thereof for such Operating Year are greater than the estimated payments (if any) theretofore made on account thereof for such Operating Year, Tenant shall make payment to Landlord within thirty (30) days after being so advised by Landlord.
(d) If Landlord agrees with the results of Tenant's Audit, which audit shows that Tenant has overpaid by more than two and one-half (2 1/2%) percent of the amount which Landlord agrees that Tenant should have paid for the period in question, or if a court determines that Tenant has overpaid by more than two and one-half (2 1/2%) percent of the amount which it is finally determined Tenant should have paid for the period in question, then, unless such overpayment by Tenant was caused by a change in facts or circumstances which Landlord could not reasonably foresee, Landlord shall reimburse Tenant for the reasonable cost of Tenant's Audit, together with interest thereon at the Lease Interest Rate from the date such reasonable cost is paid by Tenant until paid by Landlord.
6.3.2 FAILURE TO RENDER ACCOUNTING. Landlord's failure to render an accounting with respect to any Excess Operating Expenses shall not prejudice Landlord's right to render an accounting at any time thereafter, nor shall the rendering of an accounting prejudice Landlord's right to render thereafter a corrected accounting for any Operating Year, as the case may be.
ARTICLE 7
REPAIRS AND SERVICES
7.1 LANDLORD'S OBLIGATION TO REPAIR. Except as otherwise provided in this Lease, Landlord shall, throughout the Lease Term, keep and maintain in first class order, condition and repair, similar to other comparable office buildings in the Boston Central Business District:
(a) the roof, the exterior and load bearing walls (including exterior windows), the foundation, the structural floor slabs and other structural elements of the Building;
(b) the life safety, alarm and security systems serving the Building, except for those portions contained within and serving the Premises or constructed as part of Tenant's Work; and
(c) the other common facilities of the Building, including HVAC, HVAC ducts, plumbing and other Building systems and equipment servicing the Premises, as any of the foregoing may have been modified by a Base Building Modification, as defined in Exhibit C (other than any supplementary or accessory HVAC, and telecommunication/computer systems and/or any item of such equipment constructed as a part of Tenant's Work or by Tenant as an Alteration), and landscaping on the Land. Landlord shall not be responsible to make any improvements or repairs to the Building or the Premises other than as expressly provided in this Section 7.1, unless expressly otherwise provided in this Lease. Tenant shall promptly give Landlord notice of any damage to the Premises or the Building (whether or not caused by Tenant) or of any defects in any portion thereof or in any fixtures or equipment therein promptly after Tenant first learns thereof, to the extent that such defects are reasonably observable by Tenant. Tenant's failure to give such notice to Landlord shall not relieve Landlord of any obligation to make repairs which Landlord shall have pursuant to this Section 7.1, provided that Landlord shall have actual knowledge of the need to make such repairs.
Landlord shall give Tenant at least ten (10) Operating Days advance notice of any regularly scheduled cessation or interruption of Landlord's services.
7.2 TENANT'S REPAIRS AND MAINTENANCE.
(a) Tenant covenants and agrees that, from and after the date that possession of the Premises is delivered to Tenant and until the end of the Lease Term, Tenant, at its expense, will keep neat and clean and maintain in good order, condition and repair the Premises and every part thereof, and will make all required repairs thereto and/or replacements of portions thereof, excepting only for those repairs or replacements for which Landlord is responsible under the terms of Article 4, Section 7.1, or Article 12 of this Lease. Tenant shall not permit or commit any waste, and, notwithstanding anything to the contrary set forth in Section 7.1, Tenant shall be responsible for the cost of all repairs and replacements to the Premises, the Building and the facilities of the Building, whether ordinary or extraordinary, structural or non-structural, when necessitated by Tenant's, or its subTenant's or assignee's, moving property in or out of the Building or installation or removal of furniture, fixtures or other property or by the performance by Tenant, or its subtenant or assignee, of any alterations or other work in the Premises, or when necessitated by the acts, omission, misuse, neglect or improper conduct of Tenant, its assignee or subtenant, or its or their agents, employees, contractors or invitees or the use or occupancy or manner of use or occupancy of the Premises other than in accordance with the terms of this Lease. All of said repairs and any restorations or replacements required in connection therewith shall be of a quality and class at least equal to the original work or installations and shall be done in a good and workmanlike manner.
(b) If repairs or replacements are required to be made by Tenant pursuant to the terms hereof, Landlord may demand that Tenant make the same, and (except in cases of emergency, where no notice or demand shall be required) if Tenant refuses or neglects to commence such repairs or replacements within fifteen (15) days after such demand or to complete the same with reasonable diligence thereafter, Landlord may (but shall not be required to do so) make or cause such repairs or replacements to be made and shall not be responsible to Tenant for any loss or damage that may accrue to Tenant's stock or business by reason thereof. If Landlord makes or causes such repairs or replacements to be made as permitted in accordance with the foregoing, Tenant agrees that Tenant will forthwith, on demand, pay to Landlord as Additional Rent the cost thereof, together with interest thereon at the Lease Interest Rate from the date of payment by Landlord to the date Tenant reimburses the cost thereof to Landlord.
(c) Tenant shall not itself, or permit or suffer persons acting under Tenant to, either with or without negligence, injure, overload, deface or damage the Building, the Premises or any part or component thereof; commit any nuisance; permit the emission, discharge, release or other escape of any Hazardous Materials so as to impregnate, impair or in any manner affect, even temporarily, any element or part of the Premises or the property or person of others, or allow the storage, generation, disposal or use of such Materials (collectively "Hazardous Materials Activities") in any manner restricted or prohibited by law; nor shall Tenant permit to be brought onto the Premises any such Materials (except to use normal and customary materials for cleaning, lubrication of machinery, or office supplies in a lawful manner and in the ordinary course of Tenant's business, consistent with prevailing practices in first class Boston Central Business District offices), or permit any waste of the Premises. If Landlord reasonably believes that a release may have occurred or a threat of release exists on or about the Premises by reason of any act or omission of Tenant or persons acting under Tenant or Tenant's Hazardous Materials Activities do not conform to all laws, ordinances and regulations, then Landlord may, but need not, perform appropriate testing and, if such testing reveals that Tenant has violated the foregoing provisions, the costs thereof shall be promptly reimbursed to Landlord by Tenant upon demand as Additional Rent. In addition, in connection with any sale or financing by Landlord, Tenant shall execute reasonable and customary affidavits, representations and the like from time to time at Landlord's request concerning the presence or absence of hazardous materials on the Premises. In all events and without limitation, Tenant assumes liability pursuant to Section 11.1 for any bodily or personal injury or property damage (including loss of use) or any other cost or expense resulting in claims arising out of the discharge, dispersal, release or escape of hazardous materials or any pollutants or contaminants whatsoever occurring on the Premises by reason of any act of omission of Tenant or persons acting under Tenant during the Lease Term, and for so long thereafter as Tenant or persons acting under Tenant remain in occupancy of any portion of the Premises, and Tenant shall indemnify and defend Landlord, its members, managers, their agents, employees, officers, contractors, and others entitled thereto pursuant to Section 11.1 with respect to Hazardous Materials and Hazardous Materials Activities (and for these purposes the costs and loss indemnified shall include any costs of investigation of site conditions, any cleanup, remediation, removal or restoration work and any lost rents). Without limiting the foregoing, Tenant shall promptly take all actions at its sole expense as are necessary to remediate the conditions caused by such materials in accordance with and to the extent required by law; provided that such actions are undertaken in accordance with all applicable laws, rules and regulations and accepted industry practices. The provisions of this Section shall survive the expiration or sooner termination of the Lease Term.
(d) For purposes of this Lease, "Hazardous Material" or "Hazardous Materials" means and includes petroleum products, flammable explosives, radioactive materials, asbestos or any material containing asbestos, polychlorinated biphenyls, and/or any hazardous, toxic or dangerous waste, substance or material now or hereafter defined as such, or as a hazardous substance, or any similar term, by or in the Environmental Laws. For purposes of this Lease, "Environmental Law" or "Environmental Laws" shall mean: (x) any "Super Fund" or "Super Lien" law, or any other federal, state or local statute, law ordinance, code, rule, regulation, order or decree, regulating, relating to or imposing liability or standards of conduct concerning, any Hazardous Materials as may now or at any time hereafter be in effect, including without limitation, the following as the same may be amended or replaced from time to time, and all regulations promulgated thereunder or in connection therewith: the Massachusetts Hazardous Waste Management Act, as amended, M.G.L. Chapter 21, and the Massachusetts Oil and Hazardous Material Release Prevention Act, as amended, M.G.L. Chapter 21E; the Super Fund Amendments and Reauthorization Act of 1986; the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Clean Air Act, the Clean Water Act; the Toxic Substances Control Act; the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act; the Hazardous Waste Management System; and the Occupational Safety and Health Act of 1970; and (y) any law, ordinance or regulation the primary purpose of which is to protect the quality of the environment, and all other laws governing similar matters as they may be amended from time to time.
7.3 SERVICES. Subject to the provisions of Sections 14.3 and 20.12, Landlord agrees to provide the services set forth in Exhibit D annexed hereto to the Building and the Premises during Operating Hours (as defined in Exhibit D) consistent with the provision of such services in other comparable first class office buildings in the Boston Central Business District. In the event of a cessation or interruption of Building services provided by Landlord, Landlord shall use reasonable diligence to perform the repairs or otherwise cure the problem necessitating the cessation or interruption of services so that service can be restored as promptly as reasonably possible.
7.4 LANDLORD'S FAILURE TO REPAIR OR PROVIDE SERVICES.
Anything in this Lease to the contrary notwithstanding, in the event that for any reason (except as a result of any act or omission by Tenant, its employees, agents, subtenants, licensees, contractors or invitees, or the failure of any public utility to supply services, or an event which is covered by the provisions of Article 12 of this Lease) Landlord shall refuse or be unable to supply services or to make repairs which Landlord is obligated under the terms of this Lease to supply or to make, for more than three (3) consecutive Operating Days after notice from Tenant to Landlord, and as a result of such failure the Premises (or a portion thereof) are rendered untenantable, and Tenant cannot and does not use the Premises (or such portion thereof) for the conduct of its business, then in such event Tenant's obligation to pay Annual Fixed Rent and Additional Rent shall be abated pro rata according to the nature and extent such Premises are so unavailable for use, only to the extent covered by Landlord's rent interruption insurance, retroactive to the date of commencement of such interruption or cessation of services, until such condition is cured by Landlord; provided, however, that if such interruption or cessation of services was caused by Landlord's willful misconduct or negligence, then Tenant's obligation to pay Annual Fixed Rent and Additional Rent shall be so abated pro rata according to the nature and extent such Premises are so unavailable for use, until such condition is cured by Landlord, whether or not covered by Landlord's rent interruption insurance. Nothing herein shall limit Tenant's rights of self-help in the event of a cessation of services as provided in Section 20.16. For the purposes of this Section 7.4, Tenant shall not be considered to have used the Premises (or a portion thereof) for the conduct of its business during the period of any failure of Landlord to provide services or to make repairs as required by the terms of this Lease, if because of the critical nature of the business being conducted from the Premises (or portion thereof) which is materially impaired by such failure of Landlord to so provide services or to make repairs, as the case may be, limited personnel of Tenant are required to utilize the Premises (or portion thereof) under materially adverse conditions which would not ordinarily be acceptable to tenants in similar first class office buildings in the Boston Central Business District.
7.5 LIMITED REQUIREMENT FOR OVERTIME WORK.
(a) In making any repairs, alterations, additions or improvements in the Premises, Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises which may be occasioned by the performance of such repairs, alterations, additions or improvements; provided, however, except to the extent expressly provided below in this Section 7.5(b), Landlord shall have no obligation to employ contractors or labor at so-called overtime or other premium pay rates or to incur any other overtime costs or expenses whatsoever and Landlord shall have the right to perform such work during Operating Hours (as defined in Exhibit D).
(b) Prior to commencing such work, Landlord shall provide Tenant with a description and schedule of the same, if reasonably practicable. If (i) any work described in Section 7.5(a) above will materially adversely impact the provision of Landlord's Services (as defined in Exhibit D), or Tenant's ability to conduct its business in that portion of the Premises, during Operating Hours, and (ii) Tenant shall request that such work, or any separable portion thereof, be performed at times other than Operating Hours (any such work described in such a request by Tenant being herein called "Designated Overtime Work"), then, and in each such case, the following provisions shall apply with respect to such Designated Overtime Work:
(1) Except in the case of actual or perceived emergency, Landlord shall perform (or cause to be performed) the Designated Overtime Work outside of Operating Hours (even if overtime or premium pay rates be thus incurred), so long as overtime labor is reasonably available; and
(2) Tenant shall pay to Landlord, within thirty (30) days after receipt of an invoice therefor (which shall include such documentation of such costs as Tenant may reasonably request), all of the Overtime Costs (defined below) of such Designated Overtime Work; provided, however, that if such work is required to correct defects in the construction of any portion of the Base Building Construction or Landlord's Work within one (1) year of the date such portion of the Base Building Construction or Landlord's Work was substantially completed, then Tenant shall not be required to reimburse Landlord for the Overtime Costs attributable thereto.
"Overtime Costs" with respect to any work performed at times other than Operating Hours shall mean any and all actual additional costs Landlord incurs by reason of performing such work at times other than Operating Hours (including, without limitation, incremental overtime and premium pay rates) and all of the costs of any stand-by personnel required in connection therewith (including, without limitation, operating engineers and stand-by electricians).
7.6 FAILURE OF BUILDING MANAGER OR GARAGE MANAGER TO PERFORM.
(a) If Tenant is dissatisfied with the performance of the Manager of the Building or the Operator of the Garage, Tenant shall notify Landlord of Tenant's dissatisfaction, setting forth in reasonable detail the reasons for such dissatisfaction, and how the same are not comparable to the performance of managers of buildings or garages in buildings in other first class office buildings in the Boston Central Business District. If the basis for Tenant's dissatisfaction shall not have been cured to Tenant's reasonable satisfaction within sixty (60) days after such notice, then Tenant may request, after the expiration of such sixty (60) day notice period, that Landlord, to the extent available to Landlord, terminate the contract with the Building Manager and/or the Garage Operator, as the case may be, and Landlord shall give fair and reasonable consideration to (but shall not be obligated to accede to) such request. Nothing contained herein shall require Landlord to terminate any applicable agreement prior to its scheduled expiration date.
(b) Prior to entering into a renewal or extension of the contract with the Building Manager and/or with the Garage Operator, Landlord shall consult with Tenant as to whether or not the performance of the Building Manager and/or the Garage Operator is comparable to the performance of mangers of buildings or garages in the Boston Central Business District. The decision as to whether or not to renew or extend any contract with the Building Manager and/or with the Garage Manager shall be made solely by Landlord.
ARTICLE 8
ALTERATIONS
8.1 Tenant's RIGHTS. Tenant may from time to time during the Lease Term, at its expense, make such alterations, additions, installations, substitutions, improvements and decorations (hereinafter collectively referred to as "Alterations") in and to the Premises as Tenant may consider necessary or desirable for the conduct of its business in the Premises, subject to the following conditions:
(a) the outside appearance of the Building or any of its parts shall not be affected;
(b) the structure, usefulness or rentability of the Building or any of its parts shall not be materially and adversely affected;
(c) no part of the Building outside of the Premises shall be physically affected, except as otherwise expressly permitted by this Lease (such as, for example, the rights of Tenant under Article 25 to install Communications Equipment, Article 27 to install emergency generators, or Section 20.24 to install signs on the inside or outside of the Building);
(d) no other tenant or occupant of the Office Space in the Building, and no common area or facility of the Building, and no Building system or equipment, shall be materially and adversely affected;
(e) in performing the work involved in such Alterations, Tenant shall perform, observe and comply with all of the conditions and covenants set forth in the following provisions of this Article;
(f) the sprinkler system or any other life safety system will not be materially adversely affected or interrupted; and
(g) before proceeding with any Alterations (except for Decorative Alterations as described in subsection (g) below), Tenant shall submit to Landlord for its approval (which shall not be unreasonably withheld or delayed) plans and specifications for the work to be performed, and Landlord shall respond to Tenant either approving or disapproving such plans and specifications (and if disapproving, specifying the reasons for such disapproval) within ten (10) days after receipt of the plans and specifications from Tenant. If Landlord does not respond to Tenant within such ten (10) day period, then Landlord shall be deemed to have approved the proposed plans and specifications. Landlord may as a condition of its consent require Tenant (i) to perform all such work at such times and in such manner as to create the least practicable interference with the use of the Building by the other tenants and occupants thereof, including, but without limitation, on an "overtime" basis, (ii) to make reasonable revisions in and to its plans and specifications, or (iii) to agree that any portion of such Alterations connected to or involving any portion of the HVAC, plumbing, electrical or other systems of the Building be performed by a contractor selected by Tenant and approved by Landlord, such approval not to be unreasonably withheld, delayed or conditioned. In addition, at the time of Landlord's approval of such plans, Landlord may specify any of such Alterations shown on such plans of an unusual nature (collectively, "Non-Standard Alterations") which Landlord determines in its reasonable discretion might adversely impact the leasing or marketability of the Building, such as, but not limited to, internal stairways, pantries, non-building standard lavatories or showers, vaults, special flooring for computer areas, floor or slab cuts and/or new flooring installed over any existing floor cuts or over any lobby area or atrium, and the like. At the time of Landlord's approval of such plans, Landlord may specify which (or all) of the Non-Standard Alterations Landlord shall require Tenant to remove and to restore the affected portion of the Premises at the expiration of this Lease. If Landlord does not require Tenant to remove any such Non-Standard Alterations, then the same shall remain after the expiration or other termination of this Lease, and Tenant shall not be permitted to remove the same. If this Lease terminates other than at the Expiration Date, Tenant shall remove any such Non-Standard Alterations which Landlord had specified were required to be removed at the time of its approval of the work, and to restore the affected portion of the Premises, within thirty (30) days after the termination of this Lease. Landlord's review and approval of Tenant's plans and specifications and consent to the performance of the work described therein shall not be deemed an agreement by Landlord that such plans, specifications and work conform with applicable law and insurance requirements, nor shall it be deemed a waiver by Landlord of compliance by Tenant with any provisions of this Lease, nor shall it impose upon Landlord any liability or obligation with respect to such work or the performance thereof. Landlord's approval of any Tenant's Work or Alterations shall signify Landlord's consent to the Tenant's Work or Alterations shown thereon only, and shall not result in any responsibility of Landlord concerning compliance of the Tenant's Work or Alterations with laws, regulations, or codes, or the coordination of any aspect of the Tenant's Work or Alterations with other aspects of the Tenant's Work or Alterations, or with any component or system of the Building, or the feasibility of constructing the Tenant's Work or Alterations without damage or harm to the Building, all of which shall be the sole responsibility of Tenant.
(h) No prior approval of Landlord shall be required with respect to any purely decorative (such as carpeting and painting) Alterations (other than the initial Tenant's Work) with an aggregate project cost of less than Two Hundred Fifty Thousand ($250,000) Dollars ("Decorative Alterations"), which do not affect the Building's electrical service or floor service size, which do not affect the mechanical, fire, life safety or other structural or mechanical components of the Building, and which cannot be seen from the outside of the Building. Tenant shall give Landlord thirty (30) days prior written notice of Tenant's intention to perform such Alterations, shall comply with the other provisions of this Lease with respect to such Decorative Alterations, and shall provide Landlord with as-built plans of any changes to the Premises resulting from such Decorative Alterations.
8.2 CONFORMITY WITH LAW. Tenant covenants and agrees that any Alterations made by it to or upon the Premises shall be done in a good and workmanlike manner and in conformity and compliance with all applicable laws, ordinances, regulations and requirements of all public authorities having jurisdiction, and with all applicable requirements of insurers and insurance rating or underwriting organizations, that new materials and equipment of at least equal quality and class to the original installations in the Building shall be employed therein, and that the structure of the Building shall not be endangered or impaired thereby.
8.3 PERFORMANCE OF WORK, GOVERNMENTAL APPROVALS, INSURANCE.
(a) All Tenant's Work (as defined in Exhibit C), Alterations and installation of furnishings by Tenant (i) shall be coordinated with any work being performed by Landlord and in such manner as to maintain harmonious labor relations and not to damage the Building or interfere with or delay Building construction or operation or increase the cost thereof, (ii) shall not unreasonably interfere with the use or occupancy of any other tenant or occupant of the Building and, (iii) except for installation of furniture, furnishings and business equipment, shall be performed by contractors and subcontractors selected by Tenant and approved by Landlord, such approval not to be unreasonably withheld, delayed or conditioned.
(b) Tenant shall procure all necessary governmental permits, licenses and certificates and shall make all required filings of plans with governmental authorities before making any Alterations and shall obtain all required governmental approvals upon the completion thereof. At any and all times during the period of construction of any Alterations, Landlord shall be entitled to have a representative or representatives on the site to inspect such Alterations, and such representative or representatives shall have free and unrestricted access to any and every part of the Premises. Tenant shall keep full and accurate records of the cost of any Alterations in and to the Premises and shall, if requested by Landlord, make the same available to Landlord for use in connection with any proceeding to review the assessed valuation of the Building or any proceedings to acquire the Land and Building for public or quasi-public use. Tenant shall maintain such records for at least seven (7) calendar years after the calendar year in which such Alterations shall be made.
(c) Tenant agrees to save harmless and indemnify and defend Landlord, its members, managers, their agents, employees, officers and contractors, from and against any and all injury, loss, claims, damage and expense (including attorneys fees and disbursements) to any person or property occasioned by or arising out of the performance of any Alterations. In addition, over and above the insurance required to be carried by Tenant pursuant to the provisions of Section 11.2 hereof, Tenant shall carry or cause each contractor to carry worker's compensation insurance in statutory amounts covering the employees of all contractors and subcontractors, and Commercial General Liability Coverage which provides coverage in respect of the added risks of construction with such limits as Landlord may reasonably require, but in no event less than Five Million ($5,000,000.00) Dollars for injuries arising out of any one incident, and One Million ($1,000,000.00) Dollars for any property damage, as such amounts may, from time to time, be reasonably increased by Landlord to amounts customary for similar tenants in the Boston Central Business District (all such insurance to be written by companies reasonably approved by Landlord and naming Landlord and Tenant as well as the contractors as insured parties) and to deliver to Landlord certificates of all such insurance.
(d) In connection with the making of any Alterations, (i) Tenant shall make all arrangements for, and shall pay all expenses incurred in connection with, use of the freight elevator(s) serving the Premises and (ii) shall pay to Landlord its charges for reviewing Tenant's plans and specifications and to reimburse Landlord for other services performed or costs actually incurred to third parties by Landlord in connection with such Alterations, including, without limitation, any additional reasonable expense incurred by Landlord in the maintenance, cleaning, repair, safety, management, security or operation of the Building as a result of Tenant's performance of any Alterations above what is normally incurred in the management of the Building. Landlord shall provide evidence of any such costs or expenses.
8.4 LIENS. Tenant shall pay and discharge all costs and expenses of any work done in or on the Premises by Tenant or its subtenants, and its and their agents, employees or contractors, and shall not do or fail to do any act which shall or may render the Building or any part thereof, or the Premises or any part thereof subject to any mechanic's lien, notice of contract, or other lien or security agreement or charge or chattel mortgage or conditional bill of sale or title retention agreement (hereinafter collectively called "Lien"), and if any Lien be filed against the Building, the Premises, any Alterations, or any portion of any of the foregoing, Tenant shall, at Tenant's own cost and expense, cause the same to be removed of record by bonding or otherwise within twenty (20) days after the filing of any such Lien; and, in default thereof Landlord may, in addition to any other rights and remedies it may have by reason of Tenant's default, cause any such Lien to be removed of record by payment or bond or otherwise, as Landlord may elect, and Tenant shall reimburse Landlord as Additional Rent for all costs and expenses incurred by Landlord incidental to the removal of any such Lien, together with interest thereon at the Lease Interest Rate.
8.5 VIOLATIONS; DISRUPTION. Tenant, at its expense, and with diligence and dispatch, shall cause to be discharged or cancelled all notices of violation arising from any Alterations which are issued by the City of Boston Inspectional Services Department or any other public or quasi-public authority having jurisdiction. Nothing contained in this Section 8.5 shall prevent Tenant from contesting, in good faith and at its own expense, any such notices of violation, provided that Tenant shall comply with the provisions of Section 9.3 hereof. In addition, Tenant shall not exercise any of its rights under this Article 8 in such manner as would create any work stoppage, picketing, labor disruption or dispute or a violation of any of Landlord's union contracts affecting the Land or Building, or which would unreasonably interfere with the business of Landlord or of any tenant or occupant of Building. In the event of Tenant's failure to comply with the preceding sentence, Tenant shall, immediately upon notice from Landlord, cease all manner of exercise of such rights which give rise to such failure to comply. If Tenant shall fail to cease such manner of exercise of its rights as aforesaid, Landlord, in addition to any other rights available to it under this Lease and pursuant to law, shall have the right to seek an injunction.
8.6 Tenant's PROPERTY. Except as otherwise provided in Section 8.1(e) and this Section 8.6, all work, construction, repairs, Alterations, other improvements or installations made to or upon the Premises (including, but not limited to, the construction performed by Landlord or Tenant under Article 4 and Exhibit C), whether or not at the expense of Tenant, shall become part of the Premises and shall become the property of Landlord and remain upon and be surrendered with the Premises as a part thereof upon the Expiration Date or earlier termination of the Lease Term:
(a) All personal property not permanently affixed to the Building, including moveable partitions, business and trade fixtures, machinery and equipment, communications and office equipment, whether or not attached to or built into the Premises, which are installed in the Premises by or for the account of Tenant, at Tenant's expense (and without any contribution to the cost thereof from Landlord) and can be removed without damage to the Building, and all furniture, furnishings and other moveable articles of personal property owned by Tenant and located in the Premises (all of which are herein referred to as "Tenant's Property") shall remain the property of Tenant and may be removed by Tenant or any person claiming under Tenant at any time or times during the Lease Term and (with the exception of special cabinet work or property which is built into the Premises) shall be removed by Tenant at the expiration or earlier termination of the Lease Term. Tenant shall repair any damage to the Premises occasioned by the removal by Tenant or any person claiming under Tenant of any Tenant's Property from the Premises, and in no event shall Tenant leave its telephone and data cabling and telecommunications systems lines in the Building or the Premises in a partially removed, damaged or inoperable condition.
(b) At the Expiration Date or earlier termination of the Lease Term, unless otherwise agreed in writing by Landlord, or otherwise expressly provided in this Lease, Tenant shall remove from the Premises any items of Tenant's Work, Alterations, additions and/or improvements made to the Premises with Landlord's consent for which such removal was made a condition of such consent under Section 8.1 or Exhibit C. Upon such removal Tenant shall restore the Premises to substantially their condition prior to such Tenant's Work, Alterations, additions and improvements and repair any damage occasioned by such removal and restoration.
(c) Any items of Tenant's Property (except money, securities and like valuables) which remain on the Premises after the Expiration Date or earlier termination of the Lease Term may, at the option of Landlord, be deemed to have been abandoned and in such case may either be retained by Landlord as its property or may be disposed of without accountability, at Tenant's expense, in such manner as Landlord may see fit.
8.7 SURVIVAL. The provisions of this Article 8 shall survive the expiration or sooner termination of this Lease.
ARTICLE 9
LAWS, ORDINANCES, REQUIREMENTS OF PUBLIC AUTHORITIES
9.1 CERTIFICATE OF OCCUPANCY. Landlord covenants and agrees that throughout the Lease Term, the certificate of occupancy issued for the Building will permit the Premises to be used and occupied for general office purposes.
9.2 TENANT'S OBLIGATIONS. Except for (i) components within the Premises which are portions of the Base Building Construction but which were performed as a part of Tenant's Work, Tenant shall, at its expense, comply with all laws and requirements of public authorities and all requirements of insurance bodies now or hereafter in effect which shall, with respect to the Premises or the occupancy, use or manner of use of the Premises or to any abatement of nuisance, impose any violation, order or duty upon Landlord or Tenant, including without limitation, any violation, order or duty arising from (i) Tenant's use of the Premises, (ii) the manner of conduct of Tenant's business in the Premises or the operation by Tenant of its installations, equipment or other property thereon, (iii) any cause or condition created by or at the instance of Tenant, (iv) the making or performance of any Alterations, installations or other work by Tenant in or on the Premises, including, without limitation, any Tenant's Work, or (v) the breach by Tenant of any of its obligations under this Lease. In addition to the foregoing, Tenant agrees to participate in all fire safety compliance procedures instituted by Landlord and/or public authorities for the Building.
9.3 TENANT'S RIGHT TO CONTEST. If Tenant receives notice of any violation of any law or requirement of public authority or requirement of insurance bodies applicable to the Premises, it shall give prompt notice thereof to Landlord. Tenant may, at its expense, contest the validity or applicability of any such law or requirement of public authority or requirement of insurance bodies by appropriate proceedings prosecuted diligently and in good faith, and may defer compliance therewith, provided that (i) Landlord is not thereby subjected to criminal prosecution or criminal or civil penalty of any nature, (ii) no unsafe or hazardous condition remains unremedied, (iii) the Premises, or any part thereof, shall not be subject to being condemned or vacated by reason of such non-compliance or such contest, (iv) no insurance policy carried in respect of the Property by Landlord is cancelled and no premium for any such policy is increased by reason of such non-compliance or such contest, unless Tenant agrees to, and in fact does, pay the amount of any such increase within thirty (30) days after demand for payment by Landlord, and (v) such non-compliance or contest shall not constitute or result in any violation of any Underlying Lease or any mortgage on the Building or on an Underlying Lease thereof unless Tenant has been notified that such non-compliance or consent shall constitute or result in a violation of any such Underlying Lease or mortgage, and Tenant complies with all requirements of all such Underlying Leases or mortgages including those, if any, relating to the furnishing of security. Tenant hereby agrees to indemnify, defend and save Landlord harmless from and against any loss, liability, damage and expense arising out of any such deferral of compliance or contest, including, without limitation, attorneys' fees and disbursements and other expenses reasonably incurred by Landlord, and Tenant shall keep Landlord advised as to all settlements of such contest. Landlord agrees to execute any document reasonably required by Tenant in order to permit Tenant effectively to carry on any such contest, provided Landlord is not thereby subjected to any cost or expense or exposed to any liability or obligation on account thereof.
ARTICLE 10
USE
10.1 OFFICE SPACE. Tenant shall use and occupy the Office Space portion of the Premises only for executive and general offices in connection with Tenant's business, and for other uses customarily permitted in comparable first class office buildings in the Boston Central Business District from time to time for office tenants, and for no other purpose. Subject to the other provisions of this Lease (including all exhibits) and the Rules and Regulations, Tenant shall have access to the Premises twenty-four (24) hours per day, seven (7) days per week. Landlord acknowledges that Tenant's business includes providing financial services and Tenant may use the Premises for such purposes and for customary office uses ancillary thereto.
10.2 RETAIL SPACE. Tenant shall use the Retail Space portion of the Premises only for retail uses customarily permitted in comparable first class office buildings in the Boston Central Business District from time to time, and for no other purpose. Subject to applicable law, Tenant may also use portions or all of the Retail Space for offices in connection with the conduct of Tenant's and its Affiliate's business.
10.3 ADDITIONAL PERMITTED USES. Tenant may, in addition to using the Premises for the purposes permitted by Sections 10.1 and 10.2, but subject to Tenant's compliance in respect thereof with the provisions of Section 9.2, also use portions of the Premises for the installation, maintenance and operation in the Premises of (i) electronic data processing equipment, word processing equipment and business machines, (ii) duplicating equipment, in each case used for purposes incidental to the business of Tenant with electrical loads and floor loads not to exceed the respective load capacities set forth in Exhibit D, (iii) trading floor, training facilities for employees, employee cafeteria, employee health club, employee day care center, executive dining room and associated kitchen facilities, and galley kitchen facilities for the brewing of coffee and use of microwave ovens and other activities consistent with a galley and employee lunch room, and (iv) such other uses from time to time related to and consistent and compatible with the then current business of Tenant or its Affiliates. Notwithstanding that a cafeteria, executive dining room and kitchen facilities are permitted to be included within the Premises, Tenant shall, at its sole cost and expense, provide adequate venting and ventilation and otherwise do whatever is reasonably necessary to ensure that odors therefrom do not unreasonably emanate into public or other tenants' areas within the Building, and further provided that such use shall not (A) violate any laws or requirements of public authorities, (B) cause material discomfort to any other tenants or occupants of the Building or interfere with or materially adversely impact the use or occupancy of other portions of the Building, or (C) materially adversely impact the business of any other tenant, occupant or Landlord.
10.4 RESTRICTIONS. Tenant shall not suffer or permit the Premises or any part thereof to be used in any manner, or anything to be done therein, or suffer or permit anything to be brought into or kept in the Premises, which would in any way (i) violate any law or requirement of public authorities or requirement of insurance bodies, (ii) cause structural injury to the Building or any part thereof, (iii) materially interfere with the normal operation of the HVAC, plumbing, electrical or other mechanical or electrical systems of the Building or the elevators installed therein, (iv) constitute a public or private nuisance, (v) alter the appearance of the exterior of the Building, (vi) materially affect in any adverse way any portion of the interior of the Building other than the Premises, (vii) materially interfere with the use or occupancy of any other tenant or occupant of the Building or (viii) create any unreasonable offensive odors or noise.
10.5 PROHIBITED USES. Without limiting the restriction on use set forth in Section 10.1, Tenant shall not under any circumstance use or permit the use of the Office Space portion of the Premises or any part thereof for any of the following which are expressly prohibited:
(a) sale at retail of any products or materials whatsoever, except a sales office for financial services to the public or otherwise related to Tenant's business;
(b) the conduct of a public auction of any kind;
(c) an employment agency;
(d) offices or agencies of a foreign government or political subdivisions thereof;
(e) offices of any governmental bureau or agency of the United States or any state or political subdivision thereof;
(f) offices of any public utility company, other than corporate, executive or legal staff offices;
(g) data processing services rendered primarily to others than Tenant and which are not strictly ancillary to Tenant's business;
(h) health care professionals;
(i) schools or other training or educational uses (other than those which are strictly ancillary to Tenant's business, such as training of Tenant's personnel);
(j) a clerical support business rendering clerical support services primarily to others than Tenant or performing functions other than those which are strictly ancillary to Tenant's business;
(k) reservation centers for airlines or for travel agencies other than those which are for the benefit of Tenant and its employees and strictly ancillary to Tenant's business;
(l) broadcasting centers for communications firms, such as radio and television stations;
(m) a health club or fitness center other than those which are for the benefit of Tenant and its employees and strictly ancillary to Tenant's business; and
(n) any other use or purpose which, in the reasonable judgment of Landlord fairly and consistently exercised is not in keeping with the character and dignity of the Building or which is prohibited under the Rules and Regulations.
In the event that Landlord shall recapture possession of any portion of the Premises from Tenant in accordance with the provisions of Article 13 of this Lease, Landlord shall similarly restrict the use of any such space.
10.6 LICENSES AND PERMITS. If any governmental license or permit, other than a certificate of occupancy shall be required for the proper and lawful conduct of Tenant's business in the Premises, or any part thereof, including, specifically, but without limitation, a Board of Health certificate for a cafeteria or any similar food service, and a place of assembly permit, Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same to Landlord for inspection. Tenant shall at all times comply with each such license and permit and shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Premises, or do or permit anything to be done in the Premises, in violation of the certificate of occupancy for the Building.
10.7 LOBBY USE. Tenant and Landlord shall each have the right, from time to time, to reserve the use of the main lobby of the Building (the "Main Lobby") for day or evening special functions, subject to the right of the other party to give its consent to such use, such consent not to be unreasonably withheld or delayed. During any use by either Landlord or Tenant, such use shall be subject to the need to allow access through the Main Lobby to Landlord, to Tenant, and to other tenants of the Building and their guests and invitees. Each party shall pay any and all actual costs of cleaning, security and similar services of any kind which may be required in connection with its use of the Main Lobby, but there shall not be an additional fee for use of the Main Lobby. Landlord shall not permit the use of the Main Lobby by a Competitor (as defined in Section 20.28 below) of Tenant. Landlord's use of the Main Lobby shall be limited to ten (10) separate occasions in any calendar year. If Tenant is then leasing all of the Office Space in the Building, then Tenant shall be permitted to use the Main Lobby without limit on the number of occasions during any calendar year. If Tenant is not then leasing all of the Office Space in the Building, then Tenant's use of the Main Lobby shall be limited to twelve (12) separate occasions in any calendar year.
ARTICLE 11
INDEMNITY AND INSURANCE
11.1 TENANT'S INDEMNITY. Tenant agrees to indemnify, defend and save harmless Landlord and its partners, agents, officers, directors, shareholders, principals, contractors and employees from and against all claims of whatever nature arising from (a) the use, occupancy, conduct or management of the Premises or any business thereon, (b) any work or thing whatsoever done, or any condition created (other than by Landlord, its employees, agents or contractors) in or about the Premises or (c) any negligent or otherwise wrongful act or omission of Tenant or any of its subtenants, licensees or invitees or its or their employees, agents or contractors, whether resulting in injury or death to persons or damage to property or otherwise.
The foregoing indemnity and hold harmless agreement shall include all costs, expenses and liabilities (including, without limitation, attorneys' fees and disbursements) incurred by Landlord, its partners, agents, officers, directors, shareholders, principals, contractors and employees in or in connection with any such claim or any action or proceeding brought thereon, and the defense thereof. In case any action or proceeding shall be brought against Landlord, its partners, agents, officers, directors, shareholders, principals, contractors or employees by reason of any such claim, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding on behalf of Landlord, its partners, agents, officers, directors, shareholders, principals, contractors or employees by counsel for the insurer (if such claim is covered by insurance) or otherwise by counsel reasonably satisfactory to Landlord. In no event shall Tenant be obligated to indemnify or save harmless Landlord or its partners, agents, officers, directors, shareholders, principals, contractors or employees from or in respect of any claim or matter to the extent the same results from the negligence, willful act or omission of such party. Tenant's indemnity as provided for in this Section 11.1 shall be subject to (i) Tenant's right to defend against all claims arising pursuant thereto with counsel selected by Tenant, and (ii) Tenant's right to approve or reject any settlement negotiated in connection therewith in Tenant's sole discretion.
Tenant's indemnity set forth in this Section 11.1 shall extend and apply to the Overlandlord and the holder of any mortgage on the Property or on any Underlying Lease and their respective partners, agents, officers, directors, shareholders, principals, contractors and employees.
11.2 TENANT'S INSURANCE. (a) Tenant agrees to maintain in full force and effect from the date upon which Tenant first enters the Premises or any portion thereof for any reason, throughout the Lease Term and thereafter, so long as Tenant is in occupancy of any part of the Premises, a policy of Commercial General Liability Coverage under which Landlord, Landlord's managing agent, and any Additional Insured (as hereafter defined) and Tenant are named as insureds, in the broadest form of such coverage from time to time generally available in Massachusetts, and under which policy the insurer agrees to indemnify, defend and hold Landlord, and those designated by Landlord as Additional Insureds, harmless from and against all cost, expense and/or liability arising out of or based upon any and all claims for which provision is made in Section 11.1 hereof. Each such policy shall be written on ISO occurrence form CG0001 or a substitute providing equivalent coverage and shall cover liability arising from all operations of the Tenant and coverage for bodily injury and property damage with minimum limits as follows:
(i) $2,000,000 General Aggregate Limit (Other than Products-Completed Operations);
(ii) $2,000,000 Products-Completed Operations;
(iii) $1,000,000 Personal and Advertising Injury;
(iv) $1,000,000 Each Occurrence Limit;
(v) $1,000,000 Fire Damage Liability.
(vi) $10,000 Medical Payment.
Such policy shall be written on an occurrence basis with the following enhancements: Per Location and Per Project Aggregates, Severability of Interest, and Contractual Liability. Tenant shall also maintain Umbrella Liability, which shall be excess of employer's liability, commercial general liability and commercial automobile liability, shall cover all operations of Tenant and shall minimally provide the same coverages, Additional Insureds and terms and conditions contained in the primary policies with minimum limits of $5,000,000 General Aggregate Limit and $5,000,000 Each Occurrence Limit. Each policy of insurance procured by Tenant shall contain endorsements providing that (i) such policy shall be non-cancelable and non-amendable and shall not lapse with respect to Landlord and the Additional Insureds without thirty (30) days' prior notice to Landlord and the Additional Insureds, and (ii) Tenant shall be solely responsible for the payment of premiums therefor notwithstanding that Landlord or any Additional Insured is or may be named as an insured. As of the Commencement Date hereof, the minimum limits of liability of such insurance shall be as stated above, and shall include commercial umbrella liability coverage, if necessary. If, in the opinion of any mortgagees or ground lessors of the Land and/or the Building, the foregoing coverages and or limits shall become inadequate or less than that commonly maintained by prudent tenants in similar buildings in the Boston Central Business District by tenants making similar uses, Landlord shall have the right to require Tenant to increase its insurance coverage and/or limits. All such insurance shall, to the extent permitted by law, name any mortgagees or ground lessors of the Land and the Building, and their successors and assigns (the "Additional Insureds") and Landlord, as additional insureds, to the extent that Tenant has been notified of the existence and identity of any such additional insureds.
(b) Tenant shall also maintain, and cause to be maintained by its contractors, workers' compensation insurance covering all persons employed in connection with any Tenant's Work or Alterations or in connection with the operation of Tenant's business in the Premises. Tenant shall also maintain Employer's Liability insurance with minimum limits of $500,000 for Bodily Injury by Accident, for each accident; $500,000 Bodily Injury by Disease, policy limit; and $500,000 Bodily Injury by Disease, each employee. Tenant shall cause to be maintained by its subcontractors the same requirements as set forth in Section 11.2 (a), 11.2(c) and 11.2(d).
(c) Tenant shall also maintain Commercial Automobile Liability insurance coverage with minimum limits of $1,000,000 per accident for all Owned, Leased, Non-Owned and Hired Vehicles.
(d) Each insurance policy required to be maintained under this Lease by Tenant shall state that, with respect to the interest of Landlord and each of the Additional Insureds, the insurance maintained pursuant to such policy shall not be invalidated by any action or inaction of Tenant and shall insure Landlord and the Additional Insureds regardless of any breach or violation of any warranties, declarations, conditions, or exclusions by Tenant.
(e) Each insurance policy required to be maintained under this Lease by Tenant shall state that all provisions of each such insurance policy, except for the limits of liability, shall operate in the same manner as if a separate policy had been issued to each person or entity insured thereunder.
(f) Each insurance policy required to be maintained under this Lease by Tenant shall state that the insurance provided thereunder is primary insurance without any right of contribution from any other insurance which may be carried by or for the benefit of Landlord or the Additional Insureds. Tenant shall have the right to provide any insurance required to be maintained hereunder by it under blanket and umbrella policies provided that such policies shall in all other respects comply with the requirements of this Section 11.2.
11.3 LANDLORD'S INDEMNITY. Landlord agrees to indemnify and save harmless Tenant from and against all claims of whatever nature against Tenant arising from (a) the performance by Landlord of any alterations, improvements, repairs or other work in the Building or the Premises, and (b) any negligent or otherwise wrongful act or omission of Landlord or any of its employees, whether resulting in injury or death to persons or damage to property or otherwise; provided, however, that in no event shall Landlord be liable for any loss of business or other consequential damages.
The foregoing indemnity and hold harmless agreement shall include all reasonable out-of-pocket costs, expenses and liabilities (including, without limitation, attorneys' fees and disbursements) incurred by Tenant, its partners, agents, officers, directors, shareholders, principals, contractors and employees in or in connection with any such claim or any action or proceeding brought thereon, and the defense thereof. In no event shall Landlord be obligated to indemnify or save harmless Tenant from or in respect of any claim or matter to the extent the same results from the negligence, willful act or omission of Tenant. Landlord's indemnity as provided for in this Section 11.3 shall be subject to (i) Landlord's right to defend against all claims arising pursuant thereto with counsel selected by Landlord, and (ii) Landlord's right to approve or reject any settlement negotiated in connection therewith in Landlord's sole discretion.
11.4 LANDLORD'S INSURANCE. Landlord agrees to maintain in full force and effect throughout the Lease Term (i) Commercial General Liability Coverage with respect to the Land and the Building, and the conduct and operation of its business therein, with combined base and umbrella coverage limits of not less than Ten Million ($10,000,000.00) Dollars for bodily injury or death and property damage in any one occurrence; and (ii) Cause of Loss-Special Form property insurance (including commercially reasonable amounts of loss of rents coverage, as long as such coverage is available at commercially reasonable rates) with respect to the Base Building Construction, and the Building's equipment and personal property (collectively "Landlord's Restoration Work"), but excluding Tenant's Property, Tenant's Work, Landlord's Work, and any Alterations made by Tenant, in an amount equal to the replacement cost thereof or in such lesser amount as will avoid co-insurance; provided, however, that if (i) such insurance coverage ceases to be available or (ii) the cost of such insurance coverage increases so that owners of similar properties in the Boston Central Business District generally cease to carry such insurance, Landlord shall maintain such insurance as is customarily carried by owners of similar properties in the Boston Central Business District. Landlord will not carry any insurance whatsoever on Tenant's Property or Tenant's Restoration Work and shall not be obligated to repair any damage thereto or to replace the same. Landlord shall have the right to provide any insurance required to be maintained hereunder by it under blanket policies provided that such policies shall in all other respects comply with the requirements of this Section 11.3.
11.5 TENANT'S FIRE INSURANCE. Tenant shall take out on or prior to the Commencement Date and keep in force during the Lease Term Cause of Loss-Special Form property insurance in an amount sufficient to cover the cost of (a) personal property, trade fixtures, furniture, furnishings, equipment and other Tenant's property (collectively, "Tenant's Personal Property") located at the Building, and (b) all portions of the Premises which is not included within Landlord's Restoration Work (collectively, "Tenant's Restoration Work"). So long as the Guaranty is in full force and effect, Tenant shall have the right to self-insure with respect to Tenant's Personal Property only, but not with respect to Tenant's Restoration Work, upon notice to Landlord given on or before the commencement of each Operating Year, that Tenant has elected to self-insure with respect to Tenant's Personal Property. In such event, Tenant shall provide Landlord with a certificate from a duly authorized officer of Tenant to such effect in lieu of a certificate of insurance with respect to Tenant's Personal Property.
11.6 CERTIFICATES OF INSURANCE. On or before the Commencement Date, Tenant shall furnish Landlord with certificates and endorsements and a copy of an additional insured endorsement evidencing the aforesaid insurance coverage, and renewal certificates shall be furnished to Landlord at least thirty (30) days prior to the expiration date of each policy for which a certificate was theretofore furnished. Certificates shall evidence all self-insurance retentions, deductibles and/or self-insurance greater than $5,000 for any of the above coverages
11.7 NO VIOLATION OF BUILDING POLICIES. Tenant shall not commit or permit any violation of the policies of Cause of Loss-Special Form property, boiler, sprinkler, water damage or other insurance covering the Building and/or the fixtures, equipment and property therein carried by Landlord, or do or permit anything to be done, or keep or permit anything to be kept, in the Premises, which in case of any of the foregoing, (i) would result in termination of any such policies, (ii) would adversely affect Landlord's right of recovery under any of such policies or (iii) would result in reputable and independent insurance companies refusing to insure the Building or the property of Landlord in amounts reasonably satisfactory to Landlord.
11.8 TENANT TO PAY PREMIUM INCREASES. If, because of anything done, caused or permitted to be done, or omitted by Tenant, the rates for liability, Cause of Loss-Special Form property, boiler, sprinkler, water damage or other insurance on the Building or on the property and equipment of Landlord shall be higher than they otherwise would be, Tenant shall reimburse Landlord for the additional insurance premiums thereafter paid by Landlord or by the other tenant and subtenant in the Building which shall have been charged because of the aforesaid reasons, such reimbursement to be made from time to time on Landlord's demand.
11.9 WAIVER OF SUBROGATION. Landlord and Tenant shall each endeavor to secure an appropriate clause in, or an endorsement upon, each Cause of Loss-Special Form property policy obtained by it and covering the Building, the Premises or the personal property, fixtures and equipment or Tenant's Property or any other items specified in Section 11.4 located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party. The waiver of subrogation or permission for waiver of any claim hereinbefore referred to shall extend to the agents of each party and its partners, members, managers and employees and, in the case of Tenant, shall also extend to all other persons and entities occupying or using the Premises in accordance with the terms of this Lease. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge, then the party benefiting from the waiver or permission shall pay such charge upon demand, and if such party shall fail or refuse to pay such charge within thirty (30) days of demand therefor, such party shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or permission. In the event that either Landlord or Tenant shall be unable at any time to obtain one of the provisions referred to above in any of its insurance policies, Landlord or Tenant, as the case may be, shall promptly notify the other.
Subject to the foregoing provisions of this Section 11.9, and insofar as may be permitted by the terms of the insurance policies carried by it, each party hereby releases the other and its partners, members, managers, agents and employees (and in the case of Tenant, all other persons and entities occupying or using the Premises in accordance with the terms of this Lease with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damages or destruction with respect to its property by the perils covered in the Cause of Loss-Special Form property insurance (including, but not limited to, either as a part of the policy or by endorsement, loss of rents or business income, as the case may be) occurring during the Lease Term to the extent of the limits of coverage by such insurance policies.
11.10 REQUIREMENTS FOR INSURANCE CARRIERS. Any insurance policy required to be carried by either Landlord or Tenant in accordance with this Lease shall be issued by one or more insurers in a financial size category of not less than, and with general policy holders ratings of not less than, A-VIII as rated in the most current available insurance report by A. M. Best Company, Oldwick, New Jersey, or the then equivalent thereof, and licensed to do business in the Commonwealth of Massachusetts and authorized to issue such policies.
ARTICLE 12
FIRE, CASUALTY OR TAKING
12.1 RIGHT TO TERMINATE LEASE. Tenant shall give prompt notice to Landlord in case of fire or other casualty in the Premises. In the event of substantial damage to either the Building or Premises, or both, due to a fire or other casualty, Landlord shall deliver to Tenant within sixty (60) days after the occurrence of the casualty a statement prepared by a licensed professional engineer selected by Landlord (who shall be reasonably satisfactory to Tenant) setting forth such engineer's estimates of the time required for repair or restoration of both Landlord's Restoration Work ("Landlord's Restoration Work Schedule") and Tenant's Restoration Work ("Tenant's Restoration Work Schedule," and collectively, the "Restoration Work Schedules") in accordance with a normal construction schedule (i.e. a schedule that does not give effect to savings in time that might be achieved by overtime, weekend work, premium pay, etc.). If (a) so much of the Building is damaged or rendered untenantable (whether or not the Premises or a portion thereof shall be damaged) by fire or other casualty so that the Restoration Work Schedules show that such portion of the Building cannot be reasonably expected to be restored or rendered tenantable under a normal working schedule within a period of eighteen (18) months after the occurrence of such damage or destruction; or (b) if the Premises shall suffer damage or be rendered untenantable by fire or other casualty and the Restoration Work Schedules show that such portion of the Premises cannot be reasonably expected to be restored or rendered tenantable under a normal working schedule within a period of eighteen (18) months after the occurrence of such damage or destruction, then and in any such event Landlord shall have the right to terminate this Lease by notice to Tenant given within sixty (60) days of receipt of the Restoration Work Schedules following such fire or other casualty. If either (y) the Premises shall be totally or substantially damaged or rendered wholly or substantially untenantable (whether or not any other portions of the Building shall be damaged) and the Restoration Work Schedules show that such portion of the Premises cannot be reasonably expected to be restored or rendered tenantable under a normal working schedule within a period of eighteen (18) months after the occurrence of such damage or destruction, or (z) the Building shall be substantially damaged, so that Tenant's access to and use and enjoyment of the Premises shall be rendered substantially impossible, whether or not the Premises shall be damaged, then Tenant shall have the right to terminate this Lease by notice to Landlord given within sixty (60) days of the receipt of the Restoration Work Schedules.
If during the last three (3) years of the Lease Term, the Building or the Premises shall be damaged by fire or casualty, and if both Landlord's Restoration Work and Tenant's Restoration Work cannot reasonably be expected to be repaired or restored within nine (9) months from the time that repair or restoration work would commence or prior to the Expiration Date, whichever first occurs, then Landlord or Tenant shall have the right, by giving notice to the other not later than thirty (30) days after receipt of the Restoration Work Schedules the occurrence of such damage, to terminate this Lease. Notwithstanding the foregoing, Tenant shall not have the right to elect to terminate this Lease if such casualty occurs as a result of Tenant's gross negligence or willful misconduct. If either Landlord or Tenant shall give notice of termination pursuant to this Section, the Lease Term shall expire by lapse of time upon the date which is thirty (30) days after such notice is given and Tenant shall vacate the Premises and surrender the same to Landlord. Notwithstanding the foregoing, if such termination by Landlord is to occur prior to the expiration of the last day for Tenant to give notice of its election to extend the Lease Term in accordance with Article 21 of this Lease, Tenant shall have the right, upon notice given not later than ten (10) days after notice of termination by Landlord, to negate any such termination election by Landlord by giving Landlord notice (i) that Tenant elects to negate such termination, and (ii) that Tenant elects to extend the Lease Term in accordance with Article 21 of this Lease. It is understood that Tenant's time period within which to elect to extend the Lease Term pursuant to Article 21 shall not be altered or modified by this election. Upon the termination of this Lease under the conditions provided for in this Section, Tenant's liability for rent shall cease as of the date of such termination, subject, however, to abatement thereof between the date of such casualty and the date of such termination pursuant to Section 12.3 below.
12.2 RESTORATION OF THE PREMISES. If the Premises or any part thereof shall be damaged or rendered untenantable by fire or other insured casualty and Tenant gives prompt notice thereof to Landlord and this Lease is not terminated pursuant to any provision of this Article 12, after the collection of the insurance proceeds attributable to such damage, Landlord shall, at its expense (but only to the extent of insurance proceeds made available to Landlord, after deduction therefrom of Landlord's expenses in obtaining such proceeds and, provided that Landlord shall have carried the insurance it is required to carry under this Lease, and in any event Landlord shall be required to fund the amount of any deductible thereunder), proceed with reasonable diligence to repair or cause to be repaired Landlord's Restoration Work, and Tenant, at its sole cost and expense, promptly and with due diligence shall proceed to repair or cause to be repaired Tenant's Restoration Work.
Where Landlord is obligated or otherwise elects to effect restoration of the Landlord's Restoration Work, unless such restoration is completed within one hundred fifty (150%) percent of the period of time in the original Restoration Work Schedule (such period to be subject, however, to extension where the delay in completion of such work is due to Force Majeure or to Tenant Delays; provided, however, that such extension shall be limited to a period of not more than six (6) additional months solely with respect to delays due to Force Majeure), Tenant shall have the right to terminate this Lease at any time after the expiration of such period (as extended) but prior to the time that Landlord's Restoration Work is substantially completed, such termination to take effect as of the thirtieth (30th) day after such notice is given, with the same force and effect as if such date were the date originally established as the Expiration Date hereof unless, within such thirty (30) day period Landlord's Restoration Work is substantially completed, in which case Tenant's notice of termination shall be of no force and effect and this Lease and the Lease Term shall continue in full force and effect.
12.3 PAYMENT OF RENT FOLLOWING CASUALTY. Until this Lease is terminated pursuant to Section 12.1, or the Landlord's Restoration Work and Tenant's Restoration Work have been completed pursuant to Section 12.2, the Annual Fixed Rent and Tenant's Share of the Excess Operating Expenses shall be apportioned or adjusted according to the nature and extent of the Premises which is rendered unusable by Tenant. No damages, compensation or claims shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or of the Building. If rent abates in respect of all or any portion of the Premises and Tenant reoccupies the Premises or such portion thereof, or any part thereof, for the conduct of Tenant's business operations during the period in which restoration work is taking place and prior to the date that the same is made completely tenantable, the Annual Fixed Rent allocated to the space so reoccupied shall be payable, and Tenant's Share shall be increased by the portion thereof allocable to such space. Annual Fixed Rent shall become payable, and Tenant's Share shall thereafter increase, on the earlier of Tenant's occupancy of additional portions of the Premises, or, subject to extension for Force Majeure, at the expiration of the period of time equal to one hundred fifty (150%) percent of Tenant's Restoration Work Schedule, commencing at the expiration of Landlord's Restoration Work. Occupancy by Tenant shall occur on the date upon which Tenant, or anyone associated with Tenant, commences beneficial use of additional portions of the Premises or portions thereof, if in increments (as opposed to use by Tenant's personnel or contractors in the space preparing the same for occupancy, occupancy by persons administering Tenant's occupancy, including the installation or testing of telephones, computers and other equipment, cabling wiring, furnishings, fixtures, furniture and other property of Tenant). The restoration of Landlord's Work and Tenant's Work in accordance with this Lease shall be effectuated in substantially the same manner and in accordance with substantially the same procedures as set forth in Exhibit C with respect to the original construction of the Building and the original construction of Tenant's Work. Notwithstanding anything in this Section to the contrary, if Landlord shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) payable by reason of any damage to the Building or the Premises under Landlord's insurance policies by reason of any action or inaction by Tenant or failure by Tenant to comply with any of the provisions of this Lease (including without limitation Sections 9.3 and 11.6 hereof), then without prejudice to any other remedy which may be available against Tenant, the abatement of rent provided for in this Section 12.3 shall not be effective to the extent of the uncollected insurance proceeds, and the amount of any abatement theretofore taken by Tenant shall be immediately payable to Landlord on demand.
12.4 UNINSURED CASUALTY. Notwithstanding anything to the contrary contained in this Lease, if the Building or the Premises shall be substantially damaged by fire or casualty at any time and sufficient insurance proceeds to perform Landlord's Restoration Work are not available (a) because the loss is not covered by the forms of casualty insurance at the time which are required to be maintained by Landlord pursuant to Section 11.4, or (b) due to the insolvency or bankruptcy of Landlord's insurer, and in the case of either (a) or (b), the cost to repair such fire or casualty damage exceeds fifteen (15%) percent of the full replacement cost of the Building Landlord may, at its election, terminate the Lease Term by notice to Tenant given within sixty (60) days after such loss. If Landlord shall give such notice, then this Lease shall terminate as of the date of such notice with the same force and effect as if such date were the date originally established as the Expiration Date hereof.
12.5 PROCEEDS OF TENANT'S INSURANCE.
12.5.1 IF LEASE IS NOT TERMINATED. If this Lease is not terminated as a result of a fire or other casualty, then (a) Tenant's insurance shall be held by the insurer until paid to the Depository as herein provided, but shall be adjusted solely by Tenant, and (b) the insurance company shall be directed to disburse the proceeds thereof to an institutional lender unrelated to either Landlord or Tenant and agreed upon by Landlord and Tenant, (the "Depository") to be held in escrow by the Depository and to be paid out of escrow to Tenant, or as designated by Tenant, for the costs of Tenant's Restoration Work, in the same manner as provided in Exhibit C with respect to the construction of Tenant's Work. Landlord shall pay any costs or fees of such Depository.
12.5.2 IF LEASE IS TERMINATED. If this Lease is terminated as a result of a fire or other casualty, then (a) Tenant's insurance shall be adjusted jointly by Landlord, any Mortgagee and Tenant, and (b) the insurance company shall be directed to disburse the proceeds thereof in separate checks as follows:
(1) the Allowance Share (as defined below) of such proceeds shall be paid to Landlord and the Mortgagee as their interests may appear, and
(2) the remaining balance of such proceeds shall be paid to Tenant.
For the purposes hereof, the "Allowance Share" of the proceeds of any insurance on Tenant's Restoration Work shall be the amount thereof multiplied by a fraction, the numerator of which is the amount of Landlord's Contribution (as defined in Exhibit C) and the denominator of which is the actual aggregate cost of Tenant's Work and of any Alterations theretofore approved and completed. In implementation of the foregoing in the case of a termination hereof, Landlord, any Mortgagee and Tenant shall all join in a written direction letter to Tenant's insurance company (A) advising it that this Lease has terminated as a result of the loss in question, (B) directing it to disburse, by means of separate checks, a specific amount or percentage of insurance proceeds available under Tenant's policy to Landlord and such Mortgagee (as their interests may appear) and to Tenant, respectively, (which amounts shall be determined in accordance herewith), and (C) authorizing the insurance company to rely on such letter without inquiry and agreeing that it shall not be responsible or liable to any of the signatories to the letter for complying therewith.
12.6 EMINENT DOMAIN COMPLETE OR SUBSTANTIAL TAKING. If the whole of the Building or of the Premises shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose (other than for temporary use or occupancy), the Lease Term shall forthwith cease and terminate as of the date of vesting of title by reason of such taking (which date is hereinafter referred to as the "date of the taking"), and the rent shall be apportioned as of such date. If such portion of the Building shall be so taken so that substantial structural alterations or reconstruction of the Building shall be necessary as a result of such taking (whether or not the Premises be affected), which alterations or reconstruction Landlord determines will take at least 180 days to complete, Landlord may, at its option, terminate this Lease and the Lease Term and estate hereby granted as of the date of such vesting of title by notifying Tenant in writing of such termination within sixty (60) days following the date of the taking.
12.7 EMINENT DOMAIN: PARTIAL TAKING. If any part, but less than all, of the Premises shall be so taken and this Lease shall not be terminated pursuant to Section 12.6, then the part so taken shall no longer constitute part of the Premises but this Lease shall otherwise remain unaffected by such taking; provided, however, that Tenant may elect to terminate the Lease Term in the event of:
(i) a taking of more than twenty-five (25%) percent of the total rentable area of the Premises, or
(ii) a taking that has a material adverse effect on Tenant's access to the Building or the Premises, if Landlord determines that it will be unable to provide or in fact fails to provide adequate alternative access to the Building and the Premises within ninety (90) days thereafter, by giving notice of such election to Landlord not later than sixty (60) days after Tenant's receipt from Landlord of notice of such taking or the date of such taking, whichever first occurs, or not later than thirty (30) days after such one hundred eightieth day, as the case may be. If notice of termination of this Lease shall be given pursuant to this Section, then upon such date as may be specified by Tenant by notice to Landlord, which date shall be not earlier than thirty (30) and not later than sixty (60) days after the date of Tenant's notice, the Lease Term shall terminate as of the date specified in such notice and the rent shall be apportioned as of such date of termination. Upon a partial taking and this Lease continuing in force as to any part of the Premises,
(a) the Annual Fixed Rent and Tenant's Share of the Excess Operating Expenses shall be equitably reduced for the remainder of the Lease Term, according to the nature and extent of the loss of use of the Premises suffered by Tenant; and
(b) Landlord shall, at its expense, restore with reasonable diligence the remaining portions of the Premises as nearly as practicable to the same condition as it was in prior to such condemnation or taking; provided, however, that Landlord shall not be obligated to expend for such restoration and for restoration of the remainder of the Building any amount in excess of the net condemnation proceeds actually received by Landlord; and provided, further that Landlord will not be obligated to repair any damage to Tenant's Property, or Tenant's Work or Alterations. Proceeds of any award applied by the holder of any mortgage to reduction of the indebtedness secured thereby or retained by any Overlandlord as compensation for the taking shall not be deemed to have been received by Landlord.
12.8 LANDLORD TO RECEIVE ENTIRE AWARD. In the event of any condemnation or taking hereinabove mentioned of all or a part of the Building (whether or not the Premises be affected) Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant, and Tenant hereby expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and Tenant shall be entitled to receive no part of such award. The foregoing, however, shall not be deemed to preclude Tenant from recovering a separate award for any compensation to which Tenant may otherwise lawfully be entitled in such case in respect of Tenant's Property, the unamortized cost of all of Tenant's Work and all Alterations made by Tenant to the Premises during the Lease Term, any increased rent which Tenant is (or would be) required to pay for new space, and moving expenses, provided such award shall be made by the condemning authority in addition to, and shall not result in a reduction of, the award made by it to Landlord. If a separate award is not possible with respect to the unamortized cost of all of Tenant's Work and all Alterations made by Tenant to the Premises during the Lease Term, Tenant shall be entitled to the portion of the award, if any, allocable to the unamortized cost of all of Tenant's Work and all Alterations made by Tenant to the Premises during the Lease Term, as aforesaid. Notwithstanding the foregoing, in the event of a permanent taking, Landlord shall in any such event be entitled to receive the Allowance Share thereof (computed as described in Subsection 12.5.2 with respect to insurance proceeds) and Tenant shall be entitled to receive the balance.
ARTICLE 13
ASSIGNMENT, SUBLETTING, MORTGAGING
13.1 LANDLORD'S CONSENT REQUIRED.
(a) Except as specifically permitted by this Article, Tenant shall not, by operation of law or otherwise, assign, mortgage or encumber this Lease, or sublet or permit the Premises or any part thereof to be used by others. If and so long as Tenant is a corporation with fewer than five hundred (500) shareholders or a partnership or limited liability company, an assignment, within the meaning of this Article 13, shall be deemed to include one or more sales or transfers of stock or partnership or membership interests, by operation of law or otherwise, or the issuance of new stock or partnership membership interests, by which an aggregate of more than fifty (50%) percent of Tenant's stock or partnership or membership interests shall be vested in a party or parties who are not stockholders, partners or members as of the date hereof. For the purpose of this Section 13.1, ownership of stock or partnership or membership interests shall be determined in accordance with the principles set forth in Section 544 of the Internal Revenue Code of 1954, as amended from time to time, or the corresponding provisions of any subsequent law.
(b) An "Affiliate" shall mean an entity (i) into or with which another entity is merged or consolidated, (ii) to which all or substantially all of an entity's assets are transferred as a going concern, (iii) which is at least fifty (50%) percent owned or controlled by Guarantor, by State Street Bank and Trust Company, or by a successor in interest of Guarantor, (iv) which is merely a change in form of such entity, rather than any change in ownership or control, or (v) which is an affiliate of Guarantor or of a successor in interest of Guarantor which is a Bank Holding Company as defined in the Bank Holding Company Act. Anything in the foregoing Section 13.1(a) to the contrary notwithstanding, transactions with an Affiliate of Tenant shall not be deemed to be an assignment or subletting within the meaning of this Article 13, provided that (1) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles consistently applied at least equal to the greater of (y) the net worth of Tenant immediately prior to such merger, consolidation, transfer, or change in form, or (z) the net worth of Tenant herein named on the date of this Lease (which test shall not be applicable as long as the Guaranty is in full force and effect), (2) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) Operating Days prior to the effective date of any such transaction, unless Tenant or Guarantor is prohibited from such disclosure by laws relating to non-public information in accordance with Securities Laws, in which case such information shall be delivered to Landlord within ten (10) Operating Days after the effective date of any such transaction, (3) such assignee agrees directly with Landlord, by written instrument in form satisfactory to Landlord, to be bound by all the obligations of Tenant hereunder including, without limitation, the covenant against further assignment and subletting, (4) in no event shall Tenant be released from its obligations under this Lease, or shall Guarantor be released from its obligations under the Guaranty, and (5) any such transfer or transaction is for a legitimate, regular business purpose of Tenant.
(c) The following shall not be considered to be an assignment or subletting which is subject to the provisions of this Article 13, and no further documentation shall be required with respect to such occupancy: (i) occupancy of the Premises or portions thereof by (as distinguished from a transfer of this Lease to) divisions, subdivisions and Affiliates of Guarantor or State Street Bank and Trust Company, or (ii) occupancy by entities which, prior to the commencement of such occupancy, were at least fifty (50%) percent owned or controlled by Guarantor or State Street Bank and Trust Company, or (iii) occupancy of non-material portions of the Premises by persons or entities providing out-sourced services to Tenant and its Affiliates (but not to the general public).
13.2 OFFER NOTICE.
13.2.1 Offer Notice; With a Prospective Tenant. If Tenant shall have received and negotiated a bona fide written offer from an independent third party which it desires to accept to sublet all or any part of the Premises or to assign this Lease, Tenant shall submit to Landlord a notice (any such notice being hereinafter called an "Offer Notice") containing the following items:
(a) the name and address of the proposed subtenant or assignee and a brief description of such person's or entity's business, current financial information in respect of such person or entity (including, without limitation, to the extent in Tenant's possession, its most recent balance sheet and income statements certified by its chief financial officer or a certified public accountant), the identity of any broker entitled to a commission in respect of such subletting or assignment and the commission, if any, payable to such broker, and any other information reasonably requested by Landlord; and
(b) a duplicate original of the offer, together with a copy of the proposed instrument of assignment or sublease (containing, in the case of an assignment, a provision for assumption by the assignee of all of the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the Lease Term), the effective date of which shall be at least thirty (30) days but not more than ninety (90) days after the date of the giving of such notice, which shall be conditioned on Landlord's consent thereto and which shall comply with the provisions of Section 13.5; and
(c) executed copies of all other agreements, if any, relating to the proposed assignment or sublease and, if not fully disclosed by such agreements, a statement of all consideration to be received by Tenant for or in connection with such assignment or sublease (including, without limitation, any payment to be made for Tenant's Property or leasehold improvements) and the terms of payment therefor.
13.2.2 Offer Notice; Without a Prospective Tenant. If Tenant desires to sublet all or any part of the Premises or to assign this Lease but Tenant shall not have received and negotiated a bona fide written offer from an independent third party, Tenant shall have the right to submit an Offer Notice to Landlord containing only the following items:
(a) that Tenant desires to assign this Lease, or, if Tenant desires to sublet a portion of the Premises, then a description of the portion of the Premises proposed to be sublet, and the term for which such portion of the Premises is proposed to be sublet;
(b) to the extent known, if applicable, the name and address of the proposed subtenant or assignee and a brief description of such person's or entity's business, if Tenant shall have the same available, current financial information in respect of such person or entity (including, without limitation, its most recent balance sheet and income statements certified by its chief financial officer or a certified public accountant or other information reasonably satisfactory to Landlord), the identity of any broker entitled to a commission in respect of such subletting or assignment and the commission, if any, payable to such broker, and any other information reasonably requested by Landlord; and
(c) to the extent known, if applicable, a description of all of the material economic terms and conditions of the proposed subletting or assignment (including, without limitation, with respect to a subletting, the proposed fixed rent, additional rent, base amounts or years, if any, free rent and other concessions, if any, the party responsible for the cost of physical separation, and other similar, material proposed terms and conditions) setting forth all consideration to be received by Tenant for or in connection with such subletting or assignment (including, without limitation, any payment to be made for Tenant's Property or leasehold improvements) and the terms of payment therefor.
If Tenant shall thereafter receive and negotiate a bona fide written offer from an independent third party, Tenant shall have the right to submit an Offer Notice in accordance with Section 13.2.1 above.
13.2.3 Landlord's Consent. If Landlord shall waive its right to underlease (as provided in Section 13.3) or to terminate (as provided in Section 13.4) with respect to an Offer Notice made pursuant to Section 13.2.2 above, then Landlord shall not unreasonably withhold, condition or delay its consent (subject to and as otherwise provided in Section 13.5 or Section 13.6, as applicable), to an assignment of this Lease or to a sublease for the space which was the subject of such Offer Notice. If a sublease for the space which was the subject of such an Offer Notice, or an assignment of the Lease is not executed within one (1) year after the granting of Landlord's consent, then Landlord's right to underlet or to terminate as provided in this Article 13 shall be deemed revived and reinstated with respect to any subsequent desire of Tenant to assign this Lease or to sublet as otherwise provided in this Article 13 and Tenant shall be required to give another Offer Notice in accordance with this Section 13.2.
13.3 LANDLORD'S RIGHT TO UNDERLET. Subject to the provisions of Section 13.13, upon receipt of any Offer Notice, Landlord shall have the option with respect to each such Offer Notice, exercisable by notice from Landlord to Tenant given (i) within fifteen (15) days after receipt of such Offer Notice, if such Offer Notice is made pursuant to Section 13.2.1 above, or (ii) within thirty (30) days, if such Offer Notice is made pursuant to Section 13.2.2 above, to underlet from Tenant the space which Tenant so desires to sublet, for the term for which Tenant desires to sublet it and for a rent equal to the rent which Tenant by the terms of this Lease is required to pay for the rentable area of the space so to be sublet, such underlease to be upon the covenants, agreements, terms, provisions and conditions contained in this Lease except as hereinafter provided and except for such thereof which are irrelevant or inapplicable. Without limiting the generality of the foregoing, it is hereby expressly agreed that:
(a) such underlease to Landlord shall give the undertenant the unqualified and unrestricted right, without Tenant's permission, (x) to assign such underlease or any interest therein and/or to underlet from time to time the space covered by such underlease or any parts of such space, except that Landlord agrees that any such underlease will not be assigned except simultaneously with an assignment of Landlord's interest under this Lease so that at all times the Landlord under this Lease and the undertenant under said underlease shall be the same person, corporation or other entity, and each assignor of such underlease shall thereafter be released of all obligations under such underlease, and (y) to make any and all changes, alterations and improvements in the space covered by such underlease deemed desirable by the undertenant, and which were either set forth as a condition of the Offer Notice or as to which Tenant shall have given its approval, such approval not to be unreasonably withheld or delayed;
(b) such underlease shall provide that (x) any assignee or subtenant of the undertenant may, at the election of the undertenant, be permitted to make alterations, decorations and installations in such space or any part thereof, and (y) any such alterations, decorations and installations therein made by any assignee or subtenant of the undertenant may be removed, or left, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such underlease provided that such assignee or subtenant, at its expense, shall repair the damage and injury to such space so underlet caused by such removal and any assignee or subtenant shall restore such space to its condition immediately prior to such assignment or sublet; provided, however, that unless such alterations, decorations or installations were either set forth as a condition of the Offer Notice or as to which Tenant shall have given its approval, such assignee or subtenant shall, at its expense, remove any such alterations, decorations or installations and shall repair the damage and injury to the space so underlet caused by such removal, and any assignee or subtenant shall restore such space to its condition immediately prior to such assignment or sublet;
(c) such underlease shall also provide that the parties to such underlease expressly negate any intention that any estate created under such underlease be merged with any other estate held by either of said parties;
(d) Tenant shall and will at all times at its expense provide and permit an appropriate and lawful means of ingress and egress from such space so underlet by Tenant to Landlord, such means of ingress or egress to be specified by Tenant in the Offer Notice with respect to such space;
(e) Landlord, at Tenant's expense if specified in the Offer Notice (but otherwise at Landlord's expense), may make such Alterations as may be required or deemed necessary by Landlord physically to separate the underleased space from the balance of the Premises and to comply with all laws and requirements of public authorities relating to such separation;
(f) the occupant or occupants of all or any part or parts of such space shall, in common with Tenant, have the use of toilet and other common facilities on the floor on which such space is located;
(g) any default (after the expiration of any applicable notice, grace or cure period) by Landlord in the payment of rent under such underlease or by anyone claiming through such underlease shall entitle Tenant to a corresponding offset against the payment of rent due under this Lease;
(h) any failure by such assignee or subtenant to remove any such alterations, decorations or installations, to repair the damage and injury to the space so underlet caused by such removal, or to restore such space to its condition immediately prior to such assignment or sublet shall entitle Tenant, after giving Landlord at least ten (10) days' notice of its intention to do so, to perform the removal, repair and/or restoration which should have been performed by such assignee or subtenant, and Landlord shall reimburse Tenant for the reasonable out of pocket third party costs incurred by Tenant in performing such removal, repair and/or restoration.
13.4 LANDLORD'S RIGHT TO TERMINATE. Subject to the provisions of Section 13.13, upon receipt of any Offer Notice in which Tenant proposes to assign this Lease (which shall include, for purposes of this Section 13.4, a proposed subletting of all or substantially all of the Premises for the entire or substantially the entire remaining Lease Term), or in which Tenant proposes to sub let any space in the Premises for the entire or substantially the entire remaining Lease Term, then and in any of such events, Landlord shall have the right, exercisable by notice to Tenant given (i) within fifteen (15) days after Landlord receives Tenant's Offer Notice, if such Offer Notice is made pursuant to Section 13.2.1 above, or (ii) within thirty (30) days, if such Offer Notice is made pursuant to Section 13.2.2 above, and in addition to the other rights granted Landlord under this Article 13, (x) in the case of an assignment, to terminate this Lease, in which event this Lease shall terminate on the date fixed in Landlord's notice, which shall not be less than thirty (30) nor more than ninety (90) days after the giving of such notice, with the same force and effect as if the termination date fixed in Landlord's notice were the date originally fixed in this Lease as the Expiration Date, or (y) in the case of a subletting, to terminate this Lease with respect to the space proposed by Tenant to be sublet, in which event on the date fixed in Landlord's notice, which shall not be less than thirty (30) nor more than ninety (90) days after the giving of such notice, such space shall no longer be part of the Premises or covered by this Lease and the rentable area of the Premises, the Annual Fixed Rent and Tenant's Share of the Excess Operating Expenses shall be appropriately reduced.
13.5 CONDITIONS ON SUBLETTING. If Landlord does not exercise any option granted to Landlord by Sections 13.3 and 13.4 with respect to a proposed sublease which is the subject of an Offer Notice, Landlord agrees with respect to transfers as to which Landlord's consent is required, that Landlord will not unreasonably withhold or delay its consent to such proposed sublease provided that the following further conditions shall be satisfied:
(a) the Premises or any part thereof shall not, without Landlord's prior consent, which shall not be unreasonably withheld or delayed, have been listed or otherwise publicly advertised for subletting at a rental rate less than the rental rate being sought by Landlord for space in the Building provided that Landlord shall, within ten (10) days after Tenant so requests, have informed Tenant of the rental rate being sought by Landlord for such space, and all advertisements of the Premises or any portion thereof for subletting shall have been approved by Landlord. The foregoing, however, shall not be deemed to prohibit Tenant from negotiating or consummating a sublease at a lower rental rate;
(b) an Event of Default shall not then exist under this Lease;
(c) the proposed subtenant shall be of a character, be engaged in a business, and propose to use the Premises or portion thereof to be sublet in a manner, in keeping with the standards in such respect of the other tenancies in the Building;
(d) the proposed subtenant shall not then be a tenant, subtenant or assignee of any space in the Building, nor shall the proposed subtenant be a person or entity with whom Landlord is then actively negotiating to lease space in the Building, so long as comparable space is available in the Building. The term "comparable space" as used herein shall mean any space in the Building which is (i) reasonably expected to be available for lease within one (1) year before or after the effective date of the proposed sublease, and (ii) equivalent in size, plus or minus ten (10%) percent, of the rentable area of the proposed sublease space. If Tenant asks Landlord for information concerning the status of any proposed offeree or for information concerning prohibited offerees, Landlord will respond promptly to Tenant's request;
(e) the proposed subtenant shall not occupy and use or propose to occupy and use the Premises for any purpose prohibited under Section 10.4;
(f) the character of the business to be conducted or the proposed use of the Premises by the proposed subtenant shall not (i) reasonably be likely to increase Operating Expenses with respect to the Premises proposed to be so sublet beyond that which Landlord now incurs for use by Tenant, unless Tenant agrees to pay the amount of such excess as incurred by Landlord; (ii) materially increase the burden on elevators or other Building systems over the burden prior to such proposed subletting; or (iii) violate or reasonably be likely to violate any provisions or restrictions contained herein relating to the use or occupancy of the Premises;
(g) any proposed sublease shall state that it is expressly subject to all of the obligations of Tenant under this Lease and shall contain the further condition and restriction that the sublease shall not be assigned, encumbered or otherwise transferred or the subleased premises further sublet by the sublessee in whole or in part, or any part thereof suffered or permitted by the sublessee to be used or occupied by others, without the prior written consent of Landlord in each instance;
(h) any proposed sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of the termination of this Lease, or the re-entry or dispossession of Tenant by Landlord under this Lease, such subtenant shall, at Landlord's option, attorn to Landlord as its sublessor pursuant to the then applicable terms of such sublease for the remaining term thereof, except that Landlord shall not be (i) liable for any previous act or omission of Tenant as sublessor under such sublease, (ii) subject to any offset which theretofore accrued to such subtenant against Tenant, or (iii) bound by any previous modification of such sublease not consented to in writing by Landlord; or (iv) bound by any previous prepayment of rent more than one month in advance; and
(i) Tenant shall reimburse Landlord on demand for any costs that may reasonably be incurred by Landlord in connection with said sublease, including, without limitation, the costs of making investigations as to the acceptability of the proposed subtenant and reasonable legal costs incurred in connection with the granting of any requested consent.
Within fifteen (15) days after Landlord's receipt of Tenant's sublease request, together with the other information required under this Article 13, Landlord shall notify Tenant in writing whether or not Landlord approves the proposed sublease. If Landlord fails to respond to Tenant within such fifteen (15) day period, then Landlord shall be deemed to have consented to the same. In the event Landlord disapproves such proposed sublease, Landlord shall set forth in reasonable detail Landlord's reasons therefor in its notice given to Tenant disapproving such proposed sublease.
Tenant agrees to furnish Landlord such information in addition to the information set forth in the Offer Notice as Landlord may reasonably request in connection with the proposed sublease or assignment.
13.6 CONSENT TO ASSIGNMENT; LANDLORD MAY COLLECT RENT FROM ASSIGNEE. If Landlord does not exercise its option provided for in Section 13.4 with respect to a proposed assignment of this Lease, Tenant shall not have the right to proceed with such assignment without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed provided the conditions of Section 13.5 shall apply, insofar as applicable, to an assignment of this Lease.
Within thirty (30) days after Landlord's receipt of Tenant's assignment request, together with the other information required under this Article 13, Landlord shall notify Tenant in writing whether or not Landlord approves the proposed assignment. If Landlord fails to respond to Tenant within such period, then Landlord shall be deemed to have consented to the same. In the event Landlord disapproves such proposed assignment, Landlord shall set forth in reasonable detail Landlord's reasons therefor in its notice given to Tenant disapproving such proposed assignment.
If this Lease shall be assigned, or if the Premises or any part thereof be sublet or occupied by any person or persons other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection of rent shall be deemed a waiver of the covenants in this Article, nor shall it be deemed acceptance by Landlord of the assignee, subtenant or occupant as a tenant, or a release of Tenant from the full performance by Tenant of all the terms, conditions and covenants of this Lease.
13.7 ASSUMPTION OF LEASE. Each permitted assignee or transferee shall assume and be deemed to have assumed the obligations of Tenant under this Lease to be performed, or arising or accruing, on and after the effective date of such assignment or transfer and shall be and remain liable jointly and severally with Tenant for the payment of Annual Fixed Rent and Additional Rent, and for the due performance of all the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the Lease Term. No assignment shall be binding on Landlord unless such assignee or Tenant shall deliver to Landlord a duplicate original of the instrument of assignment which contains a covenant of assumption by the assignee of all of the obligations aforesaid and shall obtain from Landlord the aforesaid written consent, prior thereto. No assignment in whole or in part of this Lease shall release Tenant or any assignee of Tenant of its continuing liability under this Lease, unless expressly so agreed in writing by Landlord. Tenant shall reimburse Landlord on demand for any costs that may be incurred by Landlord in connection with any such assignment, including, without limitation, costs of the nature described in Section 13.5(j).
13.8 TENANT'S INDEMNIFICATION. If Landlord shall fail or refuse to give its consent to any proposed assignment or sublease as required by this Lease, or if Landlord shall exercise any of its options set forth in Sections 13.3 and 13.4, Tenant shall indemnify, defend and hold harmless Landlord, its members, managers, their agents, employees, officers and contractors, from and against any and all loss, liability, costs and expenses (including, without limitation, reasonable attorneys' fees) asserted against, imposed upon or incurred by Landlord by reason of any claims made against Landlord by the proposed assignee or sublessee or by any brokers, finders or other persons for commissions or other compensation in connection with the proposed assignment or sublease; provided, however, that Tenant shall not indemnify Landlord against any broker's, finder's, or other person's commissions arising out of a transaction between Landlord and the proposed assignee or subtenant provided by Tenant, if Landlord has exercised any of its options set forth in Sections 13.3 or 13.4.
13.9 TIME LIMITATION; AMENDMENTS. If Landlord grants its consent to an assignment or sublease and such assignment or sublease does not become effective for any reason within sixty (60) days after the granting of such consent, or if such assignment or sublease is modified or amended in any material way prior to its becoming effective (except with respect to an Offer Notice made pursuant to Section 13.2.2 above, as permitted by Section 13.2.3 above), then and in either such event Landlord's consent shall be deemed to have been withdrawn and Tenant shall not have the right to assign this Lease or to sublease all or any portion of the Premises without once again complying with all of the provisions and conditions of Sections 13.1, 13.2, 13.3, 13.4, 13.5 and 13.6. In no event shall Tenant agree to any material modification or amendment of any sublease to which Landlord has consented, without Landlord's prior written consent, which shall not be unreasonably withheld or delayed.
13.10 ADDITIONAL RENT DUE UPON ASSIGNMENT OR SUBLETTING. If Landlord shall not exercise any of its options set forth in Sections 13.3 and 13.4 and shall give its consent to any assignment of this Lease or to any sublease, then except as provided in Section 13.13, Tenant shall, as consideration therefor, pay to Landlord as Additional Rent the following amounts, reduced (but not below zero) by the actual Transaction Expenses (as hereafter defined) incurred by Tenant in connection with such subletting, such expenses to be amortized over the term of the sublease with interest at the Lease Interest Rate:
(a) in the case of any assignment, an amount equal to fifty (50%) percent of all sums and other considerations paid to or for the benefit of Tenant by the assignee for or by reason of such assignment of Tenant's leasehold interest; or
(b) in the case of a sublease, fifty (50%) percent of the excess, if any, of (i) any rents, additional charges or other consideration payable under the sublease or any agreement relating thereto to or for the benefit of Tenant by the subtenant over (ii) the rents accruing during the term of the sublease in respect of and allocable to the subleased space pursuant to the terms of this Lease. Amounts due to Landlord pursuant to this Section 13.10 shall be paid to Landlord as Additional Rent at the time such payments are payable by the assignee or subtenant to Tenant and whether or not such payments are made.
"Transaction Expenses" shall mean the actual and reasonable out-of-pocket expenses incurred by Tenant in connection with such assignment or subletting (but only to the extent that such expenses do not exceed the amounts being offered to tenants in the Boston Central Business District market for premises of similar size and leases for similar lease terms) for (i) attorneys' fees, (ii) brokerage or leasing commissions to an independent third party broker, (iii) marketing and advertising costs, (iv) tenant improvement costs, construction allowances, free rent, moving expenses to the extent paid to the subtenant or assignee, and other tenant inducements, (v) expenses incurred to investigate the creditworthiness and suitability of the subtenant or assignee, (vi) fees of any consulting experts retained in connection with such sublet or assignment (e.g., architects and/or engineers to review plans and specifications, the fees of expediters, etc.) and reasonable disbursements associated therewith, (vii) any amounts payable to Landlord pursuant to Section 13.5(j) or Section 13.7 in connection with such sublease or assignment and (viii) any sales and/or transfer taxes payable by Tenant in connection with such sublease or assignment.
13.11 LIABILITY NOT DISCHARGED. The joint and several liability of Tenant and any assignee or successor of Tenant under this Lease, or any guarantor of Tenant's obligations under this Lease, shall not be discharged, released or impaired in any respect by any agreement or stipulation made by Landlord modifying any of the obligations contained in this Lease, or by any waiver or failure by Landlord to enforce any of the obligations of this Lease, but in no event shall Tenant's or Guarantor's continued liability exceed what its continuing liability would have been had the Lease not been modified except for those modifications, if any, which were consented to by Tenant.
13.12 EFFECT OF LISTING OF NAMES. The listing of any name other than Tenant on the door of the Premises, on the Building directory or otherwise shall not operate to vest any right or interest in this Lease or in the Premises in any other person or entity, nor shall such listing be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or any portion thereof or to the use or occupancy of the Premises or any portion thereof by others.
13.13 EXCEPTIONS TO SECTIONS 13.3, 13.4 AND 13.10.
(a) Landlord waives its right to underlet, as provided in Section 13.3, with respect to up to three hundred thousand (300,000) Rentable Square Feet of the Premises in the aggregate proposed to be sublet by Tenant from time to time, other than to Affiliates of Tenant, which comply with the requirements of Section 13.1(b), pursuant to one or more Offer Notices.
(b) Landlord waives its right to terminate this Lease, as provided in Section 13.4 (y), with respect to up to three hundred thousand (300,000) Rentable Square Feet of the Premises in the aggregate proposed to be sublet by Tenant from time to time, other than to Affiliates of Tenant, which comply with the requirements of Section 13.1(b), pursuant to one or more Offer Notices.
(c) Landlord waives its right to receive Additional Rent as provided in Section 13.10, solely with respect to rent or other consideration payable to Tenant by a subtenant, with respect to any period prior to the fifth (5th) Lease Anniversary Date.
(d) Landlord waives its right to receive Additional Rent as provided in Section 13.10, solely with respect to an assignment or subletting to Affiliates of Tenant which complies with the requirements of Section 13.1(b).
(e) With respect to an assignment or subletting to Affiliates of Tenant which complies with the requirements of Section 13.1(b), Landlord also waives its right to underlet as provided in Section 13.3, and waives its right to terminate this Lease as provided in Section 13.4(y).
13.14 RECAPTURE OF RETAIL SPACE. If in response to an Offer Notice from Tenant, Landlord terminates this Lease pursuant to Section 13.4 as to the Retail Space (or applicable portion thereof), then Operating Expenses thereafter attributable to Retail Space (or applicable portion thereof) shall be excluded from Operating Expenses, and Base Operating Expenses shall be reduced by the product of Sixteen ($16.00) Dollars and the portion or all of the Retail Space (or applicable portion thereof) affected by the termination. If Landlord underlets Retail Space (or a portion thereof) pursuant to Section 13.3, no change in Base Operating Expenses shall be made, the Operating Expenses attributable to the Retail Space shall not be excluded from Operating Expenses, and the sublease(s) shall set forth the responsibilities for payment of Excess Operating Expenses attributable to the space so subleased.
ARTICLE 14
NO LIABILITY OR REPRESENTATIONS BY LANDLORD; FORCE MAJEURE
14.1 NO LIABILITY.
(a) Subject to Sections 11.3 and 11.9, neither Landlord nor its partners, members, managers, agents or employees shall be liable for (i) any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft; (ii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks in or from any part of the Building or the Property or from the pipes, appliances or plumbing or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature, unless caused by or due to the negligence or willful misconduct of Landlord, its agents, servants or employees; nor shall Landlord, nor its partners, members managers, agents or employees be liable for any such damage caused by other tenants or persons in the Building or caused by operations in construction of any private, public or quasi-public work; (iii) subject to Landlord's repair obligations provided in Section 7.1, any latent defect in the Premises, the Building or other improvements on the Property; or (iv) any injury or damages for which Tenant is reimbursed under its insurance policies.
(b) If at any time any windows of the Premises are temporarily or permanently closed, darkened or bricked up as a result of causes beyond Landlord's reasonable control, or are temporarily closed or darkened by Landlord, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction.
(c) Landlord shall have no responsibility or liability for the ventilating conditions and/or temperature of the Premises during the hours or days Landlord is not required or requested to furnish heat, ventilation or air-conditioning pursuant to Exhibit D or pursuant to Sections 14.3 or 20.12, Landlord having informed Tenant that the windows of the Premises and the Building may be sealed, and that the Premises may become uninhabitable and the air therein may become unbreathable during such times. Insofar as air temperature and ventilation are concerned, any use or occupancy of the Premises during the hours or days Landlord is not so required or requested to, or pursuant to Section 14.3 or 20.12 does not furnish heat, ventilation or air-conditioning to the Premises shall be at the sole risk, responsibility and hazard of Tenant. Such condition of the Premises shall not constitute nor be deemed to be a breach or a violation of this Lease or of any provision hereof, nor shall it be deemed an eviction, nor shall Tenant claim or be entitled to claim any abatement of rent nor make any claim for any damages or compensation by reason of such condition of the Premises.
(d) Except as otherwise provided in Section 12.8 with respect to an award with respect to an eminent domain taking, Tenant shall neither assert nor seek to enforce any claim against any of Landlord's assets other than Landlord's interest in the Land and the Building (including the rents therefrom, and any insurance or condemnation proceeds related thereto, but subject to any priority given to a lender of Landlord), and Tenant agrees to look solely to such interest for the satisfaction of any liability of Landlord under this Lease, it being specifically agreed that neither Landlord, nor any successor holder of Landlord's interest hereunder, nor any general or limited partner of Landlord or any such successor (if Landlord or such successor is a partnership), nor any shareholder, director or officer of Landlord or any such successor (if Landlord or such successor is a corporation), nor any member or manager of Landlord or any such successor (if Landlord or such successor is a limited liability company), nor any trustee of Landlord or any such successor (if Landlord or such successor is a trust) shall ever be personally liable for any such claim or liability.
14.2 NO REPRESENTATIONS BY LANDLORD. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except for those expressly set forth in this Lease and the Exhibits annexed hereto or in any other written agreement which may be made between the parties hereto concurrently with the execution and delivery of this Lease and which shall expressly refer to this Lease. No rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease.
14.3 FORCE MAJEURE.
(a) This Lease and the obligation of Tenant to pay rent hereunder and perform and comply with all of the other covenants and agreements hereunder on the part of Tenant to be performed and complied with shall in no way be affected, impaired or excused because of Landlord's delay or failure to perform or comply with any of the covenants or provisions hereunder on the part of Landlord to be performed or complied with, or because Landlord is unable to fulfill any of its obligations under this Lease or is unable to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures, if Landlord is prevented or delayed from so doing by Force Majeure (as hereinafter defined). Landlord shall in each instance exercise reasonable diligence to effect performance when and as soon as possible or practicable.
(b) Tenant shall not be deemed to have failed or delayed in making any required repairs or replacements or performing any non-monetary obligations hereunder if Tenant is unable to make or is delayed in making any such repair or replacement or performing any such non-monetary obligation by reason of Force Majeure. Tenant shall in each instance exercise reasonable diligence to effect performance when and as soon as possible or practicable. In no event or under any circumstance shall any such delay or failure in making such repairs and replacements or performing such non-monetary obligations relieve Tenant of any of its monetary obligations under the terms of this Lease.
(c) "Force Majeure" shall mean prevention or delay or inability to perform by either party (i) by reason of strikes or labor troubles, (ii) by reason of governmental preemption in connection with a national emergency, (iii) by reason of any rule, order or regulation of any government agency or any department or subdivision thereof, whether in connection with a drought, energy shortage or other like event or otherwise, (iv) by reason of the conditions of supply and demand which have been or are affected by war or other emergency, (v) by reason of fire, casualty or other acts of God, including, without limitation, floods, hurricanes or other natural disasters, or materially adverse weather conditions, or (vi) by reason of any other cause whatsoever beyond the reasonable control of Landlord or Tenant, as applicable. It is specifically understood that with respect to any party seeking relief from performance by Force Majeure, the actions or failures to act of the employees, contractors or subcontractors ("Responsible Persons") are deemed to be within the reasonable control of such party, unless such non-performance by the employee, contractor or subcontractor is itself caused by Force Majeure. It is further understood that a party shall not be entitled to relief from performance if the delay or inability to perform was caused by or is the fault of a Responsible Person, such as an unfair labor practice resulting in a strike, or a violation of law resulting in an order of a governmental agency. Financial difficulties or lack of funds on the part of Landlord or Tenant shall not constitute Force Majeure.
The following limitation on Force Majeure shall apply only from and after completion of all of Landlord's Work, Tenant's Work, receipt of a C/O for the entire Building, and initial occupancy of all of the Office Space in the Building. After such date, neither Landlord nor Tenant shall be entitled to relief from performance by reason of Force Majeure if the delay or inability to perform could be mitigated or overcome by the expenditure of money or utilization of alternate means of performance, if such expenditure would be reasonable under the circumstances. By way of illustration, a delay caused by a city-wide labor strike or a fire at the manufacturer of a custom piece of equipment, which could not be obtained elsewhere within the same time schedule would be excusable as Force Majeure, but if the effects of such strike could be avoided by hiring a different contractor, or if the piece of equipment could be obtained elsewhere reasonably within the same time schedule, but at an increased but reasonable cost, such strike or inability to obtain the custom piece of equipment would not be deemed to be Force Majeure, unless the excess cost would be an unreasonable expenditure under the circumstances.
ARTICLE 15
ENTRY, RIGHT TO CHANGE PUBLIC PORTIONS OF THE BUILDING
15.1 LANDLORD'S RIGHT OF ENTRY. Landlord shall have the right, without being deemed thereby to evict Tenant from the Premises or any part thereof or otherwise to violate any of the terms of this Lease or any of Tenant's rights hereunder,
(a) to enter and pass through the Premises or any part or parts thereof,
(i) to examine the Premises and to show them to the fee owners, Overlandlord or Mortgagee (both as hereafter defined) and to prospective purchasers, mortgagees or lessees of the Building as an entirety,
(ii) for the purpose of performing such maintenance and making such repairs or changes in or to the Premises or in or to the Building or its facilities as may be provided for or permitted by this Lease or as may be mutually agreed upon by the parties or as Landlord may be required to make by laws and requirements of public authorities,
(iii) at such times as such entry shall be required by circumstances of emergency affecting the Premises or the Building, provided that in such event, if practicable, Landlord or its agents shall be accompanied by a designated representative of Tenant or a member of the police, fire, water or other municipal department concerned or of a recognized protection company or of a public utility which is concerned, and
(iv) during the last eighteen (18) months of the Lease Term to exhibit the Premises to prospective tenants thereof, and
(b) to take all materials into and upon the Premises that may be required for any repairs, changes or maintenance and to store the same in locations therein reasonably acceptable to Tenant, for a reasonable time, as reasonably required in connection with the completion of such repairs, changes or maintenance.
Landlord's rights under this Section shall be exercised in such manner as to create the least practicable interference with Tenant's use of the Premises; provided, however, that the foregoing shall not obligate Landlord to perform any work outside of Operating Hours except as provided in Section 7.5.
Tenant shall have the right, by written notice to Landlord, to designate portions of the Premises as "Secured Areas" and as to such areas, Landlord, its agents, employees, contractors and invitees shall not, except in emergencies, have access unless accompanied by a representative of Tenant. Tenant agrees to furnish such a representative promptly upon request. In emergencies, Landlord shall use whatever efforts are practicable under the circumstances to notify Tenant before entering Tenant's Secured Areas.
Except in the case of an emergency which makes notice to Tenant impractical, any entry on the Premises by Landlord pursuant to this Section 15.1 shall be made after reasonable notice to Tenant.
15.2 LANDLORD'S RIGHT TO CHANGE ENTRIES, ETC. Landlord shall have the right at any time without thereby creating any actual or constructive eviction or incurring any liability to Tenant therefor, and without abatement in rent, to change the arrangement or location of lobbies, entrances, passageways, doors, doorways, stairways, elevators, corridors and other like portions of the Building outside of the Premises, provided that (x) such change does not interfere with Tenant's access to the Premises, decrease the area of the Premises, create an unreasonable configuration, or otherwise materially adversely affect Tenant's use of the Premises, (y) unless required by law or insurance requirements, no changes shall be made by Landlord in entrances, doorways or corridors on the floors on which the Premises are located without Tenant's express consent, which shall not be unreasonably withheld, and (z) Landlord shall consult with Tenant before making any changes in the immediate vicinity of the Premises which could reasonably be anticipated to jeopardize the security of the Premises for the conduct of Tenant's business.
15.3 EXCAVATION. In the event that an excavation or any construction should be made for building or other purposes upon land adjacent to the Building, or should be authorized to be made, Tenant shall, if necessary, afford to the person or persons causing or authorized to cause such excavation or construction, license to enter upon the Premises for the purpose of doing such work as shall reasonably be necessary to protect or preserve the wall or walls of the Building, or the Building, from injury or damage and to support them by proper foundations, pinning and/or underpinning, or otherwise. The restrictions on access by Landlord to Secured Areas provided by Section 15.1 of this Lease shall be applicable to any entry under this Section 15.3.
ARTICLE 16
ELECTRICITY
16.1 TENANT TO PURCHASE ELECTRICITY.
(a) Landlord agrees that, prior to the Commencement Date, risers, bus ducts, feeders and wiring to furnish electric service to the Premises will be installed in the Building by Landlord in accordance with the provisions of Schedule C-1 (as to the service capacity of electric risers). It is understood that main service transformers, panel boxes and meters are furnished and installed in the Building by and at the expenses of the public utility company which provides electrical service to the Building, and accordingly, Landlord's obligation hereunder with respect thereto shall be limited to using reasonable efforts to cause such utility to install and, when appropriate, to maintain such transformers and meters.
(b) Tenant shall obtain and pay for Tenant's entire separate supply of electric current to the Premises by direct application to and arrangement with the public utility company servicing the Building, which current shall also serve Tenant's supplemental HVAC units in the Premises. Notwithstanding the foregoing, Tenant shall not contract directly with the public utility company if such contract would impair or otherwise affect Landlord's ability to contract for electric services for the Building at competitive rates, or would increase the rates available to Landlord for electric services for the Building.
16.2 LANDLORD NOT LIABLE. Landlord shall not in any way be liable or responsible to Tenant for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of electric service is changed or interrupted or is no longer available or suitable for Tenant's requirements unless due to the negligence or willful misconduct of Landlord, its agents, employees or contractors.
16.3 TENANT NOT TO OVERLOAD CIRCUITS. In no event shall Tenant use or install any fixtures, equipment or machines the use of which in conjunction with other fixtures, equipment and machines in the Premises would result in an overload of the electrical circuits servicing the Premises.
16.4 TENANT NOT TO EXCEED CAPACITY; LIGHT BULBS. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the then existing feeders to the Building or the risers or wiring installation. Landlord shall furnish, install and replace, as required, all lighting tubes, lamps, bulbs and ballasts required in the Premises at Tenant's sole cost and expense, provided that Landlord's charges therefor shall be in accordance with Landlord's regular rates in effect from time to time, and not materially in excess of the rates for similar materials and services provided by landlords in other first class office buildings in the Boston Central Business District. At Tenant's election, Tenant may furnish lighting tubes, lamps, bulbs and ballasts required in the Premises at Tenant's sole cost and expense, provided that all of such items shall be consistent in color, quality and aesthetics with the items which had previously been provided by Landlord. All lighting tubes, lamps, bulbs and ballasts so installed shall become Landlord's property upon the expiration or sooner termination of this Lease.
16.5 ALTERNATE ELECTRIC SERVICE PROVIDER.
(a) If Tenant desires to have electricity for the Premises furnished by a provider (an "ASP") other than the service provider from whom Landlord from time to time shall purchase electricity for the common areas of the Building, Tenant shall not enter into any agreement with any such ASP, or give such ASP permission to install lines or other equipment without the Landlord's prior written consent in each instance. Such consent shall not be unreasonably withheld or delayed, provided that it shall not be unreasonable in any case for Landlord to require: (i) that Landlord shall not be required to incur any expense in connection with any aspect of the service to be provided by Tenant's ASP, including without limitation, the cost of installation, service and/or removal of equipment, fixtures or materials associated therewith; (ii) that prior to the commencement of any work in the Building by the ASP, Landlord shall have been furnished with information (acceptable to Landlord in its sole discretion, reasonably exercised) as to the ASP's financial condition, business reputation and insurance coverage; (iii) that Landlord shall have determined that there is sufficient space in the Premises and in any common electrical closets (for which Landlord may charge a reasonable fee) or other facilities for the ASP to install, maintain and repair its equipment, and that the installation, maintenance and repair of such equipment shall not have any materially adverse effect on the Building, the Property or on the property or facilities of any other tenant or occupant of any part thereof; (iv) that Tenant and/or the ASP shall have obtained all necessary permits, licenses and approvals; and (v) that Landlord shall have the right to have access to any equipment placed in the Building for purposes of inspection and ensuring compliance herewith. Tenant shall be solely responsible for any and all costs and expenses incurred in connection with the installation, use, maintenance, repair and removal of such equipment and shall indemnify, defend and hold Landlord harmless from and against any loss, cost, damage or expense suffered by Landlord as a result of Tenant's arrangements with its ASP. Landlord shall have no liability for the service to be provided by any ASP, including without limitation any loss or interruption of service or any damages to Tenant or its business arising therefrom, unless such loss or interruption of service or damages were caused by the negligence or willful misconduct of Landlord, its agents, employees or contractors.
(b) If Tenant reasonably believes that Operating Expenses for the Building will be materially reduced if electricity for the entire Building were provided by an ASP, and Tenant desires to have electricity for the entire Building furnished by an ASP, Tenant shall notify Landlord setting forth the terms and conditions upon which such ASP is willing to provide service to the Building. Landlord shall give reasonable consideration to the provision of service by such ASP, provided (i) that Landlord shall not be required to incur any expense in connection with any aspect of the service to be provided by the ASP, including without limitation, the cost of installation, service and/or removal of equipment, fixtures or materials associated therewith; (ii) that prior to the commencement of any work in the Building by the ASP, Landlord shall have been furnished with information (acceptable to Landlord in its sole discretion) as to the ASP's financial condition, business reputation and insurance coverage; (iii) that Landlord shall have determined that there is sufficient space in the Building for the ASP to install, maintain and repair its equipment, and that the installation, maintenance and repair of such equipment shall not have any detrimental effect on the Building, the Property or on the property or facilities of any other tenant or occupant of any part thereof; (iv) that Tenant and/or the ASP shall have obtained all necessary permits, licenses and approvals; and (v) that Landlord shall have the right to have access to any equipment placed in the Building for purposes of inspection and ensuring compliance herewith. Tenant shall be solely responsible for any and all costs and expenses incurred in connection with the installation, use, maintenance, repair and removal of such equipment and shall indemnify, defend and hold Landlord harmless from and against any loss, cost, damage or expense suffered by Landlord as a result of Tenant's arrangements with its ASP. Landlord shall have no liability for the service to be provided by any ASP, including without limitation any loss or interruption of service or any damages to Tenant or its business arising therefrom, unless such loss or interruption of service or damages were caused by the negligence or willful misconduct of Landlord, its agents, employees or contractors.
ARTICLE 17
SUBORDINATION; ASSIGNMENT OF RENTS
17.1 SUBORDINATION TO MORTGAGES, ETC. This Lease is and shall be subject and subordinate to any ground or underlying lease (collectively called "Underlying Lease"), which may hereafter affect the Building and/or the Land, and to any amendment, modification, renewal or extension of any such Underlying Lease. Landlord represents that as of the date of execution of this Lease, there is no Underlying Lease which affects the Land and/or the Building, and there shall not be such an Underlying Lease which affects the Land and/or the Building prior to the time that a notice of lease with respect to this Lease is recorded in the Suffolk County Registry of Deeds. This Lease also is and shall be subject and subordinate to all mortgages which may now or hereafter affect any Underlying Lease, the Land and/or the Building, to each and every advance made thereunder and to all renewals, modifications, amendments, consolidations, replacements or extensions thereof. The landlord or lessor under any Underlying Lease is referred to herein as an "Overlandlord" and the secured party under any such mortgage is referred to herein as a "Mortgagee". This clause shall be self-operative and no further instrument of subordination shall be required by any Overlandlord or Mortgagee, provided that Landlord shall provide a non-disturbance and attornment agreement from such Overlandlord or Mortgagee as required by Section 17.6. In confirmation of such subordination, Tenant shall promptly execute any certificate or instrument of subordination that Landlord may reasonably request, as long as such instrument of subordination complies with the requirements of Section 17.6 of this Lease. Landlord shall reimburse Tenant on demand for any costs that may reasonably be incurred by Tenant in connection with the execution of such instrument of subordination, including, without limitation, reasonable legal costs incurred in connection therewith.
17.2 RIGHTS OF MORTGAGEES, ETC. In the event of any act or omission by Landlord which would or may give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant will not exercise any such right until:
(a) it has given written notice of any such act or omission to Landlord, and to any Overlandlord or Mortgagee whose names and addresses have previously been furnished to Tenant, and
(b) a reasonable period of time for remedying such act or omission shall have elapsed following such giving of notice during which the parties to whom such notice has been given, or any of them, have not commenced with reasonable diligence the remedying of such act or omission.
17.3 MODIFICATIONS REQUIRED BY LENDERS. If, in connection with obtaining temporary or permanent financing for the Land and/or Building, or any Underlying Lease, any lender shall request reasonable modifications of this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer the execution of an agreement of modification of this Lease provided such modifications do not increase the monetary obligations of Tenant hereunder, or materially adversely affect the leasehold interest hereby created, or Tenant's rights and obligations hereunder. Landlord shall reimburse Tenant on demand for any costs that may reasonably be incurred by Tenant in connection with the execution of an agreement of modification of this Lease so required by any lender, including, without limitation, reasonable legal costs incurred in connection with the granting of any requested consent.
17.4 ASSIGNMENT OF LEASE TO MORTGAGEE, ETC. With reference to any assignment by Landlord of Landlord's interest in this Lease, or the rents payable hereunder, conditional in nature or otherwise, which assignment is made to an Overlandlord or Mortgagee, Tenant agrees:
(a) that the execution thereof by Landlord, and the acceptance thereof by such Overlandlord or Mortgagee, shall never be treated as an assumption by such Overlandlord or Mortgagee of any of the obligations of Landlord hereunder, unless such Overlandlord or Mortgagee shall, by notice sent to Tenant, specifically otherwise elect; and
(b) that, except as aforesaid, such Overlandlord, or Mortgagee shall be treated as having assumed Landlord's obligations hereunder only, in the case of a Mortgagee, upon foreclosure by such Mortgagee, or if title passes by a deed in lieu of foreclosure, and the taking of possession of the Premises, or the taking of possession by such Mortgagee as a mortgagee in possession, or, in the case of an Underlying Lease, the assumption of Landlord's position hereunder by such Overlandlord, any such assumption in each such case to be limited as set forth in Section 14.1(d). In no event shall the acquisition of title to the Building and/or the Land by a purchaser which, simultaneously therewith, leases the entire Building and/or the Land back to the seller thereof be treated as an assumption, by operation of law or otherwise, of Landlord's obligations hereunder, but Tenant shall look solely to such seller-lessee, and its successors from time to time in title, for performance of Landlord's obligations hereunder. For all purposes, such seller-lessee, and its successors in title, shall be the landlord hereunder unless and until Landlord's position shall have been assumed by such purchaser- lessor.
17.5 SUBORDINATION OF MORTGAGE, ETC., TO LEASE. Notwithstanding anything to the contrary set forth in this Article 17, if any Overlandlord or Mortgagee shall file in the Suffolk County Registry of Deeds an instrument in which such Overlandlord or Mortgagee shall subordinate its Underlying Lease or mortgage to this Lease, then and in such event such Underlying Lease or mortgage shall be subordinate to this Lease and the provisions of this Article 17, insofar as they would subordinate this Lease to that particular Underlying Lease or mortgage, shall be of no further force or effect.
17.6 NON-DISTURBANCE AND ATTORNMENT.
(a) Within a reasonable time after execution of this Lease, Landlord shall obtain an agreement in substantially the form of Exhibit J attached hereto, in favor of Tenant from the holder of any existing Mortgage and from the landlord under any existing Underlying Lease, which provides substantially that so long as this Lease shall be in full force and effect (1) Tenant shall not be named or joined in any action or proceeding to terminate the Underlying Lease by reason of Landlord's default, as tenant thereunder, or to foreclose the mortgage in question by reason of Landlord's default thereunder, (2) no such termination or foreclosure, or any action or proceeding brought in pursuance thereof, or any deed in lieu of foreclosure, shall cause a cancellation or termination of this Lease, and (3) if such Overlandlord or Mortgagee shall become the owner in fee of the Land and Building or, in the case of the Mortgagee, the assignee of the Underlying Lease or the lessee of any other lease given in substitution therefor, or if the Land, Building and/or such Underlying Lease shall be sold as a result of any action or proceeding to foreclose such mortgage, or if title passes by a deed in lieu of foreclosure, then provided that Tenant shall recognize and attorn to the Mortgagee or Overlandlord or any of their successors or assigns, this Lease shall continue in full force and effect as a direct lease between Tenant and the then owner of the Land and Building or the then lessee of such Underlying Lease, or the lessee of any other lease given in substitution therefor, or such purchaser of the Land, Building and/or Underlying Lease, as the case may be, upon all of the terms, provisions, conditions and obligations of this Lease, except that such owner, lessee or purchaser (other than an entity which controls, is controlled by or is under common control with, Landlord) shall not be (i) bound by any prepayment of rent which Tenant might have paid for more than the current month to any prior landlord (including Landlord) except for estimated payments of Excess Operating Expenses, (ii) bound by any amendment or modification of this Lease made without the consent of such Overlandlord or Mortgagee which would materially increase Landlord's obligations, materially decrease Tenant's obligations, or reduce the rent or the Term, (iii) liable for any act or omission of any prior landlord (including Landlord) under this Lease, except any such act or omission which either involves the physical condition of the Premises and is continuing at the time of such succession, or as to which such Overlandlord or Mortgagee shall have been given notice and an opportunity to cure, (iv) subject to any offsets or defenses of any prior landlord (including Landlord), except (A) as to any failure of Landlord to perform on account of which failure a claim, defense or counterclaim is asserted (and notice thereof is given to Overlandlord or Mortgagee and an opportunity to cure, (B) as to a continuing right to an abatement of rent on account of a casualty or taking or a failure under Section 7.4 of the Lease, and (C) a right of set off for failure of Landlord to pay undisputed amounts owed to Tenant in accordance with the provisions of Section 20.14, of the Lease (v) liable for performance of any initial work or installations which are required to be made by Landlord under this Lease, except for the funding of Landlord's Contribution as required by Exhibit C, (vi) liable for the return of any security deposit provided by Tenant, unless such security deposit shall have been received in hand by such Overlandlord or Mortgagee, (vii) obligated to repair the Premises or the Building, or any part thereof, in the event of damage beyond such repair as can reasonably be accomplished from the net proceeds of insurance actually made available to such Overlandlord or Mortgagee, provided that in the event such Overlandlord or Mortgagee does not restore the Premises or Building, Tenant shall have the right to exercise its termination right under Section 12.1 hereof, or (viii) obligated to repair the Premises or the Building, or any part thereof, in the event of partial condemnation beyond such repair as can reasonably be accomplished from the net proceeds of any award actually made available to such Overlandlord or Mortgagee, as consequential damages allocable to the part of the Premises or Building not taken, provided that if such Overlandlord or Mortgagee does not restore the Premises or the Building, Tenant shall have the right to exercise its termination right under Section 12.7.
(b) Anything in this Article 17 to the contrary notwithstanding, this Lease shall not be subordinate to any future Underlying Lease or future Mortgage, unless and until there shall first be delivered to Tenant, for execution, a recognition or nondisturbance and attornment agreement executed by the holder of such Mortgage or Landlord under such Underlying Lease, substantially in the form described in Section 17.6 (a) above with respect to existing Mortgages or any existing Underlying Lease.
ARTICLE 18
CERTAIN ADDITIONAL TENANT COVENANTS
In addition to the covenants contained elsewhere in this Lease, Tenant covenants, during the Lease Term and for such further time as Tenant occupies any part of the Premises:
(a) to pay when due all Annual Fixed Rent and Additional Rent and all charges for utility services rendered to the Premises and service inspections therefor and, as further Additional Rent, all charges for additional and special services rendered pursuant to Exhibit D;
(b) to keep the Premises equipped with all safety appliances (including without limitation fire extinguishers) required by law or ordinance or any other regulation of any public authority, to procure all licenses and permits so required because of any use made of the Premises or any portion thereof by Tenant, and, if requested by Landlord, to do any work so required because of such use, it being understood that the foregoing provisions shall not be construed to broaden in any way the uses to which Tenant is permitted to make of the Premises under the terms of this Lease;
(c) not to place a load upon any floor in the Premises exceeding the floor load per square foot of area which such floor was designed to carry and which is allowed by law; and not to move any safe, vault or other heavy equipment in, about or out of the Premises except in such manner and at such time as Landlord shall in each instance expressly authorize. Tenant's business machines and mechanical equipment shall be placed and maintained by Tenant at Tenant's expense in settings sufficient to absorb and prevent vibration or noise that may be transmitted to the Building structure or to any other space in the Building;
(d) to pay when due all taxes which may be imposed upon personal property (including, without limitation, fixtures and equipment) in the Premises by whomever assessed;
(e) to observe and comply with, and to cause its servants, employees, agents, visitors, licensees and sublessees to comply with, the Rules and Regulations set forth in Exhibit E hereto (as such Rules and Regulations may, from time to time, be amended in accordance with Section 20.13 hereof);
(f) to cause all of the windows in the Premises to be kept closed; to keep entirely unobstructed at all times all of the vents, intakes, outlets and grills; and to comply with and observe all reasonable regulations and requirements prescribed by Landlord for the proper functioning of the heating, ventilating and air-conditioning system; and
(g) not to, either directly or indirectly, use any contractors and/or labor and/or materials if the use thereof would or may create any labor dispute with other contractors and/or labor and/or materials engaged or used by Tenant or Landlord or others in the construction, maintenance and/or operation of the Building or any part thereof. This provision shall apply prior to, as well as during, the Lease Term.
ARTICLE 19
TENANT'S DEFAULT; LANDLORD'S REMEDIES
19.1 TENANT'S DEFAULT. This Lease and the Lease Term are subject to the limitation that Tenant shall be in default if, at any time during the Lease Term, any one or more of the following events (herein called an "Event of Default") shall occur:
(a) if Tenant shall fail to pay any installment of the Annual Fixed Rent, or any Additional Rent, or any part thereof, when the same shall become due and payable and such failure shall continue for five (5) days after notice thereof from Landlord to Tenant (provided that if Tenant shall have failed to pay any such installment or other charge or portion thereof when the same becomes due and payable two times during any Lease Year and Landlord shall in each case have given Tenant notice of such failure, then after such second time it shall be an Event of Default in the event Tenant thereafter during such Lease Year fails to pay any such installment or other charge or portion thereof on the date the same becomes due and payable, without notice (or, in the case of other charges which are payable on or subsequent to demand, further notice) from Landlord); or
(b) if the Premises shall become abandoned, meaning that Tenant has deserted the Premises without the intention to return, and has ceased to maintain or protect the same; or
(c) if Tenant's interest in this Lease shall devolve upon or pass to any person or entity, whether by operation of law or otherwise, and whether directly or indirectly, except as expressly permitted by Article 13 hereof, or
(d) if Tenant shall fail to perform or observe any term, covenant, or condition of this Lease (other than those specifically referred to in subparagraph (a) or (c) of this Section) on the part of Tenant to be performed or observed and such failure shall continue for thirty (30) days after notice thereof from Landlord to Tenant, or, if said default is curable but shall reasonably require longer than thirty (30) days to cure, if Tenant shall fail to commence to cure said default within thirty (30) days after receipt of notice thereof and/or fail continuously to prosecute the curing of the same to completion with due diligence, and in any event within such period of time as will prevent Landlord from being subjected to the risk of criminal liability or termination of any Underlying Lease or foreclosure of any mortgage; or
(e) if the estate hereby created shall be taken on execution or by other process of law; or
(f) (i) if Tenant shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or
(ii) if Tenant shall commence or institute any case, proceeding or other action (x) seeking relief on its behalf as debtor, or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (y) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or
(iii) if Tenant shall make a general assignment for the benefit of creditors; or
(iv) if any case, proceeding or other action shall be commenced or instituted against Tenant (x) seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding- up, liquidation, dissolution, composition or other relief with respect to it or its debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (y) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, which either (1) results in any such entry of an order for relief, adjudication of bankruptcy or insolvency or such an appointment or the issuance or entry of any other order having a similar effect or (2) remains undismissed for a period of ninety (90) days; or
(v) if any case, proceeding or other action shall be commenced or instituted against Tenant seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its property which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within ninety (90) days from the entry thereof; or
(vi) if Tenant shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (ii), (iii), (iv) or (v) above; or
(vii) if a trustee, receiver or other custodian is appointed for any substantial part of the assets of Tenant which appointment is not vacated or effectively stayed within seven (7) Operating Days.
(g) If any event described in section 19.1(f) shall occur with respect to Guarantor.
19.2 TERMINATION.
(a) (i) If an Event of Default described in Section 19.1(f) or (g) hereof shall occur, or
(ii) if an Event of Default described in Sections 19.1(a),(b),(c),(d) or (e) shall occur and Landlord, at any time thereafter, at its option gives written notice to Tenant stating that this Lease and the Lease Term shall expire and terminate on the date specified in such notice, which date shall not be less than five (5) days after the giving of such notice, then this Lease and the Lease Term and all rights of Tenant under this Lease shall expire and terminate, as of the date on which the Event of Default described in clause (i) above occurred, or the date specified in the notice given pursuant to clause (ii) above, as the case may be, were the date herein definitely fixed for the expiration of the Lease Term (except that Tenant shall continue to be liable as hereinafter provided) and Tenant immediately shall quit and surrender the Premises.
(b) Anything contained herein to the contrary notwithstanding, if such termination shall be stayed by order of any court having jurisdiction over any proceeding described in Section 19.1(f) hereof, or by federal or state statute, then, following the expiration of any such stay, or if Tenant, or Tenant as debtor-in-possession or the trustee appointed in any such proceeding (being collectively referred to as "Tenant" only for the purposes of paragraphs (b) and (c) of this Section 19.2) shall fail to assume Tenant's obligations under this Lease within the period prescribed therefor by law or within one hundred twenty (120) days after entry of the order for relief or as may be allowed by the court, or, if Tenant shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on five (5) days notice to Tenant and upon the expiration of said five (5) day period this Lease shall cease and expire as aforesaid and Tenant shall immediately quit and surrender the Premises as aforesaid. Upon the termination of this Lease provided above, Landlord, without notice, may re-enter and repossess the Premises using such force for that purpose as may be necessary without being liable to indictment, prosecution or damages therefor and may dispossess Tenant by summary proceedings or otherwise.
(c) For the purposes of the preceding paragraph (b), adequate protection of Landlord's right, title and interest in and to the Premises, and adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, shall include, without limitation, the following requirements:
(i) that Tenant comply with all of its obligations under this Lease;
(ii) that Tenant pay to Landlord, on the first day of each month occurring subsequent to the entry of such order, or the effective date of such stay, a sum equal to the amount by which the Premises diminished in value during the immediately preceding monthly period, but, in no event, an amount which is less than the aggregate rent payable for such monthly period;
(iii) that Tenant continue to use the Premises in the manner required by this Lease;
(iv) that Landlord be permitted to supervise the performance of Tenant's obligations under this Lease;
(v) that Tenant pay to Landlord within thirty (30) days after entry of such order or the effective date of such stay, as partial adequate protection against future diminution in value of the Premises and adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, an additional security deposit in an amount acceptable to Landlord, which in no event shall be less than the equivalent of six (6) months of Annual Fixed Rent;
(vi) that Tenant has and will continue to have unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that sufficient funds will be available to fulfill the obligations of Tenant under this Lease;
(vii) that if Tenant assumes this Lease and proposes to assign the same (pursuant to Title 11 U.S.C. 365, or as the same may be amended) to any person who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to such court having competent jurisdiction over Tenant's estate, then notice of such proposed assignment, setting forth (x) the name and address of such person, (y) all of the terms and conditions of such offer and (z) the adequate assurance to be provided Landlord to assure such person's future performance under this Lease, including, without limitation, the assurances referred to in Title 11 U.S.C. 365(b)(3), as it may be amended, shall be given to Landlord by Tenant no later than thirty (30) days after receipt by Tenant of such offer, but in any event no later than ten (10) days prior to the date that Tenant shall make application to such court for authority and approval to enter into each assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept, or to cause Landlord's designee to accept, an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease; and
(viii) that if Tenant assumes this Lease and proposes to assign the same, and Landlord does not exercise its option pursuant to paragraph (vii) of this Section 19.2(c), Tenant hereby agrees that:
(A) such assignee shall have a net worth not less than the net worth of Tenant as of the Commencement Date, or such Tenant's obligations under this Lease shall be unconditionally guaranteed by a person having a net worth equal to Tenant's net worth as of the Commencement Date;
(B) such assignee shall not use the Premises except for general office purposes and subject to all the restrictions contained in Article 10 hereof;
(C) such assignee shall assume in writing all of the terms, covenants and conditions of this Lease; and
(D) in the event that the Annual Fixed Rent paid by such assignee is greater than the Annual Fixed Rent reserved hereunder, Tenant shall pay over to Landlord one-half of such difference; and
(E) if such assignee makes a lump-sum payment to Tenant or Tenant's trustee for the right to assume this Lease, Tenant or Tenant's trustee shall pay over to Landlord one-half of such payment,
(d) If, at any time, (i) Tenant shall comprise two (2) or more persons, or (ii) Tenant's obligations under this Lease shall have been guaranteed by any person other than Tenant, or (iii) Tenant's interest in this Lease shall have been assigned, the word "Tenant", as used in clause (f) of Section 19.1, shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under the Lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in said clause (f) shall be deemed paid as compensation for the use and occupation of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of rent or a waiver on the part of Landlord of any rights under this Section.
(e) The provisions of subdivisions (b) through (d) of this Section 19.2 apply only in respect of the circumstances described in subsection 19.1(f) and as such are not intended to constitute modifications of any of the provisions of Article 13 except in such circumstances.
19.3 RE-ENTRY; CONTINUED LIABILITY; RELETTING.
(a) If Tenant shall default in the payment of any installment of Annual Fixed Rent or any Additional Rent on any date on which the same becomes due and payable, and if such default shall continue for five (5) days after Landlord shall have given Tenant notice of such default, or if this Lease shall be terminated pursuant to or as provided in Section 19.2, Landlord and Landlord's agents and employees may immediately or at any time thereafter re-enter the Premises, or any part thereof in the name of the whole, either by summary dispossess proceedings or by any suitable action or proceeding at law or otherwise, without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any persons therefrom, to the end that Landlord may have, hold, possess and enjoy the Premises again.
(b) If this Lease is terminated or if Landlord shall re-enter the Premises as aforesaid, or in the event of the termination of this Lease, or of re-entry, by or under any proceeding or action or any provision of law by reason of an Event of Default hereunder on the part of Tenant, Tenant covenants and agrees forthwith that,
(i) the Annual Fixed Rent and Additional Rent shall become due thereupon and be paid by Tenant up to the time of such re-entry, dispossession and/or termination, together with such expenses as Landlord may incur for legal expenses, attorneys' fees and disbursements, brokerage, and/or putting the Premises in good order, or for preparing the same for reletting;
(ii) Landlord shall use reasonable efforts to relet the Premises, provided that Tenant shall have (A) surrendered possession of the Premises to Landlord, and (B) acknowledged in writing its continuing liabilities and obligations hereunder. Landlord may relet the Premises or any part or parts thereof, either in the name of Landlord or otherwise, (but shall have no obligation to do so, except as otherwise expressly provided above) for a term or terms, which may at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the Lease Term, and may grant concessions or free rent;
(iii) Tenant or the legal representatives of Tenant shall also pay Landlord, as liquidated damages, and not as a penalty, for the failure of Tenant to observe and perform Tenant's covenants herein contained, amounts equal to the Annual Fixed Rent and Additional Rent which would have been payable by Tenant had this Lease not been so terminated, or had Landlord not so reentered the Premises, such payments to be made upon the due dates therefor specified herein following such termination or re-entry and continuing until the Expiration Date; provided, however, that if Landlord shall relet the Premises (although it is under no obligation to do so), Landlord shall credit Tenant, up to the amount due from Tenant, with the net rent received by Landlord for such reletting after deducting from the first installments of such rent received the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Premises and in securing possession thereof, as well as the expenses of reletting, including, without limitation, legal expenses, attorneys' fees and disbursements, brokerage commissions, alteration costs, value of rent concessions, and other expenses incurred for keeping the Premises in good order or for preparing the same for reletting. Landlord and Tenant agree that Landlord's damages in the event of termination or re-entry are difficult to ascertain and that the liquidated damages provided for in this Section represent a reasonable estimate of Landlord's damages. Any suit brought to collect the amount of the aforesaid damages for any month or months shall not prejudice in any way the rights of Landlord to collect the damages for any subsequent month or months by a similar proceeding. Nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Lease Term would have expired if it had not been so terminated under or pursuant to Section 19.2, or under any provision of law, or had Landlord not re-entered the Premises.
(c) The terms "re-enter" and "re-entry," as used herein, are not limited to their technical legal meanings.
19.4 LIQUIDATED DAMAGES. Landlord may elect, as an alternative to the damages and charges provided for in Section 19.3, and in lieu of all other such damages thereafter accruing, to have Tenant pay the liquidated damages provided for below, which election may be made by notice given to Tenant at any time after the termination of this Lease under or pursuant to Section 19.2, above, and whether or not Landlord shall have collected any damages as hereinabove provided in Section 19.3. Upon such notice, Tenant shall promptly pay to Landlord, as liquidated damages, in addition to any damages collected or due from Tenant from any period prior to such notice, such a sum as at the time of such notice represents the amount of the excess, if any, of (i) the discounted present value (at a discount rate equal to the U.S. Treasury obligations having a term closest to the number of years constituting the balance of the Term as of the time payment is to be made), of the Annual Fixed Rent and Additional Rent which would have been payable by Tenant under this Lease for the remainder of the Lease Term, if Tenant had fulfilled all of its obligations hereunder, over and above (ii) the discounted present value, at the same discount rate as in clause (i) of this Subsection 19.4, of the Annual Fixed Rent and Additional Rent that would be received by Landlord (after deducting all reasonably estimated costs of reletting, including, without limitation, brokerage fees, advertising, required tenant improvements and concessions and attorneys' fees) if the Premises were relet at the time of such notice for the remainder of the Lease Term at the fair rental value thereof at the time of such notice. Landlord and Tenant agree that Landlord's damages in the event of termination or re-entry are difficult to ascertain, and that the liquidated damages provided for in this Section represent a reasonable estimate of Landlord's damages.
For the purposes of this Article, if Landlord elects to require Tenant to pay liquidated damages in accordance with this Section 19.4, (a) the total rent shall be computed by assuming Tenant's Share of the Excess Operating Expenses under Article 6 to be the same as were payable for the twelve (12) calendar months (or if fewer than twelve calendar months shall have elapsed since the date hereof, for the partial year, but annualized) immediately preceding such termination or re-entry, and (b) if the Premises or any part thereof shall have been relet by Landlord for the unexpired portion of the Lease Term, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent received upon such reletting shall be prima facie evidence of the fair rental value of the Premises, or part thereof, so relet during the term of such reletting.
19.5 RIGHTS IN THE EVENT OF TENANT'S BANKRUPTCY. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove for and obtain, in proceedings for the termination of this Lease by reason of bankruptcy or insolvency, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above.
19.6 WAIVER OF REDEMPTION, ETC.
(a) Tenant, for itself and any and all persons claiming through or under Tenant, including its creditors, upon the termination of this Lease or expiration of the Lease Term in accordance with the terms hereof, or in the event of entry of judgment for the recovery of the possession of the Premises in any action or proceeding, or if Landlord shall reenter the Premises by process of law or otherwise, hereby waives any right of redemption provided or permitted by any statute, law or decision now or hereafter in force, and does hereby waive, surrender and give up all rights or privileges which it or they may or might have under and by reason of any present or future law or decision, to redeem the Premises or for a continuation of this Lease for the Lease Term after having been dispossessed or ejected therefrom by process of law, or otherwise.
(b) If Tenant is in arrears in the payment of Annual Fixed Rent or Additional Rent, Tenant waives its right, if any, to designate the item against which any payments made by Tenant are to be credited and Tenant agrees that Landlord may apply any payment made by Tenant to any items as Landlord may see fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payment shall be credited.
(c) Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with the Lease, the relationship of Landlord and Tenant and Tenant's use or occupancy of the Premises or any other claim (other than claim for personal injuries or property damage, or any other compulsory counterclaim for which a jury trial is permitted). It is further mutually agreed that if Landlord commences any summary proceedings for non-payment of rent, Tenant will not interpose and does hereby waive the right to interpose any counterclaim of whatever nature or description in such proceeding, except for any compulsory counterclaim. If Tenant asserts any affirmative claims against Landlord in a separate proceeding, Tenant agrees that it will not move or otherwise attempt to consolidate the separate actions or otherwise preclude Landlord's claim for possession from being governed by the Uniform Summary Process Rules and the expedited procedure provided by such Rules, but the parties shall abide by any final, non-appealable court order requiring consolidation of separate actions.
19.7 ADDITIONAL RIGHTS OF LANDLORD.
(a) In the event of a breach or threatened breach by Tenant of any of its obligations under this Lease, Landlord shall also have the right to seek an injunction. The remedies to which Landlord may resort under this Lease are cumulative and are not intended to be exclusive of any other remedies to which Landlord may be lawfully entitled at any time and Landlord may invoke any remedies allowed at law or in equity as if specific remedies were not provided for herein.
(b) If this Lease shall terminate under or pursuant to Section 19.2, or if Landlord shall re-enter the Premises under the provisions of this Article, or in the event of the termination of this Lease, or of re-entry by or under any summary dispossess or other proceeding or action or any provision of law by reason of Tenant's default hereunder, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord against any Annual Fixed Rent or Additional Rent due from Tenant at the time of such termination or re-entry or, at Landlord's option, against any damages payable by Tenant under this Article or pursuant to law. Any such sums received by Landlord shall be for use and occupancy only, and in no way shall be relied upon to establish any type of tenancy.
19.8 LANDLORD'S DEFAULT. Landlord shall in no event be in default in the performance of any of Landlord's obligations hereunder unless and until (i) Landlord shall have failed to perform such obligations within thirty (30) days (or, if an obligation is such that it cannot be performed within thirty (30) days, Landlord shall have failed to commence with reasonable diligence performance of the same within such thirty (30) day period) after notice by Tenant to Landlord properly specifying wherein Landlord has failed to perform any such obligation, and (ii) Tenant has given notice to all parties as required under Section 17.2 hereof and such parties have not commenced the performance of such obligations within the time provided in Section 17.2.
ARTICLE 20
MISCELLANEOUS
20.1 WAIVER. Failure on the part of Landlord or Tenant to complain of any action or non-action on the part of the other, no matter how long the same may continue, shall never be a waiver by Tenant or Landlord, respectively, of any of the other's rights hereunder.
Further, no waiver at any time of any of the provisions hereof by Landlord or Tenant shall be construed as a waiver of any of the other provisions hereof, and a waiver at any time of any of the provisions hereof shall not be construed as a waiver at any subsequent time of the same provisions. The consent or approval of Landlord or Tenant to or of any action by the other requiring such consent or approval shall not be construed to waive or render unnecessary Landlord's or Tenant's consent or approval to or of any subsequent similar act by the other.
No payment by Tenant, or acceptance by Landlord, of a lesser amount than shall be due from Tenant to Landlord shall be treated otherwise than as a payment on account. The acceptance by Landlord of a check for a lesser amount with an endorsement or statement thereon, or upon any letter accompanying such check, that such lesser amount is payment in full, shall be given no effect, and Landlord may accept such check without prejudice to any other rights or remedies which Landlord may have against Tenant. Further, the acceptance by Landlord of Annual Fixed or Additional Rent paid by Tenant under this Lease shall not be or be deemed to be a waiver by Landlord of any default by Tenant, whether or not Landlord knows of such default, except for such defaults as to which such payment relates and then only to the extent of the amount of such payment. If Landlord and Tenant shall now or hereafter enter into any agreement for the renewal of this Lease at the expiration of the Lease Term, the execution of such renewal agreement between Landlord and Tenant prior to the expiration of the Lease Term shall not be considered a vested right in Tenant to such further term so as to prevent Landlord from terminating this Lease and any such extension or renewal thereof if Landlord becomes entitled so to do during the remainder of the original Lease Term; and if Landlord shall so terminate this Lease, any such renewal or extension previously entered into between Landlord and Tenant or the right of Tenant to any such renewal or extension shall also be terminated thereby. Any right herein contained on the part of Landlord to terminate this Lease shall continue during any extension or renewal hereof and any default or Event of Default which occurs and is not cured prior to the commencement of a renewal term or extension of the Lease Term shall continue as such in and during such renewal term or extension of the Lease Term.
20.2 CONSENTS. Wherever in this Lease Landlord's consent or approval is required and Landlord has expressly agreed in writing that such consent or approval shall not be unreasonably withheld, if Landlord shall refuse such consent or approval, then, except as set forth below, Tenant in no event shall be entitled to and shall not make any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedy in such circumstance shall be an action or proceeding to enforce any such provision by way of specific performance, injunction or declaratory judgment, except in the event that it is determined by a court of competent jurisdiction that Landlord failed to act in good faith, in which event Landlord shall be liable for the actual money damages reasonably suffered by Tenant, provided that Tenant shall have used reasonable efforts to mitigate same. Where Landlord has not so expressly agreed in writing, it is the express intent of the parties that any such consent shall be given or required only in the sole, absolute and unfettered discretion of Landlord, and may be withheld for any reason whatsoever.
20.3 QUIET ENJOYMENT. Landlord agrees that, upon Tenant's paying the Annual Fixed and Additional Rent herein reserved, and performing and observing the covenants, conditions and agreements hereof upon the part of Tenant to be performed and observed, Tenant shall and may peaceably hold and enjoy the Premises during the Lease Term, without interruption or disturbance from Landlord or persons claiming through or under Landlord, or by paramount or adverse title, subject, however, to the terms of this Lease and to the terms and conditions of all Underlying Leases and all mortgages which now or hereafter affect the Premises of which Tenant has been given notice, subject to the terms of any Non-Disturbance Agreements obtained from any holders of any Underlying Leases or mortgages. This covenant shall be construed as running with the Land to and against subsequent owners and successors in interest, and is not, nor shall it operate or be construed as, a personal covenant of Landlord, except to the extent of Landlord's interest in the Land and Building, and this covenant and any and all other covenants of Landlord contained in this Lease shall be binding upon Landlord and upon such subsequent owners and successors in interest of Landlord's interest under this Lease, to the extent of their respective interests in the Land and Building, as and when they shall acquire same and then only for so long as they shall retain such interest.
20.4 SURRENDER.
(a) No act or thing done by Landlord during the Lease Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid, unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the Premises prior to the termination of this Lease; provided, however, that the foregoing shall not apply to the delivery of keys to Landlord or its agents in its (or their) capacity as managing agent or for purpose of emergency access. In any event, however, the delivery of keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of this Lease or a surrender of the Premises.
(b) Upon the expiration or earlier termination of the Lease Term, or upon any re-entry by Landlord of the Premises, Tenant shall quit and surrender the Premises to Landlord in good order, condition and repair, except for ordinary wear and tear, damage by fire or other casualty, if any, taking by eminent domain, if any, and other conditions requiring repair, which are not the obligation of Tenant to repair under the terms of this Lease, and Tenant shall remove all of Tenant's Property therefrom and shall restore the Premises to the extent required under any of the other provisions of this Lease.
20.5 BROKER. Tenant warrants and represents that Tenant has not dealt with any broker in connection with the consummation of this Lease other than the brokers, persons or firms designated in Section 1.2 hereof; and in the event any claim is made against Landlord by any other broker or agent alleging dealings with Tenant, Tenant shall defend Landlord against such claim, using counsel approved by Landlord, such approval not to be unreasonably withheld, and save harmless and indemnify and defend Landlord on account of any loss, cost, damage and expense (including, without limitation, attorneys' fees and disbursements) which may be suffered or incurred by Landlord by reason of such claim. Landlord agrees that it shall be solely responsible for the payment of brokerage commissions to the brokers, persons or firms designated in Section 1.2 hereof.
20.6 INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision of this Lease, or the application thereof to any person or circumstance, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.
20.7 PROVISIONS BINDING, ETC. The obligations of this Lease shall run with the Land, and except as herein otherwise provided, the terms hereof shall be binding upon and shall inure to the benefit of the successors and assigns, respectively, of Landlord and Tenant and, if Tenant shall be an individual, upon and to his heirs, executors, administrators, successors and assigns. Each term and each provision of this Lease to be performed by Tenant shall be construed to be both a covenant and a condition. The reference contained herein to successors and assigns of Tenant is not intended to constitute a consent to assignment by Tenant, but has reference only to those instances in which Landlord may hereafter give consent to a particular assignment as required by the provisions of Article 13 hereof.
20.8 RECORDING. Each party hereby agrees, at the request of the other, to execute, acknowledge and deliver a memorandum with respect to this Lease sufficient for recording, (but in no event setting forth the rent or other charges payable by Tenant hereunder) and reasonably satisfactory to Landlord's and Tenant's attorneys. Such memorandum shall not in any circumstance be deemed to change, or be deemed a construction of this Lease, or, in the event of a conflict, control or otherwise affect any of the terms of this Lease. Tenant agrees not to record this Lease (whether directly or indirectly) or any other document related hereto other than any such memorandum. Tenant further agrees, at the request of Landlord upon the expiration or earlier termination of this Lease, to execute, acknowledge and deliver to Landlord an instrument in recordable form evidencing such expiration or termination of this Lease and the termination of the effectiveness of any memorandum thereof, in form reasonably satisfactory to Landlord.
20.9 NOTICES. Whenever, by the terms of this Lease, any notice, demand, request, approval, consent or other communication (each of which shall be referred to as a "notice") shall or may be given either to Landlord or to Tenant, such notice shall be in writing and shall be sent by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, or by recognized national overnight courier, as follows:
(i) If intended for Landlord, addressed to Landlord at the Present Mailing Address of Landlord set forth on the first page of this Lease (or to such other address or addresses as may from time to time hereafter be designated by Landlord by like notice), Attention: John B. Hynes, III, with a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attention: Stuart A. Offner, Esq.
(ii) If intended for Tenant, addressed to Tenant at the Present Mailing Address of Tenant set forth on the first page of this Lease, with a copy to:
Peabody & Arnold LLP
50 Rowes Wharf
Boston, MA 02110
Attention: Michael J. Glazerman, Esq.
In no event shall the validity of any notice actually given to Landlord or Tenant be affected by any failure to deliver copies of such notices to counsel as hereinabove provided. Except as otherwise provided herein, all such notices shall be deemed to have been served on the date of actual receipt (in the case of hand delivery) or one (1) Operating Day after such notice shall have been deposited in the United States mails within the continental United States (in the case of mailing by registered or certified mail as aforesaid).
20.10 WHEN LEASE BECOMES BINDING. Employees or agents of Landlord have no authority to make or agree to make a lease or any other agreement or undertaking in connection herewith. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises, and this document shall become effective and binding only upon the execution and delivery hereof by both Landlord and Tenant. All negotiations, considerations, representations and understandings between Landlord and Tenant are incorporated herein and may be modified or altered only by written agreement between Landlord and Tenant, and no act or omission of any employee or agent of Landlord shall alter, change or modify any of the provisions hereof.
20.11 HEADINGS. The Article and Section headings throughout this Lease and the Table of Contents hereof are for convenience and reference only, and the words contained therein shall in no way be held to explain, modify, amplify or aid in the interpretation, construction or meaning of the provisions of this Lease.
20.12 SUSPENSION OF SERVICES. Landlord reserves the right to interrupt, curtail or suspend the services required to be furnished by Landlord under Section 7.3 and Exhibit D when the necessity therefor arises by reason of accident, repairs, emergency, mechanical breakdown or governmental preemption or restriction, or when required by any law, order or regulation of any Federal, State, County or municipal authority, or as the result of the making by Landlord of any additions, improvements or installations in the Building or for any cause beyond the reasonable control of Landlord. Except in the case of emergencies, Landlord agrees to give Tenant at least two (2) weeks advance notice of any of the foregoing activities which require major work in the Premises, or which would require a shut down of utilities serving the Premises. Landlord shall use reasonable diligence to complete all required repairs or other necessary work as quickly as reasonably possible so that Tenant's inconvenience resulting therefrom may be for as short a period of time as circumstances will reasonably permit. Except as provided in Section 7.4, no diminution or abatement of rent or other compensation shall or will be claimed by Tenant as a result of, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of, any such interruption, curtailment or suspension.
20.13 RULES AND REGULATIONS.
(a) Landlord shall have the right, from time to time during the Lease Term, to make reasonable changes in, and additions to, the rules and regulations set forth in Exhibit E provided that such changes or additions are applicable to all other office tenants in the Building, and provided that Landlord gives Tenant notice of such changes and additions; and
(i) Landlord deems that such changes or additions are necessary or desirable for the safety, care or appearance of the Building or the preservation of good order therein, or the operation or maintenance of the Building, or the equipment thereof, or the comfort of tenants or other occupants in the Building, and
(ii) do not unreasonably affect the conduct of Tenant's business in the Premises.
In the case of any conflict or inconsistency between the provisions of this Lease and any of said rules and regulations as originally promulgated or as changed, the provisions of this Lease shall control. Said rules and regulations, as changed in accordance with this Section from time to time, are hereinafter called the "Rules and Regulations". Notwithstanding the foregoing, Landlord agrees to use reasonable efforts not to enforce against Tenant any Rules and Regulations which Landlord shall not then be enforcing against a majority of other office tenants in the Building.
(b) The right to dispute the reasonableness of any change in the Rules and Regulations upon Tenant's part shall be deemed waived unless the same is asserted by service of a notice upon Landlord within thirty (30) days after notice is given to Tenant of the adoption of any such change.
(c) Nothing in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease against any other tenant. Landlord shall not be liable to Tenant for violation of the Rules and Regulations or of any other lease by other tenants or occupants of the Building, or their servants, agents, visitors or licensees.
20.14 TENANT'S SET-OFF RIGHT. If any sum is actually due and payable to Tenant by Landlord in accordance with the provisions of this Lease, and either (i) Landlord has agreed in writing that such sum is actually due and payable to Tenant, or (ii) a court has determined that such sum is actually due and payable to Tenant, and Landlord fails to pay such sum to Tenant within thirty (30) days after receipt of written notice from Tenant of Landlord's failure to pay, (which such notice shall include the advice that failure by Landlord to respond may result in Tenant's having a right of offset against the Annual Fixed Rent otherwise due and payable hereunder) then Tenant shall have the right to offset against the next payments of Annual Fixed Rent due hereunder the amount which Landlord has so failed to pay, together with interest thereon at the Lease Interest Rate from the date which is thirty (30) days after receipt of written notice from Tenant of Landlord's failure to pay, until paid by Landlord.
20.15 ESTOPPEL CERTIFICATES. Each party hereto covenants and agrees, at any time and from time to time, as reasonably requested by the other party, upon not less than ten (10) days' prior notice, to execute, acknowledge and deliver to the other a statement in writing certifying that this Lease is unmodified and, if such be the case, in full force and effect (or if there have been modifications, that the same is in full force and effect, if such be the case, as modified and stating the date of each such modification), certifying the dates to which the Annual Fixed Rent and Additional Rent and other charges, if any, have been paid, and stating whether or not, to the best knowledge of the signer, the other party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by others with whom the party requesting such certificate may be dealing. The form of the estoppel certificate to be provided by Tenant is attached hereto as Exhibit K, with such reasonable modifications as may be requested by Landlord's potential lender or purchaser.
20.16 SELF-HELP.
(a) If Tenant shall at any time fail to make any payment or perform any act which Tenant is obligated to make or perform under this Lease then Landlord, may, but shall not be obligated so to do, after notice to and demand upon Tenant and the expiration of the applicable grace period, or without notice to or demand upon Tenant (or such reduced notice as may be reasonable in the circumstances) in the case of any emergency, and without waiving or releasing Tenant from any obligations of Tenant in this Lease contained, make such payment or perform such act which Tenant is obligated to make or perform under this Lease in such manner and to such extent as Landlord shall determine, and, in exercising any such rights, pay any reasonably necessary and incidental costs and expenses, employ counsel and incur and pay reasonable attorneys' fees. All sums so paid by Landlord and all reasonable and necessary costs and expenses of Landlord incidental thereto, together with interest thereon at the Lease Interest Rate, shall be deemed to be Additional Rent and, except as otherwise in this Lease expressly provided, shall be payable to Landlord on demand, and Tenant covenants to pay any such sum or sums with interest as aforesaid, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case of default by Tenant in the payment of Annual Fixed Rent.
(b) If a condition described in Section 7.4 shall exist which materially and adversely affects Tenant's ability to conduct business in any critical area of the Premises (such as the trading floor, computer room, or executive management floor or floors), which remains uncured for more than four (4) hours after notice from Tenant, Tenant may take such action as is reasonably required to cause the condition to be cured, whereupon Landlord shall be relieved of the responsibility for curing such condition. In any such case, Tenant shall indemnify Landlord from and against all loss, cost and expense incurred by Landlord with respect to any damage to the Building or any portion thereof caused by Tenant's cure of actions hereunder. If Tenant takes action to cure any condition in accordance with this Subsection 20.16(b), Tenant shall promptly notify Landlord of the action taken by Tenant to effect such cure, and Landlord shall reimburse Tenant for the reasonable out of pocket third party costs incurred by Tenant in performing such cure. The costs so reimbursed by Landlord to Tenant shall be included in Operating Expenses.
(c) In the event of an emergency, where an act is required to be performed in order to avoid injury to persons or material damage to the Premises or the Building, either party shall have the right of self-help, without formal notice or demand, except that in emergency situations, either party shall attempt to communicate with the other party's designated representatives in person or by telephone to alert such party to the emergency condition. The party who should have performed the cure of the emergency condition shall reimburse the other for the reasonable out of pocket third party costs incurred by the party performing such cure. The costs so reimbursed by Landlord to Tenant shall be included in Operating Expenses.
(d) In all cases, the right of self-help provided for in this Section 20.16 shall be carefully and judiciously exercised, it being agreed that whenever possible, the party initially responsible for taking any action shall be given reasonable and sufficient opportunity to do so, in order to avoid any conflict with respect to whether or not self-help should have been exercised, or with respect to the reasonableness of the expenses incurred.
20.17 HOLDING OVER. Any holding over by Tenant after the expiration of the Lease Term shall, under no circumstances, give rise to any type of tenancy. Any payments by Tenant after the expiration of the Lease Term shall be for use and occupancy only, shall in no way be relied upon to establish any type of tenancy, and shall be considered to be liquidated damages and not a penalty. Such payments shall be due from Tenant at the greater of the Applicable Holdover Percentage (as defined below) of (i) the Annual Fixed Rent and at the full amount of the Additional Rent provided for herein immediately prior to such expiration, or (ii) the Fair Market Rent. Tenant's occupancy shall otherwise be on the terms and conditions set forth in this Lease, as far as applicable. The "Applicable Holdover Percentage" shall be one hundred fifty (150%) percent for the first six months of such holding over, and two hundred (200%) percent for any time thereafter. Landlord waives no rights against Tenant by reason of accepting any holding over by Tenant, including without limitation the right to terminate such tenancy as provided by law at any time after the expiration of the Lease Term, or the right to obtain possession of the Premises, and any right to damages in the event that Tenant's holding over causes Landlord to suffer any loss. Notwithstanding the foregoing however, Landlord specifically agrees to stay the execution of any court order providing for delivery of possession of the Premises to Landlord until the expiration of the first nine (9) months of any such holdover. Landlord also specifically agrees to waive the right to claim such actual damages in excess of the Applicable Holdover Percentage of Annual Fixed Rent and Additional Rent or Fair Market Rent, as the case may be, solely with respect to the first nine (9) months of any such holdover, Landlord and Tenant agreeing that Landlord's damages in the event of a holding over by Tenant after the expiration of the Lease Term are difficult to ascertain, and that the provisions of this Section 20.17 reflect a reasonable estimate of Landlord's damages. From and after the expiration of such nine (9) month period, actual damages may be recovered in addition to the Applicable Holdover Percentage of Annual Fixed Rent and Additional Rent, or Fair Market Rent, as the case may be, including any damages accruing from and after the expiration of such nine (9) month period relating to any loss, cost or damage, whether first incurred prior to the expiration of such period or thereafter. Nothing in this Section 20.17 shall be deemed to imply any right of Tenant to stay in the Premises after the expiration of the Lease Term.
20.18 COUNTERPARTS. This Lease may be executed in several counterparts, each of which shall be deemed an original, and such counterparts together shall constitute but one and the same instrument.
20.19 ENTIRE AGREEMENT. This Lease (including the Exhibits attached hereto) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersedes all prior dealings between them with respect to such subject matter, and there are no verbal or collateral understandings, agreements, representations or warranties not expressly set forth in this Lease. No subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant, unless reduced to writing and signed by the party or parties to be charged therewith.
20.20 NO PARTNERSHIP. The relationship of the parties hereto is that of landlord and tenant and no partnership, joint venture or participation is hereby created.
20.21 GUARANTY.
(a) Simultaneously with the execution of this Lease, State Street Corporation ("Guarantor") has executed a Guaranty (the "Guaranty") in the form attached hereto as Exhibit I, of all of Tenant's obligations under this Lease, including, without limitation, Tenant's obligation to purchase the Land and Building in accordance with and in the circumstances provided in Article 24 hereto.
(b) During the Lease Term, and any extensions or renewals thereof, and thereafter so long as Tenant is in occupancy of any part of the Premises, the Guaranty shall remain in full force and effect and Landlord shall hold the Guaranty as security for the performance of Tenant's obligations hereunder. If Tenant defaults in respect of the performance of any of Tenant's obligations hereunder, including but not limited to the payment of Annual Fixed Rent or Additional Rent, Landlord shall have the right from time to time, without notice and without prejudice to any other remedy Landlord may have on account thereof, to call upon Guarantor to make good on the Guaranty, and may apply any funds so received from Guarantor to Landlord's damages arising from, or to cure any such default, whether such damages or deficiency accrue before or after summary proceedings or other reentry by Landlord. If Landlord conveys Landlord's interest under this Lease, the Guaranty shall be turned over and assigned by Landlord to Landlord's grantee. From and after any such transfer or assignment, Tenant agrees to look solely to such grantee for release of the Guaranty. Failure at any time during the Lease Term and any extensions or renewals for the Guaranty to be in full force and effect shall constitute a default by Tenant under this Lease.
20.22 FINANCIAL STATEMENTS.
(a) Tenant represents and warrants to Landlord that (i) the financial statements of Tenant heretofore delivered to Landlord are true and correct and fairly reflect the financial condition and results of operation of Tenant and (ii) as of the date of this Lease, there has been no material adverse change in the condition, financial or otherwise, of Tenant from the date of such financial statements which could affect Tenant's ability to perform its obligations hereunder.
(b) During the Lease Term, at any time, and from time to time upon Landlord's request, Tenant shall deliver to Landlord a copy of Tenant's financial statements for Tenant's fiscal year just ended, if the same are otherwise prepared and are available to Tenant. Landlord acknowledges that the same may not be certified by an independent certified public accountant and may be only internal statements for Tenant's use. If and only during any time that the results of Tenant's operations are consolidated with those of Guarantor and separate financial statements of Tenant (including even uncertified internal statements) are not separately available, then Tenant shall not be required to provide separate financial statements for Tenant so long as the same are provided for Guarantor.
(c) During the Lease Term, within ninety (90) days following the end of Guarantor's fiscal year, Tenant shall deliver to Landlord a copy of Guarantor's financial statements for Guarantor's fiscal year just ended, certified by an independent certified public accountant as presenting fairly, in all material respects, the financial condition of Guarantor and the results of its operations in accordance with generally accepted accounting principles, except that during any time that Guarantor is a company whose stock is publicly traded on a recognized national securities exchange, Tenant shall deliver to Landlord a copy of Guarantor's annual report in the form delivered to the general public, as soon as such annual report is publicly available, and in such event the same shall satisfy Tenant's obligation to deliver financial statements of Guarantor as required by this Section 20.22(c).
20.23 GOVERNING LAW. This Lease shall be governed by the laws of the Commonwealth of Massachusetts applicable to agreements made and to be wholly performed within the Commonwealth, as the same may from time to time exist.
20.24 NAME OF BUILDING; SIGNAGE.
(a) Provided that, and only during such time as, (i) Tenant or an Affiliate of Tenant is leasing at least Five Hundred Thousand (500,000) Rentable Square Feet in the Building (or in lieu of the foregoing if Tenant or an Affiliate of Tenant leases less than Five Hundred Thousand (500,000) Rentable Square Feet in the Building, Tenant and its Affiliates lease more space in the Building than any other tenant or subtenant in the Building), and (ii) so long as no Event of Default has occurred and is continuing, Tenant or such Affiliate shall be granted the right to require Landlord to name the Building such name as Tenant selects to identify Guarantor (or any successor in interest of Guarantor) or any Affiliate of Tenant or Guarantor or the business conducted by them or any of them at the Premises, or, upon at least sixty (60) days prior written notice to Landlord, such other name as may be designated by Tenant to correspond with the name of Guarantor (or any successor in interest of Guarantor) or any Affiliate of Tenant or Guarantor. Any name other than the name of Guarantor (or any successor in interest of Guarantor) or any Affiliate of Tenant or Guarantor shall be subject to Landlord's approval, which approval shall not be unreasonably withheld, delayed or conditioned.
(b) Provided that, and only during such time as, (i) Tenant is leasing at least Five Hundred Thousand (500,000) Rentable Square Feet in the Building, and (ii) so long as no Event of Default has occurred and is continuing, Tenant or such Affiliate shall be granted the right to install, exclusive of any other tenant in the Building, prominent identification signage on the exterior of the Tower portion of the Building, subject to any applicable requirements of the City of Boston.
(c) Provided that, and only during such time as, (i) Tenant is leasing at least Three Hundred Thousand (300,000) Rentable Square Feet in the Building, and (ii) no Event of Default has occurred and is continuing, Tenant or such Affiliate shall be granted the right to install prominent identification signage in the Building's lobbies; except that if Tenant is leasing less than Three Hundred Thousand (300,000) Rentable Square Feet in the Building, Tenant shall nevertheless be granted the right to install identification signage equal to that provided to any other tenant in the Building leasing a reasonably equivalent amount of space.
(d) If the name under which Tenant, Guarantor (or any successor in interest of Guarantor), or an Affiliate of Tenant or Guarantor conducts its business shall change, then to the extent that Tenant is permitted to install identification signage either on the exterior or interior of the Building, Tenant may revise the signage to reflect the new name under which Tenant, Guarantor (or any successor in interest of Guarantor), or an Affiliate of Tenant or Guarantor conducts its business, provided that Tenant shall repair all damage to the Building caused by such change in signage, including, without limitation, removing any markings or discoloration on the Building remaining after the removal or change in signage.
(e) The design, size and location of all such signage, and any alterations or revisions thereto which Tenant shall desire to make during the Lease Term, shall be subject to prior written approval by Landlord, which Landlord shall not unreasonably withhold, delay or condition.
(f) Tenant, at Tenant's sole cost and expense, shall obtain any permits required for the installation, maintenance or repair of all such signage from the City of Boston and all other regulatory bodies. Tenant shall be solely responsible for the cost of installation, maintenance and repair of all such signage.
(g) At all times, Tenant shall keep all of Tenant's signs well lit (if lighting shall have been approved by Landlord), maintained in good condition and repair, and current in appearance and design, and appropriate to a first-class office building in the Boston Central Business District. At any time after the tenth Lease Anniversary Date, and thereafter, not more frequently than at ten year intervals, Landlord may require Tenant to modernize or update the signage, if Landlord determines in its reasonable discretion that the signage (either interior or exterior or both) is not consistent with the standards for signage in comparable first-class office buildings in the Boston Central Business District. Promptly after such request, Tenant shall cause a more modern design to be prepared and submitted to Landlord for its approval, which approval shall not be unreasonably withheld, delayed or conditioned, and after obtaining such approval, Tenant shall cause the updated signage to be installed, and thereafter maintained as required herein. If the then existing signage shall have the benefit of any valid non-conforming use protection (as to the availability of signage, the size of the sign, illumination or similar matters) which would be lost in connection with any such update, and changes thereto to modernize the signage would cause Tenant to lose the benefit of such "grandfather" protection, Tenant shall not be required to change the signage in a way which would lose the benefit of such protection. To the extent that modernizing the signage would remove the grandfather protection, Tenant shall modernize the sign to the extent that can reasonably be accomplished without removing the grandfather protection.
(h) Subject to the provisions of this Section 20.24, Landlord shall have the right to grant to other tenants in the Building signage rights such as, but not limited to, signage rights in the Main Lobby of the Building, outside the entrances to the Building, or located on sign monuments within or without the Building, if any, or signs for retail tenants.
(i) Upon the expiration or earlier termination of this Lease, or if an Event of Default has occurred and is continuing, Tenant shall remove all of its signs from the interior and exterior of the Building, and shall repair any damage caused to the Building by such removal, including, without limitation, removing or restoring any remaining markings or discoloration on the Building remaining after the removal of such signage.
(j) Tenant shall be entitled to space in the Building's Main Lobby computerized directory for listing names of Tenant, Tenant's divisions, Tenant's officers and certain designated employees, Tenant's Affiliates, and sublessees or assignees permitted in accordance with Article 13, a list of which will be provided by Tenant to Landlord and shall be revised periodically.
20.25 DEEMED APPROVAL. Whenever, by the terms of this Lease, consent or approval of either Landlord or Tenant is required, and such party is deemed to have consented to any requested action or condition unless such party shall have responded within the period specified in the appropriate Section of this Lease, no such consent or approval shall be deemed to have been given unless the notice requesting such approval shall have set forth, in a manner reasonably evident to the recipient, that failure to respond within the specified period of time would constitute approval of the requested action or condition.
20.26 TENANT'S SECURITY SYSTEM. Tenant shall have the right to install its own security system in the building, the specifications of which shall be subject to Landlord's approval, such approval not to be unreasonably withheld, delayed or conditioned. Except as to Secure Areas, Tenant shall provide Landlord with all codes, passwords, etc. necessary in order for Landlord to have free and unobstructed access to the Premises.
20.27 STORAGE SPACE. Tenant shall have the right to occupy approximately 15,000 square feet of space on the lower level of the Building as identified on Exhibit B-1 hereto (the "Storage Space") to be used for storage in connection with Tenant's business. The term with respect to the Storage Space shall commence on the date on which Landlord makes the Storage Space available to Tenant (the "Storage Space Commencement Date") and shall terminate on the Expiration Date. Tenant shall not pay any Fixed Annual Rent for the use of the Storage Space, but except as otherwise provided in this Section 20.27, all of the other provisions of this Lease shall apply as if the Storage Space were a part of the Premises, except that the Storage Space shall not be included in the calculation of Rentable Square Feet for the purpose of determining Tenant's Share. Tenant shall pay to Landlord as an additional charge for electricity supplied to the Storage Space, an amount determined in accordance with Article 16 of this Lease; provided, however, that if the Storage Space is not separately metered, then such charge shall be equal to Landlord's actual costs of providing electricity to the Storage Space, as reasonably allocated by Landlord based on a submeter or other reasonable allocation. Landlord shall not be required to provide any services (such as, without limitation, cleaning) to the Storage Space, and the Storage Space shall not be included in calculating Tenant's Share. Tenant shall accept the Storage Space in its "as is" condition. Tenant shall be permitted to make alterations to the Storage Space at Tenant's sole expense, subject to the conditions set forth in Article 8 of this Lease, provided that Tenant shall remove any such alterations as directed by Landlord at the termination of this Lease, to the extent that Landlord so requires in accordance with Article 8. Tenant's right to occupy the Storage Space hereunder is a license otherwise upon the same terms and conditions set forth in this Lease, revocable by Landlord at any time upon the occurrence of an Event of a Default by Tenant under the terms of this Lease, and shall not be construed to be a lease of such space.
20.28 RETAIL TENANT APPROVAL. If any portion of the Retail Space is deleted from the Premises pursuant to the IP Extension Deletion Option contained in Section 3.3.6 or the Minimum Area Deletion Option contained in Section 3.3.8, or recapture pursuant to Article 13, and if Landlord shall desire to lease any portion of the Retail Space, Landlord shall submit to Tenant a notice (the "Retail Tenant Notice") containing the name and address of the proposed tenant (a "Retail Tenant") and a brief description of the Retail Tenant's business. Tenant shall have the right to consent to the Retail Tenant, which Tenant shall not unreasonably withhold or delay. Within ten (10) Operating Days after Tenant's receipt of the Retail Tenant Notice, Tenant shall notify Landlord in writing whether or not Tenant approves of the proposed Retail Tenant. If Tenant fails to respond to Landlord within such ten (10) Operating Day period, then Tenant shall be deemed to have consented to the same. If Tenant disapproves of the lease to such proposed Retail Tenant, Tenant shall set forth in reasonable detail Tenant's reasons therefor in its notice to Landlord disapproving the proposed Retail Tenant. It shall not be unreasonable for Tenant to withhold its consent to a proposed Retail Tenant if the proposed Retail Tenant would be a Competitor (as defined below) of Tenant. A "Competitor" of Tenant shall mean an entity primarily engaged in the provision of financial services. A retail branch of a full service bank, and an ATM machine or machines (which may, but are not required to be, associated with the full service bank), are specifically permitted to be tenants in the Building, provided that Tenant shall have the right to approve the identity of the bank and the identity of the operator of the ATM machine or machines, which approval shall not be unreasonably withheld or delayed.
20.29 TENANT'S OPTION TO PROVIDE SERVICES. If Tenant is dissatisfied with the cleaning services (as required by Exhibit D and the attachments thereto (the "Cleaning Services") being provided by Landlord to the Premises, Tenant shall notify Landlord of Tenant's dissatisfaction, setting forth in reasonable detail the reasons for such dissatisfaction, and how the same are not comparable to Cleaning Services being provided in other first class office buildings in the Boston Central Business District. If, following such notice, the reasons for Tenant's dissatisfaction shall not have been cured to Tenant's reasonable satisfaction within sixty (60) days after such notice, then Tenant shall have the right to assume, on the sixtieth (60th) day following the expiration of such sixty (60) day notice period, the obligation to provide Cleaning Services to the Premises. Any party or parties employed by Tenant to render Cleaning Services to the Premises shall cooperate reasonably with Landlord's personnel providing Cleaning Services to other portions of the Building, and shall comply with the reasonable Rules and Regulations with respect to the rendering of such Cleaning Services as Landlord may from time to time adopt. Thereafter, Landlord shall have no obligation to provide Cleaning Services to the Premises.
ARTICLE 21
OPTION TO EXTEND
21.1 TENANT'S OPTION. Provided that, at the time of each such exercise, (i) there then exists no Event of Default, or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, an(ii) this Lease is then in full force and effect, Tenant shall have the right and option to extend the Lease Term for two (2) extended terms of ten (10) years each (an "Extended Term" or respectively, the "First Extended Term" and "Second Extended Term"). Each Extended Term shall commence on the day immediately succeeding the Expiration Date of the initial Lease Term or the Extended Term, as the case may be, and shall end on the day immediately preceding the tenth (10th) anniversary of the first (1st) day of the Extended Term. Tenant shall exercise each such option to extend by giving notice to Landlord of its desire to do so not later than twenty-four (24) months prior to the Expiration Date of the initial Lease Term or the preceding Extended Term, as the case may be. The giving of such notice by Tenant shall automatically extend the Lease Term for the applicable Extended Term, and no instrument of renewal need be executed. In the event that Tenant fails to give such notice to Landlord, except as provided in Article 23, this Lease shall automatically terminate at the end of the Term then in effect, and Tenant shall have no further option to extend the Lease Term, it being agreed that time is of the essence with respect to the giving of such notice. The Extended Term shall be on all the terms and conditions of this Lease, except that the Annual Fixed Rent for the Extended Terms shall be determined pursuant to Sections 21.2 and 21.3 below, and during any Extended Term, the provisions of this Section 21.1 shall be effective with respect to subsequent Extended Terms only to the extent of the remaining number of the two (2) options set forth above (i.e., after exercise of the first option to extend, during that Extended Term, only one (1) option to similarly extend shall survive). In no event or under any circumstance shall the options to extend as provided in this Article 21 be interpreted to give Tenant the option to extend beyond that point in time which is twenty (20) years following the Expiration Date of the original Lease Term.
21.2 EXTENDED TERM RENT. The Annual Fixed Rent for the Extended Terms shall be as follows:
(a) The Annual Fixed Rent for the First Extended Term shall be ninety-five (95%) percent of the Fair Market Rent (as hereinafter defined) for the Premises, as of the commencement of the First Extended Term.
(b) The Annual Fixed Rent for the Second Extended Term shall be one hundred (100%) percent of the Fair Market Rent (as hereinafter defined) for the Premises, as of the commencement of the Second Extended Term.
Tenant shall in all events pay, as Additional Rent, Tenant's Share of the Tax Expenses and Excess Operating Expenses in accordance with Article 6 of this Lease, except that the Base Operating Expenses shall mean the actual Operating Expenses for the Operating Year in which such Extended Term commences.
21.3 FAIR MARKET RENT. Not earlier than thirty (30) months prior to the expiration of the initial Lease Term or an applicable Extended Term, as the case may be, at the request of either party, the parties shall commence good faith negotiations to determine the Fair Market Rent (as defined below) which would be applicable for the Premises for the next Extended Term. Failure to reach agreement on the Fair Market Rent which would be applicable to the Premises for the next Extended Term shall not postpone or delay the time within which Tenant must exercise its option to extend the Lease Term. If in accordance with the provisions of Article 23 Tenant shall have elected to lease the Garage, then the Fair Market Rent for the Garage shall be determined pursuant to Section 23.5.
If, pursuant to the provisions of Section 21.1 hereof, Tenant has validly exercised an option to extend the initial Lease Term or an applicable Extended Term, as the case may be, then, for purposes of establishing the Annual Fixed Rent payable by Tenant during the applicable Extended Term under the provisions of Section 21.2 hereof, the term "Fair Market Rent" shall mean the fair market rental value per annum for the Premises, as of the commencement of the applicable Extended Term, determined as follows:
(a) If Tenant has validly exercised an option to extend the initial Lease Term or an applicable Extended Term, as the case may be, and if Landlord and Tenant fail to reach agreement not later than twelve (12) months prior to the expiration of the Initial Term or the first Extended Term, as the case may be, on the determination of the Fair Market Rent to be paid by Tenant for the Premises during an Extended Term, then either Landlord or Tenant (the "Initiating Party") shall initiate the proceedings for such determination by notice to the other, and by designating in such notice the name and address of a commercial real estate broker, consultant or appraiser willing to act in such determination, having at least ten (10) years' experience as an appraiser or real estate broker in the leasing of first-class office space in the Boston Central Business District (hereinafter called a "Qualified Appraiser"). Within thirty (30) days after receipt by the other party (the "Responding Party") of such notice, the Responding Party, by notice given to the Initiating Party, shall designate the name and address of another Qualified Appraiser willing so to act in such determination. If the Responding Party shall fail, neglect or refuse within said 30-day period to designate another Qualified Appraiser willing so to act, the Qualified Appraiser designated by the Initiating Party shall alone conduct the determination of the Fair Market Rent for the Premises during an Extended Term. If two Qualified Appraisers have been designated as aforesaid, such two Qualified Appraisers shall appoint an additional Qualified Appraiser (the "Third Qualified Appraiser"), who shall be independent and who is willing so to act in such determination, and notice of such designation shall be given both to the Initiating Party and to the Responding Party. If the two Qualified Appraisers do not, within a period of thirty (30) days after the appointment of the latter of them, agree upon and designate a Third Qualified Appraiser willing so to act, either Qualified Appraiser previously designated may request the Boston Office of the American Arbitration Association (or any successor thereto, or if the same shall not exist, by application to a court of competent jurisdiction) to designate a Third Qualified Appraiser willing so to act and a Third Qualified Appraiser so appointed shall, for all purposes, have the same standing and powers as though the Third Qualified Appraiser had been seasonably appointed by the Qualified Appraisers first appointed. In case of the inability or refusal to serve of any person designated as a Qualified Appraiser, or in case any Qualified Appraiser for any reason ceases to be such, a Qualified Appraiser to fill such vacancy shall be appointed by the Initiating Party, Responding Party, the Qualified Appraisers first appointed or the Boston Office of the American Arbitration Association, as the case may be, whichever made the original appointment, or, if the party which made the original appointment fails to fill such vacancy, upon application of any Qualified Appraiser who continues to act or by the Initiating Party, or the Responding Party to the Boston Office of the American Arbitration Association (or any successor thereto, or if the same shall not exist, by application to a court of competent jurisdiction), and any Qualified Appraiser so appointed to fill such vacancy shall have the same standing and powers as though appointed originally.
(b) The resulting board of Qualified Appraisers, forthwith upon their appointment, shall (i) hear the parties to this Lease and their respective witnesses, (ii) examine the records relating to the Building and such other documents and records as may, in their judgment, be necessary and (iii) determine the Fair Market Rent for the Premises to become applicable during an Extended Term. The parties shall produce such records and documents as the Qualified Appraisers may reasonably request in order to determine the fair market rental of the Premises. In determining the Fair Market Rent for the Premises during an Extended Term, the board of Qualified Appraisers shall take into account all factors relevant to determination of a fair market rental value of the Premises on the basis of a long-term lease, including but not limited to any advantage or disadvantage to Tenant or to Landlord in connection with the following factors:
(A) The Qualified Appraisers shall ignore any increase in value to the Premises created by Tenant's Work or Alterations to the Premises, and the Premises shall be deemed to contain a new "building standard" tenant installation which would be the "building standard" for comparable space for lease in first class office buildings in the Boston Central Business District, and the actual configuration of the Premises shall not be considered in determining the Fair Market Rent;
(B) The size of the Premises, including any premium or discount relevant to the market for such space and the availability of the same;
(C) Then current arms-length negotiated rentals, including inducements and allowances, being charged to new (or renewal) tenants for renewals and extensions which do not have pre-negotiated or limited contract rents for comparable space in first class office buildings in the Boston Central Business District;
(D) Neither party shall be deemed to be under any compulsion to rent or lease space;
(E) The fact that the Extended Term shall provide for Base Operating Expenses equal to the Operating Expenses for the Operating Year in which occurs the first day of the applicable Extended Term.
(c) If, pursuant to the preceding provisions, there is only one Qualified Appraiser, a determination of Fair Market Rent for the Premises by such sole Qualified Appraiser shall be final and binding upon the parties. Where, however, there exists a board of three Qualified Appraisers, as is contemplated hereby, then the Fair Market Rent for the Premises shall be determined separately and independently by each of the first two Qualified Appraisers (such determinations being hereinafter referred to, individually, as an "Appraisal" and, collectively, as the "Appraisals"). Each such appraisal shall set forth the Fair Market Rent in detail.
(i) If such Appraisals vary from each other by 10% or less, then the arithmetic average of such two Appraisals shall constitute the Fair Market Rent for the Premises during an Extended Term.
(ii) If such Appraisals vary by more than 10%, then within ten (10) days after submission of both Appraisals, the Third Qualified Appraiser shall select one of such two Appraisals, and such selected Appraisal shall, in its entirety and without regard to the other Appraisal, constitute the Fair Market Rent for the Premises during an Extended Term. In making his selection, in no event shall the Third Qualified Appraiser have any power to amend, modify, compromise, average or blend either of the first two Appraisals, it being the intent of Landlord and Tenant that the Third Qualified Appraiser shall simply select the one of such two Appraisals which, in the judgment of the Third Qualified Appraiser, most accurately and fairly defines the fair market rental value of the Premises based on the conditions hereinabove set forth.
(d) Each of Landlord and Tenant shall pay the costs and fees of the Qualified Appraiser chosen by it, and Landlord and Tenant shall share the costs and fees of the Third Qualified Appraiser. Each of Landlord and Tenant shall pay the legal fees and expenses of their respective counsel.
21.4 RETROACTIVE ADJUSTMENTS. If, pursuant to the preceding provisions of this Article 21, Fair Market Rent has not been determined as of the date the same is to become effective, Tenant shall pay on account of Annual Fixed Rent the rent specified by Landlord as the Fair Market Rent until such determination is made, with necessary adjustments between Landlord and Tenant to be made retroactively, by a cash payment (including interest on the adjusted amount due at the Lease Interest Rate), on the first day of the month next succeeding a final determination of the Fair Market Rent. Promptly after determination of the Fair Market Rent, Landlord and Tenant shall execute a suitable instrument confirming such adjustments, but failure to do so shall have no effect on the Fair Market Rent or any such adjustments.
ARTICLE 22
OPTIONS TO EXPAND
22.1 EXPANSION.
(a) This Article 22 shall apply if and only if either (i) Tenant shall have exercised the IP Extension Deletion Option and the IP Extension Deleted Space shall have been deleted from the Premises, as provided in Section 3.3.6, or (ii) Tenant shall have exercised the Minimum Area Deletion Option and the Minimum Area Deleted Space shall have been deleted from the Premises, as provided in Section 3.3.8. If this Article 22 is applicable, at any time upon request of Tenant, Landlord shall advise Tenant of the scheduled expiration dates of space scheduled to become available in the Building, to the extent then known by Landlord, and shall permit Tenant to inspect such space.
(b) Provided that, at the time of each exercise (i) there then exists no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, and (ii) this Lease is then in full force and effect, Tenant shall have the option at four (4) times specified below in subsection (b) (each, an "Expansion Option") to expand the floor area of the Premises by adding additional space (the "Expansion Option Space") in full floor increments only, up to the maximum amount of rentable square feet designated in section (c) below. Tenant may elect to add Expansion Option Space to its Premises if, but only if, not less than fifteen (15) months before the commencement of the applicable Leeway Period (defined in subsection (c) below), Tenant has given notice of its exercise of each respective Expansion Option to Landlord.
(c) Provided Tenant has validly exercised an applicable Expansion Option, Landlord shall have the flexibility of delivering possession of the Expansion Option Space, (or portions thereof subject to the limitations hereinafter set forth in this subparagraph), at any time within a twelve (12) month period (the "Leeway Period") specified below:
|
| | |
| | |
Leeway Period | | Approximate Maximum Percentage of IP Extension Deleted Space or Additional Space, as Applicable |
April 1, 2008 and April 1, 2009 | | 25% |
April 1, 2010 and April 1, 2011 | | 25% |
April 1, 2013 and April 1, 2014 | | 25% |
April 1, 2015 and April 1, 2016 | | 25% |
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Each date on which Landlord delivers to Tenant portions of the Expansion Option Space hereinafter shall be referred to as an "Expansion Option Delivery Date". Such delivery shall be made by Landlord giving Tenant notice(s), not less than thirty (30) days prior to an Expansion Option Delivery Date, of (i) the floor(s), or portions thereof, and (ii) the corresponding date(s) when, within the applicable Leeway Period, Expansion Option Space, or portions thereof, will first become available to Tenant.
The Expansion Option Space may be located on one or any combination of full floors, as specified by Landlord, of the IP Extension Deleted Space or Additional Space, as applicable. If the result of calculating the Maximum Percentage of the IP Extension Deleted Space or Additional Space, as applicable, is not exactly equal to the combination of full floors of space available for delivery to Tenant upon exercise of any Expansion Option, then Landlord shall be permitted to increase or to reduce the number of Rentable Square Feet in the Expansion Option Space to be delivered to Tenant, so that Landlord shall deliver full floors to Tenant, unless Tenant is willing to accept less than full floors. In all events, the number of Rentable Square Feet that Tenant shall be permitted to add in accordance with this Section 22.1 shall be exhausted when all of the IP Extension Deleted Space or Additional Space, as applicable, shall have been added to the Premises.
(d) For the purpose of interpreting succeeding provisions of this Article 22, a reference to the term "Expansion Option Space" shall be deemed a reference to any or all of the space which may be added to the Premises in accordance with this Article 22, whichever is appropriate to the context.
(e) If Landlord is unable to deliver possession of all portions of any particular Expansion Option Space at one time, Landlord shall have the right to deliver portions thereof, and each such Expansion Option Space need not be contiguous to the balance of such Expansion Option Space previously delivered, or contiguous to the balance of the Premises. Landlord shall schedule the expiration dates of leases entered into with other tenants in the Expansion Option Space so that such tenants' leases shall expire at times which shall enable Landlord to deliver portions of the Expansion Option Space during the applicable Leeway Period, and Landlord shall include in leases entered into with other tenants in the Expansion Option Space commercially reasonable provisions for holdover penalties to be paid by such tenants, and for the payment of fees and expenses of Landlord's attorneys in taking actions to evict such tenants.
(f) Notwithstanding the foregoing, if Landlord is unable to deliver possession of any of the Expansion Option Space on the date specified in Landlord's notice(s) for reasons beyond Landlord's reasonable control (including the failure of an existing tenant or occupant to vacate such space, in which event Landlord shall institute and maintain eviction proceedings against such holdover tenant, so as to obtain possession of the space as promptly as possible under the circumstances), Landlord shall use reasonable efforts and exercise due diligence to deliver possession, and the applicable Expansion Option Delivery Date shall be deemed to be the first day thereafter that possession is so delivered. If Landlord shall be unable to deliver possession of any of the Expansion Option Space before the expiration of the applicable Leeway Period because of the failure of an existing tenant or occupant to vacate such space, Tenant shall receive a credit against rent coming due under this Lease from and after the expiration of the applicable Leeway Period in an amount equal one-half (1/2) of the per diem amount of any holdover payment actually collected by Landlord from the existing tenant of the Expansion Option Space (or the applicable portion thereof) which exceeds the per diem rent payable by such existing tenant during the last scheduled month of its lease term. Notwithstanding anything to the contrary contained herein, the amount of any credit due to Tenant hereunder shall be reduced by the actual out-of-pocket costs including, without limitation, reasonable attorneys' fees, incurred by Landlord in collecting any holdover payment (to the extent such costs are not collected from the existing tenant). Landlord shall use reasonable efforts to collect all holdover payments due to Landlord from such existing tenant and, in Landlord's reasonable discretion, Landlord shall use reasonable efforts to collect all costs of collecting all holdover payments from such existing tenant. In addition, if any such delay in delivering any of the Expansion Option Space continues for a period of more than six (6) months after the expiration of the applicable Leeway Period, then Tenant shall have the additional remedy, to elect by notice given to Landlord within ten (10) days after the expiration of such six (6) month period, and while such failure to deliver continues, to terminate Tenant's obligations with respect to such portion of the Expansion Option Space (but not otherwise with respect to the Premises) and this Lease shall cease and determine with respect to such portion of the Expansion Option Space on the thirtieth (30th) day after Tenant gives such notice, unless within such 30-day period, Landlord has delivered possession of such Expansion Option Space as to which delivery was delayed. The remedies of Tenant specified in this section (f) shall be Tenant's sole remedies at law and in equity with respect to such delays.
(g) Landlord shall have no obligation to remove improvements made to any of the Expansion Option Space prior to delivery to Tenant, whether or not made by Landlord, nor shall Landlord have any obligation to prepare the space for Tenant's occupancy Tenant hereby acknowledging and agreeing that Expansion Option Space shall be delivered, and Tenant shall accept possession thereof, in its then "AS IS" condition, without representation or warranty by Landlord.
22.2 RENT FOR EXPANSION OPTION SPACE.
(a) Effective as of each Expansion Option Delivery Date, the definition of Premises shall be modified to include the applicable Expansion Option Space. Also, effective as of ninety (90) days after each Expansion Option Delivery Date (the "Expansion Option Rent Commencement Date"), (i) the Annual Fixed Rent shall be increased by one hundred (100%) percent of the Fair Market Rent for the applicable Expansion Option Space; and (ii) Tenant shall pay, as Additional Rent, Tenant's Share (adjusted to include the additional Expansion Option Space added to the Premises) of the Tax Expenses and Excess Operating Expenses in accordance with Article 6 of this Lease, except that the Base Operating Expenses shall mean the actual Operating Expenses for the Operating Year in which the applicable Expansion Option Rent Commencement Date occurs.
(b) Promptly after each Expansion Option Rent Commencement Date occurs, Landlord and Tenant shall execute a suitable instrument confirming the Expansion Option Rent Commencement Date and such adjustments, but failure to do so shall have no effect on the Expansion Option Rent Commencement Dates or on any such adjustments.
22.3 FAIR MARKET RENT. Fair Market Rent for the Expansion Option Space shall be determined in the same fashion as Fair Market Rent for the Premises during an Extended Term is determined, as provided in Section 21.3 hereof, except that Landlord shall specify its determination of the Fair Market Rent for the Expansion Option Space, or portions thereof, in each notice Landlord gives to Tenant pursuant to the provisions of Section 21.3 hereof, and except that the Qualified Appraisers shall include in their determination of Fair Market Rent an allowance for tenant improvements if such an allowance would be customary considering the then current market conditions and the condition of the Expansion Option Space. But for the exceptions contained in the preceding sentence, all other provisions for determining Fair Market Rent for the Premises during an Extended Term shall apply, mutatis mutandis, in respect of a determination of Fair Market Rent for the Expansion Option Space, or portions thereof.
22.4 RETROACTIVE ADJUSTMENTS. If, pursuant to the preceding provisions of this Article 22, Fair Market Rent has not been determined as of the date the same is to become effective, Tenant shall pay on account of Annual Fixed Rent the rent specified by Landlord as the Fair Market Rent until such determination is made, with necessary adjustments between Landlord and Tenant to be made retroactively, by a cash payment (including interest on the adjusted amount due at the Lease Interest Rate), on the first day of the month next succeeding a final determination of the Fair Market Rent.
22.5 TERM OF EXPANSION OPTION SPACE. The Term of the Expansion Option Space shall be coterminous with the balance of the Premises demised under this Lease. Tenant must exercise each option to extend the Lease Term with respect to all of the space then included within the Premises, or so to be included, pursuant to any exercised Expansion Option, by the time of the applicable Extended Term Commencement Date.
ARTICLE 23
OPTION TO ADD GARAGE SPACE
23.1 TENANT'S RIGHTS. Provided that, at the time of exercise of this option, (i) there then exists no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, and (ii) this Lease is then in full force and effect, Tenant shall have the option (the "Garage Addition Option") to add the Garage to the Premises. Tenant may elect to add the Garage to the Premises, if, but only if, prior to June 1, 2002, Tenant gives notice of its exercise of the Garage Addition Option to Landlord.
23.2 CONDITION OF GARAGE. Provided that Landlord has completed the Base Building Construction, the Garage shall be delivered, and Tenant shall accept possession thereof, in its then "AS IS" condition, without any representation or warranty by Landlord and without any obligation of Landlord to provide any Landlord's Contribution or any improvements thereto.
23.3 GARAGE COMMENCEMENT DATE. The Commencement Date with respect to the Garage (the "Garage Commencement Date") shall be the date upon which Landlord shall have obtained a certificate of occupancy with respect to the Garage.
23.4 RENT FOR THE GARAGE.
(a) Effective as of the Garage Commencement Date, (i) the definition of Premises shall be modified to include the Garage, except that the Garage shall not be included in the calculation of Rentable Square Feet for the purpose of determining Tenant's Share; (ii) the Annual Fixed Rent shall be increased by one hundred (100%) percent of the Fair Market Rent for the Garage, which shall include any and all operating expenses and Taxes actually attributable to the Garage; (iii) Landlord shall have no further responsibility for the cleaning, operation or maintenance of the Garage, provided, however, that Landlord shall be not be required to provide services to the Garage except to the extent usually and customarily provided by owners of comparable buildings in Boston, Massachusetts in connection with the lease of a garage to an independent operator, and in all events ventilation, electricity and elevator service shall be available to the Garage; (iv) Tenant shall be responsible for the operation and maintenance of the Garage, and shall pay directly for all costs and expenses associated therewith; and (v) Tenant shall pay to Landlord, as an additional charge for electricity supplied to the Garage, an amount determined in accordance with Article 16 of this Lease; provided, however, that if the Garage is not separately metered, then such charge shall be equal to Landlord's actual costs of providing electricity to the Garage, as reasonably allocated by Landlord based on a submeter or other reasonable allocation.
(b) Promptly after the Garage Commencement Date occurs, Landlord and Tenant shall execute a suitable instrument confirming the Garage Commencement Date and such adjustments, but failure to do so shall have no effect on the Garage Commencement Date or on any such adjustments.
23.5 FAIR MARKET RENT. Fair Market Rent for the Garage shall be determined separately for the Garage in the same fashion as Fair Market Rent for the Premises during an Extended Term is determined, as provided in Section 21.3 hereof, except that Landlord shall specify its determination of the Fair Market Rent for the Garage in the notice Landlord gives to Tenant pursuant to the provisions of Section 21.3 hereof, and except that the Qualified Appraisers shall be experienced in the operation, leasing or evaluation of parking garages in the City of Boston, and shall not include in their determination of Fair Market Rent any allowance for tenant improvements. But for the exceptions contained in the preceding sentence, all other provisions for determining Fair Market Rent for the Premises during an Extended Term shall apply, mutatis mutandis, in respect of a determination of Fair Market Rent for the Garage.
23.6 RETROACTIVE ADJUSTMENTS. If, pursuant to the preceding provisions of this Article 23, Fair Market Rent for the Garage has not been determined as of the date the same is to become effective, Tenant shall pay on account of Annual Fixed Rent the rent specified by Landlord as the Fair Market Rent until such determination is made, with necessary adjustments between Landlord and Tenant to be made retroactively, by a cash payment (including interest on the adjusted amount due at the Lease Interest Rate), on the first day of the month next succeeding a final determination of the Fair Market Rent for the Garage.
23.7 TERM OF THIS LEASE WITH RESPECT TO THE GARAGE. The Lease Term with respect to the Garage shall be for a term of five (5) years with options to extend the Lease Term with respect to the Garage for three (3) additional terms of five (5) years at the Fair Market Rent for the Garage as of the commencement of each such extended term. In addition, if Tenant shall have extended the Lease Term for the First Extended Term, then upon notice to Landlord given concurrently with the notice extending the Lease Term for the First Extended Term, Tenant shall have the right to further extend the Lease Term with respect to the Garage for two (2) additional terms of five (5) years, each at the Fair Market Rent for the Garage as of the commencement of each such extended term. Further, If Tenant shall have extended the Lease Term for the Second Extended Term, then upon notice to Landlord given concurrently with the notice extending the Lease Term for the Second Extended Term, Tenant shall have the right to further extend the Lease Term with respect to the Garage for two (2) additional terms of five (5) years, each at the Fair Market Rent for the Garage as of the commencement of each such extended term. Notice of the exercise of any option to extend the Lease Term with respect to the Garage except for the first five (5) year term during the Initial Term, First Extended Term, or Second Extended Term, respectively (as to which notice shall be given as provided in Section 23.1, or concurrently with the notice extending the Lease Term for the First Extended Term, or for the Second Extended Term, respectively), shall be given to Landlord at least twelve (12) months prior to the expiration of the then current five (5) year term.
23.8 TENANT'S ELECTION NOT TO LEASE; EFFECT ON ARTICLE 26. If Tenant shall not have validly exercised the Garage Addition Option, or, having validly exercised the Garage Addition Option, if Tenant does not thereafter exercise any particular option to extend the Lease Term with respect to the Garage, then Tenant shall have no further rights under this Article 23 with respect to the Garage, and Landlord shall be free to lease any or all of the Garage to any party or parties, or to hire an operator or operators for the Garage, from time to time on such terms and conditions as it may deem appropriate, subject only to the limitations contained in Article 26 with respect to Tenant's rights to lease parking spaces. If Tenant shall have validly exercised the Garage Addition Option, then Article 26 with respect to Tenant's rights to lease parking spaces shall be deemed to be deleted from this Lease, effective as of the date of Tenant's exercise of the Garage Addition Option. If at any time thereafter the Garage shall be deleted from the Premises, or if Tenant shall elect not to exercise an option to extend the Lease Term as to the Garage, then Article 26 shall again become part of this Lease, effective as of the expiration of the Lease Term as to the Garage.
ARTICLE 24
RIGHT OF FIRST OFFER ON SALE
24.1 GRANT OF RIGHT OF FIRST OFFER. Provided that, at the time of exercise of this right by Tenant (i) there then exists no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, (ii) this Lease is then in full force and effect, and (iii) Tenant or its Affiliates is in actual occupancy of at least five hundred thousand (500,000) Rentable Square Feet of Office Space in the Building (the "Occupancy Requirement"), Land lord hereby grants to Tenant a right of first offer to purchase the Building and the Land (the "Right of First Offer") on the terms and conditions contained in this Article 24.
24.2 SALE AND REPLY NOTICES. If Landlord should, in Landlord's sole and exclusive judgment, at any time during the Initial Term of this Lease determine that it would like to sell the Building and/or the Land to a third party buyer which is not an Affiliate of Landlord or an Affiliate of any partner or member of Landlord or any of their Affiliates, Landlord shall deliver to Tenant a notice (the "Sale Notice") thereof. The Sale Notice shall specify the interest (the "Specified Interest") in the Land and/or the Building that Landlord has determined to sell. For purposes of this Article 24, "sell" or "sale" shall also include an exchange of property or a master net lease of the Land and Building in a single transaction for a term of sixty (60) years or more, or an assignment or other transfer, in one or a related series of transfers resulting in a transfer, of Landlord's entire interest in the Land and/or the Building, or a transfer or a related series of transfers which amount to a transfer of an interest of fifty (50%) percent or more in Landlord other than to an Affiliate of Landlord or an Affiliate of any partner or member of Landlord or any of their Affiliates. Specifically excluded are a "sale" pursuant to a "sale/leaseback" financing transaction or other financing transaction, provided that Landlord's and Tenant's responsibilities to each other remain substantially the same. Following the receipt of a Sale Notice, Tenant shall have the right to elect to submit an offer to Landlord ("Tenant's Purchase Offer") to purchase the Specified Interest in the Land and/or the Building in accordance with the further provisions of this Article 24. Tenant shall give Landlord notice (the "Reply Notice") within ten (10) Operating Days after receipt of the Sale Notice as to whether or not Tenant elects to prepare a Tenant's Purchase Offer as provided herein. If a Reply Notice is not received by Landlord within such ten (10) Operating Day period, or if in the Reply Notice, Tenant declines to prepare Tenant's Purchase Offer, Tenant shall conclusively be deemed to have waived its rights under this Article 24, and Landlord shall be free to sell the Specified Interest in the Land and/or the Building to any buyer, provided that Landlord accepts a bona fide offer to purchase Specified Interest in the Land and/or the Building within twelve (12) months (and with a closing to take place within six (6) months thereafter) after the earlier of (i) the expiration of the ten (10) Operating Day period for Landlord to receive a Reply Notice, without a Reply Notice having been received by Landlord, or (ii) the receipt by Landlord of a Reply Notice in which Tenant declines to prepare Tenant's Purchase Offer.
24.3 TENANT'S PURCHASE OFFER. If Tenant properly elects within said ten (10) Operating Day period in accordance with Section 24.2 to submit Tenant's Purchase Offer, then Landlord shall promptly thereafter make available to Tenant, for its review, and to make copies thereof, at Tenant's expense, at the usual office where such records are kept, all leases of space in the Building, all environmental reports in Landlord's possession with respect to the Land and Building, records of all Operating Expenses with respect to the Building for the previous two (2) years, and copies of all licenses, permits, and notices of violation (and information regarding curative action, if any, taken relative thereto), so that Tenant may prepare Tenant's Purchase Offer. If Landlord shall have prepared an offering brochure with respect to the sale of the Land and Building, Landlord shall provide Tenant with a copy thereof. Tenant shall keep any such information provided by Landlord in confidence in accordance with a confidentiality agreement to be executed between Landlord and Tenant prior to Landlord's permitting Tenant to review any such records or information. Tenant shall also be permitted to make reasonable inspections of the Property and the operating systems of the Building in a manner customary and appropriate for similar transactions in the Boston Central Business District. If at any time after commencing its diligence in order to prepare Tenant's Purchase Offer, Tenant decides that it shall not pursue such preparation of Tenant's Purchase Offer, Tenant shall promptly notify Landlord of Tenant's decision, and upon Landlord's receiving notice thereof, Landlord shall be free to sell the Land and Building to any buyer.
24.4 PURCHASE AND SALE. Tenant shall have sixty (60) days from the date of the Sale Notice to deliver Tenant's Purchase Offer to Landlord. During such sixty (60) day period, or until receipt by Landlord of notice from Tenant that Tenant has decided not to pursue preparation of Tenant's Purchase Offer, if earlier, or until Landlord shall deliver its Offer Decision Notice (which Landlord shall deliver within thirty (30) days following receipt of Tenant's Purchase Offer as provided below), or Landlord's thirty (30) day period to deliver an Offer Decision Notice shall have expired, Landlord shall not offer for sale or otherwise market the Land and Building. Tenant shall include with Tenant's Purchase Offer, and as a condition to the effectiveness thereof, a check payable to Landlord in the amount of ten (10%) percent of the purchase price proposed in Tenant's Purchase Offer as a deposit. Such delivery of Tenant's Purchase Offer shall constitute an irrevocable offer to Landlord to purchase the Specified Interest in the Land and/or Building for the purchase price stated in Tenant's Purchase Offer, subject to then usual and customary title and conveyance standards and conditions applicable to the sale of large commercial office buildings in the Boston Central Business District promulgated by the Massachusetts Conveyancers' Association, or any successor thereto. If there is any dispute as to the then applicable title and conveyance standards and conditions, either party may give a Dispute Notice to the other party, which Dispute Notice shall specify in reasonable detail the respects in which such party believes that there is a dispute as to the applicable title and conveyance standards and conditions, and the dispute resolution mechanism of Article 30 shall become applicable. Landlord shall have thirty (30) days after submission of Tenant's Purchase Offer, to decide whether or not to accept Tenant's Purchase Offer, and to deliver a notice (the "Offer Decision Notice") to Tenant either accepting or refusing to accept the Purchase Offer. If Landlord accepts Tenant's Purchase Offer, Landlord shall be bound to sell, and Tenant shall be bound to purchase, the Specified Interest in the Land and/or the Building for the purchase price stated in Tenant's Purchase Offer. If Landlord rejects Tenant's Purchase Offer, the deposit shall be promptly refunded to Tenant. Any interest earned on the deposit shall be paid to the party ultimately entitled to receive the deposit.
24.5 CLOSING DATE. If Landlord shall accept Tenant's Purchase Offer, the sale to Tenant of the Specified Interest in the Land and/or the Building shall close on the date which is no more than sixty (60) days after the date of Tenant's receipt of the Offer Decision Notice. If Landlord accepts Tenant's Purchase Offer, the deposit provided in Section 24.4 shall become non-refundable. In the event of Tenant's default with respect to such purchase, Landlord's sole remedy shall be to retain the deposit (i.e., ten (10%) percent of the purchase price) as liquidated damages and not as a penalty, it being understood that Landlord's actual damages for non-performance by Tenant may be difficult to ascertain.
24.6 NON-ACCEPTANCE OF TENANT'S PURCHASE OFFER.
(a) In the event Landlord shall elect not to accept Tenant's Purchase Offer within the thirty (30) day period set forth in Section 24.4, then Landlord may proceed to market and sell the Specified Interest in the Land and/or the Building to any buyer free of Tenant's rights under this Article 24, except as hereinafter set forth. If Landlord shall thereafter (i) fail to sell the Specified Interest in the Land and/or the Building for a price which is at least equal to one hundred two (102%) percent of the price specified in Tenant's Purchase Offer, or (ii) fail to accept a bona fide offer to purchase the Specified Interest in the Land and/or the Building within twelve (12) months after the date of the Offer Decision Notice, and if Landlord continues to desire to sell the Specified Interest in the Land and/or the Building, then the provisions of Sections 24.1 through 24.5 shall again become applicable. If Landlord sells the Specified Interest in the Land and/or the Building for a price which is at least equal to one hundred two (102%) percent of the price specified in Tenant's Purchase Offer, pursuant to a bona fide offer to purchase the Specified Interest in the Land and/or the Building which offer shall have been accepted by Landlord within twelve (12) months after the date of the Offer Decision Notice (and with a closing to take place within six (6) months thereafter), then Tenant's right of first offer as described in this Article 24 shall be deemed to have been waived with respect to such sale, but Tenant's right of first offer as provided herein shall nevertheless continue with respect to any subsequent decision by any subsequent owner thereafter to sell the Land and/or the Building during the Lease Term.
(b) At any time and from time to time, as reasonably requested by Landlord, upon not less than ten (10) days' prior notice, Tenant agrees to execute, acknowledge and deliver to Landlord a statement in writing and in recordable form certifying, if such be the case, that Tenant's right of first offer provided in this Article 24 has lapsed, or has been waived or is otherwise not applicable with respect to any particular transaction, it being intended that any such statement delivered pursuant hereto may be relied upon by others with whom Landlord may be dealing.
24.7 INAPPLICABILITY. In no event shall the provisions of this Article 24 apply to a sale pursuant to an exercise of a power of sale or a foreclosure by a mortgagee or the acceptance of a deed in lieu of foreclosure by such mortgagee or its nominee.
ARTICLE 25
COMMUNICATIONS EQUIPMENT
25.1 RIGHT TO INSTALL COMMUNICATIONS EQUIPMENT.
(a) Landlord understands that during the Term Tenant may require communication services in connection with the operation of Tenant's business which would necessitate the construction, installation, operation and use by Tenant of communication antennae, microwave and/or satellite dishes, and other equipment and facilities, including voice and wireless technology, with a height conforming to all applicable governmental laws, rules and requirements, together with related equipment, mountings and supports (collectively, the "Communications Equipment") on the roof of the Building. Landlord shall make available to Tenant, at no additional charge, space on the roof of the Building for the Communications Equipment (up to fifty (50%) percent of the total space available on the roof in the aggregate) at one or more locations reasonably designated by Landlord and reasonably acceptable to Tenant. Such space on the roof shall be solely for use by Tenant, its Affiliates, subtenants or assignees themselves (and not for resale purposes or for the use of any party other than Tenant, its Affiliates, and the use of Tenant's subtenants or assignees for their own use and not for resale). Tenant's use of the roof of the Building shall be on a non-exclusive basis. All of the provisions of this Lease with respect to Tenant's obligations hereunder shall apply to the installation, use and maintenance of the Communications Equipment, including, without limitation, provisions relating to compliance with Legal and Insurance Requirements, insurance, indemnity, repairs and maintenance, except that the roof space shall not be included in the calculation of Rentable Square Feet for the purpose of determining Tenant's Share. The license granted to Tenant in this Article 25 shall not be assignable by Tenant separate and apart from this Lease. The Communications Equipment shall be treated for all purposes of this Lease as if the same were Tenant's Property.
(b) The installation of the Communications Equipment shall constitute an Alteration and shall be performed at Tenant's sole cost and expense (including without limitation, any costs and expenses in connection with reinforcing the roof of the Building, if required) in accordance with and subject to the provisions of Article 8 hereof. Tenant's right to install the Communications Equipment shall be subject to the reasonable approval of Landlord and Landlord's architect with respect to the plans and specifications for the Communications Equipment, including, without limitation, the size, height, and dimensions of the Communications Equipment, the aesthetics of the Communications Equipment and any shielding or screening necessary or desirable to maintain the architectural integrity of the Building, in Landlord's reasonable opinion, the manner in which the Communications Equipment is attached to the roof of the Building, and the manner in which any cables, conduits or lines are run to and from the Communications Equipment and the routing and manner of installation of cables, conduits and lines through the Building core shafts to the Premises.
(c) Tenant shall have access to the roof and other areas of the Building where Tenant's cables and other items relating to the Communications Equipment are installed whenever reasonably required for the purpose of installing, maintaining, repairing, replacing and removing the Communications Equipment (including, but not limited to, access to shaftways, conduits and mechanical equipment rooms reasonably necessary to service the Communications Equipment), provided that in the event of an emergency, Landlord will use reasonable efforts to provide Tenant with immediate access to the roof and such other areas; provided, however, that only authorized engineers, employees or property authorized contractors of Tenant, Federal Communications Commission inspectors, or persons under their direct supervision will be permitted to have access to the roof. Tenant shall exercise firm control over the persons requiring access to the roof in order to keep to a minimum the number of people having access to the roof and the frequency of their visits.
(d) Subject to the priority provisions of Subsection 28.1(f), Tenant shall use and maintain the Communications Equipment so as not to cause any material interference to other tenants in the Building or Communications Equipment Users (as defined below), or damage to or interference with the operation of the Building or Building systems, or materially interfere with the use of the Building and roof by Landlord. Tenant shall maintain all of Tenant's equipment placed on or about the roof in proper operating condition and maintain same in good condition as to appearance and safety, consistent with the operation of the Building as a first class office building. Tenant shall keep its area on the roof free of all trash or waste materials.
(e) Tenant, at Tenant's sole cost and expense, shall paint and maintain the Communications Equipment in white or such other color as Landlord shall reasonably determine and shall install such lightning rods or air terminals on or about the Communications Equipment as Landlord may require. Landlord may require Tenant to screen the Communications Equipment in such a manner so that it is not visible from any adjacent building as Landlord determines in its sole discretion. Landlord shall have the right, in its sole discretion, to specify the dimensions and materials to be used to screen the Communications Equipment, in order to conform to Landlord's aesthetic plans for the Building.
(f) Landlord agrees to put provisions in the leases, licenses or other relevant agreements of all other tenants or other entities (a "Communications Equipment User") installing communications equipment on the roof along the following lines, subject to such negotiated changes as Landlord may agree which are not inconsistent herewith. Such Communications Equipment Users shall be required to install and operate their communications equipment in a manner which will not cause material interference to Landlord, Tenant or any other Communications Equipment User. For purposes thereof, interference from the operation of communications equipment shall be deemed to be material if it reduces the operating efficiency of utility or any equipment, if it adversely affects the purity of any frequency or signal or loss of information, or if it causes interruption of the signal then used by Landlord, Tenant, or any other Communications Equipment User for transmission or receiving purposes. If any communications equipment cause such a material interference, such Communications Equipment User will be required to change the frequency on which it transmits and/or receives and to take any other steps necessary to eliminate the interference. If said interference cannot be eliminated within a reasonable period of time, such provision will require the Communications Equipment User to remove the portion of its communications equipment from the roof that is causing such interference. The lease or license with the Communications Equipment Users shall provide that Tenant's Communications Equipment shall have primacy over that of all other Communications Equipment Users, so that in the event of interference conflict between Tenant and any other Communications Equipment User, Tenant shall prevail; provided, that if such interference conflict was created by a change in equipment by Tenant, Tenant shall be required to implement any reasonable alternative that may be available to resolve the same, but if there is no reasonable and technologically feasible alternative, then Tenant's change shall prevail and all communications equipment which interferes with Tenant's Communications Equipment shall be removed from the roof. Landlord agrees to use reasonable efforts to enforce such provisions against offending Communications Equipment Users, including, without limitation, seeking specific performance of the relevant portion of the lease or license with the Communications Equipment Users, but Landlord shall be under no obligation to terminate the lease or license of such Communications User, but may be required to terminate such other Communications Equipment User's right to use the roof.
25.2 REMOVAL. Tenant shall be responsible for the cost of installation, operation, cleanliness, maintenance and removal of the Communications Equipment and appurtenances, all of which shall remain the personal property of Tenant, and shall be removed by Tenant at the expiration or earlier termination of this Lease. Tenant shall be responsible to repair any damage caused to the roof or any other part of the Building, which may be caused by the installation, maintenance, operation, and removal of the Communications Equipment, including the patching of any holes to match, as closely as possible, the color surrounding the area where the Communications Equipment and appurtenances were attached. Such maintenance and operation shall be performed in a manner to avoid any interference with any other tenants, Communications Equipment Users, or Landlord.
25.3 TENANT'S CONTRACTORS. In light of the specialized nature of the Communications Equipment, Tenant shall be permitted to utilize the vendors and contractors of its choice for installation, removal and repair of the Communications Equipment. Notwithstanding the foregoing, Tenant shall provide Landlord with prior notice of any such installation, removal or repair and coordinate such work with Landlord in order to avoid voiding or otherwise adversely affecting any warranties granted to Landlord with respect to the roof. If necessary, Tenant, at its sole cost and expense, shall retain any contractor having a then existing warranty on the roof to perform such work (to the extent that it involves penetration of the roof), or, at Tenant's option, to perform the portion of such work which would affect the roof warranty in conjunction with Tenant's contractor. If Landlord contemplates roof repairs which require the temporary removal or relocation of the Communications Equipment, or which may result in an interruption of Tenant's telecommunications service, Landlord shall give Tenant at least ten (10) days prior written notice of such contemplated work in order to allow Tenant to make other arrangements for such services, provided that in the event of an emergency, Landlord shall not be required to give Tenant ten (10) days prior written notice, but shall in good faith, give Tenant as much notice as is reasonably possible considering the nature of the emergency. In addition, if the roof repairs are not of an emergency nature and Tenant reasonably requires more than ten (10) days in which to make alternative service arrangements, Landlord will work together in good faith with Tenant to agree upon an arrangement that allows Landlord to perform such roof repairs on a timely basis without additional cost and allows Tenant an adequate amount of time to make alternative service arrangements. Notwithstanding the foregoing, (i) Tenant shall not be required to relocate its Communications Equipment unless the work in question cannot reasonably be performed any other way, (ii) upon Tenant's request, Landlord shall give Tenant reasonably detailed information about the work in question, and (iii) Landlord will not disconnect Tenant's Communications Equipment without Tenant's prior written consent, but if Tenant does not grant such consent within the time frames provided for above, Tenant shall exonerate and indemnify Landlord from and against any and all liability arising out of any delay in performing the roof repairs in question resulting therefrom.
25.4 LICENSE. Tenant shall obtain and keep in full force and effect and promptly pay the cost of any tax, license, permit or other fees or charges imposed pursuant to any legal requirements relating to the installation, maintenance or use of the Communications Equipment, including, without limitation, all applicable rules and regulations of the Federal Communications Commission and the Federal Aviation Administration. Tenant acknowledges and agrees that the privileges granted Tenant under this Article 25 shall merely constitute a license and shall not, now or at any time after the installation of the Communications Equipment, be deemed to grant Tenant a leasehold or other real property interest in the Building or any portion thereof. The license granted to Tenant in this Article 25 shall automatically terminate and expire upon the expiration or earlier termination of this Lease and the termination of such license shall be self-operative and no further instrument shall be required to effect such termination.
ARTICLE 26
PARKING
26.1 NUMBER OF PARKING SPACES. During the Lease Term, Tenant shall be entitled to contract for up to, but not in excess of, one parking space located in the Garage (the "Garage") to be constructed underneath the Building, for each 2,000 Rentable Square Feet contained within the Premises, but if such calculation would result in a number which is not an integer, then the result shall be rounded down to the next lowest integer, and of which one (1) out of every three (3) parking spaces shall be on a self-parking basis (but not to exceed one hundred (100) self-parking spaces) and Tenant will be issued a like number of access cards therefor which will enable the holder thereof to gain access to the Garage at all times except as otherwise provided in Section 26.4. In order to contract for any of such parking spaces, Tenant shall give written notice to Landlord on or before June 1, 2002 specifying the number of parking spaces for which Tenant shall desire to contract with respect to the Premises. If any of the Expansion Option Space is added to the Premises as provided in Article 22, of if any Offered Space is added to the Premises as provided in Article 28, at the time Tenant gives notice to Landlord of its exercise of its rights to add the Expansion Option Space, or the Offered Space, as the case may be, Tenant shall simultaneously give notice to Landlord of the number of additional parking spaces for which Tenant desires to contract. Tenant may, from time to time, reduce the number of parking spaces for which it has contracted by giving written notice thereof to Landlord at least two (2) months prior to the desired date of such contraction. If, at any time during the Lease Term, Tenant shall not have contracted for the maximum number of parking spaces to which it is entitled under this Section 26.1, or if Tenant has given back any parking spaces, Tenant may, on a priority basis, contract for some or all of the remainder of such parking spaces to which Tenant is entitled upon two (2) months' prior written notice to Landlord of Tenant's desire to contract for such additional parking spaces. The monthly rent from time to time shall be equal to the prevailing rate charged from time to time by Landlord, or the operator of the Garage, as the case may be, but shall not exceed market rates then charged for similar parking spaces in other first class office buildings in the Boston Central Business District. Landlord's failure or inability to provide any such parking spaces, whether because of casualty, eminent domain, or for any other reason beyond Landlord's control, shall in no event entitle Tenant to terminate this Lease.
26.2 VALET-PARKING. It is contemplated that the Garage will initially be operated on a valet parking basis. No specific parking spaces will be reserved for use exclusively by Tenant or any other tenant. To the extent that there are any self-parking spaces, Landlord further contemplates that each user of the Garage will have the right to park in any available parking space in accordance with regulations of uniform applicability promulgated for all users of the Parking by Landlord or the Garage operator. Notwithstanding the foregoing, Landlord reserves the right at any time and from time to time to change the operation of the Garage from a self-parking system to a valet system and vice versa, so long as at least one (1) out of every three (3) of Tenant's parking spaces contracted for under Section 26.1 shall always be usable on a self-parking basis. Levels P-1 and P-2 shall contain self-parking spaces.
26.3 PARKING RULES AND REGULATIONS. Tenant and its employees shall observe reasonable safety precautions in the use of the Garage and shall at all times abide by all rules and regulations promulgated by Landlord of the Garage operator governing the use thereof, including the requirement that an identification or parking sticker shall be displayed at all times in all cars parked in the Garage. Such rules and regulations will not be discriminatorily enforced. Any car not displaying such a sticker, if so required, may be towed away or booted at the car owner's expense.
26.4 HOURS OF OPERATION. Subject to the provisions of Section 14.3 of this Lease, the Parking Area will remain open on Operating Days from 7:00 A.M. to 7:00 P.M., except that the holders of the access cards referred to in Section 26.1 shall be able to gain access to the Garage at all times.
26.5 LANDLORD NOT RESPONSIBLE. Landlord does not assume any responsibility for, and shall not be held liable for, any damage or loss to any automobiles parked in the Garage or to any personal property located therein, or for any injury sustained by any person in or about the Garage, except if caused by any negligence or willful misconduct of Landlord, its agents, servants and employees acting within the scope of their authority. Landlord shall not, without limitation of the foregoing, be liable for any act, omission or willful wrongdoing of any independent operator operating the Garage.
ARTICLE 27
TENANT'S EMERGENCY GENERATORS
27.1 RIGHT TO INSTALL GENERATORS. Tenant shall have the right to install (in accordance with the terms and conditions of this Lease with respect to Alterations), operate and maintain emergency back-up generators, and equipment and systems reasonably necessary for the proper operation and maintenance thereof and incidental thereto, including, without limitation, an exhaust system and/or venting system and the necessary cables and wires running to and from the Generators to the Premises, (collectively, the "Generators") and, if necessary, based upon the specifications for such Generators, two (2) above- ground fuel Tanks (the "Tanks"). The Tanks shall be located in the Garage, in a location designated by Landlord and reasonably acceptable to Tenant, which shall not exceed 1,000 usable square feet on the P-5 level of the Garage. The Generators shall be installed on the roof of the low rise portion of the Building, in a location designated by Landlord and reasonably acceptable to Tenant. Such space for the Generators and Tanks shall not be included in the area of the Premises and no Fixed Rent or Additional Rent shall be payable therefor, but all of the other provisions hereof shall apply thereto as if such space were a part of the Premises. Notwithstanding anything to the contrary herein, Tenant's right to install the Generators shall be subject to Landlord's reasonable approval of the manner in which the Generators and Tanks are installed, the manner in which any cables and wires are run to and from the Generators to the Premises, the manner in which any lines are run from the Generators to the Tanks, and the measures that will be taken to eliminate any vibrations or sound disturbances from the operation of the Generators. Landlord shall have the right to require an acceptable enclosure to hide or disguise the existence of the Generators and/or Tanks and to minimize any adverse effect that the installation of the Generators and/or the Tanks may have on the appearance of the Building. Tenant shall be solely responsible for obtaining all necessary governmental and regulatory approvals and for the cost of operating, maintaining and removing the Generators and the Tanks. Tenant shall also be responsible for the cost of all utilities consumed in the operation of the Generators.
27.2 INDEMNITY BY TENANT. Tenant shall be responsible for ensuring that the installation, maintenance, operation, and removal of the Generators and Tanks will in no way damage the Building. Tenant agrees to be responsible for any damage caused to the Building in connection with the installation, maintenance, operation, or removal of the Generators and Tanks and, in accordance with Article 11 of this Lease, to indemnify, defend and hold Landlord harmless from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including, without limitation, reasonable architects' and attorneys' fees which may be imposed upon, incurred by or asserted against Landlord in connection with the installation, maintenance, operation or removal of the Generators and the Tanks, including, without limitation, any environmental and hazardous materials claims in connection with the installation, maintenance, operation, or removal of the Generators and Tanks by Tenant or any of Tenant's agents, servants, contractors or employees. Landlord agrees Tenant may elect not to remove the Generators and Tanks and related appurtenances at the end of the Term hereof provided they are in good working order and unencumbered title thereto is transferred to Landlord.
27.3 TENANT'S RESPONSIBILITIES REGARDING GENERATORS. Tenant shall be responsible for the installation, operation, cleanliness, maintenance and removal of the Generators, Tanks and appurtenances, all of which shall remain the personal property of Tenant, and subject to the provisions of Section 27.2 hereof, shall be removed by Tenant at its own expense at the termination of the Lease. Tenant shall repair any damage caused by such removal, including the patching of any holes to match, as closely as possible, the color surrounding the area where the Generators, Tanks and appurtenances were attached. Such maintenance and operation shall be performed in a manner to avoid any unreasonable interference with any other tenants or Landlord. Tenant agrees to maintain the Generators and Tanks, including, without limitation, any enclosure installed around the Generators and Tanks, in good condition and repair. Tenant shall be responsible for performing any maintenance and improvements to any enclosure surrounding the Generators and Tanks so as to keep such enclosure in good condition.
27.4 ACCESS. Upon prior notice to Landlord (except in case of emergency where only such notice as is reasonable under the circumstances shall be required), Tenant shall have access on a twenty-four (24) hour per day and seven (7) day per week basis to the Generators and Tanks and its surrounding area for the purpose of installing, repairing, maintaining, and removing the Tenant's Generators and Tanks.
27.5 TESTING. Tenant shall only test the Generators before or after normal business hours and upon prior notice to Landlord.
ARTICLE 28
FIRST RIGHT TO LEASE
28.1 TENANT'S RIGHTS. Provided that, at the time of each exercise (i) there then exists no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, (ii) this Lease is then in full force and effect, and (iii) Tenant satisfies the Occupancy Requirement, if any Office Space in the Building shall become available for lease, Landlord shall so notify Tenant, and shall identify the space available (the "Offered Space") and shall set forth the terms and conditions on which it is willing to lease the Offered Space, including the rent which Landlord is willing to accept for the Offered Space, and the date (the "Offered Space Commencement Date") on which the Offered Space shall become a part of the Premises. Tenant may, by giving notice to Landlord within thirty (30) days after receipt of such notice, time being of the essence, elect to lease the Offered Space on the terms offered by Landlord, and Tenant's election to lease the Offered Space shall constitute a binding agreement to lease the Offered Space on the terms offered by Landlord.
28.2 CONFIRMATION OF OFFERED SPACE COMMENCEMENT DATE. Promptly after the Offered Space Commencement Date, Landlord and Tenant shall execute a suitable instrument confirming the terms thereof, but failure to do so shall have no effect on Tenant's agreement to lease the Offered Space. Tenant shall pay, as Additional Rent, Tenant's Share (adjusted to include the additional Offered Space added to the Premises) of the Excess Operating Expenses in accordance with Article 6 of this Lease.
28.3 TENANT'S ELECTION NOT TO LEASE. If Tenant shall not elect to lease the Offered Space within such 30-day period, then, except as expressly set forth below in subsection 28.4, Tenant shall have no further rights under this Article 28 with respect to the Offered Space, and Landlord shall be free to lease any or all of such space to any party or parties from time to time on such terms and conditions as it may deem appropriate. Nothing herein shall be construed to limit Tenant's rights under this Article 28 with respect to space within the Building other than the Offered Space. For purposes of the first sentence of Section 28.1, the term "available for lease" shall not include the initial leasing of any portion of the Building, any leasing pursuant to any option, commitment or right of first refusal held by another tenant to expand the premises occupied by such other tenant contained in its expiring lease, or the renewal or extension of an expiring lease with a then existing tenant, pursuant to an option to renew or extend contained in its lease.
28.4 RE-OFFER. If Tenant shall fail to elect to lease the Offered Space as aforesaid, then notwithstanding anything to the contrary contained in the preceding Subsections 28.1, 28.2 or 28.3, if Landlord shall thereafter fail to execute a lease for the Offered Space within one (1) year of the expiration of such 30-day response period, Landlord shall be required to re-offer the Offered Space to Tenant pursuant to the preceding Subsections 28.1, 28.2 and 28.3.
28.5 DELAY IN DELIVERY OF POSSESSION. Notwithstanding anything to the contrary contained in this Lease, in the event that Landlord is unable to deliver possession of any of the Offered Space on the Offered Space Commencement Date as set forth in Section 28.1, for reasons beyond Landlord's reasonable control (including the failure of an existing tenant to vacate such space, in which event Landlord shall institute and maintain eviction proceedings against such holdover tenant, so as to obtain possession of the space as promptly as possible under the circumstances), Landlord shall use reasonable efforts to deliver possession, and the Offered Space Commencement Date shall be deemed to be the first day thereafter that actual possession is so delivered, and any delay in such date shall be Tenant's sole remedy at law or in equity.
28.6 SPACE DELIVERED "AS IS". Landlord shall have no obligation to remove improvements made to any of the Offered Space prior to delivery to Tenant, whether or not made by Landlord, nor shall Landlord have any obligation to prepare the space for Tenant's occupancy Tenant hereby acknowledging and agreeing that Offered Space shall be delivered, and Tenant shall accept possession thereof, in its then "AS IS" condition, without representation or warranty by Landlord.
ARTICLE 29
MANAGEMENT OFFICE
(a) Tenant agrees to sublease to Landlord, upon the same terms as set forth in this Lease, including the rent and initial contribution, (or to delete from the Premises), upon written notice from Landlord to Tenant, and upon such other terms and conditions as are reasonably acceptable to Landlord and Tenant, not more than two thousand five hundred (2,500) Rentable Square Feet of space in the Building, which space shall be used solely for a building management office. The space may be located either in the Retail Space or in the Office Space, with the exact size and location of such space to be subject to approval by both Landlord and Tenant, which shall not be unreasonably withheld, delayed or conditioned.
(b) If Tenant shall require the use of the space constituting the management office, then upon reasonable notice to Landlord, Tenant shall have the right to designate an alternative management office in the Building, either in the Retail Space or in the Office Space. Any such move shall be at Tenant's sole cost and expense, including the cost of improving the new space to reasonably comparable finish and utility as the existing management office, and the cost of the move. Tenant shall move Landlord and its property to such new space in such manner as will minimize, to the greatest extent practicable, any interference with the business or operations of Landlord at the Building. Any materials, improvements and fixtures which can reasonably be salvaged from the building management office shall be salvaged and used in the relocated space.
ARTICLE 30
RESOLUTION OF DISPUTES
30.1 DISPUTE NOTICE. In the event there is a dispute between the parties relating to the measurement of the Premises or the Building, or construction mitigation measures as provided in Article 3, or the Shell Completion Date, as provided in Sections 4.2 or 4.3, or with respect to Base Building Construction, Landlord's Work, Tenant's Work, and the payment of Landlord's Contribution in accordance with Exhibit C, either party may send a notice to the other party setting forth in reasonable detail the matters in dispute (a "Dispute Notice"). If the dispute is not resolved within five (5) Operating Days after the date of the giving of a Dispute Notice, then authorized representatives of each party shall meet at a mutually agreeable time and place within ten (10) Operating Days after the date of the giving of a Dispute Notice in order to endeavor, in good faith, to resolve such dispute. In the event that they are unable to resolve the dispute within twenty (20) days from the giving of a Dispute Notice with respect to such dispute, then either party may submit the dispute to arbitration in accordance with Section 30.2.
30.2 SELECTION OF ARBITRATORS. If the dispute cannot be resolved between Landlord and Tenant pursuant to Section 30.1, then the dispute shall be submitted to arbitration through the Boston office of the American Arbitration Association. In no event shall arbitration be required unless specifically provided in this Lease by specific reference to this Article 30. Within ten (10) Operating Days after arbitration has been invoked, each party shall designate an arbitrator by written notice to the other and the two so designated shall (within a further period of five (5) Operating Days) select a third arbitrator of similar expertise and experience to the two arbitrators so selected, as appropriate considering the nature of the dispute. In the case of disputes relating to the performance of any work in accordance with Exhibit C, the arbitrators shall be reputable engineers, architects, or general contractors (as appropriate, considering the nature of the dispute) with at least ten (10) years experience in office building construction, including major build outs of office space in the Greater Boston, Massachusetts area, and with no relationship to either party. All arbitrators shall be selected within fifteen (15) Operating Days of the submission of the dispute to arbitration. If the third arbitrator has not been selected by that time, the third arbitrator shall be selected by the Boston office of the American Arbitration Association.
30.3 ARBITRATION PROCEDURE. The arbitration shall be conducted pursuant to the applicable statutes of the Commonwealth of Massachusetts in effect at the time, and in the manner specified herein and to the extent not inconsistent with such statutes and this section, in accordance with the Expedited Procedures included within the Commercial Dispute Resolution Procedures of the American Arbitration Association at the time in effect. The arbitration shall be held within ten (10) Operating Days after the selection of the third arbitrator. If the arbitrators are able to reach a decision by agreement of at least two (2) of the three (3) arbitrators, then such decision shall be the decision of the arbitrators. If the three (3) arbitrators are not able to reach a decision by agreement of at least two (2) of the three (3) arbitrators, then the decision of the third arbitrator shall be the decision of the arbitrators. The arbitrators shall issue their decision within ten (10) Operating Days after the conclusion of the arbitration hearing. The arbitrators shall have no power to vary or modify the provisions of this Lease or to award damages and their jurisdiction is limited accordingly. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own counsel and witnesses and the arbitrator appointed by it. Landlord and Tenant shall share equally the cost of arbitration and the fees, if any, to be paid to the third arbitrator.
EXECUTED in one or more counterparts by persons or officers hereunto duly authorized on the Date set forth in Section 1.2 above.
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WITNESS: | | | | LANDLORD: |
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| | | | KINGSTON BEDFORD JOINT VENTURE LLC |
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| | | | By: | | OTR/MSGW Lincoln LLC, Manager |
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| | | | | | By: | | /s/ JOHN B. HYNES III |
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| | | | | | By: | | /s/ JOHN B. HYNES III |
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| | | | TENANT: |
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| | | | SSB REALTY LLC |
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| | | | | | By: | | /s/ THOMAS F. CATALDO |
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| | | | | | Name: | | Thomas F. Cataldo |
| | | | | | Title: | | President |
Exhibit 10.8
FIRST AMENDMENT TO LEASE
FIRST AMENDMENT TO LEASE (this "First Amendment") dated as of August 15, 2003, by and between KINGSTON BEDFORD JOINT VENTURE LLC, a Delaware limited liability company ("Landlord") and SSB REALTY LLC, a Delaware limited liability company ("Tenant").
WITNESSETH
WHEREAS, Landlord and Tenant entered into a lease dated May 9, 2001 (the "Lease") for certain space (the "Original Premises"), as more particularly set forth in the Lease, of the building (the "Building") known as One Lincoln Street, Boston, MA 02111; and
WHEREAS, Landlord and Tenant desire to enlarge the Original Premises by adding thereto approximately 5,874 square feet of space (the "Second Floor Additional Space") on the second (2nd) floor of the Building, as shown on Exhibit A hereto, and by adding approximately 20,108 square feet of Storage Space in the basement of the Building (the "Storage Space" as to which there is no Annual Fixed Rent Payable, in accordance with Section 20.27 of the Lease), as shown on Schedule 1 hereto; and
WHEREAS, Landlord and Tenant mutually intend and desire to modify the Lease on and subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, each to the other paid, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. Premises.
(a) The definition of "Premises" set forth in Section 1.2 of the Lease is amended so that the Premises shall contain (i) the Original Premises, (ii) the Second Floor Additional Space, as shown on Exhibit A to this First Amendment (which Exhibit A shall be incorporated with and inserted as the last page of Exhibit B to the Lease), and (iii) the Storage Space, as shown on Schedule 1 to this First Amendment.
(b) The definition of "Premises" set forth in Section 2.1 of the Lease is amended by increasing the number of Rentable Square Feet from "1,034,292" to "1,045,106" Rentable Square Feet, including (i) the Original Premises, (ii) the Second Floor Additional Space, and (iii) the Storage Space.
2. Rentable Square Feet. In accordance with Section 4.2 of the Lease, Landlord and Tenant confirm that the agreed Rentable Square Feet for each floor of the Premises is as set forth on Exhibit B to this First Amendment.
3. Outside Completion Dates. The Outside Completion Dates set forth in Section 1.4 of Exhibit C to the Lease have been waived or satisfied.
4. Commencement Date; Rent Commencement Date.
(a) Subject to the conditions set forth in Section 3.1(a) of the Lease with respect to the "C/O", (i) the Commencement Date for each floor of the Premises is set forth on Exhibit C attached hereto, and (ii) the Rent Commencement Date for each floor of the Premises is set forth on Exhibit C attached hereto.
(b) Notwithstanding anything herein to the contrary contained herein, provided that, and only so long as, there shall have been no Event of Default, Landlord agrees to waive payment of Annual Fixed Rent for the Premises for the period (the "Initial Period") commencing on the earliest Rent Commencement Date for any portion of the Premises and ending on September 30, 2003.
(c) During the Initial Period, Tenant agrees to pay, with respect to any portion of the Premises as to which a C/O has been issued (other than the Free Rent Floors), an amount equal to 100% of Tenant's Share of the Operating Expenses (including Taxes) applicable to such space.
(d) During the Initial Period, there shall be no such payment of Operating Expenses with respect to the Free Rent Floors as provided in Section 5.5(a) of the Lease, but the 12-month free-rent period referred to in Section 5.5(a) shall still commence on the Commencement Date with respect to such floors and shall run during the Initial Period.
5. Expiration Date. Section 3.1(d) of the Lease is hereby deleted, and the following new Section 3.1(d) inserted in its place:
"(d) The Lease Term shall end on September 30, 2023, which ending date is hereinafter called the "Expiration Date," or shall end on such earlier date upon which the Lease Term may expire or be terminated pursuant to any of the conditions of limitation or other provisions of this Lease or pursuant to law."
6. Annual Fixed Rent. The definition of Annual Fixed Rent set forth in Section 1.2 of the Lease is hereby deleted and the following new definition of Annual Fixed Rent inserted in its place:
"Years 1-5.
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(i) | For the Original Premises, for the period commencing on the Base Rent Commencement Date, through the day preceding the fifth (5th) Lease Anniversary Date, at a rate per annum equal to the product of |
(a)Fifty-Six and 00/100 ($56.00) Dollars and
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(b) | the number of Rentable Square Feet of space included within the Premises, adjusted to reflect the initial phase-in of each floor of the Premises, and |
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(ii) | For the Second Floor Additional Space, for the period commencing on June 1, 2003, through the day preceding the fifth (5th) Lease Anniversary Date, at a rate per annum equal to the product of |
(a)Forty-Six and 00/100 ($46.00) Dollars and
(b)the number of Rentable Square Feet of space included within the Second Floor Additional Space.
Years 6-10.
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(i) | For the Original Premises, for the period from the fifth (5th) Lease Anniversary Date, through the day preceding the tenth (10th) Lease Anniversary Date, at a rate per annum equal to the product of |
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(a) | Sixty-Two and 00/100 ($62.00) Dollars and |
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(b) | the number of Rentable Square Feet of space included within the Premises, adjusted to reflect the initial phase-in of each floor of the Premises, and |
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(ii) | For the Second Floor Additional Space, for the period from the fifth (5th) Lease Anniversary Date, through the day preceding the tenth (10th) Lease Anniversary Date, at a rate per annum equal to the product of |
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(a) | Fifty and 93/100 ($50.93) Dollars and |
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(b) | the number of Rentable Square Feet of space included within the Second Floor Additional Space. |
Years 11-15.
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(i) | For the Original Premises, for the period from the tenth (10th) Lease Anniversary Date, through the day preceding the fifteenth (15th) Lease Anniversary Date, at a rate per annum equal to the product of |
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(a) | Sixty-Seven and 00/100 ($67.00) Dollars and |
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(b) | the number of Rentable Square Feet of space included within the Premises, adjusted to reflect the initial phase-in of each floor of the Premises, and |
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(ii) | For the Second Floor Additional Space, for the period from the tenth (10th) Lease Anniversary Date, at a rate per annum equal to the product of |
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(a) | Fifty-Five and 04/100 ($55.04) Dollars and |
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(b) | the number of Rentable Square Feet of space included within the Second Floor Additional Space. |
Years 16-20.
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(i) | For the Original Premises, for the period from the fifteenth (15th) Lease Anniversary Date, through the day preceding the twentieth (20th) Lease Anniversary Date, at a rate per annum equal to the product of |
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(a) | Seventy-Two and 00/100 ($72.00) Dollars and |
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(b) | the number of Rentable Square Feet of space included within the Premises, adjusted to reflect the initial phase-in of each floor of the Premises, and |
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(ii) | For the Second Floor Additional Space, for the period from the fifteenth (15th) Lease Anniversary Date, through the day preceding the twentieth (20th) Lease Anniversary Date, at a rate per annum equal to the product of |
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(a) | Fifty-Nine and 14/100 ($59.14) Dollars and |
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(b) | the number of Rentable Square Feet of space included within the Second Floor Additional Space." |
7. Holdover Damages.
(a) The initial paragraph of Section 3.3.1 of the Lease is deleted, and the following new initial paragraph inserted in its place:
"If (i) the Commencement Date with respect to approximately 406,085 Rentable Square Feet of the Premises (the " Minimum Area") shall not have occurred on or before September 1, 2003 (the "Outside Occupancy Date"), which date shall be extended day for day for any period of Force Majeure (as defined in Section 14.3), or Tenant Delays (as defined in Exhibit C), and"
(b) Section 3.3.4 of the Lease is deleted, and the following new Section 3.3.4 inserted in its place:
"3.3.4 MAXIMUM LANDLORD DELAY COST. The amount (the "Maximum Landlord Delay Cost") for which Landlord shall be liable in connection with or arising out of any delays in delivery of the Premises to Tenant, including Landlord's payments for the aggregate of the Holdover Damages and Landlord Mitigation Costs, shall be a fixed amount of Three Hundred Fifty Thousand Dollars ($350,000.00). Provided that (i) there then exists no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, and (ii) this Lease is then in full force and effect, the Maximum Landlord Delay Cost shall be paid on October 1, 2003, regardless of whether a holdover under the IP Leases occurs. Landlord shall in no event be liable for any other costs, damages or liability incurred by Tenant as a result of any such delay, including any liability of Tenant under any other lease which is cross-defaulted with one or both of the IP Leases."
8. Storage Space. The definition of "Storage Space" set forth in Section 20.27 of the Lease is hereby amended by increasing the number of square feet from "15,000" to "20,108" square feet, comprising the original storage space and additional storage space in the basement of the Building, as shown on Schedule 1 to this First Amendment (which Schedule 1 shall be substituted in lieu of and as a replacement for Exhibit B-1 to the Lease). In accordance with Section 20.27 of the Lease, there is no Annual Fixed Rent Payable with respect to the Storage Space, and the Storage Space shall not be included in the calculation of Rentable Square Feet for the purpose of determining Tenant's Share.
9. Garage; Free Spaces; Security.
(a) Tenant shall have the right to use up to 150 parking spaces in the Garage, without charge, for Tenant's employees from Tenant's first actual occupancy in the Building through August 31, 2003.
(b) Tenant shall have the right to use up to five (5) additional parking spaces, without charge, from the Commencement Date through June 30, 2004.
(c) Landlord shall provide Tenant with one hundred (100) Parking Garage passbooks, without charge. Each passbook shall contain ten (10) single use, one day free parking passes, which shall be valid through June 30, 2004.
(d) Tenant shall have the right, at its sole cost and expense and subject to Landlord's reasonable approval, to employ security personnel and to perform security checks with respect to cars entering the Garage and to install security equipment and devices therein. All such practices, procedures and installations shall be subject to the reasonable approval of Landlord, and shall not unreasonably interfere with the use or operation of the Garage.
10. Garage Right of First Offer. Article 23 of the Lease is hereby deleted in its entirety, and a new Article 31 is hereby added at the end of the Lease:
"ARTICLE 31
GARAGE FIRST OFFER
31.1 GARAGE OFFER NOTICE.
(a) Landlord shall issue one or more requests for proposals for the lease of the Garage to independent third-party garage owners or operators. Landlord's request for proposals shall be made at such time as Landlord shall designate, and shall require submissions to contain provisions for both minimum rent and percentage-based overage rent. If Landlord receives a bona fide offer to lease the Garage from a third party which Landlord intends to accept (but in no event earlier than June 1, 2004), Landlord shall submit an offer notice ("Garage Offer Notice") to Tenant setting forth the terms of the offer upon which Landlord is willing to lease the Garage. Tenant shall have the right to review a copy of any third party offer upon which the Garage Offer Notice is based. Following the receipt of a Garage Offer Notice, and provided that, at the time of the Garage Offer Notice, (i) there then exists no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default, and (ii) this Lease is then in full force and effect, Tenant shall have the right to elect to add the Garage to the Premises upon the terms hereinafter set forth.
(b) The terms of the lease with respect to the Garage shall be the same as set forth in the Garage Offer Notice; provided however that if the rent in the Garage Offer Notice includes a participation or overage rent in excess of a minimum base rent based on the gross or net operating revenue of the Garage, Tenant shall be entitled to retain fifty percent (50%) of such participation or overage rent (up to a maximum so retained equal to ten percent (10%) of annual Gross Parking Revenues, after which any excesss shall be paid to Landlord). For purposes of this Lease, the term "Gross Parking Revenue" shall mean the total annual actual cash receipts of the Garage for the parking of cars, exclusive of any taxes or fees for any other services or charges to users of the Garage.
(c) From the Commencement Date through the expiration of the 45-day election period set forth in Section 31.2 below, Tenant shall have the right to review monthly reports on Garage operations. Landlord shall provide Tenant with such reports on a monthly basis.
(d) Tenant shall have the right, by notice to Landlord given not later than March 1, 2004, to designate proposed independent garage managers or operators for the Garage, who shall be included by Landlord among the parties to whom a request for proposals is to be issued by Landlord. Any such notice by Tenant to Landlord shall set forth in reasonable detail the identity of the proposed operators and its principals.
31.2 TENANT'S REPLY.
Within forty-five (45) days after Tenant's receipt of the Garage Offer Notice, Tenant may give Landlord a binding notice (the "Garage Offer Reply Notice") as to whether or not Tenant elects to lease the Garage. In the event Tenant fails to give its Garage Offer Reply Notice, then Tenant shall conclusively be deemed to have waived its rights under this Article 31 and shall have no further rights with respect to the Garage.
31.3 ADDITION TO PREMISES. In the event Tenant submits its Garage Offer Reply Notice electing to lease the Garage within the 45-day period, then the Garage shall be added to the Premises. The Commencement Date with respect to the Garage (the "Garage Commencement Date") shall be the date upon which Landlord delivers possession of the Garage to Tenant.
31.4 RENT FOR THE GARAGE.
(a) Effective as of the Garage Commencement Date, (i) the definition of Premises shall be modified to include the Garage, except that the garage shall not be included in the calculation of Rentable Square Feet for the purpose of determining Tenant's Share; (ii) the Annual Fixed Rent shall be increased by 100% of the minimum rent set forth in the Garage Offer Notice, (iii) any additional payments to Landlord, including any percentage rent, shall constitute Additional Rent, (iv) Landlord shall have no further responsibility for the cleaning, operation or maintenance of the Garage, (v) Tenant shall be responsible for the operation and maintenance of the Garage, and (vi) during any time that the Garage is leased or operated by Tenant, Landlord shall have no obligation to comply with the provisions of Article 26 of the Lease.
(b) Promptly after the Garage Commencement Date occurs, Landlord and Tenant shall execute a suitable instrument confirming the Garage Commencement Date and such adjustments, but failure to do so shall have no effect on the Garage Commencement Date or on any such adjustments.
31.5 TENANT'S RIGHT TO DESIGNATE.
(a) In the event that the Garage is added to the Premises as provided herein, Tenant shall have the right to designate an independent operator and manager of the Garage (who need not be the party whose proposal was the basis of the Garage Offer Notice), subject to Landlord's reasonable approval which approval shall not be unreasonably withheld or delayed. The terms of the Lease with respect to the Garage shall be on the terms set forth in the Garage Offer Notice.
11. Management Office. Article 29 of the Lease shall be amended and restated in its entirety as follows:
"ARTICLE 29
MANAGEMENT OFFICE
(a) Landlord and Tenant agree that Landlord will sublease from Tenant the space on the seventh (7th) floor of the Building (the "Sublease Space"), containing approximately 5,215 Rentable Square Feet, as shown on Exhibit D to the First Amendment. Approximately 2,500 Rentable Square Feet of the Sublease Space (the "Management Office") shall be used as a management office for the Building, and the balance of the Sublease Space (the "Development Office") may be used for general office purposes, for a term equal to the Lease Term. Such sublease shall be upon the same terms and conditions as provided by Landlord to Tenant for the Second Floor Additional Space, including the annual fixed rent, free rent and improvement allowance.
(b) The Management Office shall be used and occupied only by Landlord and the person or entity from time to time managing the Building. Landlord may sub-sublease the Development Office to any affiliate of Landlord; provided however, that if Landlord (or any affiliate of Landlord) ceases to occupy the Development Office or if Landlord proposes to sub-sublease the Development Office to an unaffiliated third party, any such further transfer shall be subject to recapture by Tenant in the same manner as provided in Section 13.4 of the Lease (except that (i) the provisions of Section 13.13 of the Lease shall not apply, and (ii) Tenant's recapture right shall include a proposed sub-sublease for less than the entire or substantially the remaining term). If Tenant does not elect to recapture the Development Office portion of the Sublease Space, an assignment or subletting of the Development Office to a person or entity other than Landlord or an affiliate of Landlord shall not be made without Tenant's consent, which consent shall not be unreasonably withheld or delayed. In the event of a recapture by Tenant, or in the event of a transfer consented to by Tenant to a person or entity other than Landlord or an affiliate, Landlord shall, at its expense, construct a demising wall between the Management Office and the balance of the Sublease Space.
(c) If Tenant shall require the use of the entire Sublease Space (or if the Development Office is occupied by a person or entity other than the Landlord or an affiliate of Landlord, either the Management Office or the Development Office), then upon reasonable notice to Landlord, Tenant shall have the right to designate alternative Office Space of comparable size and utility. Any such move shall be at Tenant's sole cost and expense, including the cost of improving the new space to reasonably comparable finish and utility as the existing management office, and the cost of the move. Tenant shall move Landlord and it property to such new space in such manner as will minimize, to the greatest extent practicable, any interference with the business or operations of Landlord at the Building. Any materials, improvements and fixtures which can reasonably be salvaged from the building management office shall be salvaged and used in the relocated space."
12. Fire Stairs. The last sentence of Rule 1 to Exhibit E of the Lease shall be deleted, and the following inserted in its place:
"Tenant shall have the right to use the Building's fire stairways for emergency use and for passage within the Premises, subject to any reasonable rules that Landlord may impose from time to time with respect to such use."
13. Loading Docks. Tenant shall have the right to use and occupy during the Lease Term, at no additional rent, the two (2) rooms currently identified as the Security Office and Package Scan Room, as shown on Exhibit F attached hereto (collectively, the "Additional Loading Dock Space"). The Additional Loading Dock Space shall be maintained by Tenant in the same condition as required under the Lease with respect to the Premises.
14. Switchboards. Tenant shall have the right to connect its electrical system to the Building's main switchboards (MSB5 and MSB6). Tenant shall be solely responsible for the electrical usage costs incurred therewith. The maximum fuse of the switchboards is 800 AMPS each.
15. Provisions No Longer Applicable. Section 3.2 (International Place Leases), Section 3.3.6 (International Place Lease Extension), 3.3.7 (Shell Completion), 3.3.8 (Minimum Area), Section 3.4 (Steel Erection), Article 22 (Options to Expand) and Article 23 (Garage) of the Lease are hereby deleted.
16. Notices. (a) Section 20.9 of the Lease is hereby deleted, and the following new Section 20.9 inserted in its place:
"20.9 NOTICES. Whenever, by the terms of this Lease, any notice, demand, request, approval, consent or other communication (each of which shall be referred to as a "notice") shall or may be given either to Landlord or to Tenant, such notice shall be in writing and shall be sent by (i) hand delivery, or (ii) by registered or certified mail, return receipt requested, postage prepaid, or by recognized national overnight courier, as follows:
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(i) | If intended for Landlord, addressed to Landlord at the Present Mailing Address of Landlord set forth on the first page of this Lease (or to such other address or addresses as may from time to time hereafter be designated by Landlord by like notice), Attention: John B. Hynes, III, with a copy to: |
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attention: Stuart A. Offner, Esq.
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(ii) | If intended for Tenant, addressed to Tenant at the Present Mailing Address of Tenant set forth on the first page of this Lease, with a copy to: |
Burns & Levinson, LLP
125 Summer Street
Boston, MA 02110
Attention: Michael J. Glazerman, Esq."
(b) Section 14(ii) of the Guaranty (Exhibit I to the Lease) is hereby amended and restated as follows:
" (ii) If intended for Guarantor, addressed to Guarantor at the following address:
225 Franklin Street
Boston, MA 02110
Attention: James C. Caccivio,
Senior Vice President
With a copy to:
Burns & Levinson, LLP
125 Summer Street
Boston, MA 02110
Attention: Michael J. Glazerman, Esq."
17. Construction; Contribution. Landlord has agreed to perform certain work in the Second Floor Additional Space to prepare the same for Tenant's occupancy, which work shall be performed in accordance with Exhibit C (Work Letter) to the Lease. Notwithstanding anything to the contrary contained herein or the Lease, Landlord's Contribution with respect to the Second Floor Additional Space ("Landlord's Second Floor Additional Space Contribution") shall be the amount of Forty Dollars and 00/100 ($40.00) for each Rentable Square Foot of space included within the Second Floor Additional Space.
18. Estoppel. Landlord and Tenant agree to deliver estoppel certificates in accordance with Section 20.15 of the Lease.
19. First Right to Lease Recaptured Space. The following shall be added to the end of Section 13.14:
"In the event Landlord shall recapture space as provided above and lease such space to a third party, Landlord shall grant Tenant the first right to lease such space, pursuant to Article 28 herein, upon any termination or early expiration of such lease to such third party."
20. Additional Broker. The definition of Broker under Section 1.2 of the Lease shall be amended to add the following after the last sentence: "and, as to the Second Floor Additional Premises only, Richards, Barry, Joyce & Partners, L.L.C., 53 State Street, Boston, MA 02109".
21. Status. Tenant certifies to Landlord that, to the best of Tenant's knowledge and belief, as of the date hereof: (i) the Lease, as modified hereby, contains the entire agreement between the parties hereto relating to the Premises and that there are no other agreements between the parties relating to the Premises, the Lease or the Building which are not contained or referred to herein or in the Lease, (ii) Landlord is not in default in any respect in any of the terms, covenants and conditions of the Lease; (iii) Tenant has no existing setoffs, counterclaims or defenses against Landlord under the Lease; (iv) Tenant is not, and the performance by Tenant of its obligations hereunder shall not render Tenant, insolvent within the meaning of the United States Bankruptcy Code, the Internal Revenue Code or any other applicable law, code or regulation and (v) the Guaranty is in full force and effect and applies to the Lease as amended.
22. Brokers. Landlord and Tenant each mutually covenant, represent and warrant to the other that it has had no dealings or communications with any broker or agent (other than the Broker, whose fee was agreed upon in connection with the Lease) in connection with this First Amendment and each covenants and agrees to pay, hold harmless and indemnify the other from and against any and all cost, expense (including reasonable attorneys' fees) or liability for any compensation, commission or charges to any broker or agent claiming through the indemnifying party with respect hereto.
23. Tax Increment Financing. Landlord shall reasonably cooperate with Tenant, at no cost to Landlord, with any effort to secure, for the mutual benefit of Landlord and Tenant, so called "Tax Increment Financing" with respect to the Building. Any payments made by Landlord with respect to such tax increment financing shall be included within the definition of Taxes as set forth in Section 6.1.1(a) of the Lease.
24. Second Floor Holdover. The following new sentence shall be added to the end of Section 20.17:
"Notwithstanding the foregoing, provided that (i) there then exists no Event of Default, (ii) this Lease is then in full force and effect, and (iii) Tenant shall have given Landlord not less than 30 days notice of its intention to holdover, Landlord agrees that solely with respect to the second floor of the Building, the "Applicable Holdover Percentage" shall be one hundred percent (100%) rather than one hundred fifty percent (150%) for the first four (4) months of any holdover with respect to the second floor portion of the Premises."
25. Definitions. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Lease.
26. Counterparts. This First Amendment may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
27. Ratification. As amended hereby, the Lease is ratified and confirmed and declared to be in full force and effect.
[Signatures on next page]
IN WITNESS WHEREOF, parties have set their respective hands as of the date first above written.
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LANDLORD: |
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KINGSTON BEDFORD JOINT VENTURE LLC |
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By: | | OTR/MSGW Lincoln LLC, Manager |
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By: | | /s/ JOHN B. HYNES III | | |
| | | | |
| | Name: | | John B. Hynes III |
| | Title: | | Managing Partner/Principal |
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| | | | |
| | | | |
TENANT: |
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SSB REALTY LLC |
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By: | | /s/ THOMAS F. CATALDO |
| | |
| | Name: | | Thomas F. Cataldo |
| | Title: | | President |
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| | | | |
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GUARANTOR: |
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State Street Corporation |
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By: | | /s/ EDWARD J. RESCH |
| | |
| | Name: | | Edward J. Resch |
| | Title: | | Executive Vice President |
SCHEDULE OF EXHIBITS
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EXHIBIT A | | Second Floor Additional Space |
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EXHIBIT B | | Rentable Square Feet |
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EXHIBIT C | | Outside Completion Dates, Commencement Dates, Rent Commencement Dates |
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EXHIBIT D | | Management Office Space |
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EXHIBIT E | | Additional Loading Dock Space |
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Schedule 1 � | | Revised Exhibit B-2 to the Lease (Floor Plan of the Storage Space) |
EXHIBIT A
SECOND FLOOR ADDITIONAL SPACE
EXHIBIT B
RENTABLE SQUARE FEET
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Floor | Agreed Rentable Square Feet |
1 partial | 800 |
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1 balance | 15,611 |
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Storage/UPS | 20,108 |
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2 | 62,961 |
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3 | 64,339 |
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4 | 51,987 |
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5 | 63,268 |
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6 | 46,229 |
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7 | 56,548 |
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8 | 24,925 |
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9 | 24,925 |
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10 | 24,925 |
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11 | 24,925 |
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12 | 24,913 |
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13 | 24,917 |
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14 | 24,786 |
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15 | 24,786 |
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16 | 25,435 |
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17 | 25,435 |
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18 | 25,440 |
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19 | 25,440 |
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20 | 25,361 |
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21 | 25,361 |
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22 | 24,377 |
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23 | 24,390 |
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24 | 23,901 |
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25 | 23,933 |
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26 | 21,249 |
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27 | 21,503 |
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28 | 21,503 |
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29 | 21,223 |
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30 | 21,223 |
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31 | 19,312 |
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32 | 19,309 |
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33 | 19,228 |
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34 | 19,228 |
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35 | 15,651 |
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36 | 15,651 |
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TOTAL Square Feet | 1,045,106 |
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EXHIBIT C
OUTSIDE COMPLETION DATES; RENT COMMENCEMENT DATES
State Street Financial Center
One Lincoln Street
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| | | | | | | | | | | | | | | | | | | | | | |
Floor | Minimum Area | | Minimum Area | | Minimum Area | | | | | | Additional Space |
Outside Completion Date: | 12/1/2002 |
| | 12/1/2002 |
| | 1/1/2003 |
| | 3/1/2003 |
| | 4/1/2003 |
| 5/1/2003 |
| 6/1/2003 |
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Rent Commencement Date: | 10/1/2003 |
| | 10/1/2003 |
| | 10/1/2003 |
| | 10/1/2003 |
| | 11/1/2003 |
| 11/1/2003 |
| 10/1/2004 |
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Storage/UPS | | | 880 |
| | 19,228 |
| (1 | ) | | | | | |
1 (partial) | | | 800 |
| (2 | ) | | | | | | | |
1 (balance) | | | | | | | 15,611 |
| (2 | ) | | | |
2 | 62,961 |
| (3 | ) | | | | | | | | | |
3 | | | 64,339 |
| | | | | | | | |
4 | | | 51,987 |
| | | | | | | | |
5 | | | | | | | 63,268 |
| | | | |
6 | | | | | | | | | 46,229 |
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7 | | | | | | | 56,548 |
| | | | |
8 | | | | | | | | | | | 24,925 |
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9 | | | | | | | | | | | 24,925 |
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10 | | | | | | | | | | | 24,925 |
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11 | | | | | | | | | | | 24,925 |
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12 | | | | | | | | | | | 24,913 |
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13 | | | | | | | | | | | 24,917 |
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14 | | | | | | | | | | | 24,786 |
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15 | | | | | | | | | | | 24,786 |
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16 | | | | | | | | | | | 25,435 |
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17 | | | | | | | | | | | 25,435 |
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18 | | | | | | | | | | 25,440 |
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19 | | | | | | | | | | 25,440 |
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20 | | | | | | | | | | | 25,361 |
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21 | | | 25,361 |
| | | | | | | | |
22 | | | 24,377 |
| | | | | | | | |
23 | | | | | 24,390 |
| | | | | | |
24 | | | | | 23,901 |
| | | | | | |
25 | | | | | 23,933 |
| | | | | | |
26 | | | | | 21,249 |
| | | | | | |
27 | | | | | 21,503 |
| | | | | | |
28 | | | | | 21,503 |
| | | | | | |
29 | | | | | 21,223 |
| | | | | | |
30 | | | | | 21,223 |
| | | | | | |
31 | | | | | 19,312 |
| | | | | | |
32 | | | | | 19,309 |
| | | | | | |
33 | | | | | 19,228 |
| | | | | | |
34 | | | | | 19,228 |
| | | | | | |
35 | | | | | | | 15,651 |
| | | | |
36 | | | | | | | 15,651 |
| | | | |
TOTALS | 62,961 |
| | 167,744 |
| | 275,230 |
| | 166,729 |
| | 46,229 |
| 50,880 |
| 275,333 |
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OFFICE TOTAL | 62,961 |
| | 166,064 |
| | 256,002 |
| | 151,118 |
| | 46,229 |
| 50,880 |
| 275,333 |
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STORAGE/RETAIL TOTAL | | | 1,680 |
| | 19,228 |
| | 15,611 |
| | | | |
| | | | | | | | | | TOTAL |
| 1,045,106 |
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__________
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(1) | UPS area accelerated to 11/2/02 by SSC ATP #46. |
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(2) | Retail Rent Commencement 1/1/04. |
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(3) | Computer room area (14,000 SF) 11/1/02; Carrier Room area (1,300 SF) 10/1/02. Both accelerated by SSC ATP #46. |
EXHIBIT D
MANAGEMENT OFFICE SPACE
EXHIBIT E
ADDITIONAL LOADING DOCK SPACE
Schedule 1
REVISED EXHIBIT B-2 TO THE LEASE
FLOOR PLAN OF STORAGE SPACE
Exhibit 10.9
FINAL DRAFT
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE (the "Second Amendment") dated as of February 13, 2004, by and between FIRST STATES INVESTORS 228 LLC, a Delaware limited liability company ("Landlord"), and SSB REALTY LLC, a Delaware limited liability company ("Tenant").
WITNESSETH
WHEREAS, Kingston Bedford Joint Venture LLC ("KBJV") and Tenant entered into a Lease dated May 9, 2001, as amended by First Amendment dated as of August 15, 2003 (the "Lease") for certain space described in the First Amendment as the "Original Premises," the "Second Floor Additional Space" and "Storage Space" (together the "Premises") in the building (the "Building") known as One Lincoln Street, Boston, Massachusetts 02110, with an option to add the appurtenant parking garage ("Garage") to the Premises; and
WHEREAS, on February , 2004, (the "Effective Date") Landlord succeeded to the interest of KBJV by deed dated February , 2004 and recorded with Suffolk Registry of Deeds simultaneously with the execution of this Second Amendment; and
WHEREAS, Landlord and Tenant mutually intend and desire further to modify the Lease on and subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, each to the other paid, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant, intending to be legally bound, hereby agree as follows:
1. Annual Fixed Rent. From and after the Effective Date, the definition of Annual Fixed Rent for the initial Term set forth in Section 1.2 of the Lease is hereby deleted and the following new definition of Annual Fixed Rent for the initial Term is inserted in its place:
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(i) | For the entire Premises for which rent is payable (namely the Original Premises and Second Floor Additional Space, but not the Storage Space) from and after the Effective Date through the last day of the calendar month in which the twentieth (20th) Lease Anniversary Date occurs, at a rate per annum equal to the product of: |
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(a) | Sixty Two Dollars and Thirty Three Cents ($62.33); and |
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(b) | 1,024,998, being the number of Rentable Square Feet of space included within the Premises, exclusive of Storage Space. |
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(ii) | Annual Fixed Rent shall be pro rated as of the Effective Date and paid for the month in which the Effective Date occurs, less the amount equal to the portion of Annual Fixed Rent previously paid for that month attributable to the balance of the month from and after the Effective Date. |
The provisions of Article 21 shall remain applicable to Annual Fixed Rent for any extension of the Lease Term.
2. Management; Tenant's Election as to Services
2.1 Management of Building.
(a) From and after the Effective Date, First States Management Corp., LLC ("FS Management"), a subsidiary of American Financial Realty Trust, the parent company of Landlord, has been delegated by Landlord to assume responsibility for management of the Building. FS Management has been authorized to engage The Gale Company ("Gale") as its on-site building manager. There shall be no incremental cost to Tenant for or due to the services of Gale or any subsequent on-site building manager selected by Landlord and the total management fee to be passed through as an Operating Expense shall in no event in any Operating Year exceed the management fee specified in Section 6.2.1 (b)(ix) (the "Management Fee"). Subject to Tenant's rights hereinafter set forth, the term of any contract or other arrangement with Gale as the on-site building manager shall not exceed a period of two (2) years following the Effective Date, and may not be extended unless Tenant fails to exercise its rights under subparagraph (b) below, provided that any extension shall nevertheless be subject to termination as provided in subparagraph (b). Unless Tenant elects to self-manage the Building as hereinafter provided, there shall be an on-site building manager at all times the Lease is in effect. If Landlord or FS Management elects to replace Gale with another on-site building manager selected by Landlord or FS Management during the two (2) year period following the Effective Date, Landlord or FS Management shall not select a replacement on-site building manager against whom Tenant has a reasonable objection. Any contract or other arrangement with a replacement on-site building manager selected by Landlord, FS Management or Tenant (other than Gale) shall be terminable immediately for cause, and otherwise upon not more than thirty (30) days prior notice.
(b) From and after the second anniversary of the Effective Date, Tenant shall have the right at any time and from time to time thereafter during the Lease Term to designate a qualified on-site building manager, subject to the approval of Landlord and its lender, which approval shall not be unreasonably withheld, delayed or conditioned. Upon receipt of notice from Tenant and approval of Tenant's designee as aforesaid, Landlord shall promptly and diligently proceed to terminate any contract or other arrangement with the on-site building manager then engaged so that Tenant's designee (or any successor to Tenant's designee selected in accordance with this Section) may promptly assume the duties of an on-site building manager as expeditiously as possible, but in no event later than sixty (60) days after Tenant's notice.
(c) The person or entity from time to time acting as the on-site building manager during the Lease Term shall perform its property management duties in a timely, complete and professional manner consistent with the highest level of property management services then provided at comparable first class buildings in the Boston Central Business District (the "Management Standard"). If Gale or a replacement on-site building manager selected by Landlord or FS Management persistently fails to perform its duties in conformity with the Management Standard (a "For Cause Event"), Tenant shall notify Landlord of such For Cause Event, setting forth in reasonable detail the manner in which the performance of the on-site building manager has failed to comply with the Management Standard. If the basis for the For Cause Event shall not have been cured to Tenant's reasonable satisfaction within thirty (30) days after such notice, or if a For Cause Event occurs more than twice in any twelve (12) month period, Landlord shall promptly and diligently proceed to cause the on-site building manager to be replaced by a qualified on-site building manager designated by Tenant. In addition, Landlord shall have the right to notify Tenant of Landlord's belief that a For Cause Event has occurred with any on-site building manager selected by Tenant, or with Tenant should it provide its own on-site building manager services, Landlord shall have corresponding notice rights to Tenant, who shall have corresponding cure rights, and failing cure to Landlord's reasonable satisfaction within thirty (30) days after such notice, Landlord shall have the right to designate a replacement on-site building manager, subject to the provisions of this Section 2.1. The fees of any on-site building manager designated by Tenant shall be included in Operating Expenses, but excluded from the determination of the maximum Management Fee payable to FS Management.
(d) At all times, whether designated by Landlord, FS Management or Tenant, the on-site building manager shall be engaged by and through FS Management pursuant to a separate written agreement, but Landlord and Tenant shall have joint and equal rights to receive information from and to give direction as to day to day operations of the Building to the on-site building manager. In the event of any conflict as to direction as between Landlord and Tenant, the directions of Tenant shall control pending resolution of the disagreement between Landlord and Tenant pursuant to Article 30 of the Master Lease.
(e) Tenant as Sublandlord and KBJV as Subtenant have entered into a Sublease (the "Sublease") dated as of October 1, 2003 for 5,215 Rentable Square Feet on the seventh (7th) floor of the Building of which approximately 2,500 Rentable Square Feet is to be used as the Management Office and the balance as a Development Office. Landlord has succeeded to KBJV's interest in the Sublease. If Tenant requires replacement of Gale as the on-site building manager in accordance with sub-paragraphs (b) or (c) above and Landlord exercises its right to relinquish the Development Office as permitted under the Sublease, then Tenant, and not Landlord, shall be responsible for erecting a demising wall between the Management Office and the Development Office and Tenant further agrees, in such event, to waive the Termination Fee (as defined in the Sublease) otherwise payable by Landlord thereunder. Should Gale no longer be the on-site building manager, Landlord shall cause the Management Office to be available to the party or entity which is the then on-site building manager.
(f) Any contract or other arrangement with an on-site building manager shall be subject to the foregoing provisions of this Section 2, including, without limitation, provisions for performance, termination, furnishing of information and compliance with directions; the last sentence of Section 7.6(a) of the Lease is hereby deleted.
2.2 Tenant's Election To Perform Certain Building Services.
(a) At any time during the Term of the Lease, when and for so long as the Premises includes all of the Office Space in the Building, Tenant shall have the right, upon thirty (30) days prior written notice to Landlord, to elect to take over responsibility for janitorial, security, and other building services specified in Tenant's notice, in which event Landlord's obligations under Sections 7.3, 7.4, 7.6, 20.12, 20.29 and Exhibit D (including Schedule 1 thereof) shall be suspended as applicable to the service(s) assumed, for the duration of the period in which Tenant continues to have responsibility for performance of any one or more of such services ("Tenant's Control Period"). Tenant shall not terminate Tenant's Control Period as to any one or more service(s) assumed by Tenant until Tenant shall have given Landlord not less than sixty (60) days' prior notice of Tenant's intention to terminate Tenant's Control Period with regard to such enumerated service(s). Subject to such sixty (60) day notice requirement, Landlord's obligations arising under the aforementioned provisions of the Lease shall be reinstated at such time as Tenant's Control Period is no longer in effect as to any such service no longer assumed by Tenant. All such services assumed by Tenant shall be furnished and provided by Tenant to at least the standard(s) for service established in this Lease (inclusive of the Exhibits attached hereto).
(b) During the Tenant's Control Period, Tenant shall directly engage and pay the applicable vendors for the costs and expenses of providing the assumed services (such costs, the "Assumed Services Costs"). If Operating Expense (exclusive of Assumed Services Costs) for any Operating Year are equal to or greater than Base Operating Expenses, Tenant shall pay all Assumed Services Costs without reimbursement by Landlord, and the Assumed Services Costs shall be excluded from Operating Expenses. If Operating Expenses (exclusive of Assumed Services Costs) for any Operating Year are less than Base Operating Expenses, Landlord shall, within thirty (30) days following the end of such Operating Year, reimburse Tenant in an amount equal to the Assumed Services Costs for such Operating Year less the positive difference, if any, between (i) the sum of (A) Operating Expenses (exclusive of any Assumed Services Costs) and (B) Assumed Services Costs for such Operating Year and (ii) Base Operating Expenses. Tenant shall, at Landlord's request, provide to Landlord a detailed description of the services provided and written evidence of Tenant's payment of the Assumed Services Costs. Only that portion of the Assumed Services Costs, if any, that is reimbursed by Landlord to Tenant shall be included in Operating Expenses for the applicable Operating Year, but the full amount of thereof, whether or not reimbursed by Landlord, shall be included in gross rent to calculate the Management Fee. If Landlord fails to reimburse Tenant for Landlord's allocable portion of the Assumed Services Costs as and when aforesaid, Tenant shall be entitled to set off the amount owed, together with interest at the Lease Interest Rate, against Annual Fixed Rent and other charges payable by Tenant under the Lease.
Notwithstanding the foregoing, Landlord and Tenant agree that, within thirty (30) days following the commencement of Tenant's Control Period and within thirty (30) days following the beginning of any Operating Year during Tenant's Control Period, Landlord and Tenant shall determine, based on the Operating Budget for the Property (and using the formula described above), the amount of anticipated Landlord reimbursements to Tenant for Assumed Services Costs for such Operating Year and Tenant shall pay Landlord monthly, in arrears, the pro rata portion of such anticipated reimbursements (the "Advance Reimbursements"); provided, however, that at no time shall the accumulated total of Advance Reimbursements in any Operating Year exceed the total amount of Assumed Services Costs paid by Tenant in such year. Within thirty (30) days following the end of each Operating Year, the Advance Reimbursements shall be reconciled against the actual amount of reimbursements payable by Landlord to Tenant under the formula described above and within thirty (30) days following such reconciliation, Landlord shall make payment to Tenant, or Tenant shall make payment to Landlord, for the underpayment or overpayment, as applicable.
3. Use. The following amendments relate to use:
3.1 The first sentence of Section 10.1 is hereby deleted and the following substituted: "Tenant may use and occupy the Premises for any lawful purpose customarily permitted in comparable first class office buildings in the Boston Central Business District from time to time."
3.2 Section 10.3 is hereby amended by adding the following sentence after the first sentence thereof:
"Anything herein to the contrary notwithstanding, but subject to the following sentence and Section 10.4 hereof, any cafeteria, day care center, health club or dining facilities in the Building may be used for the benefit of Tenant, its Affiliates, subtenants and all other occupants, if any, of the Building and the employees and invitees of any or all of them and, in Tenant's sole determination, by third parties."
3.3 Section 10.5 is hereby deleted.
3.4 Section 10.7 is hereby suspended and the following provision is substituted in lieu thereof for so long as the Premises includes all of the Office Space in the Building, but not otherwise:
"Subject to rights of others to use or have access to the main lobby of the Building (the "Main Lobby") if and to the extent provided by the Lease, agreements of record with abutters or any agreements entered into in connection with the granting of governmental approval for the construction and use of the Building, Tenant shall have exclusive control of the Main Lobby at no additional cost or charge, provided, however, that Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, cost, liability or expense arising in connection with any third party tort claim arising from any occurrence within the Main Lobby at a time when Tenant had exclusive control thereover, unless such claim arose in connection with the negligence or willful misconduct of Landlord or any of its employees, guests or invitees, or in connection with any event in the Main Lobby held or sponsored by Landlord pursuant to the last sentence of this subsection. Tenant may also use and permit the use of the Main Lobby for special functions by Tenant, its Affiliates, subtenants and other occupants, if any, of the Building and, in its sole determination, by third parties. Landlord may similarly host or sponsor up to ten (10) special functions in the Main Lobby in any calendar year, provided the same do not conflict with the use of the Main Lobby or Building by Tenant or any subtenant or other occupant of the Building (as determined in Tenant's reasonable judgment), and further provided that Landlord assume all costs for cleaning, security and similar services of any kind that may be reasonably required in connection with such event."
4. Intentionally Omitted.
5. Notice. For the purposes of notice to Landlord under Section 20.9, the following shall be applicable:
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To Landlord: | | First States Investors 228, LLC c/o First States Group, L.P. 1725 The Fairway Jenkintown, PA 19046 Attn: Nicholas S. Schorsch President and CEO and Edward J. Matey Jr. Senior Vice President and General Counsel Telecopier: (215) 887-9856 |
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with a copy to: | | Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attn: Eric L. Stern, Esquire Telecopier: (215) 963-5001 |
6. Intentionally Omitted.
7. Right of First Offer. Article 24 is hereby deleted and the following substituted:
ARTICLE 24
Right Of First Offer On Sale
24.1 Right of First Offer.
(a) Provided that, at the time of exercise by Tenant, (i) no Event of Default or condition or state of facts which with the passage of time or giving of notice, or both, would constitute an Event of Default then exists, and (ii) this Lease is then in full force and effect, Landlord hereby grants to Tenant a right of first offer to purchase the Building and/or the Land or the entity owning the Building and/or the Land, or an interest in any of the foregoing (the "Right of First Offer") on the terms and conditions contained in this Article 24.
(b) If Landlord should, in Landlord's sole and exclusive judgment, at any time during the Term of this Lease determine that it would like to sell the Building and/or the Land or the entity owning the Land and/or the Building, or an interest in any of the foregoing, to a third party buyer which is not an Affiliate of Landlord or an Affiliate of any member of Landlord or any of their Affiliates (each an "Excepted Party"), Landlord shall deliver to Tenant a notice (the "Offer Notice" specifying the interest (the "Specified Interest") in the Land and/or the Building or in the entity owning the Land and/or Building that Landlord has determined to sell. The Offer Notice shall set forth the purchase price at which Landlord would be willing to sell the Specified Interest. Landlord shall have no obligation to give an Offer Notice to Tenant if Landlord desires to sell or convey an interest in the Building and/or Land or an interest in the entity owning the Building and/or Land to an Excepted Party.
(c) For the purposes of this Article 24, "sell" or "sale" shall also include an exchange of property or a master lease of the Land and Building in a single transaction for a term of sixty (60) years or more, or an assignment or other transfer in one or a related series of transfers resulting in a transfer, of fifty percent (50%) or more of Landlord's interest in the Land and/or the Building, or a transfer or a related series of transfers which amount to a transfer of an interest of fifty (50%) percent or more in Landlord (other than to an Excepted Party). Specifically excluded are a "sale" pursuant to a "sale/leaseback" financing transaction or other financing transaction, provided that Landlord's and Tenant's responsibilities to each other remain substantially the same.
24.2 Response to Offer: Due Diligence; Sale of Specified Interest to Tenant.
(a) Tenant shall have fifteen (15) days following receipt of the Offer Notice to respond, in writing, that Tenant is interested in exploring purchasing the Specified Interest (a reply notice expressing Tenant's interest in exploring purchasing the Specified Interest is referred to herein as a "Notice of Interest"). Tenant's failure to send Landlord a Notice of Interest, together with a good faith deposit in an amount equal to five percent (5%) of the Offering Price (the "Deposit"), within the fifteen (15) day period shall be deemed a waiver by Tenant of the Right of First Offer, except as provided in Section 24.3 hereof.
(b) If Tenant timely delivers a Notice of Interest and the Deposit as provided above, Tenant shall have until 5:00 p.m. local time on the thirtieth (30th) day following delivery of its Notice of Interest (the "Due Diligence Period"; the expiration of the Due Diligence Period being the "Due Diligence Deadline") to perform such title, survey, building condition, building income and expenses, legal compliance, environmental and third party tenant and other due diligence as is customary and appropriate for similar transactions in the Boston Central Business District (it being understood that Tenant shall not have any due diligence rights with respect to Tenant's Lease or other matters within Tenant's direct control). Landlord shall furnish to Tenant within three (3) days of its request therefor, but without any representation as to its completeness or accuracy (except as to the actual knowledge of Landlord's on-site property manager, as to materials delivered by Landlord or such on-site property manager as provided in Exhibit A), all pertinent information relating to the Property within the Landlord's control or possession or the possession of any of Landlord's agents or consultants, including without limitation, Landlord's attorneys, and shall permit inspections of the Property and operating systems. Should Tenant determine, in its sole but reasonable discretion, that the results of Tenant's due diligence investigations of the Specified Interest are not satisfactory to Tenant, Tenant may elect not to proceed with the purchase of the Specified Interest by sending Landlord a written withdrawal (a "Withdrawal") of its Notice of Interest on or before the Due Diligence Deadline, in which event Landlord promptly shall return to Tenant the Deposit and any interest accrued thereon, and the provisions of Section 24.3 shall take effect. The foregoing notwithstanding, any Withdrawal predicated upon due diligence investigations other than title, survey, building condition, building income and expenses, legal compliance, environmental and third party tenant due diligence of the Premises or the Building shall be delivered, is at all, not later than the fifteenth (15th) day of the Due Diligence Period. If Tenant fails to timely send a Withdrawal to Landlord as specified above, without further action of Landlord or Tenant, Landlord shall be obligated to sell the Specified Interest to Tenant, and Tenant shall be obligated to purchase the Specified Interest from Landlord, on the terms set forth in the Offer Notice, as supplemented by the terms and conditions set forth in this Article 24 and those certain additional terms and conditions enumerated in Exhibit A hereto.
(c) The closing of such sale of the Specified Interest (the "Closing") shall occur on the date (the "Closing Date") chosen by Tenant with at least two (2) Operating Days prior written notice to Landlord that is no more than thirty (30) calendar days after the Due Diligence Deadline, or another date, if any, which is mutually agreeable to the parties hereto. In the event of Tenant's default with respect to such purchase, Landlord's sole remedy shall be to retain the Deposit as liquidated damages and not as a penalty, it being understood that Landlord's actual damages for non-performance by Tenant may be difficult to ascertain. If the sale does not take place for reasons not the fault of Tenant, the Deposit shall be promptly refunded to Tenant. Any interest earned on the Deposit shall be paid to the party ultimately entitled to receive the Deposit.
24.3 Tenant's Failure to Accept Offer.
(a) If Tenant shall not reply to Landlord's Notice Offer within such fifteen (15) day period, or if in such reply Tenant declines to purchase the Specified Interest, or if a Notice of Interest is timely delivered to Landlord, but subsequently a Withdrawal is timely delivered or Tenant fails to close on the Closing Date for reasons not the fault of Landlord, and unless as specified in subsection (b) and (c) below, Tenant shall conclusively be deemed to have waived its rights under this Article 24, and Landlord shall be free to sell the Specified Interest, without re-offering the Specified Interest to Tenant, upon such terms and conditions as Landlord shall determine, but only on condition that (i) the purchase price for such sale shall be at least equal to one hundred three and one-half percent (103.5%) of the Offering Price offered to Tenant, net of any monetary concessions granted to the buyer not given to Tenant in the Offer Notice or Exhibit A and before the payment of brokerage commissions and other usual and customary costs of sale to a third party (i.e., not to Tenant under this right of first offer), and (ii) Landlord accepts a bona fide offer to purchase the Specified Interest for such purchase price within twelve (12) months, and the transaction closes within eighteen (18) months, after the date which is the earlier of (A) the date by which Tenant was required to reply to Landlord's Offer Notice or (B) the date of receipt by Landlord of a reply to Landlord's Offer Notice in which Tenant declines to purchase the Specified Interest.
(b) If within the time periods specified in subsection (a) above, Landlord shall (i) fail to sell the Specified Interest for a price which is at least equal to one hundred three and one-half percent (103.5%) of the Offering Price offered to Tenant (adjusted as provided in subclause (i) of Section 24.3(a), above), or (ii) fail to accept a bona fide offer to purchase the Specified Interest and close within the period(s) set forth in subparagraph (a) above, and if Landlord continues to desire to sell the Specified Interest, then the provisions of this Article 24 shall again become applicable, except that the Due Diligence Deadline specified in Section 24.2(b) shall be shortened until 5:00 p.m. local time on the fifteenth (15th) day following delivery of Tenant's Notice of Interest.
(c) If Landlord sells the Specified Interest for a price which is at least equal to one hundred three and one-half percent (103.5%) of the Offering Price offered to Tenant (adjusted as provided in subclause (i) of Section 24.3(a), above), pursuant to a bona fide offer to purchase the Specified Interest, which offer shall have been accepted by Landlord and closed within the period(s) as stated subparagraph (a) above, then Tenant's right of first offer as described in this Article 24 shall be deemed to have been waived with respect to such sale, but Tenant's right of first offer as provided herein shall nevertheless continue with respect to any subsequent decision by any subsequent Landlord or owner thereafter to sell an interest in the Land and/or the Building or in the entity owning the Land and/or the Building during the Lease Term.
(d ) At any time and from time to time, as reasonably requested by Landlord, upon not less than ten (10) days' prior notice, Tenant agrees to execute, acknowledge and deliver to Landlord a statement in writing and in recordable form certifying, if such be the case, that Tenant's right of first offer provided in this Article 24 has lapsed, or has been waived or is otherwise not applicable with respect to any particular transaction, it being intended that any such statement delivered pursuant hereto may be relied upon by others with whom Landlord may be dealing.
24.4 Intentionally Omitted.
24.5 Inapplicability. In no event shall the provisions of this Article 24 apply to a sale pursuant to an exercise of a power of sale or a foreclosure by a mortgagee or the acceptance of a deed in lieu of foreclosure by such mortgagee or its nominee.
8. Garage.
Landlord and Tenant shall enter into a lease for the Garage ("Garage Lease") to commence upon expiration or sooner termination of the existing lease with Valet Park of New England and vacating of the Garage by such tenant (for purposes of this section only, the "Commencement Date"). Landlord shall cause the Commencement Date to occur no later than July 1, 2004, and shall give Tenant at least thirty (30) days prior written notice of the reasonably anticipated Commencement Date. Attached hereto as Exhibit C is a summary of terms to be incorporated into the Garage Lease. For such time as the Garage Lease shall remain in effect, the provisions of Article 26 shall be suspended, and Articles 23, 31 and paragraphs 9(a), (b) and (c) of the First Amendment shall no longer be in force and effect. The foregoing notwithstanding, paragraph 9(d) of the First Amendment shall remain in effect during the Lease Term whether or not the Garage Lease is in force. If the Garage Lease is not executed and delivered by Landlord and Tenant by March 8, 2004, then at the sole option of Tenant exercised at any time thereafter in writing by notice to Landlord, this Section 8 of the Second Amendment shall no longer apply.
9. Lease Restructuring Fee. As of the Effective Date, Landlord shall pay Tenant a lease restructuring fee ("Lease Restructuring Fee") of Eight Million Six Hundred Fifty Eight Thousand, Two Hundred Fifty Nine Dollars ($8,658,259.00).
10. Landlord's Contributions. On or before the Effective Date, Tenant and Landlord shall agree on the aggregate amount of remaining payments in the nature of landlord's contributions due Tenant under the Lease (including, without limitation, unpaid Landlord's Contribution and unpaid Maximum Landlord's Delay Cost) which shall be funded into a mutually acceptable escrow account for payment to Tenant as and when due under the Lease.
11. Remaining Landlord's Work. Landlord and Tenant have agreed that the remaining Landlord's Work as concerns all floors of the Building except floors 10-14 inclusive, being the floors of which Tenant has not yet taken possession, is specified in Exhibit B hereto (the "Closing Punchlist"). Tenant shall take possession of the Remaining Floors on or before April 1, 2004 and shall complete a punch list of those floors as required by the Lease (the "Additional Punchlist," together with the Closing Punchlist and any other punchlists provided for in the Lease, the "Punchlists"). Landlord agrees to cause all work on the Punchlists to be completed as and when provided in the Lease.
12. Definitions. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Lease.
13. Entire Agreement. This Second Amendment (including the Exhibits attached hereto), together with the Lease and the First Amendment (and the Exhibits attached thereto) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersedes all prior dealings between them with respect to such subject matter, and there are no verbal or collateral understandings, agreements, representations or warranties not expressly set forth in the Lease, as amended. No subsequent alteration, amendment, change or addition to the Lease shall be binding upon Landlord or Tenant, unless reduced to writing and signed by the party or parties to be charged therewith.
Counterparts. This Second Amendment may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Time of the Essence. Time is of the essence with respect to all payment, performance, notice and other obligations of the parties as provided in this Amendment.
Ratification. As amended hereby, the Lease is ratified and confirmed and declared to be in full force and effect.
IN WITNESS WHEREOF, parties have set their respective hands as of the date first above written.
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LANDLORD: |
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FIRST STATES INVESTORS 228 LLC |
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By: | | /s/ GLENN BLUMENTHAL |
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By: | | /s/ GLENN BLUMENTHAL |
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| | | | Name: | | Glenn Blumenthal |
| | | | Title: | | Vice President |
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TENANT: |
SSB REALTY LLC |
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By: | | /s/ DONALD E. CONOVER |
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| | Name: | | Donald E. Conover |
| | Title: | | President and Manager |
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GUARANTOR: |
State Street Corporation |
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By: | | /s/ EDWARD J. RESCH |
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| | Name: | | Edward J. Resch |
| | Title: | | Chief Financial Officer |
EXHIBIT "A"
The following provisions correspond to Section 6 of the within Second Amendment, and Section 24.2(b) of the Lease as stated therein:
1. At Closing, Landlord shall convey title to the Property to Tenant by Massachusetts statutory (M.G.L.A.ch. 183, Sec. 11) quitclaim deed (the "Deed"), duly executed and acknowledged by Landlord and in proper form for recording, conveying good clear record marketable fee simple title to the real property to Tenant (or its nominee if specified in written notice from Tenant to Landlord delivered at least seven (7) days prior to the Closing), insurable as such by Tenant's title insurance company (which shall be a nationally-recognized title insurance company), subject to all matters of record. Notwithstanding the foregoing, however, Landlord agrees to discharge any mortgage liens and other voluntary encumbrances securing the payment of money due and owing by Landlord which currently exist or which may be placed on the Property by Landlord at any time up to and including the date of Closing (collectively, "Monetary Liens").
2. Prior to any entry to perform any soils or other intrusive on-site testing, Tenant shall give Landlord written notice thereof, including the identity of the company or persons who will perform such testing and the proposed scope of the testing. Landlord shall have the right to approve or disapprove, in Landlord's sole discretion, such proposed soils or other intrusive testing within three (3) business days after receipt of such notice. If Tenant or its agents, employees or contractors take any sample from the Property in connection with any such approved testing, Tenant shall provide to Landlord a portion of such sample being tested to allow Landlord, if it so chooses, to perform its own testing. Landlord or its representative may be present to observe any testing or other inspection performed on the Property. Upon the request of Landlord, Tenant shall promptly deliver to Landlord copies of any reports relating to any testing or other inspection of the Property performed by Tenant or its agents, employees or contractors. Tenant shall not contact any governmental authority without first obtaining the prior written consent of Landlord thereto, and Landlord, at Landlord's election, shall be entitled to have a representative on any phone or other contact made by Tenant to a governmental authority and present at any meeting by Tenant with a governmental authority. All due diligence materials delivered by Landlord or its on-site property manager shall be to such on-site property manager's actual knowledge, but without independent inquiry or investigation, true, correct and complete in all material respects.
3. Tenant shall maintain, and shall assure that its contractors maintain, commercial general liability and property insurance with a reputable insurer lawfully doing business in Massachusetts, with a Best's rating of A-X or better in amounts and in form and substance reasonably satisfactory to Landlord to insure against all liability of Tenant and its agents, employees or contractors, arising out of any entry or inspections of the Property pursuant to the provisions hereof, and Tenant shall provide Landlord with evidence of such insurance coverage upon request by Landlord. Any such policy shall include a contractual liability endorsement which insures Tenant's indemnity obligations hereunder. Tenant shall (i) indemnify, defend and hold Landlord harmless from and against any and all liability, claims, demands, damages or expenses of any kind, including attorneys' fees, caused directly or indirectly by, or in any manner relating to, such entry upon the Property or the making of such tests and investigations or for any damages to the Property caused thereby and (ii) restore the Property as nearly as practicable to the condition existing immediately prior to the performance of such tests and investigations.
4. If the Closing does not take place for any reason whatsoever, Tenant shall not, directly or indirectly, disclose to any person or party or use in any manner any due diligence materials or any other information of Landlord acquired by Tenant with respect to Landlord or the Property. As a condition precedent to the return of the Deposit to Tenant under Section 24 of the Lease, if Tenant shall be entitled thereto, Tenant shall return to Landlord any and all due diligence materials, including, without limitation, copies of all surveys, tests and investigations prepared by or for the benefit of Tenant in connection with the Property.
5. REPRESENTATIONS AND WARRANTIES.
(a) Landlord represents and warrants to Tenant as follows:
(i) Landlord is and will be on the Closing Date a limited liability company duly organized and validly existing under the laws of the State of Delaware [or, if other, to be specified in Closing Certificate], and qualified to do business in Massachusetts, and Landlord has and will have on the Closing Date all necessary power and authority to: (A) carry on the business for which it has been organized; (B) own and operate the Property; and (C) enter into and perform Landlord's obligations hereunder.
(ii) Landlord has taken all actions required to be taken under the laws of the State of Delaware and under Landlord's operating agreement [or other constituent documents] to approve or authorize the consummation of the transactions contemplated hereunder.
(iii) The consummation of the transactions contemplated herein shall not constitute a violation of, be in conflict with, or constitute a default under (or with the passage of time or delivery of notice, or both, would constitute a default under) any term or provision of Landlord's operating agreement or, to the actual knowledge of Landlord, any other agreement, lease, or other instrument by which the Property is bound.
(b) Tenant represents and warrants to Landlord as follows:
(i) Tenant is a [ ] duly organized, validly existing and in good standing under the laws of the State of Delaware, and shall by Closing, or promptly thereafter, be qualified to do business in the jurisdiction in Massachusetts, and Tenant has and will have on the Closing Date all necessary power and authority to: (A) carry on the business for which it has been organized; (B) own and operate the Property; and (C) enter into and perform Tenant's obligations hereunder.
(ii) Tenant has taken all actions required to be taken under the laws of the State of Delaware and under Tenant's partnership agreement, articles of incorporation and by-laws or articles of organization and operating agreement, as the case may be, to approve or authorize the consummation of the transactions contemplated hereunder.
(iii) The consummation of the transactions contemplated herein shall not constitute a violation of, be in conflict with, or constitute a default under (or with the passage of time or delivery of notice, or both, would constitute a default under) any term or provision of Tenant's partnership agreement, articles of incorporation and by-laws or articles of organization and operating agreement, as the case may be, or any other agreement or other instrument to which Tenant is bound.
6. PRORATIONS AND CHARGES.
(a) At Closing, Tenant and Landlord shall prorate as of the Closing Date those items of income and expense that are capable of an exact determination. For those items of income and expense that are incapable of an exact determination as of the Closing Date, Tenant and Landlord shall make a good faith estimate of the closing prorations using the most recent ascertainable amounts of or other reliable information in respect to each such item of income and expense. Real estate taxes and assessments that are not yet due and payable shall be apportioned using the rates and valuation shown on the latest available tax bill. If percentage rent is payable pursuant to any of the tenant leases, Landlord shall be entitled to its prorata share of any percentage rent under any tenant lease for any fiscal year which includes the Closing Date, and the proration shall be based on the number of days in such fiscal year before Closing and the actual percentage rent due under any such tenant lease for the most recent period for which percentage rent was due and payable thereunder. Tenant and Landlord shall use their best efforts to obtain an exact determination of the remaining items of income and expense within sixty (60) days after the Closing Date, except for the bill for real estate taxes and percentage rent which may be available sometime after the sixtieth (60th) day after the Closing Date. On or before the sixtieth (60th) day after the Closing Date, Tenant shall deliver a report to Landlord, indicating which estimated closing items have been determinable, together with such documentation enabling Tenant to make such exact determination and the amount either owed by, or owed to, Landlord. Landlord shall have twenty (20) days to review such report and indicate its approval of such determinations. After approval of such report or after receipt of the actual bill for real estate taxes and/or percentage rent, if Tenant owes money to Landlord, Tenant shall promptly pay such overage to Landlord, or if Landlord owes Tenant money, Landlord shall promptly pay the amount so owed to Tenant. This provision shall survive the Closing for a period of one (1) year and the recording of the Deed and shall not be merged thereby. For purposes of computing any prorations required under this Section, the Closing Date shall be a day of income and expense to Tenant unless the Closing Date occurs on the last day of a month, in which event the Closing Date shall be a day of income and expense to Landlord. Tenant shall be obligated to pay the cost of any leasing commission or tenant improvements with respect to any new lease approved by Tenant prior to the Closing.
(b) At Closing, Landlord shall be charged the following:
(i) prorated general real estate taxes and assessments;
(ii) prorated charges for service contracts and any other obligations assumed by Tenant for which payments are made in arrears;
(iii) prorated prepaid rents and other charges prepaid under the tenant leases;
(iv) security deposits held by Landlord pursuant to the tenant leases;
(v) cost of any transfer taxes or deed stamps required to record the Deed;
(vi) one-half (1/2) of the escrow fee;
(vii) Landlord's attorneys' fees;
(viii) costs of discharging and releasing all Monetary Liens;
(ix) all other fees and costs to the extent expressly allocated to Landlord herein.
(c) At Closing, Tenant shall be charged the following:
(i) charges paid in advance by Landlord relating to periods post-Closing for items assumed by Tenant;
(ii) cost of recording the Deed and such other instruments as Tenant or Tenant's title company may consider necessary or desirable to be recorded;
(iii) cost of Tenant's title insurance policy and any endorsements thereto to insure over any title defect;
(iv) one-half (1/2) of the escrow fee;
(v) Tenant's attorneys' fees; and
(vi) all other fees in connection with the consummation of the transactions contemplated by this Exhibit and not expressly set forth in this Exhibit.
NOTE: THE ABOVE PRORATION SECTIONS WILL BE SUBJECT TO APPROPRIATE MODIFICATION TO REFLECT THAT TENANT WILL BE PAYING CERTAIN EXPENSES ASSOCIATED WITH THE OWNERSHIP AND OPERATION OF THE PROPERTY PRIOR TO CLOSING.
7. INSTRUMENTS OF CONVEYANCE AND OTHER DOCUMENTS.
(a) On or prior to the Closing Date, Landlord shall deposit with Escrow Agent the following documents:
(i) the Deed;
(ii) a bill of sale conveying to Tenant such of Landlord's personal property as is located at and used in connection with the operation of the Property, except as may be expressly excluded by Landlord;
(iii) an assignment and assumption of the tenant leases (the "Assignment of Leases"), pursuant to which Landlord assigns and Tenant assumes all of Landlord's right, title, and interest as lessor under the tenant leases;
(iv) an assignment of the Service Contracts and the Intangible Property (the "Assignment of Service Contracts and Intangible Property"), pursuant to which Landlord assigns and Tenant assumes all of Landlord's right, title, and interest in and to the service contracts and the intangible property identified by Landlord;
(v) a counterpart settlement statement (the "Settlement Statement") setting forth the Purchase Price and all amounts charged against Landlord;
(vi) an affidavit regarding the non-foreign status of Landlord;
(vii) a closing certificate (the "Landlord's Closing Certificate") stating that, to the actual knowledge of Landlord, there is no default under the covenants, representations and warranties of Landlord contained in this Exhibit and, in addition, that all such representations and warranties are true and correct in all material respects as of the Closing Date as if made on and as of the Closing Date (or specifying in reasonable detail any defaults or exceptions that may then exist, provided that Landlord shall not take any action or omit to take any action that would result in any such default or exception);
(viii) a letter to each tenant identified on the rent roll delivered by Landlord to Tenant at Closing, stating that the Property has been conveyed to Tenant as of the Closing Date and advising each tenant that all future payments of rent and all other future correspondence regarding the Property should be delivered to Tenant (the "Tenant Letters"); and
(ix) such customary affidavits, evidence and documents as may be reasonably required by Tenant's title company in order to issue so-called owner's and lender's title insurance policies insuring Tenant's title to the Property, as relate to (i) mechanics' or materialmen's liens; (ii) parties in possession; and (iii) the status and capacity of Landlord and the authority of the person or persons who are executing the various documents on behalf of Landlord in connection with the sale of the Property, together with such indemnities as Tenant's title company may reasonably require mechanics' and materialmen's liens for work performed by Landlord or materials incorporated by Landlord into the Property prior to the Closing Date.
Notwithstanding any provision herein to the contrary, in the event that Landlord cannot deliver to Tenant at the Closing one or more of the foregoing instruments or any other document or instrument required hereunder to be delivered by Landlord at the Closing, then, unless Tenant waives such failure to deliver in writing, at Landlord's option by notice given to Tenant not later than the second business day after the Closing, the Closing shall be extended for such period (not to exceed forty-five (45) days) as shall be required for Landlord to deliver such instrument(s) or document(s). If, at the expiration of the extended time, Landlord, after using commercially reasonable efforts (which efforts shall not require the expenditure of money), shall be unable to deliver one or more of such instruments) or document(s), then, at Tenant's option and as Tenant's sole remedy, Tenant shall either (i) waive Landlord's failure to so deliver such instrument(s) and document(s) and close as otherwise contemplated hereunder, or (ii) determine not to proceed to Closing, in which event the Deposit shall forthwith be refunded to Tenant, with the interest earned thereon, and all obligations of the parties hereunder shall terminate except those which specifically survive termination.
(b) On or prior to the Closing Date, Tenant shall fully execute and deposit with Escrow Agent the following documents and funds:
(i) the Purchase Price, subject to the closing adjustments contemplated hereby;
(ii) such evidence or documents as may reasonably be required by Tenant's title company evidencing the status and capacity of Tenant and the authority of the person or persons who are executing the various documents on behalf of Tenant in connection with the purchase of the Property;
(iii) a counterpart Assignment of Leases;
(iv) a counterpart Assignment of Service Contracts and Intangible Property;
(v) a certificate ("Tenant's Closing Certificate") stating that there is no default under the covenants, representations and warranties of Tenant contained in this Exhibit and, in addition, that, to Tenant's actual knowledge, all such representations and warranties are true and correct in all material respects as of the Closing Date as if made on and as of the Closing Date (or specifying in reasonable detail any defaults or exceptions that may then exist, provided that Tenant shall not take any action or omit to take any action that would result in any such default or exception); and
(vi) a counterpart Settlement Statement setting forth the Purchase Price and all amounts applied on behalf of or charged against Tenant.
8. DELIVERY AND PAYMENT.
Upon consummation of the transactions contemplated in this Exhibit, Escrow Agent shall disburse funds and documents as follows:
(a) To Landlord:
(i) the Purchase Price, less amounts charged to Landlord; and
(ii) executed originals of the documents and other deliveries listed in this Exhibit.
(b) To Tenant:
(i) the Deed, the Assignment of Leases and title clearing documents, if any (each of which may be released by Escrow Agent to Tenant's title insurance company prior to the Closing for recording contemporaneously with the Closing pursuant to usual and customary escrow instructions for commercial real estate transactions in Boston, Massachusetts);
(ii) executed originals of the documents and other deliveries listed in Section [ ] above, except as provided in (i) above; and
(iii) the balance, if any, in the escrow account to the credit of Tenant by check or by wire transfer payable to Tenant.
At Closing, Landlord shall deliver, or cause its on-site property manager to deliver, to Tenant, all to the extent in Landlord's possession or control, original executed copies of all tenant leases and service contracts, the original plans and specifications for the Property, building permits, certificates of occupancy, and such other certificates, licenses, and permits as may relate to the operation of the Property, and the originals or photocopies of all books, accounts, and records relating to the Property.
9. NO OUTSIDE REPRESENTATIONS/AS-IS SALE.
(a) The Offer Notice and this Exhibit contains all of the terms and conditions agreed upon, it being understood that there are no outside representations or oral agreements.
(b) The Property is being sold in an "AS IS, WHERE IS" condition and "WITH ALL FAULTS". No representations or warranties, express, implied or arising by operation of law, have been made or are made and no responsibility has been or is assumed by Landlord or by any partner, officer, person, firm, agent, attorney, or representative acting or purporting to act on behalf of Landlord as to the condition or repair of the Property or the value, expense of operation, or income potential thereof or as to any other fact or condition which has or might affect the Property of the condition, repair, value, expense of operation or income potential of the Property or any portion thereof. The parties agree that all understandings and agreements heretofore made between them or their respective agents or representatives are merged in this Exhibit and the schedules and exhibits hereto annexed, which, along with any confidentiality agreements or access agreements that have been or may be entered into between the parties, alone fully and completely express their agreement, and that this Exhibit has been entered into after full investigation, or with the parties satisfied with the opportunity afforded for investigation, neither party relying upon any statement or representation by the other unless such statement or representation is specifically embodied in this Exhibit or such schedules or exhibits. Landlord makes no representations or warranties as to whether the Property contains asbestos or
any hazardous materials or harmful or toxic substances, or pertaining to the extent, location or nature of same, if any. Further, to the extent that Landlord has provided to Tenant access or use of a physical or electronic data room or internet site (any such form of access or use referred to as "Data Room") or information from any inspection, engineering or environmental reports concerning asbestos or any hazardous materials or harmful or toxic substances, Landlord makes no representations or warranties with respect to the accuracy or completeness, methodology of preparation or otherwise concerning the contents of such Data Room or reports. Tenant acknowledges that Landlord has requested that Tenant inspect the Property fully and carefully and investigate all matters relevant thereto and that Tenant rely solely upon the results of Tenant's own inspections or other information obtained or otherwise available to Tenant, rather than any information that may have been provided by Landlord to Tenant. Tenant expressly understands and acknowledges that it is possible that unknown liabilities may exist with respect to the Property and Tenant explicitly took that possibility into account in determining and agreeing to the Purchase Price.
(c) Tenant waives and releases Landlord from any present or future claims arising from or relating to the presence or alleged presence of asbestos or any hazardous materials or harmful or toxic substances in, on, under or about the Property, prior to, on or after the date hereof, including without limitation any claims under or on account of (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as the same may have been or may be amended from time to time, and similar state statutes, and any regulations promulgated thereunder, (ii) any other federal, state or local law, ordinance, rule or regulation, now or hereafter in effect, that deals with or otherwise in any manner relates to, environmental matters of any kind, (iii) this Exhibit, or (iv) the common law. Tenant and its successors and assigns covenant and agree to defend, indemnify and hold harmless Landlord from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses of whatever kind or nature, relating to any asbestos and hazardous materials or harmful or toxic substances heretofore or hereafter in, at, about or under the Property. The terms and provisions of this paragraph shall survive Closing hereunder or termination of this Exhibit.
(d) The provisions hereof shall survive the Closing and delivery of the Deed and shall not be merged thereby.
10. BROKER'S COMMISSION.
Landlord and Tenant each represent and warrant to the other that the warranting party has had no dealing with any other dealer, real estate agent, or broker so as to entitle such other dealer, agent, or broker to receive any commission or fee in connection with sale of the Property to Tenant. If for any reason any such commission or fee shall become due, the party dealing with such dealer, agent, or broker shall pay any such commission or fee and shall indemnify, defend, and save the other party harmless from and against any and all claims for any such commission or fee and from any attorneys' fees and litigation or other expenses relating to any such claim. The provisions of this Section shall survive the Closing or the termination of this Exhibit.
11. ASSIGNMENT.
The Right of First Offer may not be assigned by Tenant without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion.
12. LANDLORD'S LIMITED LIABILITY.
It is hereby expressly agreed that any liability of Landlord arising hereunder, for any reason whatsoever, shall be limited to Landlord's interest in and to the Property and the proceeds thereof. It is further hereby expressly agreed that in no event shall any member, manager, officer, director, employee, agent or representative of Landlord have any personal liability in connection with this Exhibit or the transaction envisioned herein.
13. TIME OF THE ESSENCE.
Time is of the essence hereof.
14. SEVERABILITY.
If any provision hereof, or its application to any person or circumstance, is held to be invalid or unenforceable to any extent, that holding shall not affect the remainder of this Exhibit or the application of that provision to persons or circumstances other than that to which it was held invalid or unenforceable.
15. The provisions hereof shall be subject to reasonable modification to reflect changes in local conveyancing custom and practice and necessary adjustments to the extent the Specified Interest shall not be real property.
EXHIBIT B_CLOSING PUNCHLIST
State Street Financial Center
Estoppel Certificate
Outstanding items
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| | | | | | | | | | |
9-Feb-04 | | | | | | |
Item | | Issue | | State Street owes KBJV | | KBJV owes State Street |
FINANCIAL ISSUES | | | | | | |
Boston Fire Watch | | Invoice #1 from KBJV dated 11/14/03 | | $ | 74,687 |
| | |
Bus duct claim | | State Street has costs associated with base building bus duct failures Claim submitted: $503,117 Paid T. D. $50,000 | | | | $ | 453,117 |
|
Stairwell door hardware | | Have not received invoices from KBJV for SSC portion | | | | |
Cleanup | | State Street had to clean an extraordinary amount of base building debris from several floors Reimbursement of costs. | | | | $ | 6,383 |
|
PUNCHLIST/DESIGN DEFICIENCIES | | | | | | |
Building heat | | Base building heating plant is insufficient to maintain building temperatures as required by lease State Street/BR+A to propose a solution | | | | Cost: roughly $ 70,000 |
|
Shell possession punchlist | | KBJV items outstanding for floors 8 -20: see attached list. State Street has not yet submitted formal punchlist for floors 10-14. | | | | |
Canopy | | KBJV incomplete work includes canopy and trench drain | | | | |
Historic wall | | KBJV construction incomplete | | | | |
State Street Financial Center
Estoppel Certificate
Outstanding items
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| | | | | |
| | | |
9-Feb-04 | | | |
Item | Issue | State Street owes KBJV | KBJV owes State Street |
Certificate of occupancy | KBJV has a temporary certificate of occupancy for the base building. Needs to be converted to a permanent C of O. | | |
Landlord�s contribution | Payment is due for the period ending 12/31/03 | | $ | 2,336,068 |
|
Exterior soffit lights at entrances | Original lighting did not fit - is any required? Holes need to be capped if no lights are being installed. The open holes allow major air infiltration into the building. | | |
Drain odor | Drains in mechanical rooms and restrooms are drying out and allowing sewer gas into tenant space | | |
37th floor distribution panel | Critical panel has deficiencies which need to be repaired | | |
Flag poles | Design of poles causes flags to twist. Needs to be corrected. | | |
Building leaks | There were some fairly severe leaks in the building as recently as early January. What is status of repairs? Ongoing leaks may induce additional mould issues. | | |
Elevators | Gongs have not all been adjusted; some are still too quiet. Not all hall lanterns work. | | |
Heat in loading dock | Floor 2 is too cold. Unheated loading dock may be the cause. | | |
State Street Financial Center
Estoppel Certificate
Outstanding items
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| | | | | | |
| | | | | | |
9-Feb-04 | | | | | | |
Item | | Issue | | State Street owes KBJV | | KBJV owes State Street |
Window washing davits | | Will they be used? If not do they need to stay in place? Can they be covered? | | | | |
Interface for Base Building Security Cameras | | KBJV has not provided interface for SSC to view base building cameras. | | | | |
Corner exterior lighting | | Tenant not satisfied with color | | | | |
Base Building Security System | | Letter of testing and completion of Base Building Security System has not been received. | | | | |
Penthouse electrical switchgear have numerous installation problems identified and noted in ET&M report 1/16/04 | | | | | | |
KBJV has not submitted final drawings for BFD Communications room on 37. | | | | | | |
Abaondoned bus duct on P-3 has not been removed. | | | | | | |
Fuel piping riser protection not complete. Garage exhaust fan protection not complete. | | | | | | |
Excesive infiltration of cold air exists at stair towers, elevator shafts, ground floor entrances and ground floor loading dock | | | | | | |
Control of Mammoth unit discharge temperatures is inconsistent and unacceptable | | | | | | |
Cooling tower make-up water lines not properly | | | | | | |
State Street Financial Center
Estoppel Certificate
Outstanding items
|
| | | | | | | | | | |
9-Feb-04 | | | | | | |
Item | | Issue | | State Street owes KBJV | | KBJV owesState Street |
heat traced. Line has frozen. Repair complete? | | | | | | |
VFD for P-5/6 malfunctioning intermittently and not resolved | | | | | | |
Second floor Lincoln exhaust fan room electric heat was not wired. Sprinkler froze, damage. Resolved? | | | | | | |
John Hynes outside door leaks. Resolved? | | | | | | |
No heat in restrooms. Major issue. | | | | | | |
Can not keep building warm. Major issue. Infiltration excessive. | | | | | | |
Totals | | | | $ | 74,687 |
| | $ | 2,865,568 |
|
Net | | | | | | $ | 2,790,881 |
|
EXHIBIT C-
GARAGE LEASE PROVISIONS
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| |
1. | Term: From the Commencement Date of the Garage Lease through September 30, 2023, with two options to extend for ten years each. |
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| | |
| | |
Year | | Fair Market Rent |
Commencement Date - 12/31/2004 | | $2,500,000.00 |
1/1/2005 - 12/31/2005 | | $3,000,000.00 |
1/1/2006 - 12/31/2006 | | $3,500,000.00 |
1/1/2007 - 12/31/2007 | | $4,000,000.00 |
1/1/2008 - 12/31/2008 | | $4,400,000.00 |
1/1/2009 - 12/31/2009 | | $4,800,000.00 |
1/1/2010 - 9/30/2023 | | Annual CPI Increases |
________
From January 1, 2010 through September 30, 2023 the fixed rent shall be subject to CPI increases over and above the CPI for January 1,2009.
at Fair Market Rent determined on substantially the same basis as in Article 21 of the Lease, modified to exclude factors not applicable to garages, including, without limitation, subsections 21.3(b) A through E.
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3. | Taxes and Operating Expenses |
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| | |
| ● | Tenant shall pay for Garage Taxes (as defined in the Lease) as well as taxes on its personal property and any other taxes separately attributable to garage operations. |
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| | |
| ●
| Tenant shall be responsible for all costs incurred in connection with the operation and maintenance of the Garage as provided in Section 23.4 of the Lease |
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| | |
| ●
| Tenant shall have the right to have electricity or water, or both, separately metered at any time at Tenant's cost and thereafter pay for such utilities directly to the applicable providers in which event the categories of electricity and water, as applicable, shall no longer be part of Operating Expenses. |
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4. | Landlord's Repairs and Maintenance Responsibilities |
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| | |
| ●
| Subject to reimbursement for Operating Expenses to the extent provided for in the Lease, Landlord shall remain solely responsible for all repairs and maintenance of the structure of the Building, including any latent defects in Base Building Construction in the Garage. Not in limitation of the foregoing, Tenant shall have no responsibility to pay for replacement of the concrete slab flooring in the Garage. |
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5. | Services to be Provided by Landlord |
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| | |
| ●
| Subject to reimbursement from Operating Expenses, Landlord shall furnish to the Garage and maintain ventilation, electricity, water, sewer, security, life and safety and alarm systems through Building systems that service both the Building and Garage and Landlord shall remove snow and ice from the ramps. |
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| | |
| ●
| The parties agree that the provisions of the Lease concerning casualty and taking may require different treatment in the Garage Lease and will be negotiated. |
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| | |
| ●
| The terms and conditions of any parking sublease or other parking arrangement entered into pursuant to the Kingston easement providing for use by the Kingston residents of up to 42 spaces at prevailing monthly parking rates shall have Tenant as the lessor and the documentation of such arrangement shall be subject to Tenant's reasonable approval. |
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| | |
| ●
| The parties recognize the special nature of the business of running a parking garage and shall negotiate appropriate provisions concerning abatement of rent. Tenant shall have the right of self-help to remedy conditions materially and adversely affecting Tenant's use of the Garage for any condition in a critical area of the Garage (to be defined in the Garage Lease) prevailing for four (4) hours or more. |
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9. | Other Terms and Conditions |
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| | |
| ●
| It is the intent to have consistency between the Garage Lease and the Lease as to the same "boiler plate" provisions wherever practicable, noting the need for different treatment given the differences between garage and office properties, so that such terms and conditions of the Lease (adapted where apt) shall be used for the Garage Lease, including without limitation but subject to modification, if apt, Article 8 (alterations) Article 9 (laws, ordinances, requirements of public authorities), Article 11 (insurance), Article 13 (assignment, subletting, mortgaging), Article 17 (subordination, assignment of rents), Article 18 (additional tenant covenants), Article 19 (Tenant's default; Landlord's remedies); Article 31 (resolution of disputes). |
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| | |
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| The Garage Lease shall be assignable separate from or together with the Lease. |
Exhibit 10.10
THIRD AMENDMENT TO LEASE
This THIRD AMENDMENT TO LEASE (the "Third Amendment") dated as of December 22, 2004, by and between FIRST STATES INVESTORS 228 LLC, a Delaware limited liability company ("Landlord"), and SSB REALTY LLC, a Delaware limited liability company ("Tenant").
WITNESSETH
WHEREAS, Kingston Bedford Joint Venture LLC ("KBJV") and Tenant entered into a Lease dated May 9, 2001, as amended by a First Amendment dated as of August 15,2003 (as so amended, the "Amended Lease"), for certain space described in the Amended Lease as the "Original Premises," the "Second Floor Additional Space" and "Storage Space" (together the "Premises") in the building (the "Building") known as One Lincoln Street, Boston, Massachusetts 02110; and
WHEREAS, on February 17, 2004, simultaneously with the execution of a Second Amendment dated as of February 17, 2004 (the "Second Amendment") to the Amended Lease (as so amended, the "Lease"), Landlord succeeded to the interest of KBJV and became the landlord under the Lease; and
WHEREAS, Landlord and Tenant mutually intend and desire further to modify the Lease on and subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, each to the other paid, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant, intending to be legally bound, hereby agree as follows:
1. Management of Building. Subject always to the ongoing rights of Tenant with respect to the management of the Building as set out in Section 2.1 of the Second Amendment, Landlord and Tenant hereby agree as follows:
(a)In the event that, at any time from and after the date hereof, Landlord, pursuant to Section 2.1(a) of the Second Amendment, elects to replace Gale with another on-site building manager selected by Landlord or FS Management, Tenant shall not object to such appointment if the replacement on-site building manager is IPC Real Estate Management LLC or any Affiliate thereof.
(b)In the event that Tenant exercises its right to designate a qualified on-site building manager pursuant to Section 2.1(b) of the Second Amendment:
(i)Tenant shall cause such on-site building manager to recognize, and to work with, the direct employees of Landlord (who shall at all times number no fewer than six) who are at that time and during the term of such on-site building manager's engagement involved in the administration, maintenance and repair of the Building (the "Landlord's Employees"); and
(ii) Landlord shall ensure that the Landlord's Employees work closely with Tenant's on-site building manager and Landlord shall, at the request of Tenant, delegate to such on-site building manager the day-to-day supervision, direction and control of the Landlord's Employees with respect to the perfomance of their duties at the Building.
If, at any time following and during the continuance of the exercise of such right, Tenant or Tenant's on-site building manager, acting reasonably, determines that one or more of the Landlord's Employees is not performing his or her functions properly or is otherwise unsuitable for his or her position, Tenant shall so notify Landlord in writing and the Landlord shall use all reasonable efforts to replace such employee with another qualified employee within 60 days of receipt ofthe notice. Tenant acknowledges, however, that Landlord must at all times employ not less than six Landlord's Employees.
(c) In the event that, in connection with any designation by Tenant of an on-site building manager pursuant to Section 2.1(b), Tenant desires that .such on-site building manager hire one or more of the Landlord's Employees, Tenant shall so notify Landlord and, within 60 days of receipt of such notice, the on-site building manager shall hire such employee or employees on their then current terms of employment (including, for greater certainty, compensation, benefits and recognition of length of service)., Notwithstanding anything in this Third Amendment, Tenant acknowledges that Landlord must :at all times remain the employer of not less than six Landlord's Employees, each of whom shall be a full time employee exclusively involved in the management, administration, maintenance or repair of the Building, and accordingly any notice provided by Tenant under this Section l(c) shall not relate to such a number of Landlord's Employees which would cause Landlord not to be in compliance with this requirement.
(d) Nothing in this Section 1 shall increase the cost of the building management services to Tenant or in any way denigrate from the Tenant's ongoing rights with respect to the management of the Building pursuant to the Lease.
2. Right to Install Communications Equipment. Section 25.1(a) of the Lease is hereby amended and restated in its entirety as follows:
(a) Landlord understands that during the Term Tenant may (i) require communication services in connection with the operation of Tenant's business which would necessitate the construction, installation, operation and use by Tenant of communication antennae, microwave and/or satellite dishes, and other equipment and facilities, including voice and wireless technology, with a height conforming to all applicable governmental laws, rules and requirements, together with related equipment, mountings and supports (collectively, the "Communications Equipment"), on the roof of the Building or (ii) desire to allow parties other than Tenant to construct, install, operate and use Communications Equipment on the roof of the Building in accordance with the provisions, terms and conditions of this Lease. Except to the extent reasonably required for Landlord's operation of the Building, Landlord shall make available to Tenant, at no additional charge, all available space on the roof of the Building (subject to that certain License Agreement dated July 1, 2004 by and between Landlord and the Boston Fire Department, as the same may be amended, modified, extended or renewed) for any Communications Equipment at locations reasonably designated by Landlord and reasonably acceptable to Tenant. All of the provisions of this Lease with respect to Tenant's obligations hereundershall apply to the installation, use and maintenance of the Communications Equipment (whether by Tenant or any other party), including, without limitation, provisions relating to compliance with Legal and Insurance Requirements, insurance, indemnity, repairs and maintenance, except that the roof space shall not be included in the calculation of Rentable Square Feet for the purpose of determining Tenant's Share. The license granted to Tenant in this Article 25 shall not be assignable by Tenant separate and apart from this Lease; provided, however, that this sentence shall not limit Tenant's right to sublicense space on the roof of the Building in accordance with this Section. The Communications Equipment shall be treated for all purposes of this Lease as if the same were Tenant's Property. Any obligation or liability assumed by Tenant in the remaining provisions of this Article 25 shall be borne by Tenant and such other party as shall enter upon and construct, install, operate, use and maintain Communication Equipment on the roof ofthe Building from time to time, and in no event shall Landlord assume or be charged with such obligations or liabilities.
3. Definitions. Capitahzed terms used but not defined herein shall have the meanings ascribed to them in the Lease.
4. Entire Agreement. This Third Amendment, together with the Lease (and the Exhibits attached thereto), constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersedes all prior dealings between them with respect to such subject matter, and there are no verbal or collateral understandings, agreements, representations or warranties not expressly set forth in the Lease, as amended. No subsequent alteration, amendment, change or addition to the Lease shall be binding upon Landlord or Tenant, unless reduced to writing and signed by the party or parties to be charged therewith.
5. Counterparts. This Third Amendment may be executed in one or more counterparts, and by different parties hereto on separate counterparts; each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
6. Time of the Essence. Time is of the essence with respect to all payment, performance, notice and other obligations of the parties as provided in this Amendment.
7. Ratification. As amended hereby, the Lease is ratified and confirmed and declared to be in full force and effect.
[End of page; signature page follows]
IN WITNESS WHEREOF, parties have set their respective hands as of the date first above written.
Exhibit 10.11
GUARANTY
BACKGROUND
Kingston Bedford Joint Venture LLC ("Landlord") and SSB Realty, LLC ("Tenant") have entered into a lease dated May 9, 2001, of certain premises (the "Premises',) consisting of floors 1 through 36, inclusive, in the building known as One Lincoln Street, Boston, Massachusetts (as it may be amended or modified, or as space may be added or deleted, the "Lease"). In consideration of Landlord offering the leased premises to Tenant, State Street Corporation (the "Guarantor'') hereby agrees to execute this Guaranty under the following terms and conditions.
AGREEMENT
1. Guarantor irrevocably guarantees to Landlord, its successors and assigns, the full and punctual payment, performance and observance by Tenant of all obligations of the Tenant under the Lease, including, without limitation, payment and performance by Tenant with respect to any exercise by Tenant of any option it has under the Lease to expand the Premises or to extend the Term of the Lease, any exercise by Tenant of its right of first offer to purchase the Land and Building in accordance with Article 24 of the Lease, and payment of any deposit required thereunder, and the payment when due of all damages that may arise under the Lease out of or in connection with Tenant's failure to fully and promptly pay, perform and observe any of the tenns, covenants and conditions of the Lease, provided that Guarantor shall have the benefit of all claims, defenses, counterclaims, rights of abatement and set off as Tenant then may have under the Lease or otherwise, other than defenses based on Tenant's insolvency or bankruptcy under the bankruptcy laws now or hereafter enacted or similar laws for the relief of debtors (all of the foregoing, collectively, the "Guaranteed Obligations''). The Guarantor expressly agrees that the validity of this Guaranty and the Guaranteed Obligations shall not be tenninated or in any way affected or impaired by reason of the assertion by Landlord against Tenant of any of the rights or remedies reserved to Landlord pursuant to the provisions of the Lease, or by reason of the waiver or failure by Landlord to enforce any of the terms, covenants or conditions of the Lease, or by reason of the granting of any indulgence or extension to Tenant, all of which may be given or done by Landlord from time to time without notice to the Guarantor; provided, however, that if this Lease is assigned to an unrelated third party, provided that Landlord has knowledge of the same, Guarantor shall be entitled to concurrently receive a copy of any notice to Tenant under the Lease which alleges a default or breach by Tenant of the Lease including an allegation ofa failure to pay, perform or observe any Guaranteed Obligation.
2. Guarantor may, at Landlord's option, be joined in any action commenced by Landlord against Tenant in connection with and based upon the Lease or any term thereof, and recovery may be had against Guarantor in such action or any independent action against Guarantor without Landlord fIrst asserting, prosecuting or exhausting any remedy or claim against Tenant. Guarantor confirms that this Guaranty constitutes present and continuing guaranty of payment and not of collection, and shall be deemed to be a primary obligation of Guarantor which shall be enforceable either before, simultaneously with, or after proceedings against Tenant or any property or security available to Landlord.
3. This Guaranty shall not apply as to any portion of the Premises on account of which Landlord has exercised its right to terminate pursuant to Section 13.4 of the Lease nor for such portions of the Premises and for such period as Landlord may have exercised its right to underlet pursuant to Section 13.3 of the Lease. If the Lease is assigned by Tenant to third parties and Landlord and such assignee thereafter agree to amend or modify the Lease without the consent or approval of Guarantor, the Guaranteed Obligations hereunder shall be released to the extent of any such amendment or modification made without Guarantor's consent.
4. Guarantor's liability hereunder shall be ascertained as though Guarantor itselfwas the tenant under the Lease, jointly and severally with Tenant, and the Guaranteed Obligations hereunder shall'not be affected or impaired by any relief of Tenant from Tenant's obligations under the Lease under the bankruptcy laws now or hereafter enacted, or similar laws for the relief of debtors. Without limiting the generality of the foregoing sentence, the obligations of Guarantor hereunder shall not be modified, altered or released and shall remain in full force and effect and unaltered by (a) Tenant's discharge of debts and/or obligations in such a proceeding, or (b) any modification or alteration of any of the terms of the Lease in such a proceeding, or (c) any assumption, rejection or assumption and assignment of the Lease in any such proceeding. Notwithstanding anything contained in this Section 4 to the contrary, nothing herein shall limit Guarantor's right to assert defenses then available to Tenant resulting from Landlord's breach of the Lease. In the event of the rejection or disaffinnance of the Lease by Tenant or Tenant's trustee in bankruptcy pursuant to bankruptcy law or any other law affecting creditor's right, Guarantor (or an affiliate of Guarantor, as designated by Guarantor, provided that Guarantor shall in such event execute a new guaranty of such new lease, in the form of this Guaranty) will enter into a new lease with Landlord for the Premises pursuant to the Lease, for the remainder of the Tenn, effective on the date of termination, at the same rent, and upon the same covenants, agreements, conditions, provisions, restrictions and limitations as are then contained in the Lease.
5. The validity of this Guaranty and the obligation of Guarantor hereunder shall not be terminated, affected or impaired by reason of any action which Landlord may take or fail to take against Tenant or by reason of any waiver of, or failure to enforce, any of the rights· or remedies reserved to Landlord in the Lease, or otherwise (provided that Guarantor shall retain any and all benefits and rights which may otherwise be applicable to Tenant under the Lease or otherwise) or by reason of the voluntary or involuntary liquidation, dissolution, sale of all or substantially all of the assets, marshaling of assets and liabilities, receivership, conservatorship, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting, Tenant or Guarantor or any of their assets; or by reason of the release of Tenant from the performance or observance of any of the agreements, covenant, terms or conditions contained in the Lease or this Guaranty by operation of any such law relating to the relief of debtors.
6. Guarantor represents and warrants to Landlord, as an inducement for Landlord to enter into and execute the Lease, that Tenant is a wholly owned subsidiary of Guarantor, and that Guarantor recognizes that Landlord has accommodated Guarantor's request that Tenant be the Tenant under the Lease, rather than Guarantor directly, and that but for Guarantor's giving this Guaranty, Landlord would not have entered into the Lease with Tenant since Landlord is relying on the fmancial strength and creditworthiness of Guarantor. Guarantor represents and warrants to Landlord, as an inducement for Landlord to enter into and execute the Lease, that Guarantor has all necessary power, authority and legal right to execute, deliver and carry out the terms and provisions of this Guaranty, that the parties executing this Guaranty are duly authorized to execute and deliver this Guaranty on behalf of Guarantor, that this Guaranty is a valid and binding obligation of Guarantor enforceable in accordance with its terms (subject, with respect to Guarantor, to the operation of bankruptcy, insolvency or similar laws for the relief of debtors) and that this Guaranty does not violate in any material respect any law, rule, regulation, agreement or contract applicable to or binding on Guarantor. Guarantor acknowledges that Guarantor controls the original Tenant so that Guarantor shall be bound as to any modification or amendment (material or otherwise) of any of the Guaranteed Obligations of the original Tenant under this Lease made as between Landlord and the original Tenan~ it being the responsibility of Tenant to keep Guarantor informed with respect to any such modification or amendment. Should the tenant under the Lease ever be an entity other than SSB Realty LLC, or any other Affiliate (as defined in the Lease) of Guarantor, no amendment or modification of the Lease will be binding on Guarantor without Guarantor's prior written consent thereto, which consent shall not be reasonably withheld (except in the event of a material increase in the obligations of Guarantor, in which case such consent may be withheld in its sole and absolute discretion.
7. In order further to induce Landlord to enter into and execute the Lease, Guarantor further agrees that in order to carry out the terms and intent of this Guaranty more effectively, Guarantor agrees to do all acts reasonably necessary or convenient to preserve for Landlord the benefits of the foregoing provisions and promptly will execute all agreements and instruments which Landlord may from time to time reasonably request for that purpose.
8. Guarantor further agrees to be responsible to the Landlord for any reasonable out of pocket expenses, including reasonable attorneys' fees, incurred by Landlord in enforcing against Guarantor any obligations of Guarantor under this Guaranty, including any reasonable costs and expenses of litigation, but only if Landlord prevails against Guarantor by a final judgment, not subject to appeal, of a court of competent jurisdiction against all claims asserted by the Landlord in such litigation.
9. Guarantor hereby irrevocably and unconditionally submits to personal jurisdiction in The Commonwealth of Massachusetts over any suit, action or proceeding arising out of this Guaranty or out of the Lease, and Guarantor hereby waives any right to object to personal jurisdiction within The Commonwealth ofMassaohusetts, or to assert that such court(s) constitute an inconvenient forum. The initiation of any suit, action or proceeding by Landlord against the Guarantor or any property of the Guarantor in any other jurisdiction shall not constitute a waiver of the agreements contained herein that the law of The Commonwealth of Massachusetts shall govern the rights of Landlord and the rights and obligations of Guarantor under this Guaranty, and that Guarantor submits to personal jurisdiction within The Commonwealth of Massachusetts.
10. If any term of this Guaranty, or the application thereof to any person or circumstance, shall to any extent be invalid or unenforceable, the remainder of this Guaranty, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term oftrus Lease shall be valid and enforceable to the fullest extent pennitted by law.
11.Capitalized terms used and not defined in this Guaranty shall have the same meanings given to such terms as in the Lease.
12.This Guaranty may not be modified or amended except by a written agreement duly executed by Guarantor with the consent in writing of Landlord.
13.This Guaranty shall be binding upo~ and inure to the benefit of, the parties hereto and their respective successors and assigns.
14.Whenever, by the terms of the Lease or this Guaranty, any notice, demand, request, approval, consent or other communication (each of which shall be referred- to as a "notice'') shall or may be given either to Landlord or to Guarantor, such notice shall be in writing and shall be sent by hand delivery or by registered or certified mail. return receipt requested, postage prepaid, or by recognized national overnight courier. as follows:
(i) If intended for Landlord, addressed to Landlord at the following address (or to such other address or addresses as may from time to time hereafter be designated by Landlord by like notice):
clo Gale & Wentworth. LLC 70 Federal Street, 3rd Floor Boston, MA 02110 Attention: John B. Hynes, III,
with a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attention: Stuart A. Offner, Esq.
(ii) If intended for Guarantor, addressed to Guarantor at the following address:
225 Franklin Street
Boston, MA 0211 0
Attention: James C. Caccivio, Senior Vice President
with a copy to:
Peabody & Arnold LLP
50 Rowes Wharf
Boston, MA 02110
Attention: Michael 1. Glazerman, Esq.
In no event shall the validity of any notice actually given to Landlord or Guarantor be affected by any failure to deliver copies of such notices to counsel as hereinabove provided. Except as otherwise provided herein, all such notices shall be deemed to have been served on the date of actual receipt (in the case of hand delivery) or three (3) business days after such notice shall have been deposited in the United States mails within the continental United States (in the case of mailing by registered or certified mall as aforesaid).
15.No consent or approval of, or exemption by, or registration or declaration with, any governmental or public body or authority, or any other party, is required to authorize, or is required in connection with the execution, delivery and performance of, this Guaranty.
16.Guarantor warrants and represents that the financial statements of Guarantor heretofore delivered to Landlord, are true and correct and fairly reflect the financial condition and results of operation of Guarantor as of the date(s) stated therein. There has been no material adverse change in the condition, financial or otherwise, of Guarantor from the date(s) of such financial statements which could materially and adversely affect Guarantor's ability to perform the Guaranteed Obligations (after giving effect to all of Guarantor's assets and liabilities).
17 . No litigation, arbitration, investigation or administrative proceeding of or before any court, arbitrator or governmental authority, bureau, or agency is currently pending or, to the knowledge of Guarantor, threatened (i) with respect to this Guaranty or performance by Guarantor under this Guaranty, or (ii) against or affecting Guarantor, or any of its property or assets, which, if adversely determined, would have a material adverse effect on the business, operations, assets or condition, financial or otherwise, of Guarantor and which could materially and adversely affect Guarantor's ability to perform the Guaranteed Obligations (after giving effect to all of Guarantor's assets and liabilities).
Executed as a sealed Massachusetts instrument as of the 9th day of May, 2001.
GUARANTOR:
STATE STREET CORPORATION
Exhibit 10.12
THIS LOAN AND SECURITY AGREEMENT, (the "Security Instrument") is made as of the 27th day of December, 2006, by LINCOLN STREET PROPERTY OWNER, LLC, having its chief executive office at 184 Kent Avenue, 5th Floor, Brooklyn, New York 11211(hereinafter referred to as "Borrower") and WACHOVIA BANK, NATIONAL ASSOCIATION, having an address at Wachovia Bank, National Association, Commercial Real Estate Services, 8739 Research Drive URP 4, NC 1075, Charlotte, North Carolina 28262 ("Wachovia") and UBS REAL ESTATE INVESTMENTS INC., having an address at 1251 Avenue of the Americas, 22nd Floor, New York, New York 10020 ("UBS"; and, together with Wachovia, collectively, hereinafter referred to as "Lender").
WIT N E S S E T H:
WHEREAS, Lender has authorized a loan (hereinafter referred to as the "Loan") to Borrower in the maximum principal sum of SEVEN HUNDRED SEVENTY-FIVE MILLION and N0/100 DOLLARS ($775,000,000.00) (hereinafter referred to as the "Loan Amount"), which Loan is evidenced by that certain promissory note, dated the date hereof, in the amount of $387,500,000, given by Borrower, as maker, to Wachovia, as payee ("Note A-1") and that certain promissory note, dated the date hereof, in the amount of $387,500,000, given by Borrower, as maker, to UBS, as payee ("Note A-2"; and together with Note A-1 and any supplements, amendments, modifications or extensions thereof, hereinafter collectively referred to as the "Note");
WHEREAS, in consideration of the Loan, Borrower has agreed to make payments in amounts sufficient to pay and redeem, and provide for the payment and redemption of the principal of, premium, if any, and interest on the Note when due;
WHEREAS, Borrower desires by this Security Instrument to provide for, among other things, the issuance of the Note and for the deposit, deed and pledge by Borrower with, and the creation of a security interest in favor of, Lender, as security for Borrower's obligations to Lender from time to time pursuant to the Note and the other Loan Documents;
WHEREAS, Borrower and Lender intend these recitals to be a material part of this Security Instrument; and
WHEREAS, all things necessary to make this Security Instrument the valid and legally binding obligation of Borrower in accordance with its terms, for the uses and purposes herein set forth, have been done and performed.
NOW THEREFORE, for ten dollars ($10) and other good and valuable consideration, the receipt of which is hereby acknowledged, Borrower and Lender agree as follows:
ARTICLE I: DEFINITIONS
Section 1.01. Certain Definitions.
For all purposes of this Security Instrument, except as otherwise expressly provided or unless the context clearly indicates a contrary intent:
(i) the capitalized terms defined in this Section have the meanings assigned to them in this Section, and include the plural as well as the singular;
(ii) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and
(iii) the words "herein", "hereof', and "hereunder" and other words of similar import refer to this Security Instrument as a whole and not to any particular Section or other subdivision.
"Adjusted Net Cash Flow" shall mean Pro-Forma Net Operating Income projected over the twelve (12)-month period subsequent to the date of calculation less (a) the Recurring Replacement Reserve Monthly Installment multiplied by twelve (12), (b) Reletting Expenses, and (c) extraordinary capital improvements projected by Lender, in its reasonable discretion, for the subsequent twelve (12) month period for which sums were not deposited into the Recurring Replacement Reserve Escrow Account. The Adjusted Net Cash Flow shall be calculated by Borrower and shall be subject to the reasonable review and approval of Lender.
"Affiliate" of any specified Person shall mean any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such specified Person.
"Annual Budget" shall mean an annual budget submitted by Borrower to Lender in accordance with the terms of Section 2.09 hereof.
"Appraisal" shall mean the appraisal of the Property and all supplemental reports or updates thereto previously delivered to Lender in connection with the Loan.
"Appraiser" shall mean the Person who prepared the Appraisal.
"Approved Annual Budget" shall mean each Annual Budget approved by Lender in accordance with the terms hereof.
"Approved Manager Standard" shall mean the standard of business operations, practices and procedures customarily employed by entities having a senior executive with at least seven (7) years' experience in the management of class "A" office buildings which manage not less than five (5) class "A" office buildings having an aggregate leasable square footage of not less than the lesser of(a) one million leasable square feet and (b) five (5) times the leasable square feet ofthe Property.
"Architect" shall have the meaning set forth in Section 3.04(b)(i) hereof.
"Assignment" shall mean the Assignment of Leases and Rents and Security Deposits of even date herewith relating to the Property given by Borrower to Lender, as the same may be modified, amended or supplemented from time to time.
"Bank" shall mean the bank, trust company, savings and loan association or savings bank designated by Lender, in its sole and absolute discretion, in which the Central Account shall be located.
"Bankruptcy Code" shall mean 11 U.S.C. §101 et seq., as amended from time to time. "Basic Carrying Costs" shall mean the sum of the following costs associated with the Property: (a) Impositions and (b) insurance premiums.
"Basic Carrying Costs Escrow Account" shall mean the Escrow Account maintained pursuant to Section 5.06 hereof.
"Basic Carrying Costs Monthly Installment" shall mean Lender's estimate of one-twelfth (1/12th) of the annual amount for Basic Carrying Costs. "Basic Carrying Costs Monthly Installment" shall also include, if required by Lender, a sum of money which, together with such monthly installments, will be sufficient to make the payment of each such Basic Carrying Cost at least thirty (30) days prior to the date initially due. Should such Basic Carrying Costs not be ascertainable at the time any monthly deposit is required to be made, the Basic Carrying Costs Monthly Installment shall be determined by Lender in its reasonable discretion on the basis of the aggregate Basic Carrying Costs for the prior Fiscal Year or month or the prior payment period for such cost. As soon as the Basic Carrying Costs are fixed for the then current Fiscal Year, month or period, the next ensuing Basic Carrying Costs Monthly Installment shall be adjusted to reflect any deficiency or surplus in prior monthly payments. If at any time during the term of the Loan Lender reasonably determines that there will be insufficient funds in the Basic Carrying Costs Escrow Account to make payments when they become due and payable, Lender shall have the right to adjust the Basic Carrying Costs Monthly Installment such that there will be sufficient funds to make such payments. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, PROVIDED THAT (A) NO EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING AND (B) BORROWER DELIVERS PROOF REASONABLY SATISFACTORY TO LENDER THAT ALL INSURANCE PREMIUMS FOR THE POLICIES OF INSURANCE REQUIRED TO BE MAINTAINED PURSUANT TO THIS SECURITY INSTRUMENT HAVE BEEN PAID IN FULL NO LATER THAN THE DATE WHICH IS FIFTEEN (15) DAYS PRIOR TO THE DATE UPON WHICH SUCH SUMS ARE DUE AND PAYABLE AND THAT ALL IMPOSITIONS HAVE BEEN PAID ON OR PRIOR TO THE DATE WHICH IS FIFTEEN (15) DAYS PRIOR TO THE DATE UPON WHICH SUCH IMPOSITIONS WOULD BE DELINQUENT, THE "BASIC CARRYING COSTS MONTHLY INSTALLMENT" SHALL BE $0, IT BEING AGREED THAT IF THE CONDITIONS SET FORTH IN CLAUSE (B) OF THIS SENTENCE ARE NOT MET WITHIN THE APPLICABLE TIME PERIODS, BORROWER SHALL HAVE THE RIGHT TO CURE A FAlLURE TO COMPLY WITH THE PROVISIONS OF CLAUSE (B) NOT MORE THAN FOUR (4) TIMES DURING THE TERM OF THE LOAN BY PAYING ANY IMPOSITIONS PRIOR TO THE DATE SUCH SUMS WOULD BE DELINQUENT AND BY PAYING ANY INSURANCE PREMIUMS PRIOR TO THE DATE UPON WHICH SUCH SUMS ARE DUE AND PAYABLE, AS APPLICABLE.
"Basic Carrying Costs Sub-Account" shall mean the Sub-Account of the Central Account established pursuant to Section 5.02 into which the Basic Carrying Costs Monthly Installments shall be deposited.
"Borrower" shall mean Borrower named herein and any successor to the obligations of
Borrower.
"Business Day" shall mean any day other than (a) a Saturday or Sunday, or (b) a day on which banking and savings and loan institutions in the State of New York or the State of North Carolina are authorized or obligated by law or executive order to be closed, or at any time during which the Loan is an asset of a Securitization, the cities, states and/or commonwealths used in
the comparable definition of"Business Day" in the Securitization documents.
"Capital Expenditures" shall mean for any period, the amount expended for items capitalized under GAAP (or such other basis of accounting reasonably acceptable to Lender) including, to the extent required to be capitalized, expenditures for building improvements or major repairs, leasing commissions and tenant improvements.
"Cash Expenses" shall mean for any period, the operating expenses (excluding Capital Expenditures) for the Property as set forth in an Approved Annual Budget to the extent that such expenses are actually incurred by Borrower minus payments into the Basic Carrying Costs Sub Account, the Debt Service Payment Sub-Account, the Reletting Reserve Sub-Account and the Recurring Replacement Reserve Sub-Account (to the extent such sums are for the payment of sums set forth as operating expenses in the Approved Annual Budget).
"Central Account" shall mean an Eligible Account, maintained at the Bank, in the name of Lender or its successors or assigns (as secured party) as may be designated by Lender.
"Closing Date" shall mean the date of the Note.
"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.
"Condemnation Proceeds" shall mean all of the proceeds in respect of any Taking or purchase in lieu thereof.
"Contractual Obligation" shall mean, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of the property owned by it is bound.
"Control" means, when used with respect to any specific Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person whether through ownership of voting securities, beneficial interests, by contract or otherwise. The definition is to be construed to apply equally to variations of the word "Control" including "Controlled," "Controlling" or "Controlled by."
"CPI" shall mean "The Consumer Price Index (New Series) (Base Period 1982-84=100) (all items for all urban consumers)" issued by the Bureau of Labor Statistics of the United States Department of Labor (the "Bureau"). If the CPI ceases to use the 1982-84 average equaling 100 as the basis of calculation, or if a change is made in the term, components or number of items contained in said index, or if the index is altered, modified, converted or revised in any other way, then the index shall be adjusted to the figure that would have been arrived at had the change in the manner of computing the index in effect at the date of this Security Instrument not been made. If at any time during the term of this Security Instrument the CPI shall no longer be published by the Bureau, then any comparable index issued by the Bureau or similar agency of the United States issuing similar indices shall be used in lieu ofthe CPl.
"Debt" shall mean the principal of, prepayment premium (if any) and interest on the Note and all other monetary obligations, monetary liabilities or sums due or to become due under this Agreement, the Note or any other Loan Document, including, without limitation, interest on said monetary obligations, monetary liabilities or sums.
"Debt Service" shall mean the amount of interest and principal payments due and payable in accordance with the Note during an applicable period.
"Debt Service Coverage" shall mean the quotient obtained by dividing Adjusted Net Cash Flow by the sum ofthe (a) aggregate payments of interest, principal and all other sums due for such specified period under the Note (determined as of the date the calculation of Debt Service Coverage is required or requested hereunder) and (b) aggregate payments of interest, principal and all other sums due for such specified period pursuant to the terms of subordinate or mezzanine financing, if any, then affecting or related to the Property or, if Debt Service Coverage is being calculated in connection with a request for consent to any subordinate or mezzanine financing, then proposed.
"Debt Service Payment Sub-Account" shall mean the Sub-Account of the Central Account established pursuant to Section 5.02 hereof into which the Required Debt Service Payment shall be deposited.
"Default" shall mean any Event of Default or event which would constitute an Event of Default if all requirements in connection therewith for the giving of notice, the lapse of time, and the happening of any further condition, event or act, had been satisfied.
"Default Rate" shall mean the lesser of (a) the highest rate allowable at law and (b) three percent (3%) above the interest rate set forth in the Note.
"Default Rate Interest" shall mean, to the extent the Default Rate becomes applicable, interest in excess of the interest which would have accrued on (a) the Principal Amount and (b) any accrued but unpaid interest, if the Default Rate was not applicable.
"Defeasance Deposit" shall mean an amount equal to the total cost incurred or to be incurred in the purchase on behalf of Borrower of Federal Obligations necessary to meet the Scheduled Defeasance Payments.
"Defeased Note" shall have the meaning set forth in Section 15.01 hereof.
"Development Laws" shall mean all applicable subdivision, zoning, environmental protection, wetlands protection, or land use laws or ordinances applicable to the Premises and/or the Improvements, and any and all applicable rules and regulations of any Governmental Authority promulgated thereunder or related thereto.
"Disclosure Document" shall mean a prospectus, prospectus supplement, private placement memorandum, or similar offering memorandum or offering circular, in each case in preliminary or final form, used to offer securities in connection with a Securitization.
"Disclosure Schedule" shall mean that certain written Disclosure Schedule delivered to Lender by Borrower on or before the Closing Date, if any, as more particularly described on Exhibit G attached hereto and made a part hereof.
"Dollar" and the sign"$" shall mean lawful money of the United States of America.
"Eligible Account" shall mean a segregated account which is either (a) an account or accounts maintained with a federal or state chartered depository institution or trust company the long term unsecured debt obligations of which are rated by each of the Rating Agencies (or, if not rated by Fitch, Inc. ("Fitch"), otherwise acceptable to Fitch, as confirmed in writing that such account would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to any certificates issued in connection with a Securitization) in its second highest rating category at all times or, if the funds in such account are to be held in such account for less than thirty (30) days, the short term obligations of which are rated by each of the Rating Agencies (or, if not rated by Fitch, otherwise acceptable to Fitch, as confirmed in writing that such account would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to any certificates issued in connection with a Securitization) in its second highest rating category at all times or (b) a segregated trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity which, in the case of a state chartered depository institution is subject to regulations substantially similar to 12 C.F.R. § 9.1O(b), having in either case a combined capital and surplus of at least $100,000,000 and subject to supervision or examination by federal and state authority, or otherwise acceptable (as evidenced by a written confirmation from each Rating Agency that such account would not, in and of itself, cause a downgrade, qualification or withdrawal of the then current ratings assigned to any certificates issued in connection with a Securitization) to each Rating Agency, which may be an account maintained by Lender or its agents. Eligible Accounts may bear interest. The title of each Eligible Account shall indicate that the funds held therein are held in trust for the uses and purposes set forth herein.
"Emergency Expenses" means an expense which, in Borrower's good faith judgment exercised in a manner consistent with the Approved Manager Standard or, if the State Street Lease is in full force and effect or if FPG Management LLC ("FPG") is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property, is necessary to (a) prevent an immediate threat to the health, safety or welfare of any person in the immediate vicinity of the Realty, (b) prevent immediate material damage or material loss to the Property, or (c) avoid the suspension of any necessary service in or to any portion of the Property.
"Engineer" shall have the meaning set forth in Section 3.04(b)(i) hereof.
"Engineering Escrow Account" shall mean an Escrow Account established and maintained pursuant to Section 5.12 hereof relating to payments for any Required Engineering Work.
"Environmental Problem" shall mean any of the following:
(a) the presence of any Hazardous Material on, in, under, or above all or any portion of the Property in violation of any Environmental Statute with respect to the Property;
(b) the release of any Hazardous Material from or onto the Property; or
(c) the failure to obtain or to abide by the terms or conditions of any permit or approval required under any Environmental Statute with respect to the Property.
A condition described above shall be an Environmental Problem regardless of whether or not any Governmental Authority has taken any action in connection with the condition and regardless of whether that condition was in existence on or before the date hereof.
"Environmental Report" shall mean the environmental audit report for the Property and any supplements or updates thereto, previously delivered to Lender in connection with the Loan.
"Environmental Statute" shall mean any federal, state or local statute, ordinance, rule or regulation, any judicial or administrative order (whether or not on consent) or judgment applicable to Borrower or the Property including, without limitation, any judgment or settlement based on common law theories, and any provisions or conditions of any permit, license or other authorization binding on Borrower relating to (a) the protection of the environment, the safety and health of persons (including employees) or the public welfare from actual or potential exposure (or effects of exposure) to any actual or potential release, discharge, disposal or emission (whether past or present) of any Hazardous Materials or (b) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Materials, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §9601 et seq., the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. §6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of1977, 33 U.S.C. §1251 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. §2601 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. §7401 et .,the National Environmental Policy Act of 1975, 42 U.S.C. §4321, the Rivers and Harbors Act of 1899, 33 U.S.C. §401 et seq., the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. §300(f) et· and, to the extent applicable to Hazardous Materials, the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C.§651 et seq., and all rules, regulations and guidance documents promulgated or published thereunder.
"Equipment" shall have the meaning set forth in the Mortgage.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Security Instrument and, as ofthe relevant date, any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (a) described in Section 414(b) or (c) of the Code of which Borrower or Guarantor is a member and (b) solely for purposes of potential liability under Section 302(c)(11) ofERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) ofthe Code, described in Section 414(m) or (o) of the Code ofwhich Borrower or Guarantor is a member.
"Escrow Account" shall mean each of the Engineering Escrow Account, the Basic Carrying Costs Escrow Account, the Recurring Replacement Reserve Escrow Account, the Reletting Reserve Escrow Account and the Underwritten Rent Escrow Account, each of which shall be an Eligible Account or book entry sub-account of an Eligible Account.
"Event of Default" shall have the meaning set forth in Section 13.01 hereof.
"Extraordinary Expense" shall mean an extraordinary operating expense or capital expense not set forth in the Approved Annual Budget or allotted for in the Recurring Replacement Reserve Sub-Account.
"Federal Obligations" shall mean non-callable direct obligations of, or obligations fully guaranteed as to payment of principal and interest by, the United States of America or any agency or instrumentality thereof provided that such obligations are backed by the full faith and credit of the United States of America as chosen by Borrower, subject to the reasonable approval of Lender.
"Fiscal Year" shall mean the twelve (12) month period commencing on January I and ending on December 31 during each year of the term of this Security Instrument, or such other fiscal year of Borrower as Borrower may select from time to time with the prior written consent of Lender (not to be unreasonably withheld, conditioned ot delayed).
"Fixtures" shall have the meaning set forth in the Mortgage.
"Force Majeure" shall mean acts of god, governmental restrictions, stays, judgments, orders, decrees, enemy actions, civil commotion, fire, casualty, strikes or work stoppages which are industry-wide and not aimed at Borrower nor its Affiliates, or other causes beyond the reasonable control of Borrower and/or its Affiliates, but Borrower's lack of funds in and of itself shall not be deemed a cause beyond the control of Borrower.
"GAAP" shall mean generally accepted accounting principles in the United States of America, as of the date of the applicable financial report, consistently applied.
"General Partner" shall mean, if Borrower is a partnership, each general partner of Borrower and, if Borrower is a limited liability company, each managing member of Borrower and, unless Borrower is a Delaware single member limited liability company which satisfies the single-purpose bankruptcy-remote entity requirement of the Rating Agencies for a single member limited liability company, in each case, if applicable, each general partner or managing member of such general partner or managing member. In the event that Borrower is a single member limited liability company, the term "General Partner" shall include such single member. Notwithstanding anything to the contrary contained herein, provided that (i) Borrower is a Delaware single member limited liability company the provisions of the organizational documents ofwhich remain as they exist as of the Closing Date (except to the extent amended with the consent of Lender) and (ii) the sole member of Borrower is Lincoln Street Mezz, LLC, in no event shall the term "General Partner" include any Person which directly or indirectly owns any interest in Lincoln Street Mezz, LLC.
"Governmental Authority" shall mean, with respect to any Person, any federal or State government or other political subdivision thereof and any entity, including any regulatory or administrative authority or court, exercising executive, legislative, judicial, regulatory or administrative or quasi-administrative functions of or pertaining to government, and any arbitration board or tribunal, in each case having jurisdiction over such applicable Person or such Person's property.
"Guarantor" shall mean any Person guaranteeing, in whole or in part, the obligations of Borrower under the Loan Documents.
"Guaranty" shall have the meaning set forth in Section 13.01 hereof.
"Hazardous Material" shall mean any flammable, explosive or radioactive materials, hazardous materials or wastes, hazardous or toxic substances, pollutants or related materials, asbestos or any asbestos containing material and toxic molds, which may pose a risk to human health or the environment or any other substance or material as defined in or regulated by any Environmental Statutes.
"Impositions" shall mean all taxes (including, without limitation, all real estate, ad valorem, sales (including those imposed on lease rentals), use, single business, gross receipts, value added, intangible, transaction, privilege or license or similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not commenced or completed within the term of this Security Instrument), ground rents, water, sewer or other rents and charges, excises, levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Property and/or any Rent (including all interest and penalties thereon), which at any time prior to, during or in respect of the term hereof may be assessed or imposed on or in respect of or be a lien upon (a) Borrower (including, without limitation, all franchise, single business or other taxes imposed on Borrower or Lender, (b) the Property or any part thereof or any Rents therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on, or in connection with the Property, or any art thereof, or the leasing or use of the Property, or any part thereof, to the extent payable by Borrower and not the applicable occupant, or the acquisition or financing of the acquisition of the Property, or any part thereof, by Borrower.
"Improvements" shall have the meaning set forth in the Mortgage.
"Indemnified Parties" shall have the meaning set forth in Section 12.01 hereof.
"Independent" shall mean, when used with respect to any Person, a Person who (a) does not have any direct financial interest or any material indirect financial interest in Borrower, or in any Affiliate of Borrower or any constituent partner, shareholder, member or beneficiary of Borrower, (b) is not connected with Borrower or any Affiliate of Borrower or any constituent partner, shareholder, member or beneficiary of Borrower as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions and (c) is not a member of the immediate family of a Person defined in (a) or (b) above.
"Initial Engineering Deposit" shall equal the amount set forth on Exhibit B attached hereto and made a part hereof.
"Institutional Lender" shall mean any of the following Persons: (a) any bank, savings and loan association, savings institution, trust company or national banking association, acting for its own account or in a fiduciary capacity, (b) any charitable foundation, (c) any insurance company or pension and/or annuity company, (d) any fraternal benefit society, (e) any pension, retirement or profit sharing trust or fund within the meaning ofTitle I of ERISA or for which any bank, trust company, national banking association or investment adviser registered under the Investment Advisers Act of 1940, as amended, is acting as trustee or agent, (f) any investment company or business development company, as defined in the Investment Company Act of 1940, as amended, (g) any small business investment company licensed under the Small Business Investment Act of 1958, as amended, (h) any broker or dealer registered under the Securities Exchange Act of 1934, as amended, or any investment adviser registered under the Investment Adviser Act of 1940, as amended, (i) any government, any public employees' pension or retirement system, or any other government agency supervising the investment of public funds, or (j) any other entity all of the equity owners of which are Institutional Lenders; provided that each of said Persons shall have net assets in excess of$1,000,000,000 and a net worth in excess of $500,000,000, be in the business of making commercial mortgage loans, secured by properties of like type, size and value as the Property and have a long term credit rating which is not less than "BBB-" (or its equivalent) from each Rating Agency.
"Insurance Proceeds" shall mean all of the proceeds received under the insurance policies required to be maintained by Borrower pursuant to Article III hereof.
"Insurance Requirements" shall mean all terms of any insurance policy required by this Security Instrument, all requirements of the issuer of any such policy, and all regulations and then current standards applicable to or affecting the Property or any use or condition thereof, which may, at any time, be recommended by the Board of Fire Underwriters, if any, having jurisdiction over the Property, or such other Person exercising similar functions.
"Interest Accrual Period" shall mean the period commencing on the Closing Date through and including the tenth (lOth) day of January, 2007 and, thereafter, each one (1) month period, which shall commence on the eleventh (11th) day of each calendar month and end on and include the tenth (lOth) day of the next occurring calendar month.
"Interest Rate" shall have the meaning set forth in the Note.
"Interest Shortfall" shall mean any shortfall in the amount of interest required to be paid with respect to the Loan Amount on any Payment Date.
"Late Charge" shall have the meaning set forth in Section 13.09 hereof.
"Leases" shall have the meaning set forth in the Mortgage.
"Legal Requirement" shall mean as to any Person, the certificate of incorporation, by-laws, certificate of limited partnership, agreement of limited partnership or other organization or governing documents of such Person, and any law, statute, order, ordinance, judgment, decree, injunction, treaty, rule or regulation (including, without limitation, Environmental Statutes, Development Laws and Use Requirements) or determination of an arbitrator or a court or other Governmental Authority and all covenants, agreements, restrictions and encumbrances contained in any instruments, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
"Lender" shall mean the Lender named herein and its successors or assigns.
"Loan" shall have the meaning set forth in the Recitals hereto.
"Loan Amount" shall have the meaning set forth in the Recitals hereto.
"Loan Documents" shall mean this Security Instrument, the Note, the Mortgage, the Assignment, and any and all other agreements, instruments, certificates or documents executed and delivered by Borrower or any Affiliate of Borrower in connection with the Loan, together with any supplements, amendments, modifications or extensions thereof.
"Loan Year" shall mean each 365 day period (or 366 day period if the month of February in a leap year is included) commencing on the first day of the month following the Closing Date (provided, however, that the first Loan Year shall also include the period from the Closing Date to the end of the month in which the Closing Date occurs).
"Lockout Expiration Date" shall have the meaning set forth in Section 15.01 hereof.
"Loss Proceeds" shall mean, collectively, all Insurance Proceeds and all Condemnation
Proceeds.
"Major Space Lease" shall mean any Space Lease of a tenant or Affiliate of such tenant where such tenant, together with such Affiliate, leases, in the aggregate, five percent (5%) or more of the Total GLA.
"Management Agreement" shall have the meaning set forth in Section 7.02 hereof.
"Manager" shall mean the Person, other than Borrower, which manages the Property on behalf of Borrower.
"Material Adverse Effect" shall mean any event or condition that has a material adverse effect on (a) the Property, (b) the business, profits, management, operations or condition (financial or otherwise) of Borrower, (c) the enforceability, validity, perfection or priority of the lien of any Loan Document or (d) the ability of Borrower to perform any of its material obligations under any Loan Document.
"Maturity", when used with respect to the Note, shall mean the Maturity Date set forth in the Note or such other date pursuant to the Note on which the final payment of principal, and premium, if any, on the Note becomes due and payable as therein or herein provided, whether at Stated Maturity or by declaration of acceleration, or otherwise.
"Maturity Date" shall mean the Maturity Date set forth in the Note.
"Monthly Debt Service Payment" shall mean a monthly payment of principal and interest in an amount equal to that which is required pursuant to the Note.
"Mortgage" shall mean that certain mortgage or deed of trust or deed to secure debt or similar security document executed by Borrower of even date herewith encumbering the Premises, in the original principal sum of the Loan Amount.
"Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been, or were required to have been, made by Borrower, Guarantor or any ERISA Affiliate and which is covered by Title IV of ERISA.
"Net Capital Expenditures" shall mean for any period the amount by which Capital Expenditures during such period exceed reimbursements for such items during such period from any fund established pursuant to the Loan Documents.
"Net Operating Income" shall mean in each Fiscal Year or portion thereof during the term hereof, Operating Income less Operating Expenses.
"Net Proceeds" shall mean the excess of (a)(i) the purchase price (at foreclosure or otherwise) actually received by Lender with respect to the Property as a result of the exercise by Lender of its rights, powers, privileges and other remedies after the occurrence of an Event of Default, or (ii) in the event that Lender (or Lender's nominee) is the purchaser at foreclosure by credit bid, then the amount of such credit bid, in either case, over (b) all costs and expenses, including, without limitation, all attorneys' fees and disbursements and any brokerage fees, if applicable, incurred by Lender in connection with the exercise of such remedies, including the sale of such Property after a foreclosure against the Property.
"Non-Discretionary Expenses" means any non-discretionary expense required for the Property, including, without limitation, any expense which, in Borrower's good faith judgment exercised in a manner consistent with the Approved Manager Standard or, if the State Street Lease is in full force and effect or if FPG is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property, is necessary to (a) comply with any of the material obligations of the Borrower as landlord under any Space Lease, (b) comply with any material agreements, encumbrances or other instruments affecting the Property with respect to which the failure to comply could reasonably be expected to have a Material Adverse Effect, (c) pay Real Estate Taxes, (d) maintain insurance for the Property and Borrower as required under Section 3.01, or (e) pay utility bills for the Property as and when due and payable.
"Note" shall have the meaning set forth in the Recitals hereto.
"Note A-1" shall have the meaning set forth in the Recitals hereto.
"Note A-2" shall have the meaning set forth in the Recitals hereto.
"OFAC List" shall mean the list of specially designated nationals and blocked persons subject to financial sanctions that is maintained by the U.S. Treasury Department, Office of Foreign Assets Control and accessible through the internet website www.treas.gov/ofac/tllsdn.pdf.
"Officer's Certificate" shall mean a certificate delivered to Lender by Borrower which is signed on behalf of Borrower by an authorized representative of Borrower which states that the items set forth in such certificate are true, accurate and complete in all respects.
"Operating Expenses" shall mean, in each Fiscal Year or portion thereof during the term hereof, all expenses directly attributable to the operation, repair and/or maintenance of the Property including, without limitation, (a) Impositions, (b) insurance premiums, (c) management fees, whether or not actually paid, equal to the greater of the actual management fees and three percent (3%) of annual "base" or "fixed" Rent and reimbursables due under the Leases and (d) costs attributable to the operation, repair and maintenance of the systems for heating, ventilating and air conditioning the Improvements and actually paid for by Borrower. Operating Expenses shall not include interest, principal and premium, if any, due under the Note or otherwise in connection with the Debt, income taxes, extraordinary and/or capital improvement costs, leasing commissions or expenses, any non-cash charge or expense such as depreciation or amortization or any item of expense otherwise includable in Operating Expenses which is paid directly by any tenant except real estate taxes paid directly to any taxing authority by any tenant and/or any other cost of or expense that may be capitalized under GAAP.
"Operating Income" shall mean, in each Fiscal Year or portion thereof during the term hereof, all revenue derived by Borrower arising from the Property including, without limitation, rental revenues (whether denominated as basic rent, additional rent, escalation payments, electrical payments, tenant reimbursables or otherwise) and other fees and charges payable pursuant to Leases or otherwise in connection with the Property, and business interruption, rent or other similar insurance proceeds. Operating Income shall not include (a) Insurance Proceeds (other than proceeds of rent, business interruption or other similar insurance allocable to the applicable period) and Condemnation Proceeds (other than Condemnation Proceeds arising from a temporary taking or the use and occupancy of all or part of the applicable Property allocable to the applicable period), or interest accrued on such Condemnation Proceeds, (b) proceeds of any financing, (c) proceeds of any sale, exchange or transfer of the Property or any part thereof or interest therein, (d) capital contributions or loans to Borrower or an Affiliate of Borrower, (e) any item of income otherwise includable in Operating Income but paid directly by any tenant to a Person other than Borrower except for real estate taxes paid directly to any taxing authority by any tenant, (f) any other extraordinary, non-recurring revenues, (g) Rent paid by or on behalf of any lessee under a Space Lease which is the subject of any proceeding or action relating to its bankruptcy, reorganization or other arrangement pursuant to the Bankruptcy Code or any similar federal or state law or which has been adjudicated a bankrupt or insolvent unless such Space Lease has been affirmed by the trustee in such proceeding or action, (h) Rent paid by or on behalf of any lessee under a Space Lease the demised premises of which are not occupied either by such lessee or by a sublessee thereof for sixty (60) or more days unless the lessee has a long term unsecured debt rating of not less than "A" (or its equivalent) from each Rating Agency, (i) Rent paid by or on behalf of any lessee under a Space Lease in whole or partial consideration for the termination of any Space Lease, or U) sales tax rebates from any Governmental Authority.
"Payment Date" shall mean, with respect to each month, the eleventh (11th) calendar day in such month, or if such day is not a Business Day, the next following Business Day.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established under ERISA, or any successor thereto.
"Permitted Encumbrances" shall have the meaning set forth in Section 2.05(a) hereof.
"Permitted Liens" shall mean, with respect to the Property, collectively, (a) the liens created by this Security Instrument, the Mortgage and the other Loan Documents, (b) all liens and other matters disclosed on the title insurance policy insuring the lien of this Security Instrument, (c) liens, if any, for Impositions imposed by any Governmental Authority not yet delinquent or being contested in good faith and by appropriate proceedings in accordance with the Loan Documents, (d) mechanic's or materialmen's liens, if any being contested in good faith and by appropriate proceedings in accordance with the Loan Documents, (e) rights of existing and future tenants pursuant to Leases entered into in accordance with this Security Instrument, (f) pledges or deposits made to secure payment of worker's compensation insurance (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions or social security programs, incurred in the ordinary course of business, (g) bankers' liens, rights of setoff and other similar liens existing solely with respect to cash and other investments on deposit in one or more accounts maintained by or on behalf of Borrower, in each case granted in the ordinary course of business in favor of the bank or banks with which such accounts are maintained, solely securing amounts owing to such bank with respect to cash management and operating account arrangements, (h) liens relating to equipment financing (i) which are incurred in the ordinary course of Borrower's business in connection with the ownership of the Property, (ii) provided the removal of the equipment related to such liens would not result in a Material Adverse Effect, (iii) which are secured only by the financed equipment, and (iv) the obligations secured thereby are, unless being contested in accordance with the terms of this Security Instrument, paid prior to the earlier to occur of the thirtieth (30th) day after the date incurred and the date when due, and (v) in an amount not to exceed one percent (1%) of the Loan Amount and (i) such other title and survey exceptions as Lender has approved or may approve in writing in Lender's reasonable discretion, all of which (other than the liens of the type set forth in clauses (a) and (b) above) are subordinate to the lien of this Security Instrument.
"Person" shall mean any individual, corporation, limited liability company, partnership, joint venture, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.
"Plan" shall mean an employee benefit or other plan established or maintained by Borrower, Guarantor or any ERISA Affiliate during the five-year period ended prior to the date of this Security Instrument or to which Borrower, Guarantor or any ERISA Affiliate makes, is obligated to make or has, within the five year period ended prior to the date of this Security Instrument, been required to make contributions (whether or not covered by Title IV of ERISA or Section 302 of ERISA or Section 401(a) or 412 of the Code), other than a Multiemployer Plan.
"Premises" shall mean the plot(s), piece(s) or parcel(s) of real property described in Exhibit A attached hereto and made a part hereof.
"Principal Amount" shall mean the Loan Amount as such amount may be reduced from time to time pursuant to the terms of this Security Instrument, the Note or the other Loan Documents.
"Principal Payments" shall mean all payments of principal made pursuant to the terms of the Note.
"Pro-Forma Net Operating Income" shall mean Pro-Forma Operating Income less Pro Forma Operating Expenses.
"Pro-Forma Operating Expenses" shall mean projected annualized Operating Expenses based on a trailing twelve (12)-month period adjusted upwards (but not downwards) by CPI as reasonably adjusted by Lender to take into account, among other things, anticipated increases in Operating Expenses.
"Pro-Forma Operating Income" shall mean projected annualized Operating Income based on the most recent rent roll and such other information as is required to be delivered by Borrower pursuant to Section 2.09 hereof excluding rent relating to tenants under Space Leases (pursuant to the most recent rent roll) that are past due more than forty-five (45) days as reasonably adjusted by Lender to take into account, among other things, a vacancy factor equal to the greater of (a) anticipated vacancies and (b) market vacancies for the market in which the Property is located.
"Prohibited Person" shall mean any Person and/or any Affiliate thereof identified on the OFAC List or any other Person or foreign country or agency thereof with whom a U.S. Person may not conduct business or transactions by prohibition of Federal law or Executive Order of the President of the United States of America.
"Property" shall mean the Premises, the Improvements, the Equipment, the Fixtures, the Leases, the Sub-Accounts, the Escrow Accounts and all other assets of Borrower, including without limitation, all other collateral of whatever nature granted to Lender as security for the Loan pursuant to the Mortgage and each other Loan Document, together with all proceeds, products, substitutions and accessories (including claims and demands therefor) of each of the foregoing.
"Property Agreements" shall mean all agreements, grants of easements and/or rights-of way, reciprocal easement agreements, declarations of covenants, conditions and restrictions, disposition and development agreements, planned unit development agreements, parking agreements, party wall agreements or other instruments affecting the Property, but expressly excluding any brokerage agreements, management agreements, service contracts, Space Leases or the Loan Documents.
"Rating Agency" shall mean each of Standard & Poor's Ratings Services, a division of The McGraw-Hill Company, Inc. ("Standard & Poor's"), Fitch, Inc., and Moody's Investors Service, Inc. ("Moody's") and any successor to any of them; provided, however, that at any time after a Securitization, "Rating Agency" shall mean those of the foregoing rating agencies that from time to time rate the securities issued in connection with such Securitization.
"Realty" shall have the meaning set forth in Section 2.05(b) hereof.
"Recurring Replacement Expenditures" shall mean expenditures related to capital repairs, replacements and improvements performed at the Property from time to time.
"Recurring Replacement Reserve Escrow Account" shall mean the Escrow Account maintained pursuant to Section 5.08 hereof relating to the payment of Recurring Replacement Expenditures.
"Recurring Replacement Reserve Monthly Installment" shall mean at any time during which an Event of Default exists, the amount per month set forth on Exhibit B attached hereto and made a part hereof. FOR AVOIDANCE OF DOUBT, IF NO EVENT OF DEFAULT EXISTS, THE RECURRING REPLACEMENT RESERVE MONTHLY INSTALLMENT SHALL BE $0.
"Recurring Replacement Reserve Sub-Account" shall mean the Sub-Account of the Central Account established pursuant to Section 5.02 hereof into which the Recurring Replacement Reserve Monthly Installment shall be deposited.
"Regulation AB" shall mean Regulation AB under the Securities Act and the Securities
Exchange Act of 1934 (as amended).
"Reletting Expenditures" shall mean reasonable and actual out-of-pocket expenditures payable to bona-fide third parties incurred by Borrower relating to reletting of space at the Property and in connection with any brokerage commissions due and payable, or any improvements and replacements required to be made by Borrower (or reasonable and actual out of-pocket expenditures paid to tenants in connection with any improvements and replacements made by tenants at the Property) under the terms of any Lease to prepare the relevant space for occupancy by the tenant thereunder.
"Reletting Expenses" shall mean Lender's estimate of expenditures to be incurred by Borrower on an annual basis during the term of the Loan relating to reletting of space at the Property and in connection with any brokerage commissions due and payable in connection therewith, or any improvements and replacements required to be made by Borrower (or expenditures to be paid to tenants in connection with any improvements and replacements to be made by tenants at the Property) to prepare the relevant space for occupancy.
"Reletting Reserve Escrow Account" shall mean the Escrow Account maintained pursuant to Section 5.07 hereof relating to the payment of Reletting Expenditures.
"Reletting Reserve Monthly Installment" shall mean (a) security deposits retained by Borrower in connection with the termination of any Space Lease and (b) all sums received by Borrower in connection with any modification, cancellation, termination or surrender of any Lease, including, without limitation, any modification, cancellation, termination or surrender fees, buy-out fees, or reimbursements for tenant improvements and/or leasing commissions.
"Reletting Reserve Sub-Account" shall mean the Sub-Account of the Central Account established pursuant to Section 5.02 hereof into which the Reletting Reserve Monthly Installment shall be deposited.
"Rent Account" shall mean an Eligible Account maintained in a bank acceptable to Lender in the joint names of Borrower and Lender or such other name as Lender may designate in writing.
"Rents" shall have the meaning set forth in the Mortgage.
"Required Debt Service Coverage" shall mean a Debt Service Coverage of not less than 1.15:1.
"Required Debt Service Payment" shall mean, as of any Payment Date, the amount of interest and principal then due and payable pursuant to the Note, together with any other sums due thereunder, including, without limitation, any prepayments required to be made or for which notice has been given under this Security Instrument, Default Rate Interest and premium, if any, paid in accordance therewith plus.
"Required Engineering Work" shall mean the immediate engineering and/or environmental remediation work set forth on Exhibit D attached hereto and made a part hereof.
"Retention A mount" shall have the meaning set forth in Section 3.04(b)(vii) hereof.
"Scheduled Defeasance Payments" shall mean:
(a) with respect to a defeasance of the Loan in whole, payments on or prior to,
but as close as possible to (i) each scheduled Payment Date, after the date of defeasance and through and including the Lockout Expiration Date, upon which interest payments or interest and Principal Payments are required under the Loan Documents and in amounts equal to the scheduled payments due on such dates under the Loan Documents and (ii) the Lockout Expiration Date, of the Principal Amount and any accrued and unpaid interest thereon; or
(b) with respect to any defeasance of the Loan in part, payments on or prior to, but as close as possible to, (i) each scheduled Payment Date after the date of defeasance through and including the Lockout Expiration Date, of a proportionate share (based on the percentage of outstanding principal prior to the defeasance represented by the amount of principal defeased) ofthe monthly installments of principal and interest
due on such dates under the Loan Documents and (ii) the Lockout Expiration Date, of the unpaid portion of the portion ofthe Principal Amount so defeased and any accrued and unpaid interest thereon.
"Securities Act" shall mean the Securities Act of 1933, as the same shall be amended from time to time.
"Securitization" shall mean a public or private offering of securities by Lender or any of its Affiliates or their respective successors and assigns which are collateralized, in whole or in part, by this Security Instrument.
"Security Agreement" shall have the meaning set forth in Section 15.01 hereof.
"Security Deposit Account" shall have the meaning set forth in Section 5.01 hereof.
"Security Instrument" shall mean this Security Instrument as originally executed or as it may hereafter from time to time be supplemented, amended, modified or extended by one or more indentures supplemental hereto.
"Significant Obligor" shall have the meaning set forth in Item llOl(k) of Regulation AB.
"Single Purpose Entity" shall mean a corporation, partnership, joint venture, limited liability company, trust or unincorporated association, which is formed or organized solely for the purpose of holding, directly, an ownership interest in the Property or, with respect to General Partner, holding an ownership interest in and managing a Person which holds an ownership interest in the Property, does not engage in any business unrelated to, with respect to Borrower, the Property and, with respect to General Partner, its interest in Borrower, does not have any assets other than those related to, with respect to Borrower, its interest in the Property and, with respect to General Partner, its interest in Borrower, or any indebtedness other than as permitted by this Security Instrument or the other Loan Documents, has its own separate books and records and has its own accounts, in each case which are separate and apart from the books and records and accounts of any other Person, holds itself out as being a Person separate and apart from any other Person and which otherwise satisfies the criteria of the Rating Agency, as in effect on the Closing Date, for a special-purpose bankruptcy-remote entity.
"Solvent" shall mean, as to any Person, that (a) the sum of the assets of such Person, at a fair valuation, exceeds its liabilities, including contingent liabilities, (b) such Person has sufficient capital with which to conduct its business as presently conducted and as proposed to be conducted and (c) such Person has not incurred debts, and does not intend to incur debts, beyond its ability to pay such debts as they mature. For purposes of this definition, "debt" means any liability on a claim, and "claim" means (a) a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (b) a right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. With respect to any such contingent liabilities, such liabilities shall be computed in accordance with GAAP at the amount which, in light of all the facts and circumstances existing at the time, represents the amount which can reasonably be expected to become an actual or matured liability.
"Space Leases" shall mean any Lease (including, without limitation, any Major Space Lease) or any other agreement with Borrower providing for the use and occupancy of a portion of the Property together with any supplements, renewals, amendments, modifications or extensions thereof.
"State" shall mean any of the states which are members of the United States of America.
"State Street Lease" shall mean that certain Lease dated May 9, 2001 between SSB Realty LLC, as tenant and First States Investors 228 LLC, as Landlord, as amended.
"Stated Maturity" when used with respect to the Note or any installment of interest and/or principal payment thereunder, shall mean the date specified in the Note as the fixed date on which a payment of all or any portion of principal and/or interest is due and payable.
"Sub-Accounts" shall have the meaning set forth in Section 5.02 hereof.
"Substantial Casualty" shall have the meaning set forth in Section 3.04 hereof.
"Taking" shall mean a condemnation or taking pursuant to the lawful exercise of the power of eminent domain.
"Total GLA" shall mean the total gross leasable area of the Property, including all Space Leases.
"Transfer" shall mean the conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) all or any portion of any legal or beneficial interest (a) in all or any portion of the Property; (b) if Borrower is a corporation or, if Borrower is a partnership and any General Partner is a corporation, in the stock of Borrower or any General Partner; (c) in Borrower (or any trust ofwhich Borrower is a trustee); or (d) if Borrower is a limited or general partnership, joint venture, limited liability company, trust, nominee trust, tenancy in common or other unincorporated form of business association or form of ownership interest, in any Person having a legal or beneficial ownership in Borrower, excluding any legal or beneficial interest in any constituent limited partner, if Borrower is a limited partnership, or in any non-managing member, if Borrower is a limited liability company, unless such interest would, or together with all other direct or indirect interests in Borrower which were previously transferred, aggregate 49% or more of the partnership or membership, as applicable, interest in Borrower or would result in any Person who, as of the Closing Date, did not own, directly or indirectly, 49% or more of the partnership or membership, as applicable, interest in Borrower, owning, directly or indirectly, 49% or more of the partnership or membership, as applicable, interest in Borrower and excluding any legal or beneficial interest in any General Partner unless such interest would, or together with all other direct or indirect interest in the General Partner which were previously transferred, aggregate 49% or more of the partnership or membership, as applicable, interest in the General Partner (or result in a change in control of the management of the General Partner from the individuals exercising such control immediately prior to the conveyance or other disposition of such legal or beneficial interest) and shall also include, without limitation to the foregoing, the following: an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof or any interest therein for a price to be paid in installments; an agreement by Borrower leasing all or substantially all of the Property to one or more Persons pursuant to a single or related transactions other than the State Street Lease or any other Space Lease entered into in accordance with the normal and customary operations of the Property, or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower's right, title and interest in and to any Leases or any Rent; any instrument subjecting the Property to a condominium regime or transferring ownership to a cooperative corporation; and the dissolution or termination of Borrower or the merger or consolidation of Borrower with any other Person. Notwithstanding the foregoing, "Transfer" shall not include (a) transfers made by devise or descent or by operation of law upon the death of a partner, member or shareholder of Borrower or General Partner or any Person owning a direct or indirect legal or beneficial interest in Borrower or General Partner if (i) written notice of any transfer pursuant to this proviso is given to Lender together with such documents relating to the transfer as Lender may reasonably require, (ii) control over the management and operation of the Property is retained by Fortis Property Group, LLC, Joel Kestenbaum, Margaret Kestenbaum, Amram Kass, David Werner, Joseph Friedland and/or RCG Longview II, L.P. ("RCG" and together with Fortis Property Group, LLC, Joel Kestenbaum, Margaret Kestenbaum, Amram Kass, David Werner and Joseph Friedland, collectively, the "Original Principals", whether one or more) at all times prior to the death or legal incapacity of all the Original Principals and is thereafter assumed by Persons who are acceptable in all respects to Lender in its sole and absolute discretion, (iii) no such transfer by any of the Original Principals will release the respective estate from any liability as a Guarantor if such Original Principal is also a Guarantor unless a replacement Guarantor is provided which is acceptable to Lender in its sole and absolute discretion, and (iv) no such transfer, death or other event has any adverse effect either on the Single Purpose Entity status of Borrower under the requirements of any Rating Agency or on the status of Borrower as a continuing legal entity liable for the payment of the Debt and the performance of all other obligations secured hereby, nor (b) subject to the provisions of clauses (i) through (iv) above and provided, that (i) any inter vivos transfer of all or any portion of the Property or any inter vivos transfer or issuance of capital stock (or other ownership interests) in Borrower or General Partner is made in connection with Original Principals' bona fide, good faith estate planning and (ii) the Person(s) with Control of Borrower or the management of the Property are (x) the same Person(s) who had such Control and management rights immediately prior to the transfer in question, or (y) reasonably acceptable to Lender, (i) an inter vivos or testamentary transfer of all or any portion of the ownership interest in Borrower to one or more family members of Original Principals or a trust in which all of the beneficial interest is held by one or more family members of Original Principals or a partnership, limited liability company, corporation or other legal entity in which a majority of the capital and profits interests are held by one or more family members of Original Principals, or (ii) any inter vivos or testamentary transfer or issuance of capital stock (or other ownership interests) in the General Partner to one or more family members of Original Principals, a trust in which all of the beneficial interest is held by one or more family members of Original Principals or a partnership, limited liability company, corporation or other legal entity in which a majority of the capital and profits interests are held by one or more family members of Original Principals, nor (c) any transfer, conveyance or assignment of any direct or indirect legal or beneficial ownership interest in Borrower, provided, in each case, that Original Principals continue to collectively own in the aggregate, directly or indirectly, (x) not less than the percentage of direct or indirect ownership interests in Borrower owned by such Original Principals as of the Closing Date (but in no event less than fifteen percent (15%) of the direct or indirect interest in Borrower) or (y) sixteen percent (16%) of the direct or indirect ownership interests in Borrower, if such Original Principals collectively owned in the aggregate more than sixteen percent (16%) of the ownership interests in Borrower as of the Closing Date, and directly or indirectly Control Borrower, and provided further that, in the event that any Person (a "Principal Transferee") who does not, as of the Closing Date, own or Control, directly or indirectly, 49% or more of the stock, partnership interest or membership interest, as applicable, in Borrower acquires, directly or indirectly, 49% or more of the stock, partnership interest or membership interest, as applicable, in Borrower as a result of such transfer, conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation or granting of a security interest, Lender shall be furnished an opinion, in form and substance and from counsel reasonably satisfactory to Lender, substantially similar to the Insolvency Opinion which discusses the substantive non-consolidation of Borrower with the Principal Transferee in the event of a bankruptcy, insolvency or similar proceeding relating to the Principal Transferee. Nothing contained herein or in any other Loan Document shall be construed to prohibit (i) the acquisition by RCG of Control of Borrower, or (ii) the acquisition by RCG of eighty percent (80%) or more of the direct or indirect ownership interests in Borrower; provided that RCG is (i) as of and subsequent to such acquisition, Controlled by the same Persons which Control RCG as of the Closing Date, (ii) not a Prohibited Person, (iii) not the subject (nor has been the subject during the seven (7) years prior to such assignment) of a bankruptcy, insolvency or reorganization proceeding or any other action for the relief of debtors, (iv) a replacement guarantor which is an Affiliate ofRCG and otherwise acceptable to Lender in its sole but reasonable discretion executes a guaranty in form and substance identical (other than the name of the guarantor thereunder) to each Guaranty and (v) in the event that a Principal Transferee who does not, as of the Closing Date, own or Control, directly or indirectly, 49% or more of the stock, partnership interest or membership interest, as applicable, in Borrower acquires, directly or indirectly, 49% or more of the stock, partnership interest or membership interest, as applicable, in Borrower as a result of such transfer, conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation or granting of a security interest, Lender shall be furnished an opinion, in form and substance and from counsel reasonably satisfactory to Lender, substantially similar to the Insolvency Opinion which discusses the substantive non-consolidation of Borrower with the Principal Transferee in the event of a bankruptcy, insolvency or similar proceeding relating to the Principal Transferee. As used herein, "family members" shall include spouses, children (including adopted children) and grandchildren and any lineal descendants.
"UCC" shall mean the Uniform Commercial Code as in effect on the date hereof in the State in which the Realty is located; provided, however, that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection or priority of the security interest in any item or portion of the collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State in which the Realty is located ("Other UCC State"), "UCC" means the Uniform Commercial Code as in effect in such Other UCC State for purposes of the provisions hereof relating to such perfection or effect of perfection or non perfection or priority.
"Undefeased Note" shall have the meaning set forth in Section 15.01 hereof.
"Underwritten Rent Escrow Account" shall mean an Escrow Account maintained pursuant to Section 5.14 hereof.
"Unscheduled Payments" shall mean (a) all Loss Proceeds that Borrower has elected or is required to apply to the repayment of the Debt pursuant to this Security Instrument, the Note or any other Loan Documents, (b) any funds representing a voluntary or involuntary principal prepayment other than scheduled Principal Payments and (c) any Net Proceeds.
"Use Requirements" shall mean any and all building codes, permits, certificates of occupancy or compliance, laws, regulations, or ordinances (including, without limitation, health, pollution, fire protection, medical and day-care facilities, waste product and sewage disposal regulations), restrictions of record, easements, reciprocal easements, declarations or other agreements affecting the use of the Premises or Improvements or any part thereof.
"Welfare Plan" shall mean an employee welfare benefit plan as defined in Section 3(1) of ERISA established or maintained by Borrower, Guarantor or any ERISA Affiliate or that covers any current or former employee of Borrower, Guarantor or any ERISA Affiliate.
"Work" shall have the meaning set forth in Section 3.04(a)(i) hereof.
ARTICLE II: REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER
Section 2.01. Payment of Debt. Borrower will pay the Debt at the time and in the manner provided in the Note and the other Loan Documents, all in lawful money of the United States of America in immediately available funds.
Section 2.02. Representations, Warranties and Covenants of Borrower. Borrower represents and warrants to and covenants with Lender:
(a) Organization and Authority. Borrower (i) is a limited liability company, general partnership, limited partnership or corporation, as the case may be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) has all requisite power and authority and all necessary licenses and permits to own and operate the Property and to carry on its business as now conducted and as presently proposed to be conducted and (iii) is duly qualified, authorized to do business and in good standing in the jurisdiction where the Property is located and in each other jurisdiction where the conduct of its business or the nature of its activities makes such qualification necessary. If Borrower is a limited liability company, limited partnership or general partnership, each general partner or managing member, as applicable, of Borrower which is a corporation is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation.
(b) Power. Borrower and, if applicable, each General Partner has full power and authority to execute, deliver and perform, as applicable, the Loan Documents to which it is a party, to make the borrowings thereunder, to execute and deliver the Note and to grant to Lender a first, prior, perfected and continuing lien on and security interest in the Property, subject, as of the Closing Date, only to the Permitted Encumbrances.
(c) Authorization of Borrowing. The execution, delivery and performance of the Loan Documents to which Borrower is a party, the making of the borrowings thereunder, the execution and delivery of the Note, the grant of the liens on the Property pursuant to the Loan Documents to which Borrower is a party and the consummation of the Loan are within the powers of Borrower and have been duly authorized by Borrower and, if applicable, the General Partners, by all requisite action (and Borrower hereby represents that no approval or action of any member, limited partner or shareholder, as applicable, of Borrower is required to authorize any of the Loan Documents to which Borrower is a party) and will constitute the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their terms, except as enforcement may be stayed or limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in proceedings at law or in equity) and will not (i) violate any provision of its partnership agreement or partnership certificate or certificate of incorporation or by-laws, or operating agreement, certificate of formation or articles of organization, as applicable, or, to its knowledge, any law, judgment, order, rule or regulation of any court, arbitration panel or other Governmental Authority, domestic or foreign, or other Person affecting or binding upon Borrower or the Property, or (ii) violate any provision of any indenture, agreement, mortgage, deed of trust, contract or other instrument to which Borrower or, if applicable, any General Partner is a party or by which any of their respective property, assets or revenues are bound, or be in conflict with, result in an acceleration of any obligation or a breach of or constitute (with notice or lapse of time or both) a default or require any payment or prepayment under, any such indenture, agreement, mortgage, deed of trust, contract or other instrument, or (iii) result in the creation or imposition of any lien, except those in favor of Lender as provided in the Loan Documents to which it is a party.
(d) Consent. Neither Borrower nor, if applicable, any General Partner, is required to obtain any consent, approval or authorization from, or to file any declaration or statement with, any Governmental Authority or other agency in connection with or as a condition to the execution, delivery or performance of this Security Instrument, the Note or the other Loan Documents which has not been so obtained or filed.
(e) Intentionally Omitted.
(f) Other Agreements. Borrower is not a party to nor is otherwise bound by any agreements or instruments which, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect. Neither Borrower nor, if applicable, any General Partner, is in violation of its organizational documents or other restriction or any agreement or instrument by which it is bound, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or Governmental Authority, or any Legal Requirement, in each case, applicable to Borrower or the Property, except for such violations that would not, individually or in the aggregate, have a Material Adverse Effect.
(g) Maintenance of Existence. (i) Borrower and, if applicable, each General Partner at all times since their formation have been duly formed and existing at all times and at all times have preserved and shall preserve and has kept and shall keep in full force and effect their existence as a Single Purpose Entity.
(ii) Borrower and, if applicable, each General Partner, at all times since their organization have complied, and will continue to comply, with the provisions of its certificate of limited partnership and agreement of limited partnership or certificate of incorporation and by-laws or articles of organization, certificate of formation and operating agreement, as applicable, and the laws of its jurisdiction of organization relating to partnerships, corporations or limited liability companies, as applicable.
(iii) Borrower and, if applicable, each General Partner have done or caused to be done and will do all things necessary to observe organizational formalities and preserve their existence and Borrower and, if applicable, each General Partner will not amend, modify or otherwise change the certificate of limited partnership and agreement of limited partnership or certificate of incorporation and by-laws or articles of organization, certificate of formation and operating agreement, as applicable, or other organizational documents of Borrower and, if applicable, each General Partner.
(iv) Borrower and, if applicable, each General Partner, have at all times accurately maintained, and will continue to accurately maintain, their respective financial statements, accounting records and other partnership, company or corporate documents separate from those of any other Person and Borrower, have filed and will file its own tax returns or, if Borrower and/or, if applicable, General Partner is part of a consolidated group for purposes of filing tax returns, Borrower and, General Partner, as applicable, have been shown and will be shown as separate members of such group. Borrower and, if applicable, each General Partner have not at any time since their formation commingled, and will not commingle, their respective assets with those of any other Person and each has maintained and will maintain their assets in such a manner such that it will not be costly or difficult to segregate, ascertain or identify their individual assets from those of any other Person. Borrower and, if applicable, each General Partner has not permitted and will not permit any Affiliate independent withdrawal rights relating to their bank accounts. Borrower and, if applicable, each General Partner have at all times since their formation accurately maintained and utilized, and will continue to accurately maintain and utilize, their own separate bank accounts, payroll and separate books of account, stationery, invoices and checks.
(v) Borrower and, if applicable, each General Partner, have at all times paid, and, to the extent sufficient income is generated from the Property, will continue to pay, their own liabilities from their own separate assets and each has allocated and charged and shall each allocate and charge fairly and reasonably any overhead which Borrower and, if applicable, any General Partner, shares with any other Person, including, without limitation, for office space and services performed by any employee of another Person.
(vi) Borrower and, if applicable, each General Partner, have at all times identified themselves, and will continue to identify themselves, in all dealings with the public, under their own names and as separate and distinct entities and have corrected and shall correct any known misunderstanding regarding their status as separate and distinct entities. Borrower and, if applicable, each General Partner, have not at any time identified themselves, and will not identify themselves, as being a division of any other
Person.
(vii) Borrower and, if applicable, each General Partner, have been at all times, and, as of the Closing Date, anticipate that they will continue to be, adequately capitalized in light of the nature of their respective businesses.
(viii) Borrower and, if applicable, each General Partner, (A) have not owned, do not own and will not own any assets or property other than, with respect to Borrower, the Property and any incidental personal property necessary for the ownership, management or operation of the Property and, with respect to General Partner, if applicable, its interest in Borrower, (B) have not engaged and will not engage in any business other than the ownership, management and operation of the Property or, with respect to General Partner, if applicable, its interest in Borrower, (C) have not incurred and will not incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than, with respect to Borrower, (X) the Loan and (Y) unsecured trade and operational debt which (1) is not evidenced by a note, (2) is incurred in the ordinary course of the operation of the Property, (3) does not exceed in the aggregate two percent (2%) of the Loan Amount and (4) is, unless being contested in accordance with the terms of this Security Instrument, paid prior to the earlier to occur of the forty-fifth (45th) day after the date incurred and the date when due, (D) have not pledged and will not pledge their assets for the benefit of any other Person, and (E) have not made and will not make any loans or advances to any Person (including any Affiliate), provided, however, if no Event of Default exists, Borrower and General Partner shall be permitted to make distributions to their respective members pursuant to their organizational documents.
(ix) Neither Borrower nor, if applicable, any General Partner will change its name or principal place of business without giving Lender at least thirty (30) days prior written notice.
(x) Neither Borrower nor, if applicable, any General Partner has, and neither of such Persons will have, any subsidiaries (other than, with respect to General Partner, Borrower).
(xi) Borrower has preserved and maintained and will preserve and maintain its existence as a limited liability company organized under the laws of the State of Delaware and all material rights, privileges, tradenames and franchises. General Partner, if applicable, has preserved and maintained and will preserve and maintain its existence as a limited liability company organized under the laws of the State ofDelaware and all material rights, privileges, tradenames and franchises.
(xii) Neither Borrower, nor, if applicable, any General Partner, has merged or consolidated with, and neither will merge or consolidate with, and neither has sold all or substantially all of its respective assets to any Person, and neither will sell all or substantially all of its respective assets to any Person, and neither has liquidated, wound up or dissolved itself (or suffered any liquidation, winding up or dissolution) and neither will liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution). Neither Borrower, nor, if applicable, any General Partner has acquired nor will acquire any business or assets from, or capital stock or other ownership interest of, or be a party to any acquisition of, any Person.
(xiii) Borrower and, if applicable, each General Partner, have not at any time since their formation assumed, guaranteed or held themselves out to be responsible for, and will not assume, guarantee or hold themselves out to be responsible for the liabilities or the decisions or actions respecting the daily business affairs of their partners, shareholders or members or any predecessor company, corporation or partnership, each as applicable, any Affiliates, or any other Persons. Borrower and, if applicable, each General Partner, have not at any time since their formation acquired, and will not acquire, obligations or securities of its partners or shareholders, members or any predecessor company, corporation or partnership, each as applicable, or any Affiliates (other than, with respect to General Partner, its interest in Borrower). Borrower and, if applicable, each General Partner, have not at any time since their formation made, and will not make, loans to its partners, members or shareholders or any predecessor company, corporation or partnership, each as applicable, or any Affiliates of any of such Persons. Borrower and, if applicable, each General Partner, have no known contingent liabilities nor do they have any material financial liabilities under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Person is a party or by which it is otherwise bound other than under the Loan Documents
(xiv) Borrower and, if applicable, each General Partner, have not at any time since their formation entered into and was not a party to, and, will not enter into or be a party to, any transaction with its Affiliates, members, partners or shareholders, as applicable, or any Affiliates thereof except in the ordinary course of business of such Person on terms which are no less favorable to such Person than would be obtained in a comparable arm's length transaction with an unrelated third party.
(xv) If Borrower is a limited partnership or a limited liability company, the General Partner shall be a corporation or limited liability company whose sole asset is its interest in Borrower and the General Partner will at all times comply, and will cause Borrower to comply, with each of the representations, warranties, and covenants contained in this Section 2.02(g) as if such representation, warranty or covenant was made directly by such General Partner.
(xvi) Borrower shall at all times cause there to be at least two duly appointed members of the board of directors or board of managers or other governing board or body, as applicable (each, an "Independent Director"), of, if Borrower is a corporation, Borrower, if Borrower is a limited partnership, of the General Partner, and if Borrower is a limited liability company, of the General Partner or of Borrower, reasonably satisfactory to Lender who shall not have been at the time of such individual's appointment, and may not be or have been at any time (A) a shareholder, officer, director, attorney, counsel, partner, member or employee of Borrower or any of the foregoing Persons or Affiliates thereof, (B) a customer or creditor of, or supplier or service provider to, Borrower or any of its shareholders, partners, members or their Affiliates, (C) a member of the immediate family of any Person referred to in (A) or (B) above or (D) a Person Controlling, Controlled by or under common Control with any Person referred to in (A) through (C) above. A natural person who otherwise satisfies the foregoing definition except for being the Independent Director of a Single Purpose Entity Affiliated with Borrower or General Partner shall not be disqualified from serving as an Independent Director if such individual is at the time of initial appointment, or at any time while serving as the Independent Director, an Independent Director of a Single Purpose Entity Affiliated with Borrower or General Partner if such individual is an independent director provided by a nationally-recognized company that provides professional independent directors.
(xvii) Borrower and, if applicable, each General Partner, shall not cause or permit the board of directors or board of managers or other governing board or body, as applicable, of Borrower or, if applicable, each General Partner, to take any action which, under the terms of any certificate of incorporation, by-laws, limited liability company agreement, operating agreement, certificate of formation or articles of organization requires a vote of the board of directors or board of managers or other governing board or body of Borrower, or, if applicable, the General Partner, unless at the time of such action there shall be at least two members who are Independent Directors.
(xviii) Borrower and, if applicable, each General Partner has paid and shall pay the salaries of their own employees and has maintained and shall maintain a sufficient number of employees in light of their contemplated business operations.
(xix) Borrower shall, and shall cause its Affiliates to, and Borrower has and has caused its Affiliates to, conduct its business so that the assumptions made with respect to Borrower and, if applicable, each General Partner, in that certain opinion letter relating to substantive non-consolidation dated the date hereof (the "Insolvency Opinion") delivered in connection with the Loan has been and shall be true and correct in all respects.
Notwithstanding anything to the contrary contained in this Section 2.02(g), provided Borrower is a Delaware single member limited liability company which satisfies the single purpose bankruptcy remote entity requirements of each Rating Agency for a single member limited liability company, the foregoing provisions of this Section 2.02(g) shall not apply to the General Partner.
(h) No Defaults. No Default or Event of Default has occurred and is continuing or would occur as a result of the consummation of the transactions contemplated by the Loan Documents. Borrower is not in default in the payment or performance of any of its Contractual Obligations in any respect.
(i) Consents and Approvals. Borrower and, if applicable, each General Partner, have obtained or made all necessary (i) consents, approvals and authorizations, and registrations and filings of or with all Governmental Authorities and (ii) consents, approvals, waivers and notifications of partners, stockholders, members, creditors, lessors and other nongovernmental Persons, in each case, which are required to be obtained or made by Borrower or, if applicable, the General Partner, in connection with the execution and delivery of, and the performance by Borrower of its obligations under, the Loan Documents.
(j) Investment Company Act Status, etc. Borrower is not (i) an "investment company," or a company "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended, (ii) 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 (iii) subject to any other federal or state Jaw or regulation which purports to restrict or regulate its ability to borrow money.
(k) Compliance with Law. To Borrower's best knowledge, Borrower is in compliance in all material respects with all Legal Requirements to which it or the Property is subject, including, without limitation, all Environmental Statutes, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act and ERISA. No portion of the Property has been or will be purchased, improved, fixtured, equipped or furnished with proceeds of any illegal activity and, to the best of Borrower's knowledge, no illegal activities are being conducted at or from the Property.
(l) Financial Information. All financial data of Borrower that has been delivered by Borrower to Lender (i) is true, complete and correct in all material respects, (ii) accurately represents the financial condition and results of operations of the Persons covered thereby as of the date on which the same shall have been furnished, and (iii) has been prepared in accordance with GAAP (or such other accounting basis as is reasonably acceptable to Lender) throughout the periods covered thereby. As of the date hereof, neither Borrower nor, if applicable, any General Partner, has any contingent liability, liability for taxes or other unusual or forward commitment not reflected in such financial statements delivered to Lender. Since the date of the last financial statements delivered by Borrower to Lender except as otherwise disclosed in such financial statements or notes thereto, there has been no change in the assets, liabilities or financial position of Borrower nor, if applicable, any General Partner, or in the results of operations of Borrower which would have a Material Adverse Effect. Neither Borrower nor, if applicable, any General Partner, has incurred any obligation or liability, contingent or otherwise not reflected in such financial statements which would have a Material Adverse Effect.
(m) Transaction Brokerage Fees. Borrower has not dealt with any financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Security Instrument except for The Carlton Group, Ltd. and Meridian Capital Group. All brokerage fees, commissions and other expenses payable in connection with the transactions contemplated by the Loan Documents have been paid in full by Borrower contemporaneously with the execution of the Loan Documents and the funding of the Loan. Borrower hereby agrees to indemnify and hold Lender harmless for, from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from (i) a claim by any Person that such Person acted on behalf of Borrower in connection with the transactions contemplated herein or (ii) any breach of the foregoing representation. The provisions of this subsection (m) shall survive the repayment of the Debt.
(n) Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of "purchasing" or "carrying" any "margin stock" within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulations T, U or X or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of the Loan Documents.
(o) Pending Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of Borrower, threatened against or affecting Borrower or the Property in any court or before any Governmental Authority which if adversely determined either individually or collectively has or is reasonably likely to have a Material Adverse Effect.
(p) Solvency; No Bankruptcy. Each of Borrower and, if applicable, the General Partner, (i) is and has at all times been Solvent and immediately after the consummation of the transactions contemplated by the Loan Documents will be Solvent and (ii) is free from bankruptcy, reorganization or arrangement proceedings or a general assignment for the benefit of creditors and is not contemplating the filing of a petition under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of such Person's assets or property and Borrower has no knowledge of any Person contemplating the filing of any such petition against it or, if applicable, the General Partner. None of the transactions contemplated hereby will be or have been made with an intent to hinder, delay or defraud any present or future creditors of Borrower and Borrower has received reasonably equivalent value in exchange for its obligations under the Loan Documents. Borrower's assets do not, and immediately upon consummation of the transaction contemplated in the Loan Documents will not, constitute unreasonably small capital to carry out its business as presently conducted or as proposed to be conducted. Borrower does not intend to, nor believes that it will, incur debts and liabilities beyond its ability to pay such debts as they may mature.
(q) Use of Proceeds. The proceeds of the Loan shall be applied by Borrower to, inter alia, (i) satisfy certain mortgage loans presently encumbering all or a part of the Property and (ii) pay certain transaction costs incurred by Borrower in connection with the Loan. No portion of the proceeds of the Loan will be used for family, personal, agricultural or household use.
(r) Tax Filings. Borrower and, if applicable, each General Partner, have filed all federal, state and local tax returns required to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by Borrower and, if applicable, the General Partners. Borrower and, if applicable, the General Partners, believe that their respective tax returns properly reflect the income and taxes of Borrower and said General Partner, if any, for the periods covered thereby, subject only to reasonable adjustments required by the Internal Revenue Service or other applicable tax authority upon audit.
(s) Not Foreign Person. Borrower is not a "foreign person" within the meaning of §1445(f)(3) ofthe Code.
(t) ERISA. (i) The assets of Borrower and Guarantor are not and will not become treated as "plan assets", whether by operation of law or under regulations promulgated under ERISA. If any Person having a legal or beneficial ownership interest in Borrower is using (or is deemed under ERISA to be using) "plan assets", Borrower will qualify as a "real estate operating company" within the meaning of29 C.P.R. §2510.3-101(e) at all times that the Loan is outstanding. Each Plan and Welfare Plan, and, to the knowledge of Borrower, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, its terms and the applicable provisions of ERISA, the Code and any other applicable Legal Requirement, and no event or condition has occurred and is continuing as to which Borrower would be under an obligation to furnish a report to Lender under clause (ii)(A) of this Section. Other than an application for a favorable determination letter with respect to a Plan, there are no pending issues or claims before the Internal Revenue Service, the United States Department of Labor or any court of competent jurisdiction related to any Plan or Welfare Plan under which Borrower, Guarantor or any ERISA Affiliate, directly or indirectly (through an indemnification agreement or otherwise), could be subject to any material risk of liability under Section 409 or 502(i) of ERISA or Section 4975 of the Code. No Welfare Plan provides or will provide benefits, including, without limitation, death or medical benefits (whether or not insured) with respect to any current or former employee of Borrower, Guarantor or any ERISA Affiliate beyond his or her retirement or other termination of service other than (A) coverage mandated by applicable law, (B) death or disability benefits that have been fully provided for by fully paid up insurance or (C) severance benefits.
(ii) Borrower will furnish to Lender as soon as possible, and in any event within ten (10) days after Borrower knows or has reason to believe that any of the events or conditions specified below with respect to any Plan, Welfare Plan or Multiemployer Plan has occurred or exists, an Officer's Certificate setting forth details respecting such event or condition and the action, if any, that Borrower or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC (or any other relevant Governmental Authority) by Borrower or an ERISA Affiliate with respect to such event or condition, if such report or notice is required to be filed with the PBGC or any other relevant Governmental Authority:
(A) any reportable event, as defined in Section 4043 of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code and of Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code), and any request for a waiver under Section 412(d) of the Code for any Plan;
(B) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by Borrower or an ERISA Affiliate to terminate any Plan;
(C) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by Borrower or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan;
(D) the complete or partial withdrawal from a Multiemployer Plan by
Borrower or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA;
(E) the institution of a proceeding by a fiduciary of any Multiemployer Plan against Borrower or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within thirty (30) days;
(F) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust ofwhich such Plan is a part ifBorrower or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; or Plan.
(G) the imposition of a lien or a security interest in connection with a
(iii) Borrower shall not knowingly engage in or permit any transaction in connection with which Borrower, Guarantor or any ERISA Affiliate could be subject to either a civil penalty or tax assessed pursuant to Section 502(i) or 502(1) of ERISA or Section 4975 of the Code, permit any Welfare Plan to provide benefits, including without limitation, medical benefits (whether or not insured), with respect to any current or former employee of Borrower, Guarantor or any ERISA Affiliate beyond his or her retirement or other termination of service other than (A) coverage mandated by applicable law, (B) death or disability benefits that have been fully provided for by paid up insurance or otherwise or (C) severance benefits, permit the assets of Borrower or Guarantor to become "plan assets", whether by operation of law or under regulations promulgated under ERISA or adopt, amend (except as may be required by applicable law) or increase the amount of any benefit or amount payable under, or permit any ERISA Affiliate to adopt, amend (except as may be required by applicable law) or increase the amount of any benefit or amount payable under, any employee benefit plan (including, without limitation, any employee welfare benefit plan) or other plan, policy or arrangement, except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits expense to Borrower, Guarantor or any ERISA Affiliate.
(u) Labor Matters. No organized work stoppage or labor strike is pending or, to the best of Borrower's knowledge, threatened by employees or other laborers at the Property and neither Borrower nor Manager (i) is involved in or, to the best of Borrower's knowledge, threatened with any labor dispute, grievance or litigation relating to labor matters involving any employees and other laborers at the Property, including, without limitation, violation of any federal, state or local labor, safety or employment laws (domestic or foreign) and/or charges of unfair labor practices or discrimination complaints; (ii) has engaged in any unfair labor practices within the meaning of the National Labor Relations Act or the Railway Labor Act; or (iii) is a party to, or bound by, any collective bargaining agreement or union contract with respect to employees and other laborers at the Property and no such agreement or contract is currently being negotiated by Borrower, Manager or any of their Affiliates.
(v) Borrower's Legal Status. Borrower's exact legal name that is indicated on the signature page hereto, organizational identification number and place of business or, if more than one, its chief executive office, as well as Borrower's mailing address, if different, which were identified by Borrower to Lender and contained in this Security Instrument, are true, accurate and complete. Borrower (i) will not change its name, its place of business or, if more than one place of business, its chief executive office, or its mailing address or organizational identification number if it has one without giving Lender at least thirty (30) days prior written notice of such change, (ii) if Borrower does not have an organizational identification number and later obtains one, Borrower shall promptly notify Lender of such organizational identification number and (iii) will not change its type of organization, jurisdiction of organization or other legal structure.
(w) Compliance with Anti-Terrorism, Embargo and Anti-Money Laundering Laws. (i) None of Borrower, General Partner, any Guarantor, or any Person who owns any equity interest in or Controls Borrower, General Partner or any Guarantor currently is identified on the OFAC List or otherwise qualifies as a Prohibited Person, and Borrower has implemented procedures, approved by Borrower and, if applicable, General Partner, to ensure that no Person who now or hereafter owns an equity interest in Borrower or General Partner is a Prohibited Person or Controlled by a Prohibited Person, (ii) no proceeds of the Loan will be used to fund any operations in, finance any investments or activities in or make any payments to, Prohibited Persons, and (iii) none of Borrower, General Partner, or any Guarantor is in violation of any Legal Requirements relating to anti-money laundering or anti-terrorism, including, without limitation, Legal Requirements related to transacting business with Prohibited Persons or the requirements of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of2001, U.S. Public Law 107-56, and the related regulations issued thereunder, including temporary regulations, all as amended from time to time. No tenant at the Property currently is identified on the OFAC List or otherwise qualifies as a Prohibited Person, and, to the best of Borrower's knowledge, no tenant at the Property is owned or Controlled by a Prohibited Person. Borrower will implement (or will ensure that Manager implements) procedures, approved by Borrower, to ensure that no tenant at the Property is a Prohibited Person or owned or Controlled by a Prohibited Person.
Section 2.03. Further Acts, etc. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages or deeds of trust, as applicable, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, reasonably require for the better assuring, conveying, assigning, transferring, and confirming unto Lender the property and rights hereby mortgaged, given, granted, bargained, sold, alienated, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out or facilitating the performance of the terms of this Security Instrument or for filing, registering or recording this Security Instrument and, within five (5) Business Days ofwritten demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments to evidence more effectively the lien hereof upon the Property. Borrower grants to Lender an irrevocable power of attorney coupled with an interest for the purpose of protecting, perfecting, preserving and realizing upon the interests granted pursuant to this Security Instrument and to effect the intent hereof, all as fully and effectually as Borrower might or could do; and Borrower hereby ratifies all that Lender shall lawfully do or cause to be done by virtue hereof; provided, however, that Lender shall not exercise such power of attorney unless and until Borrower fails to take the required action within the five (5) Business Day time period stated above unless the failure to so exercise, could, in Lender's reasonable judgment, result in a Material Adverse Effect. Upon (a) receipt of an affidavit of an officer of Lender as to the loss, theft, destruction or mutilation of the Note or any other Loan Document which is not of public record, (b) receipt of an indemnity of Lender related to losses resulting solely from the issuance of a replacement note or other applicable Loan Document and (c) in the case of any such mutilation, upon surrender and cancellation of such Note or other applicable Loan Document, Borrower will issue, in lieu thereof, a replacement Note or other applicable Loan Document, dated the date of such lost, stolen, destroyed or mutilated Note or other Loan Document in the same principal amount thereof and otherwise of like tenor.
Section 2.04. Recording of Security Instrument, etc. Borrower forthwith upon the execution and delivery of this Security Instrument and thereafter, from time to time, will cause this Security Instrument, and any security instrument creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully protect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all filing, registration or recording fees, and all expenses incident to the preparation, execution and acknowledgment of this Security Instrument, any mortgage or deed of trust, as applicable, supplemental hereto, any security instrument with respect to the Property and any instrument of further assurance, and all federal, state, county and municipal, taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Security Instrument, any mortgage or deed of trust, as applicable, supplemental hereto, any security instrument with respect to the Property or any instrument of further assurance, except where prohibited by law to do so, in which event Lender may declare the Debt to be due and payable within sixty (60) days after written demand from Lender. Borrower shall hold harmless and indemnify Lender and its successors and assigns, against any liability incurred as a result of the imposition of any tax on the making and recording of this Security Instrument.
Section 2.05. Representations, Warranties and Covenants Relating to the Property. Borrower represents and warrants to and covenants with Lender with respect to the Property as follows:
(a) Lien Priority. The Mortgage is a valid and enforceable first lien on the portion of the Property which constitutes real property and this Security Instrument creates a valid and enforceable lien on the balance of the Property, in each case free and clear of all encumbrances and liens having priority over the lien of this Security Instrument or the Mortgage, as applicable, except for the items set forth as exceptions to or subordinate matters in the title insurance policy insuring the lien of the Mortgage, none of which, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided by this Security Instrument or the Mortgage, materially affect the value or marketability of the Property, impair the use or operation of the Property for the use currently being made thereof or impair Borrower's ability to perform its obligations under the Loan Documents in a timely manner (such items being the "Permitted Encumbrances").
(b) Title. Borrower has, subject only to the Permitted Encumbrances, good, insurable and marketable fee simple title to the Premises, Improvements and Fixtures (collectively, the "Realty") and to all easements and rights benefiting the Realty and has the right, power and authority to mortgage, encumber, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign, and hypothecate the Property. Borrower will preserve its interest in and title to the Property and will forever warrant and defend the same to Lender against any and all claims made by, through or under Borrower and will forever warrant and defend the validity and priority of the lien and security interest created herein against the claims of all Persons whomsoever claiming by, through or under Borrower. The foregoing warranty of title shall survive the foreclosure of this Security Instrument and the Mortgage and shall inure to the benefit of and be enforceable by Lender in the event Lender acquires title to the Property pursuant to any foreclosure. In addition, except pursuant to the State Street Lease, there are no outstanding options or rights of first refusal to purchase the Property or Borrower's ownership thereof.
(c) Taxes and Impositions. Except as otherwise set forth in the Disclosure Schedule, all taxes and other Impositions and governmental assessments due and owing in respect of, and affecting, the Property have been paid. Borrower has paid all Impositions which constitute special governmental assessments in full, except for those assessments which are permitted by applicable Legal Requirements to be paid in installments, in which case all installments which are due and payable have been paid in full. There are no pending, or to Borrower's best knowledge, proposed special or other assessments for public improvements or otherwise affecting the Property, nor are there any contemplated improvements to the Property that may result in such special or other assessments.
(d) Casualty; Flood Zone. Except as otherwise set forth in the property condition or engineer's report for the Property delivered to Lender in connection with the origination of the Loan, the Realty is in good repair and free and clear of any damage, destruction or casualty that has not been repaired (whether or not covered by insurance) that would materially affect the value of the Realty or the use for which the Realty was intended. Except otherwise set forth in the property condition or engineer's report for the Property delivered to Lender in connection with the origination of the Loan, there exists no structural or other material defects or damages in or to the Property and Borrower has not received any written notice from any insurance company or bonding company of any material defect or inadequacies in the Property, or any part thereof, which would materially and adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond. Except as otherwise set forth in the survey and/or in any flood search for the Property delivered to Lender in connection with the origination of the Loan, no portion of the Premises is located in an "area of special flood hazard," as that term is defined in the regulations of the Federal Insurance Administration, Department of Housing and Urban Development, under the National Flood Insurance Act of 1968, as amended (24 CFR § 1909.1) or Borrower has obtained the flood insurance required by Section 3.01(a)(vi) hereof. The Premises either does not lie in a 100 year flood plain that has been identified by the Secretary of Housing and Urban Development or any other Governmental Authority or, if it does, Borrower has obtained the flood insurance required by Section 3.01(a)(vi) hereof.
(e) Completion; Encroachment. To Borrower's knowledge, except as set forth in the survey and property condition of engineer's report for the Property delivered to Lender in connection with the origination of the Loan, all Improvements necessary for the efficient use and operation of the Premises, including, without limitation, all Improvements which were included for purposes of determining the appraised value of the Property in the Appraisal, have been completed and none of said Improvements lie outside the boundaries and building restriction lines of the Premises. Except as set forth in the title insurance policy insuring the lien of the Mortgage, no improvements on adjoining properties encroach upon the Premises.
(f) Separate Lot. The Premises are taxed separately without regard to any other real estate and constitute a legally subdivided lot under all applicable Legal Requirements (or, if not subdivided, no subdivision or platting of the Premises is required under applicable Legal Requirements), and for all purposes may be mortgaged, encumbered, conveyed or otherwise dealt with as an independent parcel. The Property does not benefit from any tax abatement or exemption.
(g) Use. To Borrower's best knowledge, the existence of all Improvements, the present use and operation thereof and the access of the Premises and the Improvements to all of the utilities and other items referred to in paragraph (k) below are in compliance in all material respects with all Leases affecting. Borrower has not received any notice from any Governmental Authority alleging any uncured violation relating to the Property of any applicable Legal Requirements.
(h) Licenses and Permits. To Borrower's best knowledge, Borrower currently holds and will continue to hold all certificates of occupancy, licenses, registrations, permits, consents, franchises and approvals of any Governmental Authority or any other Person. All such certificates of occupancy, licenses, registrations, permits, consents, franchises and approvals are current and in full force and effect.
(i) Intentionally Omitted.
(j) Property Proceedings. There are no actions, suits or proceedings pending or, to Borrower's best knowledge, threatened in any court or before any Governmental Authority or arbitration board or tribunal (i) relating to (A) the zoning of the Premises or any part thereof, (B) any certificates of occupancy, licenses, registrations, permits, consents or approvals issued with respect to the Property or any part thereof, (C) the condemnation of the Property or any part thereof, or (D) the condemnation or relocation of any roadways abutting the Premises required for access or the denial or limitation of access to the Premises or any part thereof from any point of access to the Premises, (ii) asserting that (A) any such zoning, certificates of occupancy, licenses, registrations, permits, consents and/or approvals do not permit the operation of any material portion of the Realty as presently being conducted, (B) any material improvements located on the Property or any part thereof cannot be located thereon or operated with their intended use or (C) the operation of the Property or any part thereof is in violation in any material respect of any Environmental Statutes, Development Laws or other Legal Requirements or Space Leases or Property Agreements or (iii) which could reasonably be expected to (A) affect the validity or priority of any Loan Document or (B) have a Material Adverse Effect. Borrower is not aware of any facts or circumstances which may give rise to any actions, suits or proceedings described in the preceding sentence.
(k) Utilities. The Premises has all necessary legal access to water, gas and electrical supply, storm and sanitary sewerage facilities, other required public utilities (with respect to each of the aforementioned items, by means of either a direct connection to the source of such utilities or through connections available on publicly dedicated roadways directly abutting the Premises or through permanent insurable easements benefiting the Premises), fire and police protection, parking, and means of direct access between the Premises and public highways over recognized curb cuts (or such access to public highways is through private roadways which may be used for ingress and egress pursuant to permanent insurable easements).
(1) Mechanics' Liens. The Property is free and clear of any mechanics' liens or liens in the nature thereof (except for those that would be the obligation of the tenants under Space Leases to cure), and, to Borrower's best knowledge, no rights are outstanding that under law could give rise to any such liens, any of which liens are or may be prior to, or equal with, the lien of this Security Instrument and the Mortgage, except those which are insured against by the title insurance policy insuring the lien of the Mortgage.
(m) Intentionally Omitted.
(n) Intentionally Omitted.
(o) Space Leases.
(i) To the best of Borrower's knowledge, Borrower has delivered a true, correct and complete copy of all Space Leases as of the date hereof.
(ii) To the best of Borrower's knowledge, each Space Lease constitutes the legal, valid and binding obligation of Borrower and, to the knowledge of Borrower, is enforceable against the tenant thereof. Except as previously disclosed to Lender in the Disclosure Schedule, to the best knowledge of Borrower no default exists, or with the passing of time or the giving of notice would exist, (A) under any Major Space Lease or (B) under any other Space Leases which would, in the aggregate, have a Material Adverse Effect.
(iii) To the best of Borrower's knowledge, except as previously disclosed to Lender in the Disclosure Schedule, no tenant under any Space Lease' has, as of the date hereof, paid Rent more than thirty (30) days in advance, and the Rents under such Space Leases have not been waived, released, or otherwise discharged or compromised.
(iv) To the best of Borrower's knowledge, except as previously disclosed to Lender in the Disclosure Schedule, all work to be performed by Borrower to date under the Space Leases has been substantially performed, all contributions to be made by Borrower to the tenants thereunder have been made except for any held-back amounts, and all other conditions precedent to each such tenant's obligations thereunder have been satisfied.
(v) To the best of Borrower's knowledge, except as previously disclosed to Lender in the Disclosure Schedule, each tenant under a Space Lease or such tenant's authorized subtenant is currently occupying the space demised by such Space Lease.
(vi) To the best of Borrower's knowledge, each Space Lease is in full force and effect and (except as disclosed on the Disclosure Schedule) has not been assigned, modified, supplemented or amended in any way.
(vii) To the best of Borrower's knowledge, each tenant under each Space Lease is free from bankruptcy, reorganization or arrangement proceedings or a general assignment for the benefit of creditors.
(p) Property Agreements. To the best knowledge of Borrower, there are no Property Agreements other than those set forth in the title insurance policy insuring the lien of this Security Instrument.
(q) Personal Property. Borrower represents that it has good and marketable title to all personal property constituting a part of the Property, free and clear of any liens, except for liens created under the Loan Documents, Permitted Liens and liens which describe the equipment and other personal property owned by tenants.
(r) Leasing Brokerage and Management Fees. Except as previously disclosed to Lender in the Disclosure Schedule, there are no brokerage fees or commissions payable by Borrower with respect to the leasing of space at the Property and there are no management fees payable by Borrower with respect to the management of the Property.
(s) Security Deposits. Borrower is in compliance with all Legal Requirements relating to such security deposits as to which failure to comply might, individually or in the aggregate, have a Material Adverse Effect.
(t) Intentionally Omitted.
(u) Representations Generally. The representations and warranties contained in this Security Instrument, and the review and inquiry made on behalf of Borrower therefor, have all been made by Persons having the requisite expertise and knowledge to provide such representations and warranties. No representation, warranty or statement of fact made by or on behalf of Borrower in this Security Instrument or in any certificate, document or schedule furnished to Lender pursuant hereto, contains any untrue statement of a material fact (which may be to Borrower's best knowledge where so provided herein). There are no facts presently known to Borrower which have not been disclosed to Lender which would, to Borrower's best knowledge, individually or in the aggregate, have a Material Adverse Effect nor as far as Borrower can foresee could reasonably be expected to individually or in the aggregate, have a Material Adverse Effect. Lender acknowledges that the words "to the best knowledge" and "to the knowledge" and word of like effect or import mean, with respect to any representation or warranty of Borrower, the best knowledge ofDavid Werner, Jonathan Landau and/or Terrence Storey, or such other Person expressly identified as of the date of the making (or the effective date, as the case may be) of the representation or warranty in question.
Section 2.06. Removal of Lien. (a) Borrower shall, at its expense, maintain this Security Instrument and the Mortgage as a first lien on the Property and shall keep the Property free and clear of all liens and encumbrances of any kind and nature other than the Permitted Liens. Borrower shall, within thirty (30) days following the filing thereof, promptly discharge of record, by bond or otherwise, any such liens and, promptly upon request by Lender, shall deliver to Lender evidence reasonably satisfactory to Lender of the discharge thereof.
(b) Without limitation to the provisions of Section 2.06(a) hereof, Borrower shall (i) pay, from time to time when the same shall become due, or take such action reasonably necessary to cause the removal of, all claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or permit the creation of, a lien on the Property or any part thereof, (ii) cause to be removed of record (by payment or posting of bond or settlement or otherwise) any mechanics', materialmens', laborers' or other lien on the Property, or any part thereof, or on the revenues, rents, issues, income or profit arising therefrom, and (iii) in general, do or cause to be done, without expense to Lender, everything reasonably necessary to preserve in full the lien of this Security Instrument and the Mortgage. If Borrower fails to comply with the requirements of this Section 2.06(b), then, upon five (5) Business Days' prior notice to Borrower, Lender may, but shall not be obligated to, pay any such lien, and Borrower shall, within five (5) Business Days after Lender's demand therefor, reimburse Lender for all sums so expended, together with interest thereon at the Default Rate from the date advanced, all of which shall be deemed part of the Debt. Nothing contained herein shall be deemed a consent or request of Lender, express or implied, by inference or otherwise, to the performance of any alteration, repair or other work by any contractor, subcontractor or laborer or the furnishing of any materials by any materialmen in connection therewith.
(c) Notwithstanding the foregoing, Borrower may contest any lien (other than a lien relating to non-payment of Impositions, the contest of which shall be governed by Section 4.04 hereof), provided that, following prior notice to Lender (i) Borrower is contesting the validity of such lien with due diligence and in good faith and by appropriate proceedings, without cost or expense to Lender or any of its agents, employees, officers, or directors, (ii) Borrower shall preclude the collection of, or other realization upon, any contested amount from the Property or any revenues from or interest in the Property, (iii) neither the Property nor any part thereof nor interest therein, shall be in any imminent danger of being sold, forfeited or lost by reason of such contest by Borrower, (iv) such contest by Borrower shall not affect the ownership, use or occupancy of the Property, (v) such contest by Borrower shall not subject Lender or Borrower to the risk of civil or criminal liability (other than the civil liability of Borrower for the amount of the lien in question, together with penalties), (vi) such lien is subordinate to the lien of this Security Instrument and the Mortgage, (vii) Borrower has not consented to such lien, (viii) Borrower has given Lender prompt notice of the filing of such lien and, upon request by Lender from time to time, notice of the status of such contest by Borrower and/or confirmation of the continuing satisfaction of the conditions set forth in this Section 2.06(c), (ix) Borrower shall promptly pay the obligation secured by such lien upon a final determination of Borrower's liability therefor, and (x) if an amount contested is in excess of $1,000,000, Borrower shall deliver to Lender cash, a bond or other security acceptable to Lender equal to 125% of the contested amount pursuant to collateral arrangements reasonably satisfactory to Lender.
Section 2.07. Cost of Defending and Upholding this Security Instrument Lien. If any action or proceeding is commenced to which Lender is made a party relating to the Loan Documents and/or the Property or Lender's interest therein or in which it becomes necessary to defend or uphold the lien of this Security Instrument or any other Loan Document, Borrower shall, within ten (10) days after demand, reimburse Lender for all actual out-of-pocket expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by Lender in connection therewith, and if not paid upon demand, such sum, together with interest thereon at the Default Rate from and after such demand until fully paid, shall constitute a part of the Debt.
Section 2.08. Use of the Property. Borrower will use, or cause to be used, the Property for such use as is permitted pursuant to applicable Legal Requirements including, without limitation, under the certificate of occupancy applicable to the Property, and which is required by the Loan Documents. Borrower shall not suffer or permit the Property or any portion thereof to be used by the public, any tenant, or any Person not subject to a Lease, in a manner as is reasonably likely to impair Borrower's title to the Property, or in such manner as may give rise to a claim or claims of adverse usage or adverse possession by the public, or of implied dedication of the Property or any part thereof.
Section 2.09. Financial Reports. (a) Borrower will keep and maintain or will cause to be kept and maintained on a Fiscal Year basis, in accordance with GAAP (or such other accounting basis reasonably acceptable to Lender) consistently applied, proper and accurate books, tax returns, records and accounts reflecting (i) all of the financial affairs of Borrower and Guarantor and (ii) all items of income and expense in connection with the operation of the Property or in connection with any services, equipment or furnishings provided in connection with the operation thereof, whether such income or expense may be realized by Borrower or by any other Person whatsoever, excepting lessees unrelated to and unaffiliated with Borrower who have leased from Borrower portions of the Premises for the purpose of occupying the same. Lender shall have the right from time to time at all times during normal business hours upon reasonable notice to examine such books, tax returns, records and accounts at the office of Borrower or other Person maintaining such books, tax returns, records and accounts and to make such copies or extracts thereof as Lender shall desire, provided, however, so long as no Event of Default shall have occurred and be continuing, Lender shall only have the right to make such examination two (2) times in any twelve (12) month period. After the occurrence of an Event of Default, Borrower shall pay any costs and expenses incurred by Lender to examine Borrower's accounting records with respect to the Property, as Lender shall determine to be necessary or appropriate in the protection of Lender's interest. Lender hereby acknowledges and agrees that Borrower will prepare its financial reports on a tax accounting basis.
(b) Borrower will furnish Lender (i) annually, within one hundred twenty (120) days following the end of each Fiscal Year of Borrower and (ii) on a quarterly basis, within forty-five (45) days following the end of each fiscal quarter of Borrower, with a complete copy of Borrower's financial statement consistently applied covering (i) all of the financial affairs of Borrower and (ii) the operation of the Property for such Fiscal Year or fiscal quarters, as applicable, and containing a statement of revenues and expenses, a statement of assets and liabilities. Each annual financial statement shall be audited by an Independent certified public accountant that is reasonably acceptable to Lender in accordance with GAAP (or such other accounting basis reasonably acceptable to Lender). Together with the financial statements required to be furnished pursuant to this Section 2.09(b), Borrower shall furnish to Lender an Officer's Certificate certifying as ofthe date thereof(l) that the financial statements accurately represent the results of operations and financial condition of Borrower and the Property all in accordance with GAAP (or such other accounting basis reasonably acceptable to Lender) consistently applied, and (2) whether there exists an Event of Default under the Note or any other Loan Document executed and delivered by Borrower and, if such event or circumstance exists, the nature thereof, the period of time it has existed and the action then being taken to remedy such event or circumstance. Lender hereby acknowledges and agrees that, as of the Closing Date, Reznick, P.C. is an acceptable certified public account.
(c) When requested by Lender, Borrower will furnish Lender monthly, within thirty (30) days following the end of each month, with a true, complete and correct cash flow statement with respect to the Property in the form attached hereto as Exhibit C and made a part hereof, showing (i) all cash receipts of any kind whatsoever and all cash payments and disbursements and (ii) commencing February 2007, year-to-date summaries of such cash receipts, payments and disbursements, together with a certification of Manager stating that such cash flow statement is true, complete and correct and a list of all litigation and proceedings affecting Borrower or the Property in which the amount involved is $250,000 or more, if not covered by insurance (or $1,000,000 or more whether or not covered by insurance).
(d) Intentionally Omitted.
(e) Borrower will furnish Lender annually, within thirty (30) days following the end of each year and within thirty (30) days following receipt of such request therefor, with a true, complete and correct rent roll for the Property, including a list of which tenants are in default under their respective Leases, dated as of the date of Lender's request, identifying each tenant, the monthly rent and additional rent, if any, payable by such tenant, the expiration date of such tenant's Lease, the security deposit, if any, held by Borrower under the Lease, the space covered by the Lease, to Borrower's knowledge, each tenant that has filed a bankruptcy, insolvency, or reorganization proceeding since delivery of the last such rent roll and the arrearages for such tenant, if any, and, if requested by Lender, a summary of the material terms of the Leases, including, without limitation, the dates of occupancy, the dates of expiration, any current or pending Rent concessions, work obligations or other inducements granted to the tenants thereunder, and any renewal options, and such rent roll shall be accompanied by an Officer's Certificate, dated as of the date of the delivery of such rent roll, certifying that such rent roll is true, correct and complete in all material respects as of its date.
(f) Borrower shall furnish to Lender, within thirty (30) days after Lender's request therefor, with such further detailed information with respect to the operation of the Property and the financial affairs of Borrower as may be reasonably requested by Lender.
(g) Borrower shall cause Manager to furnish to Lender, within thirty (30) days following the end of each month, a schedule of tenant security deposits showing any activity in the Security Deposit Account for such month, together with a certification of Manager as to the balance in such Security Deposit Account and that such tenant security deposits are being held in accordance with all Legal Requirements.
(h) Borrower will furnish Lender annually, within one hundred twenty (120) days after the end of each Fiscal Year, with a report setting forth (i) the Net Operating Income for such Fiscal Year, (ii) the average occupancy rate of the Property during such Fiscal Year, (iii) the capital repairs, replacements and improvements performed at the Property during such Fiscal Year and the aggregate Recurring Replacement Expenditures made in connection therewith, and (iv) the balance contained in each of the Escrow Accounts as of the end of such Fiscal Year (which balance Lender shall provide upon Borrower's written request therefor).
(i) Borrower shall and shall cause Guarantor to furnish to Lender annually, within thirty (30) days of filing its respective tax return, a copy of such tax return.
(j) Borrower shall submit to Lender for Lender's approval (not to be unreasonably withheld, conditioned or delayed) an Annual Budget not later than thirty (30) days prior to the commencement of each Fiscal Year or, with respect to the Fiscal Year in which the Closing Date occurs, prior to the Closing Date, setting forth in reasonable detail budgeted monthly operating income and monthly operating capital and other expenses for the Property. Each Annual Budget shall contain, management fees, third party service fees, and other expenses as Borrower may reasonably determine. Lender shall have the right to approve such Annual Budget which approval shall not be unreasonably withheld, conditioned or delayed and in the event that Lender objects to the proposed Annual Budget submitted by Borrower, Lender shall advise Borrower of such objections within fifteen (15) days after receipt thereof (and deliver to Borrower a reasonably detailed description of such objections) and Borrower shall, within five (5) Business Days after receipt of notice of any such objections, revise such Annual Budget and resubmit the same to Lender. Lender shall advise Borrower of any objections to such revised Annual Budget within seven (7) Business Days after receipt thereof (and deliver to Borrower a reasonably detailed description of such objections) and Borrower shall revise the same in accordance with the process described herein until Lender approves an Annual Budget, provided, however, that if Lender shall not advise Borrower of its objections to any proposed Annual Budget within the applicable time period set forth in this Section, then such proposed Annual Budget shall be deemed approved by Lender. Until such time that Lender approves a proposed Annual Budget, the most recently Approved Annual Budget shall apply; provided that, such Approved Annual Budget shall be adjusted to reflect actual increases in Basic Carrying Costs and utilities expenses and to delete any non-recurring expenses. In the event that Borrower must incur an Extraordinary Expense, then Borrower shall promptly deliver to Lender a reasonably detailed explanation of such proposed Extraordinary Expense for Lender's approval, which approval may be granted or denied in Lender's sole but reasonable discretion. Notwithstanding anything to the contrary contained herein, Lender's approval shall not be required with respect to any Annual Budget reflecting an increase of five percent (5%) or less from the previous Annual Budget for any discretionary line items or for any Emergency Repairs or Non-Discretionary Expenses.
(k) In the event that Borrower fails to deliver any of the financial statements, reports or other information required to be delivered to Lender pursuant to this Section 2.09 on or prior to their due dates, if any such failure shall continue for twenty (20) days following notice thereof from Lender, Borrower shall pay to Lender an administrative fee in the amount of One Thousand Dollars ($1,000) for each due date with respect to which such a failure occurs (and not on a per item basis). Borrower agrees that such administrative fee (i) is a fair and reasonable fee necessary to compensate Lender for its additional administrative costs and increased costs relating to Borrower's failure to deliver the aforementioned statements, reports or other items as and when required hereunder and (ii) is not a penalty.
Section 2.10. Litigation. Borrower will give prompt written notice to Lender of any litigation or governmental proceedings pending or threatened (in writing) against Borrower which might have a Material Adverse Effect.
Section 2.11. Updates of Representations. Borrower shall deliver to Lender within fifteen (15) Business Days of the request of Lender an Officer's Certificate updating all of the representations and warranties contained in this Security Instrument and the other Loan Documents and certifying that all of the representations and warranties contained in this Security Instrument and the other Loan Documents, as updated pursuant to such Officer's Certificate, are true, accurate and complete as of the date of such Officer's Certificate or shall set forth the exceptions to representations and/or warranties in reasonable detail, as applicable, and, upon Lender's request for further information with respect to such exceptions, shall provide Lender such additional information as Lender may reasonably request. Notwithstanding the foregoing, provided that no Event of Default has occurred and is continuing, Borrower shall not be required to deliver the foregoing Officer's Certificate unless made or given in connection with a Securitization or other sale of the Loan and in no event more than three (3) times during the term of the Loan.
ARTICLE III: INSURANCE AND CASUALTY RESTORATION
Section 3.01. Insurance Coverage. Borrower shall, at its expense, maintain the following insurance coverages with respect to the Property during the term of this Security Instrument:
(a) (i) Insurance against loss or damage by fire, casualty and other hazards included in an "all-risk" coverage endorsement or its equivalent (which, in the case of insurance during the time of any construction work ("Construction") shall be in "builder's risk completed value non-reporting form" together with rents, earnings and extra expense insurance covering loss due to delay in completion of the Improvements) covering the Property in an amount not less than the greater of (A) 100% of the insurable replacement value of the Property (exclusive of the Premises and footings and foundations) and (B) such other amount as is necessary to prevent any reduction in such policy by reason of and to prevent Borrower, Lender or any other insured thereunder from being deemed to be a co-insurer, with such endorsements as Lender may from time to time reasonably require and which are customarily required by Institutional Lenders of similar properties similarly situated, including, without limitation, if the Property constitutes a legal non-conforming use, an ordinance oflaw coverage endorsement which contains "Demolition Cost", "Loss Due to Operation of Law" and "Increased Cost of Construction" coverages in an amount of not less than $25,000,000. Not less frequently than once every three (3) years, Borrower, at its option, shall either (A) have the Appraisal updated or obtain a new appraisal of the Property, (B) have a valuation of the Property made by or for its insurance carrier conducted by an appraiser experienced in valuing properties of similar type to that of the Property which are in the geographical area in which the Property is located or (C) provide such other evidence as will, in Lender's reasonable judgment, enable Lender to determine whether there shall have been an increase in the insurable value of the Property and Borrower shall deliver such updated Appraisal, new appraisal, insurance valuation or other evidence acceptable to Lender, as the case may be, and, if such updated Appraisal, new appraisal, insurance valuation, or other evidence acceptable to Lender reflects an increase in the insurable value of the Property, the amount of insurance required hereunder shall be increased accordingly and Borrower shall deliver evidence satisfactory to Lender that such policy has been so increased.
(ii) Commercial general liability insurance against claims for personal and bodily injury and/or death to one or more persons or property damage, occurring on, in or about the Property (including the adjoining streets, sidewalks and passageways therein) in the amount of $1,000,000 per occurrence and $2,000,000 general aggregate on a per location basis and, in addition thereto, not less than $100,000,000 excess and/or umbrella liability insurance shall be maintained for any and all claims.
(iii) Business interruption, rent loss or other similar insurance with an unlimited indemnity period (A) with loss payable to Lender, (B) covering all risks required to be covered by the insurance provided for in Section 3.01(a)(i) hereof and (C) in an amount not less than 100% of the projected fixed or base rent plus percentage rent for the succeeding twenty-four (24) month period based on an occupancy rate of 100%. The amount of such insurance shall be determined upon the execution of this Security Instrument, and not more frequently than once each calendar year thereafter based on Borrower's reasonable estimate of projected fixed or base rent plus percentage rent, from the Property for the next succeeding twenty-four (24) months together with a twelve (12) month extended period of indemnity. In the event the Property shall be damaged or destroyed, Borrower shall and hereby does assign to Lender all payment of claims under the policies of such insurance, and all amounts payable thereunder, and all net amounts, shall be collected by Lender under such policies and shall be applied in accordance with this Security Instrument; provided, however, that nothing herein contained shall be deemed to relieve Borrower of its obligations to timely pay all amounts due under the Loan Documents.
(iv) Intentionally Omitted.
(v) Insurance against loss or damages from (A) leakage of sprinkler systems and (B) explosion of steam boilers, air conditioning equipment, pressure vessels or similar apparatus now or hereafter installed at the Property, in such amounts as Lender may from time to time reasonably require and which are then customarily required by Institutional Lenders of similar properties similarly situated, but in no event less than $25,000,000.
(vi) Flood insurance in an amount equal to the full insurable value of the Property or the maximum amount available, whichever is less, if the Improvements are located in an area designated by the Secretary of Housing and Urban Development as being "an area of special flood hazard" under the National Flood Insurance Program (i.e., having a one percent or greater chance of flooding), and if flood insurance is available under the National Flood Insurance Act.
(vii) Worker's compensation insurance or other similar insurance to the extent required by Governmental Authorities or Legal Requirements.
(viii) Intentionally omitted.
(ix) (A) During any period of the term of the Loan that the Terrorism Risk Insurance Extension Act of 2005 ("TRIA") is in effect, if "acts of terrorism" or other similar acts or events are hereafter excluded from Borrower's comprehensive all risk insurance policy (including business interruption, rent loss or similar insurance coverage), Borrower shall obtain an endorsement to such policy, or a separate policy insuring against all "certified acts of terrorism" as defined by TRIA and "fire following", each in an amount equal to one hundred percent (100%) of the "Full Replacement Cost," which for purposes of this Security Instrument shall mean actual replacement value (exclusive of the Premises, footings and foundations) with a waiver of depreciation; and
(B) during any period of the term of the Loan that TRIA is not in effect, if "acts of terrorism" or other similar acts or events or "fire following" are hereafter excluded from Borrower's comprehensive all risk insurance policy or business interruption insurance coverage, Borrower shall obtain an endorsement to such policy, or a separate policy insuring against all such excluded acts or events, to the extent such policy or endorsement is available, in an amount determined by Lender in its sole discretion (but in no event greater than the total insurable value plus required business interruption, rent loss or similar coverage); provided, however, Borrower shall not be required to pay annual premiums in excess of three (3) times the premium as of the Closing Date for the insurance required pursuant to Section 3.0l(a)(i), (ii) and (iii) for such coverage.
(x) At all times during Construction, contractor's liability insurance to a limit of not less than $25,000,000 on a per occurrence basis covering each contractor's construction operation at the Premises.
(xi) Such other insurance as may from time to time be required by Lender and which is then customarily required by Institutional Lenders for similar properties similarly situated, against other insurable hazards, including, but not limited to, malicious mischief, vandalism, sinkhole and mine subsidence and/or windstorm due regard to be given to the size and type of the Premises, Improvements, Fixtures and Equipment and their location, construction and use. Additionally, Borrower shall carry such insurance coverage as Lender may from time to time require if the failure to carry such insurance may result in a downgrade, qualification or withdrawal of any class of securities issued in connection with a Securitization or, if the Loan is not yet part of a Securitization, would result in an increase in the subordination levels of any class of securities anticipated to be issued in connection with a proposed Securitization.
(b) If the State Street Lease is not in full force and effect, Borrower shall cause any Manager of the Property to maintain fidelity insurance in an amount equal to or greater than the Operating Income of the Property for the six (6) month period immediately preceding the date on which the premium for such insurance is due and payable or such lesser amount as Lender shall approve.
Section 3.02. Policy Terms. (a) All insurance required by this Article III shall be in the form (other than with respect to Sections 3.01(a)(vi) and (vii) above when insurance in those two sub-sections is placed with a governmental agency or instrumentality on such agency's forms) and amount and with deductibles as, from time to time, shall be reasonably acceptable to Lender, under valid and enforceable policies issued by financially responsible insurers authorized to do business in the State where the Property is located, with a general policyholder's service rating of not less than A and a financial rating of not less than X as rated in the most currently available Best's Insurance Reports (or the equivalent, if such rating system shall hereafter be altered or replaced) and shall have a claims paying ability rating and/or financial strength rating, as applicable, of not less than "A-" (or its equivalent), or such lower claims paying ability rating and/or financial strength rating, as applicable, as Lender shall, in its sole and absolute discretion, consent to, from a Rating Agency (one of which after a Securitization in which Standard & Poor's rates any securities issued in connection with such Securitization, shall be Standard & Poor's). Certificates of insurance for all insurance policies and, promptly upon receipt of written request therefor and in the event of a casualty, original or certified copies of all insurance policies shall be delivered to and held by Lender. All such policies (except policies for worker's compensation) shall name Lender, its successors and/or assigns as an additional named insured or, with respect to the insurance required pursuant to Section 3.0l(a)(iii) above, shall provide for loss payable to Lender, its successors and/or assigns and shall contain (or have attached): (i) standard "non-contributory mortgagee" endorsement or its equivalent relating, inter alia, to recovery by Lender notwithstanding the negligent or willful acts or omissions of Borrower; (ii) a waiver of subrogation endorsement as to Lender; (iii) an endorsement indicating that neither Lender nor Borrower shall be or be deemed to be a co-insurer with respect to any casualty risk insured by such policies and shall provide for a deductible per loss of an amount not more than $25,000 for perils covered under Borrower's "all-risk" insurance policy required pursuant to Section 3.0l(a)(i) above and $100,000 for all other perils, and (iv) a provision that such policies shall not be canceled, terminated, denied renewal or amended, including, without limitation, any amendment reducing the scope or limits of coverage, without at least thirty (30) days' prior written notice to Lender in each instance. Not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Security Instrument, originals or certified copies of renewals of such policies (or certificates evidencing such renewals) bearing notations evidencing the payment of premiums or accompanied by other reasonable evidence of such payment (which premiums shall not be paid by Borrower through or by any financing arrangement which would entitle an insurer to terminate a policy) shall be delivered by Borrower to Lender. Borrower shall not carry separate insurance, concurrent in kind or form or contributing in the event of loss, with any insurance required under this Article III.
(b) If Borrower fails to maintain and deliver to Lender the original policies or certificates of insurance required by this Security Instrument, or if Borrower is obligated to deposit sums into the Basic Carrying Costs Sub-Account and there are insufficient funds in the Basic Carrying Costs Escrow Account to pay the premiums for same, Lender may, at its option, procure such insurance, and Borrower shall pay, or as the case may be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender, with interest thereon at the Default Rate from the date paid by Lender to the date of repayment and such sum shall constitute a part of the Debt.
(c) Borrower shall notify Lender of the renewal premium of each insurance policy and Lender shall be entitled to pay such amount on behalf of Borrower from the Basic Carrying Costs Escrow Account.
(d) The insurance required by this Security Instrument may, at the option of Borrower, be effected by blanket and/or umbrella policies issued to Borrower covering the Property provided that, in each case, the policies otherwise comply with the provisions of this Security Instrument and allocate to the Property, from time to time (but in no event less than once a year), the coverage specified by this Security Instrument, without possibility of reduction or coinsurance by reason of, or damage to, any other property (real or personal) named therein. If the insurance required by this Security Instrument shall be effected by any such blanket or umbrella policies, Borrower shall furnish to Lender (i) original policies or certified copies thereof, or an original certificate of insurance together with reasonable access to the original of such policy to review such policy's coverage of the Property, with schedules attached thereto showing the amount of the insurance provided under such policies applicable to the Property and (ii) an Officer's Certificate setting forth (A) the number of properties covered by such policy, (B) the location by city (if available, otherwise, county) and state of the properties, (C) the average square footage of the properties, (D) a brief description of the typical construction type included in the blanket policy and (E) such other information as Lender may reasonably request.
Section 3.03. Assignment of Policies. (a) Borrower hereby assigns to Lender the proceeds of all insurance (other than worker's compensation and liability insurance) obtained pursuant to this Security Instrument, all of which proceeds shall be payable to Lender as collateral and further security for the payment of the Debt and the performance of Borrower's obligations hereunder and under the other Loan Documents, and Borrower hereby authorizes and directs the issuer of any such insurance to make payment of such proceeds directly to Lender. Except as otherwise expressly provided in Section 3.04 or elsewhere in this Article III, Lender shall have the option, in its discretion, and without regard to the adequacy of its security, to apply all or any part of the proceeds it may receive pursuant to this Article in such manner as Lender may elect to any one or more of the following: (i) the payment of the Debt, whether or not then due, in any proportion or priority as Lender, in its discretion, may elect, (ii) the repair or restoration of the Property, (iii) the cure of any Default or (iv) the reimbursement of the costs and expenses of Lender incurred pursuant to the terms hereof in connection with the recovery of the Insurance Proceeds. Nothing herein contained shall be deemed to excuse Borrower from repairing or maintaining the Property as provided in this Security Instrument or restoring all damage or destruction to the Property, regardless of the sufficiency of the Insurance Proceeds, and the application or release by Lender of any Insurance Proceeds shall not cure or waive any Default or notice of Default.
(b) In the event of the foreclosure of this Security Instrument or the Mortgage or any other transfer of title or assignment of all or any part of the Property in extinguishment, in whole or in part, of the Debt, all right, title and interest of Borrower in and to all policies of insurance required by this Security Instrument shall inure to the benefit of the successor in interest to Borrower or the purchaser of the Property. If, prior to the receipt by Lender of any proceeds, the Property or any portion thereof shall have been sold on foreclosure of this Security Instrument or the Mortgage or by deed in lieu thereof or otherwise, or any claim under such insurance policy arising during the term of this Security Instrument is not paid until after the extinguishment of the Debt, and Lender shall not have received the entire amount of the Debt outstanding at the time of such extinguishment, whether or not a deficiency judgment on this Security Instrument or the Mortgage shall have been sought or recovered or denied, then, the proceeds of any such insurance to the extent of the amount ofthe Debt not so received, shall be paid to and be the property of Lender, together with interest thereon at the Default Rate, and the reasonable attorney's fees, costs and disbursements incurred by Lender in connection with the collection of the proceeds which shall be paid to Lender and Borrower hereby assigns, transfers and sets over to Lender all of Borrower's right, title and interest in and to such proceeds. Notwithstanding any provisions of this Security Instrument to the contrary, Lender shall not be deemed to be a trustee or other fiduciary with respect to its receipt of any such proceeds, which may be commingled with any other monies of Lender; provided, however, that Lender shall use such proceeds for the purposes and in the manner permitted by this Security Instrument. Any proceeds deposited with Lender shall be held by Lender in an interest-bearing account, but Lender makes no representation or warranty as to the rate or amount of interest, if any, which may accrue on such deposit and shall have no liability in connection therewith. Interest accrued, if any, on the proceeds shall be deemed to constitute a part of the proceeds for purposes of this Security Instrument. The provisions of this Section 3.03(b) shall survive the termination of this Security Instrument by foreclosure, deed in lieu thereof or otherwise as a consequence of the exercise of the rights and remedies of Lender hereunder after an Event of Default.
Section 3.04. Casualty Restoration. (a) (i) In the event of any damage to or destruction of the Property having a value in excess of$250,000 (as reasonably determined by Borrower), Borrower shall give prompt written notice to Lender (which notice shall set forth Borrower's good faith estimate of the cost of repairing or restoring such damage or destruction, or if Borrower cannot reasonably estimate the anticipated cost of restoration, Borrower shall nonetheless give Lender prompt notice of the occurrence of such damage or destruction, and will diligently proceed to obtain estimates to enable Borrower to quantify the anticipated cost and time required for such restoration, whereupon Borrower shall promptly notify Lender of such good faith estimate) and, provided that restoration does not violate any Legal Requirements, Borrower shall promptly commence and diligently prosecute to completion the repair, restoration or rebuilding of the Property so damaged or destroyed to a condition such that the Property shall be at least equal in value to that immediately prior to the damage to the extent practicable, in full compliance with all Legal Requirements and the provisions of all Leases, and in accordance with Section 3.04(b) below. Such repair, restoration or rebuilding of the Property are sometimes hereinafter collectively referred to as the "Work".
(ii) Borrower shall not adjust, compromise or settle any claim for Insurance Proceeds without the prior written consent of Lender, which shall not be unreasonably withheld or delayed and Lender shall have the right, at Borrower's sole cost and expense, to participate in any settlement or adjustment of Insurance Proceeds; provided, however, that, except during the continuance of an Event of Default, Lender's consent shall not be required with respect to the adjustment, compromising or settlement of any claim for Insurance Proceeds in an amount less than $5,000,000.
(iii) Subject to Section 3.04(a)(iv), Lender shall apply any Insurance Proceeds which it may receive towards the Work in accordance with Section 3.04(b) and the other applicable sections of this Article III.
(iv) If (A) an Event of Default shall have occurred and be continuing, (B) Lender is not reasonably satisfied that the Debt Service Coverage, after substantial completion of the Work, will be at least equal to the Required Debt Service Coverage, (C) more than thirty percent (30%) of the reasonably estimated fair market value of the Property is damaged or destroyed, (D) any Major Space Leases physically affected by such destruction shall not continue in full force and effect, (E) Lender is not reasonably satisfied that the Work can be completed six (6) months prior to Maturity or (F) Lender is not reasonably satisfied that the Work can be completed within eighteen (18) months of the damage to or destruction of the Property (each, a "Substantial Casualty"), Lender shall have the option, in its sole discretion to apply any Insurance Proceeds it may receive pursuant to this Security Instrument (less any actual out-of-pocket cost to Lender of recovering and paying out such proceeds incurred pursuant to the terms hereof and not otherwise reimbursed to Lender, including, without limitation, reasonable attorneys' fees and expenses) to the payment of the Debt, without any prepayment fee or charge of any kind, or to allow such proceeds to be used for the Work pursuant to the terms and subject to the conditions of Section 3.04(b) hereof and the other applicable sections of this Article III. Notwithstanding the foregoing, provided that no Event of Default exists and the State Street Lease is in full force and effect, Lender will allow the Insurance Proceeds to be used for the Work in the event that Borrower is required to restore the Property pursuant to the terms of the State Street Lease.
(v) In the event that Lender elects or is obligated hereunder to allow Insurance
Proceeds to be used for the Work, any excess proceeds remaining after completion of such Work shall be applied to the payment of the Debt without any prepayment fee or charge of any kind.
(b) If any Condemnation Proceeds in accordance with Section 6.01(a), or any Insurance Proceeds in accordance with Section 3.04(a), are to be applied to the repair, restoration or rebuilding of the Property, then such proceeds shall be deposited into a segregated interest bearing bank account at the Bank, which shall be an Eligible Account, held by Lender and shall be paid out from time to time to Borrower as the Work progresses (less any actual out-of-pocket cost to Lender of recovering and paying out such proceeds, including, without limitation, reasonable attorneys' fees and costs allocable to inspecting the Work and the plans and specifications therefor) subject to Section 5.13 hereof and to all ofthe following conditions:
(i) An Independent architect or engineer selected by Borrower and reasonably acceptable to Lender (an "Architect" or "Engineer") or a Person otherwise reasonably acceptable to Lender, shall have delivered to Lender a certificate estimating the cost of completing the Work, and, if the amount set forth therein is more than the sum of the amount of Insurance Proceeds then being held by Lender in connection with a casualty and amounts agreed to be paid as part of a final settlement under the insurance policy upon or before completion of the Work, Borrower shall have delivered to Lender, at Borrower's option, either (A) cash collateral in an amount equal to such excess, (B) an unconditional, irrevocable, clean sight draft letter of credit, in form, substance and issued by a bank reasonably acceptable to Lender, in the amount of such excess and draws on such letter of credit shall be made by Lender to make payments pursuant to this Article III following exhaustion of the Insurance Proceeds therefor or (C) a completion bond in form, substance and issued by a surety company reasonably acceptable to Lender.
(ii) If the cost of the Work is reasonably estimated by an Architect or Engineer in a certification reasonably acceptable to Lender to be equal to or exceed five percent (5%) of the Loan Amount, such Work shall be performed under the supervision of an Architect or Engineer, it being understood that the plans and specifications with respect thereto shall provide for Work so that, upon completion thereof, the Property shall be at least equal in replacement value and general utility to the Property prior to the damage or destruction.
(iii) Each request for payment shall be made on not less than ten (10) days' prior notice to Lender and shall be accompanied by a certificate of an Architect or Engineer, or, if the Work is not required to be supervised by an Architect or Engineer, by an Officer's Certificate stating (A) that payment is for Work completed in compliance with the plans and specifications, if required under clause (ii) above, (B) that the sum requested is required to reimburse Borrower for payments by Borrower to date, or is due to the contractors, subcontractors, materialmen, laborers, engineers, architects or other Persons rendering services or materials for the Work (giving a brief description of such services and materials), and that when added to all sums previously paid out by Lender does not exceed the value of the Work done to the date of such certificate, (C) if the sum requested is to cover payment relating to repair and restoration of personal property required or relating to the Property, that title to the personal property items covered by the request for payment is vested in Borrower (unless Borrower is lessee of such personal property), and (D) that the Insurance Proceeds and other amounts deposited by Borrower held by Lender after such payment is more than the estimated remaining cost to complete such Work; provided, however, that if such certificate is given by an Architect or Engineer, such Architect or Engineer shall certify as to clause (A) above, and such Officer's Certificate shall certify as to the remaining clauses above, and provided, further, that Lender shall not be obligated to disburse such funds if Lender determines, in Lender's reasonable discretion, that Borrower shall not be in compliance with this Section 3.04(b) until such time as Borrower shall be in compliance with this
Section 3.04(b). Additionally, each request for payment shall contain a statement signed by Borrower stating that the requested payment is for Work satisfactorily done to date.
(iv) Each request for payment shall be accompanied by waivers of lien, in customary form and substance, covering that part of the Work for which payment or reimbursement is being requested and, if required by Lender, a search prepared by a title company or licensed abstractor, or by other evidence reasonably satisfactory to Lender that there has not been filed with respect to the Property any mechanic's or other lien or instrument for retention of title relating to any part of the Work not discharged of record. Additionally, as to any personal property covered by the request for payment, Lender shall be furnished with evidence of Borrower having incurred a payment obligation therefor and such further evidence reasonably satisfactory to assure Lender that UCC filings therefor provide a valid first lien on the personal property.
(v) Lender shall have the right to inspect the Work at all reasonable times upon reasonable prior notice and may condition any disbursement of Insurance Proceeds upon satisfactory compliance by Borrower with the provisions hereof. Neither the approval by Lender of any required plans and specifications for the Work nor the inspection by Lender of the Work shall make Lender responsible for the preparation of such plans and specifications, or the compliance of such plans and specifications of the Work, with any applicable law, regulation, ordinance, covenant or agreement.
(vi) Insurance Proceeds shall not be disbursed more frequently than once every thirty (30) days.
(vii) Until such time as the Work has been substantially completed, Lender shall not be obligated to disburse to Borrower an amount (the "Retention Amount") up to (A) until fifty percent (50%) of the Work has been completed (as reasonably determined by Lender), ten percent (10%) of the cost of the Work and (B) after fifty percent (50%) of the Work has been completed (as reasonably determined by Lender), five percent (5%) of the cost of the Work. Upon substantial completion of the Work, Borrower shall send notice thereof to Lender and, subject to the conditions of Section 3.04(b)(i)-(iv), Lender shall disburse one-half of the Retention Amount to Borrower; provided, however, that the remaining one-half of the Retention Amount shall be disbursed to Borrower when Lender shall have received copies of any and all final certificates of occupancy or other certificates, licenses and permits required for the ownership, occupancy and operation of the Property in accordance with all Legal Requirements. Borrower hereby covenants to diligently seek to obtain any such certificates, licenses and permits.
(viii) Upon failure on the part of Borrower promptly to commence the Work or to proceed diligently and continuously to completion of the Work, which failure shall continue after notice for thirty (30) days, Lender may apply any Insurance Proceeds or Condemnation Proceeds it then or thereafter holds to the payment of the Debt in accordance with the provisions of the Note; provided, however, that Lender shall be entitled to apply at any time all or any portion of the Insurance Proceeds or Condemnation Proceeds it then holds to the extent necessary to cure any Event of Default.
(c) If Borrower (i) within one hundred-eighty (180) days after the occurrence of any damage to the Property or any portion thereof (or such shorter period as may be required under any Major Space Lease) shall fail to submit to Lender for approval plans and specifications for the Work (approved by the Architect and by all Governmental Authorities whose approval is required), (ii) after any such plans and specifications are approved by all Governmental Authorities, the Architect and Lender, shall fail to promptly commence such Work or (iii) shall fail to diligently prosecute such Work to completion, then, in addition to all other rights available hereunder, at law or in equity, Lender, or any receiver of the Property or any portion thereof, upon five (5) days' prior notice to Borrower (except in the event of emergency in which case no notice shall be required), may (but shall have no obligation to) perform or cause to be performed such Work, and may take such other steps as it reasonably deems advisable. Borrower hereby waives, for Borrower, any claim, other than for gross negligence or willful misconduct, against Lender and any receiver arising out of any act or omission of Lender or such receiver pursuant hereto, and Lender may apply all or any portion of the Insurance Proceeds (without the need to fulfill any other requirements of this Section 3.04) to reimburse Lender and such receiver, for all costs not reimbursed to Lender or such receiver upon demand together with interest thereon at the Default Rate from the date such amounts are advanced until the same are paid to Lender or the receiver.
(d) Borrower hereby irrevocably appoints Lender as its attorney-in-fact, coupled with an interest, to collect and receive any Insurance Proceeds paid with respect to any portion of the Property or the insurance policies required to be maintained hereunder, and to endorse any checks, drafts or other instruments representing any Insurance Proceeds whether payable by reason of loss thereunder or otherwise.
(e) Notwithstanding the foregoing provisions of this Section 3.04, upon the occurrence of any damage to or destruction of the Property, provided that such damage or destruction is not a Substantial Casualty, if in Lender's reasonable judgment the cost of repair of or restoration to the Property required as a result of any damage or destruction is less than $5,000,000 in the aggregate and the Work can be completed in less than two hundred seventy (270) days (but in no event beyond the date which is six (6) months prior to the Maturity Date), then Lender, upon request by Borrower, shall permit Borrower to apply for and receive the Insurance Proceeds directly from the insurer (and Lender shall advise the insurer to pay over such Insurance Proceeds directly to Borrower), to the extent required to pay for any such Work, with any excess thereof to be promptly paid by Borrower to Lender to be applied against the Debt.
Section 3.05. Compliance with Insurance Requirements. Borrower promptly shall comply with, and shall cause the Property to comply with, all Insurance Requirements, even if such compliance requires structural changes or improvements or would result in interference with the use or enjoyment of the Property or any portion thereof provided Borrower shall have a right to contest in good faith and with diligence such Insurance Requirements provided (a) no Event of Default shall exist during such contest and such contest shall not subject the Property or any portion thereof to any lien or affect the priority of the lien of this Security Instrument or the Mortgage, (b) failure to comply with such Insurance Requirements will not subject Lender or any of its agents, employees, officers or directors to any civil or criminal liability, (c) such contest will not cause any reduction in insurance coverage, (d) such contest shall not affect the ownership, use or occupancy of the Property, (e) the Property or any part thereof or any interest therein shall not be in any danger of being sold, forfeited or lost by reason of such contest by Borrower, (f) Borrower has given Lender prompt notice of such contest and, upon request by Lender from time to time, notice of the status of such contest by Borrower and/or information of the continuing satisfaction of the conditions set forth in clauses (a) through (e) of this Section 3.05, (g) upon a final determination of such contest, Borrower shall promptly comply with the requirements thereof, and (h) prior to and during such contest, Borrower shall furnish to Lender security satisfactory to Lender, in its reasonable discretion, against loss or injury by reason of such contest or the non-compliance with such Insurance Requirement (and if such security is cash, Lender shall deposit the same in an interest-bearing account and interest accrued thereon, if any, shall be deemed to constitute a part of such security for purposes of this Security Instrument, but Lender (i) makes no representation or warranty as to the rate or amount of interest, if any, which may accrue thereon and shall have no liability in connection therewith and (ii) shall not be deemed to be a trustee or fiduciary with respect to its receipt of any such security and any such security may be commingled with other monies of Lender). If Borrower shall use the Property or any portion thereof in any manner which could permit the insurer to cancel any insurance required to be provided hereunder, Borrower immediately shall obtain a substitute policy which shall satisfy the requirements of this Security Instrument and which shall be effective on or prior to the date on which any such other insurance policy shall be canceled. Borrower shall not by any action or omission invalidate any insurance policy required to be carried hereunder unless such policy is replaced as aforesaid, or materially increase the premiums on any such policy above the normal premium charged for such policy. Borrower shall cooperate with Lender in obtaining for Lender the benefits of any Insurance Proceeds lawfully or equitably payable to Lender in connection with the transaction contemplated hereby.
Section 3.06. Event of Default During Restoration. Notwithstanding anything to the contrary contained in this Security Instrument including, without limitation, the provisions of this Article III, if, at the time of any casualty affecting the Property or any part thereof, or at any time during any Work, or at any time that Lender is holding or is entitled to receive any Insurance Proceeds pursuant to this Security Instrument, either a Default of which Borrower has been given notice or an Event of Default exists and is continuing, Lender shall then have no obligation to make such proceeds available for Work and Lender shall have the right and option, to be exercised in its sole and absolute discretion and election, with respect to the Insurance Proceeds, either to retain and apply such proceeds in reimbursement for the actual out-of-pocket costs, fees and expenses incurred by Lender in accordance with the terms hereof in connection with the adjustment of the loss and, during the continuance of an Event of Default, any balance toward payment of the Debt in such priority and proportions as Lender, in its sole discretion, shall deem proper, or towards the Work, upon such terms and conditions as Lender shall determine, or to cure such Event of Default, or to any one or more of the foregoing as Lender, in its sole and absolute discretion, may determine. If Lender shall receive and retain such Insurance Proceeds, the lien of this Security Instrument shall be reduced only by the amount thereof received, after reimbursement to Lender of expenses of collection, and actually applied by Lender in reduction of the principal sum payable under the Note in accordance with the Note.
Section 3.07. Application of Proceeds to Debt Reduction. (a) No damage to the Property, or any part thereof, by fire or other casualty whatsoever, whether such damage be partial or total, shall relieve Borrower from its liability to pay in full the Debt and to perform its obligations under this Security Instrument and the other Loan Documents.
(b) If any Insurance Proceeds are applied to reduce the Debt, Lender shall apply the same in accordance with the provisions of the Note.
ARTICLE IV: IMPOSITIONS
Section 4.01. Payment of Impositions, Utilities and Taxes, Etc. (a) Borrower shall pay or cause to be paid all Impositions at least five (5) days prior to the date upon which any fine, penalty, interest or cost for nonpayment is imposed, and furnish to Lender, upon request, receipted bills of the appropriate taxing authority or other documentation reasonably satisfactory to Lender evidencing the payment thereof. If Borrower shall fail to pay any Imposition in accordance with this Section and is not contesting or causing a contesting of such Imposition in accordance with Section 4.04 hereof, or if Borrower is obligated to deposit sums into the Basic Carrying Costs Sub-Account and there are insufficient funds in the Basic Carrying Costs Escrow Account to pay any Imposition, Lender shall have the right, but shall not be obligated, to pay that Imposition, and Borrower shall repay to Lender, within ten (10) days after demand, any amount paid by Lender, with interest thereon at the Default Rate from the date of the advance thereof to the date of repayment, and such amount shall constitute a portion of the Debt secured by this Security Instrument and the Mortgage.
(b) Borrower shall, prior to the date upon which any fine, penalty, interest or cost for the nonpayment is imposed, pay or cause to be paid all charges for electricity, power, gas, water and other services and utilities in connection with the Property, and shall, upon request, deliver to Lender receipts or other documentation reasonably satisfactory to Lender evidencing payment thereof. If Borrower shall fail to pay any amount required to be paid by Borrower pursuant to this Section 4.01 and is not contesting such charges in accordance with Section 4.04 hereof, Lender shall have the right, but shall not be obligated, to pay that amount, and Borrower will repay to Lender, within ten (10) days after demand, any amount paid by Lender with interest thereon at the Default Rate from the date of the advance thereof to the date of repayment, and such amount shall constitute a portion of the Debt secured by this Security Instrument and the Mortgage.
(c) Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies imposed upon Lender by reason of or in connection with its ownership of any Loan Document or any other instrument related thereto, or resulting from the execution, delivery and recording of, or the lien created by, or the obligation evidenced by, any of them, other than income, franchise and other similar taxes imposed on Lender and shall pay all corporate stamp taxes, if any, and other taxes, required to be paid on the Loan Documents. If Borrower shall fail to make any such payment within ten (10) days after written notice thereof from Lender, Lender shall have the right, but shall not be obligated, to pay the amount due, and Borrower shall reimburse Lender therefor, on demand, with interest thereon at the Default Rate from the date of the advance thereof to the date of repayment, and such amount shall constitute a portion of the Debt secured by this Security Instrument and the Mortgage.
Section 4.02. Deduction from Value. In the event of the passage after the date of this Security Instrument of any Legal Requirement deducting from the value of the Property for the purpose of taxation, any lien thereon or changing in any way the Legal Requirements now in force for the taxation of this Security Instrument and/or the Debt for federal, state or local purposes, or the manner of the operation of any such taxes so as to adversely affect the interest of Lender, or imposing any tax or other charge on any Loan Document, then Borrower will pay such tax, with interest and penalties thereon, if any, within the statutory period, or, at Borrower's election, upon thirty (30) days prior notice to Lender, Borrower shall be permitted to prepay the Debt in whole without any prepayment fee or charge of any kind. In the event the payment of such tax or interest and penalties by Borrower would be unlawful, or taxable to Lender or unenforceable or provide the basis for a defense of usury, then in any such event, Lender shall have the option, by written notice of not less than sixty (60) days, to declare the Debt immediately due and payable, with no prepayment fee or charge of any kind.
Section 4.03. No Joint Assessment. Borrower shall not consent to or initiate the joint assessment of the Premises or the Improvements (a) with any other real property constituting a separate tax lot and Borrower represents and covenants that the Premises and the Improvements are and shall remain a separate tax lot or (b) with any portion of the Property which may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes which may be levied against such personal property shall be assessed or levied or charged to the Property as a single lien.
Section 4.04. Right to Contest. Borrower shall have the right, after prior notice to Lender, at its sole expense, to contest by appropriate legal proceedings diligently conducted in good faith, without cost or expense to Lender or any of its agents, employees, officers or directors, the validity, amount or application of any Imposition or any charge described in Section 4.01(b), provided that (a) no Event ofDefault shall exist during such proceedings and such contest shall not (unless Borrower shall comply with clause (d) of this Section 4.04) subject the Property or any portion thereof to any lien or affect the priority of the lien of this Security Instrument or the Mortgage, (b) failure to pay such Imposition or charge will not subject Lender or any of its agents, employees, officers or directors to any civil or criminal liability, (c) the contest suspends enforcement of the Imposition or charge (unless Borrower first pays the Imposition or charge), (d) prior to and during such contest, if requested by Lender Borrower shall furnish to Lender security satisfactory to Lender, in its reasonable discretion, against loss or injury by reason of such contest or the non-payment of such Imposition or charge (and if such security is cash, Lender may deposit the same in an interest-bearing account and interest accrued thereon, if any, shall be deemed to constitute a part of such security for purposes of this Security Instrument, but Lender (i) makes no representation or warranty as to the rate or amount of interest, if any, which may accrue thereon and shall have no liability in connection therewith and (ii) shall not be deemed to be a trustee or fiduciary with respect to its receipt of any such security and any such security may be commingled with other monies of Lender), (e) such contest shall not affect the ownership, use or occupancy of the Property, (f) the Property or any part thereof or any interest therein shall not be in any imminent danger of being sold, forfeited or lost by reason of such contest by Borrower, (g) Borrower has given Lender notice of the commencement of such contest and upon request by Lender, from time to time, notice of the status of such contest by Borrower and/or confirmation of the continuing satisfaction of clauses (a) through (f) of this Section 4.04, and (h) upon a final determination of such contest, Borrower shall promptly comply with the requirements thereof. Upon completion of any contest, Borrower shall immediately pay the amount due, if any, and deliver to Lender proof of the completion of the contest and payment of the amount due, if any, following which Lender shall return the security, if any, deposited with Lender pursuant to clause (d) of this Section 4.04. Borrower shall not pay any Imposition in installments unless permitted by applicable Legal Requirements, and shall, upon the request of Lender, deliver copies of all notices and bills relating to any Imposition or other charge covered by this Article IV to Lender. Notwithstanding the foregoing, provided that (i) no Event of Default exists, (ii) the State Street Lease is in full force and effect and (iii) the tenant under the State Street Lease is contesting any Imposition in accordance with the terms of the State Street Lease, Borrower shall not be required to comply with the provisions of this Section 4.04. Notwithstanding the foregoing, provided that no Event of Default exists, Borrower may bring a tax certiorari proceeding to the extent and in accordance with all Legal Requirements.
Section 4.05. No Credits on Account of the Debt. Borrower will not claim or demand or be entitled to any credit or credits on account of the Debt for any part of the Impositions assessed against the Property or any part thereof and no deduction shall otherwise be made or claimed from the taxable value of the Property, or any part thereof, by reason of this Security Instrument or the Debt. In the event such claim, credit or deduction shall be required by Legal Requirements, Lender shall have the option, by written notice of not less than sixty (60) days, to declare the Debt immediately due and payable, and Borrower hereby agrees to pay such amounts not later than sixty (60) days after such notice.
Section 4.06. Documentary Stamps. If, at any time, the United States of America, any State or Commonwealth thereof or any subdivision of any such State shall require revenue or other stamps to be affixed to the Note, this Security Instrument or any other Loan Document, or impose any other tax or charges on the same, Borrower will pay the same, with interest and penalties thereon, if any.
ARTICLE V: CENTRAL CASH MANAGEMENT
Section 5.01. Cash Flow. Borrower hereby acknowledges and agrees that the Rents (which for the purposes of this Section 5.01 shall not include security deposits from tenants under Leases held by Borrower and not applied towards Rent) derived from the Property and Loss Proceeds shall be utilized to fund the Sub-Accounts. Borrower shall cause Manager to collect all security deposits from tenants under valid Leases, which shall be held by Manager, as agent for Borrower, in accordance with applicable law and in a segregated demand deposit bank account at such commercial or savings bank or banks as may be reasonably satisfactory to Lender (the "Security Deposit Account"). Borrower shall notify Lender of any security deposits held as letters of credit and, upon Lender's request after the occurrence and during the continuance of an Event of Default, such letters of credit shall be promptly delivered to Lender. Borrower shall have no right to withdraw funds from the Security Deposit Account; provided that, if no Event of Default exists, Borrower may withdraw funds from the Security Deposit Account to refund or apply security deposits as required by the Leases or by applicable Legal Requirements. During the continuance of an Event of Default, all withdrawals from the Security Deposit Account must be approved by Lender. Borrower shall cause all Rent which is due and payable to Borrower pursuant to the terms of the Leases (other than security deposits under valid Leases which are held in the Security Deposit Account) to be paid by check drawn on an account in a bank located in the United States of America, through automated clearing house funds ("ACH") or by Federal wire directly to the Rent Account. Borrower shall give each tenant under a Lease an irrevocable direction in the form of Exhibit E attached hereto and made a part hereof to deliver all rent payments made by tenants and other payments constituting Rent directly to the Rent Account and shall within five (5) days following the Closing Date deliver copies of such letters to Lender, together with an Officer's Certificate certifying that such letters were delivered to each tenant under the Leases within five (5) days of the Closing Date. Borrower shall (or shall cause Manager) to give to the bank in which the Rent Account is located an irrevocable written instruction, in form and substance acceptable to Lender, that all funds deposited in such account shall be automatically transferred through ACHor by Federal wire to the Central Account prior to 3:00 p.m. (New York City time) on a daily basis. Within three (3) Business Days of the Closing Date, Borrower shall deliver to Lender a copy of the irrevocable notice which Borrower has delivered to the bank in which the Rent Account is located pursuant to the provisions of this Section 5.01, the receipt of which is acknowledged in writing by such bank. Notwithstanding the foregoing, if any Rent is received by Borrower or Manager, then (a) such amounts shall be held in trust for the benefit, and as the property, of Lender, (b) such amounts shall not be commingled with any other funds or property of Borrower or Manager and (c) Borrower or Manager shall deposit such amounts in the Rent Account within two (2) Business Days of receipt. Upon execution of any Space Lease after the Closing Date, Borrower shall deliver to Lender a copy of the irrevocable direction letter referred to above, the receipt of which has been acknowledged by the tenant under such Space Lease. Lender may elect to change the financial institution in which the Central Account shall be maintained; however, Lender shall give Borrower and the bank in which the Rent Account is located not fewer than five (5) Business Days' prior notice of such change. Neither Borrower nor Manager shall change such bank or the Rent Account without the prior written consent of Lender (not to be unreasonably withheld, conditioned or delayed). All fees and charges of the bank(s) in which the Rent Account and Central Account are located shall be paid by Borrower.
Section 5.02. Establishment of Accounts. Lender has established the Escrow Accounts and the Central Account in the name of Lender and the Rent Account in the joint name of Borrower and Lender, as secured party. The Escrow Accounts, the Rent Account and the Central Account shall be under the sole dominion and control of Lender and funds held therein shall not constitute trust funds. Borrower hereby irrevocably directs and authorizes Lender to withdraw funds from the Rent Account, and to deposit into and withdraw funds from the Central Account and the Escrow Accounts, all in accordance with the terms and conditions of this Security Instrument. Borrower shall have no right of withdrawal in respect of the Rent Account, the Central Account or the Escrow Accounts except as specifically provided herein. Each transfer of funds to be made hereunder shall be made only to the extent that funds are on deposit in the Rent Account, the Central Account or the affected Sub-Account or Escrow Account, and Lender shall have no responsibility to make additional funds available in the event that funds on deposit are insufficient. The Central Account shall contain the Basic Carrying Costs Sub-Account, the Debt Service Payment Sub-Account and the Recurring Replacement Reserve Sub-Account, each of which accounts shall be Eligible Accounts or book-entry sub-accounts of an Eligible Account (each a "Sub-Account" and collectively, the "Sub-Accounts") to which certain funds shall be allocated and from which disbursements shall be made pursuant to the terms of this Security Instrument. Sums held in the Escrow Accounts may be commingled with other monies held by Lender.
Section 5.03. Permitted Investments. All sums deposited into the Reletting Reserve Escrow Account, the Engineering Escrow Account and the Underwritten Rent Escrow Account shall be held in an interest bearing account but Borrower acknowledges that Lender makes no representation or warranty as to the rate of return. Lender shall not have any liability for any loss in investments of funds in the Reletting Reserve Escrow Account, the Engineering Escrow Account or the Underwritten Rent Escrow Account and no such loss shall affect Borrower's obligation to fund, or liability for funding, the Central Account and each Sub-Account and Escrow Account, as the case may be. Borrower agrees that Lender shall include all such earnings on the Reletting Reserve Escrow Account, the Engineering Escrow Account and the Underwritten Rent Escrow Account as income of Borrower (and, if Borrower is a partnership, limited liability company or other pass-through entity, the partners, members or beneficiaries of Borrower, as the case may be) for federal and applicable state and local tax purposes. All interest paid or other earnings on funds deposited into the Reletting Reserve Escrow Account, the Engineering Escrow Account and the Underwritten Rent Escrow Account made hereunder shall be deposited into the Central Account and shall be allocated to the Reletting Reserve Escrow Account, the Engineering Escrow Account or the Underwritten Rent Escrow Account, as applicable. Borrower shall pay all costs, fees and expenses incurred in connection with the establishment and maintenance of, or the disbursement from, the Reletting Reserve Escrow Account, the Engineering Escrow Account and the Underwritten Rent Escrow Account, which sums shall be due and payable by Borrower upon demand and may be deducted by Lender from amounts on deposit in the Central Account or the Escrow Accounts.
Section 5.04. Servicing Fees. Borrower shall have no obligation to reimburse Lender for servicing fees incurred in connection with the ordinary, routine servicing of the Loan; provided, however, that Borrower shall reimburse Lender for (a) any and all costs and expenses incurred during the continuance of a Default, (b) any special servicing fees incurred subsequent to a Default and (c) as otherwise provided for in this Security Instrument. Additionally, in the event that Borrower requests more than one disbursement from an Escrow Account in any month and Lender, in its sole and absolute discretion, consents to such disbursement, Borrower shall pay Lender a disbursement fee in the amount of $250.00 with respect to each Escrow Account from which the additional disbursement is sought.
Section 5.05. Monthly Funding of Sub-Accounts and Escrow Accounts. (a) On or before each Payment Date during the term of the Loan, commencing on the Payment Date occurring in February 2007, Borrower shall pay or cause to be paid to the Central Account all sums required to be deposited in the Sub-Accounts pursuant to this Section 5.05(a) and all funds transferred or deposited into the Central Account shall be allocated among the Sub-Accounts as follows and in the following priority:
(i) first, TO THE EXTENT REQUIRED IN THE DEFINITION OF BASIC CARRYING COSTS MONTHLY INSTALLMENT, to the Basic Carrying Costs Sub-Account, until an amount equal to the Basic Carrying Costs Monthly Installment for such Payment Date has been allocated to the Basic Carrying Costs Sub Account;
(ii) second, to the Debt Service Payment Sub-Account, until an amount equal to the Required Debt Service Payment for such Payment Date has been allocated to the Debt Service Payment Sub-Account;
(iii) third, BUT ONLY IF AN EVENT OF DEFAULT EXISTS, to the Recurring Replacement Reserve Sub-Account, until an amount equal to the Recurring Replacement Reserve Monthly Installment for such Payment Date has been allocated to the Recurring Replacement Reserve Sub-Account; and
(iv) fourth, TO THE EXTENT REQUIRED IN THE DEFINITION OF RELETTING RESERVE MONTHLY INSTALLMENT, to the Reletting Reserve Sub-Account, until an amount equal to the Reletting Reserve Monthly Installment for such Payment Date has been allocated to the Reletting Reserve Sub-Account.
Provided that no Event of Default has occurred and is continuing, Lender agrees that in each Interest Accrual Period any amounts deposited into or remaining in the Central Account after the Sub-Accounts have been funded as set forth in this Section 5.05(a) with respect to such Interest Accrual Period and any periods prior thereto, shall be disbursed by Lender to Borrower on each Payment Date applicable to such Interest Accrual Period and on the twenty-fifth (25th) day of each month in which such Payment Date occurs. The balance of the funds distributed to Borrower after payment of all Operating Expenses by or on behalf of Borrower may be retained by Borrower. After the occurrence, and during the continuance, of an Event of Default, no funds held in the Central Account shall be distributed to, or withdrawn by, Borrower, and Lender shall have the right to apply all or any portion of the funds held in the Central Account or any Sub Account or any Escrow Account to the Debt in Lender's sole discretion.
(b) On each Payment Date, (i) sums held in the Basic Carrying Costs Sub- Account shall be transferred to the Basic Carrying Costs Escrow Account, (ii) sums held in the Debt Service Payment Sub-Account, together with any amounts deposited into the Central Account that are either (x) Loss Proceeds that Lender has elected to apply to reduce the Debt in accordance with the terms of Article III hereof or (y) excess Loss Proceeds remaining after the completion of any restoration required hereunder, shall be transferred to Lender to be applied towards the Required Debt Service Payment, (iii) sums held in the Recurring Replacement Reserve Sub-Account shall be transferred to the Recurring Replacement Reserve Escrow Account and (iv) sums held in the Reletting Reserve Sub-Account shall be transferred to the Reletting Reserve Escrow Account.
Section 5.06. Payment of Basic Carrying Costs. Borrower hereby agrees to pay all Basic Carrying Costs (without regard to the amount of money, if any, in the Basic Carrying Costs Sub Account or the Basic Carrying Costs Escrow Account). At least ten (10) Business Days prior to the due date of any Basic Carrying Costs, and not more frequently than once each month, Borrower may notify Lender in writing and request that Lender pay such Basic Carrying Costs on behalf of Borrower on or prior to the due date thereof, and, provided that no Event of Default has occurred and that there are sufficient funds available in the Basic Carrying Costs Escrow Account, Lender shall make such payments out of the Basic Carrying Costs Escrow Account before same shall be delinquent. Together with each such request, Borrower shall furnish Lender with bills and all other documents necessary, as reasonably determined by Lender, for the payment of the Basic Carrying Costs which are the subject of such request. Borrower's obligation to pay (or cause Lender to pay) Basic Carrying Costs pursuant to this Security Instrument shall include, to the extent permitted by applicable law, Impositions resulting from future changes in law which impose upon Lender an obligation to pay any property taxes or other Impositions or which otherwise adversely affect Lender's interests.
Provided that no Event of Default shall have occurred, all funds deposited into the Basic Carrying Costs Escrow Account shall be held by Lender pursuant to the provisions of this Security Instrument and shall be applied in payment of Basic Carrying Costs in accordance with the terms hereof. Should an Event of Default occur, the sums on deposit in the Basic Carrying Costs Sub-Account and the Basic Carrying Costs Escrow Account may be applied by Lender in payment of any Basic Carrying Costs or may be applied to the payment of the Debt or any other charges affecting all or any portion of the Property as Lender in its sole discretion may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided.
Section 5.07. Reletting Reserve Escrow Account. (a) Borrower hereby agrees to pay all Reletting Expenditures (without regard to the amount of money then available in the Reletting Reserve Sub-Account or the Reletting Reserve Escrow Account). Upon the execution of any Space Lease with respect to which Borrower is obligated to undertake or pay for any Reletting Expenditures and for which Borrower desires to withdraw funds from the Reletting Reserve Escrow Account, Borrower shall submit to Lender (i) an itemized line item budget (a "Budget") reasonably acceptable to Lender outlining all of the expenses relating to said Reletting Expenditures, (ii) a copy of the signed Lease for which said Reletting Expenditures relate, in each case which has an expiration date at least five (5) years after the Maturity Date and which is otherwise in compliance with the provisions of this Security Instrument, (iii) a copy of the plans and specifications for the proposed Reletting Expenditures and (iv) an Officer's Certificate with respect to the items referred to in clauses (i) through (iii) and setting forth an anticipated completion date for the Reletting Expenditures. Thereafter, provided that no Event of Default has occurred and is continuing and that Lender has received a written request from Borrower for reimbursement of any costs incurred in connection with any Reletting Expenditures, together with (i) unconditional lien waivers, (ii) a statement from an Architect or Engineer, indicating that the Reletting Expenditures in question have been completed in compliance with all Legal Requirements, (iii) copies of bills for such Reletting Expenditures marked "paid in full", (iv) upon final completion of such Reletting Expenditures, tenant estoppel certificates from the tenant leasing space in the Premises for whom the Reletting Expenditures are being made which indicate, among other things, that the tenant under such Space Lease has been in occupancy and open for business for at least one full calendar month and paid all rents due under the Space Lease without abatement, suspension, deferment, diminution, reduction or other allowances for at least one full calendar month, and (v) such other documentation as may be reasonably requested by Lender to establish that the Reletting Expenditures or portion thereof which are the subject of such request have been completed, all of which are reasonably acceptable in form and substance to Lender, Lender shall disburse to Borrower any actual expenses incurred in com1ection with such Reletting Expenditures which were set forth in the approved Budget provided that Borrower may make a request for disbursement of sums from the Reletting Reserve Escrow Account no more than once during any month and any request shall be in a minimum amount of $25,000. With respect to any Reletting Expenditures which relate to brokerage commissions, upon the receipt of (i) copies of bills for such Reletting Expenditures marked "paid in full", (ii) tenant estoppel certificates from the tenant leasing space in the Premises for which Lease the brokerage commissions are due which indicate, among other things, that the tenant under such Space Lease has been in occupancy and open for business for at least one full calendar month and paid all rents due under the Space Lease without abatement, suspension, deferment, diminution, reduction or other allowances for at least one full calendar month and (iii) a copy of the signed Lease for which said Reletting Expenditures relate, in each case which has an expiration date at least five (5) years after the Maturity Date, all of which are reasonably acceptable to Lender, Lender shall disburse to Borrower any actual expenses incurred in connection with such Reletting Expenditures out of the Reletting Reserve Escrow Account. Lender shall not be required to make any disbursements out of the Reletting Reserve Escrow Account if an Event ofDefault shall have occurred and is continuing, if more than one such request is made in any month or if sufficient funds are not available in the Reletting Reserve Escrow Account.
(b) Provided that no Event of Default shall have occurred, all funds deposited into the Reletting Reserve Escrow Account relating to Reletting Expenditures shall be held by Lender pursuant to the provisions of this Security Instrument and shall be applied in payment of Reletting Expenditures. Should an Event of Default occur, the sums on deposit in the Reletting Reserve Sub-Account and the Reletting Reserve Escrow Account may be applied by Lender in payment of any Reletting Expenditures or may be applied to the payment of the Debt or any other charges affecting all or any portion of the Property, as Lender, in its sole discretion, may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided.
(c) In the event that Borrower holds any letters of credit as security for obligations under Leases, within thirty (30) days (or if any letters of credit may expire within such thirty (30) day period, prior to the expiration of such letter of credit) of the occurrence of a monetary event of default or a material non-monetary event of default under the related Lease, Borrower shall present for draw and use all commercially reasonable efforts to draw the full amount which it is entitled to draw under such letter of credit; provided, however, Borrower shall not be obliged to draw on such letter of credit if (i) Borrower has submitted to Lender a plan of action to resolve any event of default which gave rise to Borrower's right to draw on the applicable letter of credit and Lender shall, in its reasonable discretion, have consented to such plan or Borrower is precluded from making a draw on the applicable letter of credit by applicable law, and (ii) the term of such letter of credit will not expire prior to the implementation of such submitted plan. Borrower shall deliver to Lender all security deposits which are applied against sums due to Borrower under Leases (including, without limitation, all sums drawn on letters of credit held as security for obligations of tenants under Leases) and Rent paid by or on behalf of any lessee under a Space Lease in whole or partial consideration for the termination, cancellation or surrender of any Space Lease including, without limitation, surrender or cancellation fees, buy out fees or reimbursements for tenant improvements or leasing commissions, within five (5) Business Days of receipt thereof and all such sums shall be held in the Reletting Reserve Escrow Account and shall be disbursed therefrom as set forth above.
Section 5.08. Recurring Replacement Reserve Escrow Account. Borrower hereby agrees to pay all Recurring Replacement Expenditures with respect to the Property (without regard to the amount of money then available in the Recurring Replacement Reserve Sub-Account or the Recurring Replacement Reserve Escrow Account). Provided that Lender has received written notice from Borrower at least five (5) Business Days prior to the due date of any payment relating to Recurring Replacement Expenditures and not more frequently than once each month, and further provided that no Event of Default has occurred, that there are sufficient funds available in the Recurring Replacement Reserve Escrow Account and Borrower shall have theretofore furnished Lender with lien waivers, copies of bills, invoices and other reasonable documentation as may be required by Lender to establish that the Recurring Replacement Expenditures which are the subject of such request represent amounts due for completed or partially completed capital work and improvements performed at the Property, Lender shall make such payments out of the Recurring Replacement Reserve Escrow Account.
Provided that no Event of Default shall have occurred, all funds deposited into the Recurring Replacement Reserve Escrow Account shall be held by Lender pursuant to the provisions of this Security Instrument and shall be applied in payment of Recurring Replacement Expenditures. Should an Event of Default occur, the sums on deposit in the Recurring Replacement Reserve Sub-Account and the Recurring Replacement Reserve Escrow Account may be applied by Lender in payment of any Recurring Replacement Expenditures or may be applied to the payment of the Debt or any other charges affecting all or any portion of the Property, as Lender in its sole discretion may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided.
Section 5.09. Intentionally Omitted.
Section 5.10. Intentionally Omitted.
Section 5.11. Intentionally Omitted.
Section 5.12. Performance of Engineering Work. (a) Borrower shall promptly commence and diligently thereafter pursue to completion (without regard to the amount of money then available in the Engineering Escrow Account) the Required Engineering Work prior to the date set forth on Exhibit D attached hereto and made a part hereof. After Borrower completes an item of Required Engineering Work or any portion thereof, Borrower may submit to Lender an invoice therefor with lien waivers and a statement from the Engineer, reasonably acceptable to Lender, indicating that the portion of the Required Engineering Work in question has been made or completed in compliance with all Legal Requirements, and Lender shall, within fifteen (15) days thereafter, although in no event more frequently than once each month, reimburse such amount to Borrower from the Engineering Escrow Account; provided, however, that Borrower shall not be reimbursed more than the amount set forth on Exhibit D hereto as the amount allocated to the portion of the Required Engineering Work for which reimbursement is sought, and each such request for reimbursement shall be in a minimum amount of$15,000, and provided, further, however, so long as no Event of Default exists, Lender shall, within three (3) Business Days of written request by Borrower, release to Borrower the first disbursement in the amount of $40,000 required pursuant to the work letter agreement more particularly described on Exhibit D attached hereto.
(b) From and after the date all of the Required Engineering Work or any portion thereof is completed, Borrower may submit a written request, which request shall be delivered together with (i) final lien waivers and (ii) a statement from the Engineer, as the case may be, reasonably acceptable to Lender, indicating that all of the Required Engineering Work has been made or completed in compliance with all Legal Requirements and Lender shall, within fifteen (15) days thereafter, disburse any balance of the Engineering Escrow Account to Borrower. Should an Event of Default occur, the sums on deposit in the Engineering Escrow Account may be applied by Lender in payment of any Required Engineering Work or may be applied to the payment of the Debt or any other charges affecting all or any portion of the Property, as Lender in its sole discretion may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided.
Section 5.13. Loss Proceeds. In the event of a casualty to the Property, unless Lender elects, or is required pursuant to Article III hereof to make all ofthe Insurance Proceeds available to Borrower for restoration, Lender and Borrower shall cause all such Insurance Proceeds to be paid by the insurer directly to the Central Account, whereupon Lender shall, after deducting Lender's actual out-of-pocket costs of recovering and paying out such Insurance Proceeds, including without limitation, reasonable attorneys' fees, apply same to reduce the Debt in accordance with the terms of the Note; provided, however, that if Lender elects, or is deemed to have elected, to make the Insurance Proceeds available for restoration, all Insurance Proceeds in respect of rent loss, business interruption or similar coverage shall, to the extent such proceeds are required to be held by Lender pursuant to Section 3.04 hereof, be maintained in the Central Account, to be applied by Lender in the same manner as Rent received with respect to the operation of the Property; provided, further, however, that in the event that the Insurance Proceeds with respect to such rent loss, business interruption or similar insurance policy are paid in a lump sum in advance, Lender shall, to the extent such proceeds are required to be held by Lender pursuant to Section 3.04 hereof, hold such Insurance Proceeds in a segregated interest bearing escrow account, which shall be an Eligible Account, shall estimate, in Lender's reasonable discretion, the number of months required for Borrower to restore the damage caused by the casualty, shall divide the aggregate rent loss, business interruption or similar Insurance Proceeds by such number of months, and shall disburse from such bank account into the Central Account each month during the performance of such restoration such monthly installment of said Insurance Proceeds. In the event that Insurance Proceeds are to be applied toward restoration, Lender shall hold such funds in a segregated bank account at the Bank, which shall be an Eligible Account, and shall disburse same in accordance with the provisions of Section 3.04 hereof. Unless Lender elects, or is required pursuant to Section 6.01 hereof to make all of the Condemnation Proceeds available to Borrower for restoration, Lender and Borrower shall cause all such Condemnation Proceeds to be paid to the Central Account, whereupon Lender shall, after deducting Lender's actual out-of-pocket costs of recovering and paying out such Condemnation Proceeds, including without limitation, reasonable attorneys' fees, apply same to reduce the Debt in accordance with the tenns of the Note; provided, however, that any Condemnation Proceeds received in connection with a temporary Taking shall, to the extent such proceeds are required to be held by Lender pursuant to Section 3.04 hereof, be maintained in the Central Account, to be applied by Lender in the same manner as Rent received with respect to the operation of the Property; provided, further, however, that in the event that the Condemnation Proceeds of any such temporary Taking are paid in a lump sum in advance, Lender shall hold, to the extent such proceeds are required to be held by Lender pursuant to Section 3.04 hereof, such Condemnation Proceeds in a segregated interest-bearing bank account, which shall be an Eligible Account, shall estimate, in Lender's reasonable discretion, the number of months that the Property shall be affected by such temporary Taking, shall divide the aggregate Condemnation Proceeds in connection with such temporary Taking by such number of months, and shall disburse from such bank account into the Central Account each month during the pendency of such temporary Taking such monthly installment of said Condemnation Proceeds. In the event that Condemnation Proceeds are to be applied toward restoration, Lender shall. to the extent such proceeds are required to be held by Lender pursuant to Section 3.04 hereof, hold such funds in a segregated bank account at the Bank, which shall be an Eligible Account, and shall disburse same in accordance with the provisions of Section 3.04 hereof. If any Loss Proceeds are received by Borrower, such Loss Proceeds shall, to the extent such proceeds are required to be held by Lender pursuant to Section 3.04 hereof, be received in trust for Lender, shall be segregated from other funds of Borrower, and shall be forthwith paid into the Central Account, or paid to Lender to hold in a segregated bank account at the Bank, in each case to be applied or disbursed in accordance with the foregoing. Any Loss Proceeds made available to Borrower for restoration in accordance herewith, to the extent not used by Borrower in connection with, or to the extent they exceed the cost of, such restoration, shall be deposited into the Central Account, whereupon Lender shall apply same to reduce the Debt in accordance with the terms of the Note.
Section 5.14. Underwritten Rent Escrow Account. Provided that no Event of Default has occurred and is continuing, on each Payment Date set forth on Exhibit F, attached hereto and made a part hereof, Lender shall transfer a sum equal to the amount specified on Exhibit F to the Central Account from the Underwritten Rent Escrow Account. Should an Event of Default occur, sums on deposit in the Underwritten Rent Escrow Account may be applied by Lender to the payment of the Debt or any other charges affecting all or any portion of the Property, as Lender in its sole discretion may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided.
ARTICLE VI: CONDEMNATION
Section 6.01. Condemnation. (a) Borrower shall notify Lender promptly of the commencement or threat of any Taking of the Property or any portion thereof. Lender is hereby irrevocably appointed as Borrower's attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain the proceeds of any such Taking and to make any compromise or settlement in connection with such proceedings (subject to Borrower's reasonable approval, except after the occurrence of an Event of Default, in which event Borrower's approval shall not be required), subject to the provisions of this Security Instrument; provided, however, that Borrower may participate in any such proceedings and shall be authorized and entitled to compromise or settle any such proceeding with respect to Condemnation Proceeds in an amount less than five percent (5%) of the Loan Amount without any approval or consent from Lender. Borrower shall execute and deliver to Lender any and all instruments reasonably required in connection with any such proceeding promptly after request therefor by Lender. Except as set forth above, Borrower shall not adjust, compromise, settle or enter into any agreement with respect to such proceedings without the prior consent of Lender. All Condemnation Proceeds are hereby assigned to and shall be paid to Lender to be applied in accordance with the terms hereof. With respect to Condemnation Proceeds in an amount in excess of five percent (5%) ofthe Loan Amount, Borrower hereby authorizes Lender to compromise, settle, collect and receive such Condemnation Proceeds, and to give proper receipts and acquittance therefor. Subject to the provisions of this Article VI, Lender may apply such Condemnation Proceeds (less any actual out-of-pocket cost to Lender of recovering and paying out such proceeds, including, without limitation, reasonable attorneys' fees and disbursements and costs allocable to inspecting any repair, restoration or rebuilding work and the plans and specifications therefor) toward the payment of the Debt or to allow such proceeds to be used for the Work.
(b) "Substantial Taking" shall mean (i) a Taking of such portion of the Property that would, in Lender's reasonable discretion, leave remaining a balance of the Property which would not under then current economic conditions, applicable Development Laws and other applicable Legal Requirements, permit the restoration of the Property so as to constitute a complete, rentable facility of the same sort as existed prior to the Taking, having adequate ingress and egress to the Property, capable of producing a projected Net Operating Income (as reasonably determined by Lender) yielding a projected Debt Service Coverage therefrom for the next two (2) years of not less than the Required Debt Service Coverage, (ii) a Taking which occurs less than two (2) years prior to the Maturity Date, (iii) a Taking which Lender is not reasonably satisfied could be restored within twelve (12) months and at least six (6) months prior to the Maturity Date or (iv) a Taking of more than fifteen percent (15%) of the reasonably estimated fair market value of the Property.
(c) In the case of a Substantial Taking, Condemnation Proceeds shall, at Lender's election, be payable to Lender in reduction of the Debt but without any prepayment fee or charge of any kind and, if Borrower elects to apply any Condemnation Proceeds it may receive pursuant to this Security Instrument to the payment of the Debt, Borrower may prepay the balance of the Debt without any prepayment fee or charge of any kind.
(d) In the event of a Taking which is less than a Substantial Taking, Borrower at its sole cost and expense (whether or not the award shall have been received or shall be sufficient for restoration) shall proceed diligently to restore, or cause the restoration of, the remaining Improvements not so taken, to maintain a complete, rentable, self-contained fully operational facility of the same sort as existed prior to the Taking in as good a condition as is reasonably possible. In the event of such a Taking, Lender shall receive the Condemnation Proceeds and shall pay over the same:
(i) first, provided no Event of Default shall have occurred and be continuing, to Borrower to the extent of any portion of the award as may be necessary to pay the reasonable cost of restoration of the Improvements remaining, and
(ii) second, to Lender, in reduction of the Debt without any prepayment premium or charge of any kind.
If one or more Takings in the aggregate create a Substantial Taking, then, in such event, the sections of this Article VI above applicable to Substantial Takings shall apply.
(e) In the event Lender is obligated to or elects to make Condemnation Proceeds available for the restoration or rebuilding of the Property, such proceeds shall be disbursed in the manner and subject to the conditions set forth in Section 3.04(b) hereof. If, in accordance with this Article VI, any Condemnation Proceeds are used to reduce the Debt, they shall be applied in accordance with the provisions of the Note. Borrower shall promptly execute and deliver all instruments requested by Lender for the purpose of confirming the assignment of the Condemnation Proceeds to Lender. Application of all or any part of the Condemnation Proceeds to the Debt shall be made in accordance with the provisions of Sections 3.06 and 3.07 hereof No application ofthe Condemnation Proceeds to the reduction of the Debt shall have the effect of releasing the lien of this Security Instrument or the Mortgage until the remainder of the Debt has been paid in full. In the case of any Taking, Lender, to the extent that Lender has not been reimbursed by Borrower, shall be entitled, as a first priority out of any Condemnation Proceeds, to reimbursement for all actual out-of-pocket costs, fees and expenses reasonably incurred in the determination and collection of any Condemnation Proceeds. To the extent any such amounts are required to be delivered to Lender pursuant to Section 3.04 hereof, all Condemnation Proceeds deposited with Lender pursuant to this Section, until expended or applied as provided herein, shall be held in accordance with Section 3.04(b) hereof and shall constitute additional security for the payment of the Debt and the payment and performance of Borrower's obligations but Lender shall not be deemed a trustee or other fiduciary with respect to its receipt of such Condemnation Proceeds or any part thereof. All awards so deposited with Lender shall be held by Lender in an Eligible Account, but Lender makes no representation or warranty as to the rate or amount of interest, if any, which may accrue on any such deposit and shall have no liability in connection therewith. For purposes hereof, any reference to the award shall be deemed to include interest, if any, which has accrued thereon.
(f) Notwithstanding the foregoing, provided that (i) no Event of Default exists and (ii) the State Street Lease is in full force and effect, all Condemnation Proceeds shall be applied in accordance with the provisions of the State Street Lease.
ARTICLE VII: LEASES AND RENTS
Section 7.01. Assignment. (a) Borrower does hereby bargain, sell, assign and set over unto Lender, all of Borrower's interest in the Leases and Rents. The assignment of Leases and Rents in this Section 7.01 is an absolute, unconditional and present assignment from Borrower to Lender and not an assignment for security and the existence or exercise of Borrower's revocable license to collect Rent shall not operate to subordinate this assignment to any subsequent assignment. The exercise by Lender of any of its rights or remedies pursuant to this Section 7.01 shall not be deemed to make Lender a mortgagee-in-possession. In addition to the provisions of this Article VII, Borrower shall comply with all terms, provisions and conditions of the Assignment.
(b) So long as there shall exist and be continuing no Event of Default, Borrower shall have a revocable license to take all actions with respect to all Leases and Rents, present and future, including the right to collect and use the Rents, subject to the terms of this Security Instrument, the Mortgage and the Assignment.
(c) Borrower agrees to deliver to Lender, within thirty (30) days after Lender's request, a true and complete copy of every Lease.
(d) The rights of Lender contained in this Article VII, the Assignment or any other assignment of any Lease shall not result in any obligation or liability of Lender to Borrower or any lessee under a Lease or any party claiming through any such lessee unless and until such time as Lender shall have acquired title to the Property.
(e) At any time after the occurrence and during the continuance of an Event of Default, the license granted herein above may be revoked by Lender, and Lender or a receiver appointed in accordance with this Security Instrument may enter upon the Property, and collect, retain and apply the Rents toward payment of the Debt in such priority and proportions as Lender in its sole discretion shall deem proper. ·
(f) In addition to the rights which Lender may have herein, upon the occurrence of any Event of Default, Lender, at its option, may require Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupation of such part of the Property as may be used and occupied by Borrower and may require Borrower to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise.
Section 7.02. Management of Property. (a) Borrower shall manage the Property or cause the Property to be managed in a manner which is consistent with the Approved Manager Standard or, if the State Street Lease is in full force and effect or if FPG is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property. All Space Leases entered into after the Closing Date shall provide for rental rates comparable to then existing local market rates and terms and conditions which constitute good and prudent business practice and are consistent with prevailing market terms and conditions, and shall be arms-length transactions. All Leases shall be on a form substantially similar to the form previously approved by Lender and shall provide that they are subordinate to this Security Instrument and the Mortgage and that the lessees thereunder attorn to Lender. Borrower shall deliver copies of all Leases, amendments, modifications and renewals thereof to Lender. All proposed Leases for the Property shall be subject to the prior written approval of Lender not to be unreasonably withheld, conditioned or delayed, provided, however that Borrower may enter into new leases with unrelated third parties without obtaining the prior consent of Lender provided that: (i) the proposed leases conform with the requirements of this Section 7.02; (ii) the space to be leased pursuant to such proposed lease together with any space leased or to be leased to an Affiliate of the tenant thereunder does not exceed 50,000 square feet; and (iii) the term of the proposed lease inclusive of all extensions and renewals, does not exceed ten (10) years.
(b) Borrower (i) shall observe and perform all of its material obligations under the Leases pursuant to applicable Legal Requirements and shall not do or permit to be done anything to impair the value of the Leases as security for the Debt; (ii) shall promptly send copies to Lender of all notices of default which Borrower shall receive under the Leases; (iii) shall, consistent with the Approved Manager Standard or, if the State Street Lease is in full force and effect or FPG is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property, enforce all of the material terms, covenants and conditions contained in the Leases to be observed or performed; (iv) shall not collect any of the Rents under the Leases more than one (1) month in advance (except that Borrower may collect in advance such security deposits as are permitted pursuant to applicable Legal Requirements and are commercially reasonable in the prevailing market); (v) shall not execute any other assignment of lessor's interest in the Leases or the Rents except as otherwise expressly permitted pursuant to this Security Instrument; (vi) shall not cancel or terminate any of the Leases or accept a surrender thereof in any manner inconsistent with the Approved Manager Standard or, if the State Street Lease is in full force and effect, in a manner which is a commercially reasonable manner for properties similar to the Property or FPG is Manager; (vii) shall not convey, transfer or suffer or permit a conveyance or transfer of all or any part of the Premises or the Improvements or of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of, lessees thereunder; (viii) shall not alter, modify or change the terms of any guaranty of any Major Space Lease or cancel or terminate any such guaranty; (ix) shall, in accordance with the Approved Manager Standard or, if the State Street Lease is in full force and effect or FPG is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property, make all reasonable efforts to seek lessees for space as it becomes vacant and enter into Leases in accordance with the terms hereof; (x) shall not cancel or terminate or materially modify, alter or amend any Major Space Lease or Property Agreement without Lender's consent, which consent will not be unreasonably withheld, conditioned or delayed; and (xi) shall, without limitation to any other provision hereof, execute and deliver at the request of Lender all such further assurances, confirmations and assignments in connection with the Property as are required herein and as Lender shall from time to time reasonably require.
(c) All security deposits of lessees, whether held in cash or any other form, shall be treated by Borrower as trust funds, shall not be commingled with any other funds of Borrower and, if cash, shall be deposited by Borrower in the Security Deposit Account. Any bond or other instrument which Borrower is permitted to hold in lieu of cash security deposits under applicable Legal Requirements shall be maintained in full force and effect unless replaced by cash deposits as hereinabove described, shall be issued by a Person reasonably satisfactory to Lender, shall, if permitted.pursuant to Legal Requirements, at Lender's option, name Lender as payee or mortgagee thereunder or be fully assignable to Lender and shall, in all respects, comply with applicable Legal Requirements and otherwise be reasonably satisfactory to Lender. Borrower shall, upon request, provide Lender with evidence reasonably satisfactory to Lender of Borrower's compliance with the foregoing. Following the occurrence and during the continuance of any Event of Default, Borrower shall, upon Lender's request, if permitted by applicable Legal Requirements, tum over the security deposits (and any interest thereon) to Lender to be held by Lender in accordance with the terms of the Leases and all Legal Requirements.
(d) If requested by Lender, Borrower shall furnish, or shall cause the applicable lessee to furnish, to Lender financial data and/or financial statements in accordance with Regulation AB for any lessee of the Property if, in connection with a Securitization, Lender expects there to be, with respect to such lessee or any group of affiliated lessees, a concentration within all of the mortgage loans included or expected to be included, as applicable, in such Securitization such that such lessee or group of affiliated lessees would constitute a Significant Obligor; provided, however, that in the event the related Space Lease does not require the related lessee to provide the foregoing information, Borrower shall use commercially reasonable efforts to cause the applicable lessee to furnish such information.
(e) Borrower covenants and agrees with Lender that (i) the Property will be managed at all times by Borrower, FPG or, if the State Street Lease is no longer in full force and effect, by Manager pursuant to the management agreement reasonably approved by Lender (the "Management Agreement"), (ii) after Borrower has knowledge of a fifty percent (50%) or more change in control of the ownership of Manager, Borrower will promptly give Lender notice thereof (a "Manager Control Notice") and (iii) the Management Agreement may be terminated by Lender at any time for cause (including, but not limited to, Manager's gross negligence, misappropriation of funds, willful misconduct or fraud) or at any time following (A) the occurrence of an Event of Default, or (B) the receipt of a Manager Control Notice and a substitute managing agent shall be appointed by Borrower, subject to Lender's prior written approval, not to be unreasonably withheld, conditioned or delayed and which may be conditioned on, inter alia, a letter from each Rating Agency confirming that any rating issued by the Rating Agency in connection with a Securitization will not, as a result of the proposed change of Manager, be downgraded from the then current ratings thereof, qualified or withdrawn. Lender acknowledges that, as of the date hereof, FPG and State Street Corporation (or an Affiliate of State Street Corporation) are acceptable Managers of the Property. Borrower may from time to time appoint a successor manager to manage the Property with Lender's prior written consent which consent shall not be unreasonably withheld, conditioned or delayed, provided that any such successor manager shall be a reputable management company which meets the Approved Manager Standard or, if the State Street Lease is in full force and effect or FPG is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property, and each Rating Agency shall have confirmed in writing that any rating issued by the Rating Agency in connection with a Securitization will not, as a result of the proposed change of Manager, be downgraded from the then current ratings thereof, qualified or withdrawn. Borrower further covenants and agrees that Borrower shall require Manager (or any successor managers) to maintain at all times during the term of the Loan worker's compensation insurance as required by Governmental Authorities.
(f) Lender shall, upon request of Borrower, enter into a subordination, nondisturbance and attornment agreement ("SNDA") with respect to each proposed tenant entering into a Lease in compliance with the requirements of this Security Instrument; provided, that such Lease is (i) with a tenant occupying at least 10,000 square feet of non-retail space of the Premises or any retail space of the Premises or is with an existing tenant pursuant to a Lease dated prior to the Closing Date which provides that the tenant thereunder is entitled to an SNDA, (ii) if Lender's approval is required hereunder, with a tenant reasonably approved by Lender in writing prior to Borrower's execution of any such Lease and (iii) on the standard form of Lease previously approved in writing by Lender with such commercially reasonable changes as are consistent with the Approved Manager Standard or, if the State Street Lease is in full force and effect or ifFPG is Manager, in a manner which is a commercially reasonable manner for properties similar to the Property. Any SNDA executed by Lender shall be on Lender's then standard form with such changes as Lender shall, in its reasonable discretion, agree to and provide that in the event Lender or any purchaser at foreclosure shall succeed to Borrower's interest in the Property, the Leases of such tenants will remain in full force and effect and be binding upon Lender or such purchaser and such tenant as though each were original parties thereto.
ARTICLE VIII: MAINTENANCE AND REPAIR
Section 8.01. Maintenance and Repair of the Property; Alterations; Replacement of
Equipment. Borrower hereby covenants and agrees:
(a) Borrower shall not without obtaining Lender's prior written consent (i) desert or abandon the Property, (ii) change the use of the Property or cause or permit the use or occupancy of any part of the Property to be discontinued if such discontinuance or use change would violate any zoning or other law, ordinance or regulation; (iii) consent to or seek any lowering of the zoning classification, or greater zoning restriction affecting the Property; or (iv) take any steps whatsoever to convert the Property, or any portion thereof, to a condominium or cooperative form of ownership.
(b) Borrower shall, at its expense, (i) take good care ofthe Property including grounds generally, and utility systems and sidewalks, roads, alleys, and curbs therein, and shall keep the same in good, safe and insurable condition and in compliance with all applicable Legal Requirements, (ii) promptly make all repairs to the Property, above grade and below grade, interior and exterior, structural and nonstructural, ordinary and extraordinary, unforeseen and foreseen, and maintain the Property in a manner appropriate for the facility and (iii) not commit or suffer to be committed any waste of the Property or do or suffer to be done anything which will increase the risk of fire or other hazard to the Property or impair the value thereof. Borrower shall keep the sidewalks, vaults, gutters and curbs comprising, or adjacent to, the Property, clean and free from dirt, snow, ice, rubbish and obstructions. All repairs made by Borrower shall be made in a good and workmanlike manner, shall be equal or better in quality and class to the original work and shall comply with all applicable Legal Requirements and Insurance Requirements. To the extent any of the above obligations are obligations of tenants under Space Leases or other Persons under Property Agreements, Borrower may fulfill its obligations hereunder by causing such tenants, or other Persons, as the case may be, to perform their obligations thereunder. As used herein, the terms "repair" and "repairs" shall be deemed to include all necessary replacements.
(c) Borrower shall not demolish, remove, construct, or, except as otherwise expressly provided herein, restore, or alter the Property or any portion thereof; nor consent to or (other than as required or permitted without the consent of the landlord pursuant to the terms of the State Street Lease) permit any such demolition, removal, construction, restoration, addition or alteration (hereinafter, referred to as an "Alteration") which would (I) diminish the value of the Property or (II) the aggregate cost of such Alteration exceeds $10,000,000, without Lender's prior written consent in each instance, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, notwithstanding the foregoing, Borrower may make Alterations to the Improvements provided that: (i) a Default of which Lender has given Borrower notice or an Event of Default shall not have occurred and be continuing; (ii) the Net Operating Income (as determined by Lender in its reasonable discretion), during and after completion of said Alterations, will be at least equal to the Net Operating Income prior to the Alteration; (iii) for any Alteration, the cost of which exceeds $250,000 or for which Borrower otherwise prepared plans and specifications, Borrower shall provide plans and specifications, which were prepared by an Architect or Engineer to Lender, which if the aggregate cost of the Alteration exceeds $10,000,000 shall be subject to Lender's approval, which approval shall not be unreasonably withheld, conditioned or delayed; (iv) such Alterations shall be performed by a licensed, if required by applicable law, reputable construction company with experience with work similar in scope and type to the Alterations and, if the cost of the Alterations exceeds $250,000 or is otherwise required by Legal Requirements, under the supervision of an Architect or Engineer; (v) such Alterations shall not result in the Property violating any Environmental Laws, Legal Requirements, Leases or Property Agreements; (vi) such Alterations shall not result in a material adverse effect on the business, profits, management, operations or condition (financial or otherwise) of Borrower or the enforceability, validity, perfection or priority of the lien of any Loan Document; (vii) such Alterations shall be performed in a first class manner, (viii) Lender shall have the right to inspect the Alterations at all reasonable times during the construction process upon reasonable prior notice; (ix) such Alterations shall be completed at least twelve (12) months prior to Maturity; (x) Borrower shall have delivered to Lender a certificate estimating the costs of completing the Alterations and Borrower shall, if the aggregate cost of such Alteration shall exceed $1,500,000, if requested by Lender, have delivered to Lender, as additional security for Borrower's obligations under the Loan Documents any of the following: (A) Dollars, (B) Federal Obligations, (C) securities other than Federal Obligations acceptable to Lender provided that each Rating Agency has confirmed in writing that any rating issued by the Rating Agency in connection with a Securitization will not, as a result of such alteration or alternative additional security, be downgraded, qualified or withdrawn from the then current ratings thereof, or (D) a completion and performance bond in form and substance and issued by a financial institution reasonably acceptable to Lender, each in an amount equal to the estimated cost of completion of the Alterations above $1,500,000 (exclusive of, provided the tenant under the Space Lease with respect to which such alterations are being made has a long term unsecured debt rating of"A-" (or its equivalent) or higher from each Rating Agency, such amounts to be paid or reimbursed by the tenant under the applicable Space Lease); and (xi) if the total cost ofthe Alterations shall exceed $10,000,000, Lender shall have consented to such Alteration, which consent shall not be unreasonably withheld, conditioned or delayed. Neither the approval by Lender of any required plans and specifications for the Alterations nor the inspection by Lender of the Alterations shall make Lender responsible for the preparation of such plans and specifications, or the compliance of such plans and specifications or the Alterations, with any applicable law, regulation, ordinance, covenant or agreement. After the occurrence and during the continuance of an Event of Default, Lender may in its sole discretion apply any security delivered to Lender pursuant to clause (x) above to pay for such Alterations; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided.
(d) Borrower represents and warrants to Lender that except for such items as may be owned by the current Manager of the Property and (i) there are no fixtures, machinery, apparatus, tools, equipment or articles of personal property attached or appurtenant to, or located on, or used in connection with the management, operation or maintenance of the Property, except for the Equipment and equipment leased by Borrower for the management, operation or maintenance of the Property in accordance with the Loan Documents; (ii) the Equipment and the leased equipment constitute all of the fixtures, machinery, apparatus, tools, equipment and articles of personal property necessary to the proper operation and maintenance of the Property; and (iii) all ofthe Equipment is free and clear of all liens, except for the lien of this Security Instrument and the Permitted Encumbrances. Except for such items as may be owned by the current Manager of the Property and except for tenant trade fixtures and other property owned by tenants or remaining tenant property pursuant to any Lease, all right, title and interest of Borrower in and to all extensions, improvements, betterments, renewals and appurtenances to the Property hereafter acquired by, or released to, Borrower or constructed, assembled or placed by Borrower in the Property, and all changes and substitutions of the security constituted thereby, shall be and, in each such case, without any further mortgage, encumbrance, conveyance, assignment or other act by Lender or Borrower, shall become subject to the lien and security interest of this Security Instrument and the Mortgage as fully and completely, and with the same effect, as though now owned by Borrower and specifically described in this Security Instrument, but at any and all times Borrower shall execute and deliver to Lender any documents Lender may reasonably deem necessary or appropriate for the purpose of specifically subjecting the same to the lien and security interest of this Security Instrument and the Mortgage.
(e) Notwithstanding the provisions of this Security Instrument to the contrary, Borrower shall have the right, at any time and from time to time, to remove and dispose of Equipment which may have become obsolete or unfit for use or which is no longer useful in the management, operation or maintenance of the Property. Borrower shall promptly replace any such Equipment so disposed of or removed with other Equipment of equal value and utility, free of any security interest or superior title, liens or claims; except that, if by reason of technological or other developments, replacement of the Equipment so removed or disposed of is not necessary or desirable for the proper management, operation or maintenance of the Property, Borrower shall not be required to replace the same. All such replacements or additional equipment shall be deemed to constitute "Equipment" and shall be covered by the security interest herein granted.
ARTICLE IX: TRANSFER OR ENCUMBRANCE OF THE PROPERTY
Section 9.01. Other Encumbrances. Except for Permitted Liens, Borrower shall not further encumber or permit the further encumbrance in any manner (whether by grant of a pledge, security interest or otherwise) of the Property or any part thereof or interest therein, including, without limitation, of the Rents therefrom. In addition, except for Permitted Liens, Borrower shall not further encumber and shall not permit the further encumbrance in any manner (whether by grant of a pledge, security interest or otherwise) of Borrower or any direct or indirect interest in Borrower except as expressly permitted pursuant to this Security Instrument.
Section 9.02. No Transfer. Borrower acknowledges that Lender has examined and relied on the expertise of Borrower and, if applicable, each General Partner, in owning and operating properties such as the Property in agreeing to make the Loan and will continue to rely on Borrower's ownership of the Property as a means of maintaining the value of the Property as security for repayment of the Debt and Borrower acknowledges that Lender has a valid interest in maintaining the value of the Property. Borrower shall not Transfer, nor permit any Transfer, without the prior written consent of Lender, which consent Lender may withhold in its sole and absolute discretion. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon a Transfer without Lender's consent. This provision shall apply to every Transfer regardless of whether voluntary or not, or whether or not Lender has consented to any previous Transfer.
Section 9.03. Due on Sale. Lender may declare the Debt immediately due and payable upon any Transfer or further encumbrance without Lender's consent without regard to whether any impairment of its security or any increased risk of default hereunder can be demonstrated. This provision shall apply to every Transfer or further encumbrance of the Property or any part thereof or interest in the Property or in Borrower regardless of whether voluntary or not, or whether or not Lender has consented to any previous Transfer or further encumbrance of the Property or interest in Borrower.
Section 9.04. Permitted Transfer. Notwithstanding the foregoing provisions of this Article IX, a sale, conveyance or transfer of the Property in its entirety (hereinafter, "Sale") shall be permitted hereunder provided that each of the following terms and conditions are satisfied:
(a) no Event of Default is then continuing hereunder or under any of the other Loan
Documents;
(b) Lender shall have, in its reasonable discretion, consented to the Sale, and, if the proposed Sale is to occur at any time after a Securitization, each Rating Agency shall have delivered written confirmation that any rating issued by such Rating Agency in connection with the Securitization will not, as a result of the proposed Sale, be downgraded from the then current ratings thereof, qualified or withdrawn; provided, however, that no request for consent to the Sale will be entertained by Lender if the proposed Sale is to occur within sixty (60) days of any contemplated sale of the Loan by Lender, whether in connection with a Securitization or otherwise;
(c) Borrower gives Lender written notice of the terms of the proposed Sale not less than sixty (60) days before the date on which such Sale is scheduled to close and, concurrently therewith, gives Lender (i) all such information concerning the proposed transferee of the Property (hereinafter, "Buyer") as Lender would require in evaluating an initial extension of credit to a borrower and Lender reasonably determines that the Buyer is acceptable to Lender in all respects and (ii) a non-refundable application fee equal to $15,000;
(d) Borrower pays Lender, concurrently with the closing of such Sale, a non-refundable assumption fee in an amount equal to one-quarter percent (.25%) of the then outstanding Loan Amount with respect to the first Sale and one-half percent (.5%) at the then outstanding Loan Amount with respect to each subsequent Sale, together with all actual out-of-pocket costs and expenses, including, without limitation, reasonable attorneys' fees, incurred by Lender in connection with the Sale;
(e) Buyer assumes all of the obligations under the Loan Documents arising from and after the closing of such Sale, and, prior to or concurrently with the closing of such Sale, Buyer executes, without any cost or expense to Lender, such documents and agreements as Lender shall reasonably require to evidence and effectuate said assumption and delivers such legal opinions as Lender may require;
(f) Borrower and Buyer execute, without any cost or expense to Lender, new financing statements or financing statement amendments and any additional documents reasonably requested by Lender;
(g) Borrower (or Buyer) delivers to Lender, without any cost or expense to Lender, such endorsements to Lender's title insurance policy, hazard insurance policy endorsements or certificates and other similar materials as Lender may deem necessary at the time of the Sale, all in form and substance reasonably satisfactory to Lender, including, without limitation, an endorsement or endorsements to Lender's title insurance policy insuring the lien of this Security Instrument, extending the effective date of such policy to the date of execution and delivery (or, if later, of recording) of the assumption agreement referenced above in subparagraph (e) ofthis Section, with no additional exceptions added to such policy, and insuring that fee simple title to the Property is vested in Buyer;
(h) Borrower executes and delivers to Lender, without any cost or expense to Lender, a release of Lender, its officers, directors, employees and agents, from all claims and liability relating to the transactions evidenced by the Loan Documents, through and including the date of the closing of the Sale, which agreement shall be in form and substance reasonably satisfactory to Lender and shall be binding upon Buyer;
(i) subject to the provisions of Section 18.32 hereof, such Sale is not construed so as to relieve Borrower of any personal liability under the Note or any of the other Loan Documents for any acts or events occurring or obligations arising prior to or simultaneously with the closing of such Sale, and Borrower executes, without any cost or expense to Lender, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of said personal liability, provided that, if a replacement guarantor acceptable to Lender in its sole but reasonable discretion executes a guaranty identical (other than the name of the guarantor) in substance to the guaranty executed by Guarantor in connection with the Loan (the "Guaranty"), Lender shall release the existing Guarantor from any liabilities under the Guaranty arising after the closing of the Sale;
(j) except as otherwise provided below, such Sale is not construed so as to relieve any Guarantor of its obligations under any guaranty or indemnity agreement executed in connection with the Loan and each such Guarantor executes, without any cost or expense to Lender, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of each such guaranty agreement, provided that if Buyer or a party associated with Buyer approved by Lender in its sole but reasonable discretion assumes the obligations of the current Guarantor under its guaranty and Buyer or such party associated with Buyer, as applicable, executes, without any cost or expense to Lender, a new guaranty in similar form and substance to the existing guaranty and otherwise satisfactory to Lender, then Lender shall release the current Guarantor from all obligations arising under its guaranty after the closing of such Sale; and
(k) Buyer is a Single Purpose Entity and Lender receives a non-consolidation opinion relating to Buyer from Buyer's counsel, which opinion is in form and substance reasonably acceptable to Lender.
ARTICLE X: CERTIFICATES
Section 10.01. Estoppel Certificates. (a) After request by Lender, Borrower, within fifteen (15) days and at its expense, will furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the amount of the original principal amount of the Note, and the unpaid principal amount of the Note, (ii) the rate of interest of the Note, (iii) the date payments of interest and/or principal were last paid, (iv) any offsets or defenses to the payment of the Debt and, if any are alleged, the nature thereof, (v) that the Note, this Security Instrument and the other Loan Documents have not been modified or if modified, giving particulars of such modification and (vi) that there has occurred and is then continuing no Default or if such Default exists, the nature thereof, the period of time it has existed, and the action being taken to remedy such Default.
(b) Within fifteen (15) days after written request by Borrower, Lender shall furnish to Borrower a written statement confirming the amount of the Debt, the maturity date of the Note and the date to which interest has been paid.
(c) Promptly after Lender's request (which, provided no Event ofDefault shall have occurred and be continuing, shall be no more frequent than once in any twelve (12) month period), Borrower shall use all reasonable efforts to obtain estoppel certificates from tenants in form and substance reasonably acceptable to Lender (or as otherwise prescribed in such tenant Leases).
ARTICLE XI: NOTICES
Section 11.01. Notices. Any notice, demand, statement, request or consent made hereunder shall be in writing and delivered personally or sent to the party to whom the notice, demand or request is being made by Federal Express or other nationally recognized overnight delivery service, as follows and shall be deemed given when delivered personally or one (1) Business Day after being deposited with Federal Express or such other nationally recognized delivery service:
|
| | | |
| If to Lender: | | Wachovia Bank, National Association |
| | | Commercial Real Estate Services |
| | | 8739 Research Drive URP 4 |
| | | NC 1075 |
| | | Charlotte, North Carolina 28262 |
| | | Loan Number: 502858233 |
| | | Attention: Portfolio Manager |
| | | Fax No.: (704) 715-0036 |
| | | |
| and: | | UBS Real Estate Investments Inc., |
| | | 1251 Avenue of the Americas, 22nd Floor |
| | | New York, New York 10020 |
| | | Attn: Matthew Kirsch |
| | | Fax No.: (212) 882-3391 |
| | | |
| and: | | UBS Real Estate Investments Inc., |
| | | 1251 Avenue of the Americas, 22nd Floor |
| | | New York, New York 10020 |
| | | Attn: Robert Pettinato |
| | | Fax No.: (212) 882-3392 |
| | | |
| with a copy to: | | Proskauer Rose LLP |
| | | 1585 Broadway |
| | | New York, New York 10036 |
| | | Attn: David J. Weinberger, Esq. |
| | | Fax No.: (212) 969-2900 |
| | | |
| and: | | Thelen Reid Brown Raysman & Steiner LLP |
| | | 900 Third Avenue |
| | | New York, New York 10022 |
| | | Attn: Jeffrey B. Steiner, Esq. (4194/225) |
| | | Fax No.: (212) 895-2900 |
| | | |
| If the Borrower: | | at the address first written above, |
| | | |
| with a copy to: | | DLA Piper US LLP |
| | | 1251 Avenue of the Americas |
| | | New York, New York 10020 |
| | | Attn: Robert G. Koen, Esq. |
| | | Fax No.: (212) 884-8487 |
| | | |
| and: | | RCG StateSt Boston I LLC and |
| | | RCG StateSt Boston II LLC |
| | | 7 Penn Plaza, Suite 512 |
| | | New York, New York 10001 |
or such other address as either Borrower or Lender shall hereafter specify by not less than ten (10) days prior written notice as provided herein; provided, however, that notwithstanding any provision of this Article to the contrary, such notice of change of address shall be deemed given only upon actual receipt thereof. Rejection or other refusal to accept or the inability to deliver because of changed addresses of which no notice was given as herein required shall be deemed to be receipt of the notice, demand, statement, request or consent.
ARTICLE XII: INDEMNIFICATION
Section 12.01. Indemnification Covering Property. In addition, and without limitation, to any other provision of this Security Instrument or any other Loan Document, Borrower shall protect, indemnify and save harmless Lender and its successors and assigns, and each of their agents, employees, officers, directors, stockholders, partners and members (collectively, "Indemnified Parties") for, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, actual out-of-pocket costs and expenses (exclusive of consequential damages) whether incurred or imposed within or outside the judicial process, including, without limitation, reasonable attorneys' fees and disbursements imposed upon or incurred by or asserted against any of the Indemnified Parties by reason of (a) ownership of this Security Instrument, the Assignment, the Mortgage, the Property or any part thereof or any interest therein or receipt of any Rents; (b) any accident, injury to or death of any person or loss of or damage to property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, parking areas, streets or ways; (c) any use, nonuse or condition in, on or about, or possession, alteration, repair, operation, maintenance or management of, the Property or any part thereof or on the adjoining sidewalks, curbs, parking areas, streets or ways; (d) any failure on the part of Borrower to perform or comply with any of the terms of this Security Instrument or the Assignment; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; (f) any claim by brokers, finders or similar Persons claiming to be entitled to a commission in connection with any Lease or other transaction involving the Property or any part thereof; (g) any Imposition including, without limitation, any Imposition attributable to the execution, delivery, filing, or recording of any Loan Document, Lease or memorandum thereof; (h) any lien or claim arising on or against the Property or any part thereof under any Legal Requirement or any liability asserted against any of the Indemnified Parties with respect thereto; (i) any claim arising out of or in any way relating to any tax or other imposition on the making and/or recording of this Security Instrument, the Note or any of the other Loan Documents; (j) a Default under Sections 2.02(£), 2.02(g), 2.02(k), 2.02(t) or 2.02(w) hereof, (k) the failure of any Person to file timely with the Internal Revenue Service an accurate Form 1099-B, Statement for Recipients ofProceeds from Real Estate, Broker and Barter Exchange Transactions, which may be required in connection with the Loan, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the Loan; (1) the claims of any lessee or any Person acting through or under any lessee or otherwise arising under or as a consequence of any Lease or (m) the failure to pay any insurance premiums. Notwithstanding the foregoing provisions of this Section 12.01 to the contrary, Borrower shall have no obligation to indemnify the Indemnified Parties pursuant to this Section 12.01 for liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses relative to the foregoing which result from Lender's, and its successors' or assigns', willful misconduct or gross negligence. Any amounts payable to Lender by reason of the application of this Section 12.01 shall constitute a part of the Debt secured by this Security Instrument and the other Loan Documents and shall become immediately due and payable and shall bear interest at the Default Rate from the date the liability, obligation, claim, cost or expense is sustained by Lender, as applicable, until paid. In case any action, suit or proceeding is brought against any of the Indemnified Parties by reason of any occurrence of the type set forth in (a) through (m) above, Borrower shall, at Borrower's expense, resist and defend such action, suit or proceeding or will cause the same to be resisted and defended by counsel at Borrower's expense for the insurer of the liability or by counsel designated by Borrower (unless reasonably disapproved by Lender promptly after Lender has been notified of such counsel); provided, however, that nothing herein shall compromise the right of Lender (or any other Indemnified Party) to appoint its own counsel at Borrower's expense for its defense with respect to any action which, in the reasonable opinion of counsel for Lender or such other Indemnified Party, as applicable, presents a conflict or potential conflict between Lender or such other Indemnified Party that would make such separate representation advisable. Any Indemnified Party will give Borrower prompt notice after such Indemnified Party obtains actual knowledge of any potential claim by such Indemnified Party for indemnification hereunder. The Indemnified Parties shall not settle or compromise any action, proceeding or claim as to which it is indemnified hereunder without notice to Borrower.
ARTICLE XIII: DEFAULTS
Section 13.01. Events of Default. The Debt shall become immediately due at the option of Lender upon any one or more of the following events ("Event of Default"):
(a) if the final payment or prepayment premium, if any, due under the Note shall not be paid on Maturity;
(b) if any monthly payment of interest and/or principal due under the Note (other than the sums described in (a) above) shall not be fully paid on the date upon which the same is due and payable thereunder;
(c) if payment of any sum (other than the sums described in (a) above or (b) above) required to be paid pursuant to the Note, this Security Instrument or any other Loan Document shall not be paid within ten (10) days after Lender delivers written notice to Borrower that same is due and payable thereunder or hereunder;
(d) if Borrower, Guarantor or, if Borrower or Guarantor is a partnership, any general partner of Borrower or Guarantor, or, if Borrower or Guarantor is a limited liability company, any member of Borrower or Guarantor, shall institute or cause to be instituted any proceeding for the termination or dissolution of Borrower, Guarantor or any such general partner or member;
(e) if the insurance policies required hereunder are not kept in full force and effect, or if the insurance policies are not assigned and delivered to Lender as herein provided;
(f) if Borrower or Guarantor attempts to assign its rights under this Security Instrument or any other Loan Document or any interest herein or therein, or if any Transfer occurs other than in accordance with the provisions hereof;
(g) if any representation or warranty of Borrower or Guarantor made herein or in any other Loan Document or in any certificate, report, financial statement or other instrument or agreement furnished to Lender shall prove false or misleading as of the date made in any material respect;
(h) if Borrower, Guarantor or any general partner of Borrower or Guarantor shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due;
(i) if a receiver, liquidator or trustee of Borrower, Guarantor or any general partner of Borrower or Guarantor shall be appointed or if Borrower, Guarantor or their respective general partners shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower, Guarantor or their respective general partners or if any proceeding for the dissolution or liquidation of Borrower, Guarantor or their respective general partners shall be instituted; however, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by Borrower, Guarantor or their respective general partners, as applicable, upon the same not being discharged, stayed or dismissed within ninety (90) days or if Borrower, Guarantor or their respective general partners shall generally not be paying its debts as they become due;
(j) if Borrower shall be in default beyond any notice or grace period, if any, under any other mortgage or deed of trust or security agreement covering any part of the Property without regard to its priority relative to this Security Instrument or the Mortgage; provided, however, this provision shall not be deemed a waiver of the provisions of Article IX prohibiting further encumbrances affecting the Property or any other provision of this Security Instrument;
(k) if the Property becomes subject (i) to any lien which is superior to the lien of this Security Instrument, other than a lien for real estate taxes and assessments not due and payable or a Permitted Encumbrance, or (ii) to any mechanic's, materialman's or other lien which is superior to the lien of this Security Instrument, and such lien under clause (i) or (ii) shall remain undischarged (by payment, bonding, or otherwise) for thirty (30) days after notice of such lien unless contested in accordance with the terms hereof;
(I) if Borrower discontinues the operation of the Property or any part thereof for reasons other than repair or restoration arising from a casualty or condemnation for thirty (30) days or more;
(m) except as permitted in this Security Instrument, any material alteration, demolition or removal of any of the Improvements without the prior consent of Lender;
(n) if Borrower consummates a transaction which would cause this Security Instrument or Lender's rights under this Security Instrument, the Note or any other Loan Document to constitute a non-exempt prohibited transaction under ERISA or result in a violation of a state statute regulating government plans subjecting Lender to liability for a violation of ERISA or a state statute; or
(o) if a default shall occur under any of the other terms, covenants or conditions of the Note, this Security Instrument or any other Loan Document, other than as set forth in (a) through (n) above, for ten (10) days after notice from Lender in the case of any default which can be cured by the payment of a sum of money, or for thirty (30) days after notice from Lender in the case of any other default or an additional ninety (90) days if Borrower is diligently and continuously effectuating a cure of a curable non-monetary default, other than as set forth in (a) through (n) above.
Notwithstanding the foregoing, the occurrence of any of the events described in Section 13.01(d), (h) and (i) above with respect to any Guarantor or the death of any Guarantor shall not be an Event of Default provided that (a) a replacement guaranty in the same form as the Guaranty is promptly thereafter (but in no event more than twenty (2Q) days after the occurrence of the event which gives rise to the applicable Event of Default) delivered to Lender from a creditworthy substitute guarantor acceptable to Lender in its sole but reasonable discretion, (b) Lender receives an opinion with respect to due execution, authority, enforceability of the replacement guaranty and such other matters as Lender may reasonably require in form, scope and substance and from counsel reasonably satisfactory to Lender and (c) if the substitute guarantor owns, directly or indirectly, more than a 20% direct or indirect ownership interest in Borrower or General Partner, Lender receives an opinion relating to the substantive consolidation of the substitute guarantor in form, scope and substance satisfactory to Lender. For purposes hereof, a substitute guarantor having a net worth of at least $80,000,000 shall be deemed to be creditworthy (but shall otherwise be subject to Lender's approval in its sole but reasonable discretion), provided that Lender may in its sole but reasonable discretion accept a replacement guarantor with a net worth ofless than $80,000,000.
Section 13.02. Remedies. (a) Upon the occurrence and during the continuance of any Event of Default, Lender may, in addition to any other rights or remedies available to it hereunder or under any other Loan Document, at law or in equity, take such action, without notice or demand, as it reasonably deems advisable to protect and enforce its rights against Borrower and in and to the Property including, but not limited to, the following actions, each of which may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine, in its sole discretion, without impairing or otherwise affecting any other rights and remedies of Lender hereunder, at law or in equity: (i) declare all or any portion of the· unpaid Debt to be immediately due and payable; provided, however, that upon the occurrence of any of the events specified in Section 13.0l(i), the entire Debt will be immediately due and payable without notice or demand or any other declaration of the amounts due and payable; or (ii) bring an action to foreclose this Security Instrument or the Mortgage and without applying for a receiver for the Rents, but subject to the rights of the tenants under the Leases, enter into or upon the Property or any part thereof, either personally or by its agents, nominees or attorneys, and dispossess Borrower and its agents and servants therefrom, and thereupon Lender may (A) use, operate, manage, control, insure, maintain, repair, restore and otherwise deal with all and every part of the Property and conduct the business thereat, (B) make alterations, additions, renewals, replacements and improvements to or on the Property or any part thereof, (C) exercise all rights and powers of Borrower with respect to the Property or any part thereof, whether in the name of Borrower or otherwise, including, without limitation, the right to make, cancel, enforce or modify Leases, obtain and evict tenants, and demand, sue for, collect and receive all earnings, revenues, rents, issues, profits and other income of the Property and every part thereof, and (D) apply the receipts from the Property or any part thereof to the payment of the Debt, after deducting therefrom all expenses (including, without limitation, reasonable attorneys' fees and disbursements) reasonably incurred in connection with the aforesaid operations and all amounts necessary to pay the Impositions, insurance and other charges in connection with the Property or any part thereof, as well as just and reasonable compensation for the services of Lender's third-party agents; or (iii) have an appraisal or other valuation of the Property or any part thereof performed by an Appraiser (and Borrower covenants and agrees it shall cooperate in causing any such valuation or appraisal to be performed) and any cost or expense incurred by Lender in connection therewith shall constitute a portion of the Debt and be secured by this Security Instrument or the Mortgage and shall be immediately due and payable to Lender with interest, at the Default Rate, until the date of receipt by Lender; or (iv) sell the Property or institute proceedings for the complete foreclosure of this Security Instrument or the Mortgage, or take such other action as may be allowed pursuant to Legal Requirements, at law or in equity, for the enforcement of this Security Instrument or the Mortgage, in which case the Property or any part thereof may be sold for cash or credit in one or more parcels; or (v) with or without entry, and to the extent permitted and pursuant to the procedures provided by applicable Legal Requirements, institute proceedings for the partial foreclosure of this Security Instrument or the Mortgage, or take such other action as may be allowed pursuant to Legal Requirements, at law or in equity, for the enforcement of this Security Instrument or the Mortgage for the portion of the Debt then due and payable, subject to the lien of this Security Instrument and the Mortgage continuing unimpaired and without loss of priority so as to secure the balance of the Debt not then due; or (vi) institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained in the Loan Documents, or any of them; or (vii) recover judgment on the Note or any guaranty either before, during or after (or in lieu of) any proceedings for the enforcement of this Security Instrument or the Mortgage; or (viii) apply for the appointment of a custodian, trustee, receiver, keeper, liquidator or conservator of the Property or any part thereof, irrespective of the adequacy of the security for the Debt and without regard to the solvency of Borrower or of any Person liable for the payment of the Debt, to which appointment Borrower does hereby consent and such receiver or other official shall have all rights and powers permitted by applicable law and such other rights and powers as the court making such appointment may confer, but the appointment of such receiver or other official shall not impair or in any manner prejudice the rights of Lender to receive the Rent with respect to any of the Property pursuant to this Security Instrument, the Mortgage or the Assignment; or (ix) require, at Lender's option, Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupation of any portion of the Property occupied by Borrower and may require Borrower to vacate and surrender possession to Lender of the Property or to such receiver and Borrower may be evicted by summary proceedings or otherwise; or (x) without prior notice to Borrower after commencing a foreclosure proceeding or after the appointment of a receiver (A) apply all or any portion of the cash collateral in any Sub-Account and Escrow Account, including any interest and/or earnings therein, to carry out the obligations of Borrower under this Security Instrument and the other Loan Documents, to protect and preserve the Property and for any other purpose permitted under this Security Instrument and the other Loan Documents and/or (B) have all or any portion of such cash collateral immediately paid to Lender to be applied against the Debt in the order and priority set forth in the Note; or (ix) pursue any or all such other rights or remedies as Lender may have under applicable law or in equity; provided, however, that the provisions of this Section l3.02(a) shall not be construed to extend or modify any of the notice requirements or grace periods provided for hereunder or under any of the other Loan Documents. Borrower hereby waives, to the fullest extent permitted by Legal Requirements, any defense Borrower might otherwise raise or have by the failure to make any tenant parties defendant to a foreclosure proceeding and to foreclose their rights in any proceeding instituted by Lender.
The proceeds or avails of any sale made under or by virtue of this Section 13.02, together with any other sums which then may be held by Lender under this Security Instrument, whether under the provisions of this Section 13.02 or otherwise, shall be applied as follows:
First: To the payment of the third-party costs and expenses reasonably incurred in connection with any such sale and to advances, fees and expenses, including, without limitation, reasonable fees and expenses of Lender's legal counsel as applicable, and of any judicial proceedings wherein the same may be made, and of all expenses, liabilities and advances reasonably made or incurred by Lender under this Security Instrument, together with interest as provided herein on all such advances made by Lender, and all Impositions, except any Impositions or other charges subject to which the Property shall have been sold;
Second: To the payment of the whole amount then due, owing and unpaid under the Note for principal and interest thereon, with interest on such unpaid principal at the Default Rate from the date of the occurrence of the earliest Event of Default that formed a basis for such sale until the same is paid;
Third: To the payment of any other portion of the Debt required to be paid by Borrower pursuant to any provision of this Security Instrument, the Note, or any of the other Loan Documents; and
Fourth: The surplus, if any, to Borrower unless otherwise required by Legal Requirements.
Lender and any receiver or custodian of the Property or any part thereof shall be liable to account for only those rents, issues, proceeds and profits actually received by it.
(b) Lender may adjourn from time to time any sale by it to be made under or by virtue of this Security Instrument by announcement at the time and place appointed for such sale or for such adjourned sale or sales and, except as otherwise provided by any applicable provision of Legal Requirements, Lender, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned.
(c) Upon the exercise by Lender of any power, right, privilege, or remedy pursuant to this Security Instrument which requires any consent, approval, registration, qualification, or authorization of any Governmental Authority, Borrower agrees to execute and deliver, or will cause the execution and delivery of, all applications, certificates, instruments, assignments and other documents and papers that Lender or any purchaser of the Property may be required to obtain for such governmental consent, approval, registration, qualification, or authorization and Lender is hereby irrevocably appointed the true and lawful attorney-in-fact of Borrower (coupled with an interest), in its name and stead, to execute all such applications, certificates, instruments, assignments and other documents and papers.
Section 13.03. Payment of Debt After Default. If, following the occurrence and during the continuance of any Event of Default, Borrower shall tender payment of an amount sufficient to satisfy the Debt in whole or in part at any time prior to a foreclosure sale of the Property, and if at the time of such tender prepayment of the principal balance of the Note is not permitted by the Note or this Security Instrument, Borrower shall, in addition to the entire Debt, also pay to Lender a sum equal to (a) all accrued interest on the Note and all other fees, charges and sums due and payable hereunder, (b) all costs and expenses in connection with the enforcement of Lender's rights hereunder, and (c) a prepayment charge (the "Prepayment Charge") equal to the greater of (i) 1% of the Principal Amount and (ii) the present value of a series of payments each equal to the Payment Differential (as hereinafter defined) and payable on each Payment Date over the remaining original term of the Note and on the Payment Date occurring three months prior to the Maturity Date, discounted at the Reinvestment Yield (as hereinafter defined) for the number of months remaining as of the date of such prepayment to each such Payment Date and the Payment Date occurring three months prior to the Maturity Date. The term "Payment. Differential" shall mean an amount equal to (i) the Interest Rate less the Reinvestment Yield, divided by (ii) twelve (12) and multiplied by (iii) the Principal Amount after application of the constant monthly payment due under the Note on the date of such prepayment, provided that the Payment Differential shall in no event be less than zero. The term "Reinvestment Yield" shall mean an amount equal to the lesser of (i) the yield on the U.S. Treasury issue (primary issue) with a maturity date closest to the Payment Date occurring three months prior to the Maturity Date, or (ii) the yield on the U.S. Treasury issue (primary issue) with a term equal to the remaining average life of the indebtedness evidenced by the Note, with each such yield being based on the bid price for such issue as published in the Wall Street Journal on the date that is fourteen (14) days prior to the date of such prepayment set forth in the notice of prepayment (or, if such bid price is not published on that date, the next preceding date on which such bid price is so published) and converted to a monthly compounded nominal yield. In addition to the amounts described above, if, during the first (1st) Loan Year, Borrower shall tender payment of an amount sufficient to satisfy the Debt in whole or in part following the occurrence of any Event of Default, Borrower shall, in addition to the entire Debt, also pay to Lender a sum equal to three percent (3%) of the Principal Amount. Failure of Lender to require any of these payments shall not constitute a waiver of the right to require the same in the event of any subsequent default or to exercise any other remedy available to Lender hereunder, under any other Loan Document or at law or in equity. In the event that any prepayment charge is due hereunder, Lender shall deliver to Borrower a statement setting forth the amount and determination of the prepayment fee, and, provided that Lender shall have in good faith applied the formula described above, Borrower shall not have the right to challenge the calculation or the method of calculation set forth in any such statement in the absence of manifest error, which calculation may be made by Lender on any day during the fifteen (15) day period preceding the date of such prepayment. Lender shall not be obligated or required to have actually reinvested the prepaid principal balance at the Reinvestment Yield or otherwise as a condition to receiving the prepayment charge. If at the time of such tender, prepayment of the principal balance of the Note is permitted, such tender by Borrower shall be deemed to be a voluntary prepayment of the principal balance of the Note, and Borrower shall, in addition to the entire Debt, also pay to Lender the applicable prepayment consideration specified in the Note and this Security Instrument.
Section 13.04. Possession of the Property. Upon the occurrence of any Event of Default and the acceleration of the Debt or any portion thereof, Borrower, if an occupant of the Property or any part thereof, upon demand of Lender, shall immediately surrender possession of the Property (or the portion thereof so occupied) to Lender, and if Borrower is permitted to remain in possession, the possession shall be as a month-to-month tenant of Lender and, on demand, Borrower shall pay to Lender monthly, in advance, a reasonable rental for the space so occupied and in default thereof Borrower may be dispossessed. The covenants herein contained may be enforced by a receiver of the Property or any part thereof. Nothing in this Section 13.04 shall be deemed to be a waiver of the provisions ofthis Security Instrument making the Transfer of the Property or any part thereof without Lender's prior written consent an Event of Default.
Section 13.05. Interest After Default. If any amount due under the Note, this Security Instrument or any of the other Loan Documents is not paid within any applicable notice and grace period after same is due, whether such date is the stated due date, any accelerated due date or any other date or at any other time specified under any of the terms hereof or thereof, then, in such event, Borrower shall pay interest on the amount not so paid from and after the date on which such amount first becomes due at the Default Rate; and such interest shall be due and payable at such rate until the earlier of the cure of all Events of Default or the payment of the entire amount due to Lender, whether or not any action shall have been taken or proceeding commenced to recover the same or to foreclose this Security Instrument or the Mortgage. All unpaid and accrued interest shall be secured by this Security Instrument and the Mortgage as part of the Debt. Nothing in this Section 13.05 or in any other provision of this Security Instrument shall constitute an extension of the time for payment of the Debt.
Section 13.06. Borrower's Actions After Default. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceedings by Lender to obtain judgment for the Debt, or of any other nature in aid of the enforcement of the Loan Documents, Borrower will (a) after receipt of notice of the institution of any such action, waive the issuance and service of process and enter its voluntary appearance in such action, suit or proceeding, and (b) if required by Lender, consent to the appointment of a receiver or receivers of the Property or any part thereof and of all the earnings, revenues, rents, issues, profits and income thereof.
Section 13.07. Control by Lender After Default. Notwithstanding the appointment of any custodian, receiver, liquidator or trustee of Borrower, or of any of its property, or of the Property or any part thereof, to the extent permitted by Legal Requirements, Lender shall be entitled to obtain possession and control of all property now and hereafter covered by this Security Instrument, the Mortgage and the Assignment in accordance with the terms hereof.
Section 13.08. Right to Cure Defaults. (a) Upon the occurrence of any Event of Default, Lender or its agents may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, make or do the same in such manner and to such extent as Lender may deem necessary to protect the security hereof. Lender and its agents are authorized to enter upon the Property or any part thereof for such purposes, or appear in, defend, or bring any action or proceedings to protect Lender's interest in the Property or any part thereof or to foreclose this Security Instrument or the Mortgage or collect the Debt, and the cost and expense thereof (including reasonable attorneys' fees to the extent permitted by law), with interest as provided in this Section 13.08, shall constitute a portion of the Debt and shall be immediately due and payable to Lender upon demand. All such costs and expenses incurred by Lender or its agents in remedying such Event of Default or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate, for the period from the date so demanded to the date of payment to Lender. All such costs and expenses incurred by Lender or its agents together with interest thereon calculated at the above rate shall be deemed to constitute a portion of the Debt and be secured by this Security Instrument and the Mortgage.
(b) If Lender makes any payment or advance that Lender is authorized by this Security Instrument to make in the place and stead of Borrower (i) relating to the Impositions or tax liens asserted against the Property, Lender may do so according to any bill, statement or estimate procured from the appropriate public office without inquiry into the accuracy of the bill, statement or estimate or into the validity of any of the Impositions or the tax liens or claims thereof; (ii) relating to any apparent or threatened adverse title, lien, claim of lien, encumbrance, claim or charge, Lender will be the sole judge of the legality or validity of same; or (iii) relating to any other purpose authorized by this Security Instrument but not enumerated in this Section 13.08, Lender may do so whenever, in its judgment and discretion, the payment or advance seems necessary or desirable to protect the Property and the full security interest intended to be created by this Security Instrument. In connection with any payment or advance made pursuant to this Section 13.08, Lender has the option and is authorized, but in no event shall be obligated, to obtain a continuation report of title prepared by a title insurance company. The payments and the advances made by Lender pursuant to this Section 13.08 and the cost and expenses of said title report will be due and payable by Borrower on demand, together with interest at the Default Rate, and will be secured by this Security Instrument and the Mortgage.
Section 13.09. Late Payment Charge. If any portion of the Debt is not paid in full on or before the day on which it is due and payable hereunder (expressly excluding any payment of principal due on Maturity), Borrower shall pay to Lender an amount equal to five percent (5%) of such unpaid portion of the Debt ("Late Charge") to defray the expense incurred by Lender in handling and processing such delinquent payment, and such amount shall constitute a part of the Debt.
Section 13.10. Recovery of Sums Required to Be Paid. Lender shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Debt as the same become due and payable hereunder (after the expiration of any grace period or the giving of any notice herein provided, if any), without regard to whether or not the balance of the Debt shall be due, and without prejudice to the right of Lender thereafter to bring an action of foreclosure, or any other action, for a default or defaults by Borrower existing at the time such earlier action was commenced.
Section 13.11. Marshalling and Other Matters. Borrower hereby waives, to the fullest extent permitted by law, the benefit of all appraisement, valuation, stay, extension, reinstatement, redemption (both equitable and statutory) and homestead laws now or hereafter in force and all rights of marshalling in the event of any sale hereunder of the Property or any part thereof or any interest therein. Further, Borrower hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of this Security Instrument on behalf of Borrower, whether equitable or statutory and on behalf of each and every Person acquiring any interest in or title to the Property or any part thereof subsequent to the date of this Security Instrument and on behalf of all Persons to the fullest extent permitted by applicable law.
Section 13.12. Tax Reduction Proceedings. After an Event of Default and during the continuance thereof, Borrower shall be deemed to have appointed Lender as its attorney-in-fact to seek a reduction or reductions in the assessed valuation of the Property for real property tax purposes or for any other purpose and to prosecute any action or proceeding in connection therewith. This power, being coupled with an interest, shall be irrevocable for so long as any part of the Debt remains unpaid and any Event of Default shall be continuing.
Section 13.13. General Provisions Regarding Remedies.
(a) Right to Terminate Proceedings. Lender may terminate or rescind any proceeding or other action brought in connection with its exercise of the remedies provided in Section 13.02 at any time before the conclusion thereof, as determined in Lender's sole discretion and without prejudice to Lender.
(b) No Waiver or Release. The failure of Lender to exercise any right, remedy or option provided in the Loan Documents shall not be deemed a waiver Of such right, remedy or option or of any covenant or obligation contained in the Loan Documents. No acceptance by Lender of any payment after the occurrence of an Event of Default and no payment by Lender of any payment or obligation for which Borrower is liable hereunder shall be deemed to waive or cure any Event of Default. No sale of all or any portion of the Property, no forbearance on the part of Lender, and no extension of time for the payment of the whole or any portion of the Debt or any other indulgence given by Lender to Borrower or any other Person, shall operate to release or in any manner affect the interest of Lender in the Property or the liability of Borrower to pay the Debt. No waiver by Lender shall be effective unless it is in writing and then only to the extent specifically stated.
(c) No Impairment; No Releases. The interests and rights of Lender under the Loan Documents shall not be impaired by any indulgence, including (i) any renewal, extension or modification which Lender may grant with respect to any of the Debt; (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Lender may grant with respect to the Property or any portion thereof; or (iii) any release or indulgence granted to any maker, endorser, guarantor or surety of any of the Debt.
ARTICLE XIV: COMPLIANCE WITH REQUIREMENTS
Section 14.01. Compliance with Legal Requirements. (a) Borrower shall promptly comply with (or cause the compliance with) all present and future Legal Requirements, foreseen and unforeseen, ordinary and extraordinary, whether requiring structural or nonstructural repairs or alterations including, without limitation, all zoning, subdivision, building, safety and environmental protection, land use and development Legal Requirements, all Legal Requirements which may be applicable to the curbs adjoining the Property or to the use or manner of use thereof, and all rent control, rent stabilization and all other similar Legal Requirements relating to rents charged and/or collected in connection with the Leases. Borrower represents and warrants that the Property is in compliance in all respects with all Legal Requirements as of the date hereof, no notes or notices of violations of any Legal Requirements have been entered or received by Borrower and there is no basis for the entering of such notes or notices.
(b) Borrower shall have the right to contest by appropriate legal proceedings diligently conducted in good faith, without cost or expense to Lender, the validity or application of any Legal Requirement and to suspend compliance therewith if permitted under applicable Legal Requirements, provided (i) failure to comply therewith could not reasonably be expected to subject Lender to any civil or criminal liability, (ii) Borrower shall furnish to Lender security reasonably satisfactory to Lender against loss or injury by reason of such contest or non-compliance with such Legal Requirement or, if the amount being contested is less than $250,000, provide Lender with evidence reasonably acceptable to Lender that Borrower has made provision for the payment of such amount, (iii) no Default or Event of Default shall have occurred and be continuing at the commencement of such proceedings and such contest shall not otherwise violate any of the provisions of any of the Loan Documents, (iv) such contest shall not, (unless Borrower shall comply with the provisions of clause (ii) of this Section 14.01(b)) subject the Property to any lien or encumbrance the enforcement of which is not suspended or otherwise affect the priority of the lien of this Security Instrument or the Mortgage; (v) such contest shall not affect the ownership, use or occupancy of the Property; (vi) the Property or any part thereof or any interest therein shall not be in any danger of being sold, forfeited or lost by reason of such contest by Borrower; (vii) Borrower shall give Lender prompt notice of the commencement of such proceedings and, upon request by Lender, notice ofthe status of such proceedings and/or confirmation of the continuing satisfaction of the conditions set forth in clauses (i)- (vi) of this Section 14.01(b); and (viii) upon a final determination of such proceeding, Borrower shall take all steps necessary to comply with any requirements arising therefrom.
(c) Borrower shall at all times comply with all applicable Legal Requirements with respect to the construction, use and maintenance of any vaults adjacent to the Property. If by reason of the failure to pay taxes, assessments, charges, permit fees, franchise taxes or levies of any kind or nature, the continued use of the vaults adjacent to Property or any part thereof is discontinued, Borrower nevertheless shall, with respect to any vaults which may be necessary for the continued use of the Property, take such steps (including the making of any payment) to ensure the continued use of vaults or replacements.
Section 14.02. Compliance with Recorded Documents; No Future Grants. Borrower shall promptly perfonn and observe or cause to be performed and observed, all of the material terms, covenants and conditions of all Property Agreements and all things necessary to preserve intact and unimpaired any and all appurtenances or other interests or rights affecting the Property.
ARTICLE XV: DEFEASANCE; PREPAYMENT
Section 15.01. Defeasance; Prepayment. (a) Except as set forth in this Section 15.01, no prepayment or defeasance of the Debt may be made by or on behalf of Borrower in whole or in part.
(b) Borrower may defease the Loan at any time subsequent to the earlier to occur of (x) the second (2nd) anniversary of the last Securitization involving any portion of the Loan or (y) the third (3rd) anniversary of the date hereof and prior to the calendar month immediately preceding the Maturity Date, in whole or, from time to time, in part, as of the last day of an Interest Accrual Period, in accordance with the following provisions:
(i) Lender shall have received from Borrower, not less than thirty (30) days', nor more than ninety (90) days', prior written notice specifying the date proposed for such defeasance and the amount which is to be defeased, which proposed date shall be as of a Payment Date.
(ii) Borrower shall also pay to Lender all interest due through and including the last day of the Interest Accrual Period ending on the day prior to the Payment Date in which such defeasance is being made, together with any and all other amounts due and owing pursuant to the terms of the Note, this Security Instrument or the other Loan Documents, including, without limitation, any costs incurred in connection with a defeasance.
(iii) No Event of Default shall have occurred and be continuing.
(iv) Borrower shall (A) pay the Defeasance Deposit on the date of such defeasance and (B) deliver to Lender (1) a security agreement, in form and substance reasonably satisfactory to Lender, creating a first priority lien on the Defeasance Deposit and the Federal Obligations purchased on behalf of Borrower with the Defeasance Deposit in accordance with the terms of this Section 15.01(b)(iv) (the "Security Agreement"); (2) an Officer's Certificate certifying that the requirements set forth in this Section 15.01(b)(iv) have been satisfied; (3) an opinion of counsel for Borrower in form and substance reasonably satisfactory to Lender stating, among other things, that (x) Lender has a perfected security interest in the Defeasance Deposit and a first priority perfected security interest in the Federal Obligations purchased by Lender on behalf of Borrower, (y) the contemplated defeasance will not result in any deemed exchange pursuant to Section 1001 ofthe Code of the Note and will not adversely affect the Note's or, if applicable, the undefeased Note's status as indebtedness for Federal income tax purposes and (z) any trust formed as a "real estate mortgage investment conduit" within the meaning of Section 860D of the Code ("REMIC") in connection with a Securitization will not fail to maintain its status as a REMIC as a result of such defeasance; (4) in the event that only a portion of the Loan is being defeased, Borrower shall execute and deliver all necessary documents to split the Note into two substitute notes, one having a principal balance equal to the defeased portion of the Note (the "Defeased Note") and one note having a principal balance equal to the undefeased portion of the Note (the "Undefeased Note"), the amortization schedule for which notes shall be calculated, in the case of a Defeased Note, or recalculated, in the case of an Undefeased Note, to amortize the respective principal balances of each on the same schedule as the Note (including, without limitation, the payment of the Principal Amount due on the Maturity Date); (5) a certificate, in form and substance reasonably satisfactory to Lender from a nationally recognized Independent certified public accountant confirming that the requirements of this Section 15.01(b) have been satisfied; and (6) such other certificates, documents, opinions or instruments as Lender may reasonably request. Borrower reserves the right to purchase Federal Obligations with and in lieu of making the Defeasance Deposit which provide Scheduled Defeasance Payments, and appoints Lender as its agent and attorney in-fact, coupled with an interest (which appointment will not be exercised if Borrower notifies Lender in writing in the notice provided for in Section 15.01(b)(i) that Borrower will be purchasing the Federal Obligations), for the purpose of using the Defeasance Deposit to purchase Federal Obligations which provide Scheduled Defeasance Payments, and Lender shall, upon receipt of the Defeasance Deposit, purchase such Federal Obligations on behalf of Borrower. Borrower, pursuant to the Security Agreement or other appropriate document, shall authorize and direct that the payments received from the Federal Obligations shall be made directly to Lender and applied to satisfy the obligations of Borrower under the Defeased Note. The Defeased Note and the Undefeased Note shall have identical terms as the Note, except for the principal balance. A Defeased Note cannot be the subject of a further defeasance.
(v) The Rating Agencies shall have confirmed in writing that any rating
issued by the Rating Agencies in connection with the Securitization will not, as a result of the proposed defeasance, be downgraded, from the then current ratings thereof, qualified or withdrawn.
(vi) If the Loan is to be defeased and Borrower is requesting a release of the Property in connection with such defeasance, such defeasance shall be to facilitate the disposition of the Property or in connection with any other customary transaction within the meaning of Treas. Reg. 1.860G-(2)(a)(8)(iii).
(vii) In the event of a defeasance of the Loan in whole, but not in part, if Borrower shall continue to own any assets other than the Defeasance Deposit, Borrower shall establish or designate a special-purpose bankruptcy-remote successor entity acceptable to Lender (the "Successor Borrower"), with respect to which a substantive nonconsolidation opinion satisfactory in form and substance reasonably satisfactory to Lender has been delivered to Lender and Borrower shall transfer and assign to the Successor Borrower all obligations, rights and duties under the Note and the Security Agreement, together with the pledged Defeasance Deposit. The Successor Borrower shall assume the obligations of Borrower under the Note and the Security Agreement and Borrower shall be relieved of its obligations hereunder and thereunder. Borrower shall pay Ten and No/100 Dollars ($10.00) to the Successor Borrower as consideration for assuming such Borrower obligations.
(viii) In the event the Loan is defeased in full in accordance with the terms hereof, Lender shall promptly release all reserves, escrows and guaranties relating to the Loan to Borrower.
(c) At any time subsequent to the Payment Date occurring in October, 2016 (the "Lockout Expiration Date"), Borrower may prepay the Loan, in whole, but not in part, as of the last day of an Interest Accrual Period, in accordance with the following provisions:
(i) Lender shall have received from Borrower, not less than thirty (30) days', nor more than ninety (90) days', prior written notice specifying the date proposed for such prepayment and the amount which is to be prepaid.
(ii) Borrower shall also pay to Lender all interest due through and including the last day of the Interest Accrual Period in which such prepayment is being made, together with any and all other amounts due and owing pursuant to the terms of the Note, this Secmity Instrument or the other Loan Documents.
(iii) Any partial prepayment shall be in a minimum amount not less than
$25,000 and shall be in whole multiples of $1,000 in excess thereof.
(iv) No Event of Default shall have occurred and be continuing.
(v) Any partial prepayment of the Principal Amount, including, without limitation, Unscheduled Payments, shall be applied to the installments of principal last due hereunder and shall not release or relieve Borrower from the obligation to pay the regularly scheduled installments of principal and interest becoming due under the Note.
ARTICLE XVI: ENVIRONMENTAL COMPLIANCE
Section 16.01. Covenants, Representations and Warranties. (a) Borrower has not, at any time, and, to Borrower's best knowledge, except as set forth in the Environmental Report, no other Person has at any time, handled, buried, stored, retained, refined, transported, processed, manufactured, generated, produced, spilled, allowed to seep, leak, escape or leach, or pumped, poured, emitted, emptied, discharged, injected, dumped, transferred or otherwise disposed of or dealt with Hazardous Materials in violation of any Environmental Statute on, to or from the Premises or any other real property owned and/or occupied by Borrower, and Borrower does not intend to and shall not use the Property or any part thereof or any such other real property for the purpose of handling, burying, storing, retaining, refining, transporting, processing, manufacturing, generating, producing, spilling, seeping, leaking, escaping, leaching, pumping, pouring, emitting, emptying, discharging, injecting, dumping, transferring or otherwise disposing of or dealing with Hazardous Materials, except for use and storage for use of heating oil, cleaning fluids, pesticides and other substances customarily used in the operation of properties that are being used for the same purposes as the Property is presently being used, provided such use and/or storage for use is in compliance with the requirements hereof and the other Loan Documents and does not give rise to liability under applicable Legal Requirements or Environmental Statutes or be the basis for a lien against the Property or any part thereof. In addition, without limitation to the foregoing provisions, Borrower represents and warrants that, to the best of its knowledge, after due inquiry and investigation, except as previously disclosed in writing to Lender or in the Environmental Report, there is no asbestos in, on, over, or under all or any portion of the fire-proofing or any other portion of the Property.
(b) Borrower knows of no seepage, leak, escape, leach, discharge, injection, release, emission, spill, pumping, pouring, emptying or dumping of Hazardous Materials from the Property into waters on, under or adjacent to the Property or any part thereof or any other real property owned and/or occupied by Borrower, or onto lands from which such Hazardous Materials might seep, flow or drain into such waters, except as disclosed in the Environmental Report.
(c) Borrower shall not permit any Hazardous Materials to be handled, buried, stored, retained, refined, transported, processed, manufactured, generated, produced, spilled, allowed to seep, leak, escape or leach, or to be pumped, poured, emitted, emptied, discharged, injected, dumped, transferred or otherwise disposed of or dealt with in violation of any Environmental Statute on, under, to or from the Property or any portion thereof at any time, except for use and storage for use of heating oil, ordinary cleaning fluids, pesticides and other substances customarily used in the operation of properties that are being used for the same purposes as the Property is presently being used, provided such use and/or storage for use is in compliance with the requirements hereof and the other Loan Documents and does not give rise to liability under applicable Legal Requirements or be the basis for a lien against the Property or any part thereof.
(d) Borrower represents and warrants that no actions, suits, or proceedings have been commenced and are pending, or to the best knowledge of Borrower, are threatened with respect to any Legal Requirement governing the use, manufacture, storage, treatment, transportation, or processing of Hazardous Materials in violation of any Environmental Statute with respect to the Property or any part thereof. Borrower has received no notice of, and, except as disclosed in the Environmental Report, has no knowledge of any fact, condition, occurrence or circumstance which with notice or passage of time or both would give rise to a claim under or pursuant to any Environmental Statute pertaining to Hazardous Materials on, in, under or originating from the Property or any part thereof or any other real property owned or occupied by Borrower or arising out of the conduct of Borrower, including, without limitation, pursuant to any Environmental Statute.
(e) Borrower has not waived any Person's liability with regard to Hazardous Materials in, on, under or around the Property, nor has Borrower retained or assumed, contractually or by operation of law, any other Person's liability relative to Hazardous Materials or any claim, action or proceeding relating thereto.
(f) In the event that there shall be filed a lien against the Property or any part thereof pursuant to any Environmental Statute pertaining to Hazardous Materials, Borrower shall, within sixty (60) days or, in the event that the applicable Governmental Authority has commenced steps to cause the Premises or any part thereof to be sold pursuant to the lien, within fifteen (15) days, from the date that Borrower receives notice of such lien, either (i) pay the claim and remove the lien from the Property, or (ii) furnish (A) a bond satisfactory to Lender in the amount of the claim out of which the lien arises, (B) a cash deposit in the amount of the claim out of which the lien arises, or (C) other security reasonably satisfactory to Lender in an amount sufficient to discharge the claim out of which the lien arises.
(g) Borrower represents and warrants that (i) except as disclosed in the Environmental Report, Borrower has no knowledge of any violation of any Environmental Statute or any Environmental Problem in connection with the Property, nor has Borrower been requested or required by any Governmental Authority to perform any remedial activity or other responsive action in connection with any Environmental Problem and (ii) neither the Property nor any other property owned by Borrower is included or, to Borrower's best knowledge, after due inquiry and investigation, proposed for inclusion on the National Priorities List issued pursuant to CERCLA by the United States Environmental Protection Agency (the "EPA") or on the inventory of other potential "Problem" sites issued by the EPA or has been identified by the EPA as a potential CERCLA site or included or, to Borrower's knowledge, after due inquiry and investigation, proposed for inclusion on any list or inventory issued pursuant to any other Environmental Statute, if any, or issued by any other Governmental Authority. Borrower covenants that Borrower will comply with (or cause the compliance with, as applicable) all Environmental Statutes affecting or imposed upon Borrower or the Property.
(h) Borrower covenants that it shall promptly notify Lender of the presence and/or release of any Hazardous Materials and of any request for information or any inspection of the Property or any part thereof by any Governmental Authority with respect to any Hazardous Materials and provide Lender with copies of such request and any response to any such request or inspection. Borrower covenants that it shall, in compliance with applicable Legal Requirements, conduct and complete all investigations, studies, sampling and testing (and promptly shall provide Lender with copies of any such studies and the results of any such test) and all remedial, removal and other actions necessary to clean up and remove all Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof in accordance with all such Legal Requirements applicable to the Property or any part thereof to the satisfaction of Lender.
(i) Following the occurrence of an Event of Default hereunder, and without regard to whether Lender shall have taken possession of the Property or a receiver has been requested or appointed or any other right or remedy of Lender has or may be exercised hereunder or under any other Loan Document, Lender, in the event that Lender shall have reason to believe that the Property shall be in violation of any Environmental Statute, shall have the right (but no obligation) to conduct such investigations, studies, sampling and/or testing of the Property or any part thereof as Lender may, in its discretion, determine to conduct, relative to Hazardous Materials. All costs and expenses incurred in connection therewith including, without limitation, consultants' fees and disbursements and laboratory fees, shall constitute a part of the Debt and shall, upon demand by Lender, be immediately due and payable and shall bear interest at the Default Rate from the date so demanded by Lender until reimbursed. Borrower shall, at its sole cost and expense, fully and expeditiously cooperate in all such investigations, studies, samplings and/or testings including, without limitation, providing all relevant information and making knowledgeable people available for interviews.
(j) Borrower represents and warrants that, to Borrower's knowledge and except as disclosed in the Environmental Report, all paint and painted surfaces existing within the interior or on the exterior of the Improvements are not flaking, peeling, cracking, blistering, or chipping, and do not contain lead or are maintained in a condition that prevents exposure of young children to lead-based paint, as of the date hereof, and that to Borrower's knowledge, the current inspections, operation, and maintenance program at the Property with respect to lead-based paint is consistent with FNMA guidelines and sufficient to ensure that all painted surfaces within the Property shall be maintained in a condition that prevents exposure of tenants to lead-based paint. To Borrower's knowledge, there have been no claims for adverse health effects from exposure on the Property to lead-based paint or requests for the investigation, assessment or removal of lead-based paint at the Property.
(k) Borrower represents and warrants that to Borrower's knowledge, except in accordance with all applicable Environmental Statutes and as disclosed in the Environmental Report, (i) no underground treatment or storage tanks or pumps or water, gas, or oil wells are or have been located about the Property, (ii) no PCBs or transformers, capacitors, ballasts or other equipment that contain dielectric fluid containing PCBs are located about the Property, (iii) no insulating material containing urea formaldehyde is located about the Property and (iv) no asbestos-containing material is located about the Property.
Section 16.02. Environmental Indemnification. Borrower shall defend, indemnify and hold harmless the Indemnified Parties for, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, actual out-of-pocket co.sts and expenses, whether incurred or imposed within or outside the judicial process, including, without limitation, reasonable attorneys' and consultants' fees and disbursements and investigations and laboratory fees arising out of, or in any way related to any Environmental Problem, including without limitation:
(a) the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threat of release of any Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof whether or not disclosed by the Environmental Report;
(b) any personal injury (including wrongful death, disease or other health condition related to or caused by, in whole or in part, any Hazardous Materials) or property damage (real or personal) arising out of or related to any Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof whether or not disclosed by the Environmental Report;
(c) any action, suit or proceeding brought or threatened, settlement reached, or order of any Governmental Authority relating to such Hazardous Material whether or not disclosed by the Environmental Report; and/or
(d) any violation of the provisions, covenants, representations or warranties of Section 16.0 I hereof or of any Legal Requirement which is based on or in any way related to any Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof including, without limitation, the cost of any work performed and materials furnished in order to comply therewith whether or not disclosed by the Environmental Report.
Notwithstanding the foregoing provisions of this Section 16.02 to the contrary, Borrower shall have no obligation to indemnify Lender for (i) liabilities, claims, damages, penalties, causes of action, costs and expenses relative to the foregoing to the extent resulting directly from (A) Lender's willful misconduct or gross negligence or (B) any Hazardous Materials initially placed in, on or under the Property or any other condition relating to Hazardous Materials created after foreclosure, delivery of a deed in lieu or other taking of title to the Property by Lender or its successors and assigns. Any amounts payable to Lender by reason of the application of this Section 16.02 shall be secured by this Security Instrument and the Mortgage and shall be due and payable within ten (10) days after demand by Lender and shall bear interest at the Default Rate from the date so demanded by Lender until paid.
This indemnification shall survive the termination of this Security Instrument whether by repayment of the Debt, foreclosure or deed in lieu thereof, assignment, or otherwise. The indemnity provided for in this Section 16.02 shall not be included in any exculpation of Borrower or its principals from personal liability provided for in this Security Instrument or in any of the other Loan Documents. Nothing in this Section 16.02 shall be deemed to deprive Lender of any rights or remedies otherwise available to Lender, including, without limitation, those rights and remedies provided elsewhere in this Security Instrument or the other Loan Documents.
ARTICLE XVII: ASSIGNMENTS
Section 17.01. Participations and Assignments. Lender shall have the right, at no cost to Borrower, to assign this Security Instrument and/or any of the Loan Documents, and to transfer, assign or sell participations and subparticipations (including blind or undisclosed participations and subparticipations) in the Loan Documents and the obligations hereunder to any Person; provided, however, that no such participation shall increase, decrease or otherwise affect either Borrower's or Lender's obligations under this Security Instrument or the other Loan Documents.
ARTICLE XVIII: MISCELLANEOUS
Section 18.01. Right of Entry. Lender and its agents shall (subject to the rights of tenants under Space Leases) have the right to enter and inspect the Property or any part thereof at all reasonable times, and, except in the event of an emergency, upon reasonable notice and to inspect Borrower's books and records and to make abstracts and reproductions thereof.
Section 18.02. Cumulative Rights. The rights of Lender under this Security Instrument shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Lender shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. Lender shall not be limited exclusively to the rights and remedies herein stated but shall be entitled, subject to the terms of this Security Instrument, to every right and remedy now or hereafter afforded by law.
Section 18.03. Liability. If Borrower consists of more than one Person, the obligations and liabilities of each such Person hereunder shall be joint and several.
Section 18.04. Exhibits Incorporated. The information set forth on the cover hereof, and the Exhibits annexed hereto, are hereby incorporated herein as a part of this Security Instrument with the same effect as if set forth in the body hereof.
Section 18.05. Severable Provisions. If any term, covenant or condition of the Loan Documents including, without limitation, the Note or this Security Instrument, is held to be invalid, illegal or unenforceable in any respect, such Loan Document shall be construed without such provision.
Section 18.06. Duplicate Originals. This Security Instrument may be executed in any number of duplicate originals and each such duplicate original shall be deemed to constitute but one and the same instrument.
Section 18.07. No Oral Change. The terms of this Security Instrument, together with the terms of the Note and the other Loan Documents constitute the entire understanding and agreement of the parties hereto and supersede all prior agreements, understandings and negotiations between Borrower and Lender with respect to the Loan. This Security Instrument, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought.
Section 18.08. Waiver of Counterclaim, Etc. BORROWER HEREBY WAIVES THE RIGHT TO ASSERT A COUNTERCLAIM, OTHER THAN A COMPULSORY COUNTERCLAIM, IN ANY ACTION OR PROCEEDING BROUGHT AGAINST IT BY LENDER OR ITS AGENTS, AND WAlVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER OR IN ANY COUNTERCLAIM BORROWER MAY BE PERMITTED TO ASSERT HEREUNDER OR WHICH MAY BE ASSERTED BY LENDER OR ITS AGENTS, AGAINST BORROWER, OR IN ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANYWAY CONNECTED WITH THIS SECURITY INSTRUMENT OR THE DEBT.
Section 18.09. Headings; Construction of Documents; etc. The table of contents, headings and captions of various paragraphs of this Security Instrument are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. Borrower acknowledges that it was represented by competent counsel in connection with the negotiation and drafting of this Security Instrument and the other Loan Documents and that neither this Security Instrument nor the other Loan Documents shall be subject to the principle of construing the meaning against the Person who drafted same.
Section 18.10. Sole Discretion of Lender. Whenever Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide that arrangements or terms are satisfactory or not satisfactory shall be in the sole discretion of Lender and shall be final and conclusive, except as may be otherwise specifically provided herein.
Section 18.11. Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Security Instrument specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Borrower is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice.
Section 18.12. Covenants Run with the Land. All of the grants, covenants, terms, provisions and conditions herein shall run with the Premises, shall be binding upon Borrower and shall inure to the benefit of Lender, subsequent holders of this Security Instrument and their successors and assigns. Without limitation to any provision hereof, the term "Borrower" shall include and refer to the borrower named herein, any subsequent owner of the Property, and its respective heirs, executors, legal representatives, successors and assigns. The representations, warranties and agreements contained in this Security Instrument and the other Loan Documents are intended solely for the benefit of the parties hereto, shall confer no rights hereunder, whether legal or equitable, in any other Person and no other Person shall be entitled to rely thereon.
Section 18.13. Applicable Law. THIS SECURITY INSTRUMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH COMMONWEALTH AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA.
Section 18.14. Security Agreement. (a) (i) This Security Instrument is a "security agreement" within the meaning of the UCC. The Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of Borrower in the Property. The Mortgage is filed as a fixture filing and covers goods which are or are to become fixtures on the Property. Borrower by executing and delivering this Security Instrument and the other Loan Documents has granted to Lender, as security for the Debt, a security interest in the Property to the full extent that the Property may be subject to the UCC (said portion of the Property so subject to the UCC being called in this Section 18.14 the "Collateral"). If an Event of Default shall occur, Lender, in addition to any other rights and remedies which it may have, shall have and may exercise immediately and without demand, any and all rights and remedies granted to a secured party upon default under the UCC, including, without limiting the generality of the foregoing, the right to take possession of the Collateral or any part thereof, and to take such other measures as Lender may deem necessary for the care, protection and preservation of the Collateral. Upon request or demand of Lender following an Event of Default, Borrower shall, at its expense, assemble the Collateral and make it available to Lender at a convenient place acceptable to Lender. Borrower shall pay to Lender on demand any and all expenses, including reasonable legal expenses and attorneys' fees, incurred or paid by Lender in protecting its interest in the Collateral and in enforcing its rights hereunder with respect to the Collateral. To the extent permitted by Legal Requirements, any disposition pursuant to the UCC of so much of the Collateral as may constitute personal property shall be considered commercially reasonable if made pursuant to a public sale which is advertised at least twice in a newspaper in which sheriffs sales are advertised in the county where the Premises is located. To the extent permitted by Legal Requirements, any notice of sale, disposition or other intended action by Lender with respect to the Collateral given to Borrower in accordance with the provisions hereof at least ten (10) days prior to such action, shall constitute reasonable notice to Borrower. The proceeds of any disposition of the Collateral, or any part thereof, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. It is not necessary that the Collateral be present at any disposition thereof Lender shall have no obligation to clean-up or otherwise prepare the Collateral for disposition.
(ii) The mention in a financing statement filed in the records normally pertaining to personal property of any portion of the Property shall not derogate from or impair in any manner the intention of this Security Instrument. Lender hereby declares that all items of Collateral are part of the real property encumbered hereby to the fullest extent permitted by law, regardless of whether any such item is physically attached to the Improvements or whether serial numbers are used for the better identification of certain items. Specifically, the mention in any such financing statement of any items included in the Property shall not be construed to alter, impair or impugn any rights of Lender as determined by this Security Instrument or the priority of Lender's lien upon and security interest in the Property in the event that notice of Lender's priority of interest as to any portion of the Property is required to be filed in accordance with the UCC to be effective against or take priority over the interest of any particular class of persons, including the federal government or any subdivision or instrumentality thereof. No portion of the Collateral constitutes or is the proceeds of"Farm Products", as defined in the UCC.
(iii) If Borrower is at any time a beneficiary under a letter of credit now or hereafter issued in favor of Borrower, Borrower shall promptly notify Lender thereof and, at the request and option of Lender, Borrower shall, pursuant to an agreement in form and substance satisfactory to Lender, either (A) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to Lender of the proceeds of any drawing under the letter of credit or (B) arrange for Lender to become the transferee beneficiary of the letter of credit, with Lender agreeing, in each case, that the proceeds of any drawing under the letter to credit are to be
applied as provided in this Security Instrument.
(iv) Borrower and Lender acknowledge that for the purposes of Article 9 of the UCC, the law of the Commonwealth of Massachusetts shall be the law of the jurisdiction of the bank in which the Central Account is located.
(v) Lender may comply with any applicable Legal Requirements in connection with the disposition of the Collateral, and Lender's compliance therewith will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.
(vi) Lender may sell the Collateral without giving any warranties as to the Collateral. Lender may specifically disclaim any warranties of title, possession, quiet enjoyment or the like. This procedure will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.
(vii) If Lender sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Lender and applied to the indebtedness of Borrower. In the event the purchaser of the Collateral fails to fully pay for the Collateral, Lender may resell the Collateral and Borrower will be credited with the proceeds of such sale.
(b) Borrower hereby irrevocably appoints Lender as its attorney-in-fact, coupled with an interest, to file with the appropriate public office on its behalf any financing or other statements signed only by Lender, as secured party, or, to the extent pem1itted under the UCC, unsigned, in connection with the Collateral covered by this Security Instrument.
Section 18.15. Actions and Proceedings. Lender has the right to appear in and defend any action or proceeding brought with respect to the Property in its own name or, if required by Legal Requirements or, if in Lender's reasonable judgment, it is necessary, in the name and on behalf of Borrower, which Lender believes will adversely affect the Property, the Mortgage or this Security Instrument and to bring any action or proceedings, in its name or in the name and on behalf of Borrower, which Lender, in its discretion, decides should be brought to protect its interest in the Property.
Section 18.16. Usury Laws. This Security Instrument and the Note are subject to the express condition, and it is the expressed intent of the parties, that at no time shall Borrower be obligated or required to pay interest on the principal balance due under the Note at a rate which could subject the holder of the Note to either civil or criminal liability as a result ofbeing in excess of the maximum interest rate which Borrower is permitted by law to contract or agree to pay. If by the terms of this Security Instrument or the Note, Borrower is at any time required or obligated to pay interest on the principal balance due under the Note at a rate in excess of such maximum rate, such rate of interest shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Note. No application to the principal balance of the Note pursuant to this Section 18.16 shall give rise to any requirement to pay any prepayment fee or charge of any kind due hereunder, if any.
Section 18.17. Remedies ofBorrower. In the event that a claim or adjudication is made that Lender has acted unreasonably or unreasonably delayed acting in any case where by law or under the Note, this Security Instrument or the Loan Documents, it has an obligation to act reasonably or promptly, Lender shall not be liable for any monetary damages, and Borrower's remedies shall be limited to injunctive relief or declaratory judgment.
Section 18.18. Offsets, Counterclaims and Defenses. Any assignee of this Security Instrument, the Mortgage, the Assignment and the Note shall take the same free and clear of all offsets, counterclaims or defenses which are unrelated to the Note, the Assignment, the Mortgage or this Security Instrument which Borrower may otherwise have against any assignor of this Security Instrument, the Assignment and the Note and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon this Security Instrument, the Mortgage, the Assignment or the Note and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower.
Section 18.19. No Merger of Rights. If Borrower's and Lender's estates become the same including, without limitation, upon the delivery of a deed by Borrower in lieu of a foreclosure sale, or upon a purchase of the Property by Lender in a foreclosure sale, this Security Instrument, the Mortgage and the liens created hereby shall not be destroyed or terminated by the application of the doctrine of merger of rights and in such event Lender shall continue to have and enjoy all of the rights and privileges of Lender as to the separate estates; and, as a consequence thereof, upon the foreclosure of the liens created by this Security Instrument and the Mortgage, any Leases or subleases then existing and created by Borrower shall not be destroyed or terminated by application of the law of merger or as a result of such foreclosure unless Lender or any purchaser at any such foreclosure sale shall so elect. No act by or on behalf of Lender or any such purchaser shall constitute a termination of any Lease or sublease unless Lender or such purchaser shall give written notice thereof to such lessee or sublessee.
Section 18.20. Restoration of Rights. In case Lender shall have proceeded to enforce any right under this Security Instrument by foreclosure sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then, in every such case, Borrower and Lender shall be restored to their former positions and rights hereunder with respect to the Property subject to the lien hereof.
Section 18.21. Waiver of Statute of Limitations. The pleadings of any statute of limitations as a defense to any and all obligations secured by this Security Instrument are hereby waived to the full extent permitted by Legal Requirements.
Section 18.22. Advances. This Security Instrument and the Mortgage shall cover any and all advances made pursuant to the Loan Documents, rearrangements and renewals of the Debt and all extensions in the time of payment thereof, even though such advances, extensions or renewals be evidenced by new promissory notes or other instruments hereafter executed and irrespective of whether filed or recorded. Likewise, the execution of this Security Instrument shall not impair or affect any other security which may be given to secure the payment of the Debt, and all such additional security shall be considered as cumulative. The taking of additional security, execution of partial releases of the security, or any extension oftime of payment of the Debt shall not diminish the force, effect or lien of this Security Instrument or the Mortgage and shall not affect or impair the liability of Borrower and shall not affect or impair the liability of any maker, surety, or endorser for the payment of the Debt.
Section 18.23. Application of Default Rate Not a Waiver. Application of the Default Rate shall not be deemed to constitute a waiver of any Default or Event of Default or any rights or remedies of Lender under this Security Instrument, any other Loan Document or applicable Legal Requirements, or a consent to any extension of time for the payment or performance of any obligation with respect to which the Default Rate may be invoked.
Section 18.24. Intervening Lien. To the fullest extent permitted by law, any agreement hereafter made pursuant to this Security Instrument shall be superior to the rights of the holder of any intervening lien.
Section 18.25. No Joint Venture or Partnership. Borrower and Lender intend that the relationship created hereunder be solely that of mortgagor and mortgagee or grantor and beneficiary or borrower and lender, as the case may be. Nothing herein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender nor to grant Lender any interest in the Property other than that of mortgagee, beneficiary or lender.
Section 18.26. Time of the Essence. Time shall be ofthe essence in the performance of all obligations of Borrower hereunder.
Section 18.27. Borrower's Obligations Absolute. Borrower acknowledges that Lender and/or certain Affiliates of Lender are engaged in the business of financing, owning, operating, leasing, managing, and brokering real estate and in other business ventures which may be viewed as adverse to or competitive with the business, prospect, profits, operations or condition (financial or otherwise) of Borrower. Except as set forth to the contrary in the Loan Documents, all sums payable by Borrower hereunder shall be paid without notice or demand, counterclaim, set-off, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Borrower hereunder shall in no way be released, discharged, or otherwise affected (except as expressly provided herein) by reason of: (a) any damage to or destruction of or any Taking of the Property or any portion thereof; (b) any restriction or prevention of or interference with any use of the Property or any portion thereof; (c) any title defect or encumbrance or any eviction from the Premises or any portion thereof by title paramount or otherwise; (d) any bankruptcy proceeding relating to Borrower, any General Partner, or any guarantor or indemnitor, or any action taken with respect to this Security Instrument or any other Loan Document by any trustee or receiver of Borrower or any such General Pmtner, guarantor or indemnitor, or by any court, in any such proceeding; (e) any claim which Borrower has or might have against Lender; (f) any default or failure on the part of Lender to perform or comply with any of the terms hereof or of any other agreement with Borrower; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Borrower shall have notice or knowledge of any of the foregoing.
Section 18.28. Publicity. All promotional news releases, publicity or advertising by Manager, Borrower or their respective Affiliates through any media intended to reach the general public shall not refer to the Loan Documents or the financing evidenced by the Loan Documents, or to Lender or to any of its Affiliates without the prior written approval of Lender or such Affiliate, as applicable, in each instance, such approval not to be unreasonably withheld, conditioned or delayed. Lender shall be authorized to provide information relating to the Property, the Loan and matters relating thereto to rating agencies, underwriters, potential securities investors, auditors, regulatory authorities and to any Persons which may be entitled to such information by operation of law and may use basic transaction information (including, without limitation, the name of Borrower, the name and address of the Property and the Loan Amount) in press releases or other marketing materials.
Section 18.29. Securitization Opinions. In the event the Loan is included as an asset of a Securitization by Lender or any of its Affiliates, Borrower shall, within ten (10) Business Days after Lender's written request therefor, at Lender's cost and expense, deliver opinions in form and substance and delivered by counsel reasonably acceptable to Lender and each Rating Agency, as may be reasonably required by Lender and/or the Rating Agency in connection with such securitization. Borrower's failure to deliver the opinions required hereby within such ten (10) Business Day period shall constitute an "Event of Default" hereunder.
Section 18.30. Cooperation with Rating Agencies, etc. Borrower covenants and agrees that in the event the Loan is to be included as an asset of a Securitization, Borrower shall, at Lender's expense, (a) gather any information reasonably required by each Rating Agency in connection with such a Securitization, (b) at Lender's request, meet with representatives of each Rating Agency to discuss the business and operations of the Property, and (c) cooperate with the reasonable requests of each Rating Agency and Lender in connection with all of the foregoing as well as in connection with all other matters and the preparation of any offering documents with respect thereto, including, without limitation, entering into any amendments or modifications to this Security Instrument or to any other Loan Document which may be requested by Lender to conform to Rating Agency or market standards for a Securitization provided that no such modification shall modify (a) the interest rate payable under the Note, (b) the stated maturity of the Note, (c) the amortization ofprincipal under the Note, (d) Section 18.32 hereof, (e) any other material economic term of the Loan or (f) any provision, the effect of which would increase Borrower's obligations or decrease Borrower's rights under the Loan Documents. Borrower acknowledges that the information provided by Borrower to Lender may be incorporated into the offering documents for a Securitization and to the fullest extent permitted, Borrower irrevocably waives all rights, if any, to prohibit such disclosures including, without limitation, any right of privacy. Lender and each Rating Agency shall be entitled to rely on the information supplied by, or on behalf of, Borrower and Borrower indemnifies and holds harmless the Indemnified Parties, their Affiliates and each Person who controls such Persons within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as same may be amended from time to time, for, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, whether incurred or imposed within or outside the judicial process, including, without limitation, reasonable attorneys' fees and disbursements that arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such information or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated in such information or necessary in order to make the statements in such information, or in light of the circumstances under which they were made, not misleading.
Section 18.31. Securitization Financials. Borrower covenants and agrees that, upon Lender's written request therefor in connection with a Securitization, Borrower shall, at Lender's sole cost and expense, promptly deliver (a) audited financial statements and related documentation prepared by an Independent certified public accountant that satisfy securities laws and requirements for use in a public registration statement (which may include up to three (3) years ofhistorical audited financial statements for the Property) and (b) if, at the time one or more Disclosure Documents are being prepared in connection with a Securitization, Lender expects that Borrower alone or Borrower and one or more of its Affiliates collectively, or the Property alone or the Property and any other parcel(s) of real property, together with improvements thereon and personal property related thereto, that is "related", within the meaning of the definition of Significant Obligor, to the Property (a "Related Property") collectively, will be a Significant Obligor, Borrower shall furnish to Lender upon request (i) the selected financial data or, if applicable, net operating income, required under Item 1112(b)(l) of Regulation AB and meeting the requirements thereof, if Lender expects that the principal amount of the Loan, together with any loans made to an Affiliate of Borrower or secured by a Related Property that is included in Securitization with the Loan (a "Related Loan"), as of the cut-off date for such Securitization may, or if the principal amount of the Loan together with any Related Loans as of the cut-off date for such Securitization and at any time during which the Loan and any Related Loans are included in a Securitization does, equal or exceed ten percent (10%) (but less than twenty percent (20%)) of the aggregate principal amount of all mortgage loans included or expected to be included, as applicable, in the Securitization or (ii) the financial statements required under Item 1112(b)(2) of Regulation AB and meeting the requirements thereof, if Lender expects that the principal amount of the Loan together with any Related Loans as of the cut-off date for such Securitization may, or ifthe principal amount of the Loan together with any Related Loans as of the cut-off date for such Securitization and at any time during which the Loan and any Related Loans are included in a Securitization does, equal or exceed twenty percent (20%) of the aggregate principal amount of all mortgage loans included or expected to be included, as applicable, in the Securitization. Such financial data or financial statements shall be furnished to Lender within ten (10) Business Days after notice from Lender in connection with the preparation of Disclosure Documents for the Securitization and, with respect to the data or financial statements required pursuant to clause (b) hereof, (A) not later than thirty (30) days after the end of each fiscal quarter of Borrower and (B) not later than seventy-five (75) days after the end of each Fiscal Year; provided, however, that Borrower shall not be obligated to furnish financial data or financial statements pursuant to clauses (A) or (B) of this sentence with respect to any period for which a filing pursuant to the Securities Exchange Act of 1934 in connection with or relating to the Securitization is not required.
Section 18.32. Exculpation. Notwithstanding anything herein or in any other Loan Document to the contrary, except as otherwise set forth in this Section 18.32 to the contrary, Lender shall not enforce the liability and obligation of Borrower or (a) if Borrower is a partnership, its constituent partners, (b) if Borrower is a trust, its beneficiaries, (c) if Borrower is a corporation, any of its shareholders, or (d) if Borrower is a limited liability company, any of its members (the Persons described in the foregoing clauses (a)- (d), as the case may be, are hereinafter referred to as the "Partners") to perform and observe the obligations contained in this Security Instrument or any of the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against Borrower or the Partners, except that Lender may bring a foreclosure action, action for specific performance against Borrower, or other appropriate action or proceeding (including, without limitation, an action to obtain a deficiency judgment) solely for the purpose of enabling Lender to realize upon (i) Borrower's interest in the Property, (ii) the Rent to the extent (x) received by Borrower (or received by its Partners) after the occurrence of an Event of Default, or (y) distributed to Borrower (or its Partners, but only to the extent received by its Partners) after the occurrence and during the continuance of an Event of Default (all Rent covered by clauses (x) and (y) being hereinafter referred to as the "Recourse Distributions") and (iii) any other collateral given to Lender under the Loan Documents (the collateral described in the foregoing clauses (i) - (iii) is hereinafter referred to as the "Default Collateral"); provided, however, that any judgment in any such action or proceeding shall be enforceable against Borrower and the Partners only to the extent of any such Default Collateral. The provisions of this Section shall not, however, (a) impair the validity of the Debt evidenced by the Note or in any way affect or impair the lien of this Security Instrument or any of the other Loan Documents or the right of Lender to foreclose this Security Instrument following the occurrence of an Event of Default; (b) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under this Security Instrument; (c) affect the validity or enforceability of the Note, this Security Instrument, or any of the other Loan Documents, or impair the right of Lender to seek a personal judgment against Guarantor; (d) impair the right of Lender to obtain the appointment of a receiver; (e) impair the enforcement of the Assignment; (f) impair the right of Lender to bring suit for a monetary judgment with respect to actual damages incurred by Lender resulting from fraud or material misrepresentation by Borrower, Guarantor or any Affiliate of Borrower or Guarantor in connection with this Security Instrument, the Note or the other Loan Documents, and the foregoing provisions shall not modify, diminish or discharge the liability of Borrower or the Partners with respect to same; (g) impair the right of Lender to bring suit for a monetary judgment to obtain the Recourse Distributions received by Borrower including, without limitation, the right to bring suit for a monetary judgment to proceed against any Partner, to the extent of any such Recourse Distributions theretofore distributed to and received by such Partner, and the foregoing provisions shall not modify, diminish or discharge the liability of Borrower or the Partners with respect to same; (h) impair the right of Lender to bring suit for a monetary judgment with respect to actual damages incurred by Lender resulting from Borrower's misappropriation of tenant security deposits or Rent, and the foregoing provisions shall not modify, diminish or discharge the liability of Borrower or the Partners with respect to same; (i) impair the right of Lender to obtain Loss Proceeds due to Lender pursuant to this Security Instrument; G) impair the right of Lender to enforce the provisions of Sections 2.02(g) (other than the provisions of clauses (vii) and (xix) thereof to the extent such clauses include any covenant with respect to remaining adequately capitalized or Solvent subsequent to the Closing Date (taking into account the transactions which occur on the Closing Date)), 16.01 or 16.02, inclusive of this Security Instrument, even after repayment in full by Borrower of the Debt or to bring suit for a monetary judgment against Borrower or the Partners with respect to actual damages incurred by Lender resulting from any obligation set forth in said Sections; (k) prevent or in any way hinder Lender from exercising, or constitute a defense, or counterclaim, or other basis for relief in respect of the exercise of, any other remedy against any or all of the collateral securing the Note as provided in the Loan Documents; (1) impair the right of Lender to bring suit for a monetary judgment with respect to any misapplication or conversion of Loss Proceeds, and the foregoing provisions shall not modify, diminish or discharge the liability of Borrower or the Partners with respect to same; (m) impair the right of Lender to sue for, seek or demand a deficiency judgment against Borrower solely for the purpose of foreclosing the Property or any part thereof, or realizing upon the Default Collateral; provided, however, that any such deficiency judgment referred to in this clause (m) shall be enforceable against Borrower only to the extent of any of the Default Collateral; (n) impair the ability of Lender to bring suit for a monetary judgment with respect to actual damages incurred by Lender resulting from damage, arson or waste to or of the Property; (o) impair the right of Lender to bring a suit for a monetary judgment with respect to actual damages incurred by Lender resulting from the exercise of any right or remedy under any federal, state or local forfeiture laws resulting in the loss of the lien of this Security Instrument, or the priority thereof, against the Property; (p) be deemed a waiver of any right which Lender may have under Sections 506(a), 506(b), 11ll(b) or any other provision of the Bankruptcy Code to file a claim for the full amount of the Debt or to require that all collateral shall continue to secure all of the Debt; (q) impair the right of Lender to bring suit for monetary judgment with respect to actual damages incurred by Lender resulting from any losses resulting from any claims, actions or proceedings initiated by Borrower (or any Affiliate of Borrower) alleging that the relationship of Borrower and Lender is that of joint venturers, partners, tenants in common, joint tenants or any relationship other than that of debtor and creditor; or (r) impair the right of Lender to bring suit for a monetary judgment with respect to actual damages incurred by Lender resulting from a Transfer in violation of the provisions of Article IX hereof. The provisions of this Section 18.32 shall be inapplicable to Borrower if (a) any proceeding, action, petition or filing under the Bankruptcy Code, or any similar state or federal law now or hereafter in effect relating to bankruptcy, reorganization or insolvency, or the arrangement or adjustment of debts, shall be filed by, consented to or acquiesced in by or with respect to Borrower, or if Borrower shall institute any proceeding for its dissolution or liquidation, or shall make an assignment for the benefit of creditors or (b) Lender obtains a judgment that Borrower or any Affiliate of Borrower has, in bad faith, contested or in any material way interfered with, directly or indirectly (collectively, a "Contest"), any foreclosure action, UCC sale or other material remedy exercised by Lender upon the occurrence of any Event of Default whether by making any motion, bringing any counterclaim, claiming any defense, seeking any injunction or other restraint, commencing any action, or otherwise, in which event Lender shall have recourse against all of the assets of Borrower including, without limitation, any right, title and interest of Borrower in and to the Property, any partnership interests in Borrower and any Recourse Distributions received by the Partners of Borrower (but excluding the other assets of such Partners to the extent Lender would not have had recourse thereto other than in accordance with the provisions of this Section 18.32).
Section 18.33. Mezzanine Loan Option. (a) Lender shall have the right at Lender's sole cost and expense at any time to divide the Loan into two or more (but not more than three) parts (the "Mezzanine Option"): a "mortgage loan" and one or more "mezzanine loans." The principal amount ofthe mortgage loan plus the principal amount of the mezzanine loan(s) shall equal the outstanding principal balance of the Loan immediately prior to the creation of the mortgage loan and the mezzanine loan(s). In effectuating the foregoing, Lender will make one or more loans to one or more entities that will be the direct or indirect equity owner(s) of Borrower as described in Section 18.33(b) (collectively, the "Mezzanine Borrower"). The Mezzanine Borrower will contribute the amount of the mezzanine loan(s) to Borrower (in its capacity as borrower under the mortgage loan, "mortgage borrower") and the mortgage borrower will apply the contribution to pay down the Loan to the mortgage loan amount. The mortgage loan and the mezzanine loan(s) will be on the same terms and subject to the same conditions set forth in the Loan Documents except as follows. The mezzanine loan(s) shall be made pursuant to Lender's standard mezzanine loan documents.
(b) Lender shall have the right to establish different interest rates and debt service payments for the mortgage loan and the mezzanine loan(s) and to require the payment of the mortgage loan and the mezzanine loan(s) in such order of priority as may be designated by Lender; provided, that (i) the total loan amounts for the mortgage loan and the mezzanine loan(s) shall equal the amount of the Loan immediately prior to the creation of the mortgage loan and the mezzanine loan(s), (ii) the weighted average interest rate of the mortgage loan and the mezzanine loan(s) shall on the date created equal the interest rate which was applicable to the Loan immediately prior to creation of the mortgage loan and mezzanine loan(s) and (iii) the debt service payments on the mortgage loan note and the mezzanine loan note(s) shall on the date created equal the debt service payment which was due under the Loan immediately prior to creation of a mortgage loan and a mezzanine loan(s).
(c) The Mezzanine Borrower shall be a special purpose, bankruptcy remote entity pursuant to applicable Rating Agency criteria and shall own directly or indirectly one hundred percent (100%) of the mortgage borrower. The security for the mezzanine loan(s) shall be a pledge of one hundred percent (100%) of the direct and indirect ownership interests in the mortgage borrower.
(d) Borrower shall cooperate with all reasonable requests of Lender in order to convert the Loan into a mortgage loan and one or more mezzanine loans and shall execute and deliver such documents as shall reasonably be required by Lender in connection therewith, including, without limitation, the delivery of non-consolidation, enforceability, authorization and execution opinions and an "Eagle 9" or "UCC plus" (or equivalent) UCC insurance policy and the modification of organizational documents and loan documents and the transfer of the membership interest in Borrower to the Mezzanine Borrower.
It shall be an Event of Default if Borrower fails to comply with any of the terms, covenants or conditions of this Section 18.33 after expiration of fifteen (15) Business Days notice thereof.
Section 18.34. Component Notes. Lender, without in any way limiting Lender's other rights hereunder, in its sole and absolute discretion, shall have the right at any time to require Borrower to execute and deliver "component" notes (including senior and junior notes), which notes may be paid in such order of priority as may be designated by Lender, provided that (a) the aggregate principal amount of such "component" notes shall equal the outstanding principal balance ofthe Loan immediately prior to the creation of such "component" notes, (b) the weighted average interest rate of all such "component" notes shall on the date created equal the interest rate which was applicable to the Loan immediately prior to the creation of such "component" notes, (c) the debt service payments on all such "component" notes shall on the date created equal the debt service payment which was due under the Loan immediately prior to the creation of such component notes and (d) the other terms and provisions of each of the "component" notes shall be identical in substance and substantially similar in·form to the Loan Documents. Borrower shall cooperate with all reasonable requests of Lender in order to establish the "component" notes and shall execute and deliver such documents as shall reasonably be required by Lender in connection therewith, all in form and substance reasonably satisfactory to Lender, including, without limitation, the severance of security documents if requested. It shall be an Event of Default if Borrower fails to comply with any of the terms, covenants or conditions of this Section 18.34 after the expiration of fifteen (15) Business Days after notice thereof.
Section 18.35. Intentionally Omitted.
Section 18.36. Co-Lenders. (a) Borrower hereby acknowledges and aggress that notwithstanding the fact that the Loan may be serviced by a Servicer appointed by Lender, prior to a Securitization, all requests for approval and consents hereunder and in every instance in which Lender's consent or approval is required, Borrower shall be required to obtain the consent and approval of all ofthe Persons which constitute Lender (each hereinafter referred to as a "Co-Lender"). All copies of documents, reports, requests and other delivery obligations of Borrower required hereunder shall be delivered by Borrower to each Co-Lender.
(b) Following the Closing Date (i) the liabilities of Lender shall be several and not joint, (ii) neither Co-Lender shall be responsible for the obligations of the other Co-Lender, and (iii) each Co-Lender shall be liable to Borrower only for their respective share of the Loan (based upon the percentage of the Loan which was advanced by each Co-Lender). Notwithstanding anything to the contrary contained herein, all indemnities by Borrower and obligations for costs, expenses, actual damages or advances set forth herein shall run to and benefit each Co-Lender in accordance with its share ofthe Loan (based upon the percentage of the Loan which was advanced by each Co-Lender).
(c) Each Co-Lender agrees that it has, independently and without reliance on the other Co-Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and its Affiliates and decision to enter into the Loan and the Loan Documents and that it will, independently and without reliance upon the other Co-Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Security Instrument or under any other Loan Document.
* * * * *
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Security
Instrument the day and year first above written.
Borrower's Organizational
Identification Number: 4266060
Loan Agreement
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Security
Instrument the day and year first above written.
Borrower's Organizational
Identification Number: 4266060
Loan Agreement
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Security
Instrument the day and year first above written.
Borrower's Organizational
Identification Number: 4266060
Loan Agreement
EXHIBIT A
Legal Description of Premises
Real property in the County of Suffolk,Commonwealth of Massachusetts, described as follows:
Parcel 1
A parcel of land in the City of Boston,Central District, County of Suffolk, bounded on the East side by Lincoln Street and the John F. Fitzgerald Expressway, bounded on the South side by Essex Street, bounded on the West side by Kingston Street and bounded on the North side by Bedford Street, shown on a plan entitled, "One Lincoln Street, Plan of Land in Boston, Massachusetts, Central District, Suffolk County, Scale 1:240, 6 April 2001", drawing number 255.77M,prepared by Gunther Engineering, Inc., recorded in Book 26348,Page 341.
Beginning at the southeasterly corner of said parcel, said corner being the intersection of the westerly side of Lincoln Street and the northerly side of Essex Street, being also on the northwesterly location line of the John F. Fitzgerald Expressway; thence running
S 70-15-31W 61.42 feet by a northwesterly location line of said John F. Fitzgerald Expressway and by an area of said Expressway abandoned and discontinued and again by said location line; thence
S 19-44-29 E 2.08 feet; thence
S 67-17-17 W 42.59 feet to the northerly side of Essex Street, the last two courses being by a northwesterly location line of said John F. Fitzgerald Expressway; thence
N 85-06-13 W 43.41 feet by a northwesterly location line of the John F. Fitzgerald Expressway and by the northerly side of Essex Street to the easterly side of discontinued Columbia Street; thence
N 85-05-34 W 30.00 feet by the southerly end of the discontinued Columbia Street; thence
N 81-11-30 W 59.81 feet to land now or formerly of the Kingston 88 Limited Partnership, the last two courses being along the northerly side of Essex Street; thence
N-03-52-59 E 51.94 feet; thence
N 85-48-13 W 0.50 feet; thence
N 03-52-59 E 16.22 feet; thence
N 86-51-07 W 14.12 feet; thence
S 03-08-53 W 0.83 feet; thence
N 86-51-07 W 107.51 feet to the easterly side of Kingston Street, the last six courses being by said land of Kingston 88 Limited Partnership; thence
N 06-31-51 W 0.85 feet; thence
N 06-11-30 W 53.07; feet
N 07-04-10 W 77.15 feet; thence
N 06-40-36 W 10.51feet to a point of tangency, the last three courses being along the easterly side of
Kingston Street; thence
Northerly 86.56 feet by a curve to the right of 50.00 foot radius to a point of tangency on the southerly side of Bedford Street; thence
S 87-29-10 E 163.31 feet along the southerly side of Bedford Street to the West side of discontinued
Columbia Street; thence
S 87-29-10 E 15.01 feet along the northerly end of discontinued Columbia Street to the centerline of said street; thence
S 04-37-02 W 110.71 feet by the centerline of said Columbia Street; thence
S 85-22-58 E 15.00 feet to land now or formerly of Patrick Callahan; thence
S 84-48-30 E 40.19 feet; thence
N 05-11-30 E 0.17 feet; thence
S 84-48-30 E 22.13 feet; thence
N 06-11-31 E 0.33 feet to said land of Lincoln National Life Insurance Company, the last four courses being by said land of Patrick Callahan; thence
N 06-11-31 E 7.99 feet; thence
S 83-43-56 E 13.60 feet to land now or formerly of Henry C. Brookings, the last two courses being by said land of Lincoln National Life Insurance Company; thence
S 06-16-04 W 0.50 feet; thence
S 83-43-56 E 64.80 feet to the westerly side of Lincoln Street, the last two courses being by said land of lincoln National life Insurance Company; thence
S 06-45-32 W 121.75 feet along the westerly side of lincoln Street and along the northwesterly location line of said John F. Fitzgerald Expressway to the point of beginning.
Containing 70,906 more or less square feet, or 1.628 more or less acres, or 6,587 square meters, more or less.
Together with the benefit of the following:
1.) Easement Agreement from Kingston Bedford Joint Venture to Kingston LLC dated November 10, 2000
recorded in Book 25552, Page 94; as affected by Joinder and Subordinaion of Mortgage recorded in Book
25552 Page 93; as further affected by Confirmatory Easement Agreement dated November 10, 2000 recorded in Book 255901 Page 2; as further affected by an Easement Agreement and Amendment to Existing Easement Agreement1 dated March 31, 2004 by and between First States Investors 228, LLC and Lafayette Lofts LLC, recorded on May 18, 2004 in Book 34556, Page 179.
2.) Easement Agreement to Kingston Bedford Joint Venture LLC from 99 Bedford Limited Partnership dated as July 171 2000 and recorded In Book 25589, Page 325; as affected by First Amendment of Easement Agreement dated as of September 4, 2002 and recorded on December 5, 2002 In Book 30018, Page 268.
3.) Pedestrian Easement by and between 99 Bedford Limited Partnership and Kingston Bedford Joint
Venture LLC dated as of September 4 1 2002 and recorded on December 5, 2002 In Book 30018 1 Page
312.
4.) Service Line Easement from 99 Bedford Limited Partnership and Verlzon New England, Inc. to
Kingston Bedford Joint Venture LLC dated as of September 41 2002 and recorded on December 5, 2002 in
Book 30018, Page 298.
Note: The easements set forth In Items 3 and 4 above are located as shown on a plan entitled "One lincoln Street Easement Plan of Land in Boston, Massachusetts dated July 30 1 2002 by Gunther Engineering,Inc. Drawing No. 255.76M and recorded with the Suffolk County Registry of Deeds on December 5, 2002 in Plan Book 30018, Page 298.
Parcel 2
A parcel of land in the City of Boston, Boston Proper, County of Suffolk consisting of a portion of the John F. Fitzgerald
Expressway Surface Road as altered and laid out April 12, 1955 as Layout No. 4287 and on October 18, 1955 as Layout 4359, and abandoned on June 14, 2000 as Layout 7601as recorded In Book 25464,Page 291 and shown on a plan entitled "The Commonwealth of Massachusetts, Plan of Road in the City of Boston, Suffolk County, Altered and Laid Out as a State Highway by the Department of Highways, Scale 20 feet to the inch, Layout No. 7601, Plan prepared by Gunther Engineering, Inc., Drawing No. 255.57M" dated June 9, 2000, hereinafter referred to as Plan 3, said parcel being located on the northerly side of John F. Fitzgerald Expressway and being further described as follows:
That portion of the following described parcel of land bounded by, and extending upwards from, a lower horizontal plane at elevation 16.00 Boston City Base;
Beginning at a point bearingS 70-15-31 W 9.32 feet from the intersection of the westerly sideline of
Lincoln Street and the northwesterly location line of said John F. Fitzgerald Expressway; thence
S 49-37-02 W 19.88 feet; thence
N 40-22-58 W 2.50 feet; thence
S 49-37-02 W 8.21 feet; thence
N 85-22-58 W 18.33 feet to the former location line of said Layout 4359 and Layout 4287, the last four courses being by the remaining portion of said John F. Fitzgerald Expressway; thence
N 70-15-31 E 43.87 feet by said former location line of Layout 4359 and Layout 4287 to the point of beginning.
Containing 180 square feet, more or less.
EXHIBIT B
SUMMARY OF RESERVES
|
| | |
Reserve Items | Initial Deposit Amount | Monthly Installment |
| Amount |
Basic Carrying Costs Taxes Insurance Premiums |
$1,700,989.84 $0 |
TBD TBD |
Initial Engineering Deposits Immediate Repairs Environmental Remediation |
$190,000 $0 | Not Applicable |
Recurring Replacement Reserve Monthly Installment | Not Applicable | $13,132 |
Underwritten Rent | $0 | Not Applicable |
EXHIBIT C
Property:___________________
Location:___________________
Year: _____________________
Cash Flow Statement for Month of:__________________________
Current Year to
Month Date
___________________________________________________________________________________________________
REVENUE
Net Rental Revenue
Other Revenue
Effective Gross Income __________ ______________
OPERATING EXPENSES
Common Area Maintenance Payroll
Administration
Leasing
Service
Clean & Decorate
Utilities
Repairs & Maintenance
Taxes . Insurance Management Fees Other
Total Operating Expenses __________ ______________
Net Operating Income ___________ _______________
RECURRING EXPENSES
To Include Expenses for: Carpet Replacement, Appliance Replacement, HVAC/Water Heater Replacement; Miniblinds/Drapes/Ceiling Fans:
NON-RECURRING EXPENSES
To Include Capital Expenses for: Playground, Major Signage, Lawns Trees/Shrubs, Paving/Parking, Roof Replacement, Carpentry/Siding Balconies, Exterior Paint, Major Concrete/Sidewalks, Foundations, Major Exterior, Boiler Replacement, Major HVAC Replacement, Plumbing Replace, Electrical Replace, Other Major, Fire & Storm, Ins. Loss Recovery:
Net Cash Flow ___________ _______________
Certified By: ________________
Name: _______________
Title: ________________
Management Company: __________________
EXHIBIT D
Required Engineering Work
Borrower shall complete the work set forth in that certain work letter agreement dated as of the date hereof between First States Investors 228, LLC, Borrower's predecessor in interest, and the tenant under the State Street Lease, on or prior to June 30, 2007; provided, however, in the event that the work cannot be completed within such time period due to the occurrence of a Force Majeure, Borrower shall be entitled to an extension of up to two (2) months for the completion of such work.
EXHIBIT E
Form of Direction Letter
[Letterhead of Landlord]
[Name and Address of tenant]
Re: [Address of Premises] Dear tenant:
You are hereby directed to make all future payments of rent and other sums due to
Landlord under the Lease payable as follows:
Payable To: [as currently being paid]
Address:____________________
____________________
____________________
Please take particular care in making the check payable only to the above-mentioned names because only checks made payable to the referenced names will be credited against sums due by you to landlord. Until otherwise advised in writing by Landlord and the above-mentioned bank (or its successor), you should continue to make your payments for rent and other sums as directed by the terms of this letter.
Thank you in advance for your cooperation with this change in payment procedures.
By: ___________________
___________________
EXHIBIT F
Underwritten Rent
Not Applicable
EXHIBIT G
Disclosure Schedule
None
INDEX
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ARTICLE I: DEFINITIONS | 1 |
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| | | |
Section 1.01. | Certain Definitions | 1 |
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ARTICLE II: REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER | 22 |
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Section 2.01. | Payment of Debt | 22 |
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Section 2.02. | Representations, Warranties and Covenants of Borrower | 22 |
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Section 2.03. | Further Acts, etc | 33 |
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Section 2.04. | Recording of Security Instrument, etc | 33 |
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Section 2.05. | Representations, Warranties and Covenants Relating to the Property | 34 |
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Section 2.06. | Removal of Lien | 38 |
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Section 2.07. | Cost of Defending and Upholding this Security Instrument Lien | 39 |
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Section 2.08. | Use of the Property | 39 |
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Section 2.09. | Financial Reports | 39 |
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Section 2.10. | Litigation | 42 |
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Section 2.11. | Updates of Representations | 42 |
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ARTICLE III: INSURANCE AND CASUALTY RESTORATION | 43 |
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Section 3.01. | Insurance Coverage | 43 |
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Section 3.02. | Policy Terms | 43 |
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Section 3.03. | Assignment of Policies | 45 |
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Section 3.04. | Casualty Restoration | 47 |
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Section 3.05. | Compliance with Insurance Requirements | 48 |
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Section 3.06. | Event of Default During Restoration | 52 |
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Section 3.07. | Application of Proceeds to Debt Reduction | 53 |
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ARTICLE IV: IMPOSITIONS | 53 |
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Section 4.01. | Payment of Impositions, Utilities and Taxes, Etc | 53 |
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Section 4.02. | Deduction from Value | 54 |
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Section 4.03. | No Joint Assessment | 54 |
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Section 4.04. | Right to Contest | 55 |
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Section 4.05. | No Credits on Account of the Debt | 55 |
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Section 4.06. | Documentary Stamps | 56 |
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ARTICLE V: CENTRAL CASH MANAGEMENT | 56 |
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Section 5.01. | Cash Flow | 56 |
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Section 5.02. | Establishment of Accounts | 57 |
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Section 5.03. | Permitted Investments | 57 |
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Section 5.04. | Servicing Fees | 58 |
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Section 5.05. | Monthly Funding of Sub-Accounts and EscrowAccounts | 58 |
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Section 5.06. | Payment of Basic Carrying Costs | 59 |
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Section 5.07. | Reletting Reserve Escrow Account | 60 |
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Section 5.08. | Recurring Replacement Reserve Escrow Account | 61 |
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Section 5.09. | Intentionally Omitted | 62 |
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Section 5.10. | Intentionally Omitted | 62 |
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Section 5.11. | Intentionally Omitted | 62 |
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Section 5.12. | Performance of Engineering Work | 62 |
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Section 5.13. | Loss Proceeds | 62 |
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Section 5.14. | Underwritten Rent Escrow Account | 64 |
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ARTICLE VI: CONDEMNATION | 64 |
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Section 6.01. | Condemnation | 64 |
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ARTICLE VII: LEASES AND RENTS | 66 |
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Section 7.01. | Assignment | 66 |
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Section 7.02. | Management of Property | 67 |
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ARTICLE VIII: MAINTENANCE AND REPAIR | 69 |
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Section 8.01. | Maintenance and Repair of the Property; Alterations; Replacement of Equipment | 69 |
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ARTICLE IX: TRANSFER OR ENCUMBRANCE OF THE PROPERTY | 72 |
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Section 9.01. | Other Encumbrances | 72 |
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Section 9.02. | No Transfer | 72 |
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Section 9.03. | Due on Sale | 72 |
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Section 9.04. | Permitted Transfer | 73 |
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ARTICLE X: CERTIFICATES | 74 |
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Section 10.01. | Estoppel Certificates | 74 |
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ARTICLE XI: NOTICES | 75 |
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Section 11.01. | Notices | 75 |
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ARTICLE XII: INDEMNIFICATION | 76 |
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Section 12.01. | Indemnification Covering Property | 76 |
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ARTICLE XIII: DEFAULTS | 78 |
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Section 13.01. | Events of Default | 78 |
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Section 13.02. | Remedies | 80 |
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Section 13.03. | Payment of Debt After Default | 82 |
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Section 13.04. | Possession of the Property | 83 |
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Section 13.05. | Interest After Default | 83 |
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Section 13.06. | Borrower's Actions After Default | 84 |
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Section 13.07. | Control by Lender After Default | 84 |
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Section 13.08. | Right to Cure Defaults | 84 |
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Section 13.09. | Late Payment Charge | 84 |
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Section 13.10. | Recovery of Sums Required to Be Paid | 85 |
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Section 13.11. | Marshalling and Other Matters | 85 |
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Section 13.12. | Tax Reduction Proceedings | 85 |
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Section 13.13. | General Provisions Regarding Remedies | 85 |
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ARTICLE XIV: COMPLIANCE WITH REQUIREMENTS | 86 |
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Section 14.01. | Compliance with Legal Requirements | 86 |
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Section 14.02. | Compliance with Recorded Documents; No Future Grants | 87 |
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ARTICLE XV: DEFEASANCE; PREPAYMENT | 87 |
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Section 15.01. | Defeasance; Prepayment | 87 |
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ARTICLE XVI: ENVIRONMENTAL COMPLIANCE | 90 |
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Section 16.01. | Covenants, Representations and Warranties | 90 |
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Section 16.02. | Environmental Indemnification | 92 |
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ARTICLE XVII: ASSIGNMENTS | 94 |
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Section 17.01. | Participations and Assignments | 94 |
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ARTICLE XVIII: MISCELLANEOUS | 94 |
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Section 18.01. | Right of Entry | 94 |
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Section 18.02. | Cumulative Rights | 94 |
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Section 18.03. | Liability | 94 |
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Section 18.04. | Exhibits Incorporated | 94 |
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Section 18.05. | Severable Provisions | 94 |
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Section 18.06. | Duplicate Originals | 94 |
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Section 18.07. | No Oral Change | 94 |
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Section 18.08. | Waiver of Counterclaim, Etc | 95 |
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Section 18.09. | Headings; Construction of Documents; etc | 95 |
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Section 18.10. | Sole Discretion of Lender | 95 |
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Section 18.11. | Waiver of Notice | 95 |
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Section 18.12. | Covenants Run with the Land | 95 |
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Section 18.13. | Applicable Law | 95 |
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Section 18.14. | Security Agreement | 96 |
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Section 18.15. | Actions and Proceedings | 97 |
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Section 18.16. | Usury Laws | 97 |
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Section 18.17. | Remedies of Borrower | 98 |
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Section 18.18. | Offsets, Counterclaims and Defenses | 98 |
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Section 18.19. | No Merger of Rights | 98 |
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Section 18.20. | Restoration of Rights | 98 |
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Section 18.21. | Waiver of Statute of Limitations | 98 |
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Section 18.22. | Advances | 98 |
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Section 18.23. | Application of Default Rate Not a Waiver | 99 |
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Section 18.24. | Intervening Lien | 99 |
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Section 18.25. | No Joint Venture or Partnership | 99 |
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Section 18.26. | Time of the Essence | 99 |
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Section 18.27. | Borrower's Obligations Absolute | 99 |
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Section 18.28. | Publicity | 100 |
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Section 18.29. | Securitization Opinions | 100 |
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Section 18.30. | Cooperation with Rating Agencies, etc | 100 |
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Section 18.31. | Securitization Financials | 101 |
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Section 18.32. | Exculpation | 102 |
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Section 18.33. | Mezzanine Loan Option | 103 |
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Section 18.34. | Component Notes | 104 |
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Section 18.35. | Reallocation of Loan Amounts | 105 |
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Section 18.36. | Co-Lenders | 105 |
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EXHIBITS
Exhibit A: Legal Description of Premises
Exhibit B: Summary Of Reserves
Exhibit C: Cash Flow Statement
Exhibit D: Required Engineering Work
Exhibit E: Form of Direction Letter
Exhibit F: Underwritten Rent
Exhibit G: Disclosure Schedule
Exhibit 10.13
INDEMNIFICATION AGREEMENT
Indemnity Agreement (this “Agreement”), dated as of the 20th day of March, 2015 made by ETRE Property A-1, L.P., a Delaware limited liability partnership (“Indemnitor”).
BACKGROUND
A. Lincoln Street Property Owner, LLC (the “Owner”) is the owner of a fee estate in a 36-story office tower, located at One Lincoln Street, Boston Massachusetts also known as One State Street Financial Center, the fixtures, equipment and other personal property attached or appurtenant to the building, if any, and all other appurtenances and easements to the building, together with all other assets, rights and entitlements comprising the “Property” (as defined in the Loan Agreement referenced below);
B. Margaret Kestenbaum and Joel Kestenbaum (each individually a “Guarantor” and collectively the “Guarantors”) are each the owner of an indirect interest in Lincoln Street Holdings, LLC (“Holdings”), which is an indirect owner of Owner;
C. In order to induce Wachovia Bank, N.A. and UBS Real Estate Investments, Inc. (collectively the “Lenders”) to make a mortgage loan (the “Loan”) to Owner in the amount of $775,000,000.00 pursuant to that certain Loan and Security Agreement, dated as of December 27, 2006 between the Lenders and Owner, Guarantors executed and delivered that certain Guaranty dated as of December 27, 2006, providing for a guaranty by Guarantors of certain non-recourse carve-out obligations (as may be modified, amended and restated from time to time, the “Guaranty”), and
D. In order to satisfy a closing condition to the obligation of Holdings to consummate the transaction, under that certain Contribution Agreement dated February __, 2015 by and among Holdings, Series A-1 of ETRE REIT, LLC (“A-1 Series”) and Lincoln Street Mezz, LLC (as amended, modified, or supplemented from time to time, the “Contribution Agreement”), the Indemnitor has agreed to deliver this Agreement, which sets out the Indemnitor’s obligation to indemnify the Guarantors with respect to obligations, or payments to satisfy obligations, under or pursuant to the Guaranty and any reasonable, documented, out-of-pocket loss, cost or expense (including, without limitation, reasonable attorneys’ fees and enforcement costs, whether such attorneys represent a Lender, either Guarantor or its affiliates) incurred in connection with the Guaranty (any and all such obligations being herein referred to as the “Obligations”).
TERMS OF AGREEMENT
The Parties intending to be legally bound hereby agree as follows:
1. Defined Terms. Unless otherwise stated herein, all capitalized terms used in this Agreement shall have the meanings specified in the Contribution Agreement.
2. Indemnity.
(a) Except as provided in Section 2(b) below, the Indemnitor agrees to indemnify the Guarantor if the Guarantor becomes obligated to satisfy any of the Obligations arising from and after the Closing Date or if the Guarantor makes payments in satisfaction of such Obligations arising from and after the Closing Date.
(b) Notwithstanding anything contained herein to the contrary, the Indemnity in Section 2(a) shall not cover any Obligation that first accrues (i) prior to the Closing Date or (ii) after the Closing Date and is a Guarantor Culpable Loss (as defined below). “Guarantor Culpable Loss” means any Obligation to the extent that such Obligation that arises as a direct consequence of (y) the fraud, gross negligence, intentional misconduct or misappropriation of funds by or of any of the individuals comprising the Guarantor, an Affiliate (excluding Indemnitor and any subsidiary thereof) of either or both of the individuals comprising Guarantor, or an officer or director of an Affiliate (excluding Indemnitor and any subsidiary thereof) of the individuals comprising the Guarantor (the individuals comprising the Guarantor and such Affiliates, officers and directors are each a “Guarantor Person”) or (z) the intentional breach of the terms of this Agreement or the OP Agreement by any Guarantor Person, unless the Series A-1 of ETRE REIT LLC expressly approved or authorized in writing the action or omission giving rise to the Obligation.
(c) Any and all amounts due under this Agreement shall be payable immediately upon demand and in immediately available funds.
(d) This is a continuing agreement covering all present and future Losses and shall include the Obligations revived after being satisfied. The parties shall use good faith efforts to cooperate in the defense of any claims under the Guaranty.
(e) If either Guarantor receives notice of a claim (“Notice of Claim”) with respect to any Obligations, the Guarantor shall provide written notice to the Indemnitor within ten (10) business days of receipt of the Notice of Claim; provided, however, that the failure of a party to so notify the Indemnitor shall not limit or otherwise affect the right of such Guarantor to be indemnified pursuant hereto, except to the extent such delay shall materially prejudice any defense of such claim. The Indemnitor shall have fifteen (15) days after receipt of a Notice of Claim to undertake to conduct and control, with counsel reasonably acceptable to the applicable Guarantor, at the Indemnitor’s sole expense, the settlement or defense of such claim. If the Indemnitor does not notify the Guarantor within fifteen (15) days after receipt of a Notice of Claim that the Indemnitor elects to assume control of the noticed claim, then the Guarantor shall have the right to contest, settle or compromise the claim in the exercise of the Guarantor’s reasonable discretion, and the Indemnitor shall, upon demand from the Indemnitor, promptly pay to the Guarantor the reasonable amount of any Obligations.
3. Remedies. In the event that Indemnitor fails to timely satisfy any obligation under this Agreement to pay Losses within five (5) business days of written demand therefor, each Guarantor shall have any and all rights and remedies available at law or in equity to enforce its rights hereunder.
4. No Discharge. No obligation of Indemnitor hereunder shall be discharged, impaired or affected by (i) the power or authority or lack thereof of any Guarantor to enter into the Guaranty, (ii) the validity or invalidity of the Guaranty, (iii) the waiver, consent, extension, forbearance or granting of any indulgence by, or on behalf of, any Guarantor to the Indemnitor, (iv) any offsets, counterclaims or defenses that any party hereunder may or might have to its undertakings, liabilities and obligations thereunder or hereunder, or (v) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of Indemnitor, all of which are hereby waived by Indemnitor.
5. Effective Date. This Agreement is effective as of the date first above written.
6. Assignment. Indemnitor may not assign its rights and obligations hereunder without the prior written consent of the Guarantors, which consent may be withheld or denied for any reason or no reason.
7. Further Assurances. Indemnitor agrees to execute, acknowledge, deliver, file, record and publish such further instruments and documents, and take any and all such further actions as may be required by law, or as may be reasonably required to carry out the intent and purpose of this Agreement.
8. Successors and Assigns. This Agreement shall be binding upon the Indemnitor and its executors, administrators, legal representatives, heirs, successors and assigns, and shall inure to the benefit of the Guarantors and their respective executors, administrators, legal representatives, heirs, successors and assigns.
9. Venue. Indemnitor consents to the jurisdiction of any court in New York County, New York for any action arising out of matters relating to this Agreement. Indemnitor hereby waives the right to and covenants not to commence an action in connection with this Agreement in any court outside of New York County, New York.
10. WAIVER OF JURY TRIAL. INDEMNITOR HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING OUT OF MATTERS RELATED TO THIS AGREEMENT, WHICH WAIVER IS INFORMED AND VOLUNTARY.
11. Notices. All notices, requests or other instruments or communications (any of the foregoing, a “Notice”) given pursuant to this Agreement shall be in writing, signed by the party giving the same, and shall be delivered by hand or sent by registered or certified United States mail, return receipt requested, postage prepaid, or by a recognized overnight delivery service, addressed to the parties at their respective addresses first set forth above. Any party may, by notice to the other, specify any other address for the receipt of such notices, instruments or communications. A Notice shall be deemed to have been received: (a) upon delivery, if delivered by hand, (b) on the next business day if sent by an overnight commercial courier and (c) three (3) days after the date such Notice is mailed.
12. Amendment. This Agreement may be changed only by an agreement in writing signed by the Indemnitor and the Guarantors.
13. Attorney’s Fees. In the event of any claim, controversy, suit or other proceeding arising from or relating to this Agreement, the non-prevailing party shall reimburse the prevailing party, on demand, for all costs and fees in connection therewith, including reasonable attorney’s fees.
14. Time is of the Essence. Time is of the essence with respect to the performance of all obligations under this Agreement.
15. No Third-Party Beneficiary Rights. This Agreement is made solely and specifically between and for the benefit of the Guarantors, and their respective successors and assigns, and no other person, individual, corporation or entity, whatsoever, shall have any rights, interests or claims hereunder or be entitled to any benefits under or on account of this Agreement as a third-party beneficiary or otherwise.
16. Counterparts. This Agreement may be executed in one or more counterparts and as so executed shall constitute a single instrument.
17. Miscellaneous. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. If any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, then such invalidity, illegality or unenforceability shall not affect any other provision hereof. Section headings throughout this Agreement are solely for the convenience of the parties and are intended to have no legal meaning in and of themselves. Where the context requires, the masculine, feminine and neuter genders may be substituted for one another, as may be the singular for the plural number, and vice versa.
18. Exculpation. There shall be no recourse hereunder to any constituent entity or individual or any member, shareholder, principal, affiliate, partner, director, officer, employee, or agent of Indemnitor. Recourse hereunder shall be limited to the Indemnitor.
[SIGNATURE PAGE FOLLOWS]
The Indemnitor intending to be legally bound has executed this Agreement to be effective as of the date first above written.
INDEMNITOR
ETRE Property A-1 LP
By: Series A-1 OP GP LLC,
its general partner
By: ______________________
Name:
Title
Exhibit 10.14
ETRE REIT, LLC
2015 NON-MANAGEMENT DIRECTOR COMPENSATION PLAN
RESTRICTED SHARE AWARD AGREEMENT
THIS AGREEMENT is made by and between ETRE REIT, LLC, a Delaware series limited liability company (the "Company"), and ________ (the "Grantee"), dated as of the __th day of ________, 2015.
WHEREAS, the Company maintains the ETRE REIT, LLC 2015 Non-Management Director Compensation Plan (the "Plan") (capitalized terms used but not defined herein shall have the respective meanings ascribed thereto by the Plan); and
WHEREAS, the Grantee is a Director and eligible to receive an Award under the Plan; and
WHEREAS, in accordance with the Plan, the Committee has determined that it is in the best interests of the Company and members associated with Series A-1 of the Company (the "A-1 Series") to grant Restricted Shares to the Grantee subject to the terms and conditions set forth below.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Grant of Restricted Shares.
The Company hereby grants the Grantee 2,000 Restricted Shares of the A-1 Series of the Company ("Series A-1 Restricted Shares"), subject to the terms and conditions of this Agreement and further subject to the provisions of the Plan. Certificates evidencing ownership of such Shares (if any) will be held in custody by the Company until the restrictions hereunder shall have lapsed. The Plan is hereby incorporated herein by reference as though set forth herein in its entirety. To the extent the terms or conditions in this Agreement conflict with any provision of the Plan, the terms and conditions set forth in the Plan shall govern.
2. Restrictions and Conditions.
The Series A-1 Restricted Shares awarded pursuant to this Agreement and the Plan shall be subject to the following restrictions and conditions:
| |
(a) | Subject to clauses (c) below, the period of restriction with respect to Shares granted hereunder (the "Restriction Period") shall begin on the date hereof and lapse, if and as service continues, with respect to ____ of the Shares granted hereunder, on each of the first ____ anniversaries of the date hereof. |
| |
(b) | Except as provided in the foregoing clause (a), below in this clause (b) or in the Plan, the Grantee shall have, in respect of the Series A-1 Restricted Shares granted hereunder, all of the rights of a holder of Common Shares of the A-1 Series of the Company ("Series A-1 Common Shares"), including the right to vote the Shares and the right to receive dividends. Unless otherwise provided by the Committee, the Grantee shall be entitled to receive any cash dividends on any Series A-1 Restricted Shares (whether or not then subject to restrictions) which have not been forfeited if and when dividends are paid to holders of Series A-1 Common Shares generally. Series A-1 Common Shares (not subject to restrictions) shall be delivered to the Grantee or his or her designee promptly after, and only after, the Restriction Period shall lapse without forfeiture in respect of such Series A-1 Restricted Shares. |
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(c) | In the event the Grantee has a Termination of Service for any reason, during the Restriction Period, then all Series A-1 Restricted Shares still subject to restriction shall thereupon, and with no further action, be forfeited by the Grantee. |
3. Miscellaneous.
| |
(a) | THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO ANY PRINCIPLES OF CONFLICTS OF LAW WHICH COULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. |
| |
(b) | The Committee may make such rules and regulations and establish such procedures for the administration of this Agreement as it deems appropriate. Without limiting the generality of the foregoing, the Committee may in good faith interpret this Agreement and the Plan, with such interpretations to be conclusive and binding on all persons and otherwise accorded the maximum deference permitted by law, provided that the Committee's interpretation shall not be entitled to deference on and after a Change in Control except to the extent that such interpretations are made exclusively by members of the Board who are individuals who served as Board members before the Change in Control and take any other actions and make any other determinations or decisions that it deems necessary or appropriate in connection with the Plan, this Agreement or the administration or interpretation thereof. In the event of any dispute or disagreement as to interpretation of the Plan or this Agreement or of any rule, regulation or procedure, or as to any question, right or obligation arising from or related to the Plan or this Agreement, the decision of the Committee in accordance with the foregoing provisions of this Paragraph 3(b) shall be final and binding upon all persons. |
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(c) | All notices hereunder shall be in writing, and if to the Company or the Committee, shall be delivered to the Board or mailed to its principal office, addressed to the attention of the Committee; and if to the Grantee, shall be delivered personally, sent by facsimile transmission or mailed to the Grantee at the address appearing in the records of the Company. Such addresses may be changed at any time by written notice to the other party given in accordance with this Paragraph 3(c). |
| |
(d) | Without limiting the Grantee's rights as may otherwise be applicable in the event of a Change in Control, if the Company shall be consolidated or merged with a corporation or other entity, the Grantee may be required to deposit with the successor corporation any certificates for the stock or securities or the other property that the Grantee is entitled to receive by reason of ownership of Series A-1 Restricted Shares in a manner consistent with the Plan, and such stock, securities or other property shall become subject to the restrictions and requirements imposed under this Agreement and the Plan, and the certificates therefor or other evidence shall bear a legend similar in form and substance to the legend set forth in the Plan. |
| |
(e) | Unless otherwise provided by the Committee, any shares or other securities distributed to the Grantee with respect to Series A-1 Restricted Shares or otherwise issued in substitution of Series A-1 Restricted Shares shall be subject to the restrictions and requirements imposed by this Agreement and the Plan, including depositing the certificates therefor with the Company together with a stock power and bearing a legend as provided in the Plan. |
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(f) | The failure of the Grantee or the Company to insist upon strict compliance with any provision of this Agreement or the Plan, or to assert any right the Grantee or the Company, respectively, may have under this Agreement or the Plan, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement or the Plan. |
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(g) | The Company shall be entitled to withhold from any payments or deemed payments any amount of tax withholding the Company determines to be required by law. |
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(h) | Nothing in this Agreement shall confer on the Grantee any right to continue in the service of the Company or a Series or interfere in any way with the right of the Company, the Series and the members of the Company to terminate the Grantee's service at any time. Service for only a portion of the vesting period, even if a substantial portion, will not entitle the Grantee to any proportionate vesting or avoid or mitigate a termination of rights and benefits upon or following a Termination of Service as provided in this Agreement or under the Plan. |
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(i) | This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. |
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(j) | This Agreement may be executed in any number of counterparts, including via facsimile, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. |
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(k) | Except as otherwise provided in the Plan, no amendment or modification hereof shall be valid unless it shall be in writing and signed by all parties hereto. |
(the remainder of the page left intentionally blank)
IN WITNESS WHEREOF, the Company and the Grantee have executed this Agreement as of the day and year first above written.
ETRE REIT, LLC
By: _____________________________
Name:
Title:
______________________________________
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 6 to Registration Statement No. 333-194106 on Form S-11 of ETRE REIT, LLC of our report dated April 28, 2015 relating to the balance sheet of ETRE REIT, LLC, Series A-1 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading “Experts” in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 6, 2015
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 6 to Registration Statement No. 333-194106 on Form S-11 of ETRE REIT, LLC of our report dated April 28, 2015 relating to the combined balance sheet of ETRE REIT, LLC, ETRE REIT, LLC Series A-1 and ETRE REIT, LLC Series A-2 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading “Experts” in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 6, 2015
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No.6 to Registration Statement No. 333-194106 on Form S-11 of ETRE REIT, LLC of our report dated July 6, 2015 related to the statement of revenue and certain operating expenses of State Street Financial Center (which report expresses an unmodified opinion and includes an emphasis-of-matter paragraph referring to the purpose and basis of presentation of the Statement) appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 6, 2015
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