-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L21HDQ03/Y+n9h2WLv2Wqs9bq1DF4YrJjh/74WoTkd7auW6Br28ZvGvmLEAjtg2z 3bM6z33jHaCmYNKQmRmZnA== 0000912057-00-013486.txt : 20000327 0000912057-00-013486.hdr.sgml : 20000327 ACCESSION NUMBER: 0000912057-00-013486 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME GROUP REALTY TRUST CENTRAL INDEX KEY: 0001042798 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 364173047 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13589 FILM NUMBER: 578662 BUSINESS ADDRESS: STREET 1: 77 WEST WACKER DR STREET 2: STE 3900 CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3129171300 MAIL ADDRESS: STREET 1: 77 WEST WACKER DRIVE STREET 2: SUITE 3900 CITY: CHICAGO STATE: IL ZIP: 60601 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 or /_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ Commission File Number: 1-13589 PRIME GROUP REALTY TRUST (Exact name of Registrant as specified in its charter) MARYLAND 36-4173047 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 77 WEST WACKER DRIVE, SUITE 3900, CHICAGO, ILLINOIS 60601 (Address of principal executive offices) (Zip Code) (312) 917-1300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Shares of Beneficial Interest, New York Stock Exchange $0.01 par value per share Series B - Cumulative Redeemable New York Stock Exchange Preferred Shares of Beneficial Interest, $0.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the Registrant's common shares held by non-affiliates was approximately $219,530,371 based on the closing price on the New York Stock Exchange for such shares on March 16, 2000. The number of the Registrant's common shares outstanding was 15,271,678 as of March 16, 2000. DOCUMENTS INCORPORATED BY REFERENCE Part III of this report incorporates information by reference from the definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders, to be held on May 17, 2000. ================================================================================ ITEM 1. BUSINESS BACKGROUND AND GENERAL We are a fully-integrated real estate investment company organized under Maryland law, providing property management, leasing, marketing, acquisition, development, redevelopment, construction, finance and other related services. We have elected to be taxed as a Real Estate Investment Trust ("REIT") for federal income tax purposes. As of December 31, 1999, we owned 28 office properties (including 1701 Golf Road, on which we own a second mortgage note, but for which we have consolidated the property's operations), 40 industrial properties, one retail center and one parking facility. Our properties are located primarily in the Chicago metropolitan area. In addition, we own a 50% common interest in a joint venture which owns an office property located at 77 West Wacker Drive, Chicago, Illinois, and a mortgage on an office property located at 180 N. LaSalle Street, Chicago, Illinois. We also own approximately 239.4 acres of land that we may develop. This acreage includes two development sites which contain approximately 131,000 square feet located in the Chicago central business district, one of which is held by a joint venture with a third party. We also have rights to acquire approximately 202.6 acres of developable land, including rights to acquire a site located in the Chicago central business district containing approximately 58,000 square feet. We believe that this land could be developed to have approximately 4.6 million square feet of additional office space and over 7.5 million square feet of additional industrial space. We were formed on July 21, 1997 as a Maryland real estate investment trust and on November 17, 1997, we sold 12,380,000 of our common shares at a price of $20.00 per share in an underwritten offering and became a public company. Our executive offices are located at 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601, and our telephone number is (312) 917-1300. We are the managing general partner of, and currently hold 58.4% of the common interests in, Prime Group Realty, L.P., ("Operating Partnership"). We conduct substantially all of our business through the Operating Partnership, except for certain leasing, corporate advisory, construction, painting, architectural and third party property management services, which are conducted through Prime Group Realty Services, Inc., a Maryland corporation, and its affiliates (collectively the "Services Company"). TAX STATUS We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, we will not be subject to federal income tax at the corporate level on income we distribute to our shareholders as long as we distribute at least 95% of our taxable income (excluding any net capital gain) each year. Since our inception, we believe that we have complied with the tax regulations to maintain our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property. BUSINESS AND GROWTH STRATEGIES Our primary business strategy is to achieve our investment and growth objectives by focusing on the operation, development and selective acquisition of office and industrial real estate located in 2 the Chicago metropolitan area and, to a lesser extent, other midwestern markets. To implement this strategy, we intend to continue to: - own, develop, redevelop, acquire, lease, manage and operate Class A office buildings that have below market rents and, therefore, provide the opportunity to enhance returns as leases expire or are renewed; - develop Class A office buildings in prime locations with significant leasing potential; - selectively acquire distressed, under-performing and under-managed Class B office buildings in desirable locations and improve the income potential of such assets by raising them to a higher operating standard through value-added renovation programs, professional property management and aggressive leasing, retenanting and marketing efforts; - selectively acquire and develop properties that underutilize their sites or that have excess land for future development; - selectively acquire properties or portfolios of properties from tax-sensitive owners where the properties can be acquired on a tax-deferred basis using common units of limited partner interests in the Operating Partnership, as purchase consideration; and - own, develop, redevelop, acquire, lease, manage and operate bulk warehouse/ distribution facilities and overhead crane/manufacturing facilities. Class A office buildings are centrally located, professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates and are modern structures or have been modernized to compete with newer buildings. Class B office buildings have good location, construction and tenancy and are sometimes considered to be competitive with the lower spectrum of Class A buildings. We believe that we can draw upon our extensive experience and long-term presence in the Chicago metropolitan area to create a strategic advantage in competing for future development and acquisition opportunities. As evidence of this, we recently signed a 618,000 square foot lease with a major financial institution to serve as the anchor tenant to our Dearborn Center development. This state of the art office building will be located in downtown Chicago and will contain approximately 1.5 million square feet of rentable square feet. Construction will commence upon obtaining financing, which is anticipated in the second quarter of 2000. OPERATING STRATEGY. We will focus on enhancing our cash flow per share by: - engaging in pro-active leasing programs and effective property management; - managing operating expenses through the use of in-house management expertise; - maintaining and developing long-term relationships with a diverse tenant group; - attracting and retaining motivated employees by providing financial and other incentives; - continuing to emphasize value-added capital improvements to enhance our properties' competitive advantages in their submarkets; and - maximizing the cash flow of our properties. 3 DEVELOPMENT STRATEGY. As opportunities arise and where market conditions support a favorable risk-adjusted return on investment, we intend to pursue opportunities for growth through the development of new office and industrial properties and the renovation of distressed Class B buildings. We believe that the strength and experience of our management in the development of office and industrial properties will provide us with a competitive advantage in evaluating and pursuing opportunities to develop additional properties. During the next few years, we expect that most of our development activities will be focused on Chicago central business district office and suburban office and industrial properties in the Chicago metropolitan area. Based on ongoing marketing activities and discussions with prospective tenants, we expect that over the next several years there will be significant demand from several large tenants that are unable to find large blocks of contiguous Class A office space in downtown Chicago which may lead to office development opportunities. We believe that our significant land holdings and land option rights will provide us with a distinct advantage in competing for future development opportunities. The Services Company's corporate advisory activities with third parties are expected to give us further access to future development opportunities for properties we will build and lease. ACQUISITION STRATEGY. We plan to increase our cash flow per share by acquiring selected additional office and industrial properties, including properties that: provide attractive initial yields and significant potential for growth in cash flow from property operations; are well-located, of high quality and competitive in their respective submarkets; are located in our existing submarkets and/or in other strategic submarkets where the demand for office and industrial space exceeds available supply; and have been under-managed or are otherwise capable of improved performance through intensive management, marketing and leasing. We plan to concentrate our acquisition activities in the Chicago metropolitan area and, to a lesser extent, in other midwestern markets. We believe that attractive opportunities exist to acquire office and industrial properties in these markets at prices below replacement cost. Each acquisition opportunity will be reviewed to evaluate whether it meets one or more of the following criteria: potential for higher occupancy levels and/or rents as well as for lower tenant turnover and/or operating expenses; ability to generate returns in excess of our weighted average cost of capital, taking into account the estimated costs associated with renovation and tenant turnover (I.E., tenant improvements and leasing commissions); and purchase prices at or below estimated replacement cost. We believe we have certain competitive advantages that enhance our ability to identify and complete acquisitions on a timely and efficient basis, including: - our management's significant local market experience with, and knowledge of, properties, submarkets and potential tenants; - our management's long-standing relationships with commercial real estate brokers and institutional and other owners of commercial real estate in the Chicago metropolitan area; 4 - our fully-integrated real estate operations, which allow us to quickly evaluate and respond to acquisition opportunities; - our ability to access relatively low-cost financing through the capital markets; o our management's reputation as an experienced purchaser of office and industrial properties with the ability to execute transactions in an efficient and timely manner; and - our ability to add a number of office and industrial properties to our portfolio without the need for a significant increase in general and administrative expenses, due to our expertise and depth of management. We also plan to make strategic purchases of land where opportunities exist for current -or future development. FINANCING STRATEGY. Our financing policy has the following targets in place as of December 31, 1999: (i) a minimum interest coverage ratio of at least 2.0, (ii) a minimum fixed coverage charge ratio of at least 1.60, (iii) a ratio of debt-to-net asset value of no more than 50%, and (iv) unencumbered cash and credit availability of at least $40.0 million, of which $10.0 million should be cash on hand. The foregoing ratios and measures are calculated pursuant to detailed definitions set by our Board of Trustees (our "Board") and, in some instances, are adjusted over time pursuant to a schedule set by our Board. The above targets do not mean that we will operate within each of the ratios at all times or that our Board will not approve actions which will cause us to not be in compliance with this policy. Our financing policy may be altered without the consent of our shareholders, and our organizational documents do not limit the amount or type of indebtedness that we may incur. We intend to use one or more sources of capital for future acquisitions and development activities. These capital sources may include undistributed cash flow, borrowings under certain credit facilities, property specific non-recourse debt, proceeds from the issuance of long-term, tax-exempt bonds and other debt or equity securities, other bank and/or institutional borrowings or proceeds from the sale or joint venture of mature assets. Given the current trading prices of our shares, we intend to sell and/or joint venture mature assets and use the proceeds from these sales and/or joint ventures to repay debt and repurchase our shares. Our Board of Trustees has approved the repurchase of up to $250.0 million of our outstanding shares. The shares will be repurchased from time to time in open market and privately-negotiated purchases, subject to applicable securities laws. Share repurchase decisions will be made by management based on market conditions and other factors. We plan to raise up to $500.0 million from the sale of stabilized and mature properties, and/or the sale of joint venture interests in these properties. We intend to use approximately 50% of these proceeds to retire debt and the remainder to repurchase our shares. The properties or interests we currently intend to sell and or joint venture will represent approximately 30% of the net asset value of our current office and industrial portfolio. 5 RECENT DEVELOPMENTS During 1999, we acquired, placed in service or sold the following office and industrial properties and parcels of land:
ACQUISITION NET COST/DEVELOP-MENT MONTH ACQUIRED/ RENTABLE COST/ PLACED IN SQ. FT./ SALES PRICE (IN SERVICE/SOLD PROPERTY LOCATION ACRES MILLIONS) (1) ------------------------------------------------------------------------------------------------------------------- ACQUIRED: Office: 33 West Monroe Street (2) Chicago, IL 846,759 $101.3 January National City Center (3), (4) Cleveland, OH 766,965 105.0 February 800-810 Jorie Blvd (5) Oak Brook, IL 190,829 30.0 August IBM Plaza (4), (6) Chicago, IL 1,350,660 248.5 December Brush Hill Office Center (7) Westmont, IL 109,865 12.9 December Industrial: 901 Technology Way (4), (8) Libertyville, IL 68,824 4.1 January 300 Craig Place (9) Hillside, IL 163,070 8.6 July 43-47 Hintz Road (10) Wheeling, IL 310,156 9.7 September ----------------------------------- Total Office and Industrial Properties Acquired 3,807,128 $520.1 =================================== Land: Carol Stream Land (8), (11) Carol Stream, IL 40.5 Acres $ 5.4 April, December Aurora Land (12) Aurora, IL 21.0 Acres 0.9 July, November 300 West Monroe Street and 25 & 77 South Wacker Drive (13) Chicago, IL 1.4 Acres 55.9 July ----------------------------------- Total Land Acquired 62.9 Acres $ 62.2 =================================== DEVELOPMENTS PLACED IN SERVICE: Office: Pine Meadows Center (14) Libertyville, IL 180,926 $ 23.6 October, December Industrial: 320 Fullerton Avenue (15) Carol Stream, IL 263,208 10.1 December ----------------------------------- Total developments placed in service 444,134 $ 33.7 =================================== SOLD: Office: 941-961 Weigel Drive (16) Elmhurst, IL 123,077 July Industrial: 300 Craig Place (16) Hillside, IL 163,070 July 306-310 Era Drive (16) Northbrook, IL 36,495 July 515 Huehl Road/ 500 Lindberg Road (16) Northbrook, IL 201,244 July 555 Huehl Road (16) Northbrook, IL 74,000 July 1301 Ridgeview Drive (16) McHenry, IL 217,600 July 3818 Grandville/ 1200 Northwestern (16) Gurnee, IL 345,232 July 801 Technology Way (16) Libertyville, IL 68,824 July 901 Technology Way (16) Libertyville, IL 68,824 July 1001 Technology Way (16) Libertyville, IL 212,831 July ----------------------------------- 1,511,197 $ 89.5 455 Academy Drive (17) Northbrook, IL 105,444 4.5 December ----------------------------------- Total Office and Industrial Properties Sold 1,616,641 $ 94.0 ===================================
6
NET RENTABLE SQ. FT./ SALES PRICE PROPERTY LOCATION ACRES (IN MILLIONS) MONTH SOLD ------------------------------------------------------------------------------------------------------------------- Land: 180 Kehoe Blvd. (18) Carol Stream, IL 7.5 Acres $ 1.0 July ======================================= Portion of an Office Property: 122 S. Michigan (19) Chicago, IL 161,710 $ 15.0 April ======================================= 50% of Common Interest: 77 W. Wacker Drive(20) Chicago, IL 944,556 $ 88.0 September =======================================
(1) Acquisition cost includes cash paid at closing plus prorations and accrued real estate taxes. (2) This acquisition was partially funded by the proceeds of a $65.0 million mortgage loan initially bearing interest at LIBOR plus 2.0% increasing to LIBOR plus 2.15% in February 2000, requiring monthly interest only payments, and maturing January 2002. On January 31, 1999 we entered into a three year interest rate collar agreement with a financial institution for an original notional amount of $65.0 million. The interest rate ceiling is based on a LIBOR index rate of 7.50% and the interest rate floor is based on a LIBOR index rate of 3.73%. (3) We partially funded the acquisition costs with $30.0 million in advances from our credit facilities and the assumption of two notes with principal amounts of $52.9 million and $8.7 million, with actual interest rates of 8.50% and 7.55%, respectively. These interest rates were in excess of the market rate at the acquisition date, which we estimated to be 6.75%. As a result, we have recorded an additional $2.0 million of principal to reflect an imputed interest rate of 6.75% over the term of the notes. (4) These properties were acquired from minority interest unit holders of the Operating Partnership or their affiliates, and, in the case of National City Center and IBM Plaza, an affiliate of the employer of a Board of Trustees member and, in the case of 901 Technology Way, an affiliate of one of our officers. (5) This acquisition was funded by the proceeds of a $21.0 million mortgage loan bearing interest at LIBOR plus 2.0%, requiring monthly principal and interest payments, maturing August 2002 and a portion of the proceeds from the sale of the properties referred to in note 16 below, as this property was identified as a replacement property under the tax-deferred exchange trust. (6) This acquisition was funded by the proceeds of a $160.0 million mortgage loan bearing interest at LIBOR plus 1.7%, requiring monthly interest payments and annual scheduled principal payments, maturing December 2002 and a portion of the proceeds from the sale of the properties referred to in note 20 below, as this property was identified as a replacement property under the tax-deferred exchange trust. (7) This acquisition was funded by the proceeds of an $8.2 million mortgage loan bearing interest at 8.76%, requiring monthly principal and interest payments, maturing January 2010 and a portion of the proceeds from the sale of the properties referred to in notes 17 and 20 below, as this property was identified as a replacement property under the tax-deferred exchange trust. (8) Approximately 7.5 acres of the Carol Stream Land (180 Kehoe Blvd.) was sold on July 8, 1999 and 901 Technology Way was sold on July 14, 1999. See descriptions of sold properties for information regarding disposition of these parcels. (9) This property was purchased from an affiliate of a member of our Board of Trustees who is also a minority interest unit holder of the Operating Partnership. We assumed $6.5 million of debt upon 7 acquisition of the property and repaid the balance in full upon sale of the property (see note 16 below). (10) This acquisition was funded by the proceeds of a $6.0 million mortgage loan bearing interest at LIBOR plus 2.25%, requiring monthly principal and interest payments, maturing September 2002 and a portion of the proceeds from the sale of the properties referred to in note 16 below, as this property was identified as a replacement property under the tax-deferred exchange trust. (11) This property was acquired from an affiliate of a member of our Board of Trustees who is also a minority interest unit holder in the Operating Partnership, for a total of $5.3 million in common units and $0.1 million in cash. These acquisitions were consummated pursuant to the Operating Partnership's 1998 commitment (subsequently extended to 1999) and 1999 commitment under land purchase obligations established our initial public offering. (12) We have contracts that require us to purchase an additional 107.9 acres over a remaining two to four year period. Certain minimum installment payments are required; however, the timing of purchases is at our discretion. These purchases are a part of these contracts. The acquisition of 7.5 acres in November 1999 was funded by a $0.6 million mortgage loan. (13) This property was acquired with two acquisition mortgage loans in the amounts of $4.0 million and $24.0 million and a portion of the proceeds from the sale of the properties referred to note 16 below. The $4.0 million loan is collateralized by the parcel located at 25 and 77 South Wacker Drive, matures on November 1, 2001, bears interest at (a) until the funding of a construction loan for the 300 West Monroe Street parcel, the Prime Rate plus 0.5%, and (b) thereafter at LIBOR plus 2.75% and has been guaranteed by the Operating Partnership. The $24.0 million loan is collateralized by the adjacent parcel located at 300 West Monroe Street, matures on May 1, 2000, bears interest at the Prime Rate plus 0.5% and has been guaranteed by the Operating Partnership. The 25 and 77 South Wacker Drive property also has been pledged as collateral for the $24.0 million loan. The 25 and 77 South Wacker Drive property had been identified as a replacement property under the tax-deferred exchange trust discussed in note 16 below. (14) These properties, consisting of two one-story buildings and one three-story building, were placed in service during 1999. The developments were funded through construction loans totaling $10.1 million at December 31, 1999. (15) This property was acquired from a Board member, who is also a minority interest unit holder in the Operating Partnership, for a total of $2.2 million in common units and $0.1 million in cash. These acquisitions were consummated pursuant to the Operating Partnership's 1998 commitment (subsequently extended to 1999) and 1999 commitment under land purchase obligations in the Operating Partnership established at the Company's initial public offering. (16) These properties were sold in a single transaction with a total sales price of $89.5 million, resulting in a gain of approximately $3.6 million. As part of the sale, we agreed to assume responsibility for leasing two of the properties for five years, once the existing tenants' leases expire in 2000 and 2001. Our total lease obligation is reduced as existing tenants renew their leases or as new leases from third parties are executed for space in the properties. As a result of these commitments, the gain has been deferred and is included in other liabilities until the tenants either renew their leases or are replaced. The gain may be reduced by any obligations we may incur as a result of these commitments. In order to defer the taxable gain on this transaction, net sales proceeds of $26.7 million were deposited at closing into a tax-deferred exchange trust for reinvestment in future property purchases. The tax-deferred exchange was completed with the acquisition of four replacement properties: 300 West Monroe and 35 and 77 South Wacker Drive on July 15, 1999, 800-810 Jorie Boulevard on August 12, 1999, 43-47 Hintz Road on September 30, 1999 and Enterprise Center II on January 10, 2000. 8 (17) In order to defer the taxable gain of $0.9 million on this transaction, net sales proceeds of $4.2 million were deposited at closing into a tax-deferred exchange trust for reinvestment in future property purchases. (18) The Services Company, an unconsolidated affiliate, constructed an office/warehouse facility on this parcel and sold it to the purchaser concurrently with our sale of the land. This affiliate leased the land from us during the portion of the construction period in which we owned the land. (19) On April 19, 1999, we sold approximately 161,710 net rentable square feet of our 122 South Michigan Avenue office building to National-Louis University (NLU) for a gross sales price of $14.95 million and net consideration, net of commission, closing costs and a $1.1 million capital improvement allowance of $12.1 million. As part of this sale, NLU has also acquired an undivided 31.56% interest in certain common areas of the property. We continue to own the remaining 350,659 net rentable square feet of the building and are responsible for the management of the entire property. The sale resulted in a gain of $3.8 million for the year ended December 31, 1999. (20) On September 30, 1999, we transferred this property into a new joint venture and concurrently sold 50% of our common interest for $22.0 million and a $66.0 million preferred interest (providing a cumulative preferred return of 9.5% per annum) in this property. The remaining 50% common interest is being accounted for using the equity method of accounting. Prior to the closing of the transaction, the existing $170.0 million non-recourse first mortgage was refinanced with a new $170.0 million non-recourse first mortgage. The extraordinary loss on extinguishment of debt for the year ended December 31, 1999 includes the write-off of unamortized deferred financing fees of $0.8 million. The new mortgage loan bears interest at LIBOR plus 1.25%, requiring interest only payments from time to time and annual principal payments, maturing September 2004. The sale resulted in a gain of $48.3 million for the year ended December 31, 1999 representing the net proceeds in excess of net book value at the date of the sale. As a result, the book basis of the remaining 50% common interest is $0 for financial reporting purposes at the date of the sale. In order to defer the taxable gain on this transaction, net proceeds of $84.9 million were deposited into a tax-deferred exchange trust for reinvestment in future property purchases. On December 10, 1999 and December 13, 1999, respectively, we purchased Brush Hill Office Court located in Westmont, Illinois and IBM Plaza, an office building located in Chicago, Illinois as replacement properties. The Aurora land contracts require us to purchase an additional 107.9 acres over a two to four year period for additional consideration of $8.9 million. Certain minimum installment payments are required; however, the timing of purchases is at our discretion. During 1999, we made five installment payments totaling $0.8 million. Concurrently with the closing of our initial public offering, we obtained a secured revolving credit facility from a group of financial institutions. We used the credit facility to fund property acquisitions and letters-of-credit that provide credit enhancements on certain of our bonds payable. The credit facility is also subject to various financial and other operating covenants. The credit facility had a maximum commitment of $80.0 million and the interest rate was LIBOR plus 150 basis points which was amended to LIBOR plus 225 basis points as of January 1, 1999. On February 4, 1999, the credit facility was amended and the commitment was reduced to $75.0 million with the interest rate remaining the same. On October 22, 1999, the credit facility was further amended and the commitment was reduced to $35.0 million with the interest rate remaining the same. On January 1, 1998, we provided the Services Company a $5.0 million line-of-credit, which accrues interest at LIBOR plus 3%, requires monthly principal and interest payments from available cash flow, as defined, and matures on December 31, 2000. The line is collateralized by the Services Company's third party receivables and is subject to various covenants. As of December 31, 1999, the 9 line-of-credit had $1.8 million outstanding. In January 1998, we obtained a $15.0 million revolving line-of-credit with a financial institution. The line-of-credit is collateralized by an industrial property located at 475 Superior Avenue in Munster, Indiana. Outstanding balances under the line-of-credit bear interest at a rate equal to LIBOR plus 195 basis points. In January 1999, we exercised an option to extend the line-of-credit for one year to January 2000. In February 2000, the line-of-credit was subsequently reduced to $11.5 million through March 14, 2000, reducing to $10 million thereafter. Generally, the covenants contained in the line-of-credit are identical to the covenants contained in the above mentioned line-of-credit. The line-of-credit and the previously mentioned $35.0 million credit facility are collectively referred to as the "Credit Facilities." During 1999, we incurred the following new indebtedness:
Original Principal Maturity Collateral (1),(2) Balance (In Millions) Interest Rate Date ------------------------------------------------------------------------------------------------------------------- 33 West Monroe (3) $ 65.0 LIBOR + 2.0% increasing to 1/02 2.15% in 2/00 National City Center (4),(5) 63.6 6.75% 4/01 122 S. Michigan 14.0 LIBOR + 3.0% 5/04 National City Center (6) 10.0 LIBOR + 4.5% 1/00 25 and 77 South Wacker (7) 4.0 (8) 11/01 300 West Monroe (7) 24.0 Prime Rate + 0.5% 5/00 Pine Meadows Center (two one-story buildings) (7) (9) LIBOR + 2.25% 2/01 Pine Meadows Center (one three-story building) (7) (10) LIBOR + 2.50% 2/01 2000 USG Drive (7) (11) LIBOR + 2.25% 2/01 800-810 Jorie Blvd. (4) 21.0 LIBOR + 2.0% but not less 8/02 than 6.50% 43-47 Hintz Rd. (4),(7) 6.0 LIBOR + 2.25% 9/02 77 W. Wacker Drive (12) 170.0 LIBOR + 1.25% 9/04 IBM Plaza 160.0 (13) 12/02 Brush Hill Office Court (4) 8.2 8.76% 1/10 33 West Monroe 12.5 11.0% 6/00 1600-1700 167th Street (4) 2.8 8.68% 12/09 320 Fullerton Avenue (7) (14) LIBOR + 2.25% 5/01 Line of Credit (15) LIBOR + 1.95% 2/00 Aurora Land (16) 0.6 8.0% 6/00
(1) All of the loans are subject to various financial and other operating covenants and are collateralized by mortgages on the properties, unless otherwise indicated. (2) Interest is payable monthly, with principal due at maturity, unless otherwise indicated. (3) On January 31, 1999, we entered into an interest rate collar agreement for the period from January 31, 1999 through January 31, 2002 with a financial institution for an original notional amount of $65.0 million. Pursuant to the agreement, the interest rate ceiling under the agreement is based on a LIBOR index rate of 7.50% and the interest rate floor is based on a LIBOR index rate of 3.73%. (4) Principal and interest payable monthly through maturity. (5) Consists of two assumed notes with principal amounts of $52.9 million and $8.7 million, with actual interest rates of 8.50% and 7.55%, respectively. These interest rates were in excess of the market rate at the acquisition date, which we estimated to be 6.75%. As a result, we have recorded an additional $2.0 million of principal to reflect an imputed interest rate of 6.75% over the term of the notes. (6) This loan is collateralized by a pledge of a portion of the ownership interests in the entity that owns the property. At our election, the interest rate is either (a) the Prime Rate plus 3.25% or (b) LIBOR 10 plus 4.5%. A loan modification agreement extended the maturity date and the loan was repaid in February 2000. Other loan terms remained substantially unchanged. (7) The Operating Partnership has guaranteed these loans. The $24.0 million 300 West Monroe loan has also been guaranteed by our entity which owns the the 25 and 77 South Wacker Drive property. The loan is secured by a second mortgage on the 25 and 77 South Wacker Drive property. The Pine Meadows Center and 2000 USG Drive loans document contain cross-collateralization and cross-default clauses. The 43-47 Hintz Rd. loan guaranty is limited to $1.5 million. (8) After the funding of a construction loan related to the 300 West Monroe parcel, the interest rate will be based on an index rate of LIBOR plus 2.75%. (9) A $8.7 million construction loan, of which $6.1 million has been disbursed as of December 31, 1999. (10) A $9.4 million construction loan, of which $4.9 million has been disbursed as of December 31, 1999. (11) A $6.3 million construction loan, of which $4.4 million has been disbursed as of December 31, 1999. (12) Refinancing of a mortgage loan of equal amount which provides for annual amortization during the term. The loan has been transferred into an unconsolidated joint venture in which we have a 50% common ownership interest. (13) On December 10, 1999, we entered into an interest rate swap agreement based on a LIBOR index rate of 6.3% which effectively fixed our interest rate with respect to the variable rate mortgage note payable secured by the IBM Plaza property at a rate of 8.00%. This agreement has an original notional amount of $160.0 million that decreases to $158.4 million on December 10, 2000 and to $155.2 million on December 10, 2001 coincident with principal payments on the mortgage note payable secured by IBM Plaza property. The swap agreement had a purchase price of $0.6 million and terminates on December 10, 2002. No amounts were paid or received under the terms of the swap agreement during 1999. (14) A $8.1 million construction loan of which $5.1 million has been disbursed as of December 31, 1999. (15) A $12.0 million revolving line of credit, all of which was outstanding as of December 31, 1999. (16) Interest and principal are due at maturity. 11 In January 2000, the Company acquired the following 62,559 square foot office property and 7.5 acres of vacant land:
ACQUISITION MORTGAGE COSTS DEBT PROPERTY LOCATION (IN MILLIONS) (IN MILLIONS) - ------------------------------------------------------------------------------------- Office: Enterprise Center II Westchester, IL $8.8 $5.45 ================================ Land: Libertyville Office II Libertyville, IL $1.2 - ================================
On January 8, 1999, the Company filed our initial shelf registration statement on Form S-3 with the Securities and Exchange Commission (which was declared effective on June 8, 1999) to register up to $500.0 million of our equity and debt securities for future sale. On February 8, 1999, the Company signed a contract with a buyer pursuant to which it will construct and sell to the buyer an approximately 1,018-space parking garage, including approximately 4,000 square feet of retail space, on approximately 22,000 square feet of a 61,302 square foot parcel of land that the Company owns in the Chicago central business district (see Note 13 to the table of properties acquired, placed in service and sold in 1999 regarding acquisition of this parcel). The contract provides for a sales price of the completed garage of approximately $36.0 million, plus the value of any of the retail space leased by the Company at the time of sale up to a maximum of $1.75 million. In addition, the Company is entitled to receive an additional $1.0 million from the buyer if, within 15 years after the sale of the parking garage to the buyer, it substantially completes construction of an office building on the land containing at least 800,000 square feet of office space, which is occupied by at least one tenant who is not affiliated with us. Pursuant to a letter agreement dated December 3, 1999, the contingency period for obtaining the required city approvals for the construction of the parking garage was extended from December 31, 1999 until April 30, 2000. The parties are currently discussing the possibility of further extending such contingency if necessary, as well as certain other potential modifications to the terms of the transaction. In March 1999, the option period for a parcel adjacent to one of our development property sites lapsed. We recorded the related non-refundable option price of $0.6 million as a loss on land development option in our consolidated statement of operations for the year ended December 31, 1999. On March 1, 1999, we terminated a $160.0 million treasury lock agreement due to changes in terms and timing of the purchase of an office building as a result of an amended purchase agreement. This resulted in approximately $0.6 million on deposit related to the treasury lock agreement being forfeited at the time of termination. On May 11, 1999, we terminated a $170.0 million treasury lock agreement due to changes in timing of a planned future securitization of a currently outstanding $170.0 million loan related to the 77 West Wacker Drive building. The termination resulted in a net settlement and gain upon termination of $1.2 million. The net gain of $0.6 million from the two terminations has been included as a net gain in other income in the statement of operations for the year ended December 31, 1999. During the year ended December 31, 1999, we received net cash settlements of approximately $15.2 million related to both treasury lock agreements. 12 On April 13, 1999, we modified the terms of our Series A preferred shares. Under the original terms, the holders of the Series A preferred shares had certain conversion rights if for two consecutive quarters (1) the ratio of our debt plus nonconvertible preferred shares divided by our total market capitalization exceeded 65% or (2) our fixed charges coverage ratio fell below 1.4. The new agreement eliminates the debt-to-market capitalization covenant. In exchange, the holders of the Series A preferred shares were granted the future right to cause the redemption of their shares at a price of $20.00 per share upon 120 days' prior written notice, which redemption may occur during the period beginning January 15, 2002 and ending January 15, 2004. The Series A preferred shares will continue to pay an annual dividend of $1.50 per share and will continue to be convertible into common shares on a one for one basis. We made a $0.4 million one-time payment as part of this transaction, which will be amortized, using the straight-line method, through January 15, 2002 as a preferred dividend. All 2,000,000 outstanding shares of our Series A preferred shares have been reclassified to redeemable equity at their aggregate redemption price of $40.0 million, net of the unamortized transaction fee, in the consolidated balance sheet. Under the provisions of one of the credit facilities, we are obligated to maintain interest rate contracts on a portion of our variable rate indebtedness. On January 31, 1999, we entered into an interest rate collar agreement for the period from January 31, 1999 through January 31, 2002 with a financial institution for an original notional amount of $65.0 million. The interest rate ceiling under the agreement is based on a LIBOR index rate of 7.50% and the interest rate floor is based on a LIBOR index rate of 3.73%. We entered into an interest rate cap agreement in July, 1999 with a financial institution for an original notional amount of $150.0 million at 7.0% during the period from July 1 through October 1, 1999. On November 1, 1999, we entered into an interest rate collar agreement for the period from November 1, 1999 through September 30, 2002 with a financial institution for an original notional amount of $170.0 million. The interest rate ceiling under the agreement is based on a LIBOR index rate of 7.75% and the interest rate floor is based on a LIBOR index rate of 5.62%. On November 22, 1999, we transferred the $170.0 million interest rate collar agreement to an unconsolidated investment partnership. However, we have provided a guaranty to the counterparty related to this agreement. On December 10, 1999, we entered into an interest rate swap agreement for a purchase price of $591 for the period from December 10, 1999 through December 10, 2002 for an original notional amount of $160 million that decreases to $158.4 million on December 10, 2000 and to $155.2 million on December 10, 2001. The interest rate swap under the agreement is based on a LIBOR index rate of 6.3% and effectively fixed the interest rate on $160.0 million of variable rate mortgage indebtedness at a rate of 8.0%. On March 20, 2000, we entered into an interest rate cap agreement for the period from March 20, 2000 through November 17, 2000 for a notional amount of $70.0 million. The interest rate under the agreement is dapped at a LIBOR index rate of 8.0%. These agreements satisfy our obligation to maintain interest rate contracts under the provisions of one of the credit facilities. In December 1999, we granted a permanent easement to space within the IBM Plaza property to a utility company for a fee of $2.0 million, which has been included in other income in 1999. We are under no obligation to perform any services for the utility company to earn the fee, and we believe that the easement does not decrease the value of the property. SEGMENT REPORTING DATA See Note 15 to our consolidated financial statements for a discussion on our operating segment data for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997. 13 COMPETITION We compete with other owners and developers; some of whom may have greater resources and more experience than we. In addition, the number of competitive properties in any particular market or submarket in which our properties are located could have a material adverse effect on both our ability to lease space at our properties or any newly-acquired property and on the rents charged at our properties. We believe that we are one of a limited number of publicly-traded real estate companies primarily focusing on the office and industrial market in the Chicago metropolitan area. SERVICES COMPANY The Services Company was formed in March 1997 under the laws of the state of Maryland. The Operating Partnership owns 100.0% of the nonvoting preferred stock of the Services Company, representing 95.0% of its economic value and also has a $4.8 million promissory note issued from Services Company in connection with its formation. We have also provided a $5.0 million line-of-credit to the Services Company. The ownership structure permits us to share in the Services Company's income and also maintain our status as a REIT for federal income tax purposes. We receive substantially all of the economic benefit of the businesses carried on by the Services Company because we have the right to receive dividends through the operating partnership's investment in the preferred stock. However, we do not elect the Services Company's officers or directors and, consequently, do not have the ability to control the operations of the Services Company or require the declaration of dividends. The Services Company provides certain corporate advisory, management, leasing, tenant improvement construction, painting and tenant representation services to buildings owned by others. The Services Company's leasing division provides leasing services to certain of our properties and other property owners for fees. The Services Company's tenant improvements division provides construction management services for tenant improvements, renovations and other construction related services to the properties owned, acquired, developed or managed by us. GOVERNMENT REGULATION ENVIRONMENTAL MATTERS. All of our properties were subject to Phase I or similar environmental assessments by independent environmental consultants. Phase I assessments are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. Phase I assessments generally include an historical review, a public records review, an investigation of the surveyed site and surrounding properties, and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. We are aware of environmental contamination at certain of our older industrial properties contributed to us as an equity contribution by The Prime Group, Inc. ("PGI"). These properties are in remediation programs sponsored by the appropriate state environmental agencies. PGI has contractually agreed to retain liability, and indemnify us, for the costs of environmental remediation with regard to these industrial properties, which environmental consultants have estimated will cost, in the aggregate, up to $3.2 million. Based on such estimates, certain properties PGI contributed recorded provisions for environmental remediation costs totaling $3.2 million in 1997 prior to their contribution. During 1997, PGI initiated lawsuits against a former owner (who is also a former tenant) of one of the properties and an environmental consultant to cover the cost of the remedial 14 GOVERNMENT REGULATION (CONTINUED) action plans. On February 20, 1998, PGI reached an agreement with the former owner and received a $1.8 million settlement payment, in addition to $0.5 million previously paid as a reimbursement for costs. In 1998, PGI sued a current tenant of one of the properties to recover the cost of certain remedial action plans. During 1999, we incurred $0.3 million of costs related to the above remediation and for which we are due reimbursement from PGI. We are also aware of contamination at 455 Academy Drive in Northbrook, Illinois. The tenant of the property during the time we owned it, NSI Enterprises, Inc.("NSI"), provided us with an indemnity for all of the costs of environmental remediation regarding the property they caused either knowingly or unknowingly. On December 23, 1999, 455 Academy Drive was sold to NSI and NSI agreed to clean up the contamination and obtain a no further action letter pursuant to the Illinois Environmental Remediation Program. In addition, we are aware of contamination at 1301 E. Tower Road in Schaumburg, Illinois. The property has been submitted into a remediation program sponsored by the Illinois Environmental Protection Agency and we are in the process of quantifying the cost of necessary remedial actions. In connection with 1301 E. Tower Road, the previous owner and other third parties have placed approximately $0.8 million in escrow to fund the clean-up of the property. We currently anticipate that this escrow will be sufficient to fund the necessary remedial action for this property, although the previous owner and other third parties will not be responsible for any costs in excess of the amount placed in escrow. We believe that our other properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our other properties. None of our environmental assessments of the properties have revealed any environmental liability that, after giving effect to the contractual indemnities and escrows described above, we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any such material environmental liability. Nonetheless, it is possible that our assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of our properties (such as the presence of underground storage tanks) or by third parties unrelated to us. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds our budgets for such items, our ability to make expected distributions to shareholders could be adversely affected. COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Under the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in the imposition of fines by the federal government or an award of damages to private litigants. We believe that our properties are substantially in compliance with these requirements; however, we may incur additional costs to comply with the ADA. Although we believe that such costs will not have a material adverse effect on our financial position, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions to shareholders could be adversely affected. 15 GOVERNMENT REGULATION (CONTINUED) OTHER REGULATIONS. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in material compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require us to make significant unanticipated expenditures and could have an adverse effect on our Funds from Operations and expected distributions. INSURANCE We believe that our properties are covered by adequate comprehensive liability, rental loss, and all-risk insurance, provided by reputable companies, with commercially reasonable deductibles, limits and policy specifications customarily carried for similar properties. There are, however, certain types of losses which may be either uninsurable or not economically insurable, such as losses due to floods, riots or acts of war. Should an uninsured loss occur, we could lose both our invested capital in, and anticipated profits from, the property. EMPLOYEES As of December 31, 1999, we had approximately 216 full-time employees. We believe that our relations with our employees are satisfactory. 16 ITEM 2. PROPERTIES GENERAL As of December 31, 1999, we owned 28 office properties (including 1701 Golf Road, on which we own a second mortgage note, but for which we have consolidated the property's operations), 40 industrial properties, one retail center and one parking facility. Our properties are located primarily in the Chicago metropolitan area. In addition, we own a 50% common interest in a joint venture which owns an office property located at 77 West Wacker Drive and a mortgage on an office property located at 180 N. LaSalle Street, both in the Chicago central business district. In terms of net rentable square feet, approximately 83.3% of our office properties and 85.8% of our industrial properties are located in the Chicago metropolitan area in prime business locations within established business communities. The properties located in the Chicago metropolitan area accounted for approximately 92.3% of our rental revenue and 94.4% of our tenant reimbursements revenue for the year ended December 31, 1999. Our management team has developed or redeveloped a significant number of office properties, such as the 77 West Wacker Drive building in Chicago, Illinois, and industrial properties, such as the 320 Fullerton Avenue building in Carol Stream, Illinois. In the course of such development and redevelopment, we have acquired experience across a broad range of development and redevelopment projects. We believe our properties are well maintained and, based on recent engineering reports, do not require significant capital improvements. We own approximately 239.4 acres of land that we may develop. This acreage includes two development sites which contain approximately 131,000 square feet located in the Chicago central business district, one of which comprises 67,000 square feet, and is held by a joint venture with a third party. We also have rights to acquire approximately 202.6 acres of developable land, including rights to acquire a site located in the Chicago central business district containing approximately 58,000 square feet. We believe that this land could be developed to have approximately 4.6 million square feet of additional office space and over 7.5 million square feet of additional industrial space. Included in the 202.6 acres are 48.9 acres to be acquired from affiliates of a member of our Board of Trustees for a total purchase price of $6.0 million. Our office properties are leased to tenants either (i) on a net basis with tenants obligated to pay their proportionate share of real estate taxes, insurance, utility and operating expenses or (ii) on a gross basis, with the landlord responsible for the payment of these expenses up to the amount incurred during the tenants' first year of occupancy ("Base Year") or a negotiated amount approximating the tenants' pro rata share of these expenses ("Expense Stop"). The tenants pay their pro rata share of increases in expenses above the Base Year or Expense Stop. Most of the leases for our industrial properties are written on either a (i) net basis, with tenants paying their proportionate share of real estate taxes, insurance, utility and other operating expenses as additional rent or (ii) triple net lease basis with the tenants paying all of the real estate taxes, insurance, utility and other operating expenses for the property. 17 PROPERTIES The following table sets forth certain information relating to each of our properties as of December 31, 1999, unless indicated otherwise. Through the Operating Partnership and other subsidiaries, we own a 100% interest in all of the office and the industrial properties, except for 77 West Wacker Drive (we own a 50% common ownership interest in the joint venture that owns the property), 1701 Golf Road (we own the second mortgage note on this property) and 180 N. LaSalle Street (we own the first mortgage note on this property).
NET PERCENTAGE YEAR BUILT/ RENTABLE LEASED AS OF PROPERTY LOCATION RENOVATED SQUARE FEET 12/31/99(%) - -------- -------- --------- ----------- ----------- OFFICE PROPERTIES: 330 North Wabash Avenue (IBM Plaza) Chicago, IL 1971 1,350,660 91.9 1701 Golf Road (Continental Towers) (1) Rolling Meadows, IL 1977/1979/1981 928,766 97.6 33 West Monroe Street Chicago, IL 1980 846,759 99.8 208 South LaSalle Street 1914/1956/ Chicago, IL 1982/1991 835,229 98.5 1900 East Ninth Street (National City Center) Cleveland, OH 1980 766,965 98.4 122 South Michigan Avenue Chicago, IL 1910 350,659 86.0 33 North Dearborn Street Chicago, IL 1967/1986 302,818 94.7 201 4th Avenue North (Suntrust Bldg.) Nashville, TN 1968/1985 250,566 91.3 3800 and 3850 North Wilke Road and 3930 Ventura Drive(Commerce Point) Arlington Heights, IL 1987/1989 236,642 97.1 1700 East Golf Road (Two Century Centre) Schaumburg, IL 1989 217,960 71.2 2000 York Road (2000 York Brook) Oak Brook, IL 1960/1986 200,045 99.9 800-810 Jorie Boulevard Oak Brook, IL 1961/1992 190,829 99.7 850, 860 and 1000 Technology Way (Pine Meadows Corporate Center) (2) Libertyville, IL 1999 180,926 100.0 4343 Commerce Court (The Olympian Office Center) Lisle, IL 1989 167,756 93.6 6400 Shafer Court Rosemont, IL 1980/1990 164,958 99.4 2205-2255 Enterprise Drive (Enterprise Office Center) Westchester, IL 1987 129,574 99.0 1990 Algonquin Road/2000-2060 Algonquin Road (Salt Creek Office Center)(3) Schaumburg, IL 1979/1986 125,938 95.1 740-770 Pasquinelli Drive (Brush Hill Office Center) Westmont, IL 1986 109,865 95.6 1699 E. Woodfield Road (Citibank Office Plaza) Schaumburg, IL 1979 105,602 100.0 2675 N. Mayfair (Wauwatosa Bldg.) Wauwatosa, WI 1979 104,031 89.6 620 Market Street (Professional Plaza) Knoxville, TN 1988 93,711 84.5 625 Gay Street (Centre Square II) Knoxville, TN 1988 91,426 85.2 1600-1700 167th Street (Narco River Business Center) Calumet City, IL 1981 65,394 86.7 280 Shuman Blvd. (Atrium) Naperville, IL 1979 65,273 100.0 2100 Swift Drive Oak Brook, IL 1985/1991 58,000 100.0 1301 E. Tower Road (Narco Tower) Schaumburg, IL 1992 50,400 100.0 4823 Old Kingston Pike (Weston Bldg.) Knoxville, TN 1988 34,638 100.0 4100 West Madison Street Hillside, IL 1978 24,551 43.5 -------------------------------- OFFICE PROPERTIES SUBTOTAL 8,049,941 95.0% --------------------------------
18
NET PERCENTAGE YEAR BUILT/ RENTABLE LEASED AS OF PROPERTY LOCATION RENOVATED SQUARE FEET 12/31/99(%) -------- -------- --------- ----------- ----------- INDUSTRIAL PROPERTIES: WAREHOUSE/DISTRIBUTION FACILITIES: 475 Superior Avenue Munster, IN 1989 450,000 100.0 43-47 Hintz Road Wheeling, IL 1961/1990 310,156 100.0 2160 McGaw Road Obetz, OH 1974 310,100 100.0 425 E. Algonquin Road Arlington Heights, IL 1978 304,506 100.0 320 Fullerton Avenue Carol Stream, IL 1999 263,208 47.4 11045 Gage Avenue Franklin Park, IL 1970/1992 136,600 100.0 4849 Groveport Road Obetz, OH 1968 132,100 100.0 4248, 4250 and 4300 Madison Street Hillside, IL 1980 127,129 100.0 1051 N. Kirk Road Batavia, IL 1990 120,004 100.0 4211 Madison Street Hillside, IL 1977/1992 90,344 100.0 2400 McGaw Road Obetz, OH 1972 86,400 100.0 5160 Blazer Memorial Parkway (4) Dublin, OH 1983 85,962 74.4 4160-4190 W. Madison Street Hillside, IL 1974/1992 79,532 100.0 342-346 Carol Lane Elmhurst, IL 1989 67,935 100.0 200 E. Fullerton Avenue Carol Stream, IL 1968/1995 66,254 100.0 4411 Marketing Place Columbus, OH 1984 65,804 100.0 370 Carol Lane Elmhurst, IL 1977/1994 60,290 100.0 600 London Road Delaware, OH 1981 52,441 100.0 550 Kehoe Blvd Carol Stream, IL 1997 44,575 100.0 388 Carol Lane Elmhurst, IL 1979 40,920 100.0 343 Carol Lane Elmhurst, IL 1989 30,084 100.0 350 Randy Road Carol Stream, IL 1974 25,200 100.0 11039 Gage Avenue Franklin Park, IL 1965/1993 21,935 100.0 1401 S. Jefferson Street Chicago, IL 1965/1985 17,265 100.0 OVERHEAD CRANE/MANUFACTURING FACILITIES: Chicago Enterprise Center Chicago, IL 1916/1991-1996 13535-A S. Torrence Avenue 384,806 37.9 13535-B S. Torrence Avenue 239,752 - 13535-C S. Torrence Avenue 99,333 100.0 13535-D S. Torrence Avenue 77,325 100.0 13535-E S. Torrence Avenue 57,453 100.0 13535-F S. Torrence Avenue 44,800 100.0 13535-G S. Torrence Avenue 54,743 100.0 13535-H S. Torrence Avenue 73,612 95.8 East Chicago Enterprise Center East Chicago, IN 1917/1991-1997 Building 2 (4407 Railroad Avenue) 169,435 17.1 Building 3 (4407 Railroad Avenue) 291,550 100.0 Building 4 (4407 Railroad Avenue) 87,483 98.1 4440 Railroad Avenue (5) 40,000 100.0 4635 Railroad Avenue 14,070 - Hammond Enterprise Center Hammond, IN 1920-1952 4507 Columbia Avenue 256,595 100.0 4527 Columbia Avenue (6) 16,701 58.1 4531 Columbia Avenue 250,266 99.2 -------------------------------- INDUSTRIAL PROPERTIES SUBTOTAL 5,146,668 84.3% ================================ PORTFOLIO TOTAL 13,196,609 90.9% ================================
19
NET PERCENTAGE YEAR BUILT/ RENTABLE LEASED AS OF PROPERTY LOCATION RENOVATED SQUARE FEET 12/31/99(%) - -------- -------- --------- ----------- ----------- MORTGAGE NOTE RECEIVABLE: 180 N. LaSalle Street (7) Chicago, IL 1982/1999 769,384 57.5 JOINT VENTURE INTEREST: 77 West Wacker Drive (8) Chicago, IL 1992 944,556 99.8 OTHER PROPERTIES: 398 Unit Parking Facility Knoxville, TN 1981 371-385 N. Gary Avenue (9) Carol Stream, IL 1978 11,276 78.3
- ---------- (1) We hold a mortgage note receivable on the property and have consolidated the underlying property operations based upon receiving substantially all of the economic benefits of the property's operations. (2) This property complex is comprised of two single-story buildings and a three-story building, but is treated as one office property. (3) This property complex is comprised of 1990 Algonquin Road (a two-story office building) and 2000-2060 Algonquin Road (seven single-story office buildings), but is treated as one office property. (4) This property is a mixed-use industrial/office property that has been classified as an industrial property. (5) This property is an office building adjacent to the East Chicago Enterprise Center. (6) This property is an office building within the Hammond Enterprise Center. (7) We hold a mortgage note receivable on this office property. The operating results of this property have not been consolidated. (8) On September 30, 1999, we sold 50% of our common ownership interest in 77 West Wacker Drive to a third party for a gain of approximately $48.3 million. We contributed our remaining 50% common ownership interest to a new joint venture and are reflecting our ownership in the property using the equity method. (9) This is a retail center. ITEM 3. LEGAL PROCEEDINGS Neither we nor any of our properties are presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have a material adverse effect on our consolidated financial statements. Although subsequently settled in February 1999, we were subject to the litigation discussed below during early 1999. On July 22, 1998, we entered into a purchase agreement, with an affiliate of an investor in the operating partnership, to acquire two office buildings, IBM Plaza (a 1,354,354 square foot office building located in the Chicago central business district) and National City Center (a 766,965 square foot office building located in Cleveland, Ohio) for an aggregate purchase price of approximately $357.0 million. On September 15, 1998, we terminated the purchase agreement in accordance with the terms of the agreement due to the failure of a material condition precedent to the closing of these acquisitions. On September 21, 1998, the sellers notified us in writing that they believed they were entitled to the $20.0 million earnest money provided for by the agreement and instructed the earnest 20 money escrow agent to draw the full amount under two earnest money letters-of-credit we provided under one of the Credit Facilities. The sellers also filed a compliant against us in with the Supreme Court of New York, New York County alleging that we breached the contract. On October 30, 1998, we filed our answer to the compliant and denied all material allegations of the compliant. We also filed a counterclaim against the sellers alleging that the sellers breached the contract and sought the return of the above mentioned earnest money and other damages. On February 5, 1999, we entered into an amended option agreement with the sellers of IBM Plaza and an amended purchase agreement with the sellers of National City Center, which had the following terms: - both the original lawsuit filed by the sellers and our counterclaim were dismissed; - we purchased National City Center on February 5, 1999 for a contract price of $100.0 million; and - the $20.0 million earnest money escrow described above was released and credited to the purchase of National City Center and an $8.0 million nonrefundable payment for the option to purchase IBM Plaza which was subsequently purchased for $238.0 million (including the $8.0 million deposit) in December, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS No matters were submitted to vote of security holders during the fourth quarter of 1999. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common shares began trading on the New York Stock Exchange ("NYSE") on November 12, 1997, under the symbol "PGE". On March 16, 2000, the reported closing sale price on the NYSE was $14 3/8, and there were 15,271,678 common shares outstanding held by approximately 3,000 holders of record. The following table sets forth the high and low closing sales prices per common share reported on the NYSE and the distributions we paid for the years ended December 31, 1999 and 1998
CASH DISTRIBUTIONS HIGH LOW PAID (1) FISCAL YEAR 1999 First quarter $ 15 11/16 $ 12 7/8 $ 0.3375 Second quarter 17 3/16 13 3/16 0.3375 Third quarter 17 11/16 15 0.3375 Fourth quarter 15 7/16 13 (2) FISCAL YEAR 1998 First quarter 20 7/8 19 5/8 0.3375 Second quarter 21 17 1/8 0.3375 Third quarter 19 15/16 13 1/16 0.3375 Fourth quarter 16 5/8 13 9/16 (3)
(1) All distributions are per common share and common unit. (2) On December 8, 1999, our Board of Trustees declared a dividend of $0.3375 per common share and common unit for the fourth quarter of 1999 to holders of record on December 31, 1999. These dividends were paid January 20, 2000. (3) On December 9, 1998, our Board of Trustees declared a dividend of $0.3375 per common share and common unit for the fourth quarter of 1998 to holders of record on December 31, 1998. These dividends were paid January 20, 1999. We currently make quarterly distributions to holders of our common shares and Operating Partnership common units. Distributions on the common shares and common units are not permitted unless all current and any accumulated distributions on our Series A - Cumulative Convertible Preferred Shares, our Series B - Cumulative Redeemable Preferred Shares and the related preferred units in the operating partnership have been paid in full or set aside for payment. Future distributions by us will be at the direction of our Board of Trustees. These distributions will depend on the actual cash available for distribution, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Trustees deems relevant. Concurrently with the completion of our initial public offering, the Operating Partnership issued 9,994,310 common units to PGI, Primestone Investment Partners L.P. (a joint venture of PGI and a third party), other contributors and certain members of management in exchange for property contributions and cash. Additionally, since inception through December 31, 1999, the Operating Partnership has issued 404,032 common units as partial consideration for its acquisition of the first mortgage note of 180 N. 22 LaSalle Street and 479,803 common units as partial consideration for property acquisitions from affiliates of a member of our Board of Trustees. Holders of common units may redeem, after the lock-up period of one year from the date of issuance, part or all of the common units for common shares on a one-for-one basis, or at our option, cash equal to the fair market value of a common share at the time of exchange. During 1999, 53,611 of these units were converted to common shares. Also concurrently with the completion of our initial public offering, we issued 2,000,000 of our Series A - Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share, in a private placement to an institutional investor for an aggregate purchase price of $40.0 million. Holders of our Series A - Cumulative Convertible Preferred Shares can convert them to our common shares. On March 25, 1998, we issued 2,579,994 of our common shares in a private placement. In addition, during 1999 and 1998, we granted 55,099 and 50,694, respectively, of our common shares to certain of our officers and Board members. See "Business - Recent Developments." The issuance of 2,579,994 of our common shares, the common share grants described above to certain of our employees and trustees, and the common units described above and our Series A - Cumulative Convertible Preferred Shares constituted private placements of securities which are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. 23 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth our ("PGRT") and our predecessor's selected consolidated/combined financial data and should be read in conjunction with our and our predecessor's consolidated/combined financial statements included elsewhere in this Form 10-K.
(DOLLARS IN THOUSANDS) -------------------------------------------------- PGRT - CONSOLIDATED HISTORICAL -------------------------------------------------- PERIOD FROM NOVEMBER 17, 1997 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, --------------------------------- 1999 1998 1997 ------------------------------------------------- STATEMENTS OF OPERATIONS DATA REVENUE: Rental........................... $ 126,687 $ 97,212 $7,293 Tenant reimbursements............ 50,171 37,545 2,041 Mortgage note interest........... 6,926 5,866 248 Insurance settlement............. - - - Other 12,770 6,978 248 ------------------------------------------------- Total revenue....................... 196,554 147,601 9,830 EXPENSES: Property operations.............. 44,446 29,598 2,213 Real estate taxes................ 34,470 25,077 1,765 Depreciation and amortization.... 33,258 25,447 2,478 Interest......................... 42,648 30,901 1,680 Interest-affiliates.............. - - - Loss on land development option.. 600 - - General and administrative....... 7,565 5,712 267 Financing fees................... - - - Property and asset management fees-affiliate...... - - - Provision for environmental remediation costs.............. - - - Write-off of deferred tenant costs.......................... - - - ------------------------------------------------- Total expenses...................... 162,987 116,735 8,403 ------------------------------------------------- Income (loss) before gain on sales of real estate, minority interests and extraordinary items 33,567 30,866 1,427 Gain on sales of real estate........ 53,050 - - ----------------------------------------------- Income (loss) before minority interests and extraordinary items............................ 86,617 30,866 1,427 Minority interests.................. (30,687) (9,368) (635) ----------------------------------------------- Income (loss) before extraordinary items............................ 55,930 21,498 792 Extraordinary (loss) gain on early extinguishment of debt, net of minority interests' share in the amount of $754 in 1999, $878 in 1998 and $1,127 in 1997....... (1,082) (1,253) - ----------------------------------------------- Net income (loss)................... 54,848 20,245 792 Net income allocated to preferred shareholders...................... (12,103) (7,971) (345) ----------------------------------------------- Net income available to common shareholders.............. $ 42,745 $ 12,274 $ 447 ================================================
--------------------------------------- PREDECESSOR - COMBINED HISTORICAL --------------------------------------- PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 16, YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- STATEMENTS OF OPERATIONS DATA REVENUE: Rental........................... $27,947 $ 30,538 $ 33,251 Tenant reimbursements............ 12,490 14,225 14,382 Mortgage note interest........... - - - Insurance settlement............. - - 7,257 Other 1,229 2,551 1,944 ---------------------------------------- Total revenue....................... 41,666 47,314 56,834 EXPENSES: Property operations.............. 8,622 9,767 9,479 Real estate taxes................ 8,575 9,383 9,445 Depreciation and amortization.... 11,241 12,409 12,646 Interest......................... 24,613 26,422 27,671 Interest-affiliates.............. 9,804 10,795 8,563 Loss on land development option.. - - - General and administrative....... 2,414 4,927 4,508 Financing fees................... 1,180 1,232 - Property and asset management fees-affiliate...... 1,348 1,561 1,496 Provision for environmental remediation costs.............. 3,205 - - Write-off of deferred tenant costs.......................... - 3,081 13,373 ---------------------------------------- Total expenses...................... 71,002 79,577 87,181 ---------------------------------------- Income (loss) before gain on sales of real estate, minority interests and extraordinary items (29,336) (32,263) (30,347) Gain on sales of real estate........ 286 846 771 ----------------------------------------- Income (loss) before minority interests and extraordinary items............................ (29,050) (31,417) (29,576) Minority interests.................. 666 894 3,281 ----------------------------------------- Income (loss) before extraordinary items............................ (28,384) (30,523) (26,295) Extraordinary (loss) gain on early extinguishment of debt, net of minority interests' share in the amount of $754 in 1999, $878 in 1998 and $1,127 in 1997....... 65,990 - - ----------------------------------------- Net income (loss)................... $37,606 $(30,523) $(26,295) ========================================= Net income allocated to preferred shareholders...................... Net income available to common shareholders..............
24
PGRT - CONSOLIDATED HISTORICAL ------------------------------ PERIOD FROM NOVEMBER 17, 1997 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------------------------------- 1999 1998 1997 -------------------------------------------------- BASIC EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED-AVERAGE COMMON SHARE (1): Income before gain on sales of real estate and extraordinary items......................... $ 0.84 $ 0.91 $ 0.04 Gain on sales of real estate, net of minority interests................................... 2.05 - - Extraordinary loss on extinguishment of debt, net of minority interests................... (0.07) (0.08) - --------------------------------------------------- Net income available per weighted- average common share of beneficial interest - basic. $ 2.82 $ 0.83 $ 0.04 =================================================== DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED-AVERAGE COMMON SHARE (1): Income before gain on sales of real estate and extraordinary items......................... $ 0.84 $ 0.91 $ 0.04 Gain on sales of real estate, net of minority interest.................................... 2.04 - - Extraordinary loss on extinguishment of debt, net of minority interests................... (0.07) (0.08) - --------------------------------------------------- Net income available per weighted- average common share of beneficial interest - diluted $ 2.81 $ 0.83 $ 0.04 ===================================================
(DOLLARS IN THOUSANDS) ----------------------------------------------------------------------------- PREDECESSOR - COMBINED PGRT - CONSOLIDATED HISTORICAL HISTORICAL DECEMBER 31, DECEMBER 31, ------------------------------------------------ -------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------ -------------------------- BALANCE SHEET DATA: Real estate assets, exclusive of property under development and before accumulated depreciation ............................... $1,151,094 $ 843,031 $589,279 $291,757 $289,558 Total assets................................... 1,444,175 1,164,514 741,468 325,230 343,641 Mortgage notes payable, credit facilities and bonds payable............................... 799,171 593,168 328,044 421,983 405,562 Total liabilities.............................. 901,767 668,728 370,192 447,927 434,993 Minority interests............................. 169,070 145,781 147,207 (6,905) (6,047) Series A Preferred Shares...................... 39,703 - - - - Shareholders' equity (partners' deficit)....... 333,635 350,005 224,069 (115,792) (85,305)
25
(DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------------------------------- PGRT - CONSOLIDATED HISTORICAL PREDECESSOR - COMBINED HISTORICAL -------------------------------------------------------------------------------------------------------- PERIOD FROM PERIOD FROM NOVEMBER 17, JANUARY 1, 1997 1997 THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, NOVEMBER 16, YEAR ENDED DECEMBER 31, 1999 1998 1997 1997 1996 1995 -------------------------------------------------------------------------------------------------------- OTHER DATA: Funds from operations(2).. $ 53,415 $ 46,762 $ 3,619 $ (14,461) $ (17,367) $ (12,733) Cash flows provided by (used in): Operating activities... $ 105,092 $ 53,525 $ 6,706 $ (4,241) $ (2,462) $ (1,259) Investing activities... (437,332) (361,384) (353,864) (3,926) 423 (9,176) Financing activities... 306,907 342,390 355,390 6,331 5,733 10,873 Ratio of earnings to combined fixed charges and preferred share - distributions(3)........... 1.21 1.48 1.50 - - - Office Properties: Square footage......... 8,049,941 5,833,280 4,073,722 2,353,759 1,414,897 1,414,897 Occupancy (%).......... 95.0 89.9 91.9 88.0 92.5 95.8 Industrial Properties: Square footage......... 5,146,668 5,834,974 5,832,974 5,696,355 2,462,430 2,551,624 Occupancy (%).......... 84.3 90.5 87.9 87.9 73.5 72.9
- ---------- (1) Net income available per weighted-average common share of beneficial interest-basic equals net income divided by 15,141,630, 14,862,958 and 12,593,000 common shares for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997, respectively. Net income available per weighted-average common share of beneficial interest-diluted equals net income divided by 15,208,911, 14,875,035, and 12,593,000 common shares for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997, respectively. See Note 8 to our consolidated financial statements for further information. (2) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), in its March 1995 White Paper, Funds from Operations represents net income (loss) before minority interest of holders of Common Units (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Non-cash adjustments to Funds from Operations were as follows: in all periods, depreciation and amortization, for the year ended December 31, 1999, an adjustment associated with a Services Company write off, the net gain on treasury lock terminations, and the loss on a land development option, for the period from January 1, 1997 through November 16, 1997, provision for environmental remediation cost, for the years ended December 31, 1999, 1996 and 1995, gains on the sale of real estate, for the years ended December 31, 1996 and 1995, write-off of deferred tenant costs, and for the year ended December 31, 1995, excess proceeds from insurance claims. Management considers Funds from Operations an appropriate measure of performance of an office and/or industrial REIT because industry analysts have accepted it as such. We computed Funds from Operations in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (with the exception that we report rental revenues on a cash basis (based on contractual lease terms), rather than a straight-line GAAP basis, which we believe results in a more accurate presentation of our actual operating activities), which may differ from the methodology for calculating Funds from Operations used by other REITs and, accordingly, may not be comparable to such other REITs. Further, Funds from Operations does not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt repayment obligations, or other commitments and uncertainties. Funds from Operations should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP. 26 (3) The ratios of earnings to combined fixed charges and preferred share distributions were computed by dividing earnings by combined fixed charges and preferred share distributions. For this purpose, earnings consist of income (loss) before minority interest, plus combined fixed charges. Combined fixed charges consist of interest incurred, amortization of debt issuance costs, and preferred share distributions. The Predecessor's historical earnings were insufficient to cover fixed charges by approximately $29.1 million, $31.4 million, and $29.6 million for the period from January 1, 1997 through November 16, 1997 and for the years ended December 31, 1996, and 1995, respectively. 27 The following is our consolidated quarterly summary of operations.
YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------------------------ FOURTH THIRD SECOND FIRST TOTAL QUARTER QUARTER QUARTER QUARTER ------------------------------------------------------------------------------ (In thousands, except per share amounts) Total revenues ...................................... $ 196,554 $ 44,767 $ 49,796 $ 52,912 $ 49,079 Total expenses ...................................... 162,987 39,136 40,487 42,353 41,011 ------------------------------------------------------------------------------ Income before gain on sales of real estate, minority interests and extraordinary items ................ 33,567 5,631 9,309 10,559 8,068 Gain on sales of real estate ........................ 53,050 568 48,125 4,357 - ------------------------------------------------------------------------------ Income before minority interests and extraordinary items ............................................ 86,617 6,199 57,434 14,916 8,068 Income allocated to minority interests .............. (30,687) (1,440) (22,330) (4,861) (2,056) ------------------------------------------------------------------------------ Income before extraordinary items ................... 55,930 4,759 35,104 10,055 6,012 Extraordinary items - loss on early extinguishment of debt, net of minority interests in the amount $178 in the fourth quarter and $576 in the third quarter .......................................... (1,082) (253) (829) - - ------------------------------------------------------------------------------ Net income .......................................... 54,848 4,506 34,275 10,055 6,012 Net income allocated to preferred shareholders .................................... (12,103) (3,036) (3,037) (3,030) (3,000) ------------------------------------------------------------------------------ Net income applicable to common shares .............. $ 42,745 $ 1,470 $ 31,238 $ 7,025 $ 3,012 ============================================================================== BASIC EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED AVERAGE COMMON SHARE: Income before gain on sales of real estate and extraordinary items .............................. $ 0.84 $ 0.11 $ 0.25 $ 0.29 $ 0.20 Gain on sales of real estate, net of minority interests ........................................ 2.05 0.01 1.86 0.17 - Extraordinary loss on extinguishment of debt, net of minority interests ........................ (0.07) (0.02) (0.05) - - ------------------------------------------------------------------------------ Net income available per weighted-average common share of beneficial interest - basic ...... $ 2.82 $ 0.10 $ 2.06 $ 0.46 $ 0.20 ============================================================================== Weighted average common shares outstanding-basic ................................ 15,142 15,163 15,136 15,136 15,132 ============================================================================== DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED AVERAGE COMMON SHARE: Income before gain on sales of real estate and extraordinary items .............................. $ 0.84 $ 0.11 $ 0.25 $ 0.29 $ 0.20 Gain on sales of real estate, net of minority interests ........................................ 2.04 0.01 1.85 0.17 - Extraordinary loss on extinguishment of debt, net of minority interests ........................ (0.07) (0.02) (0.05) - - ------------------------------------------------------------------------------ Net income available per weighted-average common share of beneficial interest - diluted .... $ 2.81 $ 0.10 $ 2.05 $ 0.46 $ 0.20 ============================================================================== Weighted average common shares outstanding - diluted ............................ 15,209 15,222 15,254 15,209 15,134 ============================================================================== Distributions paid per common share ................. $ 1.35 $ 0.3375 $ 0.3375 $ 0.3375 $0.3375 ==============================================================================
28
PERIOD FROM NOVEMBER 17, 1997 YEAR ENDED DECEMBER 31, 1998 THROUGH ---------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST DECEMBER 31, TOTAL QUARTER QUARTER QUARTER QUARTER 1997 ---------------------------------------------------------------------------------------- (In thousands, except per share amounts) Total revenues ........................... $ 147,601 $ 40,675 $ 41,252 $ 36,923 $ 28,751 $ 9,830 Total expenses ........................... 116,735 31,904 31,563 29,708 23,560 8,403 ---------------------------------------------------------------------------------------- Income before minority interests and extraordinary item .................... 30,866 8,771 9,689 7,215 5,191 1,427 Income allocated to minority interests ... (9,368) (2,347) (2,704) (2,352) (1,965) (635) ---------------------------------------------------------------------------------------- Income before extraordinary items ........ 21,498 6,424 6,985 4,863 3,226 792 Extraordinary items - loss on early extinguishment of debt, net of minority interests in the amount $503 in the fourth quarter and $375 in the second . (1,253) (728) -- (525) -- -- quarter ---------------------------------------------------------------------------------------- Net income ............................... 20,245 5,696 6,985 4,338 3,226 792 Net income allocated to preferred shareholders .......................... (7,971) (2,980) (2,950) (1,341) (700) (345) ---------------------------------------------------------------------------------------- Net income applicable to common shares ... $ 12,274 $ 2,716 $ 4,035 $ 2,997 $ 2,526 $ 447 ======================================================================================== Earnings per common share - basic and diluted: Income before extraordinary items ... $ 0.91 $ 0.23 $ 0.26 $ 0.22 $ 0.19 $ 0.04 Extraordinary items ................. (0.08) (0.05) -- (0.03) -- -- ---------------------------------------------------------------------------------------- Net income ............................... $ 0.83 $ 0.18 $ 0.26 $ 0.19 $ 0.19 $ 0.04 ======================================================================================== Weighted average common shares outstanding 14,875 15,137 15,535 15,572 13,181 12,593 ======================================================================================== Distributions paid per common share ...... $ 1.1789 $ 0.3375 $ 0.3375 $ 0.3375 $ 0.1664 $ -- ========================================================================================
29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with our historical consolidated financial statements and our predecessor's combined financial statements and related notes thereto included elsewhere in this Form 10-K. We are a fully-integrated real estate investment company organized under Maryland law, providing property management, leasing, marketing, acquisition, development, redevelopment, construction, finance and other related services. As of December 31, 1999, we owned 28 office properties (five were acquired in 1999, one development was placed in service in 1999, eight were acquired during 1998 and fourteen were contributed or acquired in 1997), 40 industrial properties (one was acquired in 1999, one development was placed in service in 1999 and 38 were contributed or acquired in 1997), one retail center, and one parking facility. Our properties are located primarily in the Chicago metropolitan area. In addition, we own a 50% common interest in a joint venture which owns an office property located at 77 West Wacker Drive, Chicago, Illinois, and a mortgage on an office property located at 180 N. LaSalle Street, Chicago, Illinois. As of December 31, 1999, in terms of net rentable square feet, approximately 83.3% of our office properties and 85.8% of our industrial properties were located in the Chicago metropolitan area in prime business locations within established business communities. The properties located in the Chicago metropolitan area account for approximately 92.3% of our rental revenue and 94.4% of our tenant reimbursements revenue for the year ended December 31, 1999. Our remaining office properties are located in the Cleveland, Ohio; Nashville, Tennessee; Knoxville, Tennessee; and Milwaukee, Wisconsin metropolitan areas. Our remaining industrial properties are located in the Columbus, Ohio metropolitan area. Our income is derived primarily from rental revenue (including tenant reimbursements) from our properties supplemented by interest income on the mortgage note owned. We expect that revenue growth over the next several years will come from a combination of additional acquisitions and revenue generated through increased rental and occupancy rates in the current portfolio. CAUTIONARY STATEMENTS The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto contained herein. Statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current view with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties including, but not limited to, the effects of future events on our financial performance; the risk that we may be unable to finance our planned acquisition and development activities; risks related to the industrial and office industry in which our properties compete, including the potential adverse impact of external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; risks associated with our development activities, such as the potential for cost overruns, delays and lack of predictability with respect to the financial returns associated with these development activities; the risk of a potential increase in market interest rates from current rates; and risks associated with real estate ownership, such as the potential adverse impact of changes in the local economic climate on the revenues and the value of our 30 properties' systems as well as our tenants and vendors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of December 31, 1999. Among the facts about which we have made assumptions are the following: - future economic conditions which may impact the demand for office space and our tenants' ability to pay rent, either at current or increased levels; - prevailing interest rates; - the extent of any inflation on operating expenses; - our ability to reduce various expenses as a percentage of revenues; - our continuing ability to pay amounts due to our preferred shareholders prior to any distribution to our common shareholders; - the continuing availability of our credit facilities; and - the continuing availability of financing and capital. In addition, historical results and percentage relationships set forth herein are not necessarily indicative of future operations. RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31, 1998. For the year ended December 31, 1999, the changes in rental and reimbursable income, property operating expenses, real estate taxes and depreciation and amortization from the same period in 1998 are due principally to a full year of operating results for eight properties acquired in the first half of 1998 and the additional operating results for the six properties acquired and retained during 1999, offset by the sale of eleven properties in 1999 and the sale of 50% of our ownership in the 77 West Wacker Drive building as of September 30, 1999. For the year ended December 31, 1999, rental revenue increased $29.5 million, or 30.3%, to $126.7 million (including lease termination revenue of $5.2 million), tenant reimbursement income increased $12.6 million, or 33.6%, to $50.2 million, other property revenues increased $7.0 million (including the sale of easement rights for $2.6 million) or 163.6%, to $11.2 million, interest income and other decreased $1.1 million, or 42.5%, to $1.6 million, property operating expenses increased $14.8 million, or 50.2%, to $44.4 million, real estate tax expense increased $9.4 million, or 37.5%, to $34.5 million, and depreciation and amortization increased $7.8 million, or 30.7 %, to $33.3 million, in each case as compared to the year ended December 31, 1998. These increases are impacted by 5.5 months less operations for seven of the nine industrial properties and one office property sold on July 14, 1999 and the sale of 50% of our ownership in 77 West Wacker Drive building as of September 30, 1999. For the corresponding 5.5 months in 1998, the industrial properties and one office property had rental revenue of $3.4 million, tenant reimbursement income of $0.8 million, property operating expenses of $0.1 million, real estate tax expense of $0.9 million and depreciation and amortization of $0.7 million. For the corresponding 3 months in 1998, the 77 West Wacker Drive building had a revenue of $5.6 million, tenant reimbursement income of $3.0 million, property operating expenses of $1.5 million, real estate tax expense of $1.9 million and depreciation and amortization of $2.1 million. Included in interest income and other is the net gain on the termination of treasury lock agreements of $0.6 million for the year ended December 31, 1999, due to events described in "Recent Developments". 31 RESULTS OF OPERATIONS (CONTINUED) Rental revenue, tenant reimbursement income and other property revenue for properties held in both periods increased $0.8 million for the year ended December 31, 1999, primarily due to increased occupancy and rental rates. Corresponding property operating expenses and real estate taxes increased $0.7 million primarily due to increases in real estate tax expense. Depreciation and amortization increased $1.6 million for the year ended December 31, 1999, primarily due to an increase in tenant improvements and leasing commissions. Mortgage note interest income increased $1.1 million, or 18.1%, to $6.9 million for the year ended December 31, 1999, compared to the same period in 1998, due to the additional advances on the first mortgage note held encumbering the office property known as 180 North LaSalle Street. Interest expense increased $11.7 million, or 38.0%, to $42.6 million during the year ended December 31, 1999, compared to the same period in 1998. The increase was principally due to new mortgages obtained on certain of the properties which were acquired in 1999 and 1998 and an increase in LIBOR rates which increased the interest charges on our variable rate debt. General and administrative expense increased $1.9 million, or 32.4% to $7.6 million for the year ended December 31, 1999, compared to the same period in 1998, reflecting costs related to our growth. Gain on sales of real estate increased $53.1 million for the year ended December 31, 1999, compared to the same period in 1998, due to the sale of certain properties as more fully described in "Business Recent Developments." Income allocated to minority interests increased $21.3 million, or 227.6% to $30.7 million for the year ended December 31, 1999, compared to the same period in 1998, due to an increase in income before minority interests of $55.8 million, or 180.6% to $86.6 million. The increase in income before minority interests and extraordinary item was principally due to gains on the sales of real estate, additional properties acquired in 1999 and 1998 and the effects they had on the revenue and expenses described above. The extraordinary loss on extinguishment of debt, net of minority interests, decreased $0.2 million for the year ended December 31, 1999, due to the write-off of unamortized deferred financing fees related to mortgage debt repaid upon the sale of certain properties as more fully described in "Business Recent Developments". Net income increased $34.6 million, or 170.9%, to $54.8 million for the year ended December 31, 1999, compared to the same period in 1998, due to the changes in revenue, expenses, gain on sales of real estate, minority interests and extraordinary loss on extinguishment of debt described above. The following analysis provides a comparison of our operations for the years ended December 31, 1998 and 1997. The period from January 1, 1997 through November 16, 1997 represents the activity of the Predecessor's properties and the period from November 17, 1997 through December 31, 1998 represents our activity. 32 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31, 1997 In analyzing the operating results for the year ended December 31, 1998, the changes in rental and reimbursable revenue, property operating expenses, real estate taxes and depreciation and amortization from 1997 are due principally to the addition of operating results from properties contributed and acquired as part of our initial public offering as well as properties acquired after our initial public offering through December 31, 1998. The Predecessor's properties owned by us as of December 31, 1998 consisted of five office properties, 17 industrial properties, and a parking facility. At the time of our initial public offering, nine additional office properties, 29 additional industrial properties and one retail center were contributed or acquired. After the date of our initial public offering and through December 31, 1998, we acquired ten additional office properties and a first mortgage note encumbering an office property as described in the footnotes to our consolidated financial statements contained elsewhere in this Form 10-K. For the year ended December 31, 1998, rental revenue and tenant reimbursements income increased $85.0 million, or 170.7%, to $134.8 million, and other revenue increased $5.5 million, or 372.4%, to $7.0 million, property operating expenses and real estate tax expense increased $33.5 million, or 158.2%, to $54.7 million, and depreciation and amortization expense increased $11.7 million, or 85.5%, to $25.4 million as compared to the year ended December 31, 1997. The primary reason for the increases in the above revenue and expense categories was the contribution and acquisition of new office and industrial properties we have made since our initial public offering. The additional office and industrial properties resulted in increased total rental revenue and tenant reimbursements income of $88.6 million, other revenue of $5.0 million, property operating expenses and real estate tax expense of $35.4 million and depreciation and amortization expense of $11.9 million for the year ended December 31, 1998. Included in the rental revenue increase for 1998 is $4.1 million related to lease terminations. Rental revenue and tenant reimbursement revenue for the Predecessor's properties increased $0.6 million for the year ended December 31, 1998 compared to the same period in 1997. Depreciation and amortization expense for the Predecessor's properties increased $0.7 million for the year ended December 31, 1998 compared to the same period in 1997. Mortgage note interest income increased by $5.6 million to $5.9 million due to the acquisition of the first mortgage note encumbering the property known as 180 North LaSalle Street in December 1997. Interest expense had a net increase of $4.6 million, or 17.5%, to $30.9 million during the year ended December 31, 1998. The increase was due to a $36.2 million increase due to mortgages obtained on certain of the properties which were contributed or acquired after our initial public offering, as well as our Credit Facilities borrowings used to fund property acquisitions, offset by a $31.6 million decrease as a result of the repayment of debt with proceeds from our initial public offering or debt forgiveness in 1997. General and administrative expense increased $3.0 million during the year ended December 31, 1998, reflecting costs related to our new public status and increased size. The $1.2 million decrease in financing fees and the $1.3 million decrease in property and asset management fees are due to these fees being incurred by the Predecessor under their previous ownership and are costs we no longer incur. 33 RESULTS OF OPERATIONS (CONTINUED) In 1997, the Predecessor recorded a provision for environmental remediation costs of $3.2 million, which represents the estimated costs to be incurred for the clean-up of environmental contamination of certain industrial properties. PGI has contractually agreed to indemnify us from any environmental liabilities we may incur. No additional provision was deemed necessary in 1998. Income allocated to minority interests increased $9.4 million to $9.4 million for the year ended December 31, 1998 compared to the same period in 1997 due to an increase in income before minority interest of $58.5 million, or 212.0%, to $30.9 million due to the changes in revenue and expenses described above and a change in the ownership structure. The increase in income before minority interests is due to additional properties either being contributed or acquired and the effects they had on revenue and expenses described above. The change in ownership structure is due to certain ownership percentages changing due to our initial public offering. Extraordinary gain on extinguishment of debt decreased $67.2 million to a $1.3 million extraordinary loss in 1998, due to the gain in 1997 related to the forgiveness of debt principal net of the write-off of various deferred costs, while the loss in 1998 represents only the write-off deferred costs for mortgage indebtness that was repaid or refinanced and a reduction in the maximum balance that can be drawn on one of our Credit Facilities. Net income decreased $18.2 million, or 47.3%, to $20.2 million for the year ended December 31, 1998 compared to the same period in 1997 due to the changes in revenue, expenses, minority interest, and extraordinary items described above. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Net cash provided from operations represents the primary source of liquidity to fund distributions, debt service and recurring capital costs. In order to qualify as a REIT for federal income tax purposes, we must distribute 95% of our taxable income (excluding capital gains) annually. Accordingly, we currently intend to continue to make, but are not contractually bound to make, regular quarterly distributions to holders of our common shares/units and our preferred shares. We have established annual distribution rates as follows: $1.35 per annum per common share/unit, 7.5% per annum ($1.50 per share) for each Series A preferred share and 9% per annum ($2.25 per share) for each Series B preferred share. CREDIT FACILITIES. Our Credit Facilities, with a maximum loan availability totaling $46.5 million, have been provided by various financial institutions, and are collateralized by first mortgages on certain properties owned by the Operating Partnership. Subject to our compliance with the applicable loan covenants, the Credit Facilities may be used to provide funds for acquisitions and development activities and to provide the replacement letters-of-credit for the $26.9 million of tax-exempt bonds. As of December 31, 1999, $19.5 million was drawn on our Credit Facilities (excluding the letters-of-credit impact on current availability). See Note 4 to our consolidated financial statements for further information. PROPERTY SALES. On April 19, 1999, we sold approximately 161,710 net rentable square feet of our 122 South Michigan Avenue office building to NLU for a gross sales price of $14.95 million and consideration, net of commission, closing costs and a $1.1 million capital improvement allowance, of $12.1 million. As part of this sale, NLU also acquired an undivided 31.56% interest in certain common areas of the property. We continue to own the remaining 350,659 net rentable square feet of the building and are responsible for the management of the entire property. The sale resulted in a gain of $3.8 million for the year ended December 31, 1999. 34 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) On July 8, 1999, we sold approximately 7.5 acres of land to Antunes Properties, L.L.C. for a sale price of $1.0 million. The Services Company, an unconsolidated affiliate, constructed an office/warehouse facility on this parcel and sold it to Antunes Properties, L.L.C. This affiliate leased the land from us during the portion of the construction period in which we owned the land. On July 14, 1999, we sold nine industrial properties and one office property in a single transaction with a total sale price of $89.5 million. In order to defer the taxable gain on this transaction, net sales proceeds of $26.7 million were deposited into a tax-deferred exchange trust for reinvestment in future property purchases. Four replacement properties were identified under the tax-deferred exchange trust; three of these properties have been acquired as of December 31, 1999. The fourth property was acquired in January 2000. On September 30, 1999, we sold 50% of our common interest in the 77 West Wacker Drive property for $22.0 million and a $66.0 million preferred interest (providing a cumulative preferred return of 9.5% per annum) in this property. The remaining 50% common interest will be accounted for using the equity method of accounting. Prior to the closing of the transaction, the existing $170.0 million non-recourse first mortgage was refinanced with a new $170.0 million non-recourse first mortgage. The new mortgage loan bears interest at LIBOR plus 1.25%, requiring interest only payments from time to time and annual principal payments, maturing September 2004. The sale resulted in a gain of $48.3 million for the year ended December 31, 1999. In order to defer the taxable gain on this transaction, net proceeds of $84.9 million were deposited into a tax-deferred exchange trust and used for the acquisition of IBM Plaza and the Brush Hill Office Center. On December 22, 1999, we sold an industrial property for a sale price of $4.5 million. The sale resulted in a gain of $0.6 million attributed to the building and approximately $0.3 million attributed to the adjacent land for the year ended December 31, 1999. In order to defer the taxable gain on this transaction, net sales proceeds of $4.2 million were deposited into a tax-deferred exchange trust for reinvestment in future property purchases. Two replacement properties were identified under the tax deferred trust. These properties were acquired in January 2000. INDEBTEDNESS. Our aggregate indebtedness was $799.2 million and $593.2 million at December 31, 1999 and 1998, respectively. At December 31, 1999, such indebtedness had a weighted average maturity of 5.2 years and bore interest at a weighted average interest rate of 7.7% per annum. At December 31, 1999, $329.6 million, or 41.2%, of such indebtedness bore interest at fixed rates and $469.6 million, or 58.8% of such indebtedness, including $74.5 million of tax-exempt bonds, bore interest at variable rates. Included in the variable rate debt is $160.0 million subject to an interest rate swap agreement and $65.0 million subject to an interest rate collar agreement and $70.0 million subject to an interest cap agreement. We have financed a portion of our acquisitions with proceeds from mortgage notes payable from various financial institutions, with fixed and variable interest rates and maturities from 2000 through 2013. We believe that our properties have excess value that may be utilized for additional borrowings or debt securitizations. Under the provisions of one of the credit facilities, we are obligated to maintain interest rate contracts on a portion of our variable rate indebtedness. On January 31, 1999, we entered into an interest rate collar agreement, for the period from January 31, 1999 through January 31, 2002, with a financial institution for an original notional amount of $65.0 million. The interest 35 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) rate ceiling under the agreement is based on a LIBOR index rate of 7.50% and the interest rate floor is based on a LIBOR index rate of 3.73%. We entered into an interest rate cap agreement in July, 1999 with a financial institution for an original notional amount of $150.0 million at 7.0% during the period from July 1 to October 1, 1999. On November 1, 1999 we entered into an interest rate collar agreement for the period from November 1, 1999 through September 30, 2004 with a financial institution for an original notional amount of $170.0 million. The interest rate ceiling under the agreement is based on a LIBOR rate of 7.75% and the interest rate floor is based on a LIBOR rate of 5.62% through September 30, 2002 increasing to a LIBOR rate of 6.095% thereafter. This agreement satisfy our obligation to maintain interest rate contracts under the provisions of one of the credit facilities. On December 10, 1999, we entered into an interest rate swap agreement for the period from December 10, 1999 through December 10, 2002 for an original notional amount of $160.0 million that decreases to $158.4 million on December 10, 2000 and to $155.2 million on December 10, 2001, based on a LIBOR index rate of 6.3% and effectively fixed the interest rate on $160.0 million of variable rate mortgage indebtedness at a rate of 8.0%. On March 20, 2000, we entered into an interest rate cap agreement for the period from March 20, 2000 through November 17, 2000 for a notional amount of $70.0 million. The interest rate under the agreement is capped at the LIBOR interest rate of 8.0%. These agreements satisfy our obligation to maintain interest rate contracts under the provisions of one of the credit facilities. DEBT REPAYMENTS. In connection with the sale of nine industrial properties and one office property on July 14, 1999, mortgage debt of $63.2 million was repaid with sales proceeds or assumed by the purchaser. In connection with the sale of a 50% common interest in the 77 West Wacker Drive building on September 30, 1999, $170.0 million of debt was transferred to a newly formed unconsolidated joint venture. Therefore, the indebtedness is no longer included in our consolidated financial statements. FUTURE DEBT AND EQUITY OFFERINGS. We filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on June 8, 1999, to register up to $500.0 million of our equity and debt securities for future sale at prices and on terms to be determined at the time of offering. CAPITAL IMPROVEMENTS. Our properties require periodic investments of capital for tenant-related capital improvements. During 1999 and 1998, our tenant improvements and leasing commissions averaged $24.54 and $18.04, respectively, per square foot of newly leased office space, $8.19 and $3.85, respectively, per square foot of renewal leased office space, and $2.12 and $4.53, respectively, per square foot of newly leased industrial space. Our estimated annual cost of recurring tenant improvements and leasing commissions is approximately $7.4 million based upon average annual square feet for leases expiring during the year ending December 31, 2000. Our cost of general capital improvements to our properties averages approximately $3.5 million annually based upon an estimate of $0.19 per square foot. LIQUIDITY REQUIREMENTS. We expect to meet our short-term liquidity requirements through net cash provided by operations, additional debt financings and/or joint ventures, and refinancings of maturing debt. We expect to meet our long-term liquidity requirements for the funding of property development, property acquisitions, tenant improvements and other non-recurring capital improvements through a combination of net cash from operations, long-term secured and unsecured indebtedness (including our credit facilities), joint ventures, property sales and the issuance of additional equity and debt securities. There can be no assurance that we 36 HISTORICAL CASH FLOWS will be successful in obtaining the required amount of funds for these items or that the terms of capital raising activities, if any, will be as favorable as we have experienced in prior periods. The terms of the credit facilities and our preferred shares impose restrictions on our ability to incur indebtedness and issue additional preferred shares. Historically, we have generated positive cash flows from operations to fund distributions to our shareholders and have funded our expansion primarily through equity offerings and mortgage debt financing. Historically, our predecessor's principal sources of funding for operations and capital expenditures were from mortgage debt financing. We had consolidated net cash provided by operating activities of $105.1 million and $53.5 million for the years ended December 31, 1999 and 1998, respectively. We and our predecessor had consolidated and combined net cash provided by operating activities of $2.5 million for the year ended December 31, 1997. The $51.6 million increase in net cash provided by operating activities for the year ended December 31, 1999 from the year ended December 31, 1998 was primarily due to a $34.6 million increase in net income, a $7.8 million increase in depreciation and amortization expense, a $0.6 million increase in loss on land development option, a $3.3 million increase in the equity in loss of unconsolidated investments, a $21.3 million increase in income allocated to minority interests, a $39.9 million decrease in other assets, a $1.4 million increase in accounts payable and accrued expenses, and a $9.3 million increase in accrued real estate taxes, offset by a $53.1 million increase in gain on sale of real estate, a $0.6 million increase in gain on treasury lock terminations, a $0.2 million increase in extraordinary items, a $1.6 million increase in interest income and development costs added to the mortgage note receivable principal, a $1.5 million increase in tenant receivables, a $2.0 million increase in deferred rent receivable, a $0.1 million increase in accrued interest payable, a $0.2 million decrease in amortization of costs for leases assumed, a $0.2 million decrease in liabilities for leases assumed and a $7.1 million decrease in other liabilities. The $51.0 million increase in net cash provided by operating activities for the year ended December 31, 1998 from the year ended December 31, 1997 was primarily due to a $67.2 million decrease in extraordinary items, a $9.4 million increase in income allocated to minority interests, a $11.7 million increase in depreciation and amortization, a $4.6 million increase in other liabilities, a $3.8 million increase in accrued real estate taxes, a $2.5 million increase in accrued interest payable, and a $0.3 million decrease in gain of sale of real estate, offset by a $18.2 million decrease in net income, a $11.9 million increase in other assets, a $9.8 million decrease in interest added to principal on mortgage note payable affiliate, a $3.4 million decrease in accounts payable and accrued expenses, a $2.5 million increase in tenant receivables, a $1.9 million decrease in deferred rent receivable, a $1.0 million increase in interest income and developer fees added to mortgage note receivable principal and a $0.5 million decrease in standby loan fee-affiliate added to principal on mortgage note payable affiliate. We had consolidated net cash used in investing activities of $437.3 million and $361.4 million for the years ended December 31, 1999 and 1998, respectively. We and our predecessor had consolidated and combined net cash used in investing activities of $357.8 million for the year ended December 31, 1997. The $75.9 million increase in net cash used in investing activities for the year ended December 31, 1999, from the year ended December 31, 1998, was primarily due to a $282.3 million increase in expenditures for real estate and equipment, principally related to property acquisitions and development, a $11.9 million increase in advances on the mortgage note receivable and a $4.3 increase in leasing costs, offset by a $154.3 million increase in proceeds from the sales of real estate, a $62.4 million decrease in restricted cash escrows, a $4.6 million net repayment of loans by the Services Company, and a $1.3 million distribution received from an unconsolidated joint venture. The $3.6 million increase in net cash 37 HISTORICAL CASH FLOWS (CONTINUED) used in investing activities for the year ended December 31, 1998 from the year ended December 31, 1997 was primarily due to a $46.2 million decrease in advances on mortgage note receivable, a $1.6 million decrease in expenditures for real estate and equipment, a $2.9 million decrease in due from affiliates and a $0.4 million decrease in cash contributed to the Services Company,offset by a $50.7 million increase in restricted cash escrows, a $1.3 million increase in deferred leasing costs, a $3.4 million decrease in loans provided to the Services Company and a $0.3 million decrease in proceeds from sale of real estate. We had consolidated net cash provided by financing activities of $306.9 million and $342.4 million for the years ended December 31, 1999 and 1998, respectively. We and our predecessor had consolidated and combined net cash provided by financing activities of $361.7 million for the year ended December 31,1997. The $35.5 million decrease in net cash provided by financing activities from the year ended December 31, 1999, from the year ended December 31, 1998, was due to a $0.5 million increase in financing costs, a $1.0 million decrease in contributions from minority interests, a $95.3 million decrease in net proceeds from the sale of Series B preferred shares, a $45.9 million decrease in net proceeds from a private placement and a $11.3 million increase in distributions to preferred shareholders, common shareholders and minority interests, a $0.4 million increase in preferred stock transaction fee, a $129.2 million increase in the repayment of mortgage notes payable, offset by a $32.4 million increase in proceeds from mortgage notes payable, a $29.9 million increase in deposits recovered on treasury lock agreements, $178.5 million increase in net proceeds from the credit facilities, and a $7.3 million decrease in cash used to repurchase our common shares. The $19.3 million decrease in net cash provided by financing activities for the year ended December 31, 1998 from the year ended December 31, 1997 was primarily due to a $215.7 million net decrease in the net proceeds from the sale of our preferred and common shares and operating partnership units, a $7.3 million increase in cash used to repurchase our common shares, a $43.3 million increase in the repayment of mortgage notes payable and net repayment of credit facilities, a $35.2 million increase in distributions to our preferred and common shareholders and the operating partnership's minority interest unit holders, a $19.1 million increase in financings costs, a $5.6 million decrease in proceeds from mortgage note payable affiliates, and a $44.3 million decrease in contributions from predecessor partners offset by a $305.4 million increase in proceeds from mortgage notes payable and net proceeds from credit facilities, a $42.3 million decrease in the repayment of mortgage notes payable from affiliates, a $0.7 million decrease in due from affiliates, a $1.0 million contribution from minority interest - other and a $1.7 million decrease in debt termination fees. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations, as defined by NAREIT, an alternative measure of performance of an equity REIT. Funds from Operations is defined by NAREIT to mean net income (loss) determined in accordance with GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization (other than amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. We believe that in order to facilitate a clear understanding of our consolidated historical operating results and the Predecessor's combined historical operating results, Funds from Operations should be examined in conjunction with net income (loss) as presented in audited consolidated and combined financial statements and selected financial data included elsewhere in this Form 10-K. We compute Funds from Operations 38 FUNDS FROM OPERATIONS (CONTINUED) in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (with the exception that we report rental revenues on a cash basis (based on contractual lease terms), rather than a straight-line GAAP basis, which we believe results in a more accurate presentation of our actual operating activities), which may differ from the methodology for calculating Funds from Operations used by other REITs and, accordingly, may not be comparable to such other REITs. As a result of our reporting rental revenues on a cash basis for Funds from Operations, contractual rent increases will cause reported Funds from Operations to increase. Further, Funds from Operations does not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt repayment obligations, or other commitments and uncertainties. Funds from Operations should not be considered as an alternative to net income (loss), as an indication of our performance or to cash flows as a measure of liquidity or the ability to pay dividends or make distributions. 39 The following is our consolidated quarterly summary of Funds From Operations.
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------- FOURTH THIRD SECOND FIRST TOTAL QUARTER QUARTER QUARTER QUARTER ----------------------------------------------------------------- Net income allocated to common shareholders ........................... $ 42,745 $ 1,470 $ 31,238 $ 7,025 $ 3,012 FFO adjustments: Real estate depreciation and amortization (1) ..................... 30,549 7,106 8,022 8,088 7,333 Amortization of costs for leases assumed .............................. 899 163 245 246 245 Straight-line rental revenue adjustments (3,263) (1,418) (637) (614) (594) Joint venture adjustments .............. 654 654 - - - Gain on sales of real estate ........... (52,706) (224) (48,125) (4,357) - Adjustment associated with Services Company .............................. 2,783 2,783 - - - Net (gain) loss on Treasury Lock terminations ......................... (615) - - (1,172) 557 Loss on land development options interests ............................ 600 - - - 600 Minority interests ..................... 30,687 1,440 22,330 4,861 2,056 Extraordinary loss ........................ 1,082 253 829 - - ----------------------------------------------------------------- Funds from operations ..................... $ 53,415 $ 12,227 $ 13,902 $ 14,077 $ 13,209 ================================================================= Other data: Net cash provided by operating activities $ 105,092 $ 39,612 $ 27,867 $ 16,195 $ 21,418 Net cash used in investing activities ... (437,332) (207,339) (61,117) (17,571) (151,305) Net cash provided by financing activities 306,907 178,721 25,565 6,600 96,021 PERIOD FROM YEAR ENDED DECEMBER 31, 1998 NOVEMBER 17, ----------------------------------------------------------------------- 1997 FOURTH THIRD SECOND FIRST DECEMBER 31, TOTAL QUARTER QUARTER QUARTER QUARTER 1997 --------------------------------------------------------------------------------------- Net income allocated to common shareholders ........................... $ 12,274 $ 2,716 $ 4,035 $ 2,997 $ 2,526 $ 447 FFO adjustments: Real estate depreciation and amortization (1) ..................... 23,964 7,009 6,106 5,834 5,015 2,215 Amortization of costs for leases assumed .............................. 1,137 285 286 275 291 142 Straight-line rental revenue adjustments (1,234) (181) (531) (494) (28) 180 Minority interests ..................... 9,368 2,347 2,704 2,352 1,965 635 Extraordinary loss ..................... 1,253 728 - 525 - - --------------------------------------------------------------------------------------- Funds from operations ..................... $ 46,762 $ 12,904 $ 12,600 $ 11,489 $ 9,769 $ 3,619 ======================================================================================= Other data: Net cash provided by (used in) operating activities ........................... $ 53,525 $ (133) $ 36,442 $ 9,214 $ 8,002 $ 6,706 Net cash used in investing activities .. (361,384) (25,803) (68,245) (91,645) (175,691) (353,864) Net cash provided by financing activities 342,390 64,298 26,774 86,011 165,307 355,390 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Excludes the amortization of deferred financing costs and non-real estate related depreciation. 40 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS None INFLATION Substantially all of our office and industrial leases require tenants to pay, as additional rent, a portion of any increases in real estate taxes and operating expenses over a base amount. In addition, many of the office and industrial leases provide for fixed increases in base rent or indexed escalations (based on the Consumer Price Index or other measures). We believe that inflationary increases in expenses will be offset, in part, by the expense reimbursements and contractual rent increases described above. As of December 31, 1999, approximately $469.6 million of our outstanding indebtedness (including our Credit Facilities) was subject to interest at floating rates. Future indebtedness may also be subject to floating rate interest. The floating rate debt includes $160.0 million subject to an interest rate swap agreement, which effectively results in a fixed rate of 8.0%, and $65.0 million subject to an interest rate collar agreement, which effectively results in a cap at 9.65% and a floor at 5.88%. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on such indebtedness. 41 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For our mortgage note receivable, mortgage notes payable, credit facilities and bonds payable, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps and collars, the table represents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. None of these instruments were entered into for trading purposes. INTEREST RATE SENSITIVITY PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY AVERAGE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 THEREAFTER TOTAL ---------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) ASSETS MORTGAGE NOTE RECEIVABLE (1): Fixed rate amount -- -- -- -- $ 82.7 -- $ 82.7 Fixed interest rate -- -- -- -- 9.64% -- -- LIABILITIES MORTGAGE NOTES PAYABLE (2): Fixed rate amount $ 19.0 $ 62.3 $ 3.9 $ 4.2 $ 4.4 $ 235.8 $ 329.6 Weighted-average interest rate (3) 9.69% 6.78% 7.32% 7.32% 7.32% 7.38% Variable rate $ 67.3 $ 48.3 $ 246.0 -- $ 14.0 -- $ 375.6 Weighted-average interest rate (3) 8.56% 8.68% 8.32% 9.50% -- CREDIT FACILITIES(2): Variable rate amount $ 19.5 -- -- -- -- -- $ 19.5 Weighted-average interest rate (3) 8.24% -- -- -- -- BONDS PAYABLE (2): Variable rate amount -- -- $ 48.2 -- -- $ 26.3 $ 74.5 Weighted-average interest rate (3) -- 5.67% -- -- 4.55% INTEREST RATE SWAP AGREEMENT (2)(3): Notional amount $ 1.6 $ 3.2 $ 155.2 -- -- -- $ 160.0 Pay rate 6.46% 6.46% 6.46% -- -- Fixed swap rate 6.30% 6.30% 6.30% -- -- INTEREST RATE COLLAR AGREEMENTS (2)(3): Notional amount -- -- $ 65.0 -- -- -- $ 65.0 Pay rate -- 6.48% -- -- -- Cap rate -- 7.50% -- -- -- Floor rate -- 3.73% -- -- -- - -------------------------------------------------------------------------------------------------------------------------------
(1) See Note 2 to our consolidated financial statements for additional information. (2) See Note 4 to our consolidated financial statements for additional information. (3) Based upon the rates in effect at December 31, 1999. The weighted-average interest rates, including the interest rate swap and collar agreements, on our mortgage notes payable, credit facilities and bonds payable at December 31, 1999 were 7.91%, 8.24% and 5.27%, respectively. Additionally, the bonds payable of $48.2 million and $26.3 million are collateralized by letters of credit of $48.8 million and $26.9 million, respectively, incurring annual fees of 1.65% and 2.25%, respectively. If interest rates on our variable rate debt increased by one percentage point, our annual interest incurred (including the effects of the interest rate protection agreements) would increase by $3.1 million. 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 43 PART III Certain information required by Part III is omitted from this Report as we will file a definitive proxy statement within 120 days after the end of our fiscal year pursuant to Regulation 14A for our Annual Meeting of Shareholders to be held on May 17, 2000 (the "Proxy Statement") and the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the section captioned "Election of Trustees" of the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained in the sections captioned and "Executive Officers" of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the section captioned "Principal Security Holders of the Company" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the section captioned "Other Information Certain Relationships and Related Transactions" of the Proxy Statement is incorporated herein by reference. 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Prime Group Realty Trust and the Predecessor: Report of Independent Auditors......................................................................... F-2 Consolidated Balance Sheets of Prime Group Realty Trust as of December 31, 1999 and 1998.......................................................................... F-3 Consolidated Statements of Operations of Prime Group Realty Trust for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997 and Combined Statement of Operations of the Predecessor for the period from January 1, 1997 through November 16, 1997................................................................................................ F-4 Consolidated Statements of Changes in Shareholders' Equity of Prime Group Realty Trust for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 to December 31, 1997.............................................................. F-6 Combined Statement of Changes in Predecessors' Deficit for the period from January 1, 1997 through November 16, 1997........................................................... F-7 Consolidated Statements of Cash Flows of Prime Group Realty Trust for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997 and the Combined Statement of Cash Flows of the Predecessor for the period from January 1, 1997 through November 16, 1997................................................................................................ F-8 Notes to Consolidated and Combined Financial Statements................................................ F-12 (2) Financial Statement Schedule The following financial statement schedule is included in Item 14(d) Report of Independent Auditors on Schedule (included with consent filed as Exhibit 23.1) Schedule III - Real Estate and Accumulated Depreciation of Prime Group Realty Trust as of December 31, 1999...................................................... F-40
All other schedules for which provision is made in the applicable accounting regulation of the Securities Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 45 (3) Exhibits
EXHIBIT ------- NO. DESCRIPTION --- ----------- 3.1 Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust as filed as an exhibit to our 1997 Annual Report on Form 10-4 and incorporated herein by reference. 3.2 Articles Supplementary to the Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 3.3 Articles Supplementary to the Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust date as of December 29, 1998 as filed as an exhibit to our 1998 Annual Report on Form 10-K and incorporated by reference 3.4 Amended and Restated Bylaws of Prime Group Realty Trust as filed as an exhibit to our 1997 Annual Report on Form 10-K and incorporated herein by reference. 3.5 Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. (the "Amended and Restated Agreement of Limited Partnership") as filed as an exhibit to our 1997 Annual Report on Form 10-K and incorporated herein by reference 3.6 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership dated as of December 15, 1997 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.7 Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership dated as of December 15, 1997 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.8 Amendment No. 3 to the Amended and Restated Agreement of Limited Partnership dated as of January 15, 1998 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.9 Amendment No. 4 to the Amended and Restated Agreement of Limited Partnership dated as of February 13, 1998 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.10 Amendment No. 5 to the Amended and Restated Agreement of Limited Partnership dated as of March 13, 1998 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.11 Amendment No. 6 to the Amended and Restated Agreement of Limited Partnership dated as of March 25, 1998 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.12 Amendment No. 7 to the Amended and Restated Agreement of Limited Partnership dated as of April 15, 1998 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.13 Amendment No. 8 to the Amended and Restated Agreement of Limited Partnership dated as of May 15, 1998 as filed as an exhibit to Amendment No. 2 to our Registration Statement on Form S-11 (No. 333-51599) and incorporated herein by reference 3.14 Amendment No. 9 to the Amended and Restated Agreement of Limited Partnership dated as of June 5, 1998 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference.
46 (3) EXHIBITS
EXHIBIT ------- NO. DESCRIPTION --- ----------- 3.15 Amendment No. 10 to the Amended and Restated Agreement of Limited Partnership dated as of June 15, 1998 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 3.16 Amendment No. 11 to the Amended and Restated Agreement of Limited Partnership dated as of July 15, 1998 as filed as an exhibit to Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51935) and incorporated herein by reference. 3.17 Amendment No. 12 to the Amended and Restated Agreement of Limited Partnership dated as of August 14, 1998 as filed as an exhibit to Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51935) and incorporated herein by reference 3.18 Amendment No. 13 to the Amended and Restated Agreement of Limited Partnership dated as of September 15, 1998 as filed as an exhibit to Amendment No. 1 to Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 (No. 333-51935) and incorporated herein by reference 3.19 Amendment No. 14 to the Amended and Restated Agreement of Limited Partnership dated as of October 15, 1998 as filed as an exhibit to Amendment No. 2 to our Registration Statement on Form S-3 (No. 333-64973) and incorporated herein by reference 3.20 Amendment No. 15 to the Amended and Restated Agreement of Limited Partnership dated as of November 16, 1998 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-3 (No. 333-64973) and incorporated herein by reference 3.21 Amendment No. 16 to the Amended and Restated Agreement of Limited Partnership dated as of December 15, 1998 as filed as an exhibit to Post-Effective Amendment No. 3 to our Registration Statement on Form S-3 (Registration No. 333-51935) and incorporated herein by reference 3.22 Amendment No. 17 to the Amended and Restated Agreement of Limited Partnership dated as of January 15, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference 3.23 Amendment No. 18 to the Amended and Restated Agreement of Limited Partnership dated as of February 15, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference 3.24 Amendment No. 19 to the Amended and Restated Agreement of Limited Partnership dated as of March 15, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference 3.26 Amendment No. 21 to the Amended and Restated Agreement of Limited Partnership dated as of April 15, 1999 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-3 (No. 333-70369) and incorporated herein by reference 3.27 Amendment No. 22 to the Amended and Restated Agreement of Limited Partnership dated as of April 22, 1999 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-3 (No. 333-70369) and incorporated herein by reference 3.28 Amendment No. 23 to the Amended and Restated Agreement of Limited Partnership dated as of May 15, 1999 as filed as an exhibit to Amendment No. 1 to our Registration Statement on Form S-3 (No. 333-70369) and incorporated herein by reference 3.29 Amendment No. 24 to the Amended and Restated Agreement of Limited Partnership dated as of June 15, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference
47 (3) Exhibits
EXHIBIT ------- NO. DESCRIPTION --- ----------- 3.30 Amendment No. 25 to the Amended and Restated Agreement of Limited Partnership dated as of July 14, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference 3.31 Amendment No. 26 to the Amended and Restated Agreement of Limited Partnership dated as of July 15, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference 3.32 Amendment No. 27 to the Amended and Restated Agreement of Limited Partnership dated as of August 16, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference 3.33 Amendment No. 28 to the Amended and Restated Agreement of Limited Partnership dated as of September 15, 1999 as filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference 3.34 Amendment No. 29 to the Amended and Restated Agreement of Limited Partnership dated as of October 15, 1999 3.35 Amendment No. 30 to the Amended and Restated Agreement of Limited Partnership dated as of November 15, 1999 3.36 Amendment No. 31 to the Amended and Restated Agreement of Limited Partnership dated as of December 15, 1999 3.37 Amendment No. 32 to the Amended and Restated Agreement of Limited Partnership dated as of December 30, 1999 10.1 Loan Agreement, dated December 13, 1999, between 330 N. Wabash Avenue, L.L.C., Westdeutsche Immobilienbank and Merrill Lynch Mortgage Capital Inc. 10.2 Promissory Note, dated December 13, 1999, from 330 N. Wabash Avenue, L.L.C. to Westdeutsche Immobilienbank 10.3 Guaranty Agreement, dated December 13, 1999, between Prime Group Realty, L.P. and Westdeutsche Immobilienbank 10.4 Seventh Amendment to the Credit Agreement, dated October 22, 1999, between Prime Group Realty, L.P., Prime Group Realty Trust and Bank Boston, N.A., CIBC Inc. and Prudential Securities Corporation 10.5 Fourth Note Modification Agreement, dated November 5, 1999, between LaSalle Bank National Association and Prime Group Realty, L.P. 10.6 Second Amendment to Second Amended and Restated Loan Agreement, dated November 5, 1999, between LaSalle Bank National Association, Prime Group Realty, L.P. and Prime Group Realty Trust 12.1 Computation of ratios of earnings to combined fixed changes and preferred share distributions. 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule
48 (b) Reports on Form 8-K We filed the following reports on Form 8-K during the fourth quarter of 1999: Form 8-K dated September 30, 1999, (filed on October 15, 1999; File No. 001-13589) relating to the sale of a 50% interest in one property. The report includes pro forma financial information. Form 8-K dated December 17, 1999, (filed on December 21, 1999; File No. 001-13589) relating to the Board of Trustees' approval of the repurchase of up to $250.0 million of the our outstanding common and preferred shares. Form 8-K dated December 13, 1999 (filed on December 23, 1999; File No. 001-13589) relating to purchase of one property. The report includes the financial statements of the property and pro forma financial information. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March ____, 2000. PRIME GROUP REALTY TRUST Dated: March ___, 2000 ________________________ Richard S. Curto PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: March ___, 2000 ________________________ William M. Karnes EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- - -------------------------------- Michael W. Reschke Chairman of the Board and Trustee March ___, 2000 - -------------------------------- Richard S. Curto President, Chief Executive Officer and Trustee March ___, 2000 - -------------------------------- William M. Karnes Executive Vice President and Chief Financial Officer March ___, 2000 - -------------------------------- Roy P. Rendino Senior Vice President - Finance and Chief Accounting Officer March ___, 2000 - -------------------------------- Stephen J. Nardi Trustee March ___, 2000 - -------------------------------- James R. Thompson Trustee March ___, 2000 - -------------------------------- Jacque M. Ducharme Trustee March ___, 2000 - -------------------------------- Christopher J. Nassetta Trustee March ___, 2000 - -------------------------------- Thomas J. Saylak Trustee March ___, 2000
50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March ____, 2000. PRIME GROUP REALTY TRUST Dated: March ___, 2000 /s/ RICHARD S. CURTO -------------------- Richard S. Curto PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: March ___, 2000 /s/ WILLIAM M. KARNES --------------------- William M. Karnes EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ MICHAEL W. RESCHKE - ---------------------------- Michael W. Reschke Chairman of the Board and Trustee March ___, 2000 /s/ RICHARD S. CURTO - ---------------------------- Richard S. Curto President, Chief Executive Officer and Trustee March ___, 2000 /s/ WILLIAM M. KARNES - ---------------------------- William M. Karnes Executive Vice President and Chief Financial Officer March ___, 2000 /s/ ROY P. RENDINO - ---------------------------- Roy P. Rendino Senior Vice President - Finance and Chief Accounting Officer March ___, 2000 /s/ STEPHEN J. NARDI - ---------------------------- Stephen J. Nardi Trustee March ___, 2000 /s/ JAMES R. THOMPSON - ---------------------------- James R. Thompson Trustee March ___, 2000 /s/ JACQUE M. DUCHARME - ---------------------------- Jacque M. Ducharme Trustee March ___, 2000 /s/ CHRISTOPHER J. NASSETTA - ---------------------------- Christopher J. Nassetta Trustee March ___, 2000 /s/ THOMAS J. SAYLAK - ---------------------------- Thomas J. Saylak Trustee March ___, 2000
51 INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Financial Statements Prime Group Realty Trust and the Predecessor: Report of Independent Auditors.......................................................................... F-2 Consolidated Balance Sheets of Prime Group Realty Trust as of December 31, 1999 and 1998.............................................................................. F-3 Consolidated Statements of Operations of Prime Group Realty Trust for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997 and Combined Statement of Operations of the Predecessor for the period from January 1, 1997 through November 16, 1997...................................... F-4 Consolidated Statements of Changes in Shareholders' Equity of Prime Group Realty Trust for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 to December 31, 1997........................................................ F-6 Combined Statement of Changes in Predecessors' Deficit for the period from January 1, 1997 through November 16, 1997.......................................................... F-7 Consolidated Statements of Cash Flows of Prime Group Realty Trust for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997 and the Combined Statement of Cash Flows of the Predecessor for the period from January 1, 1997 through November 16, 1997...................................... F-8 Notes to Consolidated and Combined Financial Statements................................................. F-12 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation of Prime Group Realty Trust as of December 31, 1999................................................................................. F-40
F-1 REPORT OF INDEPENDENT AUDITORS Board of Trustees Prime Group Realty Trust We have audited the accompanying consolidated balance sheets of Prime Group Realty Trust as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 (date of formation) through December 31, 1997. We have also audited the accompanying combined statements of operations, changes in predecessor's deficit, and cash flows of the Predecessor for the period from January 1, 1997 through November 16, 1997. These financial statements are the responsibility of Prime Group Realty Trust's and Predecessor's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Group Realty Trust at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997, and the Predecessor's combined results of its operations and its cash flows for the period from January 1, 1997 through November 16, 1997, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Chicago, Illinois MARCH 20, 2000 F-2 PRIME GROUP REALTY TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
December 31, 1999 1998 ------------------------------------------ Assets Real estate at cost: Land............................................................................... $ 183,295 $ 139,505 Building and improvements.......................................................... 928,567 655,154 Tenant improvements .............................................................. 39,232 48,372 ------------------------------------------ 1,151,094 843,031 Accumulated depreciation.............................................................. (37,977) (24,756) ------------------------------------------ 1,113,117 818,275 Property under development............................................................ 125,724 51,376 ------------------------------------------ 1,238,841 869,651 Mortgage note receivable.............................................................. 82,687 63,270 Cash and cash equivalents............................................................. 21,167 46,500 Tenant receivables.................................................................... 11,438 7,288 Restricted cash escrows............................................................... 42,140 53,820 Deferred rent receivable.............................................................. 9,501 39,062 Deferred costs - net.................................................................. 26,901 32,891 Other................................................................................. 11,500 52,032 ========================================== Total assets.......................................................................... $1,444,175 $1,164,514 ========================================== Liabilities and shareholders' equity Mortgage notes payable................................................................ $ 705,194 $ 518,718 Credit facilities..................................................................... 19,527 - Bonds payable......................................................................... 74,450 74,450 Accrued interest payable.............................................................. 3,508 2,440 Accrued real estate taxes............................................................. 40,689 29,657 Accounts payable and accrued expenses................................................. 36,133 26,068 Liabilities for leases assumed........................................................ 3,235 4,792 Dividends payable..................................................................... 8,122 8,080 Other................................................................................. 10,909 4,523 ------------------------------------------ Total liabilities..................................................................... 901,767 668,728 Commitments and contingencies......................................................... - - Minority interests: Operating partnership.............................................................. 168,070 144,781 Other.............................................................................. 1,000 1,000 Series A - Cumulative Convertible Preferred Shares, 2,000,000 shares designated, issued and outstanding at December 31, 1999 39,703 - Shareholders' equity: Preferred Shares, $0.01 par value; 30,000,000 shares authorized: Series B - Cumulative Redeemable Preferred Shares, 4,000,000 shares designated, issued and outstanding at December 31, 1999 and 1998...... 40 40 Series A - Cumulative Convertible Preferred Shares, 2,000,000 shares designated, issued and outstanding at December 31, 1998................ - 20 Common Shares: $0.01 par value; 100,000,000 shares authorized; 15,189,438 and 15,110,794 shares issued and outstanding at December 31, 1999 and 1998, respectively.......................... 152 151 Additional paid-in capital......................................................... 321,357 360,017 Retained (distributions in excess of) earnings..................................... 12,086 (10,223) ------------------------------------------ Total shareholders' equity............................................................ 333,635 350,005 ========================================== Total liabilities and shareholders' equity............................................ $1,444,175 $1,164,514 ==========================================
See accompanying notes. F-3 PRIME GROUP REALTY TRUST AND THE PREDECESSOR CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS OF PRIME GROUP REALTY TRUST AND COMBINED STATEMENT OF OPERATIONS OF THE PREDECESSOR (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
PRIME GROUP REALTY TRUST PREDECESSOR ---------------------------------------------------------- ------------------ Period from Period from November 17, January 1, 1997 through 1997 through Year ended December 31, December 31, November 16, 1999 1998 1997 1997 ---------------------------------------------------------- ------------------- Revenue Rental............................................. $ 126,687 $ 97,212 $ 7,293 $27,947 Tenant reimbursements.............................. 50,171 37,545 2,041 12,490 Other property revenues............................ 11,201 4,249 87 1,229 Mortgage note interest............................. 6,926 5,866 248 - Interest income and other.......................... 1,569 2,729 161 - ---------------------------------------------------------- ------------------- Total revenue...................................... 196,554 147,601 9,830 41,666 Expenses Property operations................................ 44,446 29,598 2,213 8,622 Real estate taxes.................................. 34,470 25,077 1,765 8,575 Depreciation and amortization...................... 33,258 25,447 2,478 11,241 Interest........................................... 42,648 30,901 1,680 24,613 Interest - affiliates.............................. - - - 9,804 Loss on land development option.................... 600 - - - General and administrative......................... 7,565 5,712 267 2,414 Financing fees..................................... - - - 1,180 Property and asset management fees -affiliates..... - - - 1,348 Provision for environmental remediation costs...... - - - 3,205 ---------------------------------------------------------- ------------------- Total expenses..................................... 162,987 116,735 8,403 71,002 ---------------------------------------------------------- ------------------- Income (loss) before gain on sales of real estate, minority interests and extraordinary items...... 33,567 30,866 1,427 (29,336) Gain on sales of real estate....................... 53,050 - - 286 ---------------------------------------------------------- ------------------- Income (loss) before minority interests and extraordinary items......................... 86,617 30,866 1,427 (29,050) Minority interests................................. (30,687) (9,368) (635) 666 ---------------------------------------------------------- ------------------- Income (loss) before extraordinary items........... 55,930 21,498 792 (28,384) Extraordinary items: (loss) gain on extinguishment of debt, net of minority interests in the amount of $754, $878 and $1,127 for the years ended December 31, 1999 and 1998, and for the period from January 1, 1997 through November 16, 1997, respectively ............................. (1,082) (1,253) - 65,990 ---------------------------------------------------------- ------------------- Net income......................................... 54,848 20,245 792 $37,606 =================== Net income allocated to preferred shareholders.................................... (12,103) (7,971) (345) ---------------------------------------------------------- Net income available to common shareholders.................................... $ 42,745 $ 12,274 $ 447 ==========================================================
F-4 PRIME GROUP REALTY TRUST AND THE PREDECESSOR CONSOLIDATED STATEMENTS OF OPERATIONS OF PRIME GROUP REALTY TRUST AND COMBINED STATEMENT OF OPERATIONS OF THE PREDECESSOR
PRIME GROUP REALTY TRUST ------------------------ Period from November 17, 1997 through Year ended December 31, December 31, 1999 1998 1997 ---------------------------------------------------------- Basic earnings available to common shares per weighted-average common share: Income before gain on sales of real estate and extraordinary items............................. $ 0.84 $ 0.91 $ 0.04 Gain on sales of real estate, net of minority 2.05 - - interests....................................... Extraordinary loss on extinguishment of debt, net of minority interests.............................. (0.07) (0.08) - ---------------------------------------------------------- Net income available per weighted-average common share of beneficial interest - basic............ $ 2.82 $ 0.83 $ 0.04 ========================================================== Diluted earnings available to common shares per weighted-average common share: Income before gain on sales of real estate and extraordinary items............................. $ 0.84 $ 0.91 $ 0.04 Gain on sales of real estate, net of minority 2.04 - - interests....................................... Extraordinary loss on extinguishment of debt, net of minority interests.............................. (0.07) (0.08) - ---------------------------------------------------------- Net income available per weighted-average common share of beneficial interest - diluted.......... $ 2.81 $ 0.83 $ 0.04 ==========================================================
See accompanying notes. F-5 PRIME GROUP REALTY TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND FOR THE PERIOD FROM NOVEMBER 17, 1997 THROUGH DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
ADDITIONAL DISTRIBUTIONS PREFERRED SHARES COMMON PAID-IN IN EXCESS OF ---------------- ------ SERIES B SERIES A SHARES CAPITAL EARNINGS TOTAL -------- -------- ------ ------- -------- ----- Issuance of 2,000,000 Series A - preferred shares $ - $20 $ - $ 39,580 $ - $ 39,600 Issuance of 12,980,000 common shares............ - - 130 232,222 - 232,352 Step-up in basis from the purchase of third-party owner's interest in predecessor............... - - - 1,430 - 1,430 Reclassification of predecessor's minority interest - - - (6,564) - (6,564) Reclassification of net deficit of predecessor................................... - - - (33,976) - (33,976) Additional contribution by predecessor.......... - - - 11,873 - 11,873 Contribution of net liabilities to services company - - - 380 - 380 Additional paid-in capital allocated to minority interest...................................... - - - (19,313) - (19,313) Net income...................................... - - - - 792 792 Series A-preferred share dividends declared ($0.173 per share)................... - - - - (345) (345) Common share dividends declared - ($0.166 per share)............................ - - - (2,160) (2,160) ------------------------------------------------------------------------------ Balance at December 31, 1997.................... - 20 130 225,632 (1,713) 224,069 Issuance of 2,579,994 common shares............. - - 26 45,904 - 45,930 Issuance of 4,000,000 Series B - preferred shares 40 - - 95,285 - 95,325 Issuance of 25,000 common shares granted during the year....................... - - - 458 - 458 Repurchase of 474,200 common shares............. - - (5) (7,262) - (7,267) Net income...................................... - - - - 20,245 20,245 Series B-preferred share dividends declared ($1.29 per share).................... - - - - (5,141) (5,141) Series A-preferred share dividends declared ($1.42 per share).................... - - - - (2,830) (2,830) Common share dividends declared ($1.35 per share)............................. - - - - (20,784) (20,784) ------------------------------------------------------------------------------ Balance at December 31, 1998.................... 40 20 151 360,017 (10,223) 350,005 Amortization of restricted stock awards.................................. - - - 576 - 576 Net income...................................... - - - - 54,848 54,848 Series B-preferred share dividends declared ($2.25 per share).................... - - - - (9,000) (9,000) Series A-preferred share dividends declared ($1.50 per share).................... - - - - (3,000) (3,000) Series A-preferred share amortized dividend..... - - - - (103) (103) Common share dividends declared ($1.35 per share)............................. - - - - (20,436) (20,436) Reclassification of Series A-preferred shares to redeemable equity............................ - (20) - (39,980) - (40,000) Conversion of 53,611 common units to common shares (one for one)................................ - - 1 744 - 745 ------------------------------------------------------------------------------ Balance at December 31, 1999.................... $40 $ - $152 $321,357 $ 12,086 $333,635 ==============================================================================
See accompanying notes. F-6 PRIME GROUP REALTY TRUST AND THE PREDECESSOR COMBINED STATEMENT OF CHANGES IN PREDECESSOR'S DEFICIT PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 16, 1997 (DOLLARS IN THOUSANDS) Balance at January 1, 1997............................................... $ (115,792) Contributions............................................................ 44,330 Distributions............................................................ (120) Net income............................................................... 37,606 --------------- Balance at November 16, 1997............................................. $ (33,976) ===============
See accompanying notes. F-7 PRIME GROUP REALTY TRUST AND THE PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST AND COMBINED STATEMENT OF CASH FLOWS OF THE PREDECESSOR (DOLLARS IN THOUSANDS)
PRIME GROUP REALTY TRUST PREDECESSOR --------------------------------------------- -------------- Period from Period from November 17, January 1, 1997 through 1997 through Year ended December 31, December 31, November 16, 1999 1998 1997 1997 --------------------------------------------- -------------- Operating activities Net income.......................................................... $ 54,848 $20,245 $ 792 $37,606 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of costs for leases assumed (included in rental revenue)...................................................... 899 1,137 142 1,022 Interest income and developer fees added to mortgage note receivable principal.......................................... (2,580) (1,010) - - Gain on sales of real estate................................... (53,050) - - (286) Depreciation and amortization.................................. 33,258 25,447 2,478 11,241 Interest added to principal on mortgage note payable affiliate. - - - 9,772 Standby loan fee-affiliate added to principal on mortgage note payable affiliate........................................ - - - 460 Net gain on treasury lock terminations......................... (615) - - - Loss on land development option................................ 600 - - - Net equity in loss of unconsolidated investments............... 3,609 274 - - Minority interests............................................. 30,687 9,368 635 (666) Extraordinary items, net of minority interest.................. 1,082 1,253 - (65,990) Changes in operating assets and liabilities: Increase in tenant receivables.............................. (4,988) (3,468) (15) (916) (Increase) decrease in deferred rent receivable.............. (3,263) (1,234) 180 487 Decrease (increase) in other assets.......................... 18,435 (21,458) (10,032) 506 Increase (decrease) in accrued interest payable.............. 1,068 1,195 (175) (1,118) Increase in accrued real estate taxes........................ 21,049 11,742 7,556 415 Increase in accounts payable and accrued expenses............ 8,702 7,299 7,202 3,498 Decrease in liabilities for leases assumed................... (1,204) (966) (350) (1,049) (Decrease) increase in other liabilities..................... (3,445) 3,701 (1,707) 777 --------------------------------------------- -------------- Net cash provided by (used in) operating activities................. 105,092 53,525 6,706 (4,241)
See accompanying notes. F-8 PRIME GROUP REALTY TRUST AND THE PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST AND COMBINED STATEMENT OF CASH FLOWS OF THE PREDECESSOR (CONTINUED) (DOLLARS IN THOUSANDS)
PRIME GROUP REALTY TRUST PREDECESSOR ------------------------------------------------------------- Period from Period from November 17, January 1, 1997 through 1997 through Year ended December 31, December 31, November 16, 1999 1998 1997 1997 ------------------------------------------------------------- INVESTING ACTIVITIES Expenditures for real estate and equipment.......................... $(583,454) $(301,068) $(297,019) $ (5,659) Proceeds from sales of real estate.................................. 154,309 - - 298 Purchase of and additional advances on mortgage note receivable..... (16,837) (4,943) (51,163) - Decrease (increase) in restricted cash escrows...................... 11,680 (50,736) - - Leasing costs....................................................... (7,106) (2,840) (48) (1,459) Net repayments from (loans provided to) services company............ 2,801 (1,797) (5,258) - Distribution from unconsolidated joint venture...................... 1,275 - - - Cash contributed to services company................................ - - (376) - Decrease in due from affiliates..................................... - - - 2,894 ------------------------------------------------------------- Net cash used in investing activities............................... (437,332) (361,384) (353,864) (3,926) FINANCING ACTIVITIES Net proceeds from the sale of preferred shares...................... - 95,325 39,600 - Net proceeds from the sale of common shares......................... - 45,930 232,352 - Common share repurchases............................................ - (7,267) - - Proceeds from sale of operating partnership units................... - - 85,000 - Financing costs..................................................... (8,306) (7,785) (3,328) - Deposits returned (made) under treasury lock agreements............ 15,256 (14,641) - - Proceeds from mortgage notes payable................................ 546,538 514,065 84,198 480 Proceeds from mortgage notes payable - affiliates................... - - - 5,647 Net proceeds (repayment of) from credit facilities.................. 19,527 (159,000) 159,000 - Repayment of mortgage notes payable................................. (219,163) (85,957) (236,537) (119) Repayment of mortgage notes payable - affiliates.................... - (3,984) (4,895) (41,367) Decrease in due to affiliates....................................... - - - (708) Contribution from minority interests - other........................ - 1,000 - - Distributions to minority interest - operating partnership.......... (14,151) (12,116) - (120) Series A - preferred shares transaction fee......................... (400) - - - Dividends paid to Series B - preferred shareholders................. (9,000) (2,891) - - Dividends paid to Series A - preferred shareholders................. (2,980) (2,445) - - Dividends paid to common shareholders............................... (20,414) (17,844) - - Contributions from partners......................................... - - - 44,330 Distributions to partners........................................... - - - (120) Debt termination fees............................................... - - - (1,692) ------------------------------------------------------------- Net cash provided by financing activities........................... 306,907 342,390 355,390 6,331 ------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents................ (25,333) 34,531 8,232 (1,836) Cash and cash equivalents at beginning of period.................... 46,500 11,969 3,737 5,573 ------------------------------------------------------------- Cash and cash equivalents at end of period.......................... $ 21,167 $ 46,500 $ 11,969 $ 3,737 =============================================================
See accompanying notes. F-9 PRIME GROUP REALTY TRUST AND THE PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST AND COMBINED STATEMENT OF CASH FLOWS OF THE PREDECESSOR (CONTINUED) (DOLLARS IN THOUSANDS) During the year ended December 31, 1999, the Company sold the following assets and liabilities: Real estate, net.............................................................................................. $ 261,255 Tenant receivables, net....................................................................................... 838 Deferred rent receivable...................................................................................... 32,824 Deferred costs, net........................................................................................... 13,318 Mortgage notes payable........................................................................................ (205,109) Accrued real estate taxes..................................................................................... (10,017) Other liabilities and assets, net............................................................................. 4,580 --------------- Net assets sold............................................................................................... 97,689 Proceeds from sales of real estate............................................................................ 154,309 --------------- Total gain on sales of real estate............................................................................ 56,620 Less gain deferred............................................................................................ (3,570) --------------- Gain recognized on sales of real estate....................................................................... $ 53,050 =============== Supplemental disclosure of non-cash investing and financing activities: The following represents noncash activity for the years ended December 31, 1999 and 1998:
Year ended December 31, 1999 1998 ---------------------------- Real estate additions through the assumption of mortgage payables................................ $ 140,899 $ - Real estate additions through the issuance of partnership units and common share grants.......... 8,828 1,658 Capital lease transaction........................................................................ 1,250 - Accounts payable and accrued expenses for property under development............................. 989 4,060 Accounts payable and accrued expenses for mortgage note receivable advances...................... 374 806 ---------------------------- $ 152,340 $ 6,524 ============================ Mortgage notes payable assumed................................................................... $ 140,899 $ - Partnership units issued to minority interest.................................................... 8,252 1,200 Accounts payable and accrued expenses............................................................ 1,363 4,866 Capital lease mortgage note payable.............................................................. 1,250 - Issuance of common share grants.................................................................. 576 458 ---------------------------- $ 152,340 $ 6,524 ============================
F-10 PRIME GROUP REALTY TRUST AND THE PREDECESSOR CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST AND COMBINED STATEMENT OF CASH FLOWS OF THE PREDECESSOR (CONTINUED) (DOLLARS IN THOUSANDS) The following assets and liabilities (Includes $12,000 of bonds receivable which have been netted against the corresponding bonds payable contributed by the Predecessor. Also includes cash of $376, net equipment of $83 and accounts payable of $839 which the Company immediately contributed to the Services Company.) were contributed by certain minority interest partners to the Company on November 17, 1997: Real estate, net........................................................................... $ 243,637 Cash and cash equivalents.................................................................. 3,737 Tenant receivable.......................................................................... 41,813 Deferred costs, net........................................................................ 25,270 Other assets............................................................................... 885 ---------------- Total assets............................................................................... 315,342 ---------------- Mortgage notes payable..................................................................... 241,432 Bonds payable.............................................................................. 74,450 Accrued interest payable................................................................... 1,420 Accrued real estate taxes.................................................................. 10,359 Accounts payable and accrued expenses...................................................... 7,711 Liabilities for leases assumed............................................................. 6,108 Other liabilities.......................................................................... 2,529 Minority interests......................................................................... (6,564) ---------------- Total liabilities and minority interests................................................... 337,445 ---------------- Predecessor's net contribution............................................................. $ (22,103) ================ The following represents our noncash activity during the period from November 17, 1997 through December 31, 1997:
Mortgage note receivable.................................................................... $ 5,100 Real estate................................................................................. 48,814 ---------------- $ 53,914 ================ Debt assumed................................................................................ $ 10,396 Partnership units issued to minority interest............................................... 42,088 Step-up in basis from purchase of third-party owner's interest in the Predecessor........... 1,430 ================ $ 53,914 ================
See accompanying notes. F-11 PRIME GROUP REALTY TRUST AND THE PREDECESSOR NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FORMATION AND ORGANIZATION OF THE COMPANY Prime Group Realty Trust (the "Company") was organized in Maryland on July 21, 1997. The Company qualified as a real estate investment trust ("REIT") beginning with the period ended December 31, 1997, under the Internal Revenue Code of 1986, as amended, for Federal income tax purposes. On November 17, 1997, the Company completed its initial public offering with the sale of 12,380,000 of its common shares of beneficial interest at $20.00 per share and the private placement of 2,000,000 of the Company's Series A-cumulative convertible preferred shares of beneficial interest at $20.00 per share. The Company contributed the initial net proceeds from the offering and private placement in exchange for 12,380,000 common units of partnership interest and 2,000,000 preferred units of partnership interest in Prime Group Realty, L.P. (the "Operating Partnership"). Subsequent to the initial public offering, the Company issued an additional 3,204,994 of its common shares (sold 600,000 common shares in 1997, sold 2,579,994 common shares in 1998 and granted 25,000 shares in 1998) and 4,000,000 of its Series B-cumulative redeemable preferred shares and contributed the net proceeds to the Operating Partnership in exchange for the same number of common units and preferred units of partnership interest. In addition, during 1998, the Company repurchased 474,200 of its common shares for an aggregate purchase price of $7,267, pursuant to a common share repurchase program the Company established in September 1998. On January 8, 1999, the Company filed its initial shelf registration statement on Form S-3 with the Securities and Exchange Commission (which was declared effective on June 8, 1999) to register up to $500,000 of its equity and debt securities for future sale. The Company is the managing general partner of the Operating Partnership and owns all of the preferred units and 58.4% and 59.4% of the common units issued at December 31, 1999 and 1998, respectively. Each common unit entitles the Company to receive distributions from the Operating Partnership. Distributions declared or paid to holders of common shares and preferred shares are based upon such distributions the Company receives with respect to its common units and preferred units. In conjunction with the Company's initial contribution to the Operating Partnership, The Prime Group, Inc. ("PGI") contributed its interest in 23 partnerships that owned various office and industrial properties (represents the Predecessor's operations) to the Operating Partnership in exchange for 3,465,000 common units (PGI contributed 3,375,000 of these common units to Primestone Investment Partners L.P. described below) and received approximately $6,487 for the reimbursement of the Company's formation costs advanced by PGI. The Operating Partnership was required to acquire a third-party ownership interest in certain of the Predecessor's properties for $1,797, resulting in a step-up in the basis of real estate of $3,227. Certain other individuals contributed their ownership interests in various properties, including the related debt, to the Operating Partnership in exchange for cash of approximately $15,761 and 1,849,417 common units valued at $20.00 per unit (total value of $36,988). In addition, Primestone Investment Partners L.P. ("Primestone"), an entity in which PGI has a 60% ownership interest, F-12 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES acquired 4,569,893 common units from the Operating Partnership for $85,000 (PGI directly or indirectly owns 31.7% and 31.4% of the Operating Partnership at December 31, 1999 and 1998, respectively.) These properties (including the Predecessor's properties), along with other acquired properties, are controlled by the Operating Partnership. PGI, the other contributors and Primestone have been reflected as Minority Interest - Operating Partnership in the consolidated financial statements. BASIS OF PRESENTATION The Company's consolidated financial statements include all of its accounts, including the Operating Partnership and the other entities in which the Company has control. The combined financial statements of the Predecessor include the accounts of the partnerships in which the Predecessor had majority interest, control or managed. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investments in corporations and partnerships in which the Company does not have operational control or a majority interest are accounted for on the equity method of accounting. Significant intercompany accounts and transactions have been eliminated in consolidation and combination. Certain amounts in the prior period consolidated and combined financial statements have been reclassified to conform to the current period presentation, with no effect on the Company's consolidated or the Predecessor's combined financial position or results of operations. On December 15, 1997, the Company acquired the first mortgage note encumbering an office property known as Continental Towers for $108,870, with a face value of $157,161. On May 15, 1998, the Company sold $75,000 of the note to a third-party bank and the note became subordinate to the third-party note. The note has a base interest rate of 6.5% per annum payable monthly, and a contingent interest rate of 6.5% per annum, payable from available cash flow as defined. All unpaid interest is added to principal. The note matures January 2013. The Company will receive all of the economic benefits from its interest in the property and therefore, has consolidated the operations of the property from the acquisition date. On November 17, 1997, the Operating Partnership acquired the assets and business of two property management and realty services companies from a third party and contributed these entities and certain other assets to a newly formed corporation, Prime Group Realty Services, Inc. (the "Services Company"). In exchange for its contribution, the Operating Partnership received 100% of the non-voting preferred stock of the Services Company and a note receivable in the amount of $4,800. Certain members of the Company's management own 100% of the voting common stock. The Services Company was formed primarily to operate certain business lines that are not directly associated with the collection of rents. The Services Company is subject to federal, state and local taxes. The Company records its ownership in the Services Company using the equity method of accounting. F-13 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REAL ESTATE Depreciation is calculated on the straight-line method over the estimated useful lives of assets, which are as follows: Building and improvements 40 years Tenant improvements Term of related leases Furniture and equipment 3-7 years
Development costs, which include land acquisition costs, fees and other costs incurred in developing new properties, are capitalized as incurred. Upon completion of construction, development costs are included in buildings and improvements and are depreciated over the useful lives of the respective properties on a straight-line basis. Interest, financing costs and other direct costs incurred during development periods are capitalized as a component of the building costs. Real estate is carried at depreciated cost. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements which improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. CASH EQUIVALENTS The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. DEFERRED COSTS Costs incurred in connection with financings, refinancings or debt modifications are capitalized as deferred financing costs and are amortized on the straight-line method over the lives of the related loans. Leasing commissions and other leasing costs directly attributable to tenant leases are capitalized as deferred leasing costs and are amortized on the straight-line method over the terms of the related lease agreements. LEASES ASSUMED In connection with certain tenant leases, the Company has assumed the liability for the remaining terms of the tenants' existing leases in their previous location. The Company has recorded a liability for the difference between total remaining costs for leases assumed and the expected benefits from subleases of the assumed lease properties. The related incentive to lessee has been capitalized as a deferred charge and is being amortized to rental revenue over the life of the respective lease. The deferred charge and related liability are adjusted for changes in the expected benefits from subleases. During the year ended December 31, 1998, the Company assumed additional liability of $1,357. During the period from January 1, 1997 through November 16, 1997, the Predecessor wrote off $1,049 of deferred charges and reduced the related liability due to changes in the estimated benefits from subleases. No amounts were written off during the years ended December 31, 1999 and 1998 or during the period from November 17, 1997 through December 31, 1997. F-14 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RENTAL REVENUE Rental revenue is recorded on the straight-line method over the terms of the related lease agreements for new leases and the remaining terms of existing leases for acquired properties. Differences between rental revenue earned and amounts due per the respective lease agreements are credited or charged, as applicable, to deferred rent receivable. Rental payments received prior to their recognition as income are classified as rent received in advance. INTEREST RATE PROTECTION AGREEMENTS The Company from time to time enters into interest rate protection agreements to effectively convert floating rate debt to a fixed rate basis, provide for an interest rate cap or collar and hedge anticipated financing transactions. Net amounts paid or received under these agreements are recognized as an adjustment to interest expense when such amounts are incurred or earned. Amounts payable or receivable from the counterparty are included in accrued interest payable accounts or accounts receivable. Premiums paid for the Company's interest rate protection agreements are included in deferred financing costs and are amortized ratably over the term of the respective interest rate protection agreement. Settlement amounts paid or received in connection with terminated interest rate protection agreements are deferred and amortized over the remaining term of the related financing transaction using the straight-line method. The Company believes it has limited exposure to the extent of non-performance by the counterparties of each protection agreement since each counterparty is a major financial institution, and the Company does not anticipate their non-performance. The fair value of the interest rate protection agreements are not recognized in the financial statements as the agreements qualify as hedges of the Company's interest rate risk. Interest rate protection agreements or specific notional components thereof that do not qualify as a hedge of the Company's interest rate risk would be recorded at fair value. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). Statement No. 133 requires recording all derivative instruments as assets or liabilities, measured at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Statement No. 133 was originally to be effective for fiscal years beginning after June 15, 1999 but was subsequently postponed to all fiscal years beginning after June 15, 2000. The Company is planning to adopt Statement No. 133 effective January 1, 2001 and does not anticipate that the adoption will have a material impact on the Company's financial condition and results of operations. EARNINGS PER SHARE Basic earnings per share ("EPS") is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS includes the potentially dilutive effect, if any, which would occur if outstanding (i) common stock options were exercised, (ii) common units were converted into shares of common share, (iii) share grants were fully-vested, and (iv) convertible preferred shares were converted into common shares. F-15 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION The Company accounts for share option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no compensation expense is recognized for the share option grants because the exercise price of the options equals the market price of the underlying shares at the date of grant. INCOME TAXES Commencing with the period ended December 31, 1997, the Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax to the extent that it distributes at least 95% of its REIT taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. As of December 31, 1999, for income tax purposes, the Company's real estate had a gross and net basis of $849,867 and $803,361, respectively, mortgage notes receivable had a basis of $170,549, deferred costs had a gross and net basis of $41,811and $27,438, respectively, and deferred rent receivable had no tax basis. The Predecessor paid no income taxes, and the income or loss from its partnerships is included on the respective income tax returns of the Predecessor's partners. 2. MORTGAGE NOTE RECEIVABLE On December 16, 1997, the Company acquired for approximately $51,163 in cash and $5,100 in common units, the first mortgage note encumbering the office property known as 180 North LaSalle Street. This 39-story office building is, located in Chicago, Illinois contains 728,860 square feet of rentable space and is approximately 58.0% leased at December 31, 1999. During 1999 and 1998, the Company made additional advances of $17,146 and $4,943, respectively, which were used to fund the redevelopment of the building and pay various operating expenses. The Company anticipates providing additional advances of $2,654 to complete the building's redevelopment. The note requires principal payments due at maturity on January 15, 2004. The note has a face value of $89,573 and $69,277 at December 31, 1999 and 1998, respectively. The note provides for interest at an accrual rate of 9.64% per annum, and a minimum pay rate at the lower of 8.25% per annum, or $2,400 annually, as defined, payable monthly. During 1999 and 1998, the Company received interest income payments of $4,728 and $5,373, respectively. No payments were received during the period from November 17, 1997 through December 31, 1997. During the years ended December 31, 1999 and 1998 and the period from November 17, 1997 through December 31, 1997, $1,995, $258 and $248, respectively, of interest income was added to the principal balance. Included in the purchase was a non-refundable option, exercisable until July 30, 2000, to acquire the existing $85,000 second mortgage on the property for $4,400 in common units of the Operating Partnership (amount included in minority interest-operating partnership), valued at the lower of $20.00 per unit or the Company's common share price at the date issued (5,000 common F-16 2. MORTGAGE NOTE RECEIVABLE (CONTINUED) units per month if the Company's common share market value is equal to or greater than $20.00 per share or $100 in common units per month if the Company's common share market value is below $20.00 per share; 80,442 and 67,018 common units were issued during the years ended December 31, 1999 and 1998, respectively), subject to certain adjustments, as defined. On November 15, 1999, the holder of such common units redeemed 53,611 common units for 53,611 common shares of the Company. At December 31, 1999 and 1998, $2,500 and $1,300, respectively, is included in other assets related to the options. In addition, the Company has an option to purchase the equity ownership of the property during the period from January 15, 2004 to February 15, 2004 for a price equal to the greater of the fair market value of the interest or $2,000. During 1999 and 1998, the Company provided construction management services of $585 and $752, respectively, to the property, which have been added to the principal balance. The Services Company provides property management and leasing services for the property pursuant to a 10-year management and leasing contract. 3. DEFERRED COSTS Deferred costs consist of the following:
December 31, --------------------------------------------------- 1999 1998 --------------------------------------------------- Financing costs...................................... $ 16,016 $ 12,161 Leasing costs........................................ 24,862 40,132 --------------------------------------------------- 40,878 52,293 Less: Accumulated amortization....................... (13,977) (19,402) --------------------------------------------------- $ 26,901 $ 32,891 ===================================================
F-17 4. MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE Mortgage notes payable, credit facilities and bonds payable consisted of the following:
DECEMBER 31, ------------------------------------- 1999 1998 ------------------------------------- Mortgage Notes Payable (A), (B): Mortgage notes payable to various financial institutions, collateralized by various properties, interest at fixed rates ranging from 6.75% to 11% per annum, with principal and interest payable through dates ranging from 2000 through 2013. The weighted average rate at December 31, 1999 was 7.4%................................. $329,604 $282,618 Mortgage notes payable to various financial institutions, collateralized by various properties, interest at variable rates ranging from LIBOR (5.82% at December 31, 1999) plus 165 basis points to LIBOR plus 450 basis points or Prime (8.5% at December 31, 1999) plus 50 basis points per annum with principal and interest payable monthly through dates ranging from 2000 through 2004. The weighted average rate at December 31, 1999 was 8.43%................................... 375,590 236,100 ------------------------------------- Total mortgage notes payable.................................... $705,194 $518,718 ===================================== Credit Facilities (A), (B): Line-of-credit with two financial institutions, collateralized by various properties with a maximum draw of $35,000, interest at rates of the higher of prime or federal funds rate plus 50 basis points or LIBOR plus 225 basis points, per annum, selected at the option of the Company with interest payable monthly and principal due November 2000 (D)......................................... $ 7,527 $ - Line-of-credit with a financial institution, collateralized by an industrial property with a maximum draw of $12,000, interest at LIBOR plus 195 basis points, per annum, with interest payable monthly and principal due January 2000, with an option to extend the line for one year........................................... 12,000 - ------------------------------------- Total credit facilities........................................... $ 19,527 $ - ===================================== Bonds Payable: Variable rate taxable and tax-exempt bonds issued by various state and local government authorities (B), (C), (D)............... $ 74,450 $ 74,450 =====================================
(A) The mortgage notes payable and credit facilities are subject to various operating and financial covenants. In addition, the Company is required to maintain escrow accounts to fund future real estate tax and other operating expense payments, which are included in restricted cash escrows. F-18 4. MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE (CONTINUED) (B) The majority of the Company's real estate assets and its mortgage note receivable have been pledged as collateral for its mortgage notes payable, credit facilities and bonds payable. (C) Permanent financing for the development of certain industrial properties has been provided by $48,150 of tax exempt industrial development revenue bonds that mature on February 16, 2022. On December 13, 1995, and on May 20, 1996, the bonds were acquired by independent third party financial institutions from an affiliate of PGI. Under the terms of the bond loan agreements, the Company makes interest-only payments monthly, calculated using a floating rate determined by the remarketing agent of the bonds. The rates ranged from 2.28% to 5.67% during 1999, 2.97% to 4.50% during 1998, and 3.35% to 4.75% during 1997. The rate at December 31, 1999 was 5.67%. The maximum annual interest rate on the bonds is 13%. Under certain conditions, the interest rate on the bonds may be converted to a fixed rate at the Company's request. Beginning February 1998, the bonds were collateralized by letters of credit from a financial institution totaling $48,800 which expire February 2002 (the bonds become due on this date unless replacement collateral is obtained.) The letters of credit are collateralized by mortgages on the related industrial facilities and a $5,000 cash collateral account and have an annual fee of 1.65% of the letters of credit face amounts. From November 17, 1997 through February 1998, the bonds were collateralized by letters of credit totaling $48,000 from our $80,000 line-of-credit (subsequently reduced to $35,000). From May 1996 to November 16, 1997, the bonds were collateralized by letters of credit that required the Predecessor to pay financing fees of 1.75% per annum of the face amount, payable quarterly in advance. The bondholders may tender bonds on any business day during the variable interest rate period discussed above and receive principal, plus accrued interest through the tender date. Upon tender, the remarketing agent will immediately remarket the bonds. In the event the remarketing agent fails to remarket any bonds, the Company is obligated to purchase those bonds. The remarketing agent receives a fee of 0.11% per annum of the outstanding bonds balance, payable quarterly in advance. (D) Permanent financing for the development of certain office properties has been provided by $26,300 of tax-exempt industrial revenue bonds. The bonds mature on December 1, 2014. Under the terms of the bond agreements, the Company makes interest-only payments monthly, calculated using a floating rate determined by the remarketing agent of the bonds. The rates ranged from 3.05% to 4.55% during 1999, 3.40% to 4.00% during 1998 and 3.35% to 3.85% during 1997. The rate at December 31, 1999 was 4.55%. Under certain conditions, the interest rates on the bonds may be converted to a fixed rate at the Company's request. The bonds are collateralized by letters of credit totaling $26,930 from our $35,000 line-of credit, which are subject to an annual fee of 2.25% of the amount outstanding. Under the terms of the bond agreements, the bondholders have the option to require the Company to purchase any of their bonds on the 15th day of any month while the bonds are outstanding. Upon the exercise of the bondholders' option to purchase the bonds, the remarketing agent will immediately remarket the bonds. In the event the remarketing agent fails to remarket the bonds, the Company is obligated to purchase those bonds. The remarketing agent receives a fee of 0.10% per annum of the outstanding bonds balance, payable quarterly in advance. F-19 4. MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE (CONTINUED) During the years ended December 31, 1999 and 1998, the Company wrote-off deferred financing costs of $1,836 and $2,131, respectively, net of accumulated amortization of $945 and $32, respectively. These write-offs resulted from mortgage notes and bonds payable that were repaid or refinanced and from the reduction in the maximum balance that can be drawn on the $35,000 line-of-credit (reduced from $235,000 to $80,000 during 1998 and from $80,000 to $35,000 during 1999). The total of these write-offs has been reflected as an extraordinary loss in the 1999 and 1998 statements of operations, net of minority interests of $754 and $878, respectively. The Predecessor had entered into a mortgage note agreement with a consortium of commercial lenders providing a maximum loan of $230,000 collateralized by a first mortgage on the 77 West Wacker Drive building. The loan was repaid with proceeds from the initial public offering. Under the terms of the loan, the Predecessor made monthly interest-only payments, calculated using certain variable rate indices, as defined. To reduce the impact of increases in interest rates, the Predecessor also entered into an interest rate swap agreement with affiliates of one of 77 West Wacker Drive building's third party owners (Counterparties) for the outstanding loan principal balance. Under the terms of the interest rate swap agreement, the Predecessor paid the Counterparties interest monthly at a fixed rate of 10% per annum. The Predecessor was to receive monthly interest payments from the Counterparties at the variable rate and was then responsible for making the monthly interest payments required under the terms of the loan. The Predecessor incurred $692 of fees to terminate the swap agreement, which have been reflected in the extraordinary item extinguishment of debt in the period from January 1, 1997 through November 16, 1997. Total interest paid on the mortgage notes payable, credit facilities and bonds payable was $49,566, $32,204, $1,855, and $25,731 for the years ended December 31, 1999 and 1998, the period from November 17, 1997 through December 31, 1997, and the period from January 1, 1997 through November 16, 1997, respectively. During the years ended December 31, 1999 and 1998, the Company incurred interest expense of $50,634 and $33,399, respectively, of which $7,986 and $2,498, respectively, was capitalized related to development projects (no interest was capitalized in the previous periods.) On August 21, 1998, the Company entered into two treasury lock agreements with two financial institutions to lock certain debt instruments at the interest rate on ten-year Treasury Notes effective on the date of the agreements to provide interest rate protection on future debt financings. One of these agreements was entered into in anticipation of a planned future securitization of a $170,000 loan related to the 77 West Wacker Drive building, and had a lock rate of 5.364%. The other agreement was entered into in anticipation of $160,000 in debt related to the acquisition of IBM Plaza, had a lock rate of 4.732% and was to expire on March 19, 1999. The Company made deposits as required by the agreements, totaling approximately $14,641. The deposits are exclusive of a $2,000 credit threshold described below. The $170,000 agreement was to expire on February 18, 1999, but was extended to April 15, 1999. At that time, the lock rate was modified to 5.016% and the credit threshold reduced from $2,000 to $500. On March 1, 1999, the Company terminated the $160,000 treasury lock agreement due to the change in terms and timing of the IBM Plaza purchase as a result of the amended purchase agreement. Approximately $557 on deposit was forfeited at the time of termination. On May 11, 1999, the Company terminated the $170,000 treasury lock agreement due to changes in timing of a planned future loan securitization related to the 77 West Wacker Drive building. The termination resulted in a net settlement and gain upon termination of $1,172. The net gain of $615 from the two terminations has been included as a net gain in other income in the statement of operations for the year ended December 31, 1999. During the period January 1, 1999 through F-20 4. MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE (CONTINUED) May 11, 1999, the Company received net cash settlements of approximately $15,256 ($7,094 related to the $170,000 agreement, and $8,162 related to the $160,000 agreement) related to both treasury lock agreements. On January 31, 1999, the Company entered into an interest rate collar agreement that hedged the Company's interest rate exposure with respect to the variable rate mortgage note secured by the 33 West Monroe property. The interest rate ceiling under the agreement is based on a LIBOR index rate of 7.50% and the interest rate floor is based on a LIBOR index rate of 3.73%. This agreement is for an original notional amount of $65,000 and its term coincident with the aforementioned variable rate mortgage note (January 31, 1999 through January 31, 2002). Under the provisions of one of the credit facilities, the Company is obligated to maintain interest rate contracts on a portion of its variable rate indebtedness. The Company entered into an interest rate cap agreement in July, 1999 with a financial institution for an original notional amount of $150,000 at 7.00% during the period from July 1 through October 1, 1999. On November 3, 1999, the Company entered into an interest rate collar agreement for the period from November 1, 1999 through September 30, 2002 with a financial institution for an original notional amount of $170,000. The interest rate ceiling under the agreement is based on a LIBOR index rate of 7.75% and the interest rate floor is based on a LIBOR index rate of 5.62%. This agreement satisfies the Company's obligation to maintain interest rate contracts under the provisions of one of its credit facilities. On November 22, 1999, the Company transferred the $170,000 interest rate collar agreement to an unconsolidated investment partnership. However, the Company has provided a guaranty to the counterparty related to this agreement. On December 10, 1999, the Company entered into an interest rate swap agreement based on a LIBOR index rate of 6.3% that effectively fixed the Company's interest rate with respect to the variable rate mortgage note payable secured by the IBM Plaza property at a rate of 8.0%. This agreement has an original notional amount of $160,000 that decreases to $158,400 on December 10, 2000 and to $155,200 on December 10, 2001 coincident with principal payments on the mortgage note payable secured by the IBM Plaza property. The swap agreement had a purchase price of $591 which is being amortized over the term of the swap agreement and terminates on December 10, 2002. No additional amounts were paid or received under the terms of the swap agreement during 1999. On March 20, 2000, the Company entered into an interest rate cap agreement for the period from March 20, 2000 through November 17, 2000 for a notional amount of $70,000. The interest rate under the agreement is capped at a LIBOR index rate of 8.0%. The above interest rate protection agreements satisfy the Company's obligation to maintain interest rate contracts under the provisions of one of the Company's credit facilities. The following represents the Company's future minimum principal payments due on its mortgage notes payable, credit facilities and bonds payable outstanding at December 31, 1999:
YEAR ENDING DECEMBER 31 AMOUNT -------------------------------------------------------------------- 2000.............................................. $105,807 2001.............................................. 110,699 2002.............................................. 297,986 2003.............................................. 4,146 2004.............................................. 18,425 Thereafter........................................ 262,108 ------------------ $799,171 ==================
F-21 5. MORTGAGE NOTES AND BONDS PAYABLE-AFFILIATES On January 2, 1998, the Company repaid a 7.0% interest rate mortgage note payable to a limited partner of $3,984. The note was collateralized by an industrial property. The Predecessor had an 11% subordinate loan agreement with affiliates of a former third party owner of the 77 West Wacker Drive building for a maximum disbursement amount of $60,000. A portion of the loan was repaid ($4,895) with proceeds of the initial public offering, and a portion was considered repaid from the swap agreement between PGI and a third party related to the loan described in Note 4 ($42,584 was recorded as a contribution from PGI in the period from January 1, 1997 through November 17, 1997) and the remainder was forgiven ($67,847), as of November 16, 1997 and included in the extraordinary item-extinguishment of debt in the period from January 1, 1997 through November 16, 1997. The third party owner had provided a guarantee of 77 West Wacker Drive building's first mortgage note payable and charged the Predecessor a standby loan fee, as defined, which was included as a component of interest expense. Standby loan fees incurred were $460 for the period from January 1, 1997 to November 16, 1997 (unpaid interest expense is included in general and administrative expenses in the Predecessor's combined statements of operations). Under the terms of the subordinate loan agreement, the Predecessor was not required to make any periodic principal or interest payments prior to the date of stabilization, as defined; unpaid interest was added to the principal balance monthly. Included in the extraordinary item-extinguishment of debt in the period from January 1, 1997 through November 16, 1997 is $1,000 in loan termination fees paid to an affiliate of the third party owner and the write-off of unamortized deferred financing fees of $165. Permanent financing for the development of certain industrial properties has been provided by $12,000 of taxable debt industrial development revenue bonds and held by an affiliate of PGI. The bonds mature on June 1, 2022. On November 17, 1997, PGI contributed the related bond receivables as part of its capital contribution. The bonds payable and related receivable have been eliminated in the Company's consolidated financial statements. The bonds have the same terms as the bonds described in letter (C) of Note 4. Total interest paid on the mortgage notes payable and bonds payable to affiliates was $33, and $32 for the year ended December 31, 1998, and for the period from January 1, 1997 through November 16, 1997, respectively. No interest was paid for the year ended December 31, 1999 or for the period from November 17, 1997 to December 31, 1997. 6. FUTURE MINIMUM LEASE INCOME AND PAYMENTS The Company has entered into lease agreements with tenants with lease terms ranging from one year to twenty years. The leases generally provide for tenants to share in increases in operating expenses and real estate taxes in excess of specified base amounts. Approximately 21%, 16%, 39%, and 57%, of rental revenue for the years ended December 31, 1999 and 1998, the period from November 17, 1997 through December 31, 1997, and the period from January 1, 1997 through November 16, 1997, respectively, was received from six different tenants (only five of these tenants were present during the year ended December 31, 1999, three tenants for the year ended December 31, 1998 and the period from November 17, 1997 through December 31, 1997, and four tenants for the period from January 1, 1997 to November 16, 1997). F-22 6. FUTURE MINIMUM LEASE INCOME AND PAYMENTS (CONTINUED) The total future minimum rentals to be received by the Company under such noncancelable operating leases in effect at December 31, 1999, exclusive of tenant reimbursements and contingent rentals, are as follows:
YEAR ENDING DECEMBER 31 AMOUNT ----------------------- ------ 2000........................................... $ 118,464 2001........................................... 109,835 2002........................................... 98,298 2003........................................... 89,722 2004........................................... 80,882 Thereafter..................................... 331,021 ----------------- $ 828,222 ================= Future minimum rentals include amounts to be received from PGI and certain affiliates totaling $6,024. In addition, as a part of lease agreements entered into with certain tenants, the Company assumed the tenants' leases at their previous locations and subsequently executed subleases for certain of the assumed lease space. Future minimum rental payments to be paid by the Company under leases assumed, net of subleases executed through December 31, 1999, are as follows: YEAR ENDING DECEMBER 31 AMOUNT ----------------------- ------ 2000........................................... $1,367 2001........................................... 1,400 2002........................................... 749 2003........................................... 67 ---------------------- $3,583 ======================
During the years ended December 31, 1999 and 1998, the Company recognized lease termination income of $5,205 and $4,124, respectively, which is included in rental revenue. In 1999, the Company granted permanent easements for fees of $2,600, which has been included in other property revenues. During 1995, a tenant of the 77 West Wacker Drive building experienced financial difficulties and in 1997 defaulted on certain 1997 rental payments. In early November 1997, the Predecessor reached an agreement with the tenant to terminate the lease. During the period from January 1, 1997 through November 16, 1997, the Predecessor recognized revenue from this tenant only to the extent cash was received. 7. PREFERRED SHARES The Company is authorized to issue up to 30,000,000 of non-voting preferred shares of beneficial interest in one or more series. At December 31, 1999 and 1998, the Company had 2,000,000 Series A-Cumulative Convertible Preferred Shares of beneficial interest ("Series A - preferred shares") with a $0.01 par value designated, issued and outstanding. On June 5, 1998, the Company completed the sale of 4,000,000 Series B-Cumulative Redeemable Preferred Shares of beneficial interest ("Series B - preferred shares") with a $0.01 par value, which were designated issued and outstanding at December 31, 1999 and 1998. Distributions on the Series B-preferred shares are payable quarterly on or about the last day of January, April, July and October of each year, at the rate of 9% (equivalent to $2.25 per annum F-23 7. PREFERRED SHARES (CONTINUED) per Series B-preferred share). The Series B-preferred shares rank senior to the Company's common shares and Series A preferred shares as to the payment of dividends and as to the distribution of assets. On and after June 5, 2003, the Series B-preferred shares may be redeemed at the Company's option at a redemption price of $25.00 per share plus accrued and unpaid distributions. The redemption price is payable solely out of the proceeds from the sale of other Company capital shares of beneficial interest. Distributions on the Series A-preferred shares are payable quarterly on or about the last day of March, June, September and December of each year, at a rate of 7.5% (equivalent of $1.50 per annum per Series A-preferred share starting November 17, 1998; prior to November 17, 1998, equivalent of $1.40 per annum per Series A - preferred share). The Series A-preferred shares rank senior to the Company's common shares as to the payment of dividends and as to the distribution of assets. Series A-preferred shareholders can convert their preferred shares into the Company's common shares based on a conversion price, as defined. The Company has the option to redeem the Series A-preferred shares beginning on and after November 17, 2007, in cash equal to the original issue price ($20.00) plus any accrued and unpaid dividends. The holders of the Series A-preferred shares have the right to elect two additional members to the Company's Board of Directors if the equivalent of two quarterly dividends are in arrears. Each of such two directors will be elected to serve until the earlier of: (1) the election and qualification of such directors' successor, or (2) the payment of the dividend arrearage. On April 13, 1999, the Company modified the terms of the Company's Series A preferred shares. Under the original terms, the holders of the Series A preferred shares had certain conversion rights if for two consecutive quarters (1) the ratio of the Company's debt plus nonconvertible preferred shares divided by its total market capitalization exceeded 65% or (2) its fixed charges coverage ratio fell below 1.4. The new agreement eliminates the debt-to-market capitalization covenant. In exchange, the holders of the Series A preferred shares were granted the future right to cause the redemption of their shares at a price of $20.00 per share upon 120 days' prior written notice, which redemption may occur during the period beginning January 15, 2002 and ending January 15, 2004. The Series A preferred shares will continue to pay an annual dividend of $1.50 per share and will continue to be convertible into common shares on a one for one basis. The Company made a $400 one-time payment as part of this transaction, which will be amortized, using the straight-line method, through January 15, 2002 as a preferred divided. All 2,000,000 outstanding shares of the Company's Series A preferred shares have been reclassified to redeemable equity at their aggregate redemption price of $40,000, net of the unamortized transaction fee ($297 as of December 31, 1999), in the consolidated balance sheet. F-24 8. EARNINGS PER SHARE The following table sets forth the computation of the Company's basic and diluted net income available per weighted-average common share of beneficial interest for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997:
PERIOD FROM NOVEMBER 17, 1997 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------------------------------------------------------- Numerator: Income before gain on sales of real estate, minority interests, extraordinary items and preferred distributions....................................... $ 33,567 $ 30,866 $ 1,427 Minority interests.................................... (8,723) (9,368) (635) Net income allocated to preferred distributions....... (12,103) (7,971) (345) ------------------------------------------------------------ Income before gain on sales of real estate and and extraordinary items............................. 12,741 13,527 447 Gain on sales of real estate, net of minority interests 31,086 - - Extraordinary loss on extinguishment of debt, net of minority interests ................................. (1,082) (1,253) - ------------------------------------------------------------ Numerator for earnings per share - income available to common shares................. $ 42,745 $ 12,274 $ 447 ============================================================ Denominator: Denominator for basic earnings per share-weighted average common shares............................... 15,141,630 14,862,958 12,593,000 Effect of dilutive securities: Employee stock options................................ 64,866 11,100 - Employee stock grants................................. 2,415 977 - ------------------------------------------------------------ Denominator for diluted earnings per share - adjusted weighted average common shares and assumed conversions ........................................ 15,208,911 14,875,035 12,593,000 ============================================================ BASIC EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED-AVERAGE COMMON SHARE: Income before gain on sales of real estate and extraordinary items................................. $ 0.84 $ 0.91 $ 0.04 Gain on sales of real estate, net of minority interests 2.05 - - Extraordinary loss on extinguishment of debt, net of minority interests.................................. (0.07) (0.08) - ------------------------------------------------------------ Net income available per weighted-average common share of beneficial interest - basic................ $ 2.82 $ 0.83 $ 0.04 ============================================================ DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED-AVERAGE COMMON SHARE: Income before gain on sales of real estate and extraordinary items................................. $ 0.84 $ 0.91 $ 0.04 Gain on sales of real estate, net of minority interests 2.04 - - Extraordinary loss on extinguishment of debt, net of minority interests.................................. (0.07) (0.08) - ------------------------------------------------------------ Net income available per weighted-average common share of beneficial interest - diluted.............. $ 2.81 $ 0.83 $ 0.04 ============================================================
F-25 8. EARNINGS PER SHARE (CONTINUED) For the 1999 earnings per share computation, 1,122,833 of the Company's options during the first quarter of 1999, 1,120,333 options during the second and third quarters of 1999, and 1,227,833 options during the fourth quarter of 1999 were not included in the computation of diluted earnings per share because the conversion would have been antidilutive. For the 1998 earnings per share computation, all of the Company's options during the second and third quarters of 1998, 1,150,000 options during the fourth quarter and all options during the period from November 17, 1997 through December 31, 1997 were not included in the computation of diluted earnings per share because the conversion would have been antidilutive. The minority interest in the Operating Partnership had 10,558,545, 10,282,521 and 10,250,882 weighted average common units outstanding during the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997, respectively, of which 9,631,445, 9,355,421 and 9,323,782, respectively, may be converted into common shares at the Company's option on a one for one basis. The convertible common units were not included in the computation of diluted earnings per share because the conversion would have been antidilutive. The Company had 2,000,000 Series A-cumulative convertible preferred shares outstanding during the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997. The Series A-convertible preferred shares were not included in the computation of diluted earnings per share because the conversion would have been antidilutive. 9. EMPLOYEE BENEFIT PLANS On November 17, 1997, the Company established a Share Incentive Plan (the "Plan") which permits the grant of stock options, stock appreciation rights, restricted stock, restricted units and performance units to officers and other key employees and to officers and employees of subsidiaries, the Operating Partnership, the Services Company and other-owned partnerships. The Plan also permits the grant of stock options to non-employee Trustees. Under the Plan, up to 2,540,000 of the Company's common shares may be issued or transferred to participants. The maximum aggregate number of common shares and share equivalent units that may be subject to awards granted during any calendar year to any one participant under the Plan, regardless of the type of awards, is 200,000. This limit applies regardless of whether such compensation is paid in common shares or share equivalent units. The Compensation Committee of the Company's Board of Trustees (the "Compensation Committee") administers the Plan and has the authority to determine, among other things, subject to the terms and conditions of the Plan, the individuals to be granted options, the exercise price at which shares may be acquired, the number of shares subject to options, the vesting requirements and the exercise period of each option. The Compensation Committee is granted discretion to determine the term of each option granted under the Plan to employees, executives and Trustees, but in no event will the term exceed ten years and one day from the date of the grant. On November 17, 1997, the Compensation Committee granted options to purchase a total of 1,160,500 of the Company's common shares (including the 75,000 options granted to Board members described below) at an exercise price of $20.00 per share to various executives and employees of the Company. During 1999 and 1998, the Board granted options to purchase a total of 107,500 and 129,500 respectively, (exclusive of options described below as part of the Company's annual incentive award program) of the Company's common shares to various employees and executives of the Company hired in 1999 and 1998 at exercise equal to the closing price on the day before the F-26 9. EMPLOYEE BENEFIT PLANS (CONTINUED) grant of the options. In addition, during 1999 and 1998, 63,167 and 117,500 options, respectively, expired as the result of employees or executives, who held options, resigning from the Company. Options for these shares granted under the plan to executives and employees have a term of 10 years and will be exercisable and vest in installments as follows: (i) 33.3% of the number of shares commencing in the first anniversary of the date of grant; (ii) an additional 33.3% for the shares commencing on the second anniversary of the date of the grant; and (iii) the remainder of the shares commencing on the third anniversary of the date of grant. Under the Plan, four of the Trustees consisting of those Trustees who are not employees or consultants of the Company as of November 17, 1997 received options to acquire 5,000 of the Company's common shares at $20.00 per share (the closing price on the day of the grant of the options). On December 16, 1999, the Board granted each of the four non-employee Trustees options to acquire an additional 5,000 of the Company's common shares at $13.19 per share (the closing price on the day before the grant of the options). Stock options granted to the Trustees have a term of 10 years and will vest and be exercisable at the rate of 33.3% per year over three years commencing on the first anniversary of their date of grant. Under a consulting agreement with one of the members of the Board, the Board granted on November 17, 1997, options to purchase 75,000 of the Company's common shares at an exercise price of $20.00 per share. Pursuant to the agreement, the options granted have a term of 10 years and will be exercisable and vest at the rate of 33.3% per year over three years commencing on the first anniversary of their date of grant. During 1998, the Company issued a total of 22,500 common shares granted to two of its officers and 2,500 common shares granted to one of its Board members pursuant to their employment agreements or consulting agreement, as applicable, valued at the market price of the Company's common shares at the date of grant, totaling $458. As part of an annual incentive award program, on December 16, 1999, the Board granted certain executives 29,719 shares of the Company's common shares, and options to purchase 363,891 of the Company's common shares at an exercise price of $13.19 per share. The common share grants vest 50% on January 15, 2000 and 50% on January 15, 2001 and the options vested on January 15, 2000. The Board also granted certain executives 25,380 shares of the Company's common shares and certain executives and employees options to purchase 364,200 of the Company's common shares, at an exercise price of $13.19 per share, as part of a long-term incentive program. These common share grants and options vest at the rate of 25.0% per year in four annual installments commencing on January 15, 2000. As the total options granted to date exceed that authorized under the plan, the excess options are subject to the Company's shareholders' approval. As part of an annual incentive award program, on December 17, 1998, the Board granted certain executives 24,933 shares of the Company's common shares and options to purchase 538,889 of the Company's common shares at an exercise price of $14.00 per share. The common share grants vest 50% on January 15, 1999 and 50% on January 15, 2000 and the options vested on January 15, 1999. The Board also granted certain executives options to purchase 254,000 of the Company's common shares, at an exercise price of $14.00 per share, as part of a long-term incentive program. These options vest at the rate of 25.0% per year in four annual installments commencing on January 15, 1999. F-27 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The unaudited pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its options under the fair value method of that statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997, respectively: risk free interest rate of 6.47%, 5.01% and 5.41%; expected dividend yield of 10.0%, 6.7% and 6.7%; volatility factor of the expected market price common stock of 0.307, 0.339 and 0.156; and a weighted-average expected life of the options of seven years for 1999 and three years for 1998 and 1997. The unaudited pro forma expense would be $1,655 ($0.11 per basic and diluted common share) for the year ended December 31, 1999, $1,174 ($0.08 per basic and diluted common share) for the year ended December 31, 1998 and $69 ($0.01 per basic and diluted common share) for the period from November 17, 1997 through December 31, 1997. The effects on unaudited pro forma net income and pro forma earnings per common share for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 to December 31, 1997 of amortizing to expense the estimated fair value of stock options are not necessarily representative of the effects on net income to be reported in future years due to such things as the vesting period of the stock options, and the potential for issuance of additional stock options in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of the Company's management, the existing models do not necessarily provide a reliable single measure of the fair value of the options granted under the plan. The following is a summary of the Company's stock option activity, and related information for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997 follows:
SHARES WEIGHTED SUBJECT TO AVERAGE EXERCISE OPTION PRICE PER SHARE ----------------- -------------------------- Initial options granted........................................... 1,160,500 $20.00 Options canceled.................................................. - - ----------------- Balance at December 31, 1997...................................... 1,160,500 20.00 Additional options granted........................................ 922,389 14.77 Options canceled.................................................. (117,500) 20.01 ----------------- Balance at December 31, 1998...................................... 1,965,389 17.54 Additional options granted........................................ 855,591 13.60 Options exercised................................................. (100) 14.00 Options canceled.................................................. (63,167) 18.43 ----------------- Balance at December 31, 1999...................................... 2,757,713 16.30 =================
At December 31, 1999, 1,308,126 shares were exercisable at a weighted average exercise price of $17.24 per share. No options on shares were available for future grant at December 31, 1999. The remaining weighted-average contractual life of these options was 8.59 years. The weighted-average grant date fair value of all options granted during the years ended December 31, 1999 and 1998 and the period from November 17, 1997 through December 31, 1997 was $1.45, $2.49 and $1.39, respectively. F-28 10. RELATED PARTY TRANSACTIONS The Company owns 100% of the nonvoting preferred stock of the Services Company which had an initial carrying value of $425 and the Company provided a loan in the amount of $4,800 (included in other assets) to the Services Company (unpaid interest expense is included in accrued interest described below), with interest at 11% per annum, payable quarterly and principal due November 2007. On January 1, 1998, the Company provided the Services Company a $5,000 line-of-credit, with interest at LIBOR plus 3%, principal and interest payable monthly from available cash flow, as defined, and matures on December 31, 2000. The line is collateralized by the Services Company's third party receivables and is subject to various covenants. As of December 31, 1999 and 1998, the line-of-credit balance was $1,795 and $1,328, respectively, and is included in other assets. At December 31, 1999 and 1998, accrued interest of $44 and $52, respectively, related to the above notes is included in other assets. The Company's net deficit in the Services Company at December 31, 1999 and 1998 was $3,770 and $176, respectively, and is included in other assets. During the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997, the Company recorded net loss (income) related to the Services Company of $3,234, $(133) and $19, respectively representing its share of the Services Company's loss from operations of $3,865, $518 and $83, respectively, net of interest income of $631, $651 and $64, respectively, related to the previously described loans. In December 1999, the Services Company wrote-off approximately $4,970 in goodwill and related capitalized costs associated with its initial acquisition of a management and construction company. The Company's share of this write-down, net of the tax benefit at the service subsidiary level, was $2,833 and is included in its share of the Services Company loss described above. The Company also paid general and administrative expenses (primarily rent, salaries and benefits) of $505 and $233 on behalf of the Services Company for the years ended December 31, 1999 and 1998, respectively. No amounts were paid for the period from November 17, 1997 through December 31, 1997. During the years ended December 31, 1999 and 1998 (no services were provided for the period from November 17, 1997 through December 31, 1997), the Services Company provided the Company with development, acquisition due diligence, construction, construction management, leasing and property management services, which are summarized as follows:
YEAR ENDED DECEMBER 31 1999 1998 ------------------------------------------ Development, construction and construction management........... $ 14,740 $ 2,639 Acquisition due diligence....................................... 287 182 Leasing......................................................... 1,985 361 Property management............................................. 265 301
At December 31, 1999, the Company owed the Services Company $2,227 and at December 31, 1998, the Services Company owed the Company $1,033, related to the above services or for advances not processed under the line-of-credit (net amounts included in other assets). The Company has lease agreements with PGI and certain affiliates, from which it recognized rental revenue of $644, $933 and $85 and tenant reimbursements revenue of $523, $644 and $46 for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997, respectively. In addition, in 1999 and 1998 the F-29 10. RELATED PARTY TRANSACTIONS (CONTINUED) Company provided $181 and $452, respectively, to one of the PGI affiliates for tenant improvements. A nonaffiliated investor in Primestone currently has a lease agreement with the Company that expires December 12, 2000. The Company recognized rental revenue of $1,000 from this investor during 1999. During 1999, the Operating Partnership acquired various office and industrial properties from minority interest holders for a total purchase price of $366,200 and assumed mortgage notes payable of $70,092 (see Note 13 for a listing of the properties). In addition, the Operating Partnership also acquired 40.5 acres of land in 1999 from a minority interest holder for a total purchase price of $5,430. In connection with the leasing and management of the Predecessor's properties, PGI was entitled to payments and fees for services performed. Such amounts incurred during the period from January 1, 1997 through November 16, 1997:
PERIOD FROM NOVEMBER 17, 1997 THROUGH DECEMBER 31, 1997 ----------------- Property management fee (a)..................................... $1,238 Administration fees (b)......................................... 463 Legal fees (c).................................................. 271 Leasing fees (d)................................................ 2 Reimbursables (e)............................................... 252 Asset management fee (f)........................................ 110
- --------------------- (A) PGI was entitled to a property management fee ranging from 2.5% to 4% of gross receipts, payable monthly in arrears. Amounts are included in property and asset management fees to affiliates in the combined financial statements of the Predecessor. (B) PGI was entitled to an annual administration fee as defined in the Partnership agreement. Amounts are included in general and administrative expenses in the combined financial statements of the Predecessor. (C) PGI was reimbursed for reasonable legal and accounting expenses incurred in connection with the operations of the Predecessor partnerships. Amounts are included in general and administrative expenses in the combined financial statements of the Predecessor. (D) PGI was entitled to leasing commissions for all leases signed. The commissions are equal to 1.5% to 3% of rent, exclusive of tenant reimbursements, during the base term of the lease; commissions were payable upon commencement of the respective leases. (E) PGI was entitled to reimbursement for expenses paid for the benefit of the Predecessor partnerships. Amounts are included in general and administrative expenses in the combined financial statements of the Predecessor. (F) PGI was entitled to annual fees for providing asset management services to the Predecessor partnerships which was payable from available cash flows. Amounts are included in property and asset management fees to affiliates in the combined financial statements of the Predecessor. Predecessor amounts due to affiliates are for amounts due for advances made by affiliates and amounts due from affiliates were for advances made by the Predecessor partnerships to affiliates. Predecessor amounts due from and due to affiliates incurred interest at Prime plus 2% and were payable upon demand. Any unpaid amounts due to affiliates or amounts due from affiliates as of November 16, 1997, have been reflected as distributions to or contributions from PGI in the combined financial statements of the Predecessor. F-30 10. RELATED PARTY TRANSACTIONS (CONTINUED) Average balances of amounts due from (including loans receivable from Services Company) and due to affiliates for the years ended December 31, 1999 and 1998, for the period from November 17, 1997 through December 31, 1997, and for the period from January 1, 1997 through November 16, 1997 are summarized as follows:
THE COMPANY PREDECESSOR ------------------------------------------------------------------ ------------------ PERIOD FROM PERIOD FROM NOVEMBER 17, JANUARY 1, 1997 THROUGH 1997 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, NOVEMBER 16, 1999 1998 1997 1997 -------------------------------------------------------------------- ------------------ Due from affiliates............ $5,738 $6,441 $5,029 $1,447 Due to affiliates.............. - - - 354
11. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" and SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" require disclosure of the fair value of certain on-and off-balance sheet financial instruments for which it is practicable to estimate. Fair value is defined by SFAS No. 107 as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company used the following methods and assumptions in estimating the fair value disclosures for financial instruments. 11. FAIR VALUES OF FINANCIAL INSTRUMENTS CASH AND CASH EQUIVALENTS AND RESTRICTED CASH ESCROWS The carrying amount of cash and cash equivalents and restricted cash escrows reported in the consolidated balance sheets approximates their fair value. The Company maintains its cash and cash equivalents and restricted cash escrows at various financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant. MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE The carrying amount of the Company's variable and fixed rate borrowings (including accrued interest) and interest rate protection agreements approximates fair value based on the current borrowing rate for similar types of borrowing and interest rate protection arrangements. 12. COMMITMENTS AND CONTINGENCIES The Company is a defendant in legal actions arising during the normal course of business. The Company believes that the ultimate outcome of those actions will not materially affect its consolidated financial position. All of the Company's properties were subject to Phase I or similar environmental assessment by independent environmental consultants which were intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. The F-31 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Company is aware of contamination at certain of the industrial properties included in the Predecessor properties, which are already in remediation programs sponsored by the state in which they are located. The Phase I assessments estimate that remedial action plans will have a probable cost of approximately $3,205. During 1997, PGI initiated lawsuits against a former environmental consultant and a former tenant of one of these properties for damages to cover the cost of the remedial action plans. During 1997, the Predecessor recorded a liability of $3,205 (included in accounts payable and accrued expenses at December 31, 1999 and 1998). PGI has contractually agreed to indemnify the Company from any environmental liabilities the Company may incur in connection with the Chicago, Hammond, and East Chicago Enterprise industrial parks. On February 20, 1998, PGI reached an agreement with the former tenant and received a $1,822 settlement payment. The Company is also aware of contamination at two other properties. At one of the properties, the tenant has provided the Company with an indemnity for all the cost associated with the environmental remediation and the tenant has purchased the property. The second property is in the remediation program sponsored by the state in which it is located and the previous owner has placed in an escrow account $760 (the maximum cost the previous owner has agreed to pay), which is being used in the clean-up of the property. The Company has contracts to acquire parcels of land and an industrial property from affiliates of a member of the Board for a total purchase price of approximately $20,856, $12,284 of which is payable in Operating Partnership common units. The contracts require the Company to acquire minimum portions of the land on an annual basis until all of the parcels are acquired by 2002. During 1998, the Company entered into contracts to acquire three parcels of land totaling 233.3 acres, of which 24.9 acres was purchased in 1999 and 54.7 acres was purchased in 1998. The remaining 153.7 acres must be purchased, at the Company's discretion, over the next two to four years for approximately $9,754. The Company is required to make periodic installment payments, of which $840 were made in 1999 and $400 were made in 1998 (amount included in property under development). During 1999, the Company sold ten properties in a single transaction with a total sales price of $89,500, resulting in a gain of approximately $3,570 (see Note 13 for a listing of the properties). As part of the sale, the Company agreed to assume responsibility for leasing two of the properties for five years, once the existing tenants' leases expire in 2000 and 2001. The Company's total lease obligation of $16,180 is reduced as existing tenants renew their leases or as new leases from third parties are executed for space in the properties. As a result of these commitments, the gain has been deferred and is included in other liabilities until the tenants either renew their leases or are replaced. The gain may be reduced by any obligations the Company may incur as a result of these commitments. On February 8, 1999, the Company signed a contract with a buyer pursuant to which we will construct and sell to the buyer an approximately 1,018-space parking garage, including approximately 4,000 square feet of retail space, on approximately 22,000 square feet of a 61,302 square foot parcel of land that we own in the Chicago central business district (see Note 13 to the table of properties acquired, placed in service and sold in 1999 regarding acquisition of this parcel). The contract provides for a sales price of the completed garage of approximately $36.0 million, plus the value of any of the retail space leased by us at the time of sale up to a maximum of $1.75 million. In addition, we are entitled to receive an additional $1.0 million from the buyer if, within 15 years after the sale of the parking garage to the buyer, we substantially complete construction of an office building on the land containing at least 800,000 square feet of office space, which is occupied by at least one tenant who is not affiliated with the Company. Pursuant to a letter agree- F-32 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) ment dated December 3, 1999, the contingency period for obtaining the required city approvals for the construction of the parking garage was extended from December 31, 1999 until April 30, 2000. The parties are currently discussing the possibility of further extending such contingency if necessary, as well as certain other potential modifications to the terms of the transaction. On November 3, 1999, an unconsolidated investment partnership of the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of its mortgage note payable to within a range of 6.87% to 9.00%. This agreement has an original notional amount of $170,000 that decreases to $166,000 on September 30, 2000, and to $162,000 on September 30, 2001, coincident with principal payments on the mortgage note payable. The interest rate protection agreement terminates on September 30, 2002. On November 10, 1999, the investment partnership entered into an additional interest rate protection agreement to effectively fix the interest rate cost of its mortgage note payable to within a range of 7.36% to 9.00% beginning on September 30, 2002. This agreement has an original notional amount of $157,500 that decreases to $152,500 September 30, 2003, coincident with principal payments on the mortgage note payable. The interest rate protection agreement terminates on September 30, 2004. The Company has provided guarantees on both of the interest rate protection agreements. As of December 31, 1999, the Company has not been required to fulfill any commitments under the guarantees. During 1999, the Company granted to unrelated parties permanent easements to space within an office property and to industrial land for total fees of $2,600, which has been included in other property revenues in 1999. The Company is under no obligation to perform any services for the parties to earn these fees, and believes that the easements do not decrease the value of the properties. F-33 13. PROPERTY ACQUISITIONS AND DISPOSITIONS The following properties were acquired, placed in service or sold in 1999 and 1998. The results of their operations are included in the Company's consolidated statement of operations from their respective dates of acquisition.
SALE PRICE/ ACQUISITION MONTH PROPERTY LOCATION COST ACQUIRED/SOLD ------------------------------------------------------------------------------------------------------------------- 1999 Acquisitions ----------------------------------------------- Office and Industrial Properties: 33 West Monroe Street Chicago, IL $ 101,300 January National City Center(1) Cleveland, OH 105,000 February 800-810 Jorie Blvd Oak Brook, IL 30,000 August 901 Technology Way(1) Libertyville, IL 4,100 January 300 Craig Place(1) Hillside, IL 8,600 July 43-47 Hintz Road Wheeling, IL 9,700 September IBM Plaza (1) Chicago, IL 248,500 December Brush Hill Office Court Westmont, IL 12,900 December ------------------ Total Office and Industrial Properties Acquired $ 520,100 ================== Land: Carol Stream Land Carol Stream, IL $ 5,430 April, December Aurora Land Aurora, IL 918 July, November 300 West Monroe Street and 25 & 77 South Wacker Drive Chicago, IL 55,912 July ------------------ Total Land Acquired $ 62,260 ================== Developments placed in service: Office: Pine Meadows Center Libertyville, IL $ 23,659 October, December Industrial: 320 Fullerton Avenue Carol Stream, IL 10,057 December ------------------ Total developments placed in service $ 33,716 ================== 1999 Sales ----------------------------------------------- 941-961 Weigel Drive (2) Elmhurst, IL 300 Craig Place (2) Hillside, IL 306-310 Era Drive (2) Northbrook, IL 515 Huehl Road/500 Lindberg Road (2) Nothbrook, IL 555 Huehl Road (2) Northbrook, IL 1301 Ridgeview Drive (2) McHenry, IL 3818 Grandville/1200 Northwestern(2) Gurnee, IL 801 Technology Way(2) Libertyville, IL 901 Technology Way(2) Libertyville, IL 1001 Technology Way(2) Libertyville, IL ------------------ $ 89,500 July 455 Academy Drive (3) Northbrook, IL 4,500 December ------------------ $ 94,000 ================== Land: 180 Kehoe Blvd. Carol Stream, IL $ 1,000 December ================== 50% of Common Interest: 77 W. Wacker Drive (4) Chicago, IL $ 88,000 September ================== Portion of an Office Property: 122 S. Michigan Ave. (5) Chicago, IL $ 14,950 April ================== 1998 Acquisitions ----------------------------------------------- Office and Industrial Properties: 33 North Dearborn Street Chicago, IL $ 34,425 January Commerce Point Arlington Heights, IL 29,971 February 208 South LaSalle Street Chicago, IL 61,352 March 122 South Michigan Avenue Chicago, IL 29,680 April 2100 Swift Drive Oak Brook, IL 6,253 April
F-34 6400 Shafer Court Rosemont, IL 22,228 May Two Century Centre Schaumburg, IL 35,886 June 2000 York Road Oak Brook, IL 16,232 June ------------------ Total Office and Industrial Properties Acquired $ 236,027 ==================
(1) These properties were acquired from minority interest unit holders of the Operating Partnership or their affiliates. (2) These properties were sold in a single transaction with a total sales price of $89,500, resulting in a gain of approximately $3,570. As part of the sale, the Company agreed to assume responsibility for leasing two of the properties for five years, once the existing tenants' leases expire in 2000 and 2001. The Company's total lease obligation is reduced as existing tenants renew their leases or as new leases from third parties are executed for space in the properties. As a result of these commitments, the gain has been deferred and is included in other liabilities until the tenants either renew their leases or are replaced. The gain may be reduced by any obligations the Company may incur as a result of these commitments. (3) On December 22, 1999, the Company sold this property for a total sales price of $4,500, resulting in a gain of $883. (4) On September 30, 1999, the Company sold a 50% common interest for $22,000 and a $66,000 preferred interest in this property, resulting in a gain of $48,339. The remaining 50% common interest was contributed to a new joint venture, which is accounted for using the equity method of accounting. At December 31, 1999, the Company's investment in the new joint venture was a deficit of $1,019 (included in other assets) consisting of $256 representing its share of the new joint venture's operations (included in other revenue) net of $1,275 of distributions received from the new joint venture. In addition, the Company owes the new joint venture $1,079 at December 31, 1999 (included in other liabilities). (5) On April 19, 1999, the Company sold approximately 161,710 net rentable square feet of its 122 South Michigan Avenue office building to National-Louis University (NLU), resulting in a gain of $3,828. As part of this sale, NLU has also acquired an undivided 31.56% interest in certain common areas of the property. The Company continues to own the remaining 350,659 net rentable square feet of the building and is responsible for the management of the entire property. 14. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS The accompanying unaudited Pro Forma Condensed Consolidated Statements of Operations are presented as if, at January 1, 1997, (i) the Company had completed its initial public offering and its 1998 common share and preferred share offerings and contributed the net proceeds to the Operating Partnership, (ii) PGI and the other contributors had contributed certain of their respective properties and operations to the Operating Partnership, (iii) the Operating Partnership had completed the sale of common units to Primestone Investment Partners L.P., (iv) the Operating Partnership acquired various office and industrial properties and the Services Company from various third parties, (v) sold all of or a portion of its interest in various office and industrial properties, and (vi) the Operating Partnership repaid debt on certain of the contribution properties. In the Company's management's opinion, all adjustments necessary to reflect the effects of the above transactions have been made. The unaudited Pro Forma Condensed Consolidated Statements of Operations are not necessarily indicative of what the actual results of operations would have been assuming the above mentioned transactions had occurred at the dates indicated above, nor do they purport to represent the Company's future results of operations. F-35 PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------- Total revenue........................................ $209,511 $204,794 $187,169 ========================================================= Net income........................................... $21,523 $19,314 $13,890 ========================================================= Net income available to common shareholders.......... $ 9,420 $ 7,314 $ 1,890 ========================================================= Earnings per diluted common share.................... $ 0.62 $ 0.49 $ 0.12 =========================================================
F-36 15. SEGMENT REPORTING Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision makers manage its operating segments separately because each operating segment represents a strategic business unit that has different issues and serve different markets. The Company's reportable operating segments include its office division and industrial division, with properties principally located in the Chicago metropolitan area. The Company evaluates its office and industrial divisions operations principally on their contribution to overall net income and funds from operations. The following summarizes the Company's historical segment operating results for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997:
YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------------- CORPORATE/ OPERATING OFFICE INDUSTRIAL PARTNERSHIP TOTAL ---------------------------------------------------------------- Revenue: Rental.............................................. $ 107,333 $ 19,354 $ - $ 126,687 Tenant reimbursements............................... 44,075 6,096 - 50,171 Mortgage note interest.............................. 6,926 - - 6,926 Other............................................... 10,109 1,092 1,569 12,770 Gain on sales of real estate........................ 52,167 883 - 53,050 ---------------------------------------------------------------- Total revenue.......................................... 220,610 27,425 1,569 249,604 Expenses: Property operations................................. 41,243 3,203 - 44,446 Real estate taxes................................... 29,798 4,672 - 34,470 Depreciation and amortization....................... 24,753 6,657 1,848 33,258 Interest............................................ - - 42,648 42,648 Loss on land development option .................... - - 600 600 General and administrative.......................... - - 7,565 7,565 ---------------------------------------------------------------- Total expenses......................................... 95,794 14,532 52,661 162,987 ---------------------------------------------------------------- Income (loss) before minority interests and extraordinary items................................. 124,816 12,893 (51,092) 86,617 FFO adjustments (1) (unaudited): Real estate depreciation and amortization........... 24,017 4,683 1,849 30,549 Amortization of costs for leases assumed............ 899 - - 899 Straight-line rental revenue adjustments............ (2,809) (454) - (3,263) Adjustments for sales of operating properties....... (52,166) (540) - (52,706) Net gain on Treasury lock terminations.............. - - (615) (615) Joint venture adjustments .......................... - - 654 654 Loss on land development option..................... - - 600 600 Adjustment associated with services company writeoff - - 2,783 2,783 Net income allocated to preferred shareholders...... - - (12,103) (12,103) ================================================================ Funds from operations.................................. $ 94,757 $ 16,582 $ (57,924) $ 53,415 ================================================================
(1) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), in its March 1995 White Paper F-37 15. SEGMENT REPORTING (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------------------- CORPORATE/ OPERATING OFFICE INDUSTRIAL PARTNERSHIP TOTAL ----------------------------------------------------------------- Revenue: Rental................................................ $ 76,754 $ 20,458 $ - $ 97,212 Tenant reimbursements................................. 31,960 5,585 - 37,545 Mortgage note interest................................ 5,866 - - 5,866 Other................................................. 3,838 266 2,874 6,978 ----------------------------------------------------------------- Total revenue............................................ 118,418 26,309 2,874 147,601 Expenses: Property operations................................... 26,838 2,760 - 29,598 Real estate taxes..................................... 19,858 5,219 - 25,077 Depreciation and amortization......................... 17,854 6,724 869 25,447 Interest.............................................. - - 30,901 30,901 General and administrative............................ - - 5,712 5,712 ----------------------------------------------------------------- Total expenses........................................... 64,550 14,703 37,482 116,735 ----------------------------------------------------------------- Income (loss) before minority interests and extraordinary items............................... 53,868 11,606 (34,608) 30,866 FFO adjustments (unaudited): Real estate depreciation and amortization............. 17,610 6,354 - 23,964 Amortization of costs for leases assumed.............. 1,137 - - 1,137 Straight-line rental revenue adjustments.............. (525) (709) - (1,234) Net income allocated to preferred shareholders........ - - (7,971) (7,971) ----------------------------------------------------------------- Funds from operations.................................... $ 72,090 $ 17,251 $ (42,579) $ 46,762 =================================================================
PERIOD FROM NOVEMBER 17, 1997 THROUGH DECEMBER 31, 1997 ---------------------------------------------------------------- CORPORATE/ OPERATING OFFICE INDUSTRIAL PARTNERSHIP TOTAL ----------------------------------------------------------------- Revenue: Rental................................................ $ 5,025 $ 2,268 $ - $ 7,293 Tenant reimbursements................................. 1,663 378 - 2,041 Mortgage note interest................................ 248 - - 248 Other................................................. 87 - 161 248 ----------------------------------------------------------------- Total revenue............................................ 7,023 2,646 161 9,830 Expenses: Property operations................................... 1,815 338 60 2,213 Real estate taxes..................................... 1,479 286 - 1,765 Depreciation and amortization......................... 1,582 803 93 2,478 Interest.............................................. - - 1,680 1,680 General and administrative............................ - - 267 267 ----------------------------------------------------------------- Total expenses........................................... 4,876 1,427 2,100 8,403 ----------------------------------------------------------------- Income (loss) before minority interests and extraordinary items................................... 2,147 1,219 (1,939) 1,427 FFO adjustments (unaudited): Real estate depreciation and amortization............. 1,470 745 - 2,215 Amortization of costs for leases assumed.............. 142 - - 142 Straight-line rental revenue adjustments.............. 180 - - 180 Net income allocated to preferred shareholders........ - - (345) (345) ================================================================= Funds from operations.................................... $ 3,939 $ 1,964 $ (2,284) $ 3,619 =================================================================
F-38 15. SEGMENT REPORTING (CONTINUED) The following summarizes the Company's segment assets and activity as of December 31, 1999 and 1998 and expenditures for real estate for the years ended December 31, 1999 and 1998 and the period from November 17, 1997 through December 31, 1997.
. DECEMBER 31, 1999 1998 --------------------------------------- Segment assets: Office........................................................ $ 1,225,270 $ 827,872 Industrial.................................................... 149,158 180,116 Corporate/operating partnership............................... 69,747 156,526 --------------------------------------- Total consolidated assets..................................... $ 1,444,175 $1,164,514 =======================================
PERIOD FROM NOVEMBER 17, YEAR ENDED 1997 THROUGH DECEMBER 31, DECEMBER 31, Expenditures for real estate: 1999 1998 1997 ---------------------------------------------------- Office........................................................ $500,037 $250,854 $417,802 Industrial.................................................... 31,083 2,898 171,477 Corporate/operating partnership .............................. 52,334 47,316 - ---------------------------------------------------- Total expenditures for real estate............................ $583,454 $301,068 $589,279 ====================================================
16. IMPACT OF YEAR 2000 (UNAUDITED) In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999 and early 2000, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its properties, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. F-39 17. SUBSEQUENT EVENTS On January 20, 2000, the Company paid distributions of $0.375 per Series A-preferred share, and $0.3375 per common share and on January 31, 2000 paid distributions of $0.5625 per Series B-preferred share to shareholders of record on December 31, 1999. In January, 2000 the Company acquired the following 62,559 square foot office property and 7.5 acres of vacant land.
ACQUISITION MORTGAGE PROPERTY LOCATION COSTS DEBT - ---------------------------------------------------------------------------------------- Office: Enterprise Center II Westchester, IL $ 8,800 $ 5,450 ================================ Land: Libertyville Office II Libertyville, IL $ 1,200 - ================================
F-40 PRIME GROUP REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS)
Cost Capitalized Subsequent to Encumbrances(1) Initial Cost Acquisition ---------------- --------------------------- ------------------------------ Buildings Buildings December 31, and and 1999 Land Improvements Land Improvements -------------- ------------ ------------- ------------- --------------- OFFICE 201 4th Ave N (4) ............ $ 4,800 $ 1,615 $ 7,072 $ 85 $ 2,694 620 Market St. (4) .......... 9,000 -- 7,090 405 904 4823 Old Kingston Pike (4) ................... 3,500 378 2,808 19 289 625 Gay St. (4) .............. 9,000 -- 7,379 568 1,090 Triad Parking Facility (4).... -- 507 1,046 24 64 1990 Algonquin Road .......... -- 1,550 6,375 -- 98 2010 Algonquin Road .......... -- 508 2,044 -- 82 1699 Woodfield Road .......... 8,605 1,962 7,853 16 388 2205-2255 Enterprise Drive ...................... -- 2,304 9,259 3 243 280 Shuman Blvd (5) ......... -- 1,261 5,056 -- (27) 1701 Golf Road ............... 73,206 21,780 87,324 51 2,860 2675 N. Mayfair (5) .......... -- 1,613 6,443 1 552 4343 Commerce Court(3) ....... -- 5,370 21,394 192 4,578 1600-1700 167th St.(3)........ 2,798 1,073 4,291 70 703 1301 E. Tower Road(3) ........ -- 1,005 4,020 60 614 4100 W. Madison Street........ -- 41 169 -- 7 371-385 N. Gary Ave.(3)....... -- 218 871 5 45 33 North Dearborn ............ 18,000 6,904 27,521 2 1,014 3800 North Wilke Road......... 19,551 5,994 23,977 23 142 208 South LaSalle Street...... 45,148 12,310 49,042 20 4,048 122 South Michigan Avenue(6) .................. 14,000 5,952 23,728 4 (5,217) 2100 Swift Drive ............. 5,100 1,391 4,862 -- 3,223 6400 Shafer Court ............ 14,077 4,385 17,843 -- 477 1700 East Golf Road .......... 20,227 7,258 28,628 -- 2,204 2000 York Road ............... 11,840 3,234 12,998 -- 1,439 33 West Monroe ............... 77,500 5,619 95,850 -- 494 National City Center ......... 71,061 14,812 90,300 -- 267 800-810 Jorie Blvd ........... 20,923 6,016 24,089 -- -- IBM Plaza .................... 160,000 39,726 208,898 -- -- Brush Hill Office Court....... 8,200 2,617 10,469 -- -- Pine Meadows Center .......... 10,979 2,155 21,505 -- -- ------- ---------------------- -------------------- Total office ................. 607,515 159,558 820,204 1,548 23,275 ------- ---------------------- -------------------- INDUSTRIAL East Chicago Enterprise ................ -- 27 533 -- 10 Center (5) EC I ......................... 2,900 18 577 -- 2 EC II ........................ 5,000 18 2,360 -- 1,830 EC III ....................... 4,500 20 7,038 -- 557 EC IV ........................ 2,600 11 1,217 -- 9 Gross Amount Carried at December 31, 1999 ------------------------------------------- Date of Accumulated Acquisition(A) Buildings Depreciation Contribution(C) and at December 31, Placed in Land Improvements Total 1999(2) Service(P) ------------ ------------- -------------- --------------- --------------- OFFICE 201 4th Ave N (4) ............ $ 1,700 $ 9,766 $ 11,466 $ 858 Nov. 1997(C) 620 Market St. (4) .......... 405 7,994 8,399 801 Nov. 1997(C) 4823 Old Kingston Pike (4) ................... 397 3,097 3,494 233 Nov. 1997(C) 625 Gay St. (4) .............. 568 8,469 9,037 956 Nov. 1997(C) Triad Parking Facility (4).... 531 1,110 1,641 61 Nov. 1997(C) 1990 Algonquin Road .......... 1,550 6,473 8,023 407 Nov. 1997(A) 2010 Algonquin Road .......... 508 2,126 2,634 125 Nov. 1997(A) 1699 Woodfield Road .......... 1,978 8,241 10,219 448 Nov. 1997(A) 2205-2255 Enterprise Drive ... 2,307 9,502 11,809 539 Nov. 1997(A) 280 Shuman Blvd (5) ......... 1,261 5,029 6,290 288 Nov. 1997(A) 1701 Golf Road ............... 21,831 90,184 112,015 5,009 Dec. 1997(A) 2675 N. Mayfair (5) .......... 1,614 6,995 8,609 360 Dec. 1997(A) 4343 Commerce Court(3) ....... 5,562 25,972 31,534 1,515 Nov. 1997(A) 1600-1700 167th St.(3)........ 1,143 4,994 6,137 321 Nov. 1997(A) 1301 E. Tower Road(3)......... 1,065 4,634 5,699 243 Nov. 1997(A) 4100 W. Madison Street........ 41 176 217 13 Nov. 1997(A) 371-385 N. Gary Ave.(3)....... 223 916 1,139 59 Nov. 1997(A) 33 North Dearborn ............ 6,906 28,535 35,441 1,456 Jan. 1998(A) 3800 North Wilke Road......... 6,017 24,119 30,136 1,253 Feb. 1998(A) 208 South LaSalle Street...... 12,330 53,090 65,420 2,782 Mar. 1998(A) 122 South Michigan Avenue(6) .................. 5,956 18,511 24,467 825 Apr. 1998(A) 2100 Swift Drive ............. 1,391 8,085 9,476 236 Apr. 1998(A) 6400 Shafer Court ............ 4,385 18,320 22,705 753 May 1998(A) 1700 East Golf Road .......... 7,258 30,832 38,090 1,358 June 1998(A) 2000 York Road ............... 3,234 14,437 17,671 632 June 1998(A) 33 West Monroe ............... 5,619 96,344 101,963 2,223 Jan. 1999(A) National City Center ......... 14,812 90,567 105,379 2,077 Feb. 1999(A) 800-810 Jorie Blvd ........... 6,016 24,089 30,105 233 Aug. 1999(A) IBM Plaza .................... 39,726 208,898 248,624 259 Dec. 1999(A) Brush Hill Office Court....... 2,617 10,469 13,086 15 Dec. 1999(A) Pine Meadows Center .......... 2,155 21,505 23,660 105 Dec. 1999(P) ----------------------------------------------------------- Total office ................. 161,106 843,479 1,004,585 26,443 ----------------------------------------------------------- INDUSTRIAL East Chicago Enterprise ................ 27 543 570 92 Nov. 1997(C) Center (5) EC I ......................... 18 579 597 68 Nov. 1997(C) EC II ........................ 18 4,190 4,208 550 Nov. 1997(C) EC III ....................... 20 7,595 7,615 931 Nov. 1997(C) EC IV ........................ 11 1,226 1,237 217 Nov. 1997(C)
F-41 PRIME GROUP REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS)
Cost Capitalized Subsequent to Encumbrances(1) Initial Cost Acquisition -------------- ------------------------ ------------------------------ Buildings Buildings December 31, and and 1999 Land Improvements Land Improvements -------------- ---------- ------------ ------------- --------------- INDUSTRIAL (CONTINUED) Hammond Enterprise Center (5) ................ $ -- $ 26 $ 614 $ -- $ 75 EC VI ........................ 5,000 81 2,883 -- 317 EC VI ........................ 4,900 101 2,936 -- 1,366 Chicago Enterprise Center (5) ................. -- 748 975 -- 33 EC VII ....................... 7,200 517 4,968 -- 392 EC VIII ...................... 7,000 124 2,493 -- 440 EC IX ........................ 4,750 269 1,127 -- 64 EC X ......................... 4,300 248 2,836 -- 320 Arlington Heights I (5)....... -- 617 2,638 -- 22 Arlington Heights II(5)....... -- 456 2,062 -- 17 Arlington Heights III(5)...... -- 452 1,938 -- 14 2160 McGraw Rd ............... -- 904 3,617 -- 1,458 4849 Groveport ............... -- 507 2,014 -- 417 2400 McGraw Rd ............... -- 348 1,382 -- 164 5160 Blazer Memorial Pkwy ....................... -- 470 1,866 -- 97 600 London Rd ................ -- 223 885 -- 11 4411 Marketing Place.......... -- 445 1,767 -- 42 475 Superior Avenue (7)....... -- 2,700 10,801 -- 112 1051 N. Kirk Road(3) ......... -- 911 3,325 -- (473) 4211 Madison Street(3) ....... -- 690 2,745 -- 10 200 E. Fullerton(3) .......... -- 525 2,100 -- 10 350 Randy Road(3) ............ -- 267 1,063 -- 30 4300,4248,4250 Madison Street(3) ......... -- 1,147 4,588 -- 110 370 Carol Lane(3) ............ -- 527 2,107 9 47 388 Carol Lane(3) ............ -- 332 1,329 -- 25 342-346 Carol Lane(3) ........ -- 600 2,398 -- 72 343 Carol Lane(3) ............ -- 350 1,398 6 24 11039 Gage Avenue(3) ......... -- 191 767 -- 10 11045 Gage Avenue(3) ......... -- 1,274 5,092 -- 215 1401 S. Jefferson(3) ......... -- 171 685 -- 22 4160-4190 W Madison Street(3)................... -- 931 3,708 -- 170 550 Kehoe Blvd.(3) .......... -- 686 2,743 13 71 43-47 Hintz Road ............. 5,960 1,943 7,888 -- -- 320 Fullerton ................ 5,124 2,286 7,771 -- -- ----------- --------------------------- ---------------------------- Total Industrial ............. 59,234 22,161 109,234 28 8,112 ----------- --------------------------- ---------------------------- Other Corporate Assets........ -- -- 476 -- 6,498 ----------- --------------------------- ---------------------------- Total ........................ $ 666,749 $ 181,719 $ 929,914 $ 1,576 $ 37,885 =========== =========================== ============================ Gross Amount Carried at December 31, 1999 ------------------------------------------- Date of Accumulated Acquisition(A) Buildings Depreciation Contribution(C) and at December 31, Placed in Land Improvements Total 1999(2) Service(P) ------------ ------------- -------------- --------------- --------------- INDUSTRIAL (CONTINUED) Hammond Enterprise Center (5) ................ $ 26 $ 689 $ 715 $ 136 Nov. 1997(C) EC VI ........................ 81 3,200 3,281 602 Nov. 1997(C) EC VI ........................ 101 4,302 4,403 616 Nov. 1997(C) Chicago Enterprise Center (5) ................ 748 1,008 1,756 330 Nov. 1997(C) EC VII ....................... 517 5,360 5,877 674 Nov. 1997(C) EC VIII ...................... 124 2,933 3,057 1,459 Nov. 1997(C) EC IX ........................ 269 1,191 1,460 165 Nov. 1997(C) EC X ......................... 248 3,156 3,404 542 Nov. 1997(C) Arlington Heights I (5)....... 617 2,660 3,277 455 Nov. 1997(C) Arlington Heights II(5)....... 456 2,079 2,535 255 Nov. 1997(C) Arlington Heights III(5) ..... 452 1,952 2,404 239 Nov. 1997(C) 2160 McGraw Rd ............... 904 5,075 5,979 513 Nov. 1997(A) 4849 Groveport ............... 507 2,431 2,938 138 Nov. 1997(A) 2400 McGraw Rd ............... 348 1,546 1,894 88 Nov. 1997(A) 5160 Blazer Memorial Pkwy .... 470 1,963 2,433 119 Nov. 1997(A) 600 London Rd ................ 223 896 1,119 56 Nov. 1997(A) 4411 Marketing Place.......... 445 1,809 2,254 111 Nov. 1997(A) 475 Superior Avenue (7)....... 2,700 10,913 13,613 571 Nov. 1997(A) 1051 N. Kirk Road(3) ......... 911 2,852 3,763 175 Nov. 1997(A) 4211 Madison Street(3)........ 690 2,755 3,445 146 Nov. 1997(A) 200 E. Fullerton(3) .......... 525 2,110 2,635 114 Nov. 1997(A) 350 Randy Road(3) ............ 267 1,093 1,360 60 Nov. 1997(A) 4300,4248,4250 Madison Street(3) ......... 1,147 4,698 5,845 255 Nov. 1997(A) 370 Carol Lane(3) ............ 536 2,154 2,690 114 Nov. 1997(A) 388 Carol Lane(3) ............ 332 1,354 1,686 72 Nov. 1997(A) 342-346 Carol Lane(3) ........ 600 2,470 3,070 131 Nov. 1997(A) 343 Carol Lane(3) ............ 356 1,422 1,778 75 Nov. 1997(A) 11039 Gage Avenue(3) ......... 191 777 968 41 Nov. 1997(A) 11045 Gage Avenue(3) ......... 1,274 5,307 6,581 275 Nov. 1997(A) 1401 S. Jefferson(3) ......... 171 707 878 41 Nov. 1997(A) 4160-4190 W Madison Street(3) .................. 931 3,878 4,809 202 Nov. 1997(A) 550 Kehoe Blvd.(3) .......... 699 2,814 3,513 148 Nov. 1997(A) 43-47 Hintz Road ............. 1,943 7,888 9,831 66 Sept. 1999(A) 320 Fullerton ................ 2,286 7,771 10,057 16 Dec. 1999(P) ----------------------------------------------------------- Total Industrial ............. 22,189 117,346 139,535 10,858 ----------------------------------------------------------- Other Corporate Assets........ -- 6,974 6,974 676 ----------------------------------------------------------- Total ........................ $ 183,295 $ 967,799 $ 1,151,094 $ 37,977 ===========================================================
F-42 PRIME GROUP REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) (1) The Company has a $20,000 mortgage note payable that is collateralized by a mortgage note receivable and $46,553 of various mortgage notes payable that are collateralized by properties under development. See Note 4 to the Company's consolidated financial statements for a description of its mortgage notes payable, credit facilities and bonds payable. (2) Depreciation is calculated on the straight-line method over the estimated useful lives of assets, which are as follows: Building and improvements 40 years Tenant improvements Term of related leases Furniture and equipment (included in buildings and improvements) 3-7 years
(3) These properties are collateral for $46,342 in various mortgage notes payable. (4) These properties are collateral for a $35,000 line-of-credit, which had $7,527 drawn at December 31, 1999. (5) These properties are collateral for letters-of-credit that support certain industrial revenue bonds on other properties reflected in this table. (6) During 1999, the Company sold 161,710 square feet of the building, which has a total of 512,369 square feet. (7) This property is collateral for a $12,000 line-of-credit, all of which was drawn at December 31, 1999. The aggregate gross cost of the properties included above, for federal income tax purposes, approximated $849,867 as of December 31, 1999. The Company has $125,724 in property under development at December 31, 1999, of which $74,348 was added during 1999 (same basis for federal income tax purposes). The following table reconciles our historical cost for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997
PERIOD FROM NOVEMBER 17, YEAR ENDED DECEMBER 31, 1997 THROUGH -------------------------------------- DECEMBER 31, 1999 1998 1997 ---------------------------------------------------------- Balance, beginning of period........................................... $ 843,031 $589,279 $ - Additions during period................................................ 584,561 253,752 589,279 Disposals during the period............................................ (276,498) - - ========================================================== Balance, close of period............................................... $1,151,094 $843,031 $589,279 ==========================================================
F-43 The following table reconciles the accumulated depreciation for the years ended December 31, 1999 and 1998 and for the period from November 17, 1997 through December 31, 1997
PERIOD FROM NOVEMBER 17, YEAR ENDED DECEMBER 31, 1997 THROUGH -------------------------------------- DECEMBER 31, 1999 1998 1997 ---------------------------------------------------------- Balance at beginning of period......................................... $24,736 $ 2,338 $ - Depreciation and amortization for the period........................... 28,454 22,418 2,338 Disposals during the period............................................ (15,213) - - ---------------------------------------------------------- Balance, close of period............................................... $37,977 $24,756 $ 2,338 ==========================================================
F-44 EX-3.34 2 EXHIBIT 3.34 Exhibit 3.34 AMENDMENT NO. 29 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. This AMENDMENT NO. 29 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of October 15, 1999 by Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a Delaware limited partnership (the "Partnership"), and on behalf of the other Partners (as hereinafter defined). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of November 17, 1997, by and among PGRT and the other parties signatory thereto, as amended thereafter (as so amended, the "Limited Partnership Agreement"). W I T N E S S E T H: WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement, the Managing General Partner may raise all or any portion of Additional Funds required by the Partnership for the acquisition of additional properties by accepting additional Capital Contributions, including the issuance of Common Units for Capital Contributions that consist of property or interests in property; WHEREAS, pursuant to that certain Exchange Agreement dated as of December 15, 1997 by and between H Group LLC, a Delaware limited liability company ("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other things, to grant to the Partnership an option (the "First Option") to exchange the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common Units of Limited Partner Interest (subject to adjustment pursuant to the terms of the Exchange Agreement), which grant of the First Option contemplated the transfer by the Partnership to HG of 5,000 Common Units of Limited Partner Interest on the date thereof and, subject to the terms of the First Option, 5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant to the terms of the Exchange Agreement) on the 15th day of each month thereafter (each such transfer a "First Option Maintenance Transfer") for such number of months set forth in the Exchange Agreement; WHEREAS, the Partnership has agreed to the terms of the grant by HG of the First Option set forth in the Exchange Agreement and desires to effect the First Option Maintenance Transfer due on October 15, 1999; WHEREAS, HG was admitted to the Partnership as an Additional Limited Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited Partnership Agreement; WHEREAS, the Partners desire to amend the Limited Partnership Agreement to reflect the increase in outstanding Common Units resulting from the issuance of Common Units to HG in connection with the First Option Maintenance Transfer due on October 15, 1999; and WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement authorize, among other things, the Managing General Partner, as true and lawful agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and record this Amendment on behalf of each Partner that has executed the Limited Partnership Agreement and on behalf of the Partnership. NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS. (a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby accepts the grant of the rights consisting of the First Option during the twenty-third month of the term of the First Option from HG as a Capital Contribution having a value on the date hereof of $100,000, in exchange for 6494.0 Common Units of Limited Partner Interest which are hereby issued by the Partnership to HG pursuant to Section 4.3.C. of the Limited Partnership Agreement, and which are evidenced by Common Unit Certificate No. 52 of the Partnership. (b) Each of the Common Units of Limited Partner Interest issued to HG pursuant to this SECTION 1 shall have the same terms and provisions of the Common Units of Limited Partner Interest issued by the Partnership on November 17, 1997 except that (i) the Exchange Rights relating thereto may be exercised at any time after December 15, 1999 (as opposed to November 17, 1998) and (ii) such Common Units of Limited Partner Interest will be subject to the Registration Rights Agreement dated as of December 15, 1997 by and among PGRT, the Partnership and HG as opposed to the Registration Rights Agreement entered into by PGRT and the Partnership on November 17, 1997. Section 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT. Exhibit A to the Limited Partnership Agreement is hereby amended and restated to reflect the aforementioned change(s) by deleting Exhibit A attached thereto in its entirety, and by attaching in lieu thereof a replacement exhibit in the form of EXHIBIT A attached hereto. From and after the effectiveness of this Amendment, the amended and restated EXHIBIT A attached hereto shall be the only Exhibit A to the Limited Partnership Agreement, unless and until it is hereafter further amended. Section 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT. A. The Limited Partnership Agreement is hereby deemed to be amended to the extent necessary to effect the matters contemplated by this Amendment. Except as specifically provided for hereinabove, the provisions of the Limited Partnership Agreement shall remain in full force and effect. B. The execution, delivery and effectiveness of this Amendment shall not operate (i) as a waiver of any provision, right or obligation of the Managing General Partner, the other General Partner or any Limited Partner under the Limited Partnership Agreement except as specifically set forth herein or (ii) as a waiver or consent to any subsequent action or transaction. Section 4. APPLICABLE LAW. This Amendment shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. -2- AMENDMENT NO. 29 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. MANAGING GENERAL PARTNER: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust By:__________________________ Name: Title: LIMITED PARTNERS: Each Limited Partner hereby executes this Amendment to the Limited Partnership Agreement. By: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust, as attorney-in fact By:__________________________ Name: Title: -3- EXHIBIT A* PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital Managing General Partner Common Units Contribution - ------------------------ ------------ ------------ Prime Group Realty Trust 15,135,827 ** 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman General Partner - --------------- 927,100 $18,542,000 The Nardi Group, L.L.C c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 Limited Partners - ---------------- The Nardi Group, L.L.C 328,182 $4,906,061 c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 Edward S. Hadesman 388,677 $7,773,540 Trust Dated May 22, 1992 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Grandville/Northwestern 9,750 $195,000 Management Corporation c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614
- ------------------ * As amended by Amendment No. 29 to the Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. ** This amount shall be inserted by the Managing General Partner.
Number of Capital Managing General Partner Common Units Contribution - ------------------------ ------------ ------------ Carolyn B. Hadesman 54,544 $1,090,880 Trust Dated May 21, 1992 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Lisa Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Cynthia Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Tucker B. Magid 33,085 $661,700 545 Ridge Road Highland Park, IL 60035 Frances S. Shubert 28,805 $576,100 511 Lynn Terrace Waukegan, IL 60085 Grandville Road Property, Inc. 7,201 $144,020 c/o Ms. Frances S Shubert 511 Lynn Terrace Waukegan, IL 60085 Sky Harbor Associates 62,149 $1,242,980 c/o Howard I. Bernstein 6541 North Kilbourn Lincolnwood, IL 60646 Jeffrey A. Patterson 110,000 $2,200,000 c/o Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Primestone Investment Partners, L.P. 7,944,893 ** c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Paul A. Roehri
- ---------------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-2
Number of Capital Managing General Partner Common Units Contribution - ------------------------ ------------ ------------ Prime Group VI, L.P. 304,097 $6,050,500 c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Michael W. Reshcke Robert J. Rudnik H Group LLC 133,050 $2,000,000 c/o Heitman Financial Ltd. 180 N. LaSalle Suite 3600 Chicago, IL 60601 Attn: Norman Perlmutter Ray R. Grinvalds 5,216 $104,320 217 Deer Valley Drive Barrington, IL 60010 Warren H. John, as Trustee of the Warren 37,259 $745,180 H. John Trust dated December 18, 1998 1730 N. Clark Street Chicago, IL 60614
EXHIBIT A-3
Number of Capital Managing General Partner Preferred Units Contribution - ------------------------ --------------- ------------ Prime Group Realty Trust 2,000,000 ** 77 West Wacker Drive Convertible Preferred Units Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman Prime Group Realty Trust 4,000,000 **/ 77 West Wacker Drive Series B Preferred -- Units Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman
- ------------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-4 EX-3.35 3 EXHIBIT 3.35 Exhibit 3.35 AMENDMENT NO. 30 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. This AMENDMENT NO. 30 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of November 15, 1999 by Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a Delaware limited partnership (the "Partnership"), and on behalf of the other Partners (as hereinafter defined). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of November 17, 1997, by and among PGRT and the other parties signatory thereto, as amended thereafter (as so amended, the "Limited Partnership Agreement"). W I T N E S S E T H: WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement, the Managing General Partner may raise all or any portion of Additional Funds required by the Partnership for the acquisition of additional properties by accepting additional Capital Contributions, including the issuance of Common Units for Capital Contributions that consist of property or interests in property; WHEREAS, pursuant to that certain Exchange Agreement dated as of December 15, 1997 by and between H Group LLC, a Delaware limited liability company ("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other things, to grant to the Partnership an option (the "First Option") to exchange the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common Units of Limited Partner Interest (subject to adjustment pursuant to the terms of the Exchange Agreement), which grant of the First Option contemplated the transfer by the Partnership to HG of 5,000 Common Units of Limited Partner Interest on the date thereof and, subject to the terms of the First Option, 5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant to the terms of the Exchange Agreement) on the 15th day of each month thereafter (each such transfer a "First Option Maintenance Transfer") for such number of months set forth in the Exchange Agreement; WHEREAS, the Partnership has agreed to the terms of the grant by HG of the First Option set forth in the Exchange Agreement and desires to effect the First Option Maintenance Transfer due on November 15, 1999; WHEREAS, HG was admitted to the Partnership as an Additional Limited Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited Partnership Agreement; WHEREAS, the Partners desire to amend the Limited Partnership Agreement to reflect the increase in outstanding Common Units resulting from the issuance of Common Units to HG in connection with the First Option Maintenance Transfer due on November 15, 1999; and WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement authorize, among other things, the Managing General Partner, as true and lawful agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and record this Amendment on behalf of each Partner that has executed the Limited Partnership Agreement and on behalf of the Partnership. NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS. (a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby accepts the grant of the rights consisting of the First Option during the twenty-fourth month of the term of the First Option from HG as a Capital Contribution having a value on the date hereof of $100,000, in exchange for 7020.0 Common Units of Limited Partner Interest which are hereby issued by the Partnership to HG pursuant to Section 4.3.C. of the Limited Partnership Agreement, and which are evidenced by Common Unit Certificate No. 53 of the Partnership. (b) Each of the Common Units of Limited Partner Interest issued to HG pursuant to this SECTION 1 shall have the same terms and provisions of the Common Units of Limited Partner Interest issued by the Partnership on November 17, 1997 except that (i) the Exchange Rights relating thereto may be exercised at any time after December 15, 1999 (as opposed to November 17, 1998) and (ii) such Common Units of Limited Partner Interest will be subject to the Registration Rights Agreement dated as of December 15, 1997 by and among PGRT, the Partnership and HG as opposed to the Registration Rights Agreement entered into by PGRT and the Partnership on November 17, 1997. Section 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT. Exhibit A to the Limited Partnership Agreement is hereby amended and restated to reflect the aforementioned change(s) by deleting Exhibit A attached thereto in its entirety, and by attaching in lieu thereof a replacement exhibit in the form of EXHIBIT A attached hereto. From and after the effectiveness of this Amendment, the amended and restated EXHIBIT A attached hereto shall be the only EXHIBIT A to the Limited Partnership Agreement, unless and until it is hereafter further amended. Section 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT. A. The Limited Partnership Agreement is hereby deemed to be amended to the extent necessary to effect the matters contemplated by this Amendment. Except as specifically provided for hereinabove, the provisions of the Limited Partnership Agreement shall remain in full force and effect. B. The execution, delivery and effectiveness of this Amendment shall not operate (i) as a waiver of any provision, right or obligation of the Managing General Partner, the other General Partner or any Limited Partner under the Limited Partnership Agreement except as specifically set forth herein or (ii) as a waiver or consent to any subsequent action or transaction. Section 4. APPLICABLE LAW. This Amendment shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. -2- AMENDMENT NO. 30 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. MANAGING GENERAL PARTNER: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust By:__________________________ Name: Title: LIMITED PARTNERS: Each Limited Partner hereby executes this Amendment to the Limited Partnership Agreement. By: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust, as attorney-in fact By:__________________________ Name: Title: -3- EXHIBIT A* PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital Managing General Partner Common Units Contribution Prime Group Realty Trust 15,135,827 ** 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman GENERAL PARTNER 927,100 $18,542,000 The Nardi Group, L.L.C c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 LIMITED PARTNERS The Nardi Group, L.L.C 328,182 $4,906,061 c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 Edward S. Hadesman 388,677 $7,773,540 Trust Dated May 22, 1992 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Grandville/Northwestern 9,750 $195,000 Management Corporation c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614
- -------------------------- * As amended by Amendment No. 30 to the Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-1
Number of Capital Limited Partners Common Units Contribution Carolyn B. Hadesman 54,544 $1,090,880 Trust Dated May 21, 1992 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Lisa Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Cynthia Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Tucker B. Magid 33,085 $661,700 545 Ridge Road Highland Park, IL 60035 Frances S. Shubert 28,805 $576,100 511 Lynn Terrace Waukegan, IL 60085 Grandville Road Property, Inc. 7,201 $144,020 c/o Ms. Frances S Shubert 511 Lynn Terrace Waukegan, IL 60085 Sky Harbor Associates 62,149 $1,242,980 c/o Howard I. Bernstein 6541 North Kilbourn Lincolnwood, IL 60646 Jeffrey A. Patterson 110,000 $2,200,000 c/o Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Primestone Investment Partners, L.P. 7,944,893 ** c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Paul A. Roehri
- ------------------------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-2
Number of Capital Limited Partners Common Units Contribution Prime Group VI, L.P. 304,097 $6,050,500 c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Michael W. Reshcke Robert J. Rudnik H Group LLC 140,070 $2,100,000 c/o Heitman Financial Ltd. 180 N. LaSalle Suite 3600 Chicago, IL 60601 Attn: Norman Perlmutter Ray R. Grinvalds 5,216 $104,320 217 Deer Valley Drive Barrington, IL 60010 Warren H. John, as Trustee of the Warren H. John 37,259 $745,180 Trust dated December 18, 1998 1730 N. Clark Street Chicago, IL 60614
EXHIBIT A-3
Number of Capital Managing General Partner Preferred Units Contribution Prime Group Realty Trust 2,000,000 ** 77 West Wacker Drive Convertible Preferred Suite 3900 Units Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman Prime Group Realty Trust 4,000,000 **/ 77 West Wacker Drive Series B Preferred Units Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman
- --------------------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-4 EX-3.36 4 EXHIBIT 3.36 Exhibit 3.36 AMENDMENT NO. 31 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. This AMENDMENT NO. 31 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of December 15, 1999 by Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a Delaware limited partnership (the "Partnership"), and on behalf of the other Partners (as hereinafter defined). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of November 17, 1997, by and among PGRT and the other parties signatory thereto, as amended thereafter (as so amended, the "Limited Partnership Agreement"). W I T N E S S E T H: WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement, the Managing General Partner may raise all or any portion of Additional Funds required by the Partnership for the acquisition of additional properties by accepting additional Capital Contributions, including the issuance of Common Units for Capital Contributions that consist of property or interests in property; WHEREAS, pursuant to that certain Exchange Agreement dated as of December 15, 1997 by and between H Group LLC, a Delaware limited liability company ("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other things, to grant to the Partnership an option (the "First Option") to exchange the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common Units of Limited Partner Interest (subject to adjustment pursuant to the terms of the Exchange Agreement), which grant of the First Option contemplated the transfer by the Partnership to HG of 5,000 Common Units of Limited Partner Interest on the date thereof and, subject to the terms of the First Option, 5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant to the terms of the Exchange Agreement) on the 15th day of each month thereafter (each such transfer a "First Option Maintenance Transfer") for such number of months set forth in the Exchange Agreement; WHEREAS, the Partnership has agreed to the terms of the grant by HG of the First Option set forth in the Exchange Agreement and desires to effect the First Option Maintenance Transfer due on December 15, 1999; WHEREAS, HG was admitted to the Partnership as an Additional Limited Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited Partnership Agreement; WHEREAS, the Partners desire to amend the Limited Partnership Agreement to reflect the increase in outstanding Common Units resulting from the issuance of Common Units to HG in connection with the First Option Maintenance Transfer due on December 15, 1999; and WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement authorize, among other things, the Managing General Partner, as true and lawful agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and record this Amendment on behalf of each Partner that has executed the Limited Partnership Agreement and on behalf of the Partnership. NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS. (a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby accepts the grant of the rights consisting of the First Option during the twenty-fifth month of the term of the First Option from HG as a Capital Contribution having a value on the date hereof of $100,000, in exchange for 7390.0 Common Units of Limited Partner Interest which are hereby issued by the Partnership to HG pursuant to Section 4.3.C. of the Limited Partnership Agreement, and which are evidenced by Common Unit Certificate No. 54 of the Partnership. (b) Each of the Common Units of Limited Partner Interest issued to HG pursuant to this SECTION 1 shall have the same terms and provisions of the Common Units of Limited Partner Interest issued by the Partnership on November 17, 1997 except that (i) the Exchange Rights relating thereto may be exercised at any time after December 15, 1999 (as opposed to November 17, 1998) and (ii) such Common Units of Limited Partner Interest will be subject to the Registration Rights Agreement dated as of December 15, 1997 by and among PGRT, the Partnership and HG as opposed to the Registration Rights Agreement entered into by PGRT and the Partnership on November 17, 1997. Section 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT. Exhibit A to the Limited Partnership Agreement is hereby amended and restated to reflect the aforementioned change(s) by deleting Exhibit A attached thereto in its entirety, and by attaching in lieu thereof a replacement exhibit in the form of EXHIBIT A attached hereto. From and after the effectiveness of this Amendment, the amended and restated EXHIBIT A attached hereto shall be the only Exhibit A to the Limited Partnership Agreement, unless and until it is hereafter further amended. Section 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT. A. The Limited Partnership Agreement is hereby deemed to be amended to the extent necessary to effect the matters contemplated by this Amendment. Except as specifically provided for hereinabove, the provisions of the Limited Partnership Agreement shall remain in full force and effect. B. The execution, delivery and effectiveness of this Amendment shall not operate (i) as a waiver of any provision, right or obligation of the Managing General Partner, the other General Partner or any Limited Partner under the Limited Partnership Agreement except as specifically set forth herein or (ii) as a waiver or consent to any subsequent action or transaction. Section 4. APPLICABLE LAW. This Amendment shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. -2- AMENDMENT NO. 31 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. MANAGING GENERAL PARTNER: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust By:__________________________ Name: Title: LIMITED PARTNERS: Each Limited Partner hereby executes this Amendment to the Limited Partnership Agreement. By: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust, as attorney-in fact By:__________________________ Name: Title: -3- EXHIBIT A* PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital Managing General Partner Common Units Contribution Prime Group Realty Trust 15,135,827 ** 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman GENERAL PARTNER 927,100 $18,542,000 The Nardi Group, L.L.C c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 The Nardi Group, L.L.C 328,182 $4,906,061 c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 Edward S. Hadesman Trust Dated May 22, 1992 388,677 $7,773,540 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Grandville/Northwestern 9,750 $195,000 Management Corporation c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614
- ---------------------- * As amended by Amendment No. 31 to the Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-1
Number of Capital Limited Partners Common Units Contribution Carolyn B. Hadesman 54,544 $1,090,880 Trust Dated May 21, 1992 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Lisa Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Cynthia Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Tucker B. Magid 33,085 $661,700 545 Ridge Road Highland Park, IL 60035 Frances S. Shubert 28,805 $576,100 511 Lynn Terrace Waukegan, IL 60085 Grandville Road Property, Inc. 7,201 $144,020 c/o Ms. Frances S. Shubert 511 Lynn Terrace Waukegan, IL 60085 Sky Harbor Associates 62,149 $1,242,980 c/o Howard I. Bernstein 6541 North Kilbourn Lincolnwood, IL 60646
EXHIBIT A-2
Number of Capital Limited Partners Common Units Contribution Jeffrey A. Patterson 110,000 $2,200,000 c/o Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Primestone Investment Partners, L.P. 7,944,893 ** c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Paul A. Roehri Prime Group VI, L.P. 304,097 $6,050,500 c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Michael W. Reshcke Robert J. Rudnik H Group LLC 147,460 $2,200,000 c/o Heitman Financial Ltd. 180 N. LaSalle Suite 3600 Chicago, IL 60601 Attn: Norman Perlmutter Ray R. Grinvalds 5,216 $104,320 217 Deer Valley Drive Barrington, IL 60010 Warren H. John, as Trustee of the Warren H. John 37,259 $745,180 Trust dated December 18, 1998 1730 N. Clark Street Chicago, IL 60614
- ----------------------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-3
Number of Capital Managing General Partner Preferred Units Contribution Prime Group Realty Trust 2,000,000 ** 77 West Wacker Drive Convertible Preferred Suite 3900 Units Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman Prime Group Realty Trust 4,000,000 **/ 77 West Wacker Drive Series B Preferred Suite 3900 Units Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman
- -------------------------------- ** This amount shall be inserted by the Managing General Partner. EX-3.37 5 EXHIBIT 3.37 Exhibit 3.37 AMENDMENT NO. 32 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. This AMENDMENT NO. 32 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of December 30, 1999, by Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a Delaware limited partnership (the "Partnership"), and on behalf of the other Partners (as hereinafter defined). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of November 17, 1997, by and among PGRT and the other parties signatory thereto, as amended thereafter (as so amended, the "Limited Partnership Agreement"). W I T N E S S E T H: WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement, the Managing General Partner may raise all or any portion of Additional Funds required by the Partnership for the acquisition of additional properties by accepting additional Capital Contributions, including the issuance of Common Units for Capital Contributions that consist of property or interests in property; WHEREAS, pursuant to that Real Estate Sales Contract, dated as of October 20, 1997, by and among The Prime Group, Inc., an Illinois corporation, Prime Group Realty Trust, a Maryland real estate investment trust, Prime Group Realty, L.P., a Delaware limited partnership and the Contributors named therein (the "Agreement"), the Partnership agreed to purchase the Vacant Parcels 4 and 11 in Carol Stream Industrial Business Park, Carol Stream, Illinois (the "Property") upon the fulfillment of certain conditions; WHEREAS, the conditions of the Agreement having been fulfilled, the Partnership is acquiring the Property in return for issuing Common Units of Limited Partner Interest to Carol Stream Industrial Park Joint Venture; and WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement authorize, among other things, the Managing General Partner, as true and lawful agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and record this Amendment on behalf of each Partner that has executed the Limited Partnership Agreement and on behalf of the Partnership. NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS. (a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby accepts from Carol Stream Industrial Park Joint Venture the grant of all of its right, title and interest in the Property, a legal description of which is attached hereto as EXHIBIT 1, as a Capital Contribution in exchange for 151,621 Common Units of Limited Partner Interest which are hereby issued by the Partnership to Carol Stream Industrial Park Joint Venture pursuant to Section 4.3.C of the Limited Partnership Agreement, and which are evidenced by Common Unit Certificate No. 58 of the Partnership. (b) Each of the Common Units of Limited Partner Interest issued to Carol Stream Industrial Park Joint Venture pursuant to this SECTION 2 shall have the same terms and provisions as the Common Units of Limited Partner Interest issued by the Partnership on November 17, 1997 except that the Exchange Rights relating thereto may be exercised only after the first (1st) anniversary of their issuance (as opposed to November 17, 1998). Section 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT. Exhibit A to the Limited Partnership Agreement is hereby amended and restated to reflect the aforementioned change(s) by deleting Exhibit A attached thereto in its entirety, and by attaching in lieu thereof a replacement exhibit in the form of EXHIBIT A attached hereto. From and after the effectiveness of this Amendment, the amended and restated EXHIBIT A attached hereto shall be the only EXHIBIT A to the Limited Partnership Agreement, unless and until it is hereafter further amended. Section 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT. A. The Limited Partnership Agreement is hereby deemed to be amended to the extent necessary to effect the matters contemplated by this Amendment. Except as specifically provided for hereinabove, the provisions of the Limited Partnership Agreement shall remain in full force and effect. B. The execution, delivery and effectiveness of this Amendment shall not operate (i) as a waiver of any provision, right or obligation of the Managing General Partner, the other General Partner or any Limited Partner under the Limited Partnership Agreement except as specifically set forth herein or (ii) as a waiver or consent to any subsequent action or transaction. Section 4. APPLICABLE LAW. This Amendment shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. [signature page follows] -2- AMENDMENT NO. 32 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. MANAGING GENERAL PARTNER: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust By:_________________________ Name: ______________________ Title:________________________ LIMITED PARTNERS: Each Limited Partner hereby executes this Amendment to the Limited Partnership Agreement. By: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust, as attorney-in fact By:__________________________ Name: _______________________ Title:_________________________ -3- As to Section 1 hereof, ACKNOWLEDGED AND AGREED CAROL STREAM INDUSTRIAL PARK JOINT VENTURE, an Illinois general partnership By: NARCO ENTERPRISES, INC., an Illinois corporation Its Managing General Partner By: ______________________________ Stephen J. Nardi President -4- EXHIBIT A* PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital Managing General Partner Common Units Contribution Prime Group Realty Trust 15,189,438 ** 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman GENERAL PARTNER The Nardi Group, L.L.C. 927,100 $18,542,000 c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 LIMITED PARTNERS The Nardi Group, L.L.C. 328,182 $4,906,061 c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 Carol Stream Industrial Park Joint Venture 151,621 $2,146,374 c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 Edward S. Hadesman Trust Dated May 22, 1992 398,427 $7,968,540 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614
- -------------------------- * As amended by Amendment No. 32 to the Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-1
Number of Capital Limited Partners Common Units Contribution Carolyn B. Hadesman 54,544 $1,090,880 Trust Dated May 21, 1992 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Lisa Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Cynthia Hadesman 1991 Trust 169,053 $3,381,060 c/o Edward S. Hadesman 2500 North Lakeview Unit 1401 Chicago, IL 60614 Tucker B. Magid 33,085 $661,700 545 Ridge Road Highland Park, IL 60035 Frances S. Shubert 36,006 $720,120 511 Lynn Terrace Waukegan, IL 60085 Sky Harbor Associates 62,149 $1,242,980 c/o Howard I. Bernstein 6541 North Kilbourn Lincolnwood, IL 60646 Jeffrey A. Patterson 110,000 $2,200,000 c/o Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601
EXHIBIT A-2
Number of Capital Limited Partners Common Units Contribution Primestone Investment Partners, L.P. 7,944,893 ** c/o The Prime Group, Inc. 77 West Wacker Drive Suite 4200 Chicago, IL 60601 Attn: Paul A. Roehri Prime Group VI, L.P. 304,097 $6,050,500 c/o The Prime Group, Inc. 77 West Wacker Drive Suite 4200 Chicago, IL 60601 Attn: Michael W. Reshcke Robert J. Rudnik H Group LLC 93,849 $1,400,000 c/o Heitman Financial Ltd. 180 N. LaSalle Suite 3600 Chicago, IL 60601 Attn: Norman Perlmutter Ray R. Grinvalds 2,608 $52,160 714 Blaine Court Schaumburg, IL 60173 Sandra F. Grinvalds 2,608 $52,160 714 Blaine Court Schaumburg, IL 60173 Warren H. John, as Trustee of the Warren H. John 37,259 $745,180 Trust dated December 18, 1998 1730 N. Clark Street Chicago, IL 60614
- -------------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-3
Number of Capital Managing General Partner Preferred Units Contribution Prime Group Realty Trust 2,000,000 ** 77 West Wacker Drive Convertible Preferred Suite 3900 Units Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman Prime Group Realty Trust 4,000,000 **/ 77 West Wacker Drive Series B Preferred Units Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman
- ---------------------- ** This amount shall be inserted by the Managing General Partner. EXHIBIT A-4 EX-10.1 6 EXHIBIT 10.1 Exhibit 10.1 LOAN AGREEMENT Between 330 N. WABASH AVENUE, L.L.C having an address at c/o Prime Group Realty Trust 77 West Wacker Drive, Suite 3900 Chicago, Illinois 60601 ("BORROWER") -and- WESTDEUTSCHE IMMOBILIENBANK having an address at Wilhelm Theodor Romheld Strasse 24, 55130 Mainz Federal Republic of Germany ("AGENT" or "LENDER") -and- Merrill Lynch Mortgage Capital Inc. having an address at World Financial Center, North Tower, 10th Floor 250 Vesey Street New York, New York 10281 ("LENDER") (each Lender together with Agent "LENDERS") Dated: as of December 13, 1999 TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS Section 1.1 Definitions ....................................................1 ARTICLE 2 THE LOAN Section 2.1 Loan ..........................................................18 Section 2.2 Conditions Precedent ..........................................18 Section 2.3 Interest ......................................................22 Section 2.4 The Note ......................................................23 Section 2.5 The Mortgage and Collateral ...................................23 Section 2.6 Default Rate ..................................................24 Section 2.7 Repayment of Loan .............................................24 Section 2.8 Prepayments ...................................................25 Section 2.9 Funding Loss ..................................................26 Section 2.10 Taxes .........................................................27 Section 2.11 Payments ......................................................28 Section 2.12 Distribution to Lenders .......................................28 Section 2.13 Increased Costs; Overriding Events ............................29 Section 2.14 Commitment Fee ................................................31 Section 2.15 Arrangement Fee ...............................................31 Section 2.17 Lending Office ................................................31 ARTICLE 3 REPRESENTATIONS AND WARRANTIES Section 3.1 Good Standing of Borrower and its Managing Members ............31 Section 3.2 Authority of Borrower .........................................32 Section 3.3 Authorizations ................................................32 Section 3.4 Binding Agreement .............................................32 Section 3.5 Litigation ....................................................32 Section 3.6 No Conflicts ..................................................33 Section 3.7 Financial Conditions ..........................................33 Section 3.8 Employee Benefit Plans ........................................33 Section 3.9 Governmental Plan .............................................33
ii Section 3.10 Investment Company ............................................33 Section 3.11 Hazardous Materials ...........................................34 Section 3.12 Solvency ......................................................34 Section 3.13 Borrower's Address ............................................34 Section 3.14 Foreign Person ................................................34 Section 3.15 Bankruptcy ....................................................35 Section 3.16 Compliance with Laws ..........................................35 Section 3.17 Utility Service ...............................................35 Section 3.18 Access ........................................................35 Section 3.19 Insurance .....................................................35 Section 3.20 Rent Roll .....................................................36 Section 3.21 No Reliance on Agent or Lenders ...............................36 ARTICLE 4 AFFIRMATIVE AND NEGATIVE COVENANTS Section 4.1 Affirmative Covenants .........................................36 Section 4.2 Negative Covenants ............................................43 ARTICLE 5 DEFAULT Section 5.1 Events of Default .............................................47 Section 5.2 Remedies ......................................................49 Section 5.3 Remedies Cumulative and Concurrent ............................49 Section 5.4 Waiver, Delay or Omission .....................................49 Section 5.5 Indemnity .....................................................49 ARTICLE 6 LIMITED RECOURSE OBLIGATIONS Section 6.1 Limited Recourse ..............................................52 ARTICLE 7 THE AGENT Section 7.1 Performance by Agent ..........................................55 Section 7.2 Actions .......................................................56 Section 7.3 Nonliability of Agent and Lenders .............................56 Section 7.4 Authorization and Action ......................................57 Section 7.5 Withholding Exemption Certificates ............................59
iii Section 7.6 Agent's Reliance, Etc .........................................59 Section 7.8 Ratable Sharing ...............................................61 ARTICLE 8 MISCELLANEOUS Section 8.1 Fees and Expenses .............................................62 Section 8.2 Cumulative Rights and No Waiver ...............................62 Section 8.3 Notices .......................................................62 Section 8.4 Severability ..................................................62 Section 8.5 Binding Effect ................................................63 Section 8.6 Execution in Counterparts .....................................63 Section 8.7 Time of the Essence ...........................................63 Section 8.8 Immunity ......................................................63 Section 8.9 Governmental Regulation of Lender .............................63 Section 8.10 Modification, Waiver, Consent .................................63 Section 8.11 Entire Agreement ..............................................64 Section 8.12 Assignment ....................................................64 Section 8.13 Applicable Law ................................................65 Section 8.14 Usury .........................................................65 Section 8.15 Consent to Jurisdiction .......................................65 Section 8.16 Monies ........................................................66 Section 8.17 Jury Trial ....................................................66 EXHIBIT A Description of Land EXHIBIT B Leases EXHIBIT C Principal Repayment Schedule
LOAN AGREEMENT This Loan Agreement (this "AGREEMENT") is made and entered into as of this 13th day of December 1999, by and between 330 N. WABASH AVENUE, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware ("BORROWER"), and WESTDEUTSCHE IMMOBILIENBANK, a banking institution organized under the laws of the Federal Republic of Germany, having an address at Wilhelm Theodor Romheld Strasse 24, 55130 Mainz, Federal Republic of Germany, individually and as agent (including any of its successors and assigns, "AGENT") for Merrill Lynch Mortgage Capital Inc., a Delaware corporation, and such other co-lenders as may exist from time to time (collectively with Agent, "LENDERS" and each individually, "LENDER"). W I T N E S S E T H: WHEREAS, Borrower owns fee title to the Premises and the Improvements (as defined below) located on the Leasehold Premises (as defined below) and a leasehold interest in the Leasehold (as defined below); WHEREAS, Borrower and Lenders have agreed, among other things, for the Lenders to make a loan to Borrower in the aggregate original principal amount of One Hundred Sixty Million Dollars ($160,000,000) (the "LOAN") evidenced by the certain Promissory Note from Borrower to Lenders dated as of the date hereof, in the amount of One Hundred Sixty Million Dollars ($160,000,000) (the "NOTE") subject to the terms and conditions hereinafter set forth; and WHEREAS, Agent has agreed to fund $60,000,000 of the Loan and Merrill Lynch Mortgage Capital Inc. has agreed to fund $100,000,000 of the Loan. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and each Lender agree as follows: ARTICLE 1 DEFINITIONS Section 1.1 DEFINITIONS. The following terms used in this Agreement shall have the respective meanings ascribed to them below: "77WWLP" means 77 West Wacker Limited Partnership, a limited partnership organized under the laws of the State of Illinois. 2 "AFFILIATE" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. "AGENTS REGISTER" has the meaning set forth in SECTION 8.12(b)(y). "ANNUAL INSTALLMENT PAYMENT" has the meaning set forth in SECTION 2.7 hereof. "APPLICABLE MARGIN" shall be 1.7%. "APPRAISAL" means an M.A.I. appraisal, reasonably satisfactory in form and scope to Agent, prepared by an appraiser selected by Borrower and reasonably satisfactory to Agent. "ASBESTOS" means any hydrated mineral silicate separable into commercially usable fibers, including, but not limited to, chrysolite (serpentine), amosite (cummingtonite-grunerite), crocidolite (riebecktite), tremolite, anthophylite and actinolite. "ASBESTOS-CONTAINING MATERIAL" means any material which contains 1% or more Asbestos by weight. "ASSIGNMENT OF CONTRACTS AND AUTHORIZATIONS" means that certain Assignment of Contracts and Authorizations between Borrower and Lenders executed on the Closing Date. "ASSIGNMENT OF LEASES AND RENTS" means that certain Assignment of Leases and Rents between Borrower and Lenders executed on the Closing Date. "BORROWER'S ADDRESS" means: c/o Prime Group Realty Trust 77 West Wacker Drive, Suite 3900 Chicago, Illinois 60601 Attention: Jeffrey A. Patterson and Louis G. Conforti with a copy to c/o Prime Group Realty Trust 77 West Wacker Drive, Suite 3900 Chicago, Illinois 60601 Attention: General Counsel 3 "BUSINESS DAY" means any day other than a Saturday or Sunday on which commercial banks are open for domestic and international business (including dealings in dollar deposits) in New York City, USA, Chicago, Illinois, USA, and Mainz, Federal Republic of Germany. "CASH COLLATERAL ACCOUNT" means the interest-bearing, U.S. Dollar depository account maintained by Borrower with LaSalle National Bank (or a comparable account at another bank that is reasonably acceptable to Agent), for the purpose of holding certain cash deposits made by Borrower pursuant to SECTION 4.1(G) hereof, which cash deposits shall be pledged to Agent as collateral for the Loan pursuant to the Cash Collateral Agreement. "CASH COLLATERAL AGREEMENT" means that certain Cash Collateral Agreement between Agent and Borrower executed on the Closing Date. "CASH EXPENDITURES" means the aggregate costs paid by Borrower in the ordinary course of maintaining and operating the Premises, the Leasehold Premises and the Improvements located thereon (determined in accordance with the cash method of accounting), including, without limitation, (a) installments of principal and interest payable by Borrower to Agent or Lenders pursuant to the terms of the Loan Documents, (b) Operating Expenses, (c) Income Taxes, (d) repayments of Qualified Loans, (e) all costs and expenses incurred by Borrower for capital improvements to the Premises, other than Tenant Improvement/Leasing Commission Costs made in accordance with the Loan Documents, (f) Tenant Improvement/Leasing Commission Costs, (g) deposits in the Cash Collateral Account and (h) amounts with respect to any of the items set forth in clauses (b) - (f) above which, in Borrower's reasonable judgment, are of a magnitude that merits the establishment of reserves for the payment thereof over a period of no less than two months. "CASH RECEIPTS" means all income of any kind received by, or on behalf of, Borrower from the Premises, the Leasehold Premises and the Improvements located thereon (determined in accordance with the cash method of accounting), including all fixed rent, percentage rent, escalation payments, storage income, tenant work order income, cost recoveries and similar operating income items whether or not derived from the Leases. "CASH MANAGEMENT SYSTEM" means a system established by Manager for the effective management and investment of cash of its Affiliates and pursuant to which: (i) Borrower's lease receivables are paid by the lessees to a lockbox account in the name of Borrower and maintained by a recognized financial institution ("Depository"); 4 (ii) Borrower's lockbox receipts are deposited daily into a deposit and disbursement account ("Operating Account") maintained in the name of Borrower with Depository and transferred daily to a concentration account maintained by Manager for its Affiliates with Depository ("Concentration Account"); (iii) Each transfer of Borrower's funds to the Concentration Account is reflected as an advance to Manager on Borrower's books (collectively, the "Intercompany Advance"); (iv) Borrower pays its obligations by issuing checks or other payment instructions against its Operating Account; (v) Borrower's checks or other payment instructions are paid by transfer of funds from the Concentration Account to its Operating Account, and the Intercompany Advance contemporaneously is reduced by the amount of such transfers; and (vi) Borrower and Manager at no time will permit Borrower's Intercompany Advance to be less than zero (0). "CLOSING" means the time of the execution and delivery hereof by Borrower and Lenders and the funding of the Loan. "CLOSING DATE" means the date hereof. "CODE" means the Internal Revenue Code of 1986, as amended, and any successor thereto. "COLLATERAL" means (a) subject to SECTION 2.5(b) hereof, the Mortgaged Property (as defined in the Mortgage) and (b) any collateral delivered to Agent in accordance with SECTION 4.1(g) hereof. "CONTROL" (including the terms "CONTROLLING", "CONTROLLED BY" and "UNDER COMMON CONTROL with") of a Person means the possession, direct or indirect, of the power to vote 50% or more of the outstanding equity securities or other ownership interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of the outstanding equity securities or other ownership interests, by contract or otherwise. 5 "DEBT SERVICE" shall mean, with respect to any period, any and all interest and scheduled payments of principal required to be made under the Loan Documents during such period; PROVIDED, HOWEVER, that for the purpose of calculating the Debt Service Coverage Ratio payments of principal required shall be deemed to be on the basis of a thirty (30) year amortization schedule in lieu of the actual amortization schedule required under the Loan Documents. "DEBT SERVICE COVERAGE RATIO" or "DSCR" shall mean with respect to any twelve (12) month period ending on December 31 (or with respect to the calendar year in which the Loan is made, such shorter period ending on December 31, 1999), the ratio of Net Operating Income (excluding tenant improvement costs and leasing commissions) for such twelve (12) month period to Debt Service for such twelve (12) month period as evidenced in the financial statements to be provided to Agent by Borrower pursuant to SECTIONS 4.1(a)(i) through 4.1(a)(iv). If applicable, at any time that Agent is in possession of collateral that has been delivered to it by or on behalf of Borrower in accordance with SECTION 4.1(g) hereof, the "Debt Service Coverage Ratio" shall be calculated as if the amount of Net Operating Income for the period in question included the value of the collateral so delivered to Agent. "DEFAULT RATE" has the meaning set forth in SECTION 2.6 hereof. "DEFAULTING LENDER" has the meaning set forth in SECTION 7.7(b) hereof. "DEFERRED MAINTENANCE REPORT" means the portions of that certain Property Condition Assessment Report dated as of July 15, 1998 prepared by De Stefano & Partners, and that certain property condition letter update dated as of November 24, 1999 (copies of which are attached hereto as Exhibit E) addressing deferred maintenance of the Leasehold Premises and Improvements located on the Leasehold Premises. "DETERMINATION DATE" has the meaning set forth in the definition of LIBOR. "EARLY PAYMENT PREMIUM" has the meaning set forth in SECTION 2.8(b) hereof. "ENVIRONMENTAL INDEMNITY AGREEMENT" means that certain Environmental Indemnity Agreement between Borrower and Lenders executed on the Closing Date. "ENVIRONMENTAL LAW" means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment, injunction, decree or judicial or mandatory agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials applicable to the Premises. 6 "ENVIRONMENTAL SITE ASSESSMENT" means that certain Phase I Environmental Site Assessment for 330 North Wabash Avenue, Chicago, Illinois, prepared by Carlson Environmental, Inc., dated August 18, 1998, and that certain letter update prepared by Carlson Environmental, Inc., dated November 19, 1999. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ESTOPPEL CERTIFICATE" means an estoppel certificate in form and substance acceptable to Agent which is dated not more than (a) forty-five (45) days prior to the Closing Date with respect to the Major Tenants, and (b) sixty (60) days prior to the Closing Date with respect to the balance of the Estoppel Certificates. "EUROCURRENCY LIABILITIES" has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EVENT(S) OF DEFAULT" has the meaning set forth in SECTION 5.1 hereof. "EXTENSION PERIOD" means the First Extension Period and/or the Second Extension Period, as applicable. "FIRST EXTENSION PERIOD" means the period from and after the day after the Maturity Date until and including the First Extension Period Termination Date. "FIRST EXTENSION PERIOD OPTION" has the meaning set forth in SECTION 2.7(b). "FIRST EXTENSION PERIOD TERMINATION DATE" means December 13, 2003. "FISCAL YEAR" means a fiscal year of Borrower ending on December 31 in any calendar year or such other fiscal year as Borrower may select from time to time in accordance with the terms of this Agreement. "FIXTURES" means all property and equipment now owned or hereafter acquired by Borrower and now or hereafter located under, on or above the Premises or the Leasehold Premises and owned by Borrower, whether or not permanently affixed, which to the fullest extent permitted by applicable law in effect from time to time shall be deemed fixtures and a part of the Premises or the Leasehold Premises. "FLOATING RATE" means, for any LIBOR Interest Period, at Borrower's election, indicated by telephonic notice, followed by written confirmation, given by Borrower to Agent no later than 11:00 a.m. New York City time, at least three (3) LIBO Business Days prior to the 7 commencement date of the first or next succeeding LIBOR Interest Period, LIBOR plus the Applicable Margin. "FOREIGN PERSON" has the meaning set forth in SECTION 3.14 hereof. "GAAP" or "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" shall mean accounting principles as generally accepted in the United States and as set forth in statements of the Financial Accounting Standards Board and/or in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, or such other accounting principles as may be mutually agreed by Lender and Borrower. "GOVERNMENTAL AUTHORITY(IES)" means any (federal, state, county, municipal or other government) governmental department, commission, board, bureau, court, agency or any instrumentality of any of them having jurisdiction over Borrower the Premises and/or the Leasehold. "GOVERNMENTAL REQUIREMENT" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, writ, injunction, franchise, permit, certificate, license, authorization, or other mandatory direction or requirement of any Governmental Authority now existing or hereafter enacted, adopted, promulgated, entered, or issued applicable to the Premises, the Leasehold Premises or Borrower. "GROUND LEASE" has the meaning set forth in the definition of LEASEHOLD. "GUARANTY" means that certain Guaranty, made by Prime in favor of Agent, executed on the Closing Date. "HAZARDOUS MATERIAL" means any flammable explosives, radioactive materials, Asbestos, and any chemical, petroleum products, or other man-made materials with hazardous or carcinogenic toxic characteristics, including, without limitation, any substances defined as or included in the definition of "hazardous substances", "hazardous waste", "hazardous materials", "toxic substances", "contaminants", or other similar terms, by any federal, state or local environmental statute, regulation or ordinance presently or hereafter in effect, as such statute, regulation or ordinance may be amended from time to time. "IMPOSITIONS" means all (a) real estate and personal property taxes and other taxes and assessments, public or private; utility rates and charges including those for water and sewer; all other governmental and non-governmental charges and any interest or costs or penalties with respect to any of the foregoing; and charges for any public improvement, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever that at any time prior to or after the execution of the Loan Documents may be assessed against Borrower 8 and levied or imposed upon the Premises and the Leasehold Premises or the rents or income received therefrom, or any use or occupancy thereof which become due and payable during the term of the Loan, (b) other taxes, assessments, fees and governmental and non-governmental charges levied imposed or assessed upon or against Borrower which become due and payable during the term of the Loan and (c) taxes levied or assessed upon the Mortgage and the Note which become due and payable during the term of the Loan (other than (i) income, gross receipts, franchise, gift, inheritance and similar taxes imposed upon Lenders or any tax imposed in lieu of or as a direct substitute for any such income, gross receipts and similar taxes, (ii) any taxes levied or assessed in connection with a Lender's transfer of all or any part of its interest in the Loan, except any transfer taxes imposed on the initial transfer of interests in the Loan by Agent within twelve (12) months of the Closing Date by any federal, state or local government in the United States of America and (iii) taxes imposed by the Federal Republic of Germany). "IMPROVEMENTS" has the meaning specified in the Mortgage. "INCOME TAXES" means all federal, state and local income taxes payable (including installment and estimated payments in respect thereof), directly or pursuant to a tax allocation agreement or successor agreement, by Borrower or its direct and indirect partners with respect to the taxable income derived or received from the Premises and the Leasehold Premises. "INDEMNIFIED PARTY" has the meaning set forth in Section 5.5. "INSTITUTION" means (a) a commercial bank organized under the laws of the United States, or any State thereof, or a commercial bank organized under the laws of another country, in any case having a net worth in excess of $500,000,000, any holding company thereof and any affiliate having a net worth in excess of $500,000,000 of any such holding company, (b) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a net worth in excess of $250,000,000, any holding company thereof and any affiliate having a net worth in excess of $250,000,000 of any such holding company, and (c) any insurance company, pension fund or investment fund having a net worth in excess of $500,000,000. Nothing in clauses (a) through (c) of the immediately preceding sentence to the contrary, each Lender shall be deemed an "Institution". "LAND" means the real property more particularly described in EXHIBIT B attached hereto and by this reference made a part hereof. "LAWS" means all present and future laws, statutes, codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations, determinations, awards and court orders of any federal, state, municipal or local government, Governmental Authority, regulatory agency or authority applicable to Borrower, the Leasehold Premises and/or the Premises. 9 "LEASEHOLD" means Borrower's leasehold interest in that certain premises (the "LEASEHOLD PREMISES") located at 401 North Wabash Avenue, Chicago, Illinois, pursuant to that certain Lease (the "GROUND LEASE"), dated December 20, 1968, by and between Marion Ortseifen Kane and Philip J. Reddy, as trustees et al., as landlord, and International Business Machines Corporation, as tenant, as amended, tenant's leasehold interest having been assigned to Borrower on or before the date hereof. The parties hereto acknowledge and agree that after such assignment Borrower does not and will not own a fee interest in the Leasehold Premises (but will own a fee interest in the Improvements located on the Leasehold Premises) and is not and will not be subject to or obligated in any way with respect to such fee interest, except as otherwise set forth in the Ground Lease. "LEASES" means any and all leases, subleases, licenses, concessions or grants of other possessory interest now or hereafter in force, oral or written, entered into by or assigned to Borrower and covering or affecting the Premises or the Leasehold Premises, or any part thereof, including, without limitation, the leases set forth on EXHIBIT B hereto (true and complete copies of which, to the best of Borrower's knowledge, have been delivered to the Agent prior to the date hereof). "LENDER DEFAULT OBLIGATION" has the meaning set forth in SECTION 7.7(b) hereof. "LENDING OFFICE" shall mean: For Agent, in its capacity as Lender: Wilhelm Theodor Romheld Strasse 24 55130 Mainz Federal Republic of Germany Attention: Mr. Claus-Jurgen Cohausz or Mr. Armin Gemmerich For Merrill Lynch Capital Inc.: World Financial Center North Tower, 10th Floor 250 Vesey Street New York, New York 10281 Attention: Mr. Steven Glassman or such other office as each of the above mentioned Lenders, on any other Lender, shall designate from time to time by written notice to Borrower and Agent given at least three (3) Business Days prior to the effective date of such notice. 10 "LIBO BUSINESS DAY" means a day other than (a) Saturday, (b) Sunday, or (c) a day on which commercial banks in New York City, United States of America, Chicago, Illinois, U.S., London, England or Mainz, Germany are required by law to close. "LIBO RESERVE PERCENTAGE" means the percentage representing the reserve requirement applicable to Eurocurrency Liabilities pursuant to Regulation D of the Board of Governors of the Federal Reserve System (or any successor thereto). In determining the LIBO Reserve Percentage, Agent shall take into account any transitional adjustment or phase-in provisions of the reserve requirements otherwise applicable to Eurocurrency Liabilities during the applicable LIBOR Interest Period, and, in the event of any change or variation in the reserve requirements during the applicable LIBOR Interest Period, Agent may use any reasonable averaging or attribution methods which it deems appropriate. The determination by Agent of any applicable LIBO Reserve Percentage shall be conclusive, absent manifest error. Failure by Agent to take into account the LIBO Reserve Percentage when calculating interest due with respect to the outstanding indebtedness of the Loan shall not constitute, whether by course of dealing or otherwise, a waiver by Agent of its right to collect such amounts for any future period. "LIBOR" means, as to the outstanding indebtedness owed hereunder with respect to the applicable LIBOR Interest Period, (a) the rate per annum equal to the offered rate for deposits in United States dollars for the applicable LIBOR Interest Period and for the amount comparable to the then outstanding indebtedness of the Loan, which appears on Dow Jones Markets Service (formerly known as Telerate) display page 3750 as of 11:00 a.m. (London time) two (2) LIBO Business Days prior to the first day of such LIBOR Interest Period (the "DETERMINATION DATE") divided by (b) one minus the LIBO Reserve Percentage. "Dow Jones Markets Service display page 3750" means the display designated as "page 3750" on the Dow Jones Markets Service (or such other page as may replace page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits). If such rate does not appear on Dow Jones Markets Service page 3750 as of approximately 11:00 a.m. (London time) on the Determination Date, the LIBOR for the LIBOR Interest Period will be reasonably determined by Agent in good faith on a customary commercial basis on the basis of the offered rates for deposits in U.S. Dollars for an amount comparable to the then outstanding indebtedness of the Loan for the same period of time as such 11 LIBOR Interest Period that are offered by four (4) major banks in the London interbank market at approximately 11:00 a.m. (London time) on the Determination Date. Agent will request that the principal London office of each of the four (4) major banks provide a quotation of its U.S. Dollar deposit offered rate. If at least two (2) such quotations are provided, the LIBOR will be the arithmetic mean of the quotations. If fewer than two (2) quotations are provided as requested, the LIBOR will be reasonably determined by Agent in good faith on a customary commercial basis on the basis of the rates quoted for loans in U.S. Dollars to leading European banks for amounts comparable to the then outstanding indebtedness of the Loan for the same period of time as such LIBOR Interest Period offered by major banks in New York City at approximately 11:00 a.m. (New York time) on the Determination Date. If at least two (2) such rates are so provided, the LIBOR will be the arithmetic mean of the quotations. If fewer than two (2) rates are provided, the LIBOR which was used to determine the last LIBOR in effect shall be deemed to be the LIBOR. "LIBOR INTEREST PERIOD" means, for any outstanding indebtedness of the Loan, the time during which the applicable Floating Rate is in effect with respect to such amount and shall mean the period commencing, (a) in the case of the first LIBOR Interest Period on the Closing Date, and (b) with respect to any subsequent LIBOR Interest Periods, on the last day of the immediately preceding LIBOR Interest Period, and ending, in each case, at the option of Borrower, as provided below, thirty (30), sixty (60), ninety (90) or one hundred and eighty (180) days thereafter; PROVIDED, HOWEVER, that whenever the last day of any LIBOR Interest Period would otherwise occur on a day other than a LIBO Business Day, the last day of such LIBOR Interest Period shall be extended to occur on the next succeeding LIBO Business Day, PROVIDED FURTHER that if such extension would cause the last day of such LIBOR Interest Period to occur in the next following calendar month, the last day of such LIBOR Interest Period shall occur on the immediately preceding LIBO Business Day. "LIEN" means, for purposes of this Agreement and with respect to any asset, any mortgage, deed of trust, lien, pledge, charge, security interest or other encumbrance of any kind in respect of such asset, including without limitation any right or arrangement with any creditor to have its claim satisfied out of such asset, or the proceeds therefrom, prior to the general creditors of the owner thereof. "LOAN DOCUMENTS" means all instruments and agreements executed and delivered, or to be executed and delivered by Borrower, to Agent and/or Lenders in connection with the Loan, each in form and substance acceptable to Agent in its reasonable discretion. By way of example, but not limitation, such documents shall include (a) the Note, (b) the Mortgage, (c) this Agreement, (d) the Environmental Indemnity Agreement, (e) the Cash Collateral Agreement and (f) all such other instruments as Agent in its reasonable discretion shall require. "MAJOR TENANTS" mean Jenner & Block, Arthur Andersen LLP, International Business Machines Corporation, Foley & Lardner and ST Holdings, Inc. "MAJORITY LENDERS" means, at any time, Lenders owed more than sixty-six and two-thirds percent (66 %) of the then aggregate unpaid principal amount of the Loan. "MANAGEMENT AGREEMENT" means the Management Agreement, dated as of the Closing Date, between Borrower and Manager. 12 "MANAGER" means Prime Group Realty, L.P., or another Affiliate of Borrower or any other Person retained by Borrower as its property manager and approved by Agent with respect to the Premises and the Leasehold Premises in accordance with the terms of the Loan Documents. "MATURITY DATE" means December 13, 2002. "MORTGAGE" means the Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of the date hereof by Borrower in favor of Lenders. "MORTGAGE INSURANCE POLICY" means a final, marked commitment of title insurance containing such coverages as Agent reasonably deems necessary, with all general survey exceptions deleted, on forms of, and issued by, Title Company and/or such other title insurance companies as may be reasonably acceptable to Agent insuring the priority of the Lien on the Land and the improvements created by the Mortgage. "NET CASH FLOW" means, for any period, the excess of Cash Receipts over Cash Expenditures. "NET OPERATING INCOME" shall include the Operating Income accrued by Borrower for the applicable period less all Operating Expenses in connection with the operation of the Premises, the Leasehold Premises and all Improvements, all the foregoing being in accordance with Generally Accepted Accounting Principles. "OPERATING ACCOUNT AGREEMENT" means that certain Operating Account Agreement between Agent and Borrower executed on the Closing Date. "OPERATING EXPENSES" means, with respect to any period, all operating expenses of the Premises, the Leasehold Premises and all Improvements, including costs incurred for utilities, repairs, maintenance, security, cleaning, salaries and payroll, administrative, marketing, legal and other professional services, management fees payable to Manager, real estate taxes and insurance premiums and such other expenses as are determined in accordance with Generally Accepted Accounting Principles consistently applied, except depreciation associated with the Premises. "OPERATING INCOME" means, with respect to any period, all of the Rents (as hereinafter defined), revenues and income under the Leases (but specifically excluding security deposits unless and to the extent same are used to cure defaults) and/or arising from the use or enjoyment of all or any portion of the Premises, the Leasehold Premises and all Improvements, and all other amounts received which, in accordance with Generally Accepted Accounting 13 Principles, are required to be included in Borrower's financial statement as operating income of the Premises, the Leasehold Premises and all Improvements. "OPINION OF BORROWER'S COUNSEL" means an opinion of counsel of Borrower, Winston & Strawn, in form and substance reasonably satisfactory to Agent and Agent's counsel. "ORGANIZATIONAL DOCUMENTS" means (a) with respect to any Person that is a corporation, the certificate of incorporation or charter and by-laws of such Person, (b) with respect to any Person that is a partnership, the partnership agreement and, if a limited partnership, certificate of limited partnership of such Person, and (c) with respect to any Person that is a limited liability company, the articles of organization and the operating agreement of such Person. "OTHER TAXES" mean any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from payment made hereunder or under the Note or from the execution, delivery or recording of, or otherwise with respect to, this Agreement, the Note or the Mortgage imposed by the United States or any state thereof (including any political subdivision or taxing authority thereof), OTHER THAN (a) income, gross receipts, franchise, inheritance, gift and similar taxes imposed upon Lenders or any tax imposed in lieu of and as a direct substitute for any such income, gross receipts, and similar taxes and (b) any taxes levied or assessed in connection with a Lender's transfer of all or any part of its interest in the Loan, except any transfer taxes imposed on the initial transfer of interests in the Loan by Agent within twelve (12) months of the Closing Date by any federal, state or local government in the United States of America. "PERCENTAGES" shall mean (i) with respect to Agent 37.5%, and (ii) with respect to Merrill Lynch Mortgage Capital Inc. 62.5%. "PERMITTED ENCUMBRANCES" means all those certain encumbrances set forth on Schedule B-2 to that certain title policy of Title Company dated as of the date hereof, No. 007750482, in respect of 330 North Wabash Avenue, Chicago, Illinois, to which the interest of Borrower in the Premises is permitted to be subject. "PERMITTED INVESTMENTS" means any investment selected by Borrower and approved by Agent, including one or more of the following: (i) obligations of, or obligations guaranteed as to principal and interest by, the United States government or any agency or instrumentality thereof, provided such obligations are backed by the full faith and credit of the United States of America; (ii) Federal Housing Administration debentures; 14 (iii) Federal Home Loan Mortgage Corp. Debt obligations, Farm Credit System Consolidated system-wide bonds and notes, Federal Home Loan Banks Consolidated Debt obligations, Federal National Mortgage Association Debt obligation, Student Loan Marketing Association Debt obligations, Finance Corp. debt obligations and Resolution Funding Corp. (REFCORP) Debt obligations; (iv) federal funds, unsecured certificates of deposit, time or demand deposits, banker's acceptances, and repurchase agreements having maturities of not more than 365 days, of any bank, the short-term debt obligations of which are rated A-1+ by S&P and P-1 by Moody's; (v) deposits that are fully insured by the Federal Deposit Insurance Corp (FDIC); (vi) debt obligations maturing in 365 days or less that are rated AAA or higher by S&P and Aaa or higher by Moody's; (vii) commercial paper rated A-1 by S&P and P-1 by Moody's and maturing in 365 days or less; (viii) investment in money market funds rated AAAm or AAAm-G by S&P and Aaa by Moody's; or (ix) principal-only strips and interest-only strips of noncallable obligations issued by the U.S. Treasury, and REFCORP securities stripped by Federal Reserve Bank of New York. "PERMITTED TRANSFEREE" means a Pension Fund or Insurance Company. "PERSON" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "PERMITTED EXCEPTIONS" means (a) Liens in favor of Lender, (b) Permitted Prior Exceptions, (c) Leases to which Lender has provided its consent (or is otherwise deemed to have given) pursuant to SECTION 4.1(O) hereof and (d) other matters expressly approved by Lender in writing which are subject and subordinate to the Lien. "PERMITTED PRIOR EXCEPTIONS" means (a) general ad valorem real property taxes which are not delinquent, (b) Special Taxes which are not delinquent, and (c) such other matters as Lender shall expressly approve in writing as "PERMITTED PRIOR EXCEPTIONS" for purposes of this Agreement. 15 "PERSONAL PROPERTY" means tangible personal property and Fixtures, including building materials and supplies, furnishings, equipment and other Goods (as defined in the Mortgage) owned by Borrower, but excluding construction equipment of a type intended for use in connection with other projects. "PREMISES" means the Land together with all of the improvements constructed thereon, Fixtures and equipment and Personal Property located thereon and used in connection with the ownership or operation thereof. "PREPAYMENT PREMIUM" has the meaning set forth in SECTION 2.9(a). "PRIME" means Prime Group Realty, L.P., a limited partnership organized under the laws of the State of Delaware. "PRIME RATE" means the per annum rate of interest publicly announced from time to time by Westdeutsche ImmobilienBank at Mainz, Germany as its "Prime Rate". "PURCHASE AGREEMENT" means that certain Agreement of Purchase and Sale between BRE\Wabash, LLC and Prime Group Realty Limited Partnership effective September 30, 1999, as assigned. "QUALIFIED INSURER" has the meaning set forth in SECTION 5.5(m)(ii). "QUALIFIED LOAN" has the meaning set forth in SECTION 4.2(j) hereof. "REINVESTMENT RATE" shall mean the yield on actively traded "On The Run" United States Treasury securities having interest payable semi-annually or the LIBOR corresponding to the appropriate LIBOR Interest Period, if applicable, and having a maturity date corresponding to the period from the day preceding the date of the applicable prepayment through the applicable LIBOR Interest Period as reported by Bloomberg Financial Markets Commodities News screen USD, PROVIDED, HOWEVER, that if the Maturity Date is not the same as the maturity date of an actively traded "On The Run" United States Treasury security, such yield shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the yields of actively traded "On The Run" Treasury securities having a maturity closest to the Maturity Date as reported by Bloomberg Financial Markets Commodities News screen USD or the equivalent screen provided by Bloomberg Financial Markets Commodities News (or any nationally recognized publicly available on-line source for similar market data in the United States reasonably selected by Agent). 16 "REMEDIATION AMOUNT" has the meaning set forth in Section 6.1(m) hereof. "REMEDIATION WORK" has the meaning set forth in Section 6.1(m) hereof. "RENTS" means all of the rents, royalties, issues, revenues, income, profits and other benefits now or hereafter arising from the Premises and the Leasehold Premises and the occupancy, use and enjoyment thereof. "RENT ROLL" has the meaning set forth in SECTION 3.20 hereof. "RESTRAINT" means any change (including introduction) after the date of this Agreement in any applicable law, rule, regulation, guidelines or directive including, without limitation, those of the United States and the Federal Republic of Germany, or the interpretation thereof (having the force of law), by any governmental authority, central bank or comparable agency, and compliance by Lenders with any request or directive (having the force of law) to be issued after the date of this Agreement of any such authority, bank or agency. "RIGHT OF OTHERS" means, as to any property in which a Person has an interest, any legal or equitable claim or other interest (other than a Lien but including a leasehold interest, a right of first refusal in connection with sale of the Premises or a right of repossession or removal) in or with respect to such property held by any other Person, and any option or right held by any other Person to acquire any such claim or other interest or any Lien in or with respect to such property. "SECOND EXTENSION PERIOD" means the period from and after the day following the First Extension Period Termination Date until and including the Second Extension Period Termination Date. "SECOND EXTENSION PERIOD OPTION" has the meaning set forth in SECTION 2.7(C). "SECOND EXTENSION PERIOD TERMINATION DATE" means December 13, 2004. "SNDAs" has the meaning set forth in SECTION 4.1(P). "SOLVENT" and "SOLVENCY" mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person 17 is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. For purposes of this Agreement, the amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that is likely to become an actual or matured liability. "SPECIAL TAX" means, as to any property, (a) any special assessment or other Tax which is or may become a Lien affecting such property, other than general ad valorem real property taxes, and (b) any assessment, improvement, community facilities or other special taxing district in or into which such property is or may be located or incorporated or under which any special assessment or other Tax which is or may become a Lien affecting such property is or may be imposed. "SYNDICATION AGREEMENT" means that certain Syndication Agreement entered into December 9, 1999, by and between Agent and Merrill Lynch Mortgage Capital Inc. "TAXES" means any and all present or future taxes, levies, impositions, deductions, charges or withholdings imposed by the United States or any state thereof (including any political subdivision or taxing authority thereof), and all liabilities with respect thereto; PROVIDED, HOWEVER, that "Taxes" shall not include (a) income, gross receipts and similar taxes imposed upon Lenders or any tax imposed in lieu of and as a direct substitute for any such income, gross receipts and similar taxes and (b) any taxes levied or assessed in connection with a Lender's transfer of all or any part of its interest in the Loan. "TENANT" means, as to any Lease, the tenant, lessee, sublessee or licensee under such Lease. "TENANT IMPROVEMENT/LEASING COMMISSION COSTS" means, collectively, all costs and expenses incurred by Borrower for tenant improvement work, tenant work allowances or other capital improvements, allowances, concessions and payments of Borrower required pursuant to any Lease, and any leasing commissions and other costs, expenses and allowances incurred by Borrower in connection with the leasing or subleasing of all or a portion of the Premises or the Leasehold Premises pursuant to a Lease. "TERM" means the period from and after the Closing Date until, and including, the Maturity Date or, if applicable, the First Extension Period Termination Date or the Second Extension Period Termination Date. "TITLE COMPANY" means Chicago Title Insurance Company and/or such other title insurance companies as may be reasonably acceptable to Agent insuring the priority of the Lien on the Land and the Improvements created by the Mortgage. 18 "TO THE BEST OF BORROWER'S KNOWLEDGE" (and similar expressions) shall be construed as meaning to the actual knowledge, after reasonable due inquiry, of Borrower's Executive Vice President and General Counsel, or Associate General Counsel after direct inquiry of the building manager and other officers of Borrower having any relevant involvement in the operation of the Premises and the Leasehold Premises. "TRUST" means Prime Group Realty Trust, a Maryland real estate investment trust, the managing general partner of Prime. ARTICLE 2 THE LOAN Section 2.1 LOAN. (a) The Loan granted under this Agreement shall be in the aggregate amount of ONE HUNDRED SIXTY MILLION DOLLARS ($160,000,000.00) (the "LOAN AMOUNT") and shall be used for the sole purpose of the Borrower's partial financing of the acquisition of the Premises and the Leasehold Premises and the Improvements located on the Leasehold Premises. (b) Upon satisfaction of the conditions precedent to Lenders' obligation to advance the Loan pursuant to this Agreement, all funds to be advanced hereunder shall be advanced by each Lender to Agent in the amount set forth opposite its signature on the signature page attached hereto. Agent and the other Lenders shall advance the Loan Amount to the Title Company's escrow account on the Closing Date for payment by direction of Agent or Agent's counsel to make payments required under this Loan Agreement, with any excess proceeds to be disbursed to Borrower. The obligation of each Lender under this SECTION 2.1(b) shall be several and not joint. Section 2.2 CONDITIONS PRECEDENT. The obligations of Lenders hereunder are subject to the condition that Agent shall have received, at or prior to the Closing, all of the following documents in form and substance satisfactory to Agent: (a) a certificate of Borrower signed by a duly authorized officer of the sole member of Borrower, dated as of the Closing Date, stating that the following statements are true: (i) the representations and warranties contained in the Loan Documents are correct in all material respects on and as of the Closing Date, before and after giving effect to the making of the Loan by Lenders and to the application of the proceeds therefrom, as though made on and as of such date; and 19 (ii) to the best of Borrower's knowledge, no material event has occurred and is continuing, or would result from the making of the Loan by Lenders or from the application of the proceeds therefrom, that constitutes an Event of Default; (b) certified copies of the resolutions of the board of trustees of the Trust or similar governing body, as applicable, of 77WWLP and Prime approving the Loan, this Agreement, the Note and each other Loan Document to which it is or is to be a party, and of all documents evidencing other necessary partnership or corporate action and governmental and other third party approvals and consents, if any, with respect to the Loan, this Agreement, the Note and each other Loan Document; (c) a copy of the Organizational Documents of Borrower, Prime and 77WWLP, in each case together with each amendment thereto, and, in the case of the operating agreement of Borrower, the certificate of limited partnership of Prime and the certificate of limited partnership of 77WWLP, certified (as of a date reasonably near the Closing Date) by the Secretary of State of the jurisdiction of its formation or incorporation as being a true and correct copy thereof; (d) a copy of a certificate of the Secretary of State of the jurisdiction of its incorporation, dated reasonably near the Closing Date, certifying that Borrower, Prime and 77WWLP are duly incorporated or formed and in good standing under the laws of the State of the jurisdiction of their respective organization; (e) a copy of a certificate of the Secretary of State of the State of Illinois, dated reasonably near the Closing Date, stating that Borrower, Prime and 77WWLP are duly qualified and in good standing in such State; (f) a notarized certificate of a Secretary or Assistant Secretary of the Trust certifying the names and true signatures of the officers of the Trust, authorized to sign this Agreement, the Note and each other Loan Document to which they are or are to be parties and the other documents to be delivered hereunder and thereunder; (g) in connection with the security interests granted pursuant to the Mortgage: (i) copies of financing statements, delivered by Borrower to Title Company for filing under the Uniform Commercial Code of the State of Illinois, as well as any other jurisdictions deemed necessary or desirable by Agent, covering the Collateral described in the Mortgage, (ii) completed requests for information, dated on or before the Closing Date, listing the financing statements referred to in clause (i) above and all other effective 20 financing statements filed in the jurisdictions referred to in clause (i) above that name Borrower as debtor, together with copies of such other financing statements, (iii) evidence of the completion of all other recordings and filings of or with respect to the security interest granted pursuant to the Mortgage that Agent may deem necessary or desirable in order to perfect and protect the Liens created thereby, and (iv) evidence that all other action that Agent may deem reasonably necessary or desirable in order to perfect and protect the first priority liens and security interests created under the Mortgage has been taken; (h) the Mortgage in form and substance satisfactory to Agent and duly executed by Borrower in recordable form, together with: (i) evidence that counterparts of the Mortgage have been duly executed and delivered for recording to the Title Company on or before the Closing Date in such form as Agent may deem necessary or desirable in order to create a valid first and subsisting Lien on the property described therein in favor of Agent and that provision has been made for the payment of all filing and recording taxes and fees, (ii) a fully paid Mortgage Insurance Policy, in form and substance, with endorsements and in an amount acceptable to, Agent, issued and reinsured by the Title Company, insuring the Mortgage to be a valid first and subsisting Lien on the Premises and the Leasehold described therein, free and clear of all defects (including, but not limited to, mechanics' and materialmen's Liens) and encumbrances, excepting only Permitted Encumbrances, and providing for such other affirmative insurance (including endorsements for mechanics' and materialmen's Liens) and such coinsurance and direct access reinsurance as Agent may deem reasonably necessary or desirable, (iii) a survey of the Premises, certified to Agent and the issuer of the Mortgage Insurance Policy in a manner satisfactory to Agent, acceptable to Agent, (iv) an Appraisal of the Premises and the Leasehold indicating an open market value of at least $238,000,000, a forced sale value of at least $160,000,000 and otherwise in form and substance satisfactory to Agent, (v) an engineering report and such other reports as Agent has requested with respect to the Premises, in form and substance and from professional firms acceptable to Agent, 21 (vi) such consents and agreements of lessors, if any, and other third parties, and such estoppel letters and other confirmations, as Agent may deem reasonably necessary or desirable, (vii) evidence of the insurance required by the terms of the Mortgage, (viii) evidence that all other action that Agent may deem reasonably necessary or desirable in order to create valid first and subsisting Liens on the Premises and the Leasehold Premises has been taken, and (ix) original copies of all mortgage notes being assigned to Agent (or, if the same were not available, lost note affidavits, reasonably acceptable to Agent with respect thereto), together with all assignments, consolidations, splitters, spreaders, extensions and modifications thereto, to the extent being recorded in connection herewith, in form for recordation in Chicago, Illinois; (i) the Environmental Indemnity Agreement, duly executed by Borrower; (j) the Cash Collateral Agreement, duly executed; (k) the Assignment of Contracts and Authorizations, duly executed; (l) the Assignment of Leases and Rents, duly executed; (m) the Note, duly executed; (n) this Agreement, duly executed; (o) the Environmental Site Assessment; (p) a certified copy of the Management Agreement; (q) the Property Management Subordination Agreement, duly executed; (r) a favorable Opinion of Borrower's Counsel; (s) copies of notices to be sent to each tenant at the Premises and the Leasehold Premises regarding the designation of Agent as an insured/loss payee/mortgagee in accordance with the Mortgage; 22 (t) SNDAs with respect to the Major Tenants, in form and substance acceptable to Agent; (u) Estoppel Certificates from the Major Tenants and (ii) any other tenants under the Leases, that, together with the Major Tenants, account for at least sixty-six and two-thirds percent (66 2/3%) of the rentable square footage of the Premises. Notwithstanding the foregoing, Borrower will provide to Agent Estoppel Certificates for all tenants for which Borrower received Estoppel Certificates from Seller pursuant to the Purchase Agreement. (v) financial statements as requested by Agent certified as of the Closing Date and a certificate of an officer of the Trust stating no material adverse change in the financial condition of Borrower, 77WWLP, Prime and the Trust has occurred from the date the financial statements were prepared; (w) certified copies of all the Leases and a Rent Roll certified by Borrower as being true and correct in all material respects; (x) payment of Commitment Fee and Arrangement Fee required to be paid hereunder pursuant to SECTIONS 2.14 and 2.15, respectively; (y) the Guaranty, duly executed by Prime; (z) a copy of the Deferred Maintenance Report; and (aa) any other documents as may reasonably be requested by Agent in Agent's reasonable discretion. Section 2.3 INTEREST. (a) During the Term and, if applicable, the First Extension Period and the Second Extension Period, the Loan shall bear interest on the outstanding principal amount thereof from time to time at a rate per annum equal to the Floating Rate. (b) (i) During the Term, Borrower shall pay to Agent interest on the Loan on the last day of each applicable LIBOR Interest Period. (ii) If applicable, during the First Extension Period and the Second Extension Period (if Borrower exercises the First Extension Period Option and the Second Extension Period Option, respectively, pursuant to SECTION 2.7 hereof), Borrower shall pay to Agent interest on the Loan on the last day of each applicable LIBOR Interest Period. 23 (c) All interest on the Loan (including interest at the Default Rate) shall be calculated on an actual/360-day basis (including the first day but excluding the last day). (d) Borrower may elect (i) thirty (30), (ii) sixty (60), (iii) ninety (90) or (iv) one hundred and eighty (180) day LIBOR Interest Periods. In the event that Borrower fails to so designate the LIBOR Interest Period at least three (3) LIBO Business Days before the next succeeding LIBOR Interest Period, Agent shall automatically designate on Borrower's behalf a ninety (90) day LIBOR Interest Period. (e) Time shall be of the essence with respect to the time periods set forth in this SECTION 2.3. Section 2.4 THE NOTE. The Loan by Lenders to Borrower shall be evidenced by the Note. Section 2.5 THE MORTGAGE AND COLLATERAL. (a) The Note and all other obligations under the Loan Documents shall be secured by the Collateral. Upon the Closing of this Agreement and the execution of the Note, Borrower will cause the Mortgage to be registered or recorded in such a manner and in such a place as may be required in order to publish notice of and fully protect the lien or security interest of Lenders in the Premises and the Leasehold Premises. (b) On the date hereof, the Collateral includes Borrower's interest in the Ground Lease and the Improvements located on the Leasehold Premises. In the event that, at any time during the Term, an amount equal to the greater of (i) 80% of the gross sale proceeds of Borrower's sale of the Leasehold and the Improvements located upon the Leasehold Premises (as evidenced by documentation reasonably satisfactory to Agent) or (ii) 80% of the value of the Leasehold and the Improvements located upon the Leasehold Premises (as set forth in the Appraisal described in SECTION 2.2(h)(iv) hereof) is paid by Borrower to Agent in partial payment of Borrower's debt to Lenders: (A) Agent shall release the Leasehold and the Improvements located upon the Leasehold from the lien of the Mortgage and Agent shall provide to Borrower all documents necessary to cause and evidence such release; and (B) subject to SECTION 2.5(c) hereof Borrower may transfer Borrower's interest in the Ground Lease and Improvements located on the Leasehold Premises without further approval by Agent. Amounts paid under this SECTION 2.5(b) shall reduce the then outstanding principal balance of the Loan. (c) Borrower shall not transfer Borrower's interest in the Ground Lease and the Improvements located on the Leasehold Premises unless such transfer can be accomplished by 24 Borrower without violating any land use and/or parking regulations or restrictions now or hereinafter in effect impacting the Premises or the Leasehold Premises. Section 2.6 DEFAULT RATE. Any overdue principal or interest on the Loan shall bear interest, payable upon demand, for each day from and including the date which is one (1) day after payment thereof was due but excluding the date of actual payment at a rate per annum equal to the lesser of the maximum interest rate permitted under applicable law or a rate equal to the sum of 3.0% plus the Prime Rate (the "DEFAULT RATE"). After the occurrence and during the continuance of an Event of Default, the Loan shall bear interest at the Default Rate. Section 2.7 REPAYMENT OF LOAN. (a) The outstanding principal balance of the Loan shall be repaid in annual installments beginning December 13, 2000 as set forth in EXHIBIT C (each an "ANNUAL INSTALLMENT PAYMENT"). The remaining outstanding principal balance and any other indebtedness payable to Agent or Lenders under the Loan Documents shall be due and payable on the Maturity Date if no Extension Period is entered into or on the First Extension Period Termination Date or the Second Extension Period Termination Date, as the case may be. (b) Notwithstanding the foregoing, Borrower may exercise an option (the "FIRST EXTENSION PERIOD OPTION") extending the Term for the period from and after the day after the Maturity Date to and including the First Extension Period Termination Date by providing notice of such exercise (the "FIRST DESIGNATION NOTICE") to Agent, on or before the date that is thirty (30) days before the Maturity Date. The First Designation Notice once given shall be irrevocable. The exercise of the First Extension Period Option shall only be available in the event that on the date of the First Designation Notice and the Maturity Date: (i) no monetary Event of Default shall have occurred and be continuing; (ii) no default of Borrower under any material contract instrument or agreement to which Borrower is a party or by which Borrower or any of its properties or assets may be bound or to which any may be subject, which default might have a material adverse effect upon the business, operations, properties, assets or conditions (financial or otherwise) of Borrower shall have occurred and be continuing; or (iii) the Debt Service Coverage Ratio for the four (4) full calendar quarters immediately preceding the calendar quarter in which the Maturity Date occurs is at least 1.4:1. In the event that the Term is extended pursuant to the First Extension Period Option, Borrower shall (A) pay to Agent on or before the Maturity Date a fee of $200,000.00 and (B) prior to the Maturity Date, extend the interest rate hedge agreement described in SECTION 4.1(w) hereof or enter into a similar agreement acceptable to Lender for at least the duration of the First Extension Period. Upon and during the occurrence of an Event of Default, all Net Cash Flow shall be deposited into the Cash Collateral Account and shall be governed pursuant to the Cash Collateral Agreement. 25 (c) Notwithstanding the foregoing, Borrower may exercise an option (the "SECOND EXTENSION PERIOD OPTION") extending the Term for the period from and after the day after the First Extension Period Termination Date to and including the Second Extension Period Termination Date by providing notice of such exercise (the "SECOND DESIGNATION NOTICE") to Agent, on or before the date that is thirty (30) days before the First Extension Period Termination Date. The Second Designation Notice once given shall be irrevocable. The exercise of the Second Extension Period Option shall only be available in the event that on the date of the Second Designation Notice and the First Extension Period Termination Date: (i) no monetary Event of Default shall have occurred and be continuing; (ii) no default of Borrower under any material contract instrument or agreement to which Borrower is a party or by which Borrower or any of its properties or assets may be bound or to which any may be subject, which default might have a material adverse effect upon the business, operations, properties, assets or conditions (financial or otherwise) of Borrower shall have occurred and be continuing; or (iii) the Debt Service Coverage Ratio is at least 1.5:1. In the event that the Term is extended pursuant to the Second Extension Period Option, Borrower shall (A) pay to Agent on or before the First Extension Period Termination Date a fee of $200,000.00, (B) prior to the First Extension Period Termination Date, extend the interest rate hedge agreement described in SECTIONS 4.1(w) and 2.7(b)(B) hereof or enter into a similar agreement acceptable to Lender for at least the duration of the Second Extension Period and (C) make the payment required by SECTION 4.1(g)(ii) hereof. Section 2.8 PREPAYMENTS. (a) Borrower shall have the option on not less than ten (10) Business Days' prior written notice to Agent to prepay the Loan in whole or in part at any time and from time to time; PROVIDED, HOWEVER, that any such prepayment shall be accompanied by accrued interest on the principal amount being prepaid to, but excluding, the date of such prepayment plus the Prepayment Premium, if any, determined pursuant to SECTION 2.9 hereof and any other amounts then due and payable under the Loan Documents. (b) In addition to the foregoing, in the event that Borrower prepays all or any part of the principal amount of the Loan, Borrower shall also pay the following amount to Agent (the "EARLY PAYMENT PREMIUM") in addition to any other amounts required to be paid by Borrower to Agent pursuant to this SECTION 2.8 in connection with a prepayment of principal under the Loan: (i) before or on the first (1st) anniversary of the Closing Date, unless such prepayment is made in order to avoid additional liability under or pursuant to the requirements of SECTION 2.10 hereof, an amount equal to 2.0% of the principal amount so prepaid; (ii) after the first (1st) anniversary of the Closing Date but before or on the second (2nd) anniversary of the Closing Date, unless such prepayment is made in order to avoid additional liability under or pursuant to the requirements of SECTION 2.10, an amount equal to 1.0% of the principal amount so prepaid; (iii) (A) in the event that Borrower has exercised the First Extension Period Option, after the second (2nd) anniversary of the Closing Date but before or on the third (3rd) anniversary of the Closing Date, unless such 26 prepayment is made in order to avoid additional liability under or pursuant to the requirements of SECTION 2.10, an amount equal to 1.0% of the principal amount so prepaid and (B) in the event that Borrower has not exercised the First Extension Period Option, after the second (2nd) anniversary of the Closing Date but before or on the date that is nine (9) months after the second (2nd) anniversary of the Closing Date, unless such prepayment is made in order to avoid additional liability under or pursuant to the requirements of SECTION 2.10, an amount equal to 1.0% of the principal amount so prepaid and 0.0% of the principal amount so prepaid thereafter; and (iv) in the event that Borrower has exercised the First Extension Period Option, after the Maturity Date but before or on the date that is three (3) months prior to the First Extension Period Termination Date or, if Borrower has exercised the Second Extension Period Option, the Second Extension Period Termination Date, unless such prepayment is made in order to avoid additional liability under or pursuant to the requirements of SECTION 2.10 and/or SECTION 2.13 hereof in which event no Early Payment Premium shall be due, an amount equal to 0.5% of the amount prepaid and 0.0% of the amount so prepaid thereafter. Notwithstanding anything to the contrary herein above set forth, payment of the Early Payment Premium shall not be required in connection with a prepayment pursuant to SECTION 2.13 or 8.14 HEREOF or Section 3, 6, 13 or 14 of the Mortgage. (c) Except for prepayments made pursuant to Sections 6 and 3(d) of the Mortgage, any prepayment made pursuant to this SECTION 2.8 must be made in minimum amount of One Million Dollars ($1,000,000) and in One Hundred Thousand Dollar ($100,000) increments thereafter, for each such prepayment, not including any Prepayment Premium or other costs associated with such prepayment which shall be in addition to the amount so prepaid. Prepayment of principal will be applied in inverse order to all payments required to be made hereunder. Any amounts prepaid hereunder may not be reborrowed. Section 2.9 FUNDING LOSS. (a) Borrower shall indemnify Agent and Lenders against any actual, out-of-pocket third party costs resulting solely and directly from Borrower prepaying (including but not limited to as permitted under SECTION 2.8 hereof, but excluding scheduled payments of principal pursuant to the Note and payments deemed made pursuant to SECTION 8.14 hereof) all or any portion of the principal of the Loan before the end of the Term. For purposes of the foregoing indemnity, such loss shall be deemed to be the lesser of (i) the actual swap termination costs incurred by Agent (if the Floating Rate was determined by Agent through the execution of one or more third party swap agreements) and (ii) any loss arising from the reemployment of funds (such lesser amount, the "PREPAYMENT PREMIUM"). As used in the preceding sentence, the "loss arising from the reemployment of funds" shall mean the excess, if any, of (A) the aggregate present value as of the date of such prepayment of the sum of (1) each dollar being prepaid and (2) the amount of interest at the Floating Rate (but excluding the Applicable Margin), that would have been payable in respect of such Loan amount being prepaid if such prepayment had not been made and the Loan were repaid in full before the Maturity Date, determined by discounting such amounts 27 at a rate equal to the applicable Reinvestment Rate from the respective dates from which they would have been payable over (B) the amount of the Loan being prepaid. If the applicable Reinvestment Rate is equal to or higher than the Floating Rate (excluding the Applicable Margin), the Prepayment Premium shall be zero. The Prepayment Premium, if any, payable by Borrower pursuant to the terms hereof, shall include such amount or amounts, as calculated by Agent in good faith, as shall compensate Agent for any out-of-pocket loss, cost or expense incurred by Agent for terminating or unwinding any "forward swap", "hedging agreement" or other contractual arrangement entered into by Agent with a third party in order to commit to provide the Floating Rate to be applicable for the Extension Period, pursuant to SECTION 2.3 hereof. Agent will use its reasonable best efforts to mitigate, to the greatest extent possible, such losses and expenses by reversing or unwinding any swap, forward swap, hedging arrangement or other contractual arrangement relating to the Loan and/or reinvesting any funds paid, prepaid or deposited by Borrower in a reverse swap or another manner so as to reduce or eliminate the amount of any such loss or expense. A certificate of Agent prepared in good faith and setting forth in reasonable detail the basis for the determination of any cost and expense and the computation of the amount thereof, shall, absent manifest error, be presumptive evidence of such cost and expense and amount. (b) All amounts due under this SECTION 2.9 shall be payable by the Borrower within ten (10) days of demand by Agent. Section 2.10 TAXES. (a) Any and all payments by the Borrower under this Agreement and the Note shall be made free and clear of and without deduction for Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the Note to Agent: (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including but not limited to deductions applicable to additional sums payable under this provision) Agent receives an amount equal to the sum it would have received had no such deductions been made; and (ii) the Borrower shall pay to the relevant taxation authority or other authority the full amount deducted in accordance with applicable law; PROVIDED, HOWEVER, that Borrower shall have the right to contest the amount paid prior to payment; (b) In addition to the payment of Taxes, the Borrower agrees to pay prior to delinquency all Other Taxes, which Other Taxes may be repaid in installments if so permitted under applicable Laws. 28 (c) The Borrower hereby indemnifies Lenders for the full amount of Taxes and Other Taxes on amounts payable under this SECTION 2.10 which are paid by Lenders and for any actual liability (including but not limited to penalties, interest and expenses) arising in connection therewith whether or not such Taxes, Other Taxes or liabilities were correctly or legally asserted, unless due to Lenders' gross negligence or wilful misconduct. Agent shall notify Borrower immediately after Agent learns of such Taxes, Other Taxes or liabilities, but Agent's failure to so notify Borrower shall not limit Borrower's obligations under this SECTION 2.10. Lenders agree to use their reasonable efforts to minimize amounts due hereunder (including, without limitation, making any filings that are necessary to maintain Lenders' respective exemptions from withholding tax and assigning their respective interests in the Loan to a branch that is eligible for such exemption, provided such efforts are not otherwise disadvantageous to the respective Lenders). This indemnity shall be fully performed within thirty (30) days from the date Agent makes written demand therefor. (d) Upon request by Agent, within thirty (30) days after the date of any payment of Taxes or Other Taxes, Borrower will furnish to Agent the original or a certified copy of a receipt or a copy of a check evidencing payment thereof or other evidence reasonably satisfactory to Agent. (e) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this SECTION 2.10 shall survive the termination of this Agreement and the payment in full of the Note (subject to applicable statutes of limitation). Section 2.11 PAYMENTS. (a) All payments of principal, interest and/or any other amounts in connection with the Loan are to be made by Borrower without set-off or counterclaim to the order of Agent to the account of Agent as from time to time certified by Agent in writing to Borrower in U.S. Dollars in immediately available (same day) funds not later than 11:00 a.m. (New York City time) on the date such payment is due. If any payment would otherwise be due on a day which is not a Business Day, then such payment shall be due on the next succeeding Business Day, and interest shall accrue up to but not including such next succeeding Business Day. All amounts received hereunder by Agent shall be deemed received for the benefit of Lenders. (b) Borrower hereby authorizes Agent, if and to the extent payment due by Borrower under any Loan Document is not made when due under any Loan Document, to charge from time to time against any and all of Borrower's accounts with Agent any amount so due. Section 2.12 DISTRIBUTION TO LENDERS. 29 When Agent receives current funds, in payment of principal, interest or any other sums due hereunder, on or prior to 11:00 a.m. (New York City time) on any Business Day, then, on such date, Agent will notify Lenders of the same and will distribute like funds by wire transfer of immediately available funds to the Lenders ratably to such accounts at such places as have been designated by the respective Lenders in writing from time to time. If such funds are received after 11:00 a.m. (New York City time) on any Business Day, then Agent shall distribute such funds no later than the next succeeding Business Day. Upon Agent's receipt of any other amounts payable by Borrower or any other Persons, for items other than principal or interest, Agent shall promptly cause the payment to be applied in accordance with this Agreement. Unless Agent shall have received notice from Borrower prior to the date on which any payment is due to Lenders hereunder that Borrower will not make such payment in full, Agent may assume that Borrower has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower shall not have so made such payment in full to Agent, each Lender shall repay to Agent forthwith on demand the portion of such amount distributed to such Lender for which Agent did not in fact receive payment from or on account of Borrower together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender makes such repayment to Agent, at the Floating Rate. Borrower shall not be liable for Agent's failure to make such distributions to Lenders. Section 2.13 INCREASED COSTS; OVERRIDING EVENTS. (a) In the event of the imposition of any Restraint which shall prohibit or restrict the making or maintaining of the Loan or the charging of interest thereon, Borrower agrees that Agent shall have the right in good faith: (i) to comply with any such Restraint and to require the conversion of the Floating Rate to an alternative interest rate (if available or determinable) (Agent shall use its reasonable best efforts to provide Borrower with a rate of interest commensurate to the Floating Rate or a rate of interest consistent with loans and borrowers of a similar type); (ii) to permit compliance with such Restraint; or (iii) if an alternative interest rate is not available or determinable, to require repayment in full of the outstanding principal amount of the Loan together with accrued interest thereon on the earlier of: (A) immediately, if Lenders may not lawfully continue to fund and maintain the Loan to such day; PROVIDED, HOWEVER, in the event Borrower cannot make such immediate payment, Borrower will not be required to pay interest at the Default Rate for a period of one hundred eighty (180) days from the date of such request by Agent; or 30 (B) sixty (60) days after written notice (notified by telecopy or telex) to Borrower to repay the Loan in full, or such longer period (not to exceed one hundred eighty (180) days) after the date of such written notice as may be reasonably required for Borrower to repay the Loan in full. (b) In the event of the imposition of any Restraint which shall make it impossible or unlawful for Lenders to give effect to or to maintain any of their obligations under this Agreement (except as noted in clause (a) above), then except as provided in SECTION 2.13(c) hereof, Agent may give notice of such fact to Borrower whereupon Lenders' obligations hereunder shall immediately terminate and Borrower shall, within sixty (60) days after receipt of such notice (or within such shorter period as may be specified in the relevant Restraint thereof) or such longer period (not to exceed one hundred eighty (180) days) as may be reasonably required for Borrower to repay the Loan in full) repay Agent in full the outstanding principal amount of the Loan together with accrued interest thereon and any other charges due to Lenders hereunder, excluding the Early Prepayment Premium and, in respect of a Restraint based on a change of the laws of the Federal Republic of Germany, excluding the Prepayment Premium. (c) If a Restraint requires that any Lender transfer the Loan from the jurisdiction in which it was originally made or then currently held to an office of such Lender in another jurisdiction and the transfer shall: (i) impose, modify or deem applicable any liquidity, reserve, capital adequacy, special deposit or similar requirement against any assets of, deposits with or for the account of, or loans by such Lender (or its Lending Office), or (ii) impose on such Lender (or its Lending Office) any other conditions with respect to this Agreement (other than Taxes, Other Taxes or other liabilities covered by SECTION 2.10 hereof), and the result of any of the foregoing is to increase the cost to such Lender (or its Lending Office) of giving effect to the terms of this Agreement or of agreeing to make or making, funding or maintaining the Loan, then in lieu of SECTION 2.13(b) hereof, upon notification of such amount by Agent, Borrower shall either (i) promptly reimburse Agent for such actual, out-of-pocket increased costs or (ii) prepay the entire outstanding principal of the Loan and any interest accrued thereon (in which event, the Early Prepayment Premium shall not be due). Lenders shall use their commercially reasonable efforts to minimize additional amounts due hereunder (including, without limitation, making any filings that are necessary to minimize or eliminate the effect of the Restraint and assigning their respective interests in the Loan to a branch or other Lender to which the Restraint is not applicable). (d) A certificate prepared in good faith setting forth the basis for the determination of the facts, or the increased costs as noted in subsections (a), (b) and (c) of this 31 SECTION 2.13, submitted by Agent to Borrower shall, absent manifest error, be presumptive evidence of such actual, out-of-pocket increased costs. Section 2.14 COMMITMENT FEE. Borrower shall pay to Agent on the Closing Date for the account of Lenders a non-refundable commitment fee in the amount of Three Hundred Twenty Thousand Dollars ($320,000). Section 2.15 ARRANGEMENT FEE. (a) Borrower shall pay to Agent on the Closing Date a non-refundable arrangement fee in the amount of Eight Hundred Eighty Thousand Dollars ($880,000). (b) Borrower shall pay to MCM Consulting Group on the Closing Date a non-refundable arrangement fee in the amount of Four Hundred Thousand Dollars ($400,000). Section 2.16 ADMINISTRATION FEE. . Borrower shall pay to Agent, on the first day of each calendar quarter commencing January 1, 2000 during the Term, a non-refundable administration fee in the amount of Twenty-Two Thousand Five Hundred Dollars ($22,500). Section 2.17 LENDING OFFICE. The Loan shall be made by each Lender from the office identified as its Lending Office hereunder or from such other branch or affiliate of each such Lender as each such Lender may designate to Borrower and Agent in writing as its Lending Office. ARTICLE 3 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lenders, as of the date hereof, that: Section 3.1 GOOD STANDING OF BORROWER AND ITS MANAGING MEMBERS. Borrower is a limited liability company and is organized, existing and in good standing under the laws of the State of Delaware, and is qualified to do business in Illinois. 77WWLP is a limited partnership, organized, existing and in good standing under the laws of the State of Illinois. Prime is a limited partnership, organized, existing and in good standing under 32 the laws of the State of Delaware, and is qualified to do business in Illinois. The Trust is a real estate investment trust, organized, existing and in good standing under the laws of the State of Maryland. Section 3.2 AUTHORITY OF BORROWER. Borrower has full power and authority to purchase and own the Premises, to enter into this Agreement, to make the borrowings under this Agreement, to execute and deliver the Loan Documents, and to incur and perform the obligations provided for in the Loan Documents, all of which have been duly authorized by all proper and necessary action. Except for those consents or approvals already obtained, no consent or approval of any Governmental Authority is required on the part of Borrower as a condition to the validity or performance of any Loan Documents. Section 3.3 AUTHORIZATIONS. All authorizations, consents, approvals, registrations, exemptions and licenses with or from Governmental Authorities which are necessary for the borrowing, the execution and delivery of all Loan Documents, and Borrower's performance under all Loan Documents have been effected or obtained and are in full force and effect. Section 3.4 BINDING AGREEMENT. The Note and all other Loan Documents as executed and delivered concurrently with this Agreement for value received, constitute, the valid and legally binding obligations of Borrower enforceable in accordance with their terms, subject only as to enforcement, bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. Section 3.5 LITIGATION. There are no proceedings or investigations pending against Borrower or, to the best knowledge of Borrower, threatened before any court or arbitrator or before or by any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of Borrower would have a material adverse effect on the business, Premises, Leasehold Premises, condition (financial or otherwise) or operations of Borrower or its sole member. 33 Section 3.6 NO CONFLICTS. There is no statute, regulation, rule, order or judgment, and no provision of any mortgage, deed of trust, indenture, contract or agreement to which Borrower is a party which would prohibit, conflict with or in any way prevent the execution, delivery or carrying out of the terms of any Loan Documents by Borrower in any material manner. Section 3.7 FINANCIAL CONDITIONS. The financial statements heretofore delivered to Agent fairly present the financial condition of Borrower, as of the dates and for the periods referred to, and have been prepared in accordance with Generally Accepted Accounting Principles consistently applied throughout the periods involved. There have been no material adverse changes in the (a) business, condition (financial or otherwise) or operations of Borrower, or (b) to Borrower's knowledge, Premises or the Leasehold Premises, which would materially, adversely affect Borrower's ability to comply with its obligations under the Loan Documents. Section 3.8 EMPLOYEE BENEFIT PLANS. Borrower (a) is not and will not be an "employee benefit plan" (as defined in Section 3(3) of ERISA), which is subject to Title I of ERISA, and the assets of Borrower do not and will not constitute"plan assets" of one or more such plans for purposes of Title I of ERISA, and (b) Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to "governmental plans". Section 3.9 GOVERNMENTAL PLAN. Borrower is not and will not be a "governmental plan" (within the meaning of Section 3(32) of ERISA) and transactions by or with Borrower are not and will not be subject to state statutes applicable to Borrower regulating investments of and fiduciary obligations with respect to governmental plans. Section 3.10 INVESTMENT COMPANY. Borrower is not (a) an "investment company", an "affiliated person" of, "promoter" or "principal" underwriter for or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended, (b) 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 (c) subject to any other Law that purports to restrict or regulate its ability to borrow money. The making and funding of the Loan by Lenders, the application of the proceeds 34 and repayment thereof by Borrower and the consummation of the transactions contemplated by this Agreement and the other Loan Documents will not violate any Law, including, without limitation, any provision of such Acts or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. Section 3.11 HAZARDOUS MATERIALS. Neither Borrower nor its sole member is undertaking, and has not completed, either individually or together with other potentially responsible parties, any investigation or assessment (other than investigations and/or assessments made in connection with the Environment Site Assessment) or remedial or response action relating to any actual or threatened release, discharge or disposal of Hazardous Materials at the Premises or the Leasehold Premises in violation of applicable laws, either voluntarily or pursuant to the order of any Governmental Authority or the requirements of any Environmental Law; and, to Borrower's knowledge, all Hazardous Materials generated, used, treated, handled or stored at, or transported to or from, the Premises or the Leasehold Premises have been disposed of in a manner not reasonably expected to result in material liability to Borrower or any of its members. Section 3.12 SOLVENCY. Borrower, its sole member, Prime and Trust are Solvent. Section 3.13 BORROWER'S ADDRESS. The location of Borrower's and its sole member's principal place of business and chief executive office is as follows: c/o Prime Group Realty Trust 77 West Wacker Drive, Suite 3900 Chicago, Illinois 60601 c/o Prime Group Realty, L.P. 77 West Wacker Drive Chicago, Illinois 60601 Section 3.14 FOREIGN PERSON. Neither Borrower nor its sole member is a "foreign person" within the meaning of ss 1445(f)(3) of the Code (a "FOREIGN PERSON"). 35 Section 3.15 BANKRUPTCY. No bankruptcy, reorganization or insolvency proceedings are pending or contemplated either by Borrower or, to the best of Borrower's knowledge, against Borrower (or, if Borrower is a partnership or a limited liability company, any of its general partner(s) or managing member(s)). Section 3.16 COMPLIANCE WITH LAWS. To the best of Borrower's knowledge, the Premises, the Leasehold Premises and the current intended use thereof by Borrower comply in all material respects with all applicable restrictive covenants, zoning ordinances, subdivision and building codes, flood disaster laws, health and occupational laws having jurisdiction over the Premises and the Leasehold Premises. The Premises constitutes one or more separate tax parcels for purposes of ad valorem taxation. To the best of Borrower's knowledge, the Premises and the Leasehold Premises do not require any rights over, or restrictions against, other property in order to comply with any of the aforesaid Laws which have not been obtained and provided to Agent or its counsel for its review and approval. Section 3.17 UTILITY SERVICE. All utility services necessary and sufficient for the full use, occupancy and operation of the Premises and the Leasehold Premises for their intended purposes are available to the Premises and the Leasehold Premises, as applicable, including water, storm sewer, sanitary sewer, gas, electric, cable and telephone facilities, through public rights-of-way or perpetual private easements approved by Agent. Section 3.18 ACCESS. All streets, curb cuts and driveways necessary for access to and full use, occupancy, operation and disposition of the Premises have been completed, have been dedicated to and accepted by the appropriate municipal authority and are open and available to the Premises and the Improvements without further condition or cost to Borrower. Section 3.19 INSURANCE. As of the date of this Agreement, all insurance required by the terms of the Mortgage is in full force and effect and none of the premiums payable therefore have been financed. 36 Section 3.20 RENT ROLL. Borrower has delivered a true and correct (in all material respects) and complete schedule (a "RENT ROLL") of all Leases affecting the Premises and the Leasehold Premises as of the date hereof reasonably satisfactory to Agent and its counsel, which, information thereon is accurate, in all material respects, in respect of each Lease, and Borrower has delivered to Agent and its counsel for its review and approval true, correct and complete copies of all Leases described in the Rent Roll. Section 3.21 NO RELIANCE ON AGENT OR LENDERS. Borrower is a sophisticated owner, operator, developer, manager and investor in real estate and its decision to enter into this Loan is based upon its own independent expert evaluation of the terms, covenants, conditions and provisions of the Loan Documents and such other matters, materials and market conditions and criteria which Borrower and such parties deemed relevant. Borrower and its Affiliates have not relied in entering into this Agreement, the Loan or the other Loan Documents upon any oral or written information, representation, warranty or covenant from Lenders, or any of its representatives, employees, Affiliates or agents other than the representations and warranties, if any, of Lenders contained herein. Borrower, on behalf of itself and its Affiliates, further acknowledges that no employee, agent or representative of Lenders have been authorized to make, and that Borrower and its Affiliates have not relied upon, any statements, representations, warranties or covenants other than those specifically contained in this Agreement and in the other Loan Documents. Without limiting the foregoing, Borrower acknowledges that Lenders have made no representations or warranties as to the Loan or the Premises (including, without limitation, the cash flow of the Premises, the value, marketability, condition or future performance thereof, the existence, status, adequacy or sufficiency of the Leases, the tenancies or occupancies of the Premises, or the sufficiency of the cash flow of the Premises, to pay all amounts which may become due from time to time pursuant to the Loan). ARTICLE 4 AFFIRMATIVE AND NEGATIVE COVENANTS Section 4.1 AFFIRMATIVE COVENANTS. So long as Borrower may borrow hereunder and until payment in full of the Note and all sums borrowed under this Agreement and performance of all other obligations of Borrower under this Agreement and the Loan Documents, Borrower shall do the following: 37 (a) Furnish to Agent: (i) as soon as available but in no event more than one hundred twenty (120) days after the close of Borrower's fiscal year, a copy of the annual audit report relating to Borrower in reasonable detail satisfactory to Agent and prepared in accordance with Generally Accepted Accounting Principles by Ernst & Young or other certified independent public accountants reasonably satisfactory to Agent, together with financial statements consisting of a balance sheet as of the end of such fiscal year and statements of income and cash flows of Borrower for such year; (ii) as soon as available but in no event more than one hundred twenty (120) days after the close of the Trust's fiscal year, a copy of the annual financial statement relating to the Trust, in reasonable detail satisfactory to Agent and prepared in accordance with Generally Accepted Accounting Principles, together with financial statements consisting of a balance sheet as of the end of such fiscal year and statements of income and cash flows of the Trust for such year. (iii) promptly upon receipt thereof, copies of any reports and management letters submitted to Borrower by such accountants in connection with any annual or interim audit of the books of Borrower; (iv) within forty (40) days after June 30 of each calendar year during the Term, an updated Rent Roll, quarterly leasing status reports and unaudited financial statements for the Premises certified by an officer of the Trust; (v) within forty-five (45) days after December 31 of each calendar year during the Term, an updated Rent Roll and quarterly leasing status reports for the Premises certified by an officer of the Trust; (vi) within forty-five (45) days after December 31 of each calendar year during the Term, an updated operating budget for the Premises, and quarterly operating budgets thereafter, for the Premises certified by an officer of the Trust; (vii) within forty-five (45) days after December 31 of each calendar year during the Term, an updated operating statement for the Premises, and quarterly operating statements thereafter, for the Premises certified by an officer of the Trust; (viii) within thirty (30) days after the end of each calendar quarter during the Term, beginning with the fourth (4th) full calendar quarter after the Closing Date, a calculation of Net Operating Income for each of the previous four (4) calendar quarters and the Debt Service 38 Coverage Ratio associated with such four-quarter period, each certified by an officer of the Trust; and (ix) such other financial, statistical and general information, readily available to or producible by Borrower, as Agent may reasonably request. (b) Pay all of its indebtedness as and when the same shall come due, provided Borrower may contest any of the same as long as such contest is pursued in good faith and with due diligence and does not adversely affect Lenders. (c) Satisfy and comply in all material respects with all Governmental Requirements applying to and affecting the Premises and the Leasehold Premises and shall obtain and maintain in full force and effect until the Loan has been repaid in full all necessary licenses, permits and similar matters with respect to the Premises and the Leasehold Premises, all without cost or expense to Lenders where failure to do so would result in a material adverse effect on the business, Premises, Leasehold Premises, condition (financial or otherwise) or operations of Borrower, it being understood that Borrower may contest any of same as long as such contest is pursued in good faith and with due diligence and does not adversely affect Lenders. Immaterial violations which Borrower is proceeding to cure and which do not result in a Lien being created on the Premises or the Leasehold shall not cause Borrower to be in default of this SECTION 4.1(c). (d) Permit Agent or its representative and any Governmental Authority, upon reasonable notice, to visit and inspect the Premises or the Leasehold Premises at any time during normal business hours and at all other reasonable times; PROVIDED, HOWEVER, that all such visits and inspections shall be scheduled so as to cause minimal disruption to the business and operation of Borrower, Leasehold Premises, Premises and any tenants thereof. Agent hereby acknowledges and agrees that all such rights to visit and inspect are subject to any and all limitations and/or restrictions of tenants or other occupants now or hereafter in the Premises or the Leasehold Premises. (e) Give prompt written notice to Agent of: (i) any action or proceeding instituted by or against Borrower in any court or by any Governmental Authority, or of any such proceedings of which Borrower obtains actual knowledge threatened against Borrower, which action or proceeding may have a material adverse effect upon the business, operations, Premises, Leasehold, assets or conditions (financial or otherwise), of Borrower; and (ii) any other action, event or condition of any nature known to Borrower or of which it should have knowledge which constitutes an Event of Default, or a default of Borrower under any material contract instrument or agreement to which Borrower is a party or 39 by which Borrower or any of its properties or assets may be bound or to which any may be subject, which default may have a material adverse effect upon the business, operations, properties, assets or conditions (financial or otherwise), of Borrower. (f) Deliver to Agent all items, documents, writings, reports and information reasonably required by Agent to consummate the Loan. (g)(i) Agent shall hold back, pursuant to and in accordance with the Cash Collateral Agreement, from the Loan proceeds and deposit $2,500,000 into the Cash Collateral Account on the Closing Date (which depositing Borrower acknowledges and agrees to). Borrower shall deliver to Agent such agreements and other documents and instruments necessary to grant Agent a perfected first priority security interest in the Cash Collateral Account. Upon the satisfaction in full of all of Borrower's obligations under the Loan Documents, Agent shall, within five (5) days after receipt by Agent of the written request of Borrower, instruct the depository under the Cash Collateral Account to pay over to Borrower all cash or collateral remaining in the Cash Collateral Account, together with any interest accrued thereon. (ii) In the event that Borrower exercises the Second Extension Period Option, Borrower shall, prior to the First Extension Period Termination Date, deposit into the Cash Collateral Account $5,000,000, which amount shall be held pursuant to and in accordance with the Cash Collateral Agreement. (iii) In the event that any termination fees are payable to Borrower on account of the early termination of any Lease during the Term, such fees shall be deposited in the Cash Collateral Account, which amount shall be held pursuant to and in accordance with the Cash Collateral Agreement. (iv) Any and all funds deposited into the Cash Collateral Account shall be invested in Permitted Investments and any interest carried on such funds shall be paid to Borrower from time to time, but not more frequently than monthly in accordance with the Cash Collateral Agreement. (v) Notwithstanding anything to the contrary set forth previously in this SECTION 4.1(G), Borrower shall have the right to withdraw up to an aggregate amount of $2,500,000 (and, during the Second Extension Period Option, if any, an aggregate amount of (a) $7,500,000) of the funds on deposit in the Cash Collateral Account plus (b) any amounts deposited into the Cash Collateral Account pursuant to Section 3(c) of the Cash Collateral Account for Tenant Improvement/Leasing Commission Costs made by or at the direction of Borrower from time to time in accordance with the terms of the Cash Collateral Agreement upon the satisfaction of the following terms and conditions: (A) no Event of Default has occurred and is continuing; (B) Borrower has expended, out of funding sources other than the Loan Proceeds, at least 40 $2,500,000 for Tenant Improvement/Leasing Commissions Costs or other costs associated with Capital Improvements made at or to the Mortgaged Property; (C) any amounts so withdrawn will be applied only to the payment or reimbursement of Tenant Improvement/Leasing Commission Costs (except for interest distributed pursuant to Section 3(d) of the Cash Collateral Agreement) with respect, related or pursuant to any Lease; and (D) Borrower shall have delivered to Agent a certificate executed by an officer of the Trust on behalf of Borrower confirming the truth of clauses (A), (B), and (C) of this SECTION 4.1(G)(IV), and Borrower shall deliver, or will have previously delivered, to Agent a copy of the fully executed Lease or the amendment to the Lease, or the final draft thereof, to which such Tenant Improvement/Leasing Commission Costs relate (or, in lieu thereof, a summary of the material terms of such lease, with a full copy to be delivered within thirty (30) days). Disbursements to be made under this subsection (v) shall be paid by the Depositary (as defined in the Cash Collateral Agreement) to Borrower within then (10) days after satisfaction of the foregoing conditions precedent. (h) Operate the Premises at all times as a class "A" office building in accordance with all applicable Laws, cause the Premises to be managed by the Manager in accordance, in all material respects, with the terms of the Management Agreement, perform and cause Manager to observe all the terms and provisions of the Management Agreement to be performed or observed by it in all material respects, maintain the Management Agreement in full force and effect and enforce the Management Agreement in accordance with its terms in all material respects, in each case subject to the provisions of SECTION 4.2(g) hereof. Notwithstanding the foregoing or anything in SECTION 4.2(g) hereof, if the Management Agreement is terminated in accordance with the terms hereof, any successor manager selected hereunder by Agent or Borrower to manage the Premises shall be recognized in the City of Chicago as a first-class manager of a stature at least comparable, in Agent's reasonable judgment, to the preceding Manager, or a qualified (in Agent's reasonable judgment) independent office building management company managing similar buildings. Any agreement between Borrower and the new Manager shall be subject to Agent's prior written approval (which approval shall not be unreasonably withheld, conditioned or delayed) provided that (i) in Agent's reasonable judgment such agreement is no more favorable to the new Manager and no less favorable to Agent than the Management Agreement with the preceding Manager; and (ii) the new Manager enters into an agreement to subordinate its management fees in the same form as the preceding Manager or in such other form as Agent shall have approved in Agent's reasonable discretion. (i) Pay and discharge before the same shall become delinquent, (i) all Impositions imposed upon or that become a Lien upon the Premises; PROVIDED, HOWEVER, that Borrower shall not be required to pay or discharge any such Imposition that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with the provisions of and as provided by this Agreement, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors and the enforcement thereof is not stayed pending resolution of the subject contest. 41 (j) Comply, and require all tenants in accordance with their applicable Leases and other Persons operating or occupying the Premises or the Leasehold Premises to comply, in all material respects, except as may be permitted by and provided in this Agreement, with all applicable Environmental Laws and Environmental Permits; obtain and renew all Environmental Permits necessary for its operations, the Leasehold Premises and the Premises, if any, and to the extent required by any Environmental Law, conduct any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove from the Premises or the Leasehold Premises, as applicable, and clean up all Hazardous Materials which are reasonably expected to result in material liability to Borrower, in accordance with the requirements of all Environmental Laws; PROVIDED, HOWEVER, that Borrower shall not be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances. (k) Preserve and maintain its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; PROVIDED, HOWEVER, that Borrower shall not be required to preserve any right, permit, license, approval, privilege or franchise if Borrower shall determine that the preservation thereof is no longer desirable in the conduct of the business of Borrower, as the case may be, and that the loss thereof is not disadvantageous in any material respect to Borrower or Lenders and on the condition that Borrower notifies Agent in writing of any such change, promptly thereafter. (l) To the extent required by Environmental Law, establish and maintain an operations and maintenance program with respect to any Asbestos and Asbestos-containing Materials located at the Premises or the Leasehold Premises which operations and maintenance program shall comply with all applicable Laws, conform in all material respects to applicable guidelines established by any Governmental Authority and otherwise be designed in all material respects to incorporate all prudent and reasonable safeguards in order to minimize any health risk to patients, residents, employees and guests at the Premises and the Leasehold Premises from the presence of Asbestos or Asbestos-containing Material. (m) Maintain or cause to be maintained the Premises as a class "A" office building, in good order, repair and operating condition, ordinary wear and tear and the occurrence of any casualty or condemnation excepted, (ii) make or cause to be made promptly, when necessary, all necessary repairs, restorations, renewals, replacements, additions and improvements thereto, interior and exterior, structural and nonstructural, foreseen and unforeseen, or otherwise necessary to ensure that the same shall not in any way be diminished or impaired in any material respect, (iii) not cause or knowingly allow the Premises or the Leasehold Premises to be wasted and (iv) complete, to Agent's satisfaction, all of the maintenance and repair work as specified in the Deferred Maintenance Report. 42 (n) Keep the Premises and the Leasehold Premises equipped as now operated and will replace all worn out or obsolete equipment in order to maintain and operate the Premises as a class "A" office building and comply with all Laws; PROVIDED, HOWEVER, that Borrower shall not be required to replace any equipment if Borrower shall determine that such replacement is no longer necessary or desirable in the conduct of the business of Borrower and that the non-replacement of such equipment does not adversely affect, in any material respect, Borrower or Lenders. (o) Cause all Leases, and all amendments, renewals and extensions thereof, to (i) provide for rental rates and terms which, in Borrower's reasonable judgment, are comparable to existing local market rates and terms, (ii) be arms-length transactions and (iii) be written on the standard form of lease, which is hereby approved by Agent without material changes therefrom (or, with respect to any amendment, renewal or extension of an existing Lease, on the form of such existing Lease). Upon request, Borrower shall furnish Agent with executed copies of all Leases (including any amendments or modifications). No material changes may be made to Agent-approved standard form of lease without the prior written consent of Agent, which consent shall not be unreasonably withheld, conditioned or delayed. Without Lender's prior consent (which consent shall not be unreasonably withheld, conditioned or delayed), Borrower shall not (1) amend or terminate any Lease with any Tenant whose Lease or Leases demise in the aggregate at least 30,000 square feet of the rentable square feet of the Premises, and (2) amend or terminate any Lease with any Tenant so as to cause a material adverse effect on the Net Operating Income, and (3) enter into any new Lease which demises in the aggregate at least 45,000 square feet of the rentable square feet of the Premises. Within ten (10) Business Days of receipt by Lender of written notification by Borrower to Lender of Lender's need to provide its consent pursuant to this SECTION 4.1(o), Lender shall provide Borrower with its written consent, which consent shall not be unreasonably withheld, conditioned or delayed, or objection, and stating the reason for such objection. If such consent or objection is not received by Borrower within the time frame provided for in the previous sentence, Lender's consent to the specific request shall be deemed granted, PROVIDED that such consent shall not be deemed granted after the occurrence and during the continuance of any Event of Default. (p) Use reasonable efforts to obtain, within ninety (90) days of the Closing Date, Subordination, Non-Disturbance and Attornment Agreements (the "SNDAS") with respect to the Leases from each Tenant in favor of Agent, in form and substance acceptable to Agent; PROVIDED, HOWEVER, that a Tenant's failure to execute an SNDA pursuant to the terms of such Tenant's Lease shall not be deemed to be a default of Borrower under this SECTION 4.1(P). (q) Now and in the future remain Solvent and pay its debts from its assets as the same shall be due and payable unless such debts are contested by Borrower in good faith, and such contest is pursued continually and diligently. 43 (r) Do, will do or caused to be done all things necessary to preserve its limited liability company status and/or existence. (s) Maintain its books, records and bank accounts separate from those of its Affiliates and any constituent party. (t) Be, and at all times hold itself out to the public as a legal entity separate and distinct from any other entity (including any Affiliate of Borrower, any constituent party or any Affiliate of any constituent party). (u) Now and in the future maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any constituent party or any Affiliate of any constituent party, or any other Person. (v) Prior to the date hereof, and from time to time upon the reasonable request of Lender, the Borrower shall deliver to Lender, in form and substance satisfactory to Lender, such endorsements to the Mortgage Insurance Policy and such preliminary title reports and other title or lien searches (including UCC searches) and tax service contracts as Lender may reasonably require from time to time. (w) Prior to the date that is ten (10) days after the date hereof (i) cause there to be executed by an unrelated third-party an interest rate hedge guaranty, acceptable to Agent, indemnifying Lenders against interest that accrues on the Loan at an annual rate in excess of 8%, such interest rate hedge guaranty shall be collaterally assigned to Agent pursuant to an assignment in a form acceptable to Agent; and (ii) cause there to be executed by the unrelated third-party to the interest rate hedge guaranty a payment direction letter in substantially the same form attached hereto as Exhibit D. Until such time as the guaranty described in the immediately preceding sentence is in place, Prime shall be personally liable for and guaranty to Lenders the interest that accrues on the Loan at an annual rate in excess of 8%. (x) Within a reasonable period of time after Agent's request, Borrower agrees to provide at its sole cost and expense updated engineering and/or environmental reports satisfactory to Agent, not to exceed one (1) time per year, except upon the occurrence of and during the continuance of an Event of Default. Section 4.2 NEGATIVE COVENANTS. Until payment in full of the Note and all sums borrowed under this Agreement and performance of all other obligations of Borrower under this Agreement and the Loan Documents, Borrower shall not do the following: 44 (a) Mortgage, pledge, grant or permit to exist a security interest in or a lien upon any of its assets now owned or hereafter acquired, without first obtaining the written consent of Agent which consent cannot be unreasonably withheld, conditioned or delayed; PROVIDED, HOWEVER, that Borrower may contest any Lien upon its assets as long as such contest is pursued in good faith and with due diligence and does not materially adversely affect Lenders. Notwithstanding the aforementioned, Borrower may enter into such equipment financing contracts, installment sales contracts and the like in order to finance the reasonable day-to-day equipment needs of Borrower at the Premises. (b) Institute or cause to be instituted, by an issuer or underwriter of, or be a party to any public offering with respect to the Premises within the meaning of the Securities Act of 1933 and the Securities and Exchange Act of 1934. (c) Enter into or suffer to exist any agreement prohibiting or conditioning the creation or assumption of any Lien upon any of its property or assets other than in favor of Lenders; PROVIDED, HOWEVER, that Borrower may contest any such lien upon on its property or assets as long as such contest is pursued in good faith and with due diligence and does not adversely affect Lenders. (d) Make any material change in the nature of its business as carried on at the date hereof or engage in any business or activity other than the ownership, operation and maintenance of the Premises and the Leasehold Premises, and activities incidental thereto. (e) Guarantee payment of any obligation of any Person or pledge its assets for the benefit of any third party, including the sole member, principal or Affiliate of Borrower, as the case may be. (f) File or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors. (g) Without Agent's prior consent (which consent shall not be unreasonably withheld, conditioned or delayed): (i) cancel or terminate the Management Agreement or consent to or accept any cancellation or termination thereof, (ii) amend or otherwise modify, in any material respect, the Management Agreement, (iii) waive any material default under or breach of the Management Agreement, or (iv) agree in any manner to any other amendment, modification or change of any material term or condition of the Management Agreement, in each case of each of clauses (i) through (iv) inclusive, Agent's consent shall be required only if such action would materially and adversely impair the interest or rights of Lenders. Agent's withholding of its consent to a new property manager shall not be deemed to be unreasonable if the new property 45 manager, in Agent's sole reasonable determination, is not a generally recognized manager of first-class office buildings in Chicago. (h) Change its Fiscal Year unless such change would not adversely affect or alter in any material respect the calculation of Debt Service Coverage Ratio pursuant to this Agreement. (i) Now or in the future own any encumbered asset or property other than (i) the Premises and the Leasehold Premises, and (ii) incidental personal property necessary for the ownership or operation of the Premises. (j) Except as expressly provided in this Agreement, enter into any agreement to borrow funds, including the entering into of equipment financing contracts, installment sales contracts, sale-lease back transactions or the like, from any party without the prior approval of Agent. Notwithstanding the preceding sentence or other provision of this Agreement or any other Loan Document, at any time and from time to time without Agent's prior approval: (i) Borrower may obtain additional financing necessary for the reasonable day-to-day operations of the Premises; PROVIDED that (A) projected Net Cash Flow is sufficient to repay such amounts when they become due and (B) such debt (w) includes customary repayment and amortization schedules, (x) is unsecured, (y) is at all times subordinated to the lien of the Mortgage and (z) cannot be terminated and the term thereof accelerated (other than by repayment and satisfaction in full of same) prior to the repayment and satisfaction in full of the indebtedness created hereunder; (ii) Borrower may borrow funds from one or more direct or indirect partners of Borrower and/or any of their respective Affiliates; PROVIDED that such debt (x) is unsecured, (y) is at all times subordinated to the lien of the Mortgage and (z) cannot be terminated and the term thereof accelerated (other than by repayment and satisfaction in full of same) prior to the repayment and satisfaction in full of the indebtedness created hereunder; or (iii) 77WWLP, Prime or Trust may assign or pledge its interest in Borrower to a financial institution that holds at least $1,000,000,000 of real estate assets located in the United States in order to secure financing of no more than $45,000,000 to 77WWLP, Prime or Trust, as the case may be; PROVIDED that (A) Borrower is not the borrowing entity for such debt and (B) such debt (1) includes customary repayment and amortization schedules, (2) is not secured by the Premises, (3) is at all times subordinated to the lien of the Mortgage, and (4) cannot be terminated and the term thereof accelerated (other than by repayment and satisfaction in full of same) prior to the repayment and satisfaction in full of the indebtedness created hereunder; and (C) Borrower provides Agent with at least thirty (30) days prior written notice thereof. 46 Any indebtedness described in clauses (i), (ii) and (iii) of this SECTION 4.2(j), a "QUALIFIED LOAN". Except as expressly provided in this Agreement, Borrower shall not incur any further indebtedness or other obligations, other than in the ordinary course of business, without the prior approval of Agent, which approval Agent may grant or withhold in its sole discretion. (k) Other than pursuant to the Cash Management System, now or in the future make any loans or advances to any third party (including any constituent party or any affiliate of Borrower, or any constituent party thereof), other than tenants that are not Affiliates of Borrower in connection with Leases relating to the Premises and the Leasehold Premises tenant improvements thereunder. (l) Amend, modify or otherwise change the certificate of organization or operating agreement of Borrower in a manner which would adversely affect Borrower's existence as a single purpose entity. (m) Seek the dissolution or winding up, in whole or in part, of Borrower or any of its sole member. (n) Other than pursuant to the Cash Management System, commingle the funds and other assets of Borrower with those of any constituent party thereof, any Affiliate, or any constituent party, or any other Person. (o) Now or in the future, hold itself out to be responsible for the debts or obligations of any other Person. (p) Cause, permit or allow the partition of the Premises. (q) Without the prior written consent of Lender, which consent or the denial thereof shall be in Lender's sole and absolute discretion: (i) sell, convey, alienate, mortgage, encumber, pledge or otherwise transfer all or any part of the Premises; (PROVIDED, HOWEVER, that the sale or transfer of the Borrower's interest in the Ground Lease located on the Leasehold Premises in accordance with Section 2.5(c) hereof shall not be deemed a transfer for purposes of this Section 4.2(q)) or (ii) make a change in the Control of Borrower, PROVIDED, HOWEVER, that, so long as notice thereof is provided to Agent at least forty-five (45) days prior to such transfer, the following shall not require Agent's prior consent: (1) up to 50% of 77WWLP's and/or Prime's interest in Borrower may be transferred to a Permitted Transferee in a single or series of transactions and (2) so long as a subordination agreement acceptable to Agent is duly executed and provided to Agent, the interest in Borrower described in SECTION 4.2(j)(iii) hereof may be transferred pursuant to such SECTION 4.2(j)(iii) hereof. Notwithstanding any other provision of this SECTION 4.2(q) to the contrary so long as Prime retains Control of Borrower, up to 50% of 77WWLP's and/or Prime's interest in Borrower may be transferred to any Person. All 47 reasonable, actual out-of-pocket expenses of Lenders and Agent resulting from a transfer pursuant to this SECTION 4.2(Q) shall be paid, on Agent's demand, by Borrower. Nothing herein is intended to or shall restrict transfer of shares of the Trust. (r) (i) Install or otherwise use or acquire for use in connection with the Collateral any Personal Property (including replacement Personal Property pursuant to clause (C) below) which is not owned or leased by Borrower free and clear of all Liens (including conditional sale contracts) and Rights of Others (other than Permitted Exceptions) or which is not a part of the Collateral, or (ii) cause or permit the removal from the Premises or the Leasehold Premises of any Personal Property of the Borrower which is installed or otherwise used or acquired for use in connection with the Collateral, except that so long as no Event of Default has occurred and is continuing, this clause (t) shall not prohibit (A) the temporary removal of Personal Property for repairs in the ordinary course of business, (B) the removal of Personal Property of insignificant value which is not reasonably necessary or appropriate to the efficient operation of the Premises or the Leasehold Premises, as the case may be, or (C) the removal of obsolete, defective or worn out Personal Property which has been replaced by other Personal Property of equal or greater suitability and value which is intended for the same purpose. Upon the removal of any Personal Property in compliance with clause (B) or (C) above, the Borrower shall be permitted to transfer or otherwise dispose of such Personal Property as the Borrower may determine. ARTICLE 5 DEFAULT Section 5.1 EVENTS OF DEFAULT. The term "EVENT OF DEFAULT" as used herein shall mean the occurrence or happening, at any time and from time to time, of any one or more of the following which shall include by definition the expiration of any period of grace or right to cure provided therein, provided there has been satisfied any requirement in connection therewith for the giving of notice, lapse of time, or happening of any further condition, event or act: (a) if an Event of Default occurs under the Mortgage (as defined in Section 22 thereof) after expiration of any period of grace or right to cure provided therein, provided there has been satisfied any requirement in connection therewith for the giving of notice, lapse of time, or happening of any further condition, event or act; (b) if Borrower shall fail to pay any portion of the Debt, including, but not limited to, principal (including, without limitation, any Annual Installment Payment), interest, fees or other amounts payable to Agent under the Loan Documents within three (3) days after Borrower receives written notice from Agent that such payment is overdue; 48 (c) if Borrower shall fail to comply with the provisions of SECTION 4.1(G) hereof, within the time periods provided for therein; (d) if Borrower fails to duly and promptly observe, perform and discharge any covenant, term, condition or agreement contained in the Loan Documents, other than any default described in the other paragraphs of this SECTION 5.1, and such failure is not curable, or if curable such failure continues for a period of thirty (30) days after written notice thereof from Agent to Borrower, provided if such failure is not curable in thirty (30) days Borrower shall have such additional time as is reasonably necessary in the good faith opinion of Agent after consultation with Borrower to cure provided that such cure is being diligently pursued; (e) if any representation or warranty made by Borrower herein or any statement or representation made in any certificate, report or opinion delivered in connection herewith or in any of the Loan Documents, shall prove to have been incorrect in any material respect on the date as of which made (provided that if such misrepresentation or breach of warranty is capable of being cured, Borrower shall have a period of thirty (30) days from the date Borrower receives written notice from Agent or, if such misrepresentation or breach of warranty is not curable within thirty (30) days, Borrower shall have such additional time as is reasonably necessary in the good faith opinion of Agent after consultation with Borrower to cure provided that such cure is being diligently pursued); (f) If (i) Borrower shall be in default beyond any notice, grace or cure period under any other mortgage or security agreement covering any part of the Premises and the Leasehold Premises whether it be superior or junior in lien to the Mortgage, or (ii) subject to Borrower's right to contest as provided in the Loan Documents, the Premises or the Leasehold becomes subject to any mechanic's, materialman's or other lien (except a lien for local real estate taxes and assessments not then due and payable unless contested by Borrower in good faith, and such contest is pursued continually and with diligence) and such lien is not removed within thirty (30) days after Agent delivers notice thereof to Borrower; (g) In the event that financing permitted by SECTION 4.2(j)(III) hereby is entered into on behalf of Borrower, any default (after the expiration of all applicable notice, grace and opportunity to cure periods) under such documents memorializing such financing; and (h) If Borrower or Prime fails to perform any of the obligations set forth in Section 6.1(m) hereof within ten (10) days after Agent delivers written notice thereof to Borrower. 49 Section 5.2 REMEDIES. Upon an Event of Default, Agent may, at its option, use any, some or all of the following remedies, concurrently or consecutively. (a) Agent may declare all principal, interest and other amounts outstanding on the Loan immediately due and payable. Borrower expressly waives a presentment, notice, demand and protest of any kind. (b) Agent may exercise any and all of its rights and remedies provided at law and under the Note, Mortgage and any other Loan Documents. Section 5.3 REMEDIES CUMULATIVE AND CONCURRENT. No right, power or remedy of Agent as provided in this Agreement or in any of the Loan Documents is intended to be exclusive of any other right, power, or remedy of Agent, but each and every such right, power or remedy shall be cumulative and concurrent and in addition to any other right, power or remedy available to Agent now or hereafter existing at law or in equity and may be pursued separately, successively or concurrently at the sole discretion of Agent. The failure of Agent to exercise any such right, power or remedy shall in no event be construed as a waiver or release thereof. Section 5.4 WAIVER, DELAY OR OMISSION. No waiver of any Event of Default hereunder shall extend to or affect any subsequent or any other Event of Default then existing, or impair any rights, powers or remedies consequent thereon, and no delay or omission of Agent to exercise any right, power or remedy shall be construed to waive any such Event of Default or to constitute acquiescence therein. Section 5.5 INDEMNITY. Borrower hereby agrees that it will defend, indemnify and hold harmless each Lender, and each of its affiliates, officers, directors, partners, participants, employees and agents (each, an "INDEMNIFIED PARTY") from and against, and shall reimburse the affected Indemnified Party for, any and all actual, out-of-pocket losses, claims, damages, costs, expenses (including reasonable attorney fees' and expenses), liabilities, fines, penalties and charges arising out of claims made by Persons other than the Indemnified Parties (collectively, the "LOSSES"), which are or may be imposed, or sustained by such Indemnified Party by reason of: (a) ownership of the Mortgage, the Premises, the Leasehold or any interest therein or receipt of any Rents therefrom; (b) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Premises, the Leasehold Premises or any part thereof or on the adjoining sidewalks, 50 curbs, adjacent property or adjacent parking areas, streets or ways; (c) any use, nonuse or condition in, on or about the Premises, the Leasehold Premises or any part thereof or on adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (d) any failure on the part of Borrower to perform or comply with any of the terms of the Loan Documents; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Premises, the Leasehold Premises or any part thereof; (f) the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release, or threatened release of any Hazardous Substance or Asbestos on, from, or affecting the Premises, the Leasehold Premises or any other property; (g) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to any Hazardous Substance or Asbestos on, from, or affecting the Premises or the Leasehold Premises; (h) any lawsuit brought or threatened, settlement reached, or government order relating to any Hazardous Substance or Asbestos on, from, or affecting the Premises or the Leasehold Premises; (i) any violation of the Environmental Laws, which are based upon or in any way related to any Hazardous Substance or Asbestos on, from, or affecting the Premises or the Leasehold Premises including, without limitation, the costs and expenses of any remedial action in accordance with Laws, reasonable attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses; (j) any failure of the Premises or the Leasehold Premises to comply with any Laws in all material respects; (k) any representation or warranty made in this Loan Agreement, the Note, the Mortgage or the other Loan Documents being false or misleading in any material respect as of the date such representation or warranty was made; (l) 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 Premises, the Leasehold Premises or any part thereof under any legal requirement or any liability asserted against Lenders with respect thereto; and (m) the claims of any lessee of all or any portion of the Premises, the Leasehold Premises or any person acting through or under any lessee or otherwise arising under or as a consequence of any Lease, except to the extent that (i) such Losses resulted from the gross negligence or willful misconduct of such Indemnified Party or (ii) in the case of the foregoing clauses (f) through (i), Mortgagor establishes that such Losses resulted from Hazardous Materials being placed on, above or under the Premises or the Leasehold Premises only subsequent to any foreclosure by Agent (or any assignee of Agent) or acceptance by Agent (or any designee of Agent) of a deed in lieu of foreclosure with respect to the Premises or the Leasehold. In case any such claim, action or proceeding (a "CLAIM") is brought against an Indemnified Party in respect of which indemnification may be sought by such Indemnified Party pursuant hereto, Agent shall give prompt written notice thereof to Borrower, which notice shall include all documents and information in the possession of or under the control of Agent and such Indemnified Party relating to such Claim and shall specifically state that indemnification for such Claim is being sought under this SECTION 5.5; PROVIDED, HOWEVER, that the failure of Agent to so notify Borrower shall not limit or affect such Indemnified Party's rights to be indemnified pursuant to this SECTION 5.5 except to the extent Borrower is materially prejudiced by such failure. Upon receipt of such notice of Claim (together with such documents and information from Agent and such Indemnified Party), Borrower shall, at its sole cost and expense, in good faith defend any 51 such Claim with counsel reasonably satisfactory to Agent (it being understood that counsel selected by Borrower's insurance carrier shall be deemed to be acceptable to Agent and the Indemnified Party, PROVIDED such insurer is an insurer under an insurance policy provided by Borrower pursuant to the Loan Documents or otherwise was accepted by Agent as an insurer (a "QUALIFIED INSURER")), which counsel may, without limiting the rights of Agent and such Indemnified Party pursuant to the next succeeding sentence of this SECTION 5.5, also represent Borrower in such investigation, action or proceeding. In the alternative, such Indemnified Party may elect to conduct its own defense through counsel of its own choosing and at the reasonable expense of Borrower, if (A) such Indemnified Party reasonably determines that the conduct of its defense by Borrower could be materially prejudicial to its interests, (B) Borrower refuses to defend, or (C) Borrower shall have failed, in such Indemnified Party's reasonable judgment, to defend the Claim in good faith (unless, in the case of each of clauses (A), (B) and (C), such Claim is being defended by a Qualified Insurer). Borrower may settle any Claim against such Indemnified Party without such Indemnified Party's consent, PROVIDED (i) such settlement is without any liability, cost or expense whatsoever to such Indemnified Party, (ii) the settlement does not include or require any admission of liability or culpability by such Indemnified Party under any federal, state or local statute or regulation, whether criminal or civil in nature and (iii) Borrower obtains an effective written release of liability for such Indemnified Party from the party to the Claim with whom such settlement is being made, which release must be reasonably acceptable to such Indemnified Party, and a dismissal with prejudice with respect to all claims made by the party against such Indemnified Party in connection with such Claim. Agent and such Indemnified Party shall reasonably cooperate with Borrower, at Borrower's sole cost and expense, in connection with the defense or settlement of any Claim in accordance with the terms hereof. If Borrower refuses to defend any Claim or fails to defend such Claim in good faith (other than a Claim that is being defended by a Qualified Insurer) and such Indemnified Party elects to defend such Claim by counsel of its own choosing, Borrower shall be responsible for any good faith settlement of such Claim entered into by such Indemnified Party. If such Indemnified Party reasonably determines that the conduct of its defense by Borrower or a Qualified Insurer (whichever is defending such claim) would be materially prejudicial to its interests and elects to defend such Claim by counsel of its own choosing, Borrower shall be responsible for any reasonable settlement of such Claim entered into by such Indemnified Party. Except as provided in the preceding two (2) sentences, no Indemnified Party may pay or settle any Claim and seek reimbursement therefor under this SECTION 5.5. Nothing contained herein shall be construed as requiring Agent or any Indemnified Party to expend funds or incur costs to defend any Claim in connection with the matters for which Agent or any Indemnified Party is entitled to indemnification pursuant to this SECTION 5.5. The obligations of Borrower hereunder shall specifically include the obligation to expend its own funds, to incur costs in its own name and to perform all actions as may be necessary to protect Agent or any Indemnified Party from the necessity of expending its own funds, incurring cost or performing any actions in connection with the matters for which each Lender is entitled to indemnification hereunder. Any obligation of the Borrower under clauses (f), (g), (h) and (i) of this SECTION 5.5 shall terminate upon the earlier of (1) the tenth (10th) anniversary of the 52 conveyance or assignment of the Premises and the Leasehold pursuant to a judicial sale in any foreclosure action or by assignment in lieu of foreclosure and (2) repayment in full of the outstanding principal balance and any other indebtedness payable to Agent or Lenders under the Loan Documents. ARTICLE 6 LIMITED RECOURSE OBLIGATIONS Section 6.1 LIMITED RECOURSE. Subject to the qualifications below in this SECTION 6.1, the obligations and liabilities of Borrower under the Note, this Agreement, the Mortgage and the other Loan Documents shall be non-recourse. Accordingly, subject to the qualifications below in this SECTION 6.1, Lenders shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note, the Mortgage, this Loan Agreement or the other Loan Documents by an action or proceeding wherein a money judgment shall be sought against Borrower or any direct or indirect partner, member, shareholder, principal, director, employee, officer or Affiliate of Borrower, except that Agent may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lenders to enforce and realize upon the Note, the Mortgage, this Loan Agreement, the other Loan Documents, and the interests in the Premises and any other collateral given to Lenders pursuant to the Mortgage, and the other Loan Documents; PROVIDED, HOWEVER, that, except as specifically provided in this SECTION 6.1, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower's interest in the Premises and in any other Collateral given to Lenders. Agent, by accepting the Note, the Mortgage, this Loan Agreement and the other Loan Documents, and Lenders, by becoming Lenders hereunder, agree that they shall not sue for, seek or demand any deficiency judgment against Borrower or any direct or indirect partner, member, shareholder, principal, director, employee, officer or affiliate of Borrower, in any such action or proceeding, under or by reason of or under or in connection with the Mortgage, this Loan Agreement, the other Loan Documents or the Note. The provisions of this SECTION 6.1 shall not, however: (i) constitute a waiver, release or impairment of any obligation evidenced or secured by the Mortgage, this Loan Agreement, the other Loan Documents or the Note; (ii) impair the right of Agent to name Borrower as a party in any action or suit for foreclosure and sale under the Mortgage; (iii) affect the validity or enforceability of any guaranty made in connection with the Mortgage, this Loan Agreement, the Note or the other Loan Documents; or (iv) impair the right of Agent to obtain the appointment of a receiver. Nothing herein shall be deemed to be a waiver of any right which Agent may have under Section 506(a), 506(b), 1111(b) or any other provisions of the U.S. Bankruptcy Code to file a claim for the full amount of the Loan secured by the Mortgage or to require that all collateral shall continue to secure all of the debt owing to Lenders in accordance with the Note, the Mortgage, this Loan Agreement and the other Loan Documents. 53 Notwithstanding the foregoing provisions of this SECTION 6.1 or any other provision in the Loan Documents, Borrower and Prime, but not any other direct or indirect partner, member, shareholder, principal, director, employee, officer or affiliate of Borrower or Prime, shall be fully liable for: (a) all actual, out-of-pocket losses suffered and liabilities and expenses incurred by Lenders relating to fraud or intentional misrepresentation by Borrower in connection with the loan evidenced by the Loan Documents; (b) the physical waste of the Premises or the Leasehold Premises by Borrower, or any failure to maintain, repair or restore any part of the Premises or the Leasehold Premises as may be required by the Mortgage, this Loan Agreement or any of the other Loan Documents so as to constitute physical waste; (c) the breach of provisions in the Mortgage concerning Environmental Laws, Hazardous Substances and Asbestos and any indemnification of Lenders therein; (d) the removal or disposal of any portion of the Premises or the Leasehold Premises in violation of the terms of the Loan Documents after the occurrence and during the continuance of an Event of Default under the Note, the Mortgage, this Loan Agreement or any other Loan Documents; (e) the misapplication or conversion of Borrower of (i) any insurance proceeds paid by reason of any loss, damage or destruction to the Premises or the Leasehold Premises, (ii) any awards or other amounts received in connection with the condemnation of all or a portion of the Premises or the Leasehold Premises, or (iii) rents, issues, profits, proceeds, accounts, or other amounts received by Borrower after the occurrence and during the continuance of an Event of Default under the Note, the Mortgage, this Loan Agreement or the other Loan Documents, except when applied with the written consent of Agent or to pay Operating Expenses incurred or paid to Agent or Lenders as Debt Service or otherwise; (f) the costs (including reasonable attorneys' fees and disbursements) incurred by Lenders in connection with the collection or enforcement of the Loan; (g) failure to pay Taxes, assessments, charges for labor or materials or other charges that create liens on any portion of the Premises or the Leasehold for which Borrower is assessed unless contested in good faith, such contest being pursued with due diligence and continually; (h) any actual, out-of-pocket loss, damage, expense or liability incurred by Lenders arising out of Borrower's failure to obtain Agent's prior written consent to any sale, 54 conveyance, alienation, mortgage, encumbrance, pledge or other transfer of the Premises or the Leasehold any part thereof; (i) any security deposits collected with respect to the Premises that are not delivered to Agent upon a foreclosure of the Premises or action in lieu thereof, except to the extent previously applied in accordance with the respective Leases (as defined in the Mortgage); (j) all of the terms and provisions of the Environmental Indemnity Agreement and any indemnification of Lenders set forth therein; (k) the voluntary filing of bankruptcy, reorganization or insolvency proceedings by Borrower, or if an Affiliate of Borrower causes Borrower to have to file bankruptcy, reorganization or insolvency proceedings; (l) the indemnification of Agent and each Lender, and each of its affiliates, officers, directors, partners, participants, employees and agents from and against any and all actual, out-of-pocket losses, claims, damages, costs, expenses, liabilities, fines, penalties and charges which are or may be imposed upon the Improvements or which are or may be imposed upon or suffered or incurred by any such indemnified party by reason of the lack of a certificate of occupancy for the Improvements, including, without limitation, costs and expenses incurred to obtain a certificate of occupancy if and to the extent one is required pursuant to applicable Laws and is requested by applicable Governmental Authorities; and (m) to the extent required by any Governmental Authorities or by the terms of any Lease, whether existing as of the date hereof or entered into subsequent to the date hereof, Borrower or Prime shall remove or otherwise remediate the Asbestos at the Premises, as so required (collectively, the "Remediation Work"), and Borrower and Prime shall be fully liable for such removal or other remediation, as applicable. Within ten (10) Business Days of Borrower and/or Prime becoming aware of such requirement to remove or otherwise remediate Asbestos at the Premises (or if Agent becomes aware of any such requirement then within ten (10) Business Days of receiving written notice from Agent regarding such removal and/or remediation, whichever is earlier), Borrower and Prime shall cause to be delivered to Agent a letter of credit for the benefit of Agent to be drawn on a bank reasonably acceptable to Agent (the "LETTER OF CREDIT") in an amount equal to the product of (i) twenty dollars ($20.00) and (ii) the number of square feet at the Premises affected by such requirement to remove and/or remediate (the "REMEDIATION AMOUNT"). After Borrower has completed and paid for the Remediation Work, or any portion thereof, and evidence satisfactory to Agent has been provided to Agent by Borrower of such completion and payment, the amount of the Letter of Credit shall be reduced by the amount paid by Borrower for such Remediation Work, or portion thereof, as applicable. The Letter of Credit shall expire upon completion of the Remediation Work (a) to the satisfaction of the Governmental Authority, or (b) to the extent required under the applicable Lease, as 55 applicable. The Letter of Credit shall be additional Collateral for the Loan. Agent shall be entitled to draw on the Letter of Credit if either of the following should occur: (i) the occurrence of an Event of Default under the Loan Documents, or (ii) such Letter of Credit is due to expire in less than fifteen (15) days and has not been renewed and the Remediation Work has not been completed as required by (a) or (b) above, as applicable. In the case of subsection (ii) immediately above, Agent shall hold any amounts drawn on the Letter of Credit as cash collateral as security for the purpose of paying for the Remediation Work, and, in the case of subsection (i) immediately above, Agent may hold any amounts drawn on the Letter of Credit as cash collateral as security for the purpose of paying for the Remediation Work or apply the amount against any amounts due under the Loan. Within ten (10) Business Days of January 1 and July 1 of each year throughout the Term of the Loan, Borrower and/or Prime shall deliver to Agent evidence satisfactory to Agent that Borrower and/or Prime (individually or in the aggregate) has a line of credit, borrowing capacity, cash or cash equivalents available to it which evidence Borrower's ability to procure a letter of credit in an amount of at least ten million ($10,000,000) dollars. In lieu of providing Agent with a Letter of Credit, Borrower may substitute cash therefor in an amount equal to the Remediation Amount. ARTICLE 7 THE AGENT Section 7.1 PERFORMANCE BY AGENT. If an Event of Default shall have occurred and be continuing, Agent shall have the right, but not the duty, without limitation upon any of Agent's rights pursuant hereto, to perform in good faith the obligations of Borrower which are the subject of the Event of Default, in which event Agent shall endeavor to give notice to Borrower of Agent's performance, and Borrower agrees to pay to Agent, within five (5) days of demand therefor, all actual and reasonable costs and expenses incurred by Agent in connection therewith, including without limitation reasonable attorneys' fees, together with interest from the date of expenditure at the Default Rate, if an Event of Default shall have given rise to such expenditure; PROVIDED, HOWEVER that Borrower shall not be obligated to reimburse Agent for costs and expenses incurred by Agent pursuant to this SECTION 7.1 due to Agent's gross negligence or willful misconduct. Upon demand by Agent, each of the Lenders shall promptly advance to Agent in immediately available funds its ratable portion of the funds expended by Agent in curing such Event of Default together with interest thereon at the Default Rate from the date of Agent's payment through the date prior to the date on which such advance is received by Agent. Agent will disburse to each Lender such Lenders' ratable share of any fees or charges paid or advanced to Agent by Borrower (i) pursuant to SECTIONS 2.7, 2.8, and 8.12 hereof and/or (ii) pursuant to Section 11(c) of the Mortgage. 56 Section 7.2 ACTIONS. If Agent shall have reasonable cause to believe that any action or proceeding related to the Premises or the Leasehold may, if adversely determined, have a material adverse effect upon the rights or interests of Agent and/or Lenders under this Agreement or any of the other Loan Documents, Agent, after any applicable notice to Borrower shall have the right to commence, appear in and defend such action or proceeding, and in connection therewith Agent may pay necessary expenses, employ counsel, and pay reasonable attorneys' fees. Borrower agrees to pay to Agent, within five (5) days after demand therefor by Agent, all actual and reasonable costs and expenses incurred by Agent in connection therewith, including without limitation reasonable attorneys' fees, together with interest from the date of expenditure at the Default Rate, if an Event of Default shall have given rise to such action or proceeding. Borrower's obligations to repay such expenses shall be secured by the Loan Documents. Section 7.3 NONLIABILITY OF AGENT AND LENDERS. Borrower acknowledges and agrees that: (a) by accepting or approving anything required to be observed, performed, fulfilled or given to Agent or Lenders pursuant to the Loan Documents, including any certificate, statement of profit and loss or other financial statement, survey, appraisal, lease or insurance policy, neither Agent nor Lenders shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Agent; (b) neither Agent nor Lenders undertake nor assume any responsibility or duty to Borrower to select, review, inspect, supervise, pass judgment upon or inform Borrower of any matter in connection with the Premises or the Leasehold and Borrower shall rely entirely upon its own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment or supply of information to Borrower by Agent or Lenders in connection with such matters is for the protection of Agent and/or Lenders only and neither Borrower nor any third party is entitled to rely thereon; and (c) except to the extent caused by a Lender's gross negligence or willful misconduct, neither Agent nor any Lender shall be directly or indirectly liable or responsible for any loss, claim, cause of action, liability, indebtedness, damage or injury of any kind or character to any person or property arising from any construction on, or occupancy or use of, any of the Premises or the Leasehold Premises, including without limitation any loss, claim, cause of action, liability, indebtedness, damage or injury caused by, or arising from: (i) any defect in any building, structure, grading, fill, landscaping or other improvements thereon or in any on-site or 57 off-site improvement or other facility therein or thereon; (ii) any act or omission of Borrower, the parties comprising Borrower or any of Borrower's agents, employees, independent contractors, licensees or invitees; (iii) any accident in or on the Premises or the Leasehold Premises or any fire, flood or other casualty or hazard thereon; (iv) the failure of Borrower, any of Borrower's licensees, employees, invitees, agents, independent contractors or other representatives to maintain the Premises and the Leasehold Premises in a safe condition; and (v) any nuisance made or suffered on any part of the Premises or the Leasehold Premises. Section 7.4 AUTHORIZATION AND ACTION. (a) Each Lender hereby appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto, including but not limited to (i) all actions set forth in Section 59 of the Mortgage or any similar provision of any other Loan Document and (ii) except if an Event of Default has occurred or is continuing hereunder, any and all actions related to the Cash Collateral Account (Central Account), Cash Collateral Account (Ratio Reserve), if any, Cash Collateral Account , if any, and any other cash collateral accounts required to be made hereunder, including but not limited to, the release of monies or other collateral deposited or delivered to Agent pursuant thereto. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of the Note), Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders; PROVIDED, HOWEVER, that Agent shall not be required to take any action which exposes Agent to personal liability or which is contrary to this Agreement or applicable law. Agent agrees to give to each Lender prompt notice of each notice given to it by Borrower pursuant to the terms of the Loan Documents. (b) By their execution of this Agreement, all of the Lenders hereby delegate, authorize and direct Agent to act on their behalf in all respects in connection with the Loan Documents and the making of the Loan and agree with Borrower that Borrower shall only be required to deal with Agent and each of the Lenders shall be bound by any acts of Agent. (c) Except as otherwise expressly provided in this Agreement, Agent (i) shall take all such actions hereunder and under the other Loan Documents which are not inconsistent with the terms hereof or thereof as the Majority Lenders shall instruct and (ii) shall not take any material actions hereunder or under the Loan Documents contrary to the instructions of the Majority Lenders. Any provision of this Agreement which grants to Agent the right to make a decision at its sole discretion or in its reasonable judgment or at its option or any other similar provision is intended, unless the context shall clearly require otherwise, to apply only to relations between Borrower and Agent and the respective rights and obligations of Borrower and Agent 58 hereunder and shall not apply to the relations between Agent and the Lenders or the respective rights and obligations of Agent and the Lenders hereunder. (d) Promptly after Agent acquires actual knowledge thereof, Agent will give written notice to each Lender of any lien on the Premises or the Leasehold or default under this Agreement or any of the other Loan Documents. Agent agrees to consult with Lenders in respect of any remedial action to be taken in respect of any such default and shall act in accordance with any decision of the Majority Lenders. Agent agrees that during a period of forty-five (45) days from Agent's notice to Lenders of any such default, Agent will not take any such material remedial action without the prior agreement of the Majority Lenders unless in Agent's good faith judgment it is necessary to take more prompt remedial action within such period, with or without the agreement of the Majority Lenders, in order to preserve any collateral for the payment of the Loan or substantive rights or remedies under any of the Loan Documents. Agent shall advise Lenders from time to time of such remedial action as Agent shall have taken. All losses and expenses incurred by Agent in connection with the Loan, the enforcement thereof or the realization of the security therefor shall be borne by the Lenders in accordance with their ratable interest in the Loan, and Lenders will, upon request, reimburse Agent for their ratable shares of any expenses incurred by Agent in connection with any such default, any advances made to pay taxes or insurance or otherwise to preserve the lien of the Mortgage or to preserve and protect the Premises or the Leasehold (PROVIDED, HOWEVER, that Agent shall not advance sums in excess of the principal amount of the Mortgage), any other expenses incurred in connection with the enforcement of the Mortgage and any expenses incurred by Agent in connection with the consummation of the Loan not paid or provided for by Borrower. (e) Agent shall, in making any Major Decision, act upon the direction of the Majority Lenders; PROVIDED, HOWEVER, that without the consent of all of the Lenders, Agent shall not, except as expressly provided for in SECTION 7.4(A), SECTION 7.4(C) or SECTION 7.4(D) hereof, make or consent to any modification of the Loan or the Loan Documents, release any security for the Loan, or release any Person from liability in connection with the Loan under any guaranty or otherwise. As used herein, "MAJOR DECISION" means any decision to exercise any material rights or remedies under the Loan Documents. The provisions of this subsection are solely for the benefit of the Lenders and Agent and shall not create any rights in Borrower. (f) If Agent shall be prohibited by Law from continuing to act as agent with respect to the Loan, then, subject to Borrower's approval (which approval shall not be unreasonably withheld, conditioned or delayed), the Majority Lenders shall (and at any time may) designate another Lender to perform the obligations and exercise the rights of Agent hereunder. The successor Agent shall assume such obligations in writing and from and after Borrower's receipt of a copy of notice of such replacement and receipt of a copy of such assumption the successor Agent shall be the sole Agent hereunder and the term "Agent" shall thereafter refer to such successor. 59 Section 7.5 WITHHOLDING EXEMPTION CERTIFICATES. Concurrently with the disbursement of proceeds of the Loan and concurrently with (and as a condition precedent to) the sale of any participation interest in the Loan or assignment of all or any portion of the Loan, Agent shall deliver to Borrower via facsimile two completed copies of United States Internal Revenue Service Form 1001 or Form 4224, as applicable, or the successor applicable form, with respect to each Lender (or, in the case of any sale of a participation interest or assignment of all or any portion of the Loan, the applicable purchaser or assignee) certifying that such Lender (or, if applicable, purchaser or assignee) is entitled to receive payments under the Loan without deduction or withholding of any United States federal income taxes. Each Lender shall further deliver to Borrower two (2) copies of such Form 1001 or Form 4224, as applicable, or the successor applicable form, at least thirty (30) days before the date that any such form expires or becomes obsolete or immediately after the occurrence of any event requiring a change in the most recent form previously delivered by it to Borrower, in each case certifying that such Lender is entitled to receive payments under the Loan without deduction or withholding of any United States federal income taxes. Section 7.6 AGENT'S RELIANCE, ETC. Agent shall administer this Agreement and the other Loan Documents and service the Loan in accordance with the terms and conditions of this Agreement and with the same degree of care as Agent would use in servicing a loan of similar size and type held for its own account, PROVIDED, HOWEVER, that none of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, Agent: (i) may consult with legal counsel (including counsel for Borrower), independent public accountants and other experts selected and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of Borrower or to inspect either the Premises, the Leasehold or the books and records of Borrower; (iv) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. 60 (a) Subject to SECTION 7.7(B) hereof, payments actually received by Agent for the account of the Lenders shall be paid to them promptly after receipt thereof by Agent, but in any event within one (1) Business Day, PROVIDED that, if any such payments are not distributed to the Lenders within one Business Day after Agent's receipt thereof, Agent shall pay to such Lenders interest thereon, at the lesser of (a) the overnight cost of funds at which federal funds are made available to Agent (such interest rate to change automatically effective as of the date of each change in the overnight cost of federal funds) and (b) if the applicable payment represents repayment of a portion of the principal of the Loan, the rate of interest applicable to such portion of the Loan, from the date of receipt of such funds by Agent until such funds are paid in immediately available funds to such Lenders provided such funds are received by Agent not later than [11:00 A.M. (New York time)] on the date of receipt. All payments of principal and interest in respect of the Loan, all payments of the fees described in this Agreement and all payments in respect of any other obligations of Borrower under the Loan Documents shall be allocated among such of Lenders as are entitled thereto, in proportion of their respective Percentages or otherwise as provided herein, in the other Loan Documents, or in the Syndication Agreement as the case may be. Borrower shall have no liability to any Lender on account of a failure by Agent to timely or correctly allocate among the Lenders any payments in respect of any obligations of Borrower. Agent shall wire transfer immediately available funds to each Lender in accordance with wiring instructions provided by Lender to Agent, such funds as it may be entitled to receive, PROVIDED that Agent shall in any event not be bound to inquire into or determine the validity, scope or priority of any interest or entitlement of any Lender and may suspend all payments and seek appropriate relief (including without limitation instructions from the Lenders, or an action in the nature of interpleader) in the event of any doubt or dispute as to any apportionment or distribution contemplated hereby. (b) If a Lender (a "DEFAULTING LENDER") defaults in making any advance or paying any other sum payable by it hereunder, such sum together with interest thereon at the Default Rate from the date such amount was due until repaid (such sum and interest thereon as aforesaid referred to, collectively, as the "LENDER DEFAULT OBLIGATION" shall be payable by the Defaulting Lender (a) to any Lender(s) which elect, at their sole option (and with no obligation to do so), to fund the amount which the Defaulting Lender failed to fund or (b) to any Agent or any other Lender, which under the terms of this Agreement is entitled to reimbursement from the Defaulting Lender for the amounts advanced or expended. Notwithstanding any provision hereof to the contrary, until such time as a Defaulting Lender has repaid the Lender Default Obligation in full, all amounts which would otherwise be distributed to the Defaulting Lender shall instead be applied first to repay the Lender Default Obligation (to be applied first to interest at the Default Rate and then to principal) until the Lender Default Obligation has been repaid in full (whether by such application or by cure by the Defaulting Lender), whereupon such Lender shall no longer be a Defaulting Lender. Any interest collected from Borrower on account of principal advanced by any Lender(s) on behalf of a Defaulting Lender shall be paid to the Lender(s) who made such advance and shall be credited against the Defaulting Lender's obligation to pay interest on the 61 amount advanced at the Default Rate. The provisions of this section shall apply and be effective regardless of whether an Event of Default occurs and is then continuing, and notwithstanding (i) any other provision of this Agreement to the contrary, (ii) any instructions of Borrower as to its desired application of payments or (iii) the suspension of such Defaulting Lender's right to vote on matters which are subject to the consent or approval of Majority Lenders, or all Lenders. Agent shall be entitled to (A) withhold or set off, and to apply to the payment of the Lender Default Obligation any amounts to be paid to such Defaulting Lender in a court of competent jurisdiction to recover the Lender Default Obligation and, to the extent such recovery would not fully compensate the Lenders for the Defaulting Lender's breach of this Agreement, to collect damages. In addition, the Defaulting Lender shall indemnify, defend and hold Agent and each of the other Lenders harmless from and against any and all claims, actions, liabilities, damages, costs and expenses (including attorneys' fees and expense), plus interest thereon at the Default Rate, for funds advanced by Agent or any other Lender on account of the Defaulting Lender or any other damages such entities may sustain or incur by reason of or as a direct consequence of the Defaulting Lender's failure or refusal to abide by its obligations under this Agreement. Section 7.8 RATABLE SHARING. Subject to SECTION 7.7, Lenders agree among themselves that (a) with respect to all amounts received by them which applicable to the payment of the Loan, equitable adjustment will be made so that, in effect, all such amounts will be shared among them ratably in accordance with their Percentages, whether received by voluntary payment, by the exercise of the right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any or all of the Loan Documents or any collateral and (b) if any of them shall by voluntary payment or by the exercise of any right of counterclaim, set-off, banker's lien or otherwise, receive payment of a proportion of the aggregate amount of the Loan held by it which is greater than its Percentage of the payments on the account of the Loan, the one receiving such excess payment shall purchase, without recourse or warranty, an undivided interest and participation (which it shall be deemed to have done simultaneously upon the receipt of such payment) in such obligations owed to the others so that all such recoveries with respect to such obligations shall be applied ratably in accordance with their Percentages; provided, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to that party to the extent necessary to adjust for such recovery, but without interest except to the extent the purchasing party is required to pay interest in connection with such recovery. Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, subject to the terms of the Loan Documents, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of Borrower in the amount of such participation. 62 ARTICLE 8 MISCELLANEOUS Section 8.1 FEES AND EXPENSES Borrower agrees to pay all actual, out-of-pocket expenses of Agent (including the reasonable fees and expenses of its counsel) in connection with the Loan, the preparation of this Agreement and any amendments or supplements, the enforcement of any provision of this Agreement or any amendment or supplement and the collection of Note and/or the foreclosure of any Lien, and/or Mortgage, and/or the enforcement of this Agreement through all trial and appellate levels, whether such fees or expenses arise before proceedings are commenced or after entry of a final judgment; PROVIDED, HOWEVER, that Borrower shall not be required to pay more than $10,000 (in total) for Agent's travel and out-of-pocket expenses incurred in the preparation of the Loan Documents and the closing of the contemplated transaction. Borrower hereby authorizes Agent to utilize the proceeds of the Loan to satisfy any and all of the costs and expenses referred to herein and no further direction or authorization from Borrower shall be necessary to warrant disbursements in payment of the foregoing, and all such disbursements shall earn interest as provided in the Note and shall be secured by the Mortgage. Section 8.2 CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Agent hereunder or under any other Loan Documents delivered hereunder or in connection herewith, or allowed by law or equity, including but not limited to these rights exercisable in connection with an Event of Default, shall be cumulative and may be exercised from time to time. No failure on the part of Agent to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by Agent of any right preclude any other or future exercise thereof or the exercise of any other right. Section 8.3 NOTICES. Unless expressly contained herein, all notices given hereunder shall be given in accordance with the terms of the Mortgage. Section 8.4 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 63 Section 8.5 BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the respective permitted successors and assigns of Borrower, Agent and Lenders; PROVIDED, HOWEVER, that Borrower may not assign any of its rights hereunder, except as permitted in this Agreement or in the Loan Documents. Section 8.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument. Section 8.7 TIME OF THE ESSENCE. Time is of the essence in matters pertaining to this Agreement. Section 8.8 IMMUNITY. Agent's commitment to make this Loan hereunder shall not at any time be subject or liable to attachment or levy at the suit of any creditor of Borrower or any agent, contractor, subcontractor or supplier of Borrower. All third parties' rights shall be and are subordinate and inferior to Lenders' interest and lien under the terms of the Mortgage and this Agreement. Agent and Lenders shall not be liable to third parties for services, labor, materials, Fixtures, equipment and other personal property employed upon, furnished or delivered to the Premises or the Leasehold Premises, and further as to such third parties, Agent shall be under no obligation to adhere to the requirements herein imposed as conditions for the advance of Loan funds which requirements are expressly intended to be for the sole and exclusive benefit of Agent. Section 8.9 GOVERNMENTAL REGULATION OF LENDER. Lenders are subject to various Governmental Authorities and the laws, rules and regulations enacted, adopted and promulgated by them. To the extent that Lenders' power and authority to perform the obligations on the part of Lenders to be performed under this Agreement, now or hereafter, may be limited or regulated hereby, Lenders are hereby excused from such performance. Section 8.10 MODIFICATION, WAIVER, CONSENT. Any modification or waiver or any provision of this Agreement or any consent to any departure by Borrower therefrom shall not be effective unless the same is in writing and 64 signed by an authorized officer of Agent and Borrower, and then such modification, waiver or consent shall be effective only in the specific instance and for the specific purpose given. Any notice to or demand on Borrower not specifically required of Agent hereunder shall not entitle Borrower to any other or further notice or demand in the same, similar, or other circumstances unless specifically required hereunder. Section 8.11 ENTIRE AGREEMENT. The Loan Documents contain the entire agreement between the parties hereto and there are no promises, agreements, conditions, undertakings, warranties and representations, whether written or oral, express or implied, between the parties hereto other than as set forth in the Loan Documents. Moreover, in the event of a conflict between the terms of another Loan Document and this Agreement, the terms of the document which shall either enlarge the interest of Lenders in the Premises and the Leasehold, grant to Lenders greater financial security in the Premises and the Leasehold and/or assure repayment by Borrower of all sums due hereunder in full shall control. Section 8.12 ASSIGNMENT. (a) Borrower may not assign this Agreement or any of its rights or obligations hereunder without the prior approval of Agent except as provided in this Agreement or in the other Loan Documents. (b) Borrower and each Lender acknowledges and agrees that Agent may, and shall have the right without Borrower's or any Lender's consent to, sell participation interests in, or to assign, its interest in the Loan, or any portion thereof, subject to SECTION 7.5 hereof, to any Institution and upon any assignment by Agent, Agent shall be relieved of any liability hereunder and under any Loan Document arising or accruing from and after the date of such assignment to the extent of the amount so assigned; PROVIDED, however, Agent shall give ten (10) days prior notice of such assignment to Borrower (together with a completed copy of Form 1001 or Form 4224, as applicable, with respect to the proposed assignee). Borrower and Agent acknowledge that any Lender (other than Agent) may, and shall have the right, subject to providing Agent and Borrower with ten (10) days' prior written notice (together with a completed copy of Form 1001 or Form 4224, as applicable, with respect to the proposed assignee) to assign its entire interest or any portion thereof to any Institution, and upon any assignment by such Lender, such Lender shall be relieved of any liability hereunder or under any other Loan Document arising or accruing from and after the date of such assignment; PROVIDED, FURTHER, that no such sale or assignment shall result in a material increase in Borrower's obligations, costs or liabilities hereunder or a material reduction in Borrower's rights and remedies. The parties to each such assignment shall execute 65 and deliver to Agent, for its acceptance and recording in the Agent's Register, Agent's form of assignment and acceptance agreement, together with a processing and recordation fee of $2,500, which fee shall cover Agent's cost in connection with the assignments under this Agreement. If an Event of Default has occurred and is continuing, Borrower's consent to any assignment or participation to any party whatsoever shall not be required and all parties hereto agree to promptly execute and file an amendment to this Agreement reflecting any such assignment. Borrower agrees to execute within ten (10) days after request therefor is made by Agent, any documents and/or estoppel certificates reasonably requested by Agent in connection with such participation or assignment, without charge; provided that such documents and/or estoppel certificates do not expand the liability or obligations of Borrower or reduce assignee's or participant's obligations or reduce Borrower's rights and remedies. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (x) the assignee thereunder shall be a party thereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement, and such Lender assignor shall cease to be a party hereto. The Agent shall maintain a register (the "AGENT'S REGISTER") showing the identity of the Lenders from time to time. Section 8.13 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 8.14 USURY. Nothing herein, nor any transaction related hereto or thereto, shall be construed or so operate as to require Borrower to pay interest at a greater rate than is lawful under applicable law. Should any interest or other charges paid by Borrower in connection with all advances made to Borrower under this Agreement result in the computation or earning of interest in excess of the maximum lawful rate of interest which is legally permitted under applicable law, then any and all such excess shall be, and the same is hereby, waived by Agent, and any and all such excess shall be, at Agent's option, be returned to Borrower or credited against and in reduction of the balance due under the indebtedness, and the portion of such excess which exceed the balance due under this Agreement and the Note evidencing the indebtedness, shall be returned by Agent to Borrower. Section 8.15 CONSENT TO JURISDICTION. Borrower, Agent and Lenders each hereby irrevocably submit to the exclusive jurisdiction and venue of any state or federal court sitting in Chicago, Illinois for the purpose of 66 any suit, action, proceeding or judgment relating to or arising out of this Agreement or the Note or the Mortgage and/or the Loan Document. Section 8.16 MONIES. All references to monies in this Agreement shall be deemed to mean lawful monies of the United States of America. Section 8.17 JURY TRIAL. AGENT, LENDERS AND BORROWER HEREBY KNOWINGLY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDERS EXTENDING CREDIT TO BORROWER. FURTHER, BORROWER, HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF AGENT, NOR AGENT'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT AGENT WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. [SIGNATURES ON NEXT PAGE] IN WITNESS WHEREOF, this Agreement was executed and delivered the day and year first above written. BORROWER: 330 N. WABASH AVENUE, L.L.C By: 77 West Wacker Limited Partnership, its sole member By: Prime Group Realty, L.P., its general partner By: Prime Group Realty Trust, its managing general partner By: /s/ Jeffrey A. Patterson ------------------------------ Name: Jeffrey A. Patterson Title: Executive Vice President For purposes Section 6.1 hereof only: PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its Managing General Partner By: /s/ Jeffrey A. Patterson --------------------------------- Name: Jeffrey A. Patterson Title: Executive Vice President [SIGNATURES CONTINUED ON NEXT PAGE] AGENT AND LENDER: WESTDEUTSCHE IMMOBILIENBANK MAXIMUM US $60,000,000 By: /s/ Claus J. Cohausz -------------------------- Name: Claus J. Cohausz Title: Senior Vice President By: /s/ Armin Gemmerich -------------------------- Name: Armin Gemmerich Title: Vice President LENDER: MERRILL LYNCH MORTGAGE CAPITAL, INC. US$100,000,000 By: /s/ Steven Glassman -------------------------- Name: Steven Glassman Title: Vice President EXHIBIT A DESCRIPTION OF LAND [INTENTIONALLY DELETED] EXHIBIT B LEASES [INTENTIONALLY DELETED] EXHIBIT C PRINCIPAL REPAYMENT SCHEDULE December 13, 2000 $1,600,000 December 13, 2001 $3,200,000 December 13, 2002 $3,200,000 In respect of the First Extension Period, if applicable December 13, 2003 $4,800,000 In respect of the Second Extension Period, if applicable December 13, 2004 $4,800,000
EXHIBIT D [INTENTIONALLY DELETED] EX-10.2 7 EXHIBIT 10.2 Exhibit 10.2 CHICAGO, ILLINOIS $160,000,000.00 DATED: AS OF DECEMBER 13, 1999 FOR VALUE RECEIVED, 330 N. WABASH AVENUE, L.L.C., a Delaware limited liability company, having its principal place of business at c/o Prime Group Realty Trust, 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601 ("BORROWER"), promises to pay to the order of WESTDEUTSCHE IMMOBILIENBANK, a banking institution organized under the laws of the Federal Republic of Germany, at its principal place of business at Wilhelm Theodor Romheld Strasse 24, 55130 Mainz, Federal Republic of Germany, or at such place as the holder hereof may from time to time designate in writing, individually and as agent (including any successors and assigns, "AGENT") for Merrill Lynch Mortgage Capital Inc., a Delaware corporation, having an address at World Financial Center, North Tower, 10th Floor, 250 Vesey Street, New York, New York 10281, and such other co-lenders as may exist from time to time (collectively with Agent, "LENDERS" and each individually "LENDER"), the principal sum of ONE HUNDRED SIXTY MILLION DOLLARS (US$160,000,000.00), in lawful money of the United States of America, with interest thereon to be computed from the date funds are advanced by Agent on the outstanding principal balance of the Loan from time to time at the applicable interest rate (as set forth in the Loan Agreement), and the principal balance of which is to be paid in installments as set forth on SCHEDULE A attached hereto and made a part hereof, or as more fully set forth in the Loan Agreement. Capitalized terms not defined herein but defined in the Loan Agreement shall have the meanings ascribed thereto in the Loan Agreement. Section 1. DEFINITIONS. As used in this Note, the following terms shall have the following definitions: "LOAN AGREEMENT" means that certain Loan Agreement dated as of the date hereof by and among Agent, Borrower and Lenders (as the same may be amended, modified or supplemented from time to time in accordance with terms thereof). "LOAN DOCUMENTS" relates collectively to the Note, the Mortgage, the Loan Agreement, the Environmental Indemnity Agreement, the Cash Collateral Agreement, the Other Security Documents and any and all other documents executed in connection with this Note. "OTHER SECURITY DOCUMENTS" as used in this Note shall mean all and any of the documents other than this Note, the Mortgage, or the Environmental Indemnity Agreement now or hereafter executed by Borrower and/or others and by or in favor of Agent and/or Lenders, which wholly or partially secure or guarantee payment of this Note. Section 1. PAYMENT AND CALCULATION OF INTEREST. Interest on the outstanding principal indebtedness evidenced hereby shall be paid and calculated as set forth in the Loan Agreement, and the provisions of Section 2.3 of the Loan Agreement are hereby incorporated in this Note by reference as if set forth herein at length. Section 1. APPLICATION OF PAYMENT. Payments under this Note shall be applied first to the payment of accrued interest and other costs and charges then due and payable in connection with this Note or the Debt (as defined in the Mortgage), as Agent may determine in its sole discretion, and the balance shall be applied toward the reduction of the principal balance of the Loan. All amounts due under this Note shall be payable without setoff, counterclaim or any other deduction whatsoever. Section 1. SECURITY. This Note is secured by the Mortgage, the Cash Collateral Account, the Environmental Indemnity Agreement, the Other Security Documents and such other cash collateral accounts contemplated by the Loan Documents as may be pledged to Agent and/or Lenders from time to time. Section 1. EVENT OF DEFAULT. The provisions of Article 5 of the Loan Agreement are hereby incorporated in this Note by reference as if set forth herein at length. In addition to the foregoing, in the event that it should become necessary to employ counsel to collect the Debt or to protect or foreclose the security hereof, Borrower also agrees to pay on demand all actual, out-of-pocket costs of collection incurred by Agent, including reasonable attorneys' fees and disbursements for the services of counsel whether or not suit be brought. Section 1. DEFAULT RATE. The provisions of Section 2.6 of the Loan Agreement are hereby incorporated in this Note by reference as if set forth herein at length. In addition to the foregoing, accrual of interest at the Default Rate shall be computed from the occurrence of the Event of Default until all such Events of Default have been fully cured. Any interest computed at the Default Rate shall be added to the Debt (as defined in the Mortgage), and shall be deemed secured by the Mortgage. This clause, however, shall not be construed as an agreement or privilege to extend the date of the payment of the Debt, nor as a waiver of any other right or remedy accruing to Lenders by reason of the occurrence of any Event of Default. Section 1. PREPAYMENT. The provisions of Sections 2.8 and 2.9 of the Loan Agreement are hereby incorporated in this Note by reference as if set forth herein at length. Section 1. PAYMENT 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 at any time prior to a sale or realization of the Collateral, either through foreclosure or the exercise of the other remedies available to Agent under the Mortgage or the Loan Agreement, such tender by Borrower shall be deemed to be a voluntary prepayment under this Note in the amount tendered. At the time of such tender, Borrower shall, in addition to the entire Debt, also pay to Agent the applicable prepayment consideration specified in Section 2.9 and/or 2.8 of the Loan Agreement. Section 2. USURY. This Note is subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the Debt at a rate which could subject Lenders to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Note, Borrower is at any time required or obligated to pay interest on the Debt at a rate in excess of such maximum rate, the rate of interest due under this Note shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of the maximum rate shall be, at the discretion of Agent, refunded to Borrower or deemed to have been payments in reduction of principal balance of the Loan and not on account of the interest due hereunder. In the event of reduction of the principal balance of the Loan pursuant to this Section 9 no prepayment penalty, premium or other charges, including, without limitation, the Early Prepayment Premium or the Prepayment Premium, shall be payable to Lenders or Agent. Section 1. MODIFICATION, WAIVER, CONSENT. This Note may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Agent, 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. Whenever used, the singular number shall include the plural, the plural the singular, and the words "Agent" and "Borrower" shall include their respective successors, assigns, heirs, executors and administrators. Section 1. WAIVER. Borrower and all others who may become liable for the payment of all or any part of the Debt do hereby severally waive all notices excluding those required to be given under the Loan Documents. No release of any security for the Debt or any person liable for payment of the Debt, no extension of time for payment of this Note or any installment hereof, and no alteration, amendment or waiver of any provision of the Loan Documents made by agreement between Agent and any other person or party shall release, modify, amend, waive, extend, change, discharge, terminate or affect the liability of Borrower, and any other person or party who may become liable for the payment of all or any part of the Debt, under the Loan Documents. Section 1. LIMITED RECOURSE. The provisions of Section 6.1 of the Loan Agreement are hereby incorporated in this Note by reference as if set forth herein at length. Section 1. AUTHORITY OF BORROWER. Borrower (and the undersigned representative of Borrower, if any) represents that Borrower has full power, authority and legal right to execute, deliver and perform its obligations pursuant to this Note, the Mortgage and the other Loan Documents and that this Note, the Mortgage and the other Loan Documents constitute valid and binding obligations of Borrower. Section 1. NOTICE. All notices or other communications required or permitted to be given pursuant hereto shall be given in the manner specified in the Mortgage directed to the parties at their respective addresses as provided therein. Section 1. TRANSFER OF MORTGAGED PROPERTY. Without the prior written consent of Agent, Borrower shall not sell, convey, alienate, mortgage, encumber, pledge or otherwise transfer, or permit the transfer of, directly or indirectly, the Mortgaged Property or ownership interests of Borrower, except as permitted in the Loan Documents. Section 1. [Intentionally Omitted] Section 1. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and shall inure to the benefit of Lenders and Borrower and their respective successors and assigns permitted hereunder or under the other Loan Documents. Section 1. JURY TRIAL. BORROWER HEREBY, TO THE FULLEST EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS NOTE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO TRIAL BY JURY WOULD OTHERWISE ACCRUE. AGENT IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER. Section 1. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. IN WITNESS WHEREOF, Borrower and Agent have duly executed this Agreement the day and year first above written. BORROWER: 330 N. WABASH AVENUE, L.L.C. By: 77 West Wacker Limited Partnership, its By: Prime Group Realty L.P., its general partner By: Prime Group Realty Trust, its managing general partner By: /s/ Jeffrey A. Patterson ------------------------ Jeffrey A. Patterson Executive Vice President SCHEDULE A PRINCIPAL AMORTIZATION SCHEDULE December 13, 2000 $1,600,000 December 13, 2001 $3,200,000 December 13, 2002 $3,200,000 In respect of the First Extension Period, if applicable December 13, 2003 $4,800,000 In respect of the Second Extension Period, if applicable December 13, 2004 $4,800,000
EX-10.3 8 EXHIBIT 10.3 Exhibit 10.3 GUARANTY THIS GUARANTY ("GUARANTY"), dated as of December 13, 1999, is made by PRIME GROUP REALTY, L.P., a Delaware limited partnership, having an address at c/o Prime Group Realty Trust, 77 West Wacker Drive, Chicago, Illinois 60601 ("GUARANTOR"), in favor of WESTDEUTSCHE IMMOBILIENBANK, a German banking corporation ("LENDER"), whose address is Wil.-Th.-Roemheld-Str. 24, 55130 Mainz, Germany, and is executed pursuant to the Loan Agreement, dated as of the date of this Guaranty, by and between 330 N. Wabash Avenue, L.L.C., a Delaware limited liability company (the "BORROWER") and Lender (hereinafter referred to as "AGENT") for itself and Merrill Lynch Mortgage Capital Inc., a Delaware corporation and such other co-lenders as may exist from time to time (collectively with Agent, "LENDERS" and each individually, "LENDER") under the Loan Agreement (such Loan Agreement, as it may from time to time be supplemented, modified and amended in accordance with the terms thereof, being referred to in this Guaranty as the "LOAN AGREEMENT"; capitalized terms used but not defined herein but defined in the Loan Agreement shall have the meanings assigned to them in the Loan Agreement), the provisions of which are incorporated in this Guaranty by reference. The Loan Agreement provides, among other things, for rules of construction which apply to this Guaranty. W I T N E S S E T H: WHEREAS, the Borrower, Agent and Lender have entered into the Loan Agreement; WHEREAS, Guarantor will derive substantial direct and indirect benefit from the transactions contemplated by the Loan Documents; and WHEREAS, the Agent is unwilling to make the loan pursuant to the Loan Documents unless it receives a guaranty by Guarantor for the benefit of Agent and Lender of the Guarantied Obligations (as hereinafter defined); NOW, THEREFORE, in consideration of the recitals set forth above and incorporated herein, the agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce the Agent to accept the Loan Documents as aforesaid and make the Loan, Guarantor hereby covenants and agrees as follows: 1. GUARANTIED OBLIGATIONS. (a) Commencing as of the first (1st) anniversary of the funding of the Loan and subject to the provisions of subsection (b) below, Guarantor unconditionally, absolutely and irrevocably, as a primary obligor and not merely as a surety, guaranties to Agent the full and punctual payment and performance of the following in accordance with the Loan Documents (the "GUARANTIED OBLIGATIONS"): (i) in the event that the Debt Service Coverage Ratio shall be less than 1.3:1 on a Debt Service Coverage Ratio Calculation Date, the repayment of the first twenty percent (20%) of the principal balance of the Loan outstanding as of the applicable Debt Service Coverage Ratio Calculation Date; (ii) in the event that the Debt Service Coverage Ratio is equal to or greater than 1.3:1, but less than 1.5:1 on a Debt Service Coverage Ratio Calculation Date, the repayment of a portion of the principal balance of the Loan outstanding as of the applicable Debt Service Coverage Ratio Calculation Date equal to the difference between (A) the amount of the loan outstanding as of the applicable Debt Service Coverage Ratio Calculation Date and (B) One Hundred Thirty Five Million Dollars ($135,000,000.00); (iii) the payment and performance of all obligations under Section 6.1(l) of the Loan Agreement; and (iv) the payment and performance of all obligations under Section 6.1(m) of the Loan Agreement. (b) In the event that the conditions set forth in subsection (a)(i) or (ii) above shall occur, Guarantor shall only be obligated to guaranty the Guarantied Obligations described in such subsections (a)(i) or (ii) as applicable until, subject to future reinstatement of such Guarantied Obligations, a Debt Service Coverage Ratio of 1.5:1 or greater is achieved for two (2) consecutive calendar quarters. Nothing in this Section 1(b) shall limit the Guaranteed Obligations set forth in Sections 1(a)(iii) and (iv) above. (c) For the purpose of this Guaranty, the Debt Service Coverage Ratio shall be calculated initially on the first anniversary of the funding of the Loan, and thereafter at the end of each quarter (each, a "DEBT SERVICE CALCULATION RATIO CALCULATION DATE"). 2. GUARANTY ABSOLUTE. (a) Guarantor guarantees that the Guarantied Obligations will be paid strictly in accordance with the Loan Documents, regardless of any law, statute, rule, regulation, decree or order now or hereafter in effect in any jurisdiction affecting or purporting to affect in any manner any of such terms or the rights or remedies of Agent with respect thereto. (b) Any payment or payments made by the Borrower or any other person or received or collected by Agent from Borrower or any other person by virtue of any action or proceeding or any other set-off or appropriation or application at any time or from time to time in respect of any indebtedness, obligations or liabilities of Borrower under the Loan Documents may be applied by the Agent in satisfaction of such indebtedness, obligations and liabilities in such order as Agent may determine, subject to the terms of the Loan Documents, and no application of such payment or payments to satisfaction of indebtedness, obligations or liabilities other than the Guarantied Obligations shall discharge in any manner any obligations of the Guarantor hereunder. (c) The liability of Guarantor under this Guaranty shall be absolute and unconditional, and shall not be affected, released, terminated, discharged or impaired, in whole or in part, by, and Agent may proceed to exercise any right or remedy hereunder irrespective of, any or all of the following: (i) any lack of genuineness, regularity, validity, legality or enforceability, or the voidability of, all or any of the Loan Documents or any other agreement or instrument relating thereto; (ii) the failure of Agent to exercise or to exhaust any right or remedy or take any action against Borrower or any collateral or other security available to it; (iii) any amendment or modification of the terms of any or all of the Loan Documents; (iv) any change in the time, manner or place of payment, of all or any of the Guarantied Obligations or any extensions of time for payment, whether in whole or in part, of the terms of any or all of the Loan Documents on the part of Borrower to be paid; (v) any amendment or waiver of, or any assertion or enforcement or failure or refusal to assert or enforce, or any consent or indulgence granted by Agent with respect to a departure from, any term of any of the Loan Documents, including, without limiting the generality of the foregoing, the waiver by Agent of any default of Borrower, or the making of any other arrangement with, or the accepting of any compensation or settlement from, Borrower; (vi) any failure or delay of Agent to exercise, or any lack of diligence in exercising, any right or remedy with respect to the Loan Documents or this Guaranty; (vii) any dealings or transactions between Agent and Borrower, whether or not Guarantor shall be a party to or cognizant of the same; (viii) any bankruptcy, insolvency, assignment for the benefit of creditors, receivership, trusteeship or dissolution of or affecting Borrower; (ix) any exchange, surrender or release, in whole or in part, of any security which may be held by Agent at any time for or under the Loan Documents or in respect of the Guarantied Obligations; (x) any other guaranty now or hereafter executed by Guarantor or any other guarantor or the release of any other guarantor from liability for the payment, performance or observance of any of the Guarantied Obligations or any of the terms of the Loan Documents on the part of Borrower to be paid, whether by operation of law or otherwise; (xi) any rights, powers or privileges Agent may now or hereafter have against any person, entity or collateral in respect of the Guarantied Obligations; (xii) Agent's consent to any assignment or successive assignments of the Loan Documents by Borrower; (xiii) any other circumstance which might in any manner or to any extent constitute a defense available to Borrower, or vary the risk of Guarantor, or might otherwise constitute a legal or equitable discharge or defense available to a surety or guarantor, whether similar or dissimilar to the foregoing; (xiv) any and all notice of the creation, renewal or extension of the Guarantied Obligations and notice of or proof of reliance by Agent upon this Guaranty or acceptance of the Guaranty; or (xv) any change, restructuring or termination of the organizational structure or existence of the Borrower; whether occurring before or after any default by Borrower under the Loan Documents, and with or without further notice to or assent from Guarantor. (d) This Guaranty shall continue to be effective or be reinstated, as the case may be, and the rights of Agent hereunder shall continue with respect to, any Obligation (or portion thereof) at any time paid by Borrower which shall thereafter be required to be restored or returned by Agent upon the insolvency, bankruptcy or reorganization of Borrower, or for any other reason, all as though such Obligation (or portion thereof) had not been so paid or applied. (e) Notwithstanding anything to the contrary contained herein, the obligations of Guarantor hereunder shall survive the maturity, satisfaction or assignment of the Mortgage (as defined in the Loan Documents), or foreclosure of the Mortgage or delivery of a deed in lieu thereof; PROVIDED, HOWEVER, if the Mortgage is satisfied and the Loan repaid in full, the Guaranty shall terminate. 3. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants, as of the date hereof, to Agent as follows: (a) Guarantor is a duly organized, validly existing limited partnership and in good standing under the laws of Delaware, and has full power, authority and legal right to execute and deliver this Guaranty and to perform fully and completely all of its obligations hereunder. (b) The execution, delivery and performance of this Guaranty by Guarantor has been duly authorized by all necessary action, and, will not violate any provision of any law, regulation, order or decree of any governmental authority, bureau or agency or of any court binding on Guarantor, or any provision of the limited partnership agreement of Guarantor, or of any contract, undertaking or agreement to which Guarantor is a party or which is binding upon Guarantor or any of its property or assets, and will not result in the imposition or creation of any lien, charge or encumbrance on, or security interest in, any of its property or assets pursuant to the provisions of any of the foregoing. (c) This Guaranty has been duly executed and delivered by a duly authorized officer of the managing general partner of Guarantor and constitutes a legal, valid and binding obligation of Guarantor, enforceable against it in accordance with its terms, subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally and doctrines of equity affecting the availability of specific enforcement as a remedy. (d) All necessary resolutions, consents, licenses, approvals and authorizations of any person or entity required in connection with the execution, delivery and performance of this Guaranty have been duly obtained and are in full force and effect. (e) There are no conditions precedent to the effectiveness of this Guaranty that have not been either satisfied or waived. (f) The Guarantor has, independently and without reliance upon the Agent and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Guaranty. (g) Guarantor is the holder, directly or indirectly, of 100% of the beneficial interests of Borrower and until the Guarantied Obligations have been fully paid and performed, Guarantor shall continue to hold at least fifty percent (50%) of the beneficial interests in Borrower. 4. WAIVERS. Guarantor expressly waives the following: (a) notice of acceptance of this Guaranty and of any change in the financial condition of Borrower; (b) promptness, diligence, presentment and demand for payment of any of the Guarantied Obligations; (c) protest, notice of dishonor, notice of default and any other notice with respect to any of the Guarantied Obligations and/or this Guaranty; (d) any demand for payment under this Guaranty; (e) the right to interpose all substantive and procedural defenses of the law of guaranty, indemnification and suretyship, except the defenses of prior payment by Borrower of the Guarantied Obligations which Guarantor is called upon to pay under this Guaranty; (f) all rights and remedies accorded by applicable law to guarantors, or sureties, including, without being limited to, any extension of time conferred by any law now or hereafter in effect; (g) the right to trial by jury in any action or proceeding of any kind arising on, under, out of, or by reason of or relating, in any way, to this Guaranty or the interpretation, breach or enforcement hereof; (h) the right to interpose any setoff or counterclaim of any nature or description in any action or proceeding arising hereunder or with respect to this Guaranty; (i) any right or claim of right to cause a marshalling of the assets of Borrower or to cause Agent to proceed against Borrower and/or any collateral or security held by Agent at any time or in any particular order; (j) any defense based on any statutory or other limitation of the amount of any deficiency judgment available to Agent after foreclosure or other proceedings to realize upon any collateral security; and (k) any defense or benefits that may be afforded by Section 1301 of the New York Real Property Actions and Proceedings Law or any statute or law in any other jurisdiction having similar effect. (l) any defense based on the failure to make Guarantor a defendant in any action to foreclose the Mortgage. 5. BANKRUPTCY. Notwithstanding anything to the contrary herein, Guarantor's liability shall extend to all amounts which constitute part of the Guarantied Obligations and would be owed by Borrower under the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving Borrower. Without limiting the foregoing, neither Guarantor's obligation to make payment in accordance with this Guaranty nor any remedy for the enforcement thereof shall be impaired, modified, changed, stayed, released or limited in any manner by any impairment, modification, change, release, limitation or stay of the liability of Borrower or its estate in bankruptcy or any remedy for the enforcement thereof, resulting from the operation of any present of future provision of the Bankruptcy Code or other statute or from the decision of any court interpreting any of the same. 6. CURRENCY OF PAYMENTS. Any and all amounts required to be paid by Guarantor hereunder shall be paid in lawful money of the United States of America and in immediately available funds to Agent. Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to Agent on account of its liability hereunder, it will notify Agent in writing that such payment is made under this Guaranty for that purpose. 7. WAIVER OF RIGHTS AGAINST BORROWER; SUBORDINATION. (a) Until such time as the Loan is paid in full, Guarantor hereby irrevocably waives all rights of subrogation and any other claims that it may now or hereafter acquire against either Borrower or any insider that arise from the existence, payment, performance or enforcement of Guarantor's obligations under this Guaranty or any other documents executed in connection herewith (collectively, the "GUARANTY DOCUMENTS"), including, without limitation, any right of reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of Agent against either Borrower or any insider, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from either Borrower or any insider, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right. (b) If any amount shall be paid to Guarantor in violation of the preceding subsection (a) at any time prior to the indefeasible cash payment in full of all amounts payable under this Guaranty, such amount shall be held in trust for the benefit of Agent and shall forthwith be paid to Agent to be credited and applied to all amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents and the Guaranty Documents, or to be held as collateral for any amounts payable under this Guaranty thereafter arising. Guarantor acknowledges that it has and will receive direct and indirect benefits from the financing arrangements contemplated by the Loan Documents and the Guaranty Documents and that the waiver set forth in this subsection is knowingly made in contemplation of such benefits. (c) All indebtedness, liabilities and obligations of Borrower to Guarantor, whether secured or unsecured and whether or not evidenced by any instrument, now existing or hereafter created or incurred, are and shall be subordinate and junior in right of payment to the Guarantied Obligations. 8. AMENDMENT IN WRITING. No amendment or waiver of any provision of this Guaranty nor consent to any departure by Guarantor therefrom shall in any event be effective unless the same shall be in writing and signed by Agent and Guarantor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 9. REMEDIES. The obligations of Guarantor under this Guaranty are independent of the Borrower's obligations under the Loan Documents, and a separate action or actions may be brought and prosecuted against the Guarantor to enforce this Guaranty, irrespective of whether any action is brought against the Borrower or whether the Borrower is joined in any such action or actions. Any one or more successive and/or concurrent actions may be brought hereon against Guarantor either in the same action, if any, brought against Borrower or in separate actions, as often as Agent, in its sole discretion, may deem advisable. 10. CERTIFIED STATEMENT. Guarantor agrees that it will, at any time and from time to time, within twenty (20) days following request by Agent, execute and deliver to Agent a statement certifying that this Guaranty is unmodified and in full force and effect (or if modified, that the same is in full force and effect as modified and stating such modifications). 11. NOTICES. Unless expressly contained herein, all notices given hereunder shall be given in accordance with the terms of the Mortgage. All such notices and other communications shall be effective 2 business days after deposited in the mails addressed as aforesaid. 12. CONTINUING GUARANTY; SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until (a) payment, performance and/or observance in full of the Guarantied Obligations and all other amounts payable under this Guaranty and (b) repayment of the Loan, (ii) be binding upon Guarantor, its successors and assigns, and (iii) inure to the benefit of and be enforceable by Agent and its successors, transferees and assigns or by any person to whom Agent's interest in the Loan Documents may be assigned. Wherever in this Guaranty reference is made to Agent or Borrower, the same shall be deemed to refer also to the then successor or assign of Agent or Borrower. 13. GOVERNING LAW. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within said state. 14. SEVERABILITY. If any term, covenant, condition or provision of this Guaranty or the application thereof to any circumstance or to Guarantor shall be invalid or unenforceable to any extent, the remaining terms, covenants, conditions and provisions of this Guaranty or the application thereof to any circumstances or to Guarantor other than those as to which any term, covenant, condition or provision is held invalid or unenforceable, shall not be affected thereby and each remaining term, covenant, condition and provision of each, shall not be affected thereby and each remaining term, covenant, condition and provision of this Guaranty shall be valid and shall be enforceable to the fullest extent permitted by law. 15. NONRECOURSE OBLIGATIONS. The Loan Documents contain provisions which limit Agent's remedies against Borrower upon a default to an action of foreclosure and realization upon the collateral encumbered by the Loan Documents and prohibit any action to recover a deficiency judgment against Borrower following such foreclosure and realization. None of the foregoing provisions shall be construed to abrogate or limit the obligations of Guarantor and this Guaranty. 16. INSTRUMENT FOR PAYMENT OF MONEY ONLY. Guarantor hereby agrees and acknowledges that this Guaranty is an instrument for the payment of money only and hereby consents that Agent, at its sole option, in the event of a default by Guarantor in the payment of any of the amounts payable by Guarantor hereunder, shall have the right to bring a motion or action under New York CPLR Section 3213. 17. ANNUAL AUDITED FINANCIAL STATEMENTS. Guarantor hereby agrees to provide Agent with annual financial statements of the Guarantor certified by an officer having the status of senior vice-president or above within one hundred twenty (120) calendar days of the end of each calendar year during the Term of the Loan. 18. LIABILITY OF GUARANTOR. Liability under this Guaranty shall be limited to the Guarantor and shall not extend to any direct or indirect partner, member, shareholder, principal, director, employee, officer or affiliate of Guarantor. 19. HEADINGS. The headings used in this Guaranty are for convenience only and are not to be considered in connection with the interpretation or construction of this Guaranty. IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the date first above written. GUARANTOR PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its Managing General Partner BY: Jeffrey A. Patterson Executive Vice President EX-10.4 9 EXHIBIT 10.4 Exhibit 10.4 SEVENTH AMENDMENT TO CREDIT AGREEMENT This Seventh Amendment to Credit Agreement is made as of the 22nd day of October, 1999 by and among PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "Borrower"), PRIME GROUP REALTY TRUST, a Maryland trust (the "Company") and BANKBOSTON, N.A., a national banking association ("BankBoston"), CIBC INC., a Delaware corporation ("CIBC"), PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation ("Prudential"), the other lending institutions which are from time to time listed on Schedule 1, (collectively, with BankBoston and CIBC, the "Lenders") and BANKBOSTON, N.A., as agent for itself and such other lending institutions (the "Agent"). WHEREAS, the parties hereto are parties to that certain Credit Agreement dated as of November 17, 1997 as amended by First Amendment to Credit Agreement dated as of December 15, 1997 and by Second Amendment to Credit Agreement dated as of March 16, 1998, as amended and restated by Third Amendment to Credit Agreement dated as of March 30, 1998 as amended by Fourth Amendment to Credit Agreement dated as of April 24, 1998, as amended by Fifth Amendment to Credit Agreement dated as of October 1, 1998 and as amended and restated by Sixth Amendment to Credit Agreement dated as of February 4, 1999 (the "Existing Agreement"); and WHEREAS, the parties have agreed to amend the Existing Agreement so as to decrease the Total Commitment and to effect certain other changes in the Existing Agreement. NOW, THEREFORE, the parties hereby agree that effective upon the Effective Date hereof (as determined pursuant to Paragraph 18 below) the Existing Agreement is amended as follows, provided that the amended definition of EBITDA set forth herein shall be used for all Compliance Certificates delivered after the Effective Date, even though said Compliance Certificates may relate to periods prior to the Effective Date: 1. DECREASE IN TOTAL COMMITMENT. The Total Commitment is hereby decreased to $35,000,000 and each Lender hereby decreases its Commitment to the amount shown on the revised Schedule 1.2 attached hereto. As of the Effective Date the Commitment Percentages of the Lenders shall be adjusted as shown on said revised Schedule 1.2. Prudential, which is shown on such revised Schedule 1.2 as having a zero Commitment and 0% Commitment Percentage shall no longer be a Lender hereunder after the Effective Date. 2. DEFINITIONS: Section 1.1 of the Existing Agreement is amended to provide that the following terms shall have the following meanings and, to the extent that any of the following terms are already defined in the Existing Agreement, such definitions shall be deemed to be amended and restated by the following definitions: EBITDA. The Borrower's earnings before interest, taxes, depreciation and amortization, excluding therefrom any gains or losses realized upon the disposition of assets and other nonrecurring or extraordinary items, all as determined on a consolidated basis in accordance with Generally Accepted Accounting Principles, except that rental income shall be determined based on contractual lease terms (to the extent that the applicable tenant is actually paying rent in accordance with such terms). To the extent not already included in the Company's EBITDA pursuant to the equity basis of accounting for the Unconsolidated Entities, EBITDA shall also include the Unconsolidated Entity Percentage of the earnings before interest, taxes, depreciation and amortization, excluding therefrom any gains or losses realized upon the disposition of assets and other nonrecurring or extraordinary items, with respect to each of the Unconsolidated Entities. 3. AMENDMENT TO Section 7.23. Section 7.23 is hereby amended and restated to read as follows: Section 7.23. Amendments of Documents for other Recourse Indebtedness. On or before December 31, 1999, Borrower shall deliver to the Agent copies of amendments to each of the loan documents for the Borrower's Recourse Indebtedness, including the Lasalle National Bank $15,000,000 line of credit and the Bank One, Illinois $48,809,587 letter of credit facilities (unless such facilities have been terminated prior to such time), as necessary to permanently modify any leverage covenants and related definitions contained therein so that such covenants are not more stringent than the 65% ratio set forth in Section 9.3 hereof, and so that such leverage covenants are calculated in the same manner as provided in this Agreement as amended. 4. AMENDMENT TO Section 14.12. Section 14.12 is hereby amended by changing the Commitment amount set forth therein from $20,000,000 to $10,000,000. 5. UPDATED SCHEDULES TO CREDIT AGREEMENT. The following Schedules to the Credit Agreement are hereby updated, supplemented or replaced as follows: (a) Schedule 1 is replaced by Schedule 1 attached hereto. (b) Schedule 1.1 is replaced by Schedule 1.1 attached hereto. (c) Schedule 1.2 is replaced by Schedule 1.2 attached hereto. (d) Schedule 1.3 is replaced by Schedule 1.3 attached hereto. (e) Schedule 8.1(f) is replaced by Schedule 8.1(f) attached hereto. 6. REPRESENTATIONS AND WARRANTIES. The Borrower and the Company represent and warrant that each of the representations and warranties contained in Section 6 is true, correct and complete in all material respects as of the date hereof to the same extent as though made on such date and that no Default or Event of Default has occurred and is continuing on the date hereof. 7. EFFECTIVENESS OF LOAN DOCUMENTS. The Borrower hereby confirms that each of the Security Documents shall continue to secure the payment and performance of all of the Obligations under the Existing Agreement as amended hereby and the Borrower's obligations under the Security Documents shall continue to be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Every reference contained in the Loan Documents to the Credit Agreement shall mean and be a reference to the Existing Agreement as amended hereby and as the Credit Agreement may be further amended. 2 Except as specifically amended by this Amendment, the Existing Agreement and each of the Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 8. MISCELLANEOUS. This Amendment shall be governed by, interpreted and construed in accordance with all of the same provisions applicable under the Existing Agreement including, without limitation, all definitions set forth in Section 1.1, the rules of interpretation set forth in Section 1.2, the provisions relating to governing law set forth in Section 20, the provisions relating to counterparts in Section 22 and the provision relating to severability in Section 26. 9. CONDITIONS TO EFFECTIVENESS. This Seventh Amendment to Credit Agreement shall become effective on the earliest date (the "Effective Date") that each of the following conditions precedent have been satisfied: (a) Documents . Each of (i) this Seventh Amendment to Credit Agreement, (ii) the Seventh Amendment to the Guaranty, and (iii) replacement Loan Notes for the Lenders reflecting the amount of their Commitments as reduced pursuant hereto shall have been duly executed and delivered by the respective parties thereto, shall be in full force and effect and shall be in form and substance satisfactory to each of the Lenders. (b) Certified Copies of Amendments of Organization Documents . The Agent shall have received a Certificate of the Company to which there shall be attached complete copies of any amendments to the Borrower's Limited Partnership Agreement, Borrower's Certificate of Limited Partnership the Company's Declaration of Trust or the Company's Bylaws which have become effective since the complete certified copies of such documents which were previously delivered to the Agent. (c) Resolutions . All action on the part of the Borrower and each Guarantor necessary for the valid execution, delivery and performance by the Borrower and each Guarantor of this Amendment and the Seventh Amendment to the Guaranty shall have been duly and effectively taken, and evidence thereof satisfactory to the Agent shall have been provided to the Agent. The Agent shall have received from the Company true copies of the resolutions adopted by its Board of Directors authorizing the transactions described herein, certified by its secretary to be true and complete and in effect on the Effective Date. (d) Opinions of Counsel . Each of the Lenders and the Agent shall have received favorable opinions addressed to the Lenders and the Agent and dated as of the Effective Date, substantially in the same form as, or with appropriate provisions incorporating by reference, the opinions from Borrower's counsel previously delivered to the Lenders and the Agent, copies of which are attached as Exhibit E to the Credit Agreement. Such opinion may rely on opinions from other law firms approved by the Agent as to matters of law applicable in the various states. In the event that the Effective Date has not occurred on or before October 29, 1999, then this instrument shall be void and the Existing Agreement shall remain in effect as though this instrument had never been executed. 3 IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as a sealed instrument as of the date first set forth above. PRIME GROUP REALTY TRUST By: /s/ Louis G. Conforti ---------------------------- Louis G. Conforti Its: Executive Vice President PRIME GROUP REALTY, L.P. By: PRIME GROUP REALTY TRUST, its managing general partner By: /s/ Louis G. Conforti ---------------------------- Louis G. Conforti Its: Executive Vice President BANKBOSTON, N.A.,, as Agent By: /s/ Lori Y. Litow ---------------------------- Lori Y. Litow Its: Vice President 4 WITNESS: BANKBOSTON, N.A. Angela M. Collins By: /s/ Lori Y. Litow ----------------------- Lori Y. Litow Its Vice President Commitment: $17,500,000 Commitment Percentage: 50% Notice Address: BankBoston, N.A. 100 Federal Street Boston, MA 02110 Attn: Real Estate Department With a copy to: BankBoston, N.A. 115 Perimeter Center Place, N.E. Suite 500 Atlanta, GA 30346 Attn: Lori Y. Litow, Vice President Fax: (770)390-8434 or 391-9811 5 WITNESS: CIBC INC. ______________________________ By: /s/ Joel Gershkon ------------------------ Joel Gershkon Commitment: $17,500,000 Commitment Percentage: 50% Notice Address: CIBC Inc. c/o CIBC World Markets Corp. 200 West Madison Street, Suite 2300 Chicago, Illinois 60606 Attn: Joel Gershkon, Executive Director Phone: (312)855-3243 Fax: (312)855-3235 with a copy to: CIBC Inc. c/o CIBC World Markets Corp. 2 Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30326 Attn: Beverly Bowman Phone: (770) 319-4824 Fax: (770) 319-4950 6 WITNESS: PRUDENTIAL SECURITIES CREDIT CORPORATION /s/ Michael Pierro By: /s/ Jeffrey K. French - ------------------------------ ------------------------- Michael Pierro Jeffrey K. French Commitment: $0 Commitment Percentage: 0% Notice Address: Prudential Securities Credit Corporation One New York Plaza New York, New York 10292 . Attn: Fuller O'Connor, Director Phone: (212)778-3720 Fax: (212)778-3194 or 2253 7 SCHEDULE 1 LENDERS; DOMESTIC AND EURODOLLAR LENDING OFFICES
DOMESTIC AND EURODOLLAR LENDING OFFICES: NOTICE ADDRESS: BankBoston, N.A. BankBoston, N.A. 100 Federal Street 100 Federal Street Boston, MA 02110 Boston, MA 02110 (Domestic and Eurodollar) Attn: Real Estate Department With a copy to: BankBoston, N.A. 115 Perimeter Center Place, N.E. Suite 500 Atlanta, GA 30346 Attn: Lori Y. Litow, Vice President Fax: (770) 390-8434 or 391-9811 CIBC Inc. CIBC Inc. c/o CIBC World Markets Corp. c/o CIBC World Markets Corp. 200 West Madison Street, Suite 2300 200 West Madison Street, Suite 2300 Chicago, Illinois 60606 Chicago, Illinois 60606 (Domestic and Eurodollar) Attn: Joel Gershkon, Executive Director Phone: (312)855-3243 Fax: (312)855-3235 with a copy to: CIBC Inc. c/o CIBC World Markets Corp. 2 Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30326 Attn: Beverly Bowman Phone: (770) 319-4824 Fax: (770) 319-4950
8 SCHEDULE 1.1
MORTGAGED PROPERTIES FEE OWNER -------------------- --------- 1. Hilton Parking Garage, Knoxville, TN Triad Parking Company, Ltd. 2. SunTrust Bank Bldg., 201 4th Ave., N., Nashville, TN Nashville Office Building I, Ltd. 3. The Weston, 4823 Kingston Pike, Knoxville, TN Old Kingston Properties, Ltd. 4. One Centre Square, 620 Market St., Knoxville, TN Professional Plaza, Ltd. 5. Two Centre Square, 625 Gay St., Knoxville, TN Centre Square II, Ltd. 6. Salt Creek Office Center and Sun Annex, 1990 Algonquin Road, L.L.C. 1990-2060 Algonquin Road, Schaumburg, IL 2010 Algonquin Road, L.L.C. 7. Enterprise Drive Office Center, 2205-2255 Enterprise Drive, Westchester, IL Enterprise Drive, L.L.C. 8. 4849-4851 Groveport Pike, Obetz, Ohio Prime Columbus Industrial, L.L.C. 9. 2160 McGaw Road, Obetz, Ohio Prime Columbus Industrial, L.L.C. 10. 2400-2410 McGaw Road, Obetz, Ohio Prime Columbus Industrial, L.L.C. 11. 5160-5168 Paul G. Blazer Memorial Parkway, Prime Columbus Industrial, L.L.C. Dublin, Ohio 12. 600 London Road, Delaware, Ohio Prime Columbus Industrial, L.L.C.
8 SCHEDULE 1.2 COMMITMENTS
- ------------------------- ------------------ ------------------- ----------------------- ------------------- LENDER COMMITMENT COMMITMENT ON AND COMMITMENT % COMMITMENT PRIOR TO AFTER EFFECTIVE PRIOR TO % ON AND AFTER EFFECTIVE DATE DATE EFFECTIVE DATE EFFECTIVE DATE - ------------------------- ------------------ ------------------- ----------------------- ------------------- BankBoston, N.A. $30,000,000 $17,500,000 40% 50% - ------------------------- ------------------ ------------------- ----------------------- ------------------- Prudential Securities $10,000,000 $0 13.3333333% 0% Credit Corporation - ------------------------- ------------------ ------------------- ----------------------- ------------------- CIBC Inc. $35,000,000 $17,500,000 46.6666667% 50% - ------------------------- ------------------ ------------------- ----------------------- ------------------- Total $75,000,000 $35,000,000.00 100% 100% - ------------------------- ------------------ ------------------- ----------------------- -------------------
9 EX-10.5 10 EXHIBIT 10.5 Exhibit 10.5 FOURTH NOTE MODIFICATION AGREEMENT THIS FOURTH NOTE MODIFICATION AGREEMENT (this "MODIFICATION") is made as of this 5th day of November, 1999 by and between LASALLE BANK NATIONAL ASSOCIATION (formerly known as LaSalle National Bank) (the "LENDER") and PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "BORROWER"). RECITALS: 1. The Lender, the Borrower, and Prime Group Realty Trust (the "COMPANY") have previously executed and delivered a loan agreement dated January 28, 1998, as amended by that certain Amended and Restated Loan Agreement dated as of October 1, 1998, as further amended by that certain Second Amended and Restated Loan Agreement dated as of March 23, 1999, and as further amended by an Amendment to Second Amended and Restated Loan Agreement dated as of June 30, 1999 (the "Amended Loan Agreement"), setting forth the terms and conditions of a revolving line of credit in favor of Borrower (the "LOAN"). 2. In connection with the Second Amended and Restated Loan Agreement, Borrower has previously executed and delivered to Lender a certain Revolving Loan Note dated January 28, 1998, as amended by a Note Modification Agreement dated as of October 1, 1998, and as further amended by a Second Note Modification Agreement dated as of March 23, 1999, and as further amended by a Third Note Modification Agreement dated as of June 30, 1999 (the "MODIFIED NOTE"), in the original principal face amount of $15,000,000, payable to the order of Lender, and evidencing the Loan. 3. 475 Superior Avenue, L.L.C. ("MORTGAGOR") is a guarantor of the Loan, pursuant to the Guaranty (defined below). 4. To secure Mortgagor's obligations as a Guarantor under that certain Guaranty of Payment and Performance dated January 28, 1998, as modified pursuant to that certain First Amendment to Guaranty dated February 17, 1998, as further modified by that certain Release and Reaffirmation of Guaranty dated as of October 1, 1998, as further modified by that certain Second Reaffirmation of Guaranty and Addition of Guarantor Subsidiaries dated as of March 23, 1999, as further modified by that certain Third Reaffirmation of Guaranty dated as of June 30, 1999, and as further modified by that certain Fourth Reaffirmation of Guaranty of even date herewith (the "GUARANTY"), and in consideration of the Loan made to Borrower, Mortgagor has previously executed and delivered to Lender the following documents, each dated January 28, 1998, as amended by that certain First Amendment to Loan Documents dated as of October 1, 1998 and recorded in the real property records of Lake County, Indiana as Document Number 98093313, as further amended by that certain Second Amendment to Loan Documents dated as of March 23, 1999 and recorded in the real property records of Lake County, Indiana as Document Number 99029971, and as further amended by that certain Third Amendment to Loan Documents dated as of June 30, 1999 and recorded in the real property records of Lake County, Indiana as Document Number 99057426: (a) that certain Mortgage, Assignment of Leases and Rents, Security Agreement, and Financing Statement, executed and delivered by the Mortgagor, recorded in the real property records of Lake County, Indiana as Document Number 98006633 and encumbering certain real property described therein, and as described on Exhibit A hereto (the "MORTGAGE"); (b) that certain Assignment of Leases and Rents, executed and delivered by the Mortgagor, recorded in the real property records of Lake County, Indiana as Document Number 98006634 and encumbering certain real property described therein, and as described in Exhibit A hereto (the "ASSIGNMENT"); (c) that certain Security Agreement executed and delivered by Mortgagor encumbering certain collateral described therein (the "SECURITY AGREEMENT"); 5. The Lender, the Borrower and the Company have amended the Amended Loan Agreement pursuant to that Second Amendment to Second Amended and Restated Loan Agreement dated of even date herewith (the "SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT"; the Amended Loan Agreement, as amended by the Second Amendment to Second Amended and Restated Loan Agreement, is hereinafter referred to as the "Second Amended Loan Agreement"). 6. The Lender and Mortgagor have further amended the Mortgage, Assignment, and Security Agreement pursuant to that certain Fourth Amendment to Loan Documents dated of even date herewith (the "FOURTH AMENDMENT TO LOAN DOCUMENTS"). NOW THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Lender and Borrower agree as follows: A. AMENDMENT OF THE MODIFIED NOTE The Modified Note is hereby amended as follows: (1) Any and all references in the Modified Note to the Amended Loan Agreement shall be deemed to refer to the "Second Amended Loan Agreement, as may be further amended from time to time." (2) Any and all references to the Mortgage, Assignment, or Security Agreement shall be deemed to refer to the Mortgage, Assignment, or Security Agreement "as amended by the Fourth Amendment to Loan Documents and as may be further amended from time to time." B. FULL FORCE AND EFFECT. All of the provisions, rights, powers, and remedies contained in the Note shall stand and shall remain unchanged and in full force and effect, except to the extent specifically amended hereby. -2- C. COUNTERPARTS. This Modification may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. [the remainder of this page is intentionally left blank] -3- IN WITNESS WHEREOF, this Modification has been duly executed effective as of the date first written above. LENDER: LASALLE BANK NATIONAL ASSOCIATION, a national banking association By: _________________________________ Name: _________________________________ Its: _________________________________ BORROWER: PRIME GROUP REALTY, L.P., a Delaware limited partnership By: PRIME GROUP REALTY TRUST, a Maryland trust, its general partner By: /s/ Patrick L. McGaughy ---------------------------- Name: Patrick L. McGaughy Its: Vice President -4- EX-10.6 11 EXHIBIT 10.6 Exhibit 10.6 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT, dated as of November 5, 1999, is entered into by and among LASALLE BANK NATIONAL ASSOCIATION (formerly known as LaSalle National Bank) (the "LENDER"), PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "BORROWER"), and PRIME GROUP REALTY TRUST, a Maryland trust (the "Company") R E C I T A L S: 1. The Lender has made certain revolving financing accommodations available to the Borrower pursuant to that certain Loan Agreement dated as of January 28, 1998 between Lender, Borrower and Company ("Original Agreement"); 2. The Original Agreement was amended and restated in its entirety pursuant to that certain Amended and Restated Loan Agreement dated as of October 1, 1998 and that certain Second Amended and Restated Loan Agreement dated as of March 23, 1999, which was amended by that certain Amendment to Second Amended and Restated Loan Agreement dated as of June 30, 1999 (the "Loan Agreement"); and 3. Borrower and Lender have agreed that Borrower will increase the Maximum Facility to $12,000,000 on the date hereof until December 15, 1999 upon the terms and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the parties' mutual agreements contained herein, the parties hereby agree as follows: A. AMENDMENT TO LOAN AGREEMENT: The Loan Agreement is amended as follows: (1) On and after the date hereof and prior to December 15, 1999, "Maximum Facility" shall mean $12,000,000; (2) On and after December 15, 1999, "Maximum Facility" shall mean $10,000,000.00. B. REDUCTION OF LOANS. Not later than December 15, 1999, Borrower shall reduce the amount of outstanding Loans to $10,000,000 or less. Each payment made prior to December 15, 1999 of amounts borrowed and outstanding in excess of $10,000,000 will be deemed a permanent reduction of the Maximum Facility and the balance of the Loan. C. FULL FORCE AND EFFECT. All of the provisions, rights, powers, and remedies contained in the Loan Agreement shall stand and shall remain unchanged and in full force and effect, except to the extent specifically amended hereby. Any discrepancy between the provisions of the Loan Agreement and those of this Amendment shall be governed by the provisions of this Amendment. D. DEFINED TERMS. All capitalized terms utilized in this Amendment without definition shall have the meaning ascribed to such terms in the Loan Agreement. E. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. [the remainder of this page is intentionally left blank] -2- IN WITNESS WHEREOF, the Borrower, Company, and Lender have executed and delivered this Amendment. "BORROWER" PRIME GROUP REALTY, L.P. By: PRIME GROUP REALTY TRUST, its general partner By: /s/ Patrick L. McGaughy -------------------------- Patrick L. McGaughy Its: Vice President "COMPANY" PRIME GROUP REALTY TRUST By: /s/ Patrick L. McGaughy -------------------------- Patrick L. McGaughy Its: Vice President "LENDER" LASALLE BANK NATIONAL ASSOCIATION (formerly known as LaSalle National Bank) By:__________________________________ Title:_______________________________ -3- EX-12.1 12 EXHIBIT 12.1 EXHIBIT 12.1 PRIME GROUP REALTY TRUST AND THE PREDECESSOR STATEMENTS REGARDING COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DISTRIBUTIONS (DOLLARS IN THOUSANDS)
Prime Group Realty Trust - Historical Predecessor - Historical ----------------------------------------------- --------------------------------------------- Period from Period from November 17, January 1, 1997 through 1997 through Year ended December 31, December 31, November 16, Year ended December 31, 1999 1998 1997 1997 1996 1995 ----------------------------------------------- --------------------------------------------- Earnings Income (loss) before preferred share distributions and minority interest per the consolidated/combined financial statements.............. $33,567 $30,866 $1,427 $(29,050) $(31,417) $ (29,576) Interest expense................... 42,648 30,901 1,680 34,417 37,217 36,234 Amortization of debt issuance costs 2,424 1,230 140 630 594 1,148 ----------------------------------------------- --------------------------------------------- Earnings........................... $78,639 $62,997 $3,247 $ 5,997 $ 6,394 $ 7,806 =============================================== ============================================= Fixed Charges Interest expense................... $42,648 $30,901 $1,680 $ 34,417 $ 37,217 $ 36,234 Capitalization of interest expense. 7,986 2,498 - - - - Amortization of debt issuance costs 2,424 1,230 140 630 594 1,148 Preferred share distributions...... 12,103 7,971 345 - - - ----------------------------------------------- --------------------------------------------- Total fixed charges................ $65,161 $42,600 $2,165 $ 35,047 $ 37,811 $ 37,382 =============================================== ============================================= Ratio of earnings to combined fixed charges and preferred share distributions..................... 1.21 1.48 1.50 - - - =============================================== ============================================= Excess (deficit) of earnings to combined fixed charges and preferred share distributions..... $13,478 $20,397 $1,082 $(29,050) $(31,417) $(29,576) =============================================== ============================================= Funds from Operations Funds from operations.............. $ 53,415 $46,762 $3,619 $(14,461) $(17,367) $(12,733) Interest expense................... 42,648 30,901 1,680 34,417 37,217 36,234 Amortization of debt issuance costs.. 2,424 1,230 140 630 594 1,148 Preferred share distributions...... 12,103 7,971 345 - - - ----------------------------------------------- --------------------------------------------- Adjusted funds from operations..... $110,590 $86,864 $5,784 $ 20,586 $ 20,444 $ 24,649 =============================================== ============================================= Fixed Charges Interest expense................... $42,648 $30,901 $1,680 $ 34,417 $ 37,217 $ 36,234 Capitalization of interest expense. 7,986 2,498 - - - - Amortization of debt issuance costs.. 2,424 1,230 140 630 594 1,148 Preferred share distributions...... 12,103 7,971 345 - - - ----------------------------------------------- --------------------------------------------- Total fixed charges................ $65,161 $42,600 $2,165 $ 35,047 $ 37,811 $ 37,382 =============================================== ============================================= Ratio of funds from operations to combined fixed charges and preferred share distributions..... 1.70 2.04 2.67 - - - =============================================== ============================================= Excess (deficit) of funds from operations to combined fixed charges and preferred share $45,429 $44,264 $3,619 $(14,461) $(17,367) $(12,733) distributions..................... =============================================== =============================================
EX-21.1 13 EXHIBIT 21.1 EXHIBIT 21.1 PRIME GROUP REALTY TRUST AND THE PREDECESSOR SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1999 The following represents the Prime Group Realty Trust's (the "Company") and Prime Group Realty, L.P.'s (the "Operating Partnership") operating subsidiaries (the Company and the Operating Partnership have a majority interest or control) and related properties as of December 31, 1999:
ENTITY PROPERTY 77 West Wacker Limited Partnership (1), (3), (8) IBM Plaza, Brugh Hill Office Center Nashville Office Building I, Ltd. (1), (9) 201 4th Avenue North (Suntrust Building) Professional Plaza, Ltd. (1), (9) 620 Market Street (Professional Plaza) Old Kingston Properties, Ltd. (1), (9) 4823 Old Kingston Pike (Weston Building) Centre Square II, Ltd. (1), (9) 625 Gay Street (Centre Square II) East Chicago Enterprise Center Limited Partnership (1), (2), (8) 4440 and 4635 Railroad Avenue Enterprise Center I, L.P. (1), (4), (8) 4407 Railroad Avenue Enterprise Center II, L.P. (1), (8) 4407 Railroad Avenue (Bldg 2) Enterprise Center III, L.P. (1), (8) 4407 Railroad Avenue (Bldg 3) Enterprise Center IV, L.P. (1), (8) 4407 Railroad Avenue (Bldg 4) Hammond Enterprise Center Limited Partnership (1), (2), (8) 4507 and 4527 Columbia Avenue Enterprise Center V, L.P. (1), (2), (8) 4531 Columbia Avenue Enterprise Center VI, L.P. (1), (8) 4527 and 4531 Columbia Avenue Kemper/Prime Industrial Partners (1), (2), (4), (10) 13535 South Torrence Avenue Enterprise Center VII, L.P. (1), (2), (8) 13535 - B South Torrence Avenue Enterprise Center VIII, L.P. (1), (8) 13535 - A and D South Torrence Avenue Enterprise Center IX, L.P. (1), (2), (8) 13535 - E, F and G South Torrence Avenue Enterprise Center X, L.P. (1), (2), (8) 13535 - C and H South Torrence Avenue Arlington Heights I, L.P. (1), (2), (8) 425 E. Algonquin Road Arlington Heights II, L.P. (1), (2), (8) 425 E. Algonquin Road Arlington Heights III, L.P. (1), (2), (8) 425 E. Algonquin Road Triad Parking Company, Ltd. (1), (9) Triad Parking Facility 1990 Algonquin Road, L.L.C. (7) 1990 Algonquin Road (Salt Creek Office Center) 2010 Algonquin Road, L.L.C. (7) 2000-2060 Algonquin Road (Sun Annex) 1699 E. Woodfield Road, L.L.C. (3), (7) 1699 E. Woodfield Road (Citibank Office Plaza) 475 Superior Avenue, L.L.C. (7) 475 Superior Avenue Enterprise Drive, L.L.C. (7) 2205-2255 Enterprise Drive (Enterprise Office Center) 280 Shuman Blvd., L.L.C. (7) 280 Shuman Blvd. (Atrium) 2675 N. Mayfair Road, L.L.C. (7) 2675 N. Mayfair Road (Wauwatosa Building) Prime Columbus Industrial, L.L.C. (7) 2160 McGraw Road, 4849 Groveport Road, 2400 McGraw Road, 5160 Blazer Memorial Parkway, 600 London Road 1051 N. Kirk Road, L.L.C. (3), (7) 1051 N. Kirk Road 4211 Madison Street, L.L.C. (3), (7) 4211 Madison Street 200 E. Fullerton, L.L.C. (3), (7) 200 E. Fullerton 350 Randy Road, L.L.C. (3), (7) 350 Randy Road 4300 Madison Street, L.L.C. (3), (7) 4300, 4248, 4250 Madison Street 370 Carol Lane, L.L.C. (3), (7) 370 Carol Lane 388 Carol Lane, L.L.C. (3), (7) 388 Carol Lane
ENTITY PROPERTY 342 Carol Lane, L.L.C. (3), (7) 342-346 Carol Lane 343 Carol Lane, L.L.C. (3), (7) 343 Carol Lane 371 N. Gary Avenue, L.L.C. (3), (7) 371-385 N. Gary Avenue 1600 167th Street, L.L.C. (3), (7) 1600-1700 167th Street (Narco River Business Center) 1301 E. Tower Road, L.L.C. (3), (7) 1301 E. Tower Road (Narco Tower) 4343 Commerce Court, L.L.C. (3), (7) 4343 Commerce Court (The Olympian Office Center) 11039 Gage Avenue, L.L.C. (3), (7) 11039 Gage Avenue 11045 Gage Avenue, L.L.C. (3), (7) 11045 Gage Avenue 1401 S. Jefferson, L.L.C. (3), (7) 1401 S. Jefferson 4100 Madison Street, L.L.C. (3), (7) 4100 West Madison Street 4160 Madison Street, L.L.C. (3), (7) 4160-4190 West Madison Street 550 Kehoe Blvd., L.L.C. (3), (7) 550 Kehoe Blvd. 33 North Dearborn, L.L.C. (3), (7) 33 North Dearborn Street Wilke - Venture, L.L.C. (3), (7) 3800 and 3850 North Wilke Road and 3930 Ventura Drive(Commerce Point) Michigan - Adams L.L.C. (3), (7) 122 South Michigan Avenue LaSalle-Adams, L.L.C. (3), (7) 208 South LaSalle Street Two Century Centre, L.L.C. (3), (7) 1700 East Golf Road (Two Century Centre) 6400 Shafer Court, L.L.C. (3), (7) 6400 Shafer Court 2100 Swift Drive, L.L.C. (3), (7) 2100 Swift Drive 2000 York Road, L.L.C. (3), (7) 2000 York Road (2000 York Brook) Libertyville Corporate Office Park, L.L.C. (4), (7) Pine Meadows Center DeKalb Business Park, L.L.C. (4), (7) Property under development Prime Aurora, L.L.C. (4), (7) Property under development Prime Rolling Meadows, L.L.C. (4), (7) Property under development Prime/Beitler Development Company, L.L.C.(4), (5), (7) Property under development Oak Brook Business Center, L.L.C. (6), (7) - 330 N. Wabash Avenue, L.L.C. (7) IBM Plaza Kimberly East, L.L.C. (4), (7) Property under development 2000 USG Drive, L.L.C. (4), (7) Property under development BRE/City Center, L.L.C. (7) National City Center 33 W. Monroe, L.L.C. (3), (7) 33 W. Monroe Street Monroe-Wacker, L.L.C. (4), (7) Property under development Monroe-Wacker Office, L.L.C. (7) Property under development Brush Hill Office Center, L.L.C. (7) Brush Hill Office Court 800 Jorie Blvd., L.L.C. (7) 800-810 Jorie Blvd. 43 Hintz Road, L.L.C. (7) 43-47 Hintz Road Phoenix Office, L.L.C. (7) Investment partnership 180 Kehoe Blvd., L.L.C. (4), (7) Property under development 180 N. LaSalle, L.L.C. (3), (7) Own mortgage note receivable on 180 N. LaSalle PGR Finance I, Inc. (11) Member of Wilke-Ventura, L.L.C. PGR Finance II, Inc. (11) Member of LaSalle-Adams, L.L.C. PGR Finance III, Inc. (11) Member of Eight on L.L.C's described above PGR Finance IV, Inc. (11) - PGR Finance V, Inc. (11) Member of 1699 E. Woodfield Road, L.L.C. PGR Finance VI, Inc. (11) Member in Three of the L.L.C.'s described above PGR Finance VII, Inc. (11) Member of 6400 Shafer Court, L.L.C. PGR Finance VIII, Inc. (11) Limited Partner of 77 West Wacker Limited Partnership PGR Finance IX, Inc. (11) Member of 2000 York Road, L.L.C. PGR Finance X, Inc. (11) Member of Two Century Center, L.L.C.
PGR Finance XI, Inc. (11) Member of 180 N. LaSalle, L.L.C. PGR Finance XII, Inc. (11) Member of 33 W. Monroe, L.L.C. PGR Finance XIII, Inc. (11) Member Six of the L.L.C.s described above PGR Finance XIV, Inc. (11) Member in 1051 N. Kirk Road, L.L.C. of 4343 Commerce Court, L.L.C. 33 N. Dearborn SPC, Inc. (11) Member of 33 N. Dearborn, L.L.C. 455 Academy Drive, L.L.C. (7) Former owner of 455 Academy Drive 33 W. Monroe - I, L.L.C. (7) Member of 33 W. Monroe, L.L.C. Libertyville Corporate Office Park II, L.L.C. (7) Owner of Vacant Land adjacent 80 Pine Meadow Corporate Office Park Kimberly West, L.L.C. (7) Owner of Vacant Land in Carol Stream, Illinois 2305 Enterprise Drive, L.L.C. (7) Owner of 2305 Enterprise Drive
- ------------------ (1) Represents entities and properties previously owned by the Predecessor and whose operations were included in the Predecessor's combined financial statements. (2) These entities have divided the ownership of the related properties. (3) The Company has an indirect ownership interest in these entities through wholly owned subsidiaries (PGR Finance I-XT, Inc. and 33 N. Dearborn SPC, Inc.). (4) These entities own parcels of land that are currently under development. (5) The Company owns approximately 90% of the entity and the remaining ownership interest has been reflected as minority interest- other at December 31, 1999. (6) These subsidiaries currently do not own any property. (7) Delaware Limited liability Company (8) Illinois Limited Partnership (9) Tennessee Limited Partnership (10) Illinois General Partnership (11) Delaware Corporation EX-23.1 14 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-70369) of Prime Group Realty Trust and in the Registration Statement (Form S-8 No.333-65147) pertaining to the Prime Group Realty Trust Share Incentive Plan of our report dated March 7, 2000, with respect to the consolidated financial statements of Prime Group Realty Trust included in the Annual Report (Form 10-K) for the year ended December 31, 1999. Our audits also included the financial statement schedule of Prime Group Realty Trust listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ERNST & YOUNG LLP Chicago, Illinois March 20, 2000 EX-27.1 15 EXHIBIT 27.1
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 21,167 0 103,626 0 80,541 0 1,276,818 (37,977) 1,444,175 271,666 838,874 0 40 152 333,443 1,444,175 0 249,604 0 0 151,026 0 42,648 54,848 0 0 0 (1,082) 0 54,848 2.82 2.81 Amount includes restricted cash escrows ($42,140), net deferred costs ($26,901), and other assets ($11,500) Amount includes accrued interest payable ($3,508), accrued real estate taxes ($40,689), accounts payable and accrued expenses ($36,133), liabilities for leases assumed ($3,235), dividends payable ($8,122), other liabilities ($10,909) and minority interest of ($169,070), Amount includes property operations ($44,446), real estate taxes ($34,470), depreciation and amortization ($33,258), loss on land development option ($600), general and administrative expenses ($7,565) and minority interests allocation ($30,687).
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