-----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, GS/Wzp27jEjDpvnOkMCbHTxePVesDJ4A+2T5jYzwgDt7dLbPP1NNaYjb65ldADJk aCI3m5rdqeLuBnx7qSyDZw== 0001047469-98-013119.txt : 19980401 0001047469-98-013119.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013119 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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: 98583390 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, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13(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, including zip code) Registrant's telephone number, including area code: (312) 917-1300 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 $.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 shares of common stock held by non-affiliates was approximately $266,090,000 million based on the closing price on the New York Stock Exchange for such shares on March 2, 1998. The number of the Registrant's shares of common stock outstanding was 12,980,000 as of March 2, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III of this report incorporates information by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders, to be held in May 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS BACKGROUND AND FORMATION TRANSACTION Prime Group Realty Trust (the "Company"), a Maryland real estate investment trust, through its controlling interest in Prime Group Realty, L.P., a Delaware limited partnership (the "Operating Partnership"), is engaged in the management, leasing, acquisition, development, redevelopment, construction, marketing, financing and other activities relating to commercial office and industrial properties primarily located in the Chicago, Illinois metropolitan area (the "Chicago Metropolitan Area"). As of December 31, 1997 the Company's portfolio of properties included 19 office properties (the "Office Properties"), 45 industrial properties (the "Industrial Properties"), one parking facility and one retail center (collectively the "Properties") containing an aggregate of 9.9 million net rentable square feet. The Company was incorporated in Maryland in July 1997 and formed to succeed and expand the office and industrial real estate business of The Prime Group, Inc., an Illinois corporation ("PGI"). On November 17, 1997, the Company completed an initial public offering (the "Offering") of 12,380,000 common shares of beneficial interest (the "Common Shares") and a private placement (the "Private Placement") of 2,000,000 preferred shares of beneficial interest (the "Preferred Shares"). The offering price of the Common Shares and the Preferred Shares was $20.00 per share resulting in gross proceeds of $247.6 million and $40.0 million, respectively. In addition, a joint venture partnership owned by PGI, Blackstone, BRE/Primestone Investment L.L.C. and BRE/Primestone Management Investment L.L.C. purchased 4,569,893 common units of the Operating Partnership ("Common Units") resulting in gross proceeds of $85.0 million. On December 15, 1997, the underwriters of the Offering exercised an over allotment option and, accordingly, the Company issued an additional 600,000 Common Shares and received gross proceeds of $12.0 million. The aggregate proceeds to the Company of the Offering, the Private Placement and the exercise of the over-allotment option, net of underwriter's discount, advisory fee and offering costs aggregating $27.6 million, were approximately $272.0 million. The Company contributed the net proceeds of the Offering, the Private Placement and the exercise of the over-allotment option to the Operating Partnership. Concurrently with the consummation of the Offering, the Company and the Operating Partnership, together with the Operating Partnership's limited partners, including certain partners of PGI, engaged in certain transactions (the "Formation Transactions") which, among other things, resulted in the contribution to and the acquisition by the Company and Operating Partnership of 63 of the 66 Properties. The Formation Transactions included the following: - PGI contributed to the Operating Partnership (i) its ownership interests in the property partnerships ("PGI Partnerships") that own certain of the Properties (the "Predecessor Properties"), (ii) its rights to purchase the subordinate mortgage encumbering the PGI Partnership that owns the 77 West Wacker Drive Building from certain third-party lenders and its rights to acquire certain third parties' ownership interests in the PGI Partnerships that own certain Predecessor Properties and (iii) substantially all of its assets and liabilities relating to its office and industrial development, leasing and management business. In exchange, PGI received 3,465,000 Common Units (with an aggregate value of $69.3 million, assuming the value of each Common Unit is equal to the initial offering price of a Common Share). As described below, PGI contributed 3,375,000 of such Common Units to a joint venture between PGI and certain affiliates of Blackstone Real Estate Advisors, L.P. and certain of its affiliates ("Blackstone"), BRE/Primestone Investment L.L.C., a Delaware limited liability company and BRE/Primestone Management Investment L.L.C., a Delaware limited liability company (the "Primestone Joint Venture"), resulting in the direct ownership by PGI of a 0.5% limited partnership interest in the Operating Partnership as of December 31, 2 1997. In addition, Jeffrey A. Patterson, an executive of the Company, contributed his interest in the assets of the office and industrial division of PGI. In exchange, Mr. Patterson received 110,000 Common Units, representing approximately a 0.5% limited partnership interest in the Operating Partnership as of December 31, 1997. - Certain individuals (collectively, the "NAC Contributors") contributed six office and 14 industrial properties to the Operating Partnership. In exchange, the NAC Contributors received 927,100 common units of general partnership interest ("GP Common Units"), representing a 3.9% general partnership interest in the Operating Partnership as of December 31, 1997 (with an aggregate value of $18.5 million, assuming the value of each Common Unit is equal to the initial public offering price of a Common Share). In addition, the Operating Partnership paid the NAC Contributors approximately $14.8 million in cash. - Certain individuals (collectively, the "IBD Contributors") contributed to the Operating Partnership their ownership interests in one office property and six industrial properties in exchange for 922,317 Common Units representing a 3.9% limited partnership interest in the Operating Partnership as of December 31, 1997 (with an aggregate value of $18.4 million, assuming the value of each Common Unit is equal to the initial public offering price of a Common Share). In addition, the Operating Partnership paid the IBD Contributors approximately $0.9 million in cash, assumed approximately $6.4 million in debt and provided the IBD Contributors a note in the amount of $3.9 million (the properties contributed by the NAC Contributors and IBD Contributors are collectively the "Contribution Properties). - PGI, Blackstone, BRE/Primestone Investment L.L.C. and BRE/Primestone Management Investment L.L.C. formed the Primestone Joint Venture to invest in Common Units. To capitalize the Primestone Joint Venture, PGI contributed to the Primestone Joint Venture 3,375,000 of the Common Units it received in exchange for its contributions to the Operating Partnership. In addition, Primestone Joint Venture purchased 4,569,893 Common Units from the Operating Partnership at a price per Common Unit equal to the per share initial public offering price of the Common Shares, net of an amount equal to the underwriting discounts and commissions applicable to the Common Shares, simultaneously with the other Formation Transactions. As a result, the Primestone Joint Venture owns 7,944,893 Common Units, representing a 34.2% limited partnership interest in the Operating Partnership as of December 31, 1997. - The Operating Partnership borrowed $83.5 million under three separate mortgage loans secured by certain of the Contribution Properties (the "New Mortgage Notes") and assumed $10.4 million in mortgage notes. - The Operating Partnership repaid third-party lenders approximately $359.9 million (including prepayment fees) of obligations of the entities that own the Properties (the "Property Partnerships") or indebtedness encumbering the Properties. - The Operating Partnership obtained a line of credit (the "Credit Facility") used to fund future acquisitions and to replace the outstanding letters of credit which secure the payment of principal and interest on $74.5 million of tax-exempt bond financing (the "Tax-Exempt Bonds"). - The Operating Partnership paid approximately $40.0 million to acquire four office properties and one industrial property (collectively, the "Acquisition Properties") and approximately $5.2 million to acquire the assets and business of Continental Offices, Ltd. and Continental Offices, Ltd. Realty (collectively, the "Continental Management Business") from third parties. The purchase price for the Acquisition Properties and the Continental Management Business was in each case negotiated in arm's-length transactions with third parties based on a multiple of the net operating income of each of the Acquisition Properties and the Continental Management Business, respectively. 3 - The Operating Partnership paid approximately $1.8 million in cash to third parties for the balance of the ownership interests and subordinate debt interests relating to certain of the Predecessor Properties. - The Operating Partnership paid approximately $1.7 million in fees to obtain the Credit Facility and the New Mortgage Notes. - The Operating Partnership contributed the Continental Management Business, the health club facility located in the 77 West Wacker Drive Building and the office and industrial development, leasing and property management business to a newly formed company, Prime Group Realty Services, Inc. (the "Services Company") in exchange for (i) 100% of the non-voting participating preferred stock of the Services Company (the "Services Company Preferred Stock") and (ii) a promissory note issued by the Services Company with an initial principal balance of $4.8 million, bearing interest at 11% per annum (the "Note"). Messrs. Reschke and Curto contributed an aggregate of $50,000 for 100% of the Services Company's voting common stock. The Operating Partnership is expected to receive approximately 95.0% of the economic benefits of the operations of the Services Company by virtue of payments on the Note and distributions in respect of its ownership of the Services Company Preferred Stock. Upon completion of the Offering and the consummation of the Formation Transactions, the Company owned 63 properties, which consisted of 16 office properties, 45 industrial properties, one parking facility and one retail center containing an aggregate of 8.1 net rentable square feet. Between the closing of the Offering and December 31, 1997, the Company acquired one additional property and the first mortgage notes of two additional properties. See "Recent Developments". The Company currently is involved in only one industry segment, the ownership, management and development of real estate. Therefore, all of the financial statements contained herein relate to this industry segment. See "Financial Statements and Supplementary Data". TAX STATUS The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax at the corporate level on income it distributes to its stockholders so long as it distributes at least 95% of its taxable income (excluding any net capital gain) each year. Since the Offering the Company believes that it has complied with the tax regulations to maintain its REIT status. 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 rates. Even if the Company qualifies as a REIT, the Company may be subject to certain state and local taxes on its income and property. BUSINESS AND GROWTH STRATEGIES The Properties owned by the Company as of December 31, 1997 contain approximately 9.9 million rentable square feet. The Company currently intends to invest primarily in the acquisition, development and redevelopment of commercial real estate properties located in the (i) Chicago Central Business District ("Chicago CBD") office market, (ii) suburban Chicago office market, (iii) Chicago Metropolitan Area warehouse/distribution market and (iv) Chicago Metropolitan Area overhead crane/manufacturing market. The Company's primary business objective is to achieve sustainable long-term growth in cash flow per share and to enhance the value of its portfolio through the implementation of effective operating, acquisition, development and financing strategies. The Company believes that opportunities exist to increase cash flow per share by: - contractual rent increases in existing leases; 4 - leasing all or a portion of the existing vacant space in the Properties; - acquiring office and industrial properties (or entities that own or control such properties) at or below replacement cost and at positive spreads to its cost of capital; - increasing rental and occupancy rates and decreasing tenant concessions as vacancy rates in the Company's submarkets generally continue to decline; - developing office and industrial properties for the benefit of the Company where such development will result in a favorable risk-adjusted return on investment; - expanding its property management, leasing and corporate advisory services business; and - using, when available, long-term, tax-exempt bonds (which typically have lower interest costs) to finance the acquisition and renovation of existing industrial facilities and the development of new industrial facilities. The Company believes that a number of factors will enable it to achieve its business objectives, including: (a) the opportunity to lease available space at attractive rental rates because of increasing demand and, with respect to the Office Properties, the present limited level of new construction in the Chicago Metropolitan Area; (b) the presence of distressed sellers and inadvertent owners (through foreclosure or otherwise) of office and industrial properties in the Company's submarkets, as well as the Company's ability to acquire properties with Common Units (thereby deferring the seller's taxable gain), all of which create enhanced acquisition opportunities; and (c) the quality and location of the Properties. Management believes that the Company is well-positioned to take advantage of these opportunities because of its extensive experience in its markets, its seasoned management team, its significant land holdings and option rights and its ability to develop, redevelop, lease and efficiently manage office and industrial properties. In addition, the Company believes that public ownership and its capital structure will provide the Company with enhanced access to the public debt and equity capital markets and new opportunities for growth. OPERATING STRATEGY. The Company will focus on enhancing its cash flow per share by: (a) maximizing cash flow from its Properties through contractual rent increases, pro-active leasing programs and effective property management; (b) managing operating expenses through the use of in-house management, leasing, marketing, financing, accounting, legal, construction, management and data processing functions; (c) maintaining and developing long-term relationships with a diverse tenant group; (d) attracting and retaining motivated employees by providing financial and other incentives to meet the Company's operating and financial goals; and (e) continuing to emphasize value-added capital improvements to enhance the Properties' competitive advantages in their submarkets. ACQUISITION STRATEGY. The Company will seek to increase its cash flow per share by acquiring additional office and industrial properties at prices below replacement cost, including properties that: (a) may provide attractive initial yields and significant potential for growth in cash flow from property operations; (b) are well-located, high quality and competitive in their respective submarkets; (c) are located in the Company's existing submarkets and/or in other strategic submarkets where the demand for office and industrial space exceeds available supply; or (d) have been undermanaged or are otherwise capable of improved performance through intensive management, marketing and leasing. The Company plans to concentrate its acquisition activities in the Chicago Metropolitan Area and, to a lesser extent, in other midwestern markets. The Company believes 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: (a) potential for higher occupancy levels and/or rents as well as for lower tenant turnover and/or operating expenses; (b) ability to generate returns in excess of the Company's weighted average cost of capital, taking 5 into account the estimated costs associated with renovation and tenant turnover (I.E., tenant improvements and leasing commissions); and (c) a purchase price at or below estimated replacement cost. The Company believes it has certain competitive advantages that enhance its ability to identify and complete acquisitions on a timely and efficient basis, including: (a) management's significant local market experience with, and knowledge of, properties, submarkets and potential tenants; (b) management's long-standing relationships with commercial real estate brokers and institutional and other owners of commercial real estate in the Chicago Metropolitan Area; (c) the Company's fully-integrated real estate operations, which allow it to quickly evaluate and respond to acquisition opportunities; (d) the Company's ability to access relatively low-cost financing through the capital markets; and (e) management's reputation as an experienced purchaser of office and industrial properties with the ability to execute transactions in an efficient and timely manner. The Company also believes it could add a number of office and industrial properties to its portfolio without the need for a significant increase in general and administrative expenses, due to the Company's expertise and depth of management and the efficiencies created by its centralized management structure. The Company believes that many of the owners of commercial real estate properties located in the Chicago Metropolitan Area have a low tax basis in their properties and have the corresponding potential for the recognition of substantial taxable gains as a result of the disposition of such properties. Management believes that the Company's capital structure and ability to acquire properties in exchange for Common Units, and thereby defer a seller's potential taxable gain, will enhance the ability of the Company to consummate transactions quickly and to structure more competitive acquisitions than other real estate companies in the market which lack the Company's access to capital and ability to acquire property with Common Units. DEVELOPMENT STRATEGY. As opportunities arise and where market conditions support a favorable risk-adjusted return on investment, the Company intends to pursue opportunities for growth through the development of new office and industrial properties. The Company believes that the strength and experience of its management in the development of office and industrial properties will provide it with a competitive advantage in evaluating and pursuing opportunities to develop additional properties. During the next few years, the Company expects that most of its development activities will be focused on suburban office and industrial properties in the Chicago Metropolitan Area. Based on ongoing marketing activities and discussions with prospective tenants, the Company expects 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 significant office development opportunities. The Company believes that its significant land holdings and land option rights will provide it with a distinct advantage in competing for future development opportunities. The Company owns approximately 83.4 acres and has rights to acquire approximately 157.2 acres of developable land, which management believes could be developed with approximately 1.2 million square feet of additional office space in the Chicago CBD and approximately 4.4 million square feet of additional industrial space primarily in the Chicago Metropolitan Area. The Company's option rights include an option to acquire a development site containing approximately 58,000 square feet known as 300 N. LaSalle in downtown Chicago which, to the extent the Company is able to obtain significant preleasing commitments for such a project, the Company believes it could develop as an office or mixed-use project containing up to approximately 1.2 million net rentable square feet. The Services Company's corporate advisory activities with third parties are expected to give the Company further access to future development opportunities. The Services Company also will continue to undertake build-to-suit projects for third parties. FINANCING STRATEGY. The Company's financing strategy and objectives are determined by the Company's Board of Trustees. The Company presently intends to operate with a ratio of debt-to-total market capitalization (defined as the total debt of the Company as a percentage of the sum of the market value of 6 issued and outstanding shares, including the Common Units exchangeable for Common Shares, plus total debt) in the range of 25.0% to 50.0%. The Company also intends to operate in a manner that will facilitate its ability to secure an investment grade rating on future unsecured debt. However, such objectives may be altered without the consent of the Company's shareholders, and the Company's organizational documents do not limit the amount or type of indebtedness that the Company may incur. The Company intends 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 acquisition facilities, proceeds from the issuance of long-term, tax-exempt bonds and other debt or equity securities and other bank and/or institutional borrowings. RECENT DEVELOPMENTS During the period November 17, 1997 through December 31, 1997, the Company increased its office portfolio from 16 to 19 properties by acquiring one suburban Milwaukee, Wisconsin property and the first mortgage notes of one Chicago CBD property and one suburban Chicago property encompassing in total approximately 1.8 million square feet for an aggregate purchase price of approximately $172.2 million consisting of $167.2 million in cash and Common Units with an aggregate value of $5.1 million (representing a 1.1% limited partnership interest in the Operating Partnership as of December 31, 1997). In addition, 801 Technology Way was completed and included in the Company's industrial portfolio. Set forth below is a brief description of the property acquired by the Company during the period November 17, 1997 through December 31, 1997: 2675 N. MAYFAIR. 2675 N. Mayfair is an office building located in Wauwatosa, Wisconsin. It contains approximately 102,660 net rentable square feet of office space. As of December 31, 1997, the property was 96.0% leased to 14 tenants. The Company also acquired the first mortgage notes encumbering the following properties during the period November 17, 1997 through December 31, 1997: CONTINENTAL TOWERS. Continental Towers consists of three 12-story office towers in Rolling Meadows, Illinois that contain approximately 916,000 net rentable square feet of office space. As of December 31, 1997, the property was 99.1% leased to 71 tenants. The operations of Continental Towers have been consolidated with those of the company for financial statement purposes. 180 N. LASALLE STREET. 180 N. LaSalle Street is a 39-story office building in the Chicago CBD that contains approximately 729,000 net rentable square feet of office space. As of December 31, 1997, the property was 81.4% leased to 95 tenants. The operations of 180 N. LaSalle have been reflected as a note receivable for financial statement purposes. On March 25, 1998, the Company issued and sold 2,579,994 Common Shares in a private placement to institutional investors. The net proceeds to the Company from the private placement were approximately $49.25 million, and are expected to be used for additional property acquisitions. The Company has granted certain registration rights to the institutional investors with respect to the Common Shares purchased by them in the private placement. In addition, 801 Technology Way was available for occupancy and included in the Company's industrial portfolio at December 31, 1997. COMPETITION The Company competes with other owners and developers that may have greater resources and more experience than the Company. Additionally, the number of competitive properties in any particular market or submarket in which the Properties are located could have a material adverse effect on both the 7 Company's ability to lease space at the Properties or any newly-acquired property and on the rents charged at the Properties. The Company believes that the Credit Facility and the Company's access as a public company to the capital markets to raise funds during periods when conventional sources of financing may be unavailable or prohibitively expensive provide the Company with substantial competitive advantages. Further, the Company believes that its capital structure and ability to acquire properties in exchange for Common Units, and thereby defer a seller's potential taxable gain, enhance the Company's ability to consummate transactions quickly and to structure more competitive acquisitions than other real estate companies in the market which lack the Company's access to capital and ability to acquire property with Common Units. See "Business and Growth Strategies--Acquisition Strategy". The Company believes that the number of real estate developers has decreased as a result of the recessionary market conditions and tight credit markets during the early 1990s as well as the reluctance on the part of more conventional financing sources to fund development and acquisition projects. In addition, the Company believes that it is one of a limited number of publicly-traded real estate companies primarily focusing on the office and industrial market in the Chicago Metropolitan Area. GOVERNMENT REGULATION ENVIRONMENTAL MATTERS. All of the Properties were subject to Phase I or similar environmental assessments by independent environmental consultants in connection with the formation of the Company. 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 preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. The Company is aware of environmental contamination at certain of the older Industrial Properties: the Chicago Enterprise Center (the "CEC"), the East Chicago Enterprise Center (the "ECEC") and the Hammond Enterprise Center (the "HEC"), which are already in remediation programs sponsored by the appropriate state environmental agencies. PGI has contractually agreed to retain liability, and indemnify the Company, for 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 of the Property Partnerships have recorded provisions for environmental remediation costs totaling $3.2 million. The Company also is aware of contamination at 455 Academy Drive, one of the Contribution Properties. The current tenant of the Property, National Service Industries, has provided the Company with an indemnity for all of the costs of environmental remediation regarding the Property caused by National Service Industries either knowingly or unknowingly. The Company also is aware of contamination at 1301 E. Tower Road, one of the properties contributed by the NAC Contributors. The Property has been submitted into a remediation program sponsored by the Illinois Environmental Protection Agency. The Company's environmental consultants estimate that the remedial action will cost approximately $200,000. The Company believes that the other Properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of its other Properties. None of the Company's environmental assessments of the Properties has revealed any environmental liability that, after giving effect to the contractual indemnities described above, the Company believes would have a material adverse effect on the Company's financial condition or results of operations taken as a whole, nor is the Company aware of any such material environmental liability. Nonetheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental 8 liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as the presence of underground storage tanks) or by third parties unrelated to the Company. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds the Company's budgets for such items, the Company's 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. Although the Company believes that the Properties are substantially in compliance with these requirements, the Company may incur additional costs to comply with the ADA. Although the Company believes that such costs will not have a material adverse effect on the Company, if required changes involve a greater amount of expenditures than the Company currently anticipates, the Company's ability to make expected distributions could be adversely affected. OTHER REGULATIONS. The 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. The Company believes that the Properties are currently in material compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's funds from operations and expected distributions. INSURANCE Management believes that the 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, the Company could lose both its invested capital in, and anticipated profits from, the property. EMPLOYEES As of December 31, 1997, the Company had 226 full-time employees. ITEM 2. PROPERTIES GENERAL The Company (through the Operating Partnership) owns 19 Office Properties encompassing an aggregate of approximately 4.1 million net rentable square feet, 45 Industrial Properties encompassing an aggregate of approximately 5.8 million net rentable square feet, one parking facility with 398 parking spaces and one retail center. The Properties are owned in fee simple by the respective Property Partnerships, except for Continental Towers and 180 N. LaSalle. The Company owns the first mortgage notes of these two properties. Fourteen of the 19 Office Properties and 38 of the 45 Industrial Properties are located in the Chicago Metropolitan Area. In the Chicago Metropolitan Area, the most notable Office Property is the 77 West Wacker Drive Building, a premier 50-story landmark office tower in downtown Chicago, which contains approximately 944,600 net rentable square feet. The building has won numerous awards, including, in 1993, the Sun-Times Real Estate Development of the Year and the Best New Building Award from Friends of Downtown. Three Office Properties are located in Knoxville, Tennessee, one Office 9 Property is located in downtown Nashville, Tennessee, one Office Property is located in the Milwaukee, Wisconsin metropolitan area, six Industrial Properties are located in the Columbus, Ohio metropolitan area, the parking facility is located in Knoxville, Tennessee and the retail center is located in a suburb of Chicago. As of December 31, 1997, the Office Properties were approximately 91.9% leased to more than 390 tenants, and the Industrial Properties were approximately 87.5% leased to more than 65 tenants. Management has developed or redeveloped, leased and managed 38 of the 45 Industrial Properties (79.5%, in terms of net rentable square feet) and 13 of the 19 Office Properties (69.3%, in terms of net rentable square feet). In the course of such development and redevelopment, the Company has acquired experience across a broad range of development and redevelopment projects. For example, the Company has developed both Office Properties, such as the 77 West Wacker Drive Building, and Industrial Properties, such as the Contribution Properties. The Company also has redeveloped both Office Properties, such as 201 4th Avenue in Nashville, and Industrial Properties, such as the CEC, the ECEC and the HEC, in the Chicago Metropolitan Area. The Company believes that all of its Properties are well maintained and, based on recent engineering reports, do not require significant capital improvements. In addition to its interests in the Office Properties and Industrial Properties, the Company owns approximately 83.4 acres and has the rights to acquire an additional 157.2 acres of developable land including rights to acquire one development site located in the Chicago CBD containing approximately 58,000 square feet. Management believes that approximately 1.2 million square feet of additional office space in the Chicago CBD and approximately 4.4 million square feet of additional industrial space, primarily in the Chicago Metropolitan Area can be developed on this land. The Company also has an option to acquire one additional industrial property, 901 Technology Way, in the Libertyville Business Park, in Libertyville, Illinois, from certain of the IBD Contributors and a 15-year right of first offer to develop all or any portion of 360 acres of undeveloped office and industrial land in the Huntley Business Park, in Huntley, Illinois, currently owned and controlled by an affiliate of PGI, subject to a participation interest in such property held by a third-party lender. 10 The Office Properties are leased to tenants either on a net basis with tenants obligated to pay their proportionate share of real estate taxes, insurance, utility and operating expenses or on a full service basis, with the landlord responsible for the payment of taxes, insurance and operating expenses up to the amount incurred during the tenant's first year of occupancy ("Base Year") or a negotiated amount approximating the tenant's pro rata share of real estate taxes, insurance and operating expenses ("Expense Stop"). The tenant pays its pro rata share of increases in expenses above the Base Year or Expense Stop. Most of the leases for the Industrial Properties are written on a net basis, with tenants paying their proportionate share of real estate taxes, insurance, utility and operating expenses. PROPERTIES The following table sets forth certain information relating to each of the Properties as of December 31, 1997, unless indicated otherwise. Through the Operating Partnership, the Company owns a 100% interest in all of the Office Properties and the Industrial Properties, except for Continental Towers and 180 N. LaSalle. The Company owns the first mortgage notes on these properties.
NET PERCENTAGE YEAR BUILT/ RENTABLE LEASED AS OF PROPERTY LOCATION RENOVATED SQUARE FEET 12/31/97(%) - -------------------------------------------- ----------------------- ----------------- ----------- ------------- OFFICE PROPERTIES (OWNED): 77 West Wacker Drive...................... Chicago, IL 1992 944,556 96.0 1990 Algonquin Road/2000-2060 Algonquin Road (Salt Creek Office Center)(1)...... Schaumburg, IL 1979/1986 125,922 92.0 1699 E. Woodfield Road (Citibank Office Plaza).................................. Schaumburg, IL 1979 105,400 99.3 555 Huehl Road............................ Northbrook, IL 1987 74,000 100.0 201 4th Avenue N.......................... Nashville, TN 1968/1985 250,566 91.0 620 Market Street......................... Knoxville, TN 1988 93,711 91.4 625 Gay Street............................ Knoxville, TN 1988 91,426 90.0 4823 Old Kingston Pike.................... Knoxville, TN 1988 34,638 100.0 2675 N. Mayfair........................... Wauwatosa, WI 1979 102,660 96.0 941-961 Weigel Drive...................... Elmhurst, IL 1989/1994 123,077 100.0 4100 Madison Street....................... Hillside, IL 1978 24,536 58.2 350 N. Mannheim Road...................... Hillside, IL 1977/1987 4,850 -- 1600-1700 167th Street.................... Calumet City, IL 1981 65,394 59.5 4343 Commerce Court....................... Lisle, IL 1989 170,708 90.0 1301 E. Tower Road........................ Schaumburg, IL 1992 50,400 100.0 280 Shuman Blvd........................... Naperville, IL 1979 65,001 97.0 2205-2255 Enterprise Drive................ Westchester, IL 1987 129,574 97.0 OFFICE PROPERTIES (FOR WHICH THE COMPANY OWNS A MORTGAGE NOTE): Continental Towers (2).................... Rolling Meadows, IL 1977/1981 916,000 99.1 180 N. LaSalle (3)........................ Chicago, IL 1982/1998 729,000 81.4 ----------- ----- Office Properties Subtotal................ 4,101,419 91.9 ----------- ----- INDUSTRIAL PROPERTIES: WAREHOUSE/DISTRIBUTION FACILITIES: 425 E. Algonquin Road..................... Arlington Heights, IL 1978 304,506 100.0 1001 Technology Way....................... Libertyville, IL 1996 212,831 100.0 3818 Grandville/1200 Northwestern......... Gurnee, IL 1961/1990 345,232 100.0 306-310 Era Drive......................... Northbrook, IL 1984 36,495 100.0 2160 McGaw Road........................... Obetz, OH 1974 310,100 100.0 4849 Groveport Road....................... Obetz, OH 1968 132,100 100.0
11
NET PERCENTAGE YEAR BUILT/ RENTABLE LEASED AS OF PROPERTY LOCATION RENOVATED SQUARE FEET 12/31/97(%) - -------------------------------------------- ----------------------- ----------------- ----------- ------------- 2400 McGaw Road........................... Obetz, OH 1972 86,400 100.0 5160 Blazer Memorial Parkway (4).......... Dublin, OH 1983 85,962 66.8 600 London Road........................... Delaware, OH 1981 52,441 100.0 1401 S. Jefferson......................... Chicago, IL 1965/1985 17,265 100.0 1051 N. Kirk Road......................... Batavia, IL 1990 120,004 100.0 4211 Madison Street....................... Hillside, IL 1977/1992 90,344 100.0 200 E. Fullerton Avenue................... Carol Stream, IL 1968/1995 66,254 100.0 350 Randy Road............................ Carol Stream, IL 1974 25,200 87.5 4248, 4250 and 4300 Madison Street........ Hillside, IL 1980 127,129 100.0 370 Carol Lane............................ Elmhurst, IL 1977/1994 60,290 100.0 388 Carol Lane............................ Elmhurst, IL 1979 40,920 88.4 342-346 Carol Lane........................ Elmhurst, IL 1989 67,935 100.0 343 Carol Lane............................ Elmhurst, IL 1989 30,084 100.0 4160-4190 Madison Street.................. Hillside, IL 1974/1992 79,532 100.0 11039 Gage Avenue......................... Franklin Park, IL 1965/1993 21,935 100.0 11045 Gage Avenue......................... Franklin Park, IL 1970/1992 136,600 100.0 550 Kehoe Blvd............................ Carol Stream, IL 1997 44,575 100.0 475 Superior Avenue....................... Munster, IN 1989 450,000 100.0 801 Technology Way........................ Libertyville, IL 1997 68,824 63.4 OVERHEAD CRANE/MANUFACTURING FACILITIES: 1301 Ridgeview Drive...................... McHenry, IL 1995 217,600 100.0 515 Huehl Road/500 Lindberg............... Northbrook, IL 1988 201,244 100.0 455 Academy Drive......................... Northbrook, IL 1976 105,444 100.0 4411 Marketing Place...................... Groveport, OH 1984 65,804 100.0 Chicago Enterprise Center................... Chicago, IL 1916/1991-1996 13535-A S. Torrence Avenue................ 384,806 37.9 13535-B S. Torrence Avenue................ 239,752 100.0 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 15.3 13535-F S. Torrence Avenue................ 44,800 100.0 13535-G S. Torrence Avenue................ 54,743 -- 13535-H S. Torrence Avenue................ 73,612 56.3 East Chicago Enterprise Center.............. East Chicago, IN 1917/1991-1997 Building 2 (4407 Railroad Avenue)......... 169,435 -- 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 98.8 4527 Columbia Avenue (6).................. 16,701 62.8 4531 Columbia Avenue...................... 250,266 74.1 Industrial Properties Subtotal.............. 5,760,974 87.9 ----------- ----- Portfolio Total............................. 9,862,393 89.6 ----------- ----- ----------- ----- OTHER PROPERTIES: 398 Unit Parking Facility................. Knoxville, TN 1981 371-385 N. Gary Avenue (7)................ Carol Stream, IL 1978 11,276
12 - ------------------------ (1) 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. (2) The Company holds a mortgage note receivable on the property and has consolidated the underlying property operations. (3) The Company holds a mortgage note receivable on the property. The operating results of this property have not been consolidated with the operating results of the Company. (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) This is a retail center. ITEM 3. LEGAL PROCEEDINGS The Company is not presently subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company, 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 the consolidated financial statements of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS No matters were submitted to a vote of stockholders during the period from November 17, 1997 (inception) through December 31, 1997. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Shares began trading on the New York Stock Exchange ("NYSE") on November 17, 1997, under the symbol "PGE". On March 2, 1998, the reported closing sale price on the NYSE was $20 1/2, and there were approximately 4,100 holders of record of Common Shares. The following table sets forth the high and low closing sales prices per Common Share reported on the NYSE and the distribution paid by the Company during the period from November 17, 1997 through December 31, 1997.
HIGH LOW DISTRIBUTION --------- --------- ----------- December 31, 1997 (from November 17, 1997)...................................... 20 5/16 19 1/2 $.16644(1)
- ------------------------ (1) The Company paid a distribution of $.16644 per share of Common Stock on January 23, 1998, to stockholders of record on December 31, 1997. That distribution was for the period from November 17, 1997 through December 31, 1997 and is equivalent to a quarterly distribution of $.3375 and an annual distribution of $1.35. Concurrently with the completion of the Offering and consummation to the Formation Transactions, the Operating Partnership issued 9,994,310 Common Units to PGI, the Primestone Joint Venture, the IBD Contributors, the NAC Contributors and certain members of management of the Company. In addition, the Operating Partnership issued 256,572 Common Units as partial consideration in the acquisition of the first mortgage note of 180 N. LaSalle, which was purchased by the Company subsequent to the Offering. Holders of the Common Units may redeem part or all of the Common Units for Common Shares on a one-for-one basis, or at the option of the Company, cash equal to the fair market value of a Common Share at the time of exchange. This exchange right may not be exercised prior to the first anniversary of the consummation of the Offering. Additionally with the completion of the Offering and consummation of the Formation Transactions, the Company issued 2,000,000 cumulative convertible preferred shares of beneficial interest, $0.01 par value per share (the "Convertible Preferred Shares") in a private placement to Security Capital Preferred Growth Incorporated. Holders of the Convertible Preferred Shares may convert them to Common Shares on September 17, 1998 or the earlier occurrence of certain events. The issuance of Common Units and the Convertible Preferred Shares pursuant to the Formation Transactions constitutes 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. 14 ITEM 6. SELECTED FINANCIAL DATA The following table sets for the selected consolidated/combined financial data for the Company and the Predecessor Properties (in thousands except per share amounts) and should be read in conjunction with the consolidated/combined financial statements included elsewhere in this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------ COMPANY - CONSOLIDATED HISTORICAL PREDECESSOR PROPERTIES--COMBINED HISTORICAL ------------- --------------------------------------------------------- PERIOD FROM PERIOD FROM NOVEMBER 17, JANUARY 1, 1997 THROUGH 1997 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, NOVEMBER 16, ------------------------------------------ 1997 1997 1996 1995 1994 1993 ------------- ------------- --------- --------- --------- --------- STATEMENTS OF OPERATIONS DATA: REVENUE: Rental....................................... $ 7,293 $ 27,947 $ 30,538 $ 33,251 $ 30,352 $ 28,177 Tenant reimbursements........................ 2,041 12,490 14,225 14,382 12,451 10,750 Insurance settlement......................... -- -- -- 7,257 -- -- Other........................................ 496 1,515 3,397 2,715 3,170 1,527 ------ ------------- --------- --------- --------- --------- Total revenue................................ 9,830 41,952 48,160 57,605 45,973 40,454 ------ ------------- --------- --------- --------- --------- EXPENSES: Property operations.......................... 2,213 8,622 9,767 9,479 8,852 8,452 Real estate taxes............................ 1,765 8,575 9,383 9,445 9,057 7,167 Depreciation and amortization................ 2,478 11,241 12,409 12,646 11,624 11,739 Interest..................................... 1,680 24,613 26,422 27,671 25,985 22,827 Interest--affiliate.......................... -- 9,804 10,795 8,563 7,402 6,335 Property and asset management fee-- affiliate.................................. -- 1,348 1,561 1,496 1,388 1,106 Financing fees............................... -- 1,180 1,232 -- -- -- General and administrative................... 267 2,414 4,927 4,508 3,727 3,657 Provision for environmental remediation costs...................................... -- 3,205 -- -- -- -- Write-off of deferred tenant costs........... -- -- 3,081 13,373 -- -- ------ ------------- --------- --------- --------- --------- Total expenses................................... 8,403 71,002 79,577 87,181 68,035 61,283 ------ ------------- --------- --------- --------- --------- Income (loss) before minority interest and extraordinary item......................... 1,427 (29,050) (31,417) (29,576) (22,062) (20,829) Minority interest............................ (635) 666 894 3,281 5,393 10,531 ------ ------------- --------- --------- --------- --------- Net income (loss) before extraordinary item.. 792 (28,384) (30,523) (26,295) (16,669) (10,298) Extraordinary (loss) gain on early extinguishment of debt, net of minority interests' share in the amount of $1,127... -- 65,990 -- -- -- -- ------ ------------- --------- --------- --------- --------- Net income (loss)............................ 792 $ 37,606 $ (30,523) $ (26,295) $ (16,669) $ (10,298) ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Net income allocated to preferred shareholders............................... 345 ------ Net income available to common shareholders............................... $ 447 ------ ------ NET INCOME AVAILABLE PER WEIGHTED AVERAGE COMMON SHARE OF BENEFICIAL INTEREST-- BASIC AND DILUTED (1)............................ $ 0.04 ------ ------
15
(IN THOUSANDS) -------------------------------------------------------- COMPANY - PREDECESSOR PROPERTIES--COMBINED CONSOLIDATED HISTORICAL HISTORICAL DECEMBER 31, DECEMBER 31, ------------------------------------------ 1997 1996 1995 1994 1993 ------------ --------- --------- --------- --------- BALANCE SHEET DATA: Real estate assets, before accumulated depreciation..................................... $ 589,279 $ 291,757 $ 289,558 $ 285,687 $ 281,316 Total assets....................................... 741,468 325,230 343,641 356,421 357,158 Mortgages notes and bonds payable.................. 328,044 421,983 405,562 388,309 361,832 Total liabilities.................................. 370,192 447,927 434,993 421,257 397,539 Minority interest.................................. 147,207 (6,905) (6,047) 886 (11,527) Shareholders' equity (partners' deficit)........... 224,069 (115,792) (85,305) (65,722) (28,854)
(IN THOUSANDS) ----------------------------------------------------------------- COMPANY - CONSOLIDATED HISTORICAL PREDECESSOR PROPERTIES--COMBINED HISTORICAL ------------ --------------------------------------------------- PERIOD FROM PERIOD FROM NOVEMBER 17, JANUARY 1, 1997 THROUGH 1997 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, NOVEMBER 16, ------------------------------------- 1997 1997 1996 1995 1994 ------------ ------------ ----------- ----------- ----------- OTHER DATA: Funds from Operations(2)............................. $ 3,964 $ (14,461) $ (17,367) $ (12,733) $ (12,930) Cash flows provided by (used in): Operating activities............................... 6,658 (5,700) (3,165) (1,259) (13,875) Investing activities............................... (353,816) (2,467) 1,126 (9,176) (6,495) Financing activities............................... 335,390 6,331 5,733 10,873 15,422 Office Properties: Square footage..................................... 4,101,419 2,353,759 1,414,897 1,414,897 1,414,897 Occupancy (%)...................................... 91.9 88.0 92.5 95.8 93.7 Industrial Properties: Square footage..................................... 5,760,974 5,696,355 2,462,430 2,551,624 2,547,388 Occupancy (%)...................................... 87.9 87.9 73.5 72.9 62.3
- ------------------------ (1) Net income available per weighted-average common share of beneficial interest--basic and diluted equals net income divided by the 12,593,000 Common Shares. See Note 9 to the Company's consolidated financial statements for further information. (2) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), 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 period from January 1, 1997 through November 16, 1997, provision for environmental remediation cost, for the years ended December 31, 1996, 1995, 1994, gains on the sale of real estate, for the years ended December 31, 1996 and 1995, write-off of deferred tenant costs, for the year ended December 31, 1995, excess proceeds from insurance claims, and for the year ended December 31, 1994, lease termination fees. 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. The Company computes 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 the Company expects to report rental revenues on a cash basis, rather than a straight-line GAAP basis, 16 which the Company believes will result in a more accurate presentation of its actual operating activities), which may differ from the methodology for calculating Funds from Operations used by certain other office and/or industrial 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with the historical consolidated financial statements of the Company and the combined financial statements of the Predecessor Properties and related notes thereto included elsewhere in this Form 10-K. PGI, through the PGI Partnerships which own the Predecessor Properties, engaged in the ownership, management, operation, and leasing of commercial office and industrial properties located in the Chicago Metropolitan Area. On November 17, 1997, following completion of the Offering and the consummation of the Formation Transactions, the Company owned 63 properties (including the Predecessor Properties, the Contribution Properties and the Acquisition Properties) and succeeded to the office and industrial real estate business of PGI and certain of its affiliates. The Company owns all of its interests in the Properties through its investment in the Operating Partnership. At December 31, 1997 the Company's portfolio of real estate properties included 19 office properties and 45 industrial properties containing an aggregate of approximately 9.9 million net rentable square feet. During the period from November 17, 1997 to December 31, 1997, the Company acquired one office property and the first mortgage notes of two properties, encompassing approximately 1.8 million square feet. Income is derived primarily from rental revenue (including tenant reimbursements) from owned properties supplemented by interest income on mortgage notes owned. The Company expects 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 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current views 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 the Company's financial performance; the risk that the Company may be unable to finance its planned acquisition and development activities; risks related to the industrial and office industry in which the Company's 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 the Company's 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 potential increase in market interest rates from current rates; and risks associated with real estate ownership, such as the potential 17 adverse impact of changes in the local economic climate on the revenues and the value of the Company's properties. RESULTS OF OPERATIONS The following analysis provides a comparison of the property operations for the years ended December 31, 1997 and 1996. The period from January 1, 1997 through November 16, 1997 records the activity of the Predecessor Properties and the period from November 17, 1997 through December 31, 1997 records the activity of the Company. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total revenue increased $3.6 million, or 7.5%, to $51.8 million for the year ended December 31, 1997 compared to $48.2 million for the year ended December 31, 1996 primarily due to the addition of the activity of the Acquisition and Contribution Properties. Rental revenue increased $4.7 million, or 15.4%, to $35.2 million in 1997 from $30.5 million in 1996. In 1997, rental revenue from the Office Properties increased $3.2 million, or 13.0%, to $27.9 million from $24.7 million in 1996. In 1997, rental revenue from the Industrial Properties increased $1.5 million, or 25.9%, to $7.3 million from $5.8 million in 1996. Tenant reimbursements increased $0.3 million, or 2.1%, to $14.5 million in 1997 from $14.2 million in 1996. Tenant reimbursements from the Office Properties remained consistent at $12.1 million for both 1997 and 1996. During 1996 Keck, Mahin & Cate ("Keck") paid no tenant reimbursements until a final restructuring agreement was reached in late 1996. During 1997, Keck paid $0.6 million of tenant reimbursements. Tenant reimbursements from the Industrial Properties increased $0.3 million, or 14.3%, to $2.4 million in 1997 from $2.1 million in 1996. Other nonrecurring items recorded in 1996 resulted in a net decrease of $1.4 million, or 41.2%, in all other revenue to $2.0 million in 1997 from $3.4 million in 1996. Included in the historical financials of the Company , related to the period from November 17, 1997 to December 31, 1997 are rental revenues of $3.5 million, tenant reimbursements of $0.8 million and $0.4 million of other revenue related to the contribution and Acquisition Properties. Total expenses decreased $0.2 million, or 0.3%, to $79.4 million for the year ended December 31, 1997 compared to $79.6 million for the year ended December 31, 1996. Property operating expenses increased $1.0 million, or 11.2%, to $10.8 million in 1997 from $9.8 million in 1996. In 1997, property operating expenses from the Office Properties increased $1.6 million, or 19.5%, to $9.8 million for the year ended December 31, 1997 compared to $8.2 million for the year ended December 31, 1996. The property operating expenses from the Industrial Properties decreased $0.6 million, or 37.5%, to $1.0 million for the year ended December 31, 1997 compared to $1.6 million for the year ended December 31, 1996. In 1997, real estate tax expenses increased $1.0 million, or 10.6%, to $10.4 million from $9.4 million in 1996 primarily due to higher property assessments in 1997. In 1997, total interest expense decreased $1.1 million, or 3.0%, to $36.1 million from $37.2 million in 1996 primarily due to the paydown of the 77 West Wacker Mortgage note agreement. In 1997, general and administrative expenses decreased $2.2 million, or 44.5%, to $2.7 million from $4.9 million in 1996 primarily due to the nonrecurring expenses recorded in the last six months of 1996. In 1997, the Industrial Properties recorded a provision for environmental remediation costs of $3.2 million, which represents the probable costs to be incurred for the clean-up of environmental contamination at the properties. PGI has contractually agreed to indemnify the Company from any environmental liabilities the PGI Partnerships may have incurred and has pledged $1.0 million and approximately 485,000 partnership units in an operating partnership that can be converted to common shares of a publicly traded real estate investment trust to cover these costs. Other expenses decreased $2.1 million on a net basis in 1997 from $18.3 million in 1996 compared to $16.2 million in 1997 primarily due to the write-off of deferred tenant costs in 1996. Included in the historical financials of the Company, related to the period from November 17, 1997 to December 31, 1997, are property operating expenses of $0.6 million, real estate tax expense of $0.6 million, interest expense of $1.3 million and general and administrative expense of $0.7 million related to the Contribution Properties and Acquisition Properties. 18 In 1997, net income allocated to minority interest increased $2.0 million, or 222.2%, to $1.1 from ($0.9 million) in 1996, primarily due to an extraordinary gain resulting from early extinguishment of debt. In 1997, net income of $38.4 million was reported compared to a loss of $30.5 million in 1996, primarily due to the changes described above and the extraordinary gain on early extinguishment of debt of $65,990, net of minority interest, recorded in 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Total revenue decreased $9.4 million, or 16.3%, to $48.2 million for the year ended December 31, 1996 as compared to $57.6 million for the year ended December 31, 1995. This decrease was primarily due to the realization of a $7.3 million gain in 1995 from a non-recurring insurance settlement payment to the Company relating to fire damage to one of the Industrial Properties. Total rental revenue decreased $2.8 million, or 8.4%, to $30.5 million in 1996 from $33.3 million in 1995. In 1996, rental revenue from Office Properties decreased $3.8 million, or 13.3%, to $24.7 million from $28.5 million in 1995 primarily due to the restructuring of Keck's lease. The restructuring resulted in a decrease in the average percentage of office space leased from 94.7% in 1995 to 94.1% in 1996 leased and a decrease in net rent per leased square foot from $21.40 in 1995 to 18.74 in 1996. In 1996, rental revenue from Industrial Properties increased $1.0 million, or 20.8%, to $5.8 million from $4.8 million in 1995 primarily due to increased average percentage leased (73.2% in 1996 and 67.6% in 1995) and net rent per leased square foot ($3.18 in 1996 and $2.77 in 1995). Tenant reimbursements decreased $0.2 million, or 1.4%, to $14.2 million in 1996 from $14.4 million in 1995. In 1996, tenant reimbursements from Office Properties decreased $0.4 million, or 3.2%, to $12.1 million from $12.5 million in 1995 primarily due to the restructuring of Keck's lease. In 1996, tenant reimbursements from Industrial Properties increased $0.3 million, or 16.6%, to $2.1 million from $1.8 million in 1995 primarily due to the increased occupancy described above. In 1995, one of the Industrial Properties received a final insurance settlement of $7.3 million related to a fire that destroyed the Property. No such proceeds were received in 1996. Other revenue increased to $2.2 million in 1996 from $1.6 million in 1995 primarily due to a $0.6 million increase in interest income. All other revenue amounts remained comparable between 1996 and 1995. Total expenses decreased $7.6 million, or 8.7%, to $79.6 million for the year ended December 31, 1996 compared to $87.2 million for the year ended December 31, 1995. This decrease was primarily due to the fact that in 1995 the Company booked a $13.3 million write-off of deferred tenant costs as part of the restructuring of the Keck lease and only $3.1 million of such write-offs for Keck was booked in 1996. Property operating expenses increased $0.3 million, to $9.8 million in 1996 from $9.5 million in 1995. Property operating expenses from Office Properties remained constant at $8.2 million in both 1996 and 1995. Although there was a decline in Office Properties' occupancy in 1996, property operations were at such a level that a decline in occupancy had a minimal effect on the overall property operations. In 1996, property operating expenses from Industrial Properties decreased $0.1 million, or 7.6%, to $1.2 million. In 1996, depreciation and amortization expense decreased $0.2 million, or 1.6%, to $12.4 million primarily due to the restructuring of Keck's lease. This decrease was offset by an increase in occupancy and additional tenant improvements at the Industrial Properties. In 1996, total interest expense increased $1.0 million, or 2.8%, to $37.2 million primarily due to a $16.4 million increase in outstanding debt during May 1996. Financing fees increased $1.2 million in 1996 due to a letter of credit facility obtained in 1996 on behalf of the Industrial Properties. In 1996, general and administrative expenses increased $0.4 million, or 8.9%, to $4.9 million primarily due to a $0.5 million allowance for uncollectible tenant receivables due from the restructured lease with Keck recorded in 1996. All other expenses remained comparable between 1996 and 1995. In 1996, loss allocated to minority interest decreased $2.4 million, or 74.4%, to $0.9 million from $3.3 million in 1995 primarily due to a reduction of the minority interest's ownership in the Prime Properties during 1995. 19 Net loss increased $4.2 million to $30.5 million in 1996 compared to a net loss of $26.3 million in 1995, primarily due to the changes described above. LIQUIDITY AND CAPITAL RESOURCES CREDIT FACILITY. The Company has a Credit Facility of $235.0 million from BankBoston, N.A. and Prudential Securities Credit Corporation ("PSCC"), which is secured by first mortgages on certain properties owned by the Operating Partnership. Subject to compliance by the Company with the applicable loan covenants, the Credit Facility may be used to provide funds for acquisitions and development activities and to provide the replacement letters of credit for the $74.5 million of Tax-Exempt Bonds. MORTGAGE NOTES. The Company borrowed $83.5 million aggregate principal amount from PSCC under the Mortgage Notes at the date of the Offering. PSCC agreed to provide the Mortgage Notes financing for a 90-day term, convertible at the option of the Company into a seven-year term, subject to certain conditions. The Mortgage Notes consist of two separate notes secured, respectively, by first mortgages on all of the IBD Properties and all of the NAC Properties, together in each case, with certain of the Acquisition Properties. Interest on the Mortgage Notes accrues at a rate equal to seven-year U.S. Treasury Notes, plus 1.27%. Prior to the expiration of the Mortgage Notes, the Company expects to refinance the Mortgage Notes with a seven to ten year loan. On March 23, 1998, the Company refinanced the notes on the IBD Properties with a loan of $29.4 million which matures on March 23, 2008 to refinance one of the notes. Interest on this loan accrues at a rate of 6.85% and is payable monthly. The Company expects to refinance the second note during April 1998. ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES. The Company expects to meet its short-term liquidity requirements through net cash provided by operations. The Properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. Over the past three years, the Company's recurring tenant improvements and leasing commissions for the Predecessor Properties averaged $7.13 per square foot of leased office space and $0.49 per square foot of leased industrial space per year. The Company's estimated annual cost of recurring tenant improvements and leasing commissions is approximately $7.2 million based upon average annual square feet for leases expiring during the years ending December 31, 1997 through December 31, 2000. The Company's cost of general capital improvements to the Properties averages approximately $0.8 million annually based upon an estimate of $0.08 per square foot. The Company expects to meet its long-term liquidity requirements for the funding of property development, property acquisitions and other non-recurring capital improvements through a combination of net cash from operations, long-term secured and unsecured indebtedness (including the Credit Facility) and the issuance of additional equity securities. The terms of the Credit Facility and the Preferred Shares impose restrictions on the Company's ability to incur indebtedness and issue additional preferred shares. HISTORICAL CASH FLOWS Historically, the Predecessor Properties' principal sources of funding for operations and capital expenditures were from debt financings. PGI incurred net losses before extraordinary items in each of the last five years. However, after adding back depreciation and amortization, the Predecessor Properties have generated positive net operating cash flows for each of the last four years. The Company and the Predecessor Properties had combined net cash provided by operating activities of $1.0 million for the year ended December 31, 1997 and the Predecessor Properties had net cash used in operating activities of $3.2 million and $1.3 million for the years ended December 31, 1996 and 1995, respectively. The $4.2 million increase in net cash provided by operating activities for the year ended December 31, 1997 from the year ended December 31, 1996 was primarily due to a $68.9 million increase 20 in net income, a $1.3 million decrease in tenant receivables from straight-lining rent, a $0.6 million decrease in gain on sale of real estate, a $1.3 million increase in depreciation and amortization expense, a $0.9 million decrease in loss allocated to minority interest, a $7.7 million increase in accrued real estate taxes and a $9.3 million increase in accounts payable and accrued expenses, offset by a $0.2 million decrease in interest added to principal, a $3.1 million decrease in the write-off of deferred tenant costs, a $66.0 million increase in extraordinary item, a $2.9 million increase in tenant receivables, a $0.8 million increase in deferred costs, a $10.1 million increase in other assets, a $1.6 million decrease in accrued interest and a $1.1 million increase in other liabilities. The $1.9 million increase in net cash used in operating activities for the year ended December 31, 1996 from the year ended December 31, 1995 is primarily due to a $12.1 million increase in loss before minority interest (exclusive of the write-off of deferred tenant costs in 1995 and 1996), offset by a $8.1 million decrease in the adjustment related to the straight-lining of rent and a $1.6 million increase in interest added to principal on mortgage note payable-affiliate. The Company and the Predecessor Properties had combined net cash used in investing activities of ($356.3 million) for the year ended December 31, 1997 and the Predecessor Properties had net cash provided by (used in) investing activities of $1.1 million and ($9.2 million) for the years ended December 31, 1996 and 1995, respectively. The $357.4 million increase in net cash used in investing activities for the year ended December 31, 1997 from the year ended December 31, 1996 was primarily due to a $1.8 million decrease in proceeds from the sale of real estate, a $298.8 million increase in real estate expenditures, a $51.2 million purchase of a mortgage note receivable, a $5.2 million increase in amounts due from affiliates and a $0.4 million cash contribution to the Services Company. The $10.3 million increase in net cash provided by investing activities for the year ended December 31, 1996 from the year ended December 31, 1995 was primarily due to an $8.1 million net repayment of advances to affiliates, a $1.2 million increase in proceeds from sale of real estate and a $10.0 million decrease in real estate expenditures. The Company and the Predecessor Properties had combined net cash provided by financing activities of $361.7 million for the year ended December 31,1997 and the Predecessor Properties had net cash provided by financing activities of $5.7 million and $10.9 million for the years ended December 31, 1996 and 1995, respectively. The $356.0 million increase in net cash provided by financing activities for the year ended December 31, 1997 from the year ended December 31, 1996 was primarily due to $272.0 million in net proceeds from the Offering, Private Placement and overallotment, $85.0 million from the sale of Operating Partnership units, a $242.4 million increase in proceeds from mortgage notes payable, and a $44.3 million increase in contributions from partners, offset by a $235.7 increase in the repayment of mortgage notes payable, a $46.1 million increase in the repayment of mortgage notes payable affiliates, the payment of $5.0 million of deferred financing costs and debt termination fees and a $0.5 million decrease in due to affiliates. The $5.2 million decrease in net cash provided by financing activities from the year ended December 31, 1996 from the year ended December 31, 1995 was primarily due to a $5.4 million decrease in proceeds from mortgage notes payable, offset by a $0.2 million decrease in distributions to partners. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations, as defined by the National Association of Real Estate Investment Trusts, Inc. ("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. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, Funds from Operations should be examined in conjunction with net income (loss) as presented 21 in the audited Combined Financial Statements and selected financial data included elsewhere in this Form 10-K. The Company computes 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 the Company expects to report rental revenues on a cash basis, rather than a straight-line GAAP basis, which the Company believes will result in a more accurate presentation of its actual operating activities), which may differ from the methodology for calculating Funds from Operations used by other certain office and/or industrial REITs and, accordingly, may not be comparable to such other REITs. As a result of the Company's reporting rental revenues on a cash basis, 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 the Company's performance or to cash flows as a measure of liquidity or the ability to pay dividends or make distributions. IMPACT OF YEAR 2000 In the year 2000, many existing computer programs that use only two digits (rather than four) to identify a year in the date field could fail or create erroneous results if not corrected. This computer flaw is expected to affect virtually all companies and organizations . The Company cannot quantify the potential costs and uncertainties associated with this computer program flaw at this time, but does not anticipate that the effect of this computer program flaw on the operations of the Company will be significant. However, the Company may be required to spend time and monetary resources addressing any necessary computer program changes. INFLATION The Company's leases with the majority of its tenants require the tenants to pay most operating expenses, including real estate taxes and insurance, and increases in common area maintenance expenses, which reduce the Company's exposure to increases in costs and operating expenses resulting from inflation. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 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. 22 PART III Certain information required by Part III is omitted from this Report in that the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held in May 1998 (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 "Compensation of Executives" 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 "Certain Relationships and Related Transactions" of the Proxy Statement is incorporated herein by reference. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1 and 2) Financial Statements and Schedules Prime Group Realty Trust and Predecessor Properties: Report of Independent Auditors.................................................... F-1 Consolidated Balance Sheet of the Company as of December 31, 1997 and Combined Balance Sheet of the Predecessor Properties as of December 31, 1996............. F-2 Consolidated Statement of Operations of the Company for the period from November 17, 1997 to December 31, 1997 and Combined Statements of Operations of the Predecessor Properties for the period from January 1, 1997 to November 16, 1997 and for the years ended December 31, 1996 and 1995.............................. F-3 Consolidated Statement of Changes in Shareholders' Equity for the period from November 17, 1997 to December 31, 1997.......................................... F-4 Combined Statement of Changes in Predecessors' Deficit for the period from January 1, 1997 to November 16, 1997 and for the years ended December 31, 1996 and 1995............................................................................ F-5 Consolidated Statements of Cash Flows of the Company for the period from November 17, 1997 to December 31, 1997 and the Combined Statements of Cash Flows of the Predecessor Properties for the period from January 1, 1997 to November 16, 1997 and for the years ended December 31, 1996 and 1995.............................. F-6 Notes to Consolidated and Combined Financial Statements........................... F-9
All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. (3) Exhibits
EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- 3.1 Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust 3.2 Amended and Restated Bylaws of Prime Group Realty Trust 3.3 Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. 10.1 Form of Indemnification Agreement between Prime Group Realty Trust and each of its trustees 10.2 Right of First Offer Agreement by and between Prime Group Realty, L.P. and The Prime Group, Inc. 10.3 Share Incentive Plan 10.4 Employment Agreement by and between the Company and Michael W. Reschke 10.5 Employment Agreement by and between the Company and Richard S. Curto 10.6 Employment Agreement by and between the Company and W. Michael Karnes 10.7 Employment Agreement by and between the Company and Robert J. Rudnik 10.8 Employment Agreement by and between the Company and Jeffrey A. Patterson 10.9 Employment Agreement by and between the Company and Kevork M. Derderian 10.10 Employment Agreement by and between the Company and Edward S. Hadesman
24
EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- 10.11 Contribution Agreement dated as of October 20, 1997 by and among the Prime Group, Inc., Prime Group Realty, L.P., Prime Group Realty Trust, Narco River Business Center, Narco Tower Road Associates, Olympian Office Center, Tri-State Industrial Park Joint Venture, Carol Stream Industrial Park Joint Venture, Narco Enterprises, Inc., The Nardi Group Ltd., Narco Construction Inc., Nardi & Co., Nardi Asset Management, Inc. and Nardi Architectural, Inc. as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference. 10.12 Option to Purchase Partnership Interests dated as of June 17, 1994 by and between KILICO Realty Corporation, and The Prime Group, Inc., as amended by that certain First Amendment to Option Purchase Partnership Interests dated as of January 21, 1997 by and between KILICO Realty Corporation and The Prime Group, Inc.; as further amended by that certain Second Amendment to Option to Purchase Partnership Interests dated as if July 15, 1997 by and between KILICO Realty Corporation and The Prime Group, Inc as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference. 10.13 Option Agreement Regarding 300 N. LaSalle by and between Prime Group Realty, L.P. and 300 N. LaSalle, L.L.C. 10.14 Registration Rights Agreement among Prime Group Realty Trust, Prime Group Realty, L.P., Prime Group Limited Partnership, Primestone Investment Partners L.P. and the other investors named herein 10.15 Contribution Agreement dated as of July 8, 1997 by and among LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated June 15, 1982 and known as Trust No. 10-40113-09, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated September 7, 1994 and known as Trust No. 11-9051, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated March 30, 1984 and known as Trust No. 11-107825, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated August 1, 1986 and known as Trust No. 11-1358, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated August 1, 1986 and known as Trust No. 11-1357, LaSalle National Trust N.A., not personally, but solely as Trustee under Trust Agreement dated August 1, 1986 and known as Trust No. 11-1357, LaSalle National Trust N.A., not personally, but solely as Trustee under Trust Agreement dated January 17,1974 and known as Trust No. 286-34, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated October 15, 1995 and known as Trust No. 11-9869, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated December 1, 1987 and known as Trust No. 11-2868, 310 ERA Limited Partnership, MacArthur Drive Properties, CLE Limited Partnership, 500 Lindberg Limited Partnership, 515 Huehl Limited Partnership, 555 Huehl Limited Partnership, Sky Harbor Associates, 1001 Technology Way, LLC, The Grandville Road Limited Partnership, Industrial Building and Development Company and The Prime Group, Inc.; as amended by the First Amendment to the Contribution Agreement dated as of August 12, 1997, by and between The Prime Group, Inc., an Illinois corporation, and LaSalle National Trust, NA, t/u/t 10-40113-09 dated June 15, 1982; LaSalle National Trust, NA, t/u/t 11-9051 dated September 7, 1994; LaSalle National Trust, NA, t/u/t 11-107825 dated March 30, 1984; LaSalle National Trust, NA, t/u/t 11-1358 dated August 1, 1986; LaSalle National Trust, NA, t/u/t 11-1357 dated August 1, 1986; LaSalle National Trust, NA, t/u/t 286-34 dated January 17, 1974; LaSalle National Trust, NA, t/u/t 11-9869 dated October 15, 1995; LaSalle National Trust, NA, t/u/t 11-2868 dated December 1, 1987 as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference.
25
EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- 10.16 [Reserved] 10.17 Formation Agreement by and among Prime Group Realty Trust, Prime Group Realty, L.P., Prime Group Realty Services, Inc., The Prime Group, Inc., Prime Group Limited Partnership and Jeffrey A. Patterson 10.18 Asset Purchase Agreement by and among Continental Offices, Ltd., Continental Offices Ltd. Realty and Prime Group Realty, L.P. as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference. 10.19 Non-Compete Agreement by and among Prime Group Realty Trust, The Prime Group, Inc. and Michael W. Reschke 10.20 Option Agreement dated as of August 4, 1997 by and between Lumbermens Mutual Casualty Company and The Prime Group, Inc. as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference. 10.21 Amended and Restated Agreement dated as of July 15, 1997 by and among Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, KILICO Realty Corporatio, FKLA Realty Corporation, KR 77 Fitness Center, Inc., 77 West Wacker Limited Partnership, K/77 Investors Limited Partnership, The Prime Group, Inc., Prime Group Limited Partnership and Prime 77 Fitness Center, Inc. as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference. 10.22 Agreement dated as of July 18, 1997 by and among The Prime Group, Inc., KILICO Realty Corporation, KFC Portfolio Corp. and Kemper Investors Life Insurance Company as filed as an exhibit to Registration Statement on Form S-11 (No. 333-33547) and incorporated herein by reference. 10.23 Series A Convertible Preferred Securities Agreement by and between Security Capital Preferred Growth Incorporated and Prime Group Realty Trust 10.24 Tax Indemnification Agreement by and between Prime Group Realty Trust and the IBD Contributors 10.25 Tax Indemnification Agreement by and between Prime Group Realty Trust and one of its general partners 10.26 Credit Facility between Prime Group Realty Trust, BankBoston, N.A. and Prudential Securities Credit Corporation 10.27 Underwriting Agreement between Prime Group Realty Trust and Prudential Securities Incorporated, Friedman, Billings, Ramsey & Co., Inc., Smith Barney Inc. and Morgan Keegan & Company, Inc., as representatives of the other underwriters 10.28 Registration Rights Agreement between Prime Group Realty Trust and certain holders of Common Units of Prime Group Realty, L.P. 10.29 Environmental Remediation and Indemnification Agreement between Prime Group Realty, L.P. and The Prime Group, Inc. 10.30 Registration Rights Agreement between Prime Group Realty Trust and Security Capital Preferred Growth Incorporated 12.1 Statements re: computation of ratios 19.1 Form of Common Share Certificate 19.2 Form of Convertible Preferred Share certificate 22.1 List of subsidiaries
26
EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- 27.1 Financial Data Schedule
- ------------------------ (b) Reports on Form 8-K On December 30, 1997, the Company filed a report on Form 8-K relating to the acquisition of certain real estate properties. On January 14, 1998, the Company filed a report on Form 8-K relating to the acquisition of certain real estate properties. The Company filed the required financial statements and information under cover of Form 8-K/A on February 27, 1998. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 1998. PRIME GROUP REALTY TRUST DATED: MARCH 31, 1998 By: /s/ RICHARD S. CURTO ----------------------------------------- Richard S. Curto PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: March 31, 1998 By: /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 Chairman of the Board and - ------------------------------ Trustee March 31, 1998 Michael W. Reschke /s/ RICHARD S. CURTO President, Chief Executive - ------------------------------ Officer and Trustee March 31, 1998 Richard S. Curto /s/ KATHRYN A. DEANE Vice President and - ------------------------------ Controller March 31, 1998 Kathryn A. Deane /s/ STEPHEN J. NARDI Trustee - ------------------------------ March 31, 1998 Stephen J. Nardi /s/ JAMES R. THOMPSON Trustee - ------------------------------ March 31, 1998 James R. Thompson /s/ JACQUE M. DUCHARME Trustee - ------------------------------ March 31, 1998 Jacque M. Ducharme /s/ CHRISTOPHER J. NASSETTA Trustee - ------------------------------ March 31, 1998 Christopher J. Nassetta /s/ THOMAS J. SAYLAK Trustee - ------------------------------ March 31, 1998 Thomas J. Saylak 28 REPORT OF INDEPENDENT AUDITORS Board of Trustees Prime Group Realty Trust We have audited the accompanying consolidated balance sheet of Prime Group Realty Trust (the Company) as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the period from November 17, 1997 (date of formation) through December 31, 1997. We have also audited the accompanying combined balance sheet of Predecessor Properties (the Predecessor to the Company) as of December 31, 1996, and the related combined statements of operations, changes in predecessors' deficit, and cash flows for the period from January 1, 1997 through November 16, 1997, and for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company'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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 1997, and the consolidated results of its operations and its cash flows for the period from November 17, 1997 through December 31, 1997, and the combined financial position of Predecessor Properties at December 31, 1996 and the combined results of its operations and its cash flows for the period from January 1, 1997 through November 16, 1997, and for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Chicago, Illinois March 27, 1998 F-1 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) CONSOLIDATED BALANCE SHEET OF THE COMPANY AND COMBINED BALANCE SHEET OF THE PREDECESSOR (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
PRIME GROUP PREDECESSOR REALTY TRUST PROPERTIES AT AT DECEMBER 31 DECEMBER 31 1997 1996 -------------- ------------ ASSETS Real estate at cost: Land.............................................................................. $ 92,440 $ 23,530 Building and improvements......................................................... 496,839 268,227 -------------- ------------ 589,279 291,757 Accumulated depreciation............................................................ (2,338) (44,411) -------------- ------------ 586,941 247,346 Mortgage note receivable............................................................ 56,263 -- Cash and cash equivalents........................................................... 11,969 5,573 Tenant receivables.................................................................. 41,648 41,384 Deferred costs -- Net............................................................... 28,472 26,883 Due from affiliates................................................................. 5,258 2,894 Other............................................................................... 10,917 1,150 -------------- ------------ Total assets........................................................................ $ 741,468 $ 325,230 -------------- ------------ -------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage notes payable.............................................................. $ 249,610 $ 235,886 Mortgage notes payable -- Affiliates................................................ 3,984 99,647 Bonds payable....................................................................... 74,450 74,450 Bonds payable -- Affiliates......................................................... -- 12,000 Accrued interest payable............................................................ 1,245 2,538 Accrued real estate taxes........................................................... 17,915 9,944 Accounts payable and accrued expenses............................................... 13,903 4,213 Liabilities for leases assumed...................................................... 5,758 7,157 Dividends declared.................................................................. 2,505 -- Due to affiliates................................................................... -- 708 Other............................................................................... 822 1,384 -------------- ------------ Total liabilities................................................................... 370,192 447,927 Minority interest................................................................... 147,207 (6,905) Predecessors' net deficit........................................................... -- (115,792) Shareholders' equity: Preferred shares, $.01 par value; 30,000,000 shares authorized, 2,000,000 cumulative convertible preferred shares issued and outstanding.......................................................... 20 -- Common Shares, $.01 par value; 100,000,000 shares authorized, 12,980,000 shares issued and outstanding............................ 130 -- Additional paid-in capital........................................................ 225,632 -- Distributions in excess of earnings............................................... (1,713) -- -------------- ------------ Total shareholders' equity.......................................................... 224,069 -- -------------- ------------ Total liabilities and shareholders' equity.......................................... $ 741,468 $ 325,230 -------------- ------------ -------------- ------------
See accompanying notes. F-2 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AND COMBINED STATEMENTS OF OPERATIONS OF THE PREDECESSOR (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
PRIME GROUP REALTY TRUST -- PREDECESSOR PERIOD FROM PROPERTIES -- PREDECESSOR PROPERTIES NOVEMBER 17, 1997 PERIOD FROM YEAR ENDED DECEMBER 31 TO DECEMBER 31, JANUARY 1, 1997 ---------------------- 1997 TO NOVEMBER 16, 1997 1996 1995 ----------------- -------------------- ---------- ---------- REVENUE Rental......................................... $ 7,293 $ 27,947 $ 30,538 $ 33,251 Tenant reimbursements.......................... 2,041 12,490 14,225 14,382 Parking........................................ 60 264 320 345 Mortgage note interest......................... 248 -- -- -- Gain on sale of assets......................... -- 286 846 771 Insurance settlement........................... -- -- -- 7,257 Other.......................................... 188 965 2,231 1,599 ------ ------- ---------- ---------- Total revenue.................................. 9,830 41,952 48,160 57,605 EXPENSES Property operations............................ 2,213 8,622 9,767 9,479 Real estate taxes.............................. 1,765 8,575 9,383 9,445 Depreciation and amortization.................. 2,478 11,241 12,409 12,646 Interest....................................... 1,680 24,613 26,422 27,671 Interest -- Affiliates......................... -- 9,804 10,795 8,563 Financing fees................................. -- 1,180 1,232 -- Property and asset management fees -- Affiliates................................... -- 1,348 1,561 1,496 General and administrative..................... 267 2,414 4,927 4,508 Provision for environmental remediation costs........................................ -- 3,205 -- -- Write-off deferred tenant costs................ -- -- 3,081 13,373 ------ ------- ---------- ---------- Total expenses................................. 8,403 71,002 79,577 87,181 ------ ------- ---------- ---------- Income (loss) before minority interest and extraordinary item........................... 1,427 (29,050) (31,417) (29,576) Minority interest.............................. (635) 666 894 3,281 ------ ------- ---------- ---------- Income (loss) before extraordinary gain........ 792 (28,384) (30,523) (26,295) Extraordinary item; gain on extinguishment of debt, net of minority interest in the amount of $1,127.................................... -- 65,990 -- -- ------ ------- ---------- ---------- Net income (loss).............................. 792 $ 37,606 $ (30,523) $ (26,295) ------- ---------- ---------- ------- ---------- ---------- Net income allocated to preferred shareholders................................. 345 ------ Net income available to common shareholders.... $ 447 ------ ------ Net income available per weighted-average common share of beneficial interest -- Basic and diluted.................................. $ 0.04 ------ ------
See accompanying notes. F-3 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY PERIOD FROM NOVEMBER 17, 1997 TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
ADDITIONAL DISTRIBUTIONS PREFERRED COMMON PAID-IN IN EXCESS OF STOCK STOCK CAPITAL EARNINGS TOTAL ----------- ----------- ---------- ------------ ---------- Issuance of 2,000,000 shares of preferred stock................................. $ 20 $ -- $ 39,580 $ -- $ 39,600 Issuance of 12,980,000 shares of common stock.................................... -- 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 service company... -- -- 380 -- 380 Additional paid-in capital allocated to minority interest........................................... -- -- (19,313) -- (19,313) Net income........................................... -- -- -- 792 792 Preferred dividends declared ($0.173 per share)................................. -- -- -- (345) (345) Common dividends declared ($0.166 per share)................................. -- -- -- (2,160) (2,160) ----------- ----- ---------- ------------ ---------- Balance at December 31, 1997......................... $ 20 $ 130 $ 225,632 $ (1,713) $ 224,069 ----------- ----- ---------- ------------ ---------- ----------- ----- ---------- ------------ ----------
See accompanying notes. F-4 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) COMBINED STATEMENTS OF CHANGES IN PREDECESSORS' DEFICIT PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 16, 1997 AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) Balance at January 1, 1995........................................................ $ (65,722) Contributions..................................................................... 732 Distributions..................................................................... (179) Assignment of minority interest................................................... 3,243 Forgiveness of notes payable to minority interest................................. 2,916 Net loss.......................................................................... (26,295) --------- Balance at December 31, 1995...................................................... (85,305) Contributions..................................................................... 40 Distributions..................................................................... (4) Net loss.......................................................................... (30,523) --------- Balance at December 31, 1996...................................................... (115,792) Contributions..................................................................... 44,330 Distributions..................................................................... (120) Net income........................................................................ 37,606 --------- Balance at November 16, 1997...................................................... $ (33,976) --------- ---------
See accompanying notes. F-5 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
PREDECESSOR PRIME GROUP PROPERTIES REALTY TRUST FROM FROM JANUARY 1, PREDECESSOR PROPERTIES NOVEMBER 17, 1997 YEAR ENDED DECEMBER 31 1997 TO NOVEMBER TO DECEMBER 31, 16, ---------------------- 1997 1997 1996 1995 ---------------- -------------- ---------- ---------- OPERATING ACTIVITIES Net income (loss)...................................... $ 792 $ 37,606 $ (30,523) $ (26,295) Adjustments to reconcile net income (loss) to net cash provided by (used in) used in operating activities: Amortization of costs for leases assumed (included in rental revenue)...................................... 142 1,022 1,244 1,539 Decrease (increase) in tenant receivables from straight-lining rent................................. 180 487 (645) (8,779) Gain on sale of real estate.......................... -- (286) (846) (771) Depreciation and amortization........................ 2,478 11,241 12,409 12,646 Interest added to principal on mortgage note payable affiliate............................................ -- 9,772 10,002 8,427 Standby loan fee-affiliate added to principal on mortgage note payable affiliate...................... -- 460 522 498 Write-off of deferred tenant costs................... -- -- 3,081 13,373 Minority interest.................................... 635 (666) (894) (3,281) Extraordinary item................................... -- (65,990) -- -- Changes in operating assets and liabilities: Decrease (increase) in tenant receivables.......... (15) (916) 1,990 2,326 Increase in deferred costs......................... (48) (1,459) (703) (907) (Increase) decrease in other assets................ (10,032) 506 566 2,937 (Decrease) increase in accrued interest payable.... (175) (1,118) 316 (1,221) Increase in accrued real estate taxes.............. 7,556 415 251 5 Increase (decrease) increase in accounts payable and accrued expenses............................. 7,202 3,498 1,380 (34) Decrease in liabilities for assumed leases......... (350) (1,049) (1,532) (1,985) Increase (decrease) in other liabilities........... (1,707) 777 217 263 ---------------- -------------- ---------- ---------- Net cash provided by (used in) operating activities.... 6,658 (5,700) (3,165) (1,259)
F-6 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
PREDECESSOR PRIME GROUP PROPERTIES REALTY TRUST FROM FROM JANUARY 1, PREDECESSOR PROPERTIES NOVEMBER 17, 1997 YEAR ENDED DECEMBER 31 1997 TO NOVEMBER TO DECEMBER 31, 16, ---------------------- 1997 1997 1996 1995 ---------------- -------------- ---------- ---------- INVESTING ACTIVITIES Proceeds from sale of real estate...................... $ -- $ 298 $ 2,110 $ 921 Expenditures for real estate........................... (297,019) (5,659) (3,842) (4,842) Purchase of mortgage note receivable................... (51,163) -- -- -- Cash contributed to service company.................... (376) -- -- -- Decrease (increase) in due from affiliates............. (5,258) 2,894 2,858 (5,255) ---------------- -------------- ---------- ---------- Net cash (used in) provided by investing activities.... (353,816) (2,467) 1,126 (9,176) FINANCING ACTIVITIES Proceeds from the sale of preferred shares............. 39,600 -- -- -- Proceeds from the sale of common shares................ 232,352 -- -- -- Proceeds from sale of operating partnership units...... 85,000 -- -- -- Additions to deferred financing costs.................. (3,328) -- (10) (225) Proceeds from mortgage notes payable................... 243,198 480 1,239 9,815 Proceeds from mortgage notes payable -- Affiliates..... -- 5,647 5,891 2,693 Repayment of mortgage notes payable.................... (236,537) (119) (83) (384) Repayment of mortgage notes payable -- Affiliates...... (4,895) (41,367) (1,150) (1,079) Increase (decrease) in due to affiliates............... -- (708) (226) (347) Contributions from partners............................ -- 44,330 80 872 Distributions to partners.............................. -- (120) (8) (357) Distributions to minority interest..................... -- (120) -- -- Debt termination fees.................................. -- (1,692) -- -- Acquisition of partnership interest.................... -- -- -- (115) ---------------- -------------- ---------- ---------- Net cash provided by financing activities.............. 355,390 6,331 5,733 10,873 ---------------- -------------- ---------- ---------- Net increase (decrease) in cash and cash equivalents... 8,232 (1,836) 3,694 438 Cash and cash equivalents at beginning of period....... 3,737 5,573 1,879 1,441 ---------------- -------------- ---------- ---------- Cash and cash equivalents at end of period............. $ 11,969 $ 3,737 $ 5,573 $ 1,879 ---------------- -------------- ---------- ---------- ---------------- -------------- ---------- ----------
F-7 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) Supplemental disclosure of non-cash investing and financing activities: The following assets and liabilities (Represents the Predecessor Properties, $12,000 of bonds receivable, $241 of other assets and $368 of other liabilities contributed by the Predecessor. The bonds receivable have been netted against the corresponding bonds payable of the Predecessor Properties.) 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 owners' net contribution.............................................. $ (22,103) --------- ---------
The following represents non-cash activity for the Company during the period from November 17, 1997 to 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 predecessor...... 1,430 --------- $ 53,914 --------- ---------
See accompanying notes. F-8 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 1. FORMATION AND ORGANIZATION OF THE COMPANY Prime Group Realty Trust (together with its consolidated subsidiaries and unconsolidated investment subsidiary, the "Company") was organized in Maryland on July 21, 1997. The Company was formed to continue the business of The Prime Group, Inc. and certain of its affiliates (collectively "PGI"). The Company will make an election to qualify as a real estate investment trust ("REIT") for 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 an initial public offering (the "Offering") of 12,380,000 Common Shares of Beneficial Interest ("Common Shares") at $20.00 per share and the private placement (the "Private Placement") of 2,000,000 Cumulative Convertible Preferred Shares of Beneficial Interest ("Preferred Shares") at $20.00 per share. Net of underwriting discounts and expenses, the Company received approximately $260,792 in net proceeds from the Offering and Private Placement. On December 12, 1997, the underwriters of the Offering exercised their overallotment option to purchase 600,000 shares of Common Shares at $20.00 per share ("Overallotment"). The Company received net proceeds of approximately $11,160 on December 15, 1997, with respect to the overallotment option. Upon consummation of the Offering and Private Placement, the Company contributed the initial net proceeds from the Offering and Private Placement in exchange for 12,380,000 common units of partnership interest ("Common Units") and 2,000,000 preferred units of partnership interest ("Preferred Units") in Prime Group Realty, L.P. (the "Operating Partnership"). The Operating Partnership also sold 4,569,893 Common Units for $85,000 to Primestone Joint Venture ("Primestone"--PGI obtained a 60% ownership interest in Primestone in exchange for the contribution of 3,375,000 of its Common Units received from the contribution of its interest in the Prime Properties to the Operating Partnership described below. Primestone has at 34.2% limited partner ownership interest in the Operating Partnership at December 31, 1997). The Operating Partnership used such proceeds primarily to repay certain mortgages and other indebtedness, acquired interests in certain of the properties ("Prime Properties") owned or controlled by the PGI (the "Predecessor") and other contributor's (defined below) and purchase various office and industrial properties from an unaffiliated third parties. The Company contributed the net proceeds from the Overallotment to the Operating Partnership in exchange for 600,000 Common Units. The Operating Partnership, in turn, used such proceeds primarily for property acquisitions. The Company is the managing general partner of the Operating Partnership and owns all of the Preferred Units and 55.9% of the Common units issued at December 31, 1997. Each Common Unit entitles the Company to receive distributions from the Operating Partnership. Distributions declared or paid to holders of Common Stock are based upon such distributions received by the Company with respect to its Common Units. Upon consummation of the Offering, PGI contributed its interest in the Prime Properties to the Operating Partnership in exchange for 3,465,000 Common Units (After the contribution of 3,375,000 Common Units to Primestone, PGI has a 0.5% direct limited partner interest in the Operating Partnership at December 31, 1997), and received approximately $6,487 for the reimbursement of formation costs advanced by PGI. A senior executive of the Company contributed his interest in the Prime Properties to the Operating Partnership in exchange for 110,000 Common Units (a 0.5% limited partner interest of the Operating Partnership at December 31, 1997). In addition, the Operating Partnership was required to acquire a third-party ownership interest in certain of the Prime Properties for $1,797, resulting in a step-up in the basis of real estate of $3,227. Certain individuals (collectively, the "Contributors") contributed their F-9 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 1. FORMATION AND ORGANIZATION OF THE COMPANY (CONTINUED) 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 (a 3.9% general partner interest of the Operating Partnership and a 3.9% limited partner interest of the Operating Partnership at December 31, 1997), valued at $20.00 per unit (Total value of $36,988.). These properties, along with other acquired properties are controlled by the Operating Partnership (the "New Entities") and are described below. PGI, the senior executive and the Contributors have been reflected as minority interest in the consolidated financial statements of the Company. On November 17, 1997, the Operating Partnership acquired the assets and business of Continental Offices, Ltd. and Continental Offices, Ltd. Realty ("Continental Office Management") and contributed these entities and certain other assets to a newly formed corporation, Prime Group Realty Services, Inc. (the "Service Company"). In exchange for its contribution, the Company received 100% of the non-voting preferred stock of the Service Company and a note receivable in the amount of $4,800 (see Note 11). Certain members of management of the Company own 100% of the voting common stock. The Service Company was formed primarily to operate business lines of the Company that are not directly associated with the collection of rents. The Service Company is subject to federal, state and local taxes. Unless the context requires otherwise, all references to the Company herein mean Prime Group Realty Trust and those entities owned or controlled by Prime Group Realty Trust, including the Operating Partnership. The Prime Properties represent a combination of 23 partnerships described below (PGI Partnerships) that own, operate, and manage office and industrial properties in the greater Chicagoland area and Tennessee. The Prime Properties were under common management and ownership of PGI as either the managing general partner (responsible for the operations of the Prime Properties) or 100% owner. Prior to the contribution of the Properties, six of the Partnerships had third party owners (Third Party), whose ownership interests have been reflected as a minority interest in the combined financial statements of the Predecessor. The Prime Properties consisted of the following at November 16, 1997.
PARTNERSHIP PROPERTY - ---------------------------------------------- ---------------------------------------------- 77 West Wacker Limited Partnership (77 West 77 West Wacker Building Wacker) Nashville Office Building I, Ltd. Nashville Office Building Professional Plaza, Ltd. Professional Plaza Old Kingston Properties, Ltd. Old Kingston Two Centre Square, Ltd. Two Centre Square Hammond Enterprise Center Limited Partnership Hammond Enterprise Center (HEC)
F-10 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 1. FORMATION AND ORGANIZATION OF THE COMPANY (CONTINUED)
PARTNERSHIP PROPERTY - ---------------------------------------------- ---------------------------------------------- East Chicago Enterprise Center Limited East Chicago Enterprise Center Partnership (ECEC) Kemper/Prime Industrial Partners (KP) Chicago Enterprise Center Enterprise Center I, L.P. (ECI) Enterprise Center I Enterprise Center II, L.P. Enterprise Center II Enterprise Center III, L.P. Enterprise Center III Enterprise Center IV, L.P. Enterprise Center IV Enterprise Center V, L.P. Enterprise Center V Enterprise Center VI, L.P. Enterprise Center VI Enterprise Center VII, L.P. Enterprise Center VII Enterprise Center VIII, L.P. Enterprise Center VIII Enterprise Center IX, L.P. Enterprise Center IX Enterprise Center X, L.P. Enterprise Center X Arlington Heights I, L.P. Arlington Heights I Arlington Heights II., L.P. Arlington Heights II Arlington Heights III, L.P. Arlington Heights III Triad Parking Company, Ltd. Triad Parking Facility 77 Fitness Center, Ltd. (1) Executive Sports and Fitness Center
- ------------------------ (1) The Operating Partnership contributed this entity to the Service Company on November 17, 1997, including net equipment of $83, cash of $376 and accounts payable of $839. F-11 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 1. FORMATION AND ORGANIZATION OF THE COMPANY (CONTINUED) The entity name and related property of the New Entities (the properties were either contributed or acquired at the Offering date, unless otherwise noted) operated by the Operating Partnership at December 31, 1997 are as follows:
ENTITY PROPERTY - ---------------------------------------------- ---------------------------------------------- 1990 Algonquin Road, L.L.C. 1990 Algonquin Road 2010 Algonquin Road, L.L.C. 2010 Algonquin Road 555 Huehl Road, L.L.C. 555 Huehl Road 1669 Woodfield Road, L.L.C. 1669 Woodfield Road 475 Superior Avenue, L.L.C. 475 Superior Avenue Enterprise Drive, L.L.C. 2205-2255 Enterprise Drive 280 Shuman Blvd., L.L.C. 280 Shuman Blvd. Continental Towers, L.P. (1) Continental Towers 2675 N. Mayfair Road, L.L.C. (2) 2675 N. Mayfair Road Prime Columbus Industrial, L.L.C. 2160 McGaw Road, 4849 Groveport Road, 2400 McGaw Road, 5160 Blazer Memorial Parkway, 600 London Road and 4411 Marketing Place Libertyville Tech Way, L.L.C. 1001 Technology Way 801 Technology Way, L.L.C. 801 Technology Way 3818 Grandville, L.L.C. 3818 Grandville/1200 Northwestern 306 Era Drive, L.L.C. 306-310 Era Drive 1301 Ridgeview Drive, L.L.C. 1301 Ridgeview Drive 515 Huehl Road, L.L.C. 515 Huehl Road/500 Lindberg 455 Academy Drive, L.L.C. 455 Academy Drive 1051 N. Kirk Road, L.L.C. 1051 N. Kirk Road 4211 Madison Street, L.L.C. 4211 Madison Street 200 E. Fullerton, L.L.C. 200 E. Fullerton 350 Randy Road, L.L.C. 350 Randy Road 4300 Madison Street, L.L.C. 4300, 4248, 4250 Madison Street
F-12 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 1. FORMATION AND ORGANIZATION OF THE COMPANY (CONTINUED)
ENTITY PROPERTY - ---------------------------------------------- ---------------------------------------------- 370 Carol Lane, L.L.C. 370 Carol Lane 388 Carol Lane, L.L.C. 388 Carol Lane 941 Weigel Drive, L.L.C. 941-961 Weigel Drive 342 Carol Lane, L.L.C. 342-346 Carol Lane 343 Carol Lane, L.L.C. 343 Carol Lane 371 N. Gary Avenue, L.L.C. 371-385 N. Gary Avenue 350 N. Mannheim Road, L.L.C. 350 N. Mannheim Road 1600 167th Street, L.L.C. 1600-1700 167th Street 1301 E. Tower Road, L.L.C. 1301 E. Tower Road 4343 Commerce Court, L.L.C. 4343 Commerce Court 11039 Gage Avenue, L.L.C. 11039 Gage Avenue 11045 Gage Avenue, L.L.C. 11045 Gage Avenue 1401 S. Jefferson, L.L.C. 1401 S. Jefferson 4100 Madison Street, L.L.C. 4100 Madison Street 4160 Madison Street, L.L.C. 4160-4190 Madison Street 550 Kehoe Blvd., L.L.C. 550 Kehoe Blvd.
- ------------------------ (1) On December 15, 1997, the Company acquired the first mortgage note encumbering the property for $108,870. The note has a face value of $157,161 at December 31, 1997, has a base interest rate of 6.5% per annum payable monthly, 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, the Company has consolidated the operations of the property from the acquisition date. (2) The Company acquired the property on December 30, 1997 for $8,000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership and the partnerships in which the Company has majority interest or control. The combined financial statements of the Predecessor include the accounts of the PGI Partnerships. The F-13 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. REAL ESTATE Depreciation is calculated on the straight-line method over the estimated useful lives of assets, which are as follows: Building and improvements 40-50 years Tenant improvement Term of related leases
Development costs, which include fees and costs incurred in developing new properties, are capitalized as incurred. Upon completion of construction, development costs are amortized over the useful lives of the respective properties on a straight-line basis. Interest and other direct costs incurred during construction 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 Deferred financing costs are amortized on the straight-line method over the terms of the loans. Deferred leasing costs are amortized on the straight-line method over the terms of the related lease agreements. LEASES ASSUMED In connection with obtaining certain tenant leases 77 West Wacker assumed liability for the remaining terms of the tenants' existing leases. 77 West Wacker 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 F-14 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 period from January 1, 1997 to November 16, 1997, and for the year ended December 31, 1996, 77 West Wacker wrote off $1,049 and $3,893, respectively, of deferred charges and reduced the related liability due to changes in the estimated benefits from subleases. RENTAL REVENUE Rental revenue is recorded on the straight-line method over the terms of the related lease agreements. As a result, $180 and $487 of cash was received in excess of recorded rental revenue during the period from November 17, 1997 to December 31, 1997, and the period from January 1, 1997 to November 16, 1997, respectively, and $645 and $8,779 of noncash rent was recorded as rental revenue during the years ended December 31, 1996 and 1995, respectively, and are included in accounts receivable. As of December 31, 1997 and 1996, the balance of the accounts receivable relating to the straight-lining of rental revenue is $37,784 and $38,451, respectively. INTEREST RATE SWAP AGREEMENT 77 West Wacker has entered into an interest rate swap agreement to effectively convert its variable-rate borrowing into a fixed-rate obligation. (The agreement was terminated November 16, 1997 -- see Note 5) EARNINGS PER SHARE On December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" which specifies the method of computation, presentation, and disclosure for earnings per share ("EPS"). SFAS No. 128 requires the presentation of basic EPS and diluted EPS. Basic 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 Stock, and (iii) Preferred Shares were converted into shares of Common Stock. STOCK BASED COMPENSATION The Company accounts for stock 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 stock option grants because the exercise price of the options equals the market price of the underlying stock at the date of grant. INCOME TAXES Commencing with the period ended December 31, 1997, it is the intent of the Company to qualify as a real estate investment trust (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 is distributes at lease 95% of F-15 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, 1997, for income tax purposes, tenant receivables has a basis of $3,744, real estate has a gross and net basis of $672,618 and $647,565, respectively and deferred costs has a gross and net basis of $43,835 and $28,472, respectively. The Partnerships pay no income taxes, and the income or loss from the Partnerships is includable on the respective income tax returns of the Partners. 3. MORTGAGE NOTE RECEIVABLE On December 16, 1997, the Company acquired the first mortgage note encumbering the office property known as 180 North LaSalle Street, which is a 39-story office building, located in Chicago, Illinois, that contains 729,000 square feet of rentable space, including 15,000 square feet of retail space and is approximately 81% leased at December 31, 1997. The first mortgage note, which has a face value of $63,329 at December 31, 1997 and an interest rate of 8.25%, was purchased for approximately $51,163 in cash and $5,100 in Common Units (256,572 Common Units, a 1.1% limited partner interest in the Operating Partnership at December 31, 1997). Included in the purchase the Company acquired an option, exercisable until July 30, 2000, to acquire the existing $85.0 million second mortgage on the property for 220,000 Common Units (5,000 Common Units per month during the option period which are non-refundable) of the Operating Partnership (subject to certain adjustments as defined) and 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. The Company will also provide property management and leasing services for the property pursuant to a 10-year management and leasing contract. 4. DEFERRED COSTS Deferred costs consist of the following:
DECEMBER 31 ---------------------- 1997 1996 ---------- ---------- Financing costs....................................................... $ 5,572 $ 6,757 Leasing costs......................................................... 23,182 35,386 ---------- ---------- 28,754 42,143 Less: Accumulated amortization........................................ (282) (15,260) ---------- ---------- $ 28,472 $ 26,883 ---------- ---------- ---------- ----------
F-16 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 5. MORTGAGE NOTES AND BONDS PAYABLE
DECEMBER 31 ------------------------- 1997 1996 ------------- ---------- Line-of-credit (Line-of-Credit) with various financial institutions, collateralized by the 77 West Wacker Building with maximum draw of $235,000, bearing interest at rates ranging from the higher of prime rate or federal funds rate plus 1/2%, to Eurodollar rate plus 1.2% to 1.5%, per annum (7.23% at December 31, 1997), as defined, with interest payable monthly and principal due November 2000. The Line-of-Credit has also been used to provide letters-of-credit totaling $75,848 as of December 31, 1997, on bonds payable described below........................................................ $ 159,000 $ -- Mortgage note payable to a financial institution, collateralized by 1001 Technology Way, interest at 8.3% per annum with principal and interest payable monthly through October 2011......................................................................... 6,412 -- Mortgage notes payable to a financial institution, collateralized by various of the New Enties interest at 7.19% per annum with interest payable monthly and principal due April 30, 1998 (See Note 17.)........................................................ 83,500 -- Mortgage note payable to a financial institution collateralized by Continental Towers, interest at prime rate (8.50% at December 31, 1997) per annum with principal and interest payable monthly through January 1998........................................ 698 -- Mortgage notes payable to various commercial lenders(A)................................ -- 229,361 Mortgage notes payable to various financial institutions, interest at variable rate of prime plus 1/2% per annum and a fixed rate of 7.375% per annum with principal and interest payable monthly through October 1998........................................ -- 6,525 ------------- ---------- $ 249,610 $ 235,886 ------------- ---------- ------------- ---------- Bonds payable: Variable rate taxable and tax-exempt bonds issued by various state and local government authorities(B),(C)...................................................... $ 74,450 $ 74,450 ------------- ---------- ------------- ----------
- ------------------------ (A) 77 West Wacker had entered into a mortgage note agreement (Agreement) with a consortium of commercial lenders providing a maximum loan of $230,000 (Loan) and was collateralized by a first mortgage on the 77 West Wacker Building. The Loan was repaid with proceeds of the Offering and Private Placement. Under the terms of the Agreement, 77 West Wacker made monthly interest-only payments. Interest was calculated using certain variable rate indices, as defined. To reduce the impact of increases in interest rates, 77 West Wacker also entered into an interest rate swap agreement with affiliates of one of 77 West Wacker's Third Party owner (Counterparties) for the outstanding principal balance on the Agreement up to a maximum principal amount of $230,000. Under the terms of the interest rate swap agreement, 77 West Wacker paid the Counterparties interest monthly at a fixed rate F-17 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 5. MORTGAGE NOTES AND BONDS PAYABLE (CONTINUED) of 10% per annum. 77 West Wacker 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 Agreement. 77 West Wacker 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 to November 16, 1997. (B) Permanent financing for the development of certain industrial properties has been provided by $48,150 of tax exempt industrial development revenue bonds (Bonds). (See Note 6--on December 13, 1995, and on May 20, 1996, the Bonds were acquired by independent third party financial institutions from an affiliate of PGI.) The Bonds mature on June 1, 2022. Under the terms of the Bond loan agreements, the borrowing partnerships are to make interest-only payments monthly, calculated using a floating rate determined by the Remarketing Agent of the Bonds. The rates ranged from 3.35% to 4.75% during 1997, 2.85% to 4.40% during 1996, and 5.25% to 5.51% during 1995. The rate at December 31, 1997, was 4.40% and at December 31, 1996, was 4.40%. 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 request of the borrowing Partnership. Beginning November 17, 1997, the Bonds were collateralized by letters of credit totaling $48,918 from the Line-of-Credit. From May 1996 to November 16, 1997, the Bonds were collateralized by letters of credit that required the borrowing PGI Partnerships 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 shall immediately remarket the Bonds. In the event the remarketing agent fails to remarket any Bonds, the borrowing Partnerships are obligated to purchase those Bonds. The remarketing agent receives a fee of .11% per annum of the outstanding Bonds balance, payable quarterly in advance. (C) Permanent financing for the development of certain office properties has been provided by $26,300 of tax exempt industrial revenue bonds (IRBs). The IRB's mature on December 1, 2014. Under the terms of the IRB agreements, the borrowing Partnerships are to make interest-only payments monthly, calculated using a floating rate determined by the remarketing agent of the IRBs. The rates ranged from 3.35% to 3.85% during the 1997, 3.40% to 4.05% during 1996, and 3.40% to 4.50% during 1995. The rates at December 31, 1997, were 3.85% and at December 31, 1996, were 3.50%. Under certain conditions, the interest rates on the IRBs may be converted to a fixed rate at the request of the borrowing partnerships. The IRBs are collateralized by letters of credit totaling $26,930 from the Line-of-Credit. Under the terms of the IRB agreements, the bondholders have the option to require the borrowing Partnerships to purchase any of its IRBs on the 15th day of any month while the IRBs are outstanding. Upon the exercise of the bondholders' option to purchase the IRBs, the remarketing agent shall F-18 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 5. MORTGAGE NOTES AND BONDS PAYABLE (CONTINUED) immediately remarket the IRBs. In the event the remarketing agent fails to remarket the IRBs, the borrowing Partnerships are obligated to purchase those IRBs. Total interest paid on the mortgage notes payable and bonds payable was $1,855 and $25,731 for the period from November 17, 1997 to December 31, 1997, and the period from January 1, 1997 to November 16, 1997, respectively, and $25,643 and $25,490 for the years ended December 31, 1996 and 1995, respectively. 6. MORTGAGE NOTES AND BONDS PAYABLE--AFFILIATES
DECEMBER 31 -------------------- 1997 1996 --------- --------- Mortgage note payable--Limited partner, collateralized by 801 Technology Way, interest at 7.0%, per annum, with interest principal and interest due January 2, 1998........................... $ 3,984 $ -- Mortgage notes payable--Affiliate(A)............................................................ -- 99,357 Mortgage note payable--Affiliate; interest at 9.5% per annum with interest payable quarterly and principal and accrued interest due on maturity date of March 7, 1998.......................... -- 290 --------- --------- $ 3,984 $ 99,647 --------- --------- --------- --------- Bonds payable--Affiliate: Variable rate taxable and tax-exempt bonds issued by state and local government authorities(B) $ -- $ 12,000 --------- --------- --------- ---------
- ------------------------ (A) 77 West Wacker had entered into a 11% subordinate loan agreement with affiliates of its Third Party owner for a maximum disbursement amount of $60,000. A portion of the loan was repaid ($4,895) with proceeds of the Offering and the Private Placement, and a portion was considered repaid from the swap agreement between PGI and the Third Party related to the Loan in Note 5 ($42,584 was recorded as a contribution from PGI in the period from January 1, 1997 to 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 to November 16, 1997. As of December 31, 1996 and 1995, $56,787 and $50,896, respectively, has been funded under this agreement, and $40,873 and $30,871, respectively, of accrued interest and $1,697 and $1,175, respectively, of standby loan fees, have been added to the principal balance in accordance with the terms of the agreement. The Third Party owner has provided a guarantee of 77 West Wacker's first mortgage note payable and charges 77 West Wacker a standby loan fee, as defined, which is included as a component of interest expense. Standby loan fees incurred were $460 for the period from January 1, 1997 to November 16, 1997, and $522 and $498 for the years ended December 31, 1996 and 1995, respectively, (included in general and administrative expenses in the combined statements of operations of the Predecessor). Under the terms of the subordinate loan agreement, 77 West Wacker was not required to make any periodic principal or interest payments prior to the date of stabilization, as defined; unpaid interest is added to the principal balance monthly. Subsequent to the date of stabilization, as F-19 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 6. MORTGAGE NOTES AND BONDS PAYABLE--AFFILIATES (CONTINUED) defined, monthly payments of interest only are payable to the extent of available cash flow, as defined, during the operating period, with the entire outstanding balance due upon maturity. (B) Permanent financing for the development of certain industrial and Private Placement properties has been provided by $12,000 of tax exempt bonds which were converted to taxable debt industrial development revenue bonds (IDBs). The Bonds mature on June 1, 2022. On November 17, 1997, PGI contributed the related bond receivables held by an affiliate as part of its contribution to the Operating Partnership. On December 13, 1995, $60,150 of IDBs were acquired by an affiliate of PGI from the Third Party. On December 13, 1995, $28,300 and on May 20, 1996, $19,850 of the IDBs were sold to independent third party financial institutions by the affiliate of PGI. Under the terms of the IDB loan agreement, the borrowing Partnerships are to make interest-only payments semi-annually, calculated using a floating rate determined by the Remarketing Agent of the IDBs. The rates were 5.501% during 1997, 3.90% to 5.501% during 1996, and 5.25% to 5.51% during 1995. The rates at December 31, 1997, were 5.501% and at December 31, 1996, were 5.501%. The maximum annual interest rate on the IDBs is 13%. Under certain conditions, the interest rate on the IDBs may be converted to a fixed rate at the request of the respective borrowing Partnership. 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 shall immediately remarket the IDBs. In the event the remarketing agent fails to remarket any IDBs, the borrowing Partnership is obligated to purchase those IDBs. The remarketing agent receives a fee of .11% per annum of the outstanding IDB balance, payable quarterly in advance. Included in the extraordinary item -- extinguishment of debt in the period from January 1, 1997 to November 16, 1997, are $1,000 in loan termination fees paid to an affiliate of the Third Party and the write-off of unamortized deferred financing of $165. In 1995, mortgage notes payable to the Third Party totaling $2,716 and accrued interest of $200 were forgiven by the Third Party. The notes bore interest at 8.5%, payable quarterly from available cash flow. Total interest paid on the mortgage notes payable and bonds payable to affiliates was $32 for the period from January 1, 1997 to November 16, 1997, respectively, and $1,256 and $3,538 for the years ended December 31, 1996 and 1995, respectively. No interest was paid for the period from November 17, 1997 to December 31, 1997. 7. FUTURE MINIMUM LEASE INCOME AND PAYMENTS The Company has entered into lease agreements 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 39% and 57%, 60% and 65%, of the rental revenue for the period from November 17, 1997 to December 31, 1997, and the period from January 1, 1997 to November 16, 1997, and for the years ended December 31, 1996 and 1995, respectively, was received from four tenants. F-20 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 7. FUTURE MINIMUM LEASE INCOME AND PAYMENTS (CONTINUED) The total future minimum rentals to be received under such noncancelable operating leases executed through December 31, 1997, exclusive of tenant reimbursements and contingent rentals, are as follows:
YEAR ENDED DECEMBER 31 AMOUNT - -------------------------------------------------------------- ---------- 1998.......................................................... $ 56,322 1999.......................................................... 52,738 2000.......................................................... 47,232 2001.......................................................... 40,373 2002.......................................................... 35,763 Thereafter.................................................... 145,908 ---------- $ 378,336 ---------- ----------
Future minimum rentals include amounts to be received from the Company totaling $2,546 and from PGI totaling $3,710. In addition, as a part of lease agreement entered into with certain tenants of 77 West Wacker Building, 77 West Wacker assumed the tenants' leases at other properties and subsequently executed subleases for certain of the assumed lease space. Net future minimum rental payments due under leases assumed and subleases executed through December 31, 1997, are as follows:
YEAR ENDED DECEMBER 31 AMOUNT - ----------------------------------------------------------------- --------- 1998............................................................. $ 1,210 1999............................................................. 1,235 2000............................................................. 1,263 2001............................................................. 1,293 2002............................................................. 757 --------- $ 5,758 --------- ---------
During 1995, a tenant of the 77 West Wacker Building experienced financial difficulties and began negotiations with 77 West Wacker to reduce its leased space, resulting in an amendment to the tenant's lease agreement. As a result of the lease amendment, 77 West Wacker wrote-off $13,373 of deferred tenant costs, representing $10,296 of tenant receivables related to straight-lining of the tenant's rental revenue, $2,257 of deferred leasing costs, and $820 of tenant improvements. The same tenant continued to experience financial difficulty and in 1997 defaulted on certain 1997 rental payments. As a result of the default, as of December 31, 1996, 77 West Wacker wrote-off $3,081 of deferred tenant costs, representing $940 of tenant receivables related to straight-lining of the tenant's rental revenue and $2,141 of deferred leasing costs. In early November 1997, 77 West Wacker reached an agreement with the tenant to terminate the lease. During the period from January 1, 1997 to November 16, 1997, 77 West Wacker recognized revenue from this tenant only to the extent cash was received. F-21 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 8. 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, 1997, 2,000,000 Cumulative Convertible Preferred Shares of Beneficial Interest with a $0.01 par value were outstanding. The Preferred Shares have a liquidation preference equivalent to $20.00 per share plus the amount equal to any accrued and unpaid dividends thereon ("Liquidation Preference"). Dividends on the Preferred Shares are payable quarterly at the greater of: (i) (x) an annual rate equal to the product of the Issue Price ($20.00) multiplied by 0.07% for Dividend Periods ending before November 17, 1998 (The Company declared a dividend of $0.173 per Preferred Share on December 31, 1997.), and (y) an annual rate equal to the product of the Issue Price multiplied by 0.075% for dividend periods ending after November 17, 1998, or (ii) the regular cash dividends (determined on each dividend payment date) on the Common Shares, or portion thereof, into which a Preferred Share is convertible. The amount of dividends referred to in clause (i) above payable for each full dividend period on the Preferred Shares, other than the dividend period commencing October 1, 1998, shall be computed by dividing the annual dividend rate by four. For the dividend period commencing October 1, 1998, the amount of dividends through November 17, 1998, on the Preferred Shares shall be computed by dividing the product of the Issue Price times 0.07% by 365 and multiplying the result by number of days from October 1, 1998 through November 17, 1998 and dividends from November 18, 1998 through December 31, 1998, on the Preferred Shares shall be computed by dividing the product of the Issue Price times .075% by 365 and multiplying the result by the number of days from November 18, 1998 through December 31, 1998. The amount of dividends referred to in clause (ii) above shall equal the number of Common Shares, or portion thereof, into which a Preferred Share will be convertible on or after the conversion date as defined, multiplied by the most current quarterly dividend on a Common Share on or before the applicable dividend payment date. The Preferred Shares are convertible into shares of Common Shares, at the shareholders' option, upon the earliest to occur of: (i) September 17, 1998, (ii) the first day on which a change of control occurs, as defined, (iii) the occurrence of a REIT termination event, as defined, or (iv) such date as determined by the Company (the Conversion Date), to convert all or any portion of such shares (or such shares as determined by the Company if pursuant to clause (iv) above) into the number of fully paid and non-assessable Common Shares obtained by dividing the aggregate Liquidation Preference Amount of such shares by the conversion price by surrendering such shares to be converted. In the case of Preferred Shares called for redemption, conversion rights shall expire at the close of business on the fifth business day prior to the redemption date fixed for such redemption. The Company has the right to redeem the Preferred Shares beginning on and after November 17, 2007, in cash equal to 100% of the Liquidation Preference. Notwithstanding, anything above to the contrary, beginning on June 17, 1998, and ending on September 17, 1998, the Company, at its option, may redeem all, but not less than all, of the Preferred Shares at a premium (the "Special Redemption Price") calculated to result in a total internal rate of return to the holder (including the receipt of dividends and calculated on an annual compounded basis as if the holder had owned the shares since the Issue Date) of 20.0%. The Special Redemption Price may be paid, at the Company's option, in any combination of: (i) cash, and (ii) Common Shares valued at fair market value; provided, that the cash portion of the Special Redemption Price shall equal at least 75.0% of the Special Redemption Price. F-22 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 8. PREFERRED SHARES (CONTINUED) The holders of the 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) payment of the dividend average. 9. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted: net income available per weighted-average common share of beneficial interest for the period from November 17, 1997 to December 31, 1997: Numerator: Net income available to common shareholders................... $ 447 --------- --------- Denominator: Weighted-average common shares of beneficial interest......... 12,593,000 --------- --------- Net income available per weighted-average common share of beneficial interest--basic and diluted:....................... $ .04 --------- ---------
Options to purchase 1,223,000 Common Shares at $20.00 per share were outstanding during the period from November 17, 1997 to December 31, 1997 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The Company had 10,250,882 Common Units outstanding during the period from November 17, 1997 to December 31, 1997, of which 9,323,782 may be converted into Common Shares, after one year from the completion of the Offering at the option of the Company. The Convertible Common Units, on a one for one basis, were not included in the computation of diluted earnings per share because the conversion would be antidilutive. The Company had 2,000,000 Preferred Shares outstanding during the period from November 17, 1997 to December 31, 1997 but were not included in the computation of diluted earnings per share because the conversion would be antidilutive. 10. 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 of the Company, its subsidiaries, the Operating Partnership, the Services Company and Company-owned partnerships. The Plan also permits the grant of stock options to non-employee Trustees. Under the Plan, up to 1,850,000 Common Shares may be issued of 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, F-23 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) will be 200,000. This limit will apply regardless of whether such compensation is paid Common Share of its cash. The effects on unaudited pro forma net income and pro forma earnings per common share for the period from November 17, 1997 to December 31, 1997of 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 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. Under the Plan, each person serving as a Trustee on November 17, 1997, received options to acquire 5,000 shares. 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. On November 17, 1997, each of the seven Trustees received options to acquire 5,000 shares at $20.00 per share (the closing price on the day of the grant of the options). The Board administers the Plan and has the authority to determine, among other things, the individuals to be granted options, the exercise price at which shares may be acquired, the number of shares subject to options and the vesting requirements and the exercise period of each option. The Board 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 Board granted options to purchase a total of 1,113,000 shares at an exercise price of $20.00 per share (the closing price on the day of the grant of the options) to various executives and employees of the Company. Options for the 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 a consulting agreement between the Company and an executive of the Company, the Board granted options to purchase 75,000 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. The unaudited pro forma information regarding net income and earnings per share is required by SFAS No. 123, 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 1997; risk free interest rate of 5.41%, dividend yield of 6.7%; volatility factor of the expected market price of the Company's common stock of .156; and a weighted-average expected life of the options of ten years. The unaudited pro forma expense would be $69 ($0.01 per Common Share) for the period from November 17, 1997 to December 31, 1997. 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. F-24 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of the options granted under the Plan. A summary of the Company's stock option activity, and related information for the period from November 17, 1997 through December 31, 1997 follows:
WEIGHTED SHARES AVERAGE SUBJECT TO EXERCISE OPTION PRICE PER SHARE ---------- --------------- Initial options granted......................................... 1,223,000 $ 20.00 Options canceled................................................ -- -- ---------- ------ Balance at December 31, 1997.................................... 1,223,000 $ 20.00 ---------- ------ ---------- ------
At December 31, 1997, no options were exercised and options on 627,000 shares were available for future grant. Exercise prices for options outstanding at December 31, 1997 were $20.00 per share. The remaining weighted-average contractual life of these options was 9.88 years. The weighted-average grant date fair value of all options granted during the period is $1.39. 11. RELATED PARTY TRANSACTIONS The Company owns 100% of the nonvoting preferred stock of the Service Company which has an initial carrying value of $425 and has provided a loan in the amount of $4,800 to the Service Company (included in due from affiliates at December 31, 1997). The loan bears interest at 11% per annum, with interest payable monthly and principal due November 2007. During the period from November 17, 1997 to December 31, 1997, the Company recorded interest income of $66 (included in due from affiliates) related to the loan and $19, representing the Company's share of the Service Company's loss from operations for the same period. (The net of $47 is included in other income.) No interest income was received during the period. In addition, the Company has made non-interest bearing advances to the Service Company, of which approximately $392 is outstanding at December 31, 1997 and included in due from affiliates. F-25 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) RELATED PARTY TRANSACTIONS (CONTINUED) In connection with the leasing and management of the Prime Properties, PGI was entitled to payments and fees for services performed. Such amounts incurred during the period from January 1, 1997 to November 16, 1997, and for the years ended December 31, 1996 and 1995, are summarized as follows:
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 1997 TO 31 NOVEMBER 16, -------------------- 1997 1996 1995 ------------- --------- --------- Property management fee(a).................................. $ 1,238 $ 1,429 $ 1,364 Administration fees(b)...................................... 463 468 730 Construction management(c).................................. -- 102 115 Legal fees(d)............................................... 271 127 77 Leasing fees(e)............................................. 2 19 280 Reimbursables(f)............................................ 252 184 352 Asset management fee(g)..................................... 110 132 132
- ------------------------ (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 entitled to a construction management fee equal to 3% of construction costs. (d) PGI was reimbursed for reasonable legal and accounting expenses incurred in connection with the operations of the Partnerships. Amounts are included in general and administrative expenses in the combined financial statements of the Predecessor. (e) 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. (f) PGI was entitled to reimbursement for expenses paid for the benefit of the Partnerships. Amounts are included in general and administrative expenses in the combined financial statements of the Predecessor. (g) PGI was entitled to an annual fee from providing asset management services to the Partnership which is payable from available cash flows. Amounts are included in property and asset management fees to affiliates in the combined financial statements of the Predecessor. Amounts due to affiliates are for amounts due for advances made by affiliates. Amounts due from affiliates are for advances made by the Partnership to affiliates. Amounts due from and due to affiliates bore interest at prime plus 2% and were payable upon demand. Any unpaid amounts due to affiliates or F-26 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) RELATED PARTY TRANSACTIONS (CONTINUED) amounts due from affiliates as of November 16, 1997, have been reflected as distributions to contributions from PGI. Average balances of amounts due from and due to affiliates for the period from January 1, 1997 to November 16, 1997, and for the years ended December 31, 1996 and 1995, were summarized as follows:
PERIOD FROM YEAR ENDED DECEMBER JANUARY 1, 1997 31 TO -------------------- NOVEMBER 16, 1997 1996 1995 ----------------- --------- --------- Due from affiliates.................................... $ 1,447 $ 4,323 $ 3,251 Due to affiliates...................................... 354 821 1,107
12. INSURANCE SETTLEMENT On July 16, 1994, the Enterprise Center I property was destroyed by a fire. During 1995, ECI received a final insurance settlement of $10,871 related to the fire. The proceeds settled an insurance receivable of $1,755 recorded at December 31, 1994, and additional costs of $1,859 incurred in 1995 related to the cleanup of the property. ECI believes that all material costs of the fire were incurred prior to December 31, 1995. The remaining proceeds of $7,257 have been recorded as revenue in the 1995 combined statement of operations. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107) and No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments requires disclosures 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 following methods and assumptions were used by the Company and the PGI Partnerships in estimating their fair value disclosures for financial instruments. CASH AND CASH EQUIVALENTS The carrying amount of cash and cash equivalents reported in the consolidated and combined balance sheets approximates its fair value. The Company maintains its cash and cash equivalents at 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. Management believes that the risk is not significant. F-27 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) MORTGAGE NOTES AND BONDS PAYABLE The carrying amount of the Company's and the PGI Partnerships' variable and fixed rate borrowings approximate fair value based on the current borrowing rate for similar types of borrowing arrangements. The carrying amount of accrued interest in the consolidated and combined balance sheets approximates fair value. 14. COMMITMENTS AND CONTINGENCIES The Company is a defendant in legal actions arising during the normal course of business. Management believes that the ultimate outcome of those actions will not materially affect the Company's consolidated financial position. All of the Prime Properties and New Entities 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. Management is aware of contamination at certain of the industrial properties included in the Prime 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. However, the outcome of the lawsuits cannot yet be determined and the actual cost to be incurred by the Company cannot yet be determined. During 1997, the PGI Partnerships recorded a liability of $3,205 (included in accounts payable and accrued expenses at December 31, 1997). PGI has contractually agreed to indemnify the Company from any environmental liabilities the Company may incur and has pledged $1,000 and approximately 485,000 partnership units in an operating partnership that can be converted to common shares of a publicly traded real estate investment trust to cover these costs. 15. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS The accompanying unaudited Pro Forma Condensed Consolidated Statements of Operations of the Company are presented as if, at January 1, 1996, (i) the Company had completed the Offering, the Private Placement, and the Overallotment and contributed the net proceeds to the Operating Partnership, (ii) PGI and Contributors had contributed certain of their respective properties and operations (the Contribution Properties) to the Operating Partnership, (iii) the Operating partnership had completed the sale of Common Units to Primestone, (iv) the Operating Partnership acquired various office and industrial properties (the Acquisition Properties), and Continental Management Business from various third parties, and (v) the Operating Partnership repaid debt on certain of the Contribution Properties. The unaudited pro forma Condensed Consolidated Statements of Operations should be read in conjunction with unaudited Pro Forma condensed consolidated financial statements and all of the historical financial statements contained in the Prospectus. In management's opinion, all adjustments necessary to reflect the effects of the Offering and the Private Placement have been made. The unaudited Pro Forma Condensed Consolidated Statements of Operations of the Company are not necessarily indicative of what the actual results of operations would have been assuming the Offering, F-28 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 15. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) the Private Placement, and the Overallotment had occurred at the dates indicated above, nor do they purport to represent the future results of operations of the Company. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ Total revenue.................................................... $ 100,308 $ 98,128 ------------ ------------ ------------ ------------ Net income....................................................... $ 7,725 $ 6,243 ------------ ------------ ------------ ------------ Earnings per common share........................................ $ 0.60 $ 0.48 ------------ ------------ ------------ ------------
16. REAL ESTATE AND ACCUMULATED DEPRECIATION
COST CAPITALIZED INITIAL COST TO SUBSEQUENT TO GROSS AMOUNT CARRIED COMPANY ACQUISITION AT DECEMBER 31, 1997 ---------------------- ---------------------- --------------------------------- DECEMBER 31, BUILDING BUILDING BUILDING 1997 AND AND AND ------------- IMPROVE- IMPROVE- IMPROVE- DESCRIPTION ENCUMBRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL - ------------------ ------------- --------- ----------- --------- ----------- --------- ----------- --------- OFFICE 77 W.Wacker Bldg.. $ 159,000 $ 17,637 $ 162,755 $ -- $ -- $ 17,637 $ 162,755 180,392 Nashville Office Bldg............ 4,800 1,530 7,072 -- -- 1,530 7,072 8,602 Professional Plaza........... 9,000 -- 7,090 -- -- -- 7,090 7,090 Old Kingston...... 3,500 378 2,808 -- -- 378 2,808 3,186 Two Center Square.......... 9,000 -- 7,379 -- -- -- 7,379 7,379 Triad Parking Facility........ -- 507 1,046 -- -- 507 1,046 1,553 Hammond Enterprise Center.......... -- 26 614 -- -- 26 614 640 Chicago Enterprise Center.......... -- 775 975 -- -- 775 975 1,750 1990 Algonquin Road(1)......... -- 1,554 6,393 -- -- 1,554 6,393 7,947 2010 Algonquin Road(1)......... -- 509 2,044 -- -- 509 2,044 2,553 555 Huehl Road(1)......... -- 1,291 5,164 -- -- 1,291 5,164 6,455 1669 Woodfield Road(1)......... -- 1,962 7,853 -- -- 1,962 7,853 9,815 475 Superior Avenue.......... -- 2,700 10,801 -- -- 2,700 10,801 13,501 2205-2255 Enterprise Drive(1)........ -- 2,304 9,259 -- -- 2,304 9,259 11,563 280 Shuman Blvd... -- 1,264 5,056 -- -- 1,264 5,056 6,320 Continental Towers.......... 698 21,831 87,324 -- -- 21,831 87,324 109,155 2675 Mayfair...... -- 1,613 6,450 -- -- 1,613 6,450 8,063 DECEMBER 31, 1997 --------------- DATE OF ACCUMULATED ACQUISITION(A) DESCRIPTION DEPRECIATION(1) CONTRIBUTION(C) - ------------------ --------------- --------------- OFFICE 77 W.Wacker Bldg.. $ (835) 1997(C) Nashville Office Bldg............ (29) 1997(C) Professional Plaza........... (71) 1997(C) Old Kingston...... (25) 1997(C) Two Center Square.......... (74) 1997(C) Triad Parking Facility........ (5) 1997(C) Hammond Enterprise Center.......... (4) 1997(C) Chicago Enterprise Center.......... (162) 1997(C) 1990 Algonquin Road(1)......... (19) 1997(A) 2010 Algonquin Road(1)......... (6) 1997(A) 555 Huehl Road(1)......... (27) 1997(A) 1669 Woodfield Road(1)......... (24) 1997(A) 475 Superior Avenue.......... (29) 1997(A) 2205-2255 Enterprise Drive(1)........ (27) 1997(A) 280 Shuman Blvd... (16) 1997(A) Continental Towers.......... (126) 1997(A) 2675 Mayfair...... (1) 1997(A)
F-29 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 16. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
COST CAPITALIZED INITIAL COST TO SUBSEQUENT TO GROSS AMOUNT CARRIED COMPANY ACQUISITION AT DECEMBER 31, 1997 ---------------------- ---------------------- --------------------------------- DECEMBER 31, BUILDING BUILDING BUILDING 1997 AND AND AND ------------- IMPROVE- IMPROVE- IMPROVE- DESCRIPTION ENCUMBRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL - ------------------ ------------- --------- ----------- --------- ----------- --------- ----------- --------- INDUSTRIAL ECEC(2)........... $ -- $ 27 $ 533 $ -- $ -- $ 27 $ 553 $ 560 EC I.............. 2,900 595 -- -- -- 595 -- 595 EC II............. 5,000 18 2,360 -- -- 18 2,360 2,378 EC III............ 4,500 20 7,038 -- -- 20 7,038 7,058 EC IV............. 2,600 11 1,217 -- -- 11 1,217 1,228 EC V.............. 5,000 81 2,883 -- -- 81 2,883 2,964 EC VI............. 4,900 101 2,936 -- -- 101 2,936 3,037 EC VII............ 7,200 548 4,968 -- -- 548 4,968 5,516 ECVIII............ 7,000 151 2,493 -- -- 151 2,493 2,644 EC IX............. 4,750 269 1,127 -- -- 269 1,127 1,396 EC X.............. 4,300 275 2,836 -- -- 275 2,836 3,111 Arlington Heights I............... -- 617 2,638 -- -- 617 2,638 3,255 Arlington Heights II.............. -- 456 2,062 -- -- 456 2,062 2,518 Arlington Heights III............. -- 452 1,938 -- -- 452 1,938 2,390 2160 McGraw Rd.... -- 904 3,617 -- -- 904 3,617 4,521 4849 Groveport.... -- 507 2,030 -- -- 507 2,030 2,537 2400 McGraw Rd.... -- 348 1,392 -- -- 348 1,392 1,740 5160 Blazer Memorial Pkwy... -- 470 1,880 -- -- 470 1,880 2,350 600 London Rd..... -- 223 890 -- -- 223 890 1,113 4411 Marketing Place........... -- 445 1,780 -- -- 445 1,780 2,225 1001 Technology Way............. 6,412 1,909 7,637 -- -- 1,909 7,637 9,546 801 Technology Way............. 3,984 813 3,253 -- -- 813 3,253 4,066 3818 Grandville/1200 Northwestern(1)... -- 2,125 8,505 -- -- 2,125 8,505 10,630 306-310 Era Drive(1)........ -- 719 2,878 -- -- 719 2,878 3,597 1301 Ridgeview Drive(1)........ -- 2,287 9,148 -- -- 2,287 9,148 11,435 515 Huehl Road/500 Lindburg(1)..... -- 1,775 7,100 -- -- 1,775 7,100 8,875 455 Academy Drive(1)........ -- 754 3,018 -- -- 754 3,018 3,772 1051 N. Kirk Road(1)......... -- 911 3,645 -- -- 911 3,645 4,556 4211 Madison Street(1)....... -- 690 2,759 -- -- 690 2,759 3,449 200 E. Fullerton(1).... -- 525 2,100 -- -- 525 2,100 2,625 350 Randy Road(1)......... -- 267 1,063 -- -- 267 1,063 1,330 4300,4248,4250 Madison Street(1)....... -- 1,147 4,588 -- -- 1,147 4,588 5,735 370 Carol Lane(1)......... -- 527 2,107 -- -- 527 2,107 2,634 388 Carol Lane(1)......... -- 332 1,329 -- -- 332 1,329 1,661 941-961 Wiegel Drive(1)........ -- 3,268 13,060 -- -- 3,268 13,060 16,328 342-346 Carol Lane(1)......... -- 600 2,398 -- -- 600 2,398 2,998 DECEMBER 31, 1997 --------------- DATE OF ACCUMULATED ACQUISITION(A) DESCRIPTION DEPRECIATION(1) CONTRIBUTION(C) - ------------------ --------------- --------------- INDUSTRIAL ECEC(2)........... $ (4) 1997(C) EC I.............. (4) 1997(C) EC II............. (14) 1997(C) EC III............ (41) 1997(C) EC IV............. (16) 1997(C) EC V.............. 22 1997(C) EC VI............. (20) 1997(C) EC VII............ (51) 1997(C) ECVIII............ -- 1997(C) EC IX............. (13) 1997(C) EC X.............. (44) 1997(C) Arlington Heights I............... (28) 1997(C) Arlington Heights II.............. (19) 1997(C) Arlington Heights III............. (18) 1997(C) 2160 McGraw Rd.... (47) 1997(A) 4849 Groveport.... (26) 1997(A) 2400 McGraw Rd.... (18) 1997(A) 5160 Blazer Memorial Pkwy... (24) 1997(A) 600 London Rd..... (11) 1997(A) 4411 Marketing Place........... (23) 1997(A) 1001 Technology Way............. (40) 1997(A) 801 Technology Way............. (17) 1997(A) 3818 Grandville/1200 Northwestern(1)... (42) 1997(A) 306-310 Era Drive(1)........ (15) 1997(A) 1301 Ridgeview Drive(1)........ (48) 1997(A) 515 Huehl Road/500 Lindburg(1)..... (37) 1997(A) 455 Academy Drive(1)........ (16) 1997(A) 1051 N. Kirk Road(1)......... (11) 1997(A) 4211 Madison Street(1)....... (9) 1997(A) 200 E. Fullerton(1).... (7) 1997(A) 350 Randy Road(1)......... (3) 1997(A) 4300,4248,4250 Madison Street(1)....... (14) 1997(A) 370 Carol Lane(1)......... (7) 1997(A) 388 Carol Lane(1)......... (4) 1997(A) 941-961 Wiegel Drive(1)........ (41) 1997(A) 342-346 Carol Lane(1)......... (7) 1997(A)
F-30 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 16. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
COST CAPITALIZED INITIAL COST TO SUBSEQUENT TO GROSS AMOUNT CARRIED COMPANY ACQUISITION AT DECEMBER 31, 1997 ---------------------- ---------------------- --------------------------------- DECEMBER 31, BUILDING BUILDING BUILDING 1997 AND AND AND ------------- IMPROVE- IMPROVE- IMPROVE- DESCRIPTION ENCUMBRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL - ------------------ ------------- --------- ----------- --------- ----------- --------- ----------- --------- 343 Carol Lane(1)......... $ -- $ 350 $ 1,398 $ -- $ -- $ 350 $ 1,398 $ 1,748 371-385 N. Gary Avenue(1)....... -- 218 871 -- -- 218 871 1,089 350 N. Mannheim Road(1)......... -- 81 325 -- -- 81 325 406 1600-1700 167th Street(1)....... -- 1,073 4,291 -- -- 1,073 4,291 5,364 1301 E. Tower Road(1)......... -- 1,005 4,020 -- -- 1,005 4,020 5,025 4343 Commerce Court(1)........ -- 5,370 21,480 -- -- 5,370 21,480 26,850 11039 Gage Avenue(1)....... -- 191 767 -- -- 191 767 958 11045 Gage Avenue(1)....... -- 1,274 5,092 -- -- 1,274 5,092 6,366 1401 S. Jefferson(1).... -- 171 685 -- -- 171 685 856 4100 Madison Street(1)....... -- 42 169 -- -- 42 169 211 4160-4190 Madison Street(1)....... -- 931 3,708 -- -- 931 3,708 4,639 550 Kehoe Blvd.(1)........ -- 686 2,743 -- -- 686 2,743 3,429 ------------- --------- ----------- --------- ----------- --------- ----------- --------- Total............. $ 244,544 $ 92,440, $ 496,839 $ -- $ -- $ 92,440 $ 496,839 $ 589,279 ------------- --------- ----------- --------- ----------- --------- ----------- --------- ------------- --------- ----------- --------- ----------- --------- ----------- --------- DECEMBER 31, 1997 --------------- DATE OF ACCUMULATED ACQUISITION(A) DESCRIPTION DEPRECIATION(1) CONTRIBUTION(C) - ------------------ --------------- --------------- 343 Carol Lane(1)......... $ (4) 1997(A) 371-385 N. Gary Avenue(1)....... (3) 1997(A) 350 N. Mannheim Road(1)......... (1) 1997(A) 1600-1700 167th Street(1)....... (13) 1997(A) 1301 E. Tower Road(1)......... (13) 1997(A) 4343 Commerce Court(1)........ (67) 1997(A) 11039 Gage Avenue(1)....... (2) 1997(A) 11045 Gage Avenue(1)....... (16) 1997(A) 1401 S. Jefferson(1).... (2) 1997(A) 4100 Madison Street(1)....... (4) 1997(A) 4160-4190 Madison Street(1)....... (11) 1997(A) 550 Kehoe Blvd.(1)........ (9) 1997(A) --------------- Total............. $ (2,338) --------------- ---------------
- ------------------------ (1) These properties are collateral for $83,500 in mortgage notes payable. See Note 5. The aggregate gross cost of the property included above, for federal income tax purposes, approximated $672,618 as of December 31, 1997. The following table reconciles the historical cost of the Company from November 17, 1997 to December 31, 1997.
PERIOD FROM NOVEMBER 17, 1997 TO DECEMBER 31, 1997 ------------ Additions during period -- Contributions, acquisition, improvements, etc............................ $ 589,279 ------------ Balance, close of period............................................................................ $ 589,279 ------------ ------------
F-31 PRIME GROUP REALTY TRUST (THE COMPANY) AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY) NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND UNIT AMOUNTS) 16. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) The following table reconciles the accumulated depreciation from November 17, 1997 to December 31, 1997.
PERIOD FROM NOVEMBER 17, 1997 TO DECEMBER 31, 1997 ------------ Additions during period--Depreciation and amortization for the period............................... $ 2,338 ------------ Balance, close of period............................................................................ $ 2,338 ------------ ------------
17. SUBSEQUENT EVENTS On January 14, 1998, the Company purchased 33 North Dearborn, an office building, located in Chicago, Illinois, for a purchase price of $32,250. On January 23, 1998, the Company paid a distributions of $.173 per Preferred Share and $.166 per Common Share, to stockholders of record on December 31, 1997. On January 29, 1998, the Company refinanced a portion of certain mortgage notes payable ($27,500 of the total face value of $83,500--see Note 5). The amount refinanced, with a new mortgage note payable with an initial principal balance of $29,430 (Refinanced Note). The Refinanced Note has a maturity of 10 years, bears interest at 6.85% per annum and requires monthly principal and interest payments of $205 with unpaid principal due upon maturity. On February 20, 1998, the Company purchased Commerce Center, an office building, located in Arlington Heights, Illinois, for a purchase price of $28,438. F-32 EX-3.1 2 EXHIBIT 3.1 Exhibit 3.1 ARTICLES OF AMENDMENT AND RESTATEMENT OF PRIME GROUP REALTY TRUST Prime Group Realty Trust, a Maryland real estate investment trust (the "Trust"), certifies as follows: FIRST: the Trust desires to amend and restate its Declaration of Trust as currently in effect as hereinafter provided. SECOND: the following provisions are all the provisions of the Declaration of Trust as currently in effect. 1. THE TRUST. 1.1. NAME. The name of the trust (the "Trust") is Prime Group Realty Trust. So far as may be practicable, the business of the Trust shall be conducted and transacted under that name. Under circumstances in which the Trustees determine that the use of the name "Prime Group Realty Trust" is not practicable, they may use any other designation or name for the Trust. 1.2. FORMATION. The Trust is a real estate investment trust (a "REIT") within the meaning under Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland (the "Maryland REIT law"). The Trust shall not be deemed to be a general partnership, limited partnership, joint venture, joint stock company or a corporation (but nothing herein shall preclude the Trust from being treated for tax purposes as an association under the Internal Revenue Code of 1986, as amended (the "Code")). 1.3. PURPOSES AND POWERS. The Trust is organized as a real estate investment trust under the Maryland REIT law for the purpose of engaging in any activity permitted to real estate investment trusts generally by the Maryland REIT law and shall have all further powers consistent with law and appropriate to attain its purposes, including, without limitation or obligation, engaging in business as a REIT under the Code. 1.4. RESIDENT AGENT AND PRINCIPAL OFFICE. The name and address of the Trust's initial resident agent in the State of Maryland is The Corporation Trust Inc., 32 South Street, 2nd Floor, Baltimore, Maryland 21202, which is a resident of the State of Maryland. The address of the Trust's principal office is 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601. The Trust may have such other offices and places of business within or outside the State of Maryland as the Board of Trustees may from time to time determine. 1.5. DEFINITIONS. For purposes of this Declaration of Trust, the following terms shall have the meanings indicated: "Beneficial Ownership" shall mean ownership of Equity Shares or options to acquire Equity Shares by a Person who would be treated as an owner of such Equity Shares under Section 542(a)(2) of the Code either directly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code but without regard to Section 856(h)(3) of the Code. The terms "Beneficial Owner," "Beneficially Owns," "Beneficially Own" and "Beneficially Owned" shall have the correlative meanings. "Beneficiary" shall mean a beneficiary of the Trust as determined in accordance with the provisions of Section 4.8 hereof. "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City, New York are authorized or required by law, regulation or executive order to close. "Call Date" shall mean the date specified in the notice to holders required under Section 3.3.3(d) hereof as the Call Date. "Change of Control" shall have the meaning set forth in Section 3.3.4(a) hereof. "Closing Date of the Initial Public Offering" shall mean the time and date of payment for and delivery of Common Shares issued pursuant to the Initial Public Offering, excluding the Common Shares issuable upon exercise of the over-allotment option granted in connection with the Initial Public Offering. "Common Shares" shall have the meaning set forth in Section 3.1 hereof. "Constituent Person" shall have the meaning set forth in Section 3.3.4(e) hereof. "Constructive Ownership" shall mean ownership of Equity Shares or options to acquire Equity Shares by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns," "Constructively Own" and "Constructively Owned" shall have correlative meanings. "Conversion Date" shall have the meaning set forth in Section 3.3.4(a) hereof. "Conversion Price" shall mean the conversion price per Common Share for which the Convertible Preferred Shares are convertible, as such Conversion Price may be adjusted pursuant to Section 3.3.4 hereof. The initial conversion price shall be $20.00. "Convertible Preferred Shares" shall have the meaning set forth in Section 3.1 hereof. "Current Market Price" of publicly traded Common Shares or any other class of shares of beneficial interest or other security of the Trust or any other issuer for any day shall mean the last reported sales price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange ("NYSE") or, if such security is not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such security is listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the NASDAQ Stock Market ("NASDAQ") or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the Board of Trustees. -3- "Dividend Payment Date" shall mean (i) for any Dividend Period with respect to which the Trust pays a dividend on the Common Shares, the date on which such dividend is paid, or (ii) for any Dividend Period with respect to which the Trust does not pay a dividend on the Common Shares, a date to be set by the Board of Trustees, which date shall not be later than the 45th calendar day after the end of the applicable Dividend Period. "Dividend Periods" shall mean quarterly dividend periods commencing on January 1, April 1, July I and October 1 of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period with respect to any Convertible Preferred Shares (other than the initial Dividend Period, which shall commence on the Issue Date for such Convertible Preferred Shares and end on and include the last day of the calendar quarter immediately following such Issue Date, and other than the Dividend Period during which any Convertible Preferred Shares shall be redeemed pursuant to Section 3.3.3 hereof or converted pursuant to Section 3.3.4 hereof, which shall end on and include the Call Date with respect to the Convertible Preferred Shares being redeemed). "Equity Shares" shall mean any of the Common Shares, the Preferred Shares or the Convertible Preferred Shares, or any combination thereof, that have been issued and are outstanding. The term "Equity Shares" shall include all of the Common Shares, the Preferred Shares and the Convertible Preferred Shares that are held as Excess Shares in accordance with the provisions of Section 4.2 hereof. "Excess Shares" shall have the meaning set forth in Section 4.2 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expiration Time" shall have the meaning set forth in Section 3.3.4(d)(iv) hereof. "Fair Market Value" shall mean (except in Section 3.3.3(e) hereof) as of any day the average of the daily Current Market Prices of a Common Share on the five (5) consecutive Trading Days selected by the Trust commencing not more than 20 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date," with respect to the issuance or distribution requiring such computation. The term "ex date," when used with respect to any issuance or distribution, means the first day on which the Common Shares trade regular way, -4- without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day's Current Market Price. "Fully Junior Shares" shall mean the Common Shares and any other class or series of shares of beneficial interest of the Trust now or hereafter issued and outstanding over which the Convertible Preferred Shares have preference or priority in both (i) the payment of dividends and (ii) the distribution of assets on any liquidation, dissolution or winding up of the Trust. "Funds from Operations" shall mean net income (loss) (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring, and distributions in excess of earnings allocated to other Operating Partnership interests or minority interests (as reflected in the financial statements of the Trust) plus depreciation/amortization of assets unique to the real estate industry, all computed in a manner consistent with the revised definition of Funds From Operations adopted by the National Association of Real Estate Investment Trusts, in its White Paper dated March 1995, as such definitions may be modified from time to time, as determined by the Trust in good faith. "Initial Public Offering" shall mean the sale of Common Shares pursuant to the Trust's first effective registration statement for such Common Shares filed under the Securities Act. "Issue Date" shall mean the date on which the Convertible Preferred Shares are issued. "Issue Price" shall be $20.00. "Junior Shares" shall mean the Common Shares and any other class or series of shares of beneficial interest of the Trust now or hereafter issued and outstanding over which the Convertible Preferred Shares have preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Trust. "Market Price" on any date shall mean the average of the Closing Price for the five (5) consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported on the NYSE or, if the Equity Shares are not listed or admitted for trading on the NYSE, on the -5- principal national securities exchange on which the Equity Shares are listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on NASDAQ or, if the Equity Shares are not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Equity Shares on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in the Equity Shares selected for such purpose by the Board of Trustees. "Non-Electing Share" shall have the meaning set forth in Section 3.3.4(e) hereof. "Operating Partnership" shall mean Prime Group Realty, L.P., a Delaware limited partnership. "Ownership Limit" shall initially mean 9.9%, in number of shares or value, of the outstanding Equity Shares. The number and value of shares of the outstanding Equity Shares of the Trust shall be determined by the Trustees in good faith, which determination shall be conclusive for all purposes hereof. "Parity Shares" shall have the meaning set forth in Section 3.3.7(b) hereof. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section 4.8(e) hereof. "Person" shall mean an individual, corporation, partnership, estate, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a "group" as that term is used for purposes of Section 13(d)(3) of the Exchange Act and shall include any successor (by merger or otherwise) of such entity or group; but does not include an underwriter which participated in any public offering registered under the Securities Act of any shares of the Trust for a period of 90 days following the purchase by such underwriter of the Equity Shares; PROVIDED, that the restrictions contained in Section 4.1 hereof will not be violated following the distribution by such underwriter of such shares. -6- "Preferred Shares" shall have the meaning set forth in Section 3.1 hereof. "Prohibited Transferee" shall mean, with respect to any purported Transfer, any Person who, but for the provisions of Section 4.1 hereof, would own record title to Equity Shares. "Purchased Shares" shall have the meaning set forth in Section 3.3.4(d)(iv) hereof. "REIT Termination Event" shall mean the earliest to occur of: (i) the filing of a federal income tax return by the Trust for any taxable year on which the Trust does not elect to be taxed as a real estate investment trust; (ii) the approval by the shareholders of the Trust of a proposal for the Trust to cease to qualify as a real estate investment trust; (iii) a determination by the Board of Trustees of the Trust, based on the advice of counsel, that the Trust has ceased to qualify as a real estate investment trust; or (iv) a "determination" within the meaning of Section 1313(a) of the Code that the Trust has ceased to qualify as a real estate investment trust. "Restriction Termination Date" shall mean the first day on which the Board of Trustees of the Trust determines that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a REIT. "Securities" and "Security" shall have the meanings set forth in Section 3.3.4(d)(iii) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. "Set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Trust in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Trustees, the allocation of funds to be so paid on any series or class of shares of beneficial interest of the Trust; PROVIDED, HOWEVER, that if any funds for any -7- class or series of Junior Shares or any class or series of shares of beneficial interest ranking on a parity with the Convertible Preferred Shares as to the payment of dividends are placed in a separate account of the Trust or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Convertible Preferred Shares shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. "Share Trust" shall mean any separate trust created pursuant to Section 4.2 hereof and administered in accordance with the terms of Section 4.8 hereof, for the exclusive benefit of any Beneficiary. "Share Trustee" shall mean any person or entity unaffiliated with both the Trust and any Prohibited Transferee, such Share Trustee to be designated by the Trust to act as trustee of any Share Trust, or any successor trustee thereof. "Trading Day" shall mean any day on which the securities in question are traded on the NYSE, or if such securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on the National Market System of NASDAQ, or if such securities are not quoted on such National Market System, in the securities market in which the securities are traded. "Transaction" shall have the meaning set forth in Section 3.3.4(e) hereof. "Transfer" shall mean any sale, transfer, gift, assignment, devise or other disposition of Equity Shares (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Equity Shares or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Equity Shares), whether by operation of law or otherwise. The terms "Transfers" and "Transferred" shall have the correlative meanings. "Transfer Agent" shall mean the Trust, or such other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent, registrar and dividend disbursing agent for the Convertible Preferred Shares. "Voting Preferred Shares" shall have the meaning set forth in Section 3.3.6 hereof. -8- "Weighted Average Trading Price" shall mean, for any period, the number obtained by dividing (i) the sum of the products, for each sale of Common Shares on each Trading Day in such period, of (a) the sale price per Common Share and (b) the number of Common Shares sold by (ii) the total number of Common Shares sold during such period. 2. BOARD OF TRUSTEES. 2.1. POWERS. (a) Subject to the limitations herein or in the Bylaws of the Company (the "Bylaws"), (i) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (ii) the Board of Trustees shall have full, exclusive and absolute power, control and authority over the property of the Trust and over the business of the Trust. The Board of Trustees may take any actions as in its sole judgment and discretion are necessary or desirable to conduct the business of the Trust. This Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Board of Trustees. Any construction of this Declaration of Trust or determination made in good faith by the Board of Trustees concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Board of Trustees included in this Declaration of Trust or in the Bylaws shall in no way be construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Trustees under the general laws of the State of Maryland or any other applicable laws. (b) Except as otherwise provided in the Bylaws, the Board of Trustees, without any action by the shareholders of the Trust, shall have and may exercise, on behalf of the Trust, without limitation, the power to adopt, amend and repeal Bylaws; to elect officers in the manner prescribed in the Bylaws; to solicit proxies from holders of shares of beneficial interest of the Trust; and to do any other acts and deliver any other documents necessary or appropriate to the foregoing powers. (c) It is intended that the Board of Trustees will ensure that the Trust satisfies the requirements for qualification as a REIT under the Code, including, but not limited to, the ownership of outstanding shares of its beneficial interest, the nature of its assets, the sources of its income and the amount and timing of its distributions to its shareholders. The Board of -9- Trustees shall take no action to disqualify the Trust as a REIT or to otherwise revoke the Trust's election to be taxed as a REIT without the affirmative vote of two-thirds of the shares of beneficial interest entitled to vote on such matter at a meeting of the shareholders. 2.2. CLASSIFICATION AND NUMBER. (a) The Trustees of the Trust (the "Trustees") shall be classified, with respect to the terms for which they severally hold office, into three classes, as nearly equal in number as possible, one class ("Class I") to hold office initially for a term expiring at the first annual meeting of shareholders, another class ("Class II") to hold office initially for a term expiring at the second annual meeting of shareholders and another class ("Class III") to hold office initially for a term expiring at the third annual meeting of shareholders, with the Trustees of each class to hold office until their successors are duly elected and qualified. At each annual meeting of shareholders, the successors to the class of Trustees whose term expires at such meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Shareholder votes to elect Trustees shall be conducted in the manner provided in the Bylaws. (b) The number of Trustees shall be seven (7), which number may be increased or decreased pursuant to the Bylaws and increased pursuant to Section 3.3.8 hereof, but shall not be less than three (3). The name and class of the Trustees serving at the time of adoption of this amendment and restatement and who shall serve until their successors are duly elected and qualified are: Name Class - ---- ----- Michael W. Reschke Class I Richard S. Curto Class II Stephen J. Nardi Class III James R. Thompson Class III Christopher J. Nassetta Class II Thomas J. Saylak Class III Jacque M. Ducharme Class I -10- It shall not be necessary to list in this Declaration of Trust the names of any Trustees hereinafter elected. (c) If a vacancy in the Board of Trustees shall occur or be created (whether arising through death, retirement, resignation or removal or through an increase in the number of Trustees), the vacancy shall be filled by the affirmative vote of a majority of the remaining Trustees, at any regular meeting or any special meeting called for that purpose, even though less than a quorum of the Board of Trustees may exist. 2.3. RESIGNATION OR REMOVAL. Any Trustee may resign by written notice to the Board, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. Subject to the rights of holders of one or more classes or series of Preferred Shares to elect one or more Trustees, a Trustee may be removed at any time, with cause only, at a meeting of the shareholders, by the affirmative vote of the holders of not less than two-thirds of the shares of beneficial interest then outstanding and entitled to vote generally in the election of Trustees. 2.4. PERFORMANCE OF DUTIES AS A TRUSTEE. A Trustee shall perform his or her duties as a Trustee: (i) in good faith, (ii) in a manner he or she reasonably believes to be in the best interest of the Trust and (iii) with the care that an ordinarily prudent person in a like position would use under similar circumstances. In performing his or her duties, a Trustee is entitled to rely on any information, opinion, report or statement, including any financial statement or other financial data, prepared or presented by, (i) an officer or employee of the Trust whom the Trustee reasonably believes to be reliable and competent in the matters presented, (ii) a lawyer, certified public accountant or other person, as to matters which the Trustee reasonably believes to be within the person's professional competence, or (iii) a committee of the Board of Trustees on which the Trustee does not serve, as to matters within its designated authority, if the Trustee reasonably believes the committee to merit confidence. 3. SHARES OF BENEFICIAL INTEREST. 3.1. AUTHORIZED SHARES AND PAR VALUE. The beneficial interest in the Trust shall be divided into shares (the "Shares"). The total number of shares of beneficial interest which the Trust has authority to issue is 195,000,000 shares, consisting of (i) -11- 30,000,000 preferred shares having a par value of $0.01 per share (the "Preferred Shares"), amounting to an aggregate par value of $300,000, of which 2,000,000 shares shall be designated as 7.0% Series A Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest (the "Convertible Preferred Shares"), (ii) 65,000,000 excess shares having a par value of $0.01 per share (the "Excess Shares"), amounting to an aggregate par value of $650,000, and (iii) 100,000,000 common shares of beneficial interest having a par value of $0.01 per share (the "Common Shares"), amounting to an aggregate par value of $1,000,000. The aggregate par value of all the shares that the Trust shall have authority to issue is $1,950,000. In addition, the Trustees may amend this Declaration of Trust to create and authorize from time to time additional types, series or classes of securities or to increase or decrease the aggregate number of shares of any class that the Trust is authorized to issue, without any action of the shareholders of the Trust. 3.2. COMMON SHARES. (a) VOTING RIGHTS. Subject to the voting rights of the Convertible Preferred Shares, any additional Preferred Shares and the Excess Shares, holders of Common Shares shall be entitled to vote on all matters (for which holders of Common Shares shall be entitled to vote thereon) at all meetings of the shareholders of the Trust and shall be entitled to one vote for each Common Share entitled to vote at such meeting. Holders of Common Shares may not engage in cumulative voting in the election of Trustees. (b) RIGHTS UPON LIQUIDATION. Subject to the preferential rights upon liquidation of the Convertible Preferred Shares, any additional Preferred Shares and the Excess Shares, holders of Common Shares shall be entitled to share ratably in the assets of the Trust legally available for distribution to the shareholders in the event of the liquidation, dissolution or winding-up of the Trust after payment of, or adequate provision for, all known debts and liabilities of the Trust. (c) GENERAL NATURE OF COMMON SHARES. Holders of Common Shares shall have no conversion, sinking fund, redemption, exchange, preference, appraisal (except as provided by Maryland law) or preemptive rights. 3.3. CONVERTIBLE PREFERRED SHARES. 3.3.1. DIVIDENDS. -12- (a) Subject to the preferential rights of the holders of any Preferred Shares that rank senior in the payment of dividends to the Convertible Preferred Shares, the holders of Convertible Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Trustees, out of funds legally available for the payment of dividends, cumulative preferential dividends payable in cash in an amount per share equal to the greater of (i) (x) an annual rate equal to the product of the Issue Price multiplied by 0.07 for Dividend Periods ending before November 17, 1998 and (y) an annual rate equal to the product of the Issue Price multiplied by 0.075 for Dividend Periods ending after November 17, 1998 or (ii) the regular cash dividends (determined on each Dividend Payment Date) on the Common Shares, or portion thereof, into which a Convertible Preferred Share is convertible. The dividends referred to in clause (ii) of the preceding sentence shall equal the number of Common Shares, or portion thereof, into which a Convertible Preferred Share will be convertible on or after the Conversion Date, multiplied by the most current quarterly dividend on a Common Share on or before the applicable Dividend Payment Date. If the Trust pays a regular cash dividend on the Common Shares with respect to a Dividend Period after the date on which the Dividend Payment Date is declared pursuant to clause (ii) of the definition of Dividend Payment Date and the dividend calculated pursuant to clause (ii) of this paragraph (a) with respect to such Dividend Period is greater than the dividend previously declared on the Convertible Preferred Shares with respect to such Dividend Period, the Trust shall pay an additional dividend to the holders of the Convertible Preferred Shares on the date on which the dividend on the Common Shares is paid, in an amount equal to the difference between (y) the dividend calculated pursuant to clause (ii) of this paragraph (a) and (z) the amount of dividends previously declared on the Convertible Preferred Shares with respect to such Dividend Period. The dividends shall begin to accrue and shall be fully cumulative from the first day of the applicable Dividend Period, whether or not in any Dividend Period or Periods there shall be funds of the Trust legally available for the payment of such dividends, and shall be payable quarterly, when, as and if declared by the Board of Trustees, in arrears on Dividend Payment Dates. Each such dividend shall be payable in arrears to the holders of record of Convertible Preferred Shares as they appear in the records of the Trust at the close of business on such record dates, not less than 10 nor more than 50 days preceding such Dividend Payment Dates thereof, as shall be fixed by the Board of Trustees. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time and for such interim periods, without reference to any regular Dividend Payment Date, to holders of record on such date, not less than 10 nor more than 50 -13- days preceding the payment date thereof, as may be fixed by the Board of Trustees. Any dividend payment made on Convertible Preferred Shares shall first be credited against the earliest accrued but unpaid dividend due with respect to Convertible Preferred Shares which remains payable. (b) The amount of dividends referred to in clause (i) of Section 3.3.1(a) payable for each full Dividend Period on the Convertible Preferred Shares, other than the Dividend Period commencing October 1, 1998, shall be computed by dividing the annual dividend rate by four. For the Dividend Period commencing October 1, 1998, the amount of dividends through November 17, 1998 on the Convertible Preferred Shares shall be computed by dividing Issue Price times 0.07 by 365 and multiplying the result by the number of days from October 1, 1998 through November 17, 1998 and dividends from November 18, 1998 through December 31, 1998 on the Convertible Preferred Shares shall be computed by dividing the Issue Price times 0.075 by 365 and multiplying the result by the number of days from November 18, 1998 through December 31, 1998. The initial Dividend Period for the Convertible Preferred Shares will include a partial dividend for the period from the Issue Date until the last day of the calendar quarter immediately following such Issue Date. The amount of dividends payable for such period, or any other period shorter than a full Dividend Period, on the Convertible Preferred Shares shall be computed by dividing the number of days in such period by 365 and multiplying the result by the product of the annual dividend rate multiplied by the Issue Price. Holders of Convertible Preferred Shares shall not be entitled to any dividends, whether payable in cash, property or shares, in excess of cumulative dividends, as herein provided, on the Convertible Preferred Shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Convertible Preferred Shares which may be in arrears. (c) So long as any Convertible Preferred Shares are outstanding, no dividends, except as described in the immediately following sentence, shall be declared or paid or set apart for payment on any class or series of Parity Shares for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Convertible Preferred Shares for all Dividend Periods terminating on or prior to the dividend payment date on such class or series of Parity Shares. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon Convertible Preferred Shares and all dividends declared upon any -14- other class or series of Parity Shares shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Convertible Preferred Shares and accumulated and unpaid on such Parity Shares. (d) So long as any Convertible Preferred Shares are outstanding, no dividends (other than dividends or distributions paid solely in shares of, or options, warrants or rights to subscribe for or purchase shares of, Fully Junior Shares) shall be declared or paid or set apart for payment or other distribution shall be declared or made or set apart for payment upon Junior Shares, nor shall any Junior Shares be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Shares made for purposes of an employee incentive or benefit plan of the Trust or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any Junior Shares) by the Trust, directly or indirectly (except by conversion into or exchange for Fully Junior Shares), unless in each case (i) the full cumulative dividends on all outstanding Convertible Preferred Shares and any other Parity Shares of the Trust shall have been or contemporaneously are declared and paid or declared and set apart for payment for all past Dividend Periods with respect to the Convertible Preferred Shares and all past dividend periods with respect to such Parity Shares and (ii) sufficient funds shall have been or contemporaneously are declared and paid or declared and set apart for the payment of the dividend for the current Dividend Period with respect to the Convertible Preferred Shares and the current dividend period with respect to such Parity Shares. (e) No distributions on Convertible Preferred Shares shall be declared by the Board of Trustees or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law. 3.3.2. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Trust, whether voluntary or involuntary, subject to the prior preferences and other rights of any series of shares of beneficial interest ranking senior to the Convertible Preferred Shares upon liquidation, dissolution or winding up of the Trust, -15- before any payment or distribution of the assets of the Trust (whether capital or surplus) shall be made to or set apart for the holders of Junior Shares, the holders of the Convertible Preferred Shares shall be entitled to receive twenty dollars ($20.00) (the "Liquidation Preference") per Convertible Preferred Share plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment; PROVIDED, that the dividend payable with respect to the Dividend Period containing the date of final distribution shall be equal to the greater of (i) the dividend provided in Section 3.3.1(a)(i) hereof or (ii) the dividend determined pursuant to Section 3.3.1(a)(ii) hereof for the preceding Dividend Period. If, upon any liquidation, dissolution or winding up of the Trust, the assets of the Trust, or proceeds thereof, distributable among the holders of the Convertible Preferred Shares shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares of any class or series of Parity Shares, then such assets, or the proceeds thereof, shall be distributed among the holders of Convertible Preferred Shares and any such other Parity Shares ratably in accordance with the respective amounts that would be payable on such Convertible Preferred Shares and any such other Parity Shares if all amounts payable thereon were paid in full. For the purposes of this Section 3.3.2, (i) a consolidation or merger of the Trust with one or more corporations, real estate investment trusts or other entities, (ii) a sale, lease or conveyance of all or substantially all of the Trust's property or business or (iii) a statutory share exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Trust. (b) Subject to the rights of the holders of shares of any series or class or classes of shares of beneficial interest ranking on a parity with or prior to the Convertible Preferred Shares upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Trust, after payment shall have been made in full to the holders of the Convertible Preferred Shares, as provided in this Section 3.3.2, the holders of Convertible Preferred Shares shall have no other claim to the remaining assets of the Trust and any other series or class or classes of Junior Shares shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Convertible Preferred Shares shall not be entitled to share therein. 3.3.3. REDEMPTION AT THE OPTION OF THE TRUST. -16- (a) Except as provided in Section 3.3.3(e) below, the Convertible Preferred Shares shall not be redeemable by the Trust prior to November 17, 2007. On and after November 17, 2007, the Trust, at its option, may redeem the Convertible Preferred Shares, in whole at any time or from time to time in part out of funds legally available therefor at a redemption price payable in cash equal to 100% of the Liquidation Preference per Convertible Preferred Share (plus all accumulated, accrued and unpaid dividends as provided below). (b) Upon any redemption of Convertible Preferred Shares pursuant to this Section 3.3.3, the Trust shall pay all accrued and unpaid dividends, if any, thereon to the Call Date, without interest. If the Call Date falls after a dividend payment record date and prior to the corresponding Dividend Payment Date, then each holder of Convertible Preferred Shares at the close of business on such dividend payment record date shall be entitled to the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding any redemption of such shares before such Dividend Payment Date. Except as provided above, the Trust shall make no payment or allowance for unpaid dividends, whether or not in arrears, on Convertible Preferred Shares called for redemption. (c) If full cumulative dividends on the Convertible Preferred Shares and any other class or series of Parity Shares have not been declared and paid or declared and set apart for payment, the Convertible Preferred Shares may not be redeemed under this Section 3.3.3 in part and the Trust may not purchase or acquire Convertible Preferred Shares, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of Convertible Preferred Shares. (d) Notice of the redemption of any Convertible Preferred Shares under this Section 3.3.3 (other than paragraph (e)) shall be mailed by first-class mail to each holder of record of Convertible Preferred Shares to be redeemed at the address of each such holder as shown on the Trust's records, not less than 30 nor more than 90 days prior to the Call Date. Neither the failure to mail any notice required by this paragraph (d), nor any defect therein or in the mailing thereof, to any particular holder, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Each such mailed notice shall state, as appropriate: (1) the Call Date; (2) the number of Convertible Preferred Shares to be redeemed and, if fewer than all the shares held by such holder are to be -17- redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; (4) the place or places at which certificates for such shares are to be surrendered; (5) the then-current Conversion Price; and (6) that dividends on the shares to be redeemed shall cease to accrue on such Call Date except as otherwise provided herein. Notice having been mailed as aforesaid, from and after the Call Date (unless the Trust shall fail to make available an amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, dividends on the Convertible Preferred Shares so called for redemption shall cease to accrue, (ii) such shares shall no longer be deemed to be outstanding and (iii) all rights of the holders thereof as holders of Convertible Preferred Shares shall cease (except the rights to convert and to receive the cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon). The Trust's obligation to provide cash in accordance with the preceding sentence shall be deemed fulfilled if, on or before the Call Date, the Trust shall deposit with a bank or trust company (which may be an affiliate of the Trust) that has an office in the Borough of Manhattan, City of New York, and that has, or is an affiliate of a bank or trust company that has, capital and surplus of at least $50,000,000, necessary for such redemption, in trust, with irrevocable instructions that such cash be applied to the redemption of the Convertible Preferred Shares so called for redemption. No interest shall accrue for the benefit of the holders of Convertible Preferred Shares to be redeemed on any cash so set aside by the Trust. Subject to applicable escheat laws, any such cash unclaimed at the end of two years from the Call Date shall revert to the general funds of the Trust, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Trust for the payment of such cash. As promptly as practicable after the surrender in accordance with such notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and if the notice shall so state), such shares shall be exchanged for any cash (without interest thereon) for which such shares have been redeemed. If fewer than all the outstanding Convertible Preferred Shares are to be redeemed, shares to be redeemed shall be selected by the Trust from outstanding Convertible Preferred Shares not previously called for redemption pro rata (as nearly as may be), by lot or by any other method determined by the Trust in its sole discretion to be equitable. If fewer than all the Convertible Preferred Shares represented by any certificate are redeemed, then new certificates representing the -18- unredeemed shares shall be issued without cost to the holder thereof. (e) Notwithstanding anything herein to the contrary, beginning on June 17, 1998 and ending on September 17, 1998, the Trust, at its option, may redeem all, but not less than all, of the Convertible Preferred Shares at a premium (the "Special Redemption Price") calculated to result in a total internal rate of return to the holder (including the receipt of dividends and calculated on an annual compounded basis as if the holder had owned the shares since the Issue Date) of 20.0%. The Special Redemption Price may be paid, at the Trust's option, in any combination of (i) cash and (ii) Common Shares valued at Fair Market Value; PROVIDED, that the cash portion of the Special Redemption Price shall equal at least 75% of the Special Redemption Price. For purposes of this Section 3.3.3(e), Fair Market Value shall mean the Weighted Average Trading Price for the Common Shares for the 20 Trading Days preceding the date of the special redemption (the "Special Redemption Call Date"). Notice of the redemption of any Convertible Preferred Shares under this Section 3.3.3(e) shall be mailed by first-class mail to each holder of record of Convertible Preferred Shares to be redeemed at the address of each such holder as shown on the Trust's records, not less than 30 nor more than 90 days prior to the Special Redemption Call Date. Neither the failure to mail any notice required by this paragraph (e), nor any defect therein or in the mailing thereof, to any particular holder, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Each such mailed notice shall state, as appropriate: (1) the Special Redemption Call Date; (2) the Special Redemption Price (including the amount of the Special Redemption Price consisting of cash and the amount of the Special Redemption Price consisting of Common Shares, together with calculations supporting the determination of the number Common Shares constituting a portion of the Special Redemption Price); (3) the place or places at which certificates for such shares are to be surrendered; and (4) that dividends on the shares to be redeemed shall cease to accrue on such Call Date except as otherwise provided herein. Notice having been mailed as aforesaid, from and after the Special Redemption Call Date (unless the Trust shall fail to make available an amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, dividends on the Convertible Preferred Shares so called for redemption shall cease to accrue, (ii) such shares shall no longer be deemed to be outstanding and (iii) all rights of the holders thereof as holders of Convertible Preferred Shares shall cease (except the right to -19- receive the Special Redemption Price, without interest thereon, upon surrender and endorsement of their certificates if so required). The Trust's obligation to provide cash and Common Shares in accordance with the preceding sentence shall be deemed fulfilled if, on or before the Special Redemption Call Date, the Trust shall deposit with a bank or trust company (which may be an affiliate of the Trust) that has an office in the Borough of Manhattan, City of New York, and that has, or is an affiliate of a bank or trust company that has, capital and surplus of at least $50,000,000, necessary for such redemption, in trust, with irrevocable instructions that such cash and/or Common Shares be applied to the redemption of the Convertible Preferred Shares so called for redemption. No interest shall accrue for the benefit of the holders of Convertible Preferred Shares to be redeemed on any cash so set aside by the Trust. Subject to applicable escheat laws, any such cash or Common Shares unclaimed at the end of two years from the Special Redemption Call Date shall revert to the general funds of the Trust, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Trust for the payment of such cash or Common Shares. As promptly as practicable after the surrender in accordance with such notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and if the notice shall so state), such shares shall be exchanged for any cash (without interest thereon) and Common Shares for which such shares have been redeemed. 3.3.4. CONVERSION. Holders of Convertible Preferred Shares shall have the right to convert all or a portion of such shares into Common Shares, as follows: (a) Subject to and upon compliance with the provisions of this Section 3.3.4, a holder of Convertible Preferred Shares shall have the right, at his or her option, upon the earliest to occur of (i) September 17, 1998, (ii) the first day on which a Change of Control occurs, (iii) the occurrence of a REIT Termination Event or (iv) such date as determined by the Trust (the "Conversion Date"), to convert all or any portion of such shares (or such shares as determined by the Trust if pursuant to clause (iv) above) into the number of fully paid and non-assessable Common Shares obtained by dividing the aggregate Liquidation Preference of such shares (inclusive of accrued but unpaid dividends) by the Conversion Price (as in effect at the time and on the date provided for in the last paragraph of paragraph (b) of this Section 3.3.4) by surrendering such shares to be converted, such surrender to -20- be made in the manner provided in paragraph (b) of this Section 3.3.4; PROVIDED, HOWEVER, that the right to convert shares called for redemption pursuant to Section 3.3.3 hereof shall terminate at the close of business on the fifth Business Day prior to the Call Date fixed for such redemption, unless the Trust shall default in making payment of the cash payable upon such redemption under Section 3.3.3. "Change of Control" means each occurrence of any of the following: (i) the acquisition, directly or indirectly, by any individual or entity or group (as such term is used in Section 13(d)(3) of the Exchange Act) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act, except that such individual or entity shall be deemed to have beneficial ownership of all shares that any such individual or entity has the right to acquire, whether such right is exercisable immediately or only after passage of time) of more than 25% of the Trust's outstanding shares of beneficial interest with voting power, under ordinary circumstances, to elect Trustees of the Trust; (ii) other than with respect to the election, resignation or replacement of any trustee designated, appointed or elected by the holders of the Convertible Preferred Shares (each a "Preferred Trustee"), during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Trustees (together with any new trustees whose election by such Board of Trustees or whose nomination for election by the shareholders of the Trust was approved by a vote of 66-2/3% of the Trustees (excluding Preferred Trustees) then still in office who were either Trustees at the beginning of such period, or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Trustees then in office; and (iii) (A) the Trust consolidating with or merging into another entity or conveying, transferring or leasing all or substantially all of its assets (including, but not limited to, real property investments) to any individual or entity or (B) any corporation consolidating with or merging into the Trust, which in either event (A) or (B) is pursuant to a transaction in which the outstanding voting shares of beneficial interest of the Trust are reclassified or changed into or exchanged for cash, securities or other property; PROVIDED, HOWEVER, that the events described in clause (iii) above shall not be deemed to be a Change of Control (a) if the sole purpose of such event is that the Trust is seeking to change its domicile or to change its form of organization from a trust to a corporation or (b) if the holders of the exchanged securities of the Trust immediately after such transaction beneficially own at least a majority of the securities of the -21- merged or consolidated entity normally entitled to vote in elections of trustees. (b) In order to exercise the conversion right, the holder of each Convertible Preferred Share to be converted shall surrender the certificate representing such share, duly endorsed or assigned to the Trust or in blank, at the office of the Transfer Agent, accompanied by written notice to the Trust that the holder thereof irrevocably elects to convert such Convertible Preferred Shares. Unless the shares issuable on conversion are to be issued in the same name as the name in which such Convertible Preferred Share is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Trust, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Trust demonstrating that such taxes have been paid). Holders of Convertible Preferred Shares at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion thereof following such dividend payment record date and prior to such Dividend Payment Date. However, Convertible Preferred Shares surrendered for conversion during the period between the close of business on any dividend payment record date and the opening of business on the corresponding Dividend Payment Date (except shares converted after the issuance of notice of redemption with respect to a Call Date during such period, such Convertible Preferred Shares being entitled to such dividend on the Dividend Payment Date) must be accompanied by payment of an amount equal to the dividend payable on such shares on such Dividend Payment Date. A holder of Convertible Preferred Shares on a dividend payment record date who (or whose transferee) tenders any such shares for conversion into Common Shares on the corresponding Dividend Payment Date will receive the dividend payable by the Trust on such Convertible Preferred Shares on such date, and the converting holder need not include payment of the amount of such dividend upon surrender of Convertible Preferred Shares for conversion. Except as provided above, the Trust shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the Common Shares issued upon such conversion. -22- As promptly as practicable after the surrender of certificates for Convertible Preferred Shares as aforesaid, the Trust shall issue and shall deliver at such office to such holder, or on his or her written order, a certificate or certificates for the number of full Common Shares issuable upon the conversion of such shares in accordance with provisions of this Section 3.3.4, and any fractional interest in respect of a Common Share arising upon such conversion shall be settled as provided in paragraph (c) of this Section 3.3.4. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for Convertible Preferred Shares shall have been surrendered and such notice shall have been received by the Trust as aforesaid (and if applicable, payment of an amount equal to the dividend payable on such shares shall have been received by the Trust as described above), and the person or persons in whose name or names any certificate or certificates for Common Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date unless the share transfer books of the Trust shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such share transfer books are open, but such conversion shall be at the Conversion Price in effect on the date on which such shares shall have been surrendered and such notice received by the Trust. (c) No fractional shares or scrip representing fractions of Common Shares shall be issued upon conversion of the Convertible Preferred Shares. Instead of any fractional interest in a Common Share that would otherwise be deliverable upon the conversion of a Convertible Preferred Share, the Trust shall pay to the holder of such share an amount in cash based upon the Current Market Price of the Common Shares on the Trading Day immediately preceding the date of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of Convertible Preferred Shares so surrendered. -23- (d) The Conversion Price shall be adjusted from time to time as follows: (i) If the Trust shall after the Issue Date (A) pay a dividend or make a distribution on its capital shares in Common Shares, (B) subdivide its outstanding Common Shares into a greater number of shares, (C) combine its outstanding Common Shares into a smaller number of shares or (D) issue any shares of beneficial interest by reclassification of its Common Shares, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or distribution or at the opening of business on the Business Day next following the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any Convertible Preferred Share thereafter surrendered for conversion shall be entitled to receive the number of Common Shares that such holder would have owned or have been entitled to receive after the happening of any of the events described above as if such Convertible Preferred Shares had been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision, combination or reclassification. An adjustment made pursuant to this subparagraph (i) shall become effective immediately after the opening of business on the Business Day next following the record date (except as provided in paragraph (h) below) in the case of a dividend or distribution and shall become effective immediately after the opening of business on the Business Day next following the effective date in the case of a subdivision, combination or reclassification. (ii) If the Trust shall issue after the Issue Date rights, options or warrants to all holders of Common Shares entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Common Shares at a price per share less than 94% (100% if a stand-by underwriter is used and charges the Trust a commission) of the Fair Market Value per Common Share on the record date for the determination of shareholders entitled to receive such rights, options or warrants, then the Conversion Price in effect at the opening of business on the Business Day next following such record date shall be adjusted to equal the price -24- determined by multiplying (A) the Conversion Price in effect immediately prior to the opening of business on the Business Day next following the date fixed for such determination by (B) a fraction, the numerator of which shall be the sum of (x) the number of Common Shares outstanding on the close of business on the date fixed for such determination and (y) the number of shares that the aggregate proceeds to the Trust from the exercise of such rights, options or warrants for Common Shares would purchase at 94% of such Fair Market Value (or 100% in the case of a stand-by underwriting), and the denominator of which shall be the sum of (x) the number of Common Shares outstanding on the close of business on the date fixed for such determination and (y) the number of additional Common Shares offered for subscription or purchase pursuant to such rights, options or warrants. Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided in paragraph (h) below). In determining whether any rights, options or warrants entitle the holders of Common Shares to subscribe for or purchase Common Shares at less than 94% of such Fair Market Value (or 100% in the case of a stand-by underwriting), there shall be taken into account any consideration received by the Trust upon issuance and upon exercise of such rights, options or warrants, the value of such consideration, if other than cash, to be determined by the Board of Trustees. (iii) If the Trust shall distribute to all holders of its Common Shares any securities of the Trust (other than Common Shares) or evidence of its indebtedness or assets (excluding cumulative cash dividends or distributions paid with respect to the Common Shares after December 31, 1996 which are not in excess of the following: the sum of (A) the Trust's cumulative undistributed Funds from Operations at December 31, 1996, plus (B) the cumulative amount of Funds from Operations, as determined by the Board of Trustees, after December 31, 1996, minus (C) the cumulative amount of dividends accrued or paid in respect of the Convertible Preferred Shares or any other class or series of preferred shares of beneficial interest of the Trust after the Issue Date) or rights, options or warrants to subscribe for or purchase any of its securities (excluding those rights, options and warrants issued to all holders of Common -25- Shares entitling them for a period expiring within 45 days after the record date referred to in subparagraph (ii) above to subscribe for or purchase Common Shares, which rights and warrants are referred to in and treated under subparagraph (ii) above) (any of the foregoing being hereinafter in this subparagraph (iii) collectively called the "Securities" and individually a "Security"), then in each such case the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (x) the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by (y) a fraction, the numerator of which shall be the Fair Market Value per Common Share on the record date mentioned below less the then fair market value (as determined by the Board of Trustees, whose determination shall be conclusive), of the portion of the Securities or assets or evidences of indebtedness so distributed or of such rights, options or warrants applicable to one Common Share, and the denominator of which shall be the Fair Market Value per Common Share on the record date mentioned below. Such adjustment shall become effective immediately at the opening of business on the Business Day next following (except as provided in paragraph (h) below) the record date for the determination of shareholders entitled to receive such distribution. For the purposes of this subparagraph (iii), the distribution of a Security, which is distributed not only to the holders of the Common Shares on the date fixed for the determination of shareholders entitled to such distribution of such Security, but also is distributed with each Common Share delivered to a Person converting a Convertible Preferred Share after such determination date, shall not require an adjustment of the Conversion Price pursuant to this subparagraph (iii); PROVIDED, that on the date, if any, on which a person converting a Convertible Preferred Share would no longer be entitled to receive such Security with a Common Share (other than as a result of the termination of all such Securities), a distribution of such Securities shall be deemed to have occurred and the Conversion Price shall be adjusted as provided in this subparagraph (iii) (and such day shall be deemed to be "the date fixed for the determination of the shareholders entitled to receive such distribution" and "the record date" within the meaning of the two preceding sentences). -26- (iv) In case a tender or exchange offer (which term shall not include open market repurchases by the Trust) made by the Trust or any subsidiary of the Trust for all or any portion of the Common Shares shall expire and such tender or exchange offer shall involve the payment by the Trust or such subsidiary of consideration per Common Share having a fair market value (as determined in good faith by the Board of Trustees, whose determination shall be conclusive and described in a resolution of the Board of Trustees), at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer, that exceeds the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this subparagraph (iv) by a fraction of which the numerator shall be the number of Common Shares outstanding (including any tendered or exchanged shares) at the Expiration Time, multiplied by the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, and the denominator shall be the sum of (A) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based upon the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any maximum, being referred to as the "Purchased Shares") and (B) the product of the number of Common Shares outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (v) No adjustment in the Conversion Price shall be required unless such adjustment would require a cumulative increase or decrease of at least 1% in such price; PROVIDED, HOWEVER, that any adjustments that by reason of this subparagraph (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made; and PROVIDED, -27- FURTHER, that any adjustment shall be required and made in accordance with the provisions of this Section 3.3.4 (other than this subparagraph (v)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of Common Shares. Notwithstanding any other provisions of this Section 3.3.4, the Trust shall not be required to make any adjustment of the Conversion Price for the issuance of any Common Shares pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Trust and the investment of additional optional amounts in Common Shares under such plan. All calculations under this Section 3.3.4 shall be made to the nearest cent (with $0.005 being rounded upward) or to the nearest one-tenth of a share (with 0.05 of a share being rounded upward), as the case may be. Anything in this paragraph (d) to the contrary notwithstanding, the Trust shall be entitled, to the extent permitted by law, to make such reductions in the Conversion Price, in addition to those required by this paragraph (d), as it in its discretion shall determine to be advisable in order that any share dividends, subdivision of shares, reclassification or combination of shares, distribution of rights or warrants to purchase shares or securities, or distribution of other assets (other than cash dividends) hereafter made by the Trust to its shareholders shall not be taxable. (e) If the Trust shall be a party to any transaction (including, without limitation, a merger, consolidation, statutory share exchange, self tender offer for all or substantially all of its Common Shares, sale of all or substantially all of the Trust's assets or recapitalization of the Common Shares and excluding any transaction as to which subparagraph (d)(i) of this Section 3.3.4 applies) (each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which all or substantially all of the Common Shares are converted into the right to receive shares, securities or other property (including cash or any combination thereof), each Convertible Preferred Share which is not redeemed or converted into the right to receive shares, securities or other property prior to such Transaction shall thereafter be convertible into the kind and amount of shares, securities and other property (including cash or any combination thereof) receivable upon the consummation of such Transaction by a holder of that number of Common Shares into which one Convertible Preferred Share was convertible -28- immediately prior to such Transaction, assuming such holder of Common Shares (i) is not a Person with which the Trust consolidated or into which the Trust merged or which merged into the Trust or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of shares, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of shares, securities and other property (including cash) receivable upon such Transaction is not the same for each Common Share held immediately prior to such Transaction by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), then for the purpose of this paragraph (e) the kind and amount of shares, securities and other property (including cash) receivable upon such Transaction by each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). The Trust shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (e), and it shall not consent or agree to the occurrence of any Transaction until the Trust has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Convertible Preferred Shares that will contain provisions enabling the holders of the Convertible Preferred Shares that remain outstanding after such Transaction to convert into the consideration received by holders of Common Shares at the Conversion Price in effect immediately prior to such Transaction. The provisions of this paragraph (e) shall similarly apply to successive Transactions. (f) If: (i) the Trust shall declare a dividend (or any other distribution) on its Common Shares (other than cash dividends or distributions paid with respect to the Common Shares after December 31, 1996 not in excess of the sum of the Trust's cumulative undistributed Funds from Operations at December 31, 1996, plus the cumulative amount of Funds from Operations, as determined by the Board of Trustees, after December 31, 1996, minus the cumulative amount of dividends accrued or paid in respect of the Convertible Preferred Shares or any other class or -29- series of preferred shares of beneficial interest of the Trust after the Issue Date); (ii) the Trust shall authorize the granting to all holders of Common Shares of rights, options or warrants to subscribe for or purchase any shares of any class or any other rights, options or warrants; (iii) there shall be any reclassification of the Common Shares (other than an event to which subparagraph (d)(i) of this Section 3.3.4 applies) or any consolidation or merger to which the Trust is a party (other than a merger in which the Trust is the surviving entity) and for which approval of any shareholders of the Trust is required, or a statutory share exchange, or a self tender offer by the Trust for all or substantially all of its outstanding Common Shares or the sale or transfer of all or substantially all of the assets of the Trust as an entirety; or (iv) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the Trust; then the Trust shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of Convertible Preferred Shares at their addresses as shown on the records of the Trust, as promptly as possible, but at least 10 days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights, options or warrants are to be determined or (B) the date on which such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the proceedings described in this Section 3.3.4. -30- (g) Whenever the Conversion Price is adjusted as herein provided, the Trust shall promptly file with the Transfer Agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Trust shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment and shall mail such notice of such adjustment of the Conversion Price to the holder of each Convertible Preferred Share at such holder's last address as shown on the records of the Trust. (h) In any case in which paragraph (d) of this Section 3.3.4 provides that an adjustment shall become effective on the day next following the record date for an event, the Trust may defer until the occurrence of such event (A) issuing to the holder of any Convertible Preferred Share converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of any fraction pursuant to paragraph (c) of this Section 3.3.4. (i) There shall be no adjustment of the Conversion Price in case of the issuance of any shares of beneficial interest of the Trust in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 3.3.4. If any action or transaction would require adjustment of the Conversion Price pursuant to more than one paragraph of this Section 3.3.4, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value. (j) If the Trust shall take any action affecting the Common Shares, other than action described in this Section 3.3.4, that in the opinion of the Board of Trustees would materially and adversely affect the conversion rights of the holders of the Convertible Preferred Shares, the Conversion Price for the Convertible Preferred Shares may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Trustees, in its sole discretion, may determine to be equitable in the circumstances. -31- (k) The Trust covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Shares, for the purpose of effecting conversion of the Convertible Preferred Shares, the full number of Common Shares deliverable upon the conversion of all outstanding Convertible Preferred Shares not theretofore converted. For purposes of this paragraph (k), the number of Common Shares that shall be deliverable upon the conversion of all outstanding Convertible Preferred Shares shall be computed as if at the time of computation all such outstanding shares were held by a single holder. The Trust covenants that any Common Shares issued upon conversion of the Convertible Preferred Shares shall be validly issued, fully paid and non-assessable. Before taking any action that would cause an adjustment reducing the Conversion Price below the then-par value of the Common Shares deliverable upon conversion of the Convertible Preferred Shares, the Trust will take any action that, in the opinion of its counsel, may be necessary in order that the Trust may validly and legally issue fully paid and (subject to any customary qualification based upon the nature of a real estate investment trust) non-assessable Common Shares at such adjusted Conversion Price. The Trust shall endeavor to list the Common Shares required to be delivered upon conversion of the Convertible Preferred Shares, prior to such delivery, upon each national securities exchange, if any, upon which the outstanding Common Shares are listed at the time of such delivery. The Trust shall endeavor to comply with all federal and state securities laws and regulations thereunder in connection with the issuance of any securities that the Trust shall be obligated to deliver upon conversion of the Convertible Preferred Shares. The certificates evidencing such securities shall bear such legends restricting transfer thereof in the absence of registration under applicable securities laws or an exemption therefrom as the Trust may in good faith deem appropriate. (l) The Trust will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Common Shares or other securities or property on conversion of the Convertible Preferred Shares -32- pursuant hereto; PROVIDED, HOWEVER, that the Trust shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Shares or other securities or property in a name other than that of the holder of the Convertible Preferred Shares to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Trust the amount of any such tax or established, to the reasonable satisfaction of the Trust, that such tax has been paid. 3.3.5. FIXED CHARGE COVERAGE; LIMITATION ON ISSUANCE OF ADDITIONAL PREFERRED SHARES AND INDEBTEDNESS. (a) Without the written consent of the holders of 66-2/3% of the issued and outstanding Convertible Preferred Shares, none of the Trust, the Operating Partnership or any of their subsidiaries may issue any additional preferred securities of any such entity or incur any indebtedness (other than trade payables or accrued expenses incurred in the ordinary course of business) if, immediately following such issuance and after giving effect to such issuance and the application of the net proceeds therefrom, such entity would be reasonably expected to not satisfy one or both of the following ratios for the fiscal quarter immediately preceding such issuance: (i) Total Debt and liquidation value of non-convertible preferred shares of beneficial interest to Total Market Capitalization of less than .65 to 1.0 as of the end of the applicable fiscal quarter, or (ii) Consolidated EBITDA to Consolidated Fixed Charges of at least 1.4 to 1.0 for the applicable fiscal quarter. (b) In the event that the Trust fails to satisfy one or both of the ratios in Section 3.3.5(a)(i) and (ii) above for two consecutive quarters, the holders of Convertible Preferred Shares shall have the right to require that the Trust, to the extent that the Trust shall have funds legally available therefor, repurchase any or all of each holder's Convertible Preferred Shares at a repurchase price payable in cash in an amount equal to 100% of the Liquidation Preference thereof, plus accrued and unpaid dividends whether or not declared, if any (the "Repurchase Payment"), to the date of repurchase or the date payment is made available (the "Repurchase Date"), pursuant to the offer described in paragraph (c) below (the "Repurchase Offer"). -33- (c) Within 15 days following the second consecutive quarter that the Trust fails to satisfy one or both of the ratios in Section 3.3.5(a)(i) and (ii) above, the Trust shall mail by first class mail or overnight courier a notice to all holders of Convertible Preferred Shares stating (i) that the Trust failed to satisfy one or both of the tests (naming the test(s) failed), (ii) that the holders of Convertible Preferred Shares have the right to require the Trust to repurchase any or all Convertible Preferred Shares then held by such holder in cash, (iii) the date of repurchase (which shall be a Business Day, no earlier than 120 days and no later than 150 days from the date such notice is mailed, or such later date as may be necessary to comply with the requirements of the Exchange Act), (iv) the repurchase price for the repurchase and (v) the instructions determined by the Trust, consistent with this paragraph (c), that the holder must follow in order to have its Convertible Preferred Shares repurchased. (d) On the Repurchase Date, the Trust will, to the extent lawful, accept for payment Convertible Preferred Shares or portions thereof tendered pursuant to the Repurchase Offer and promptly mail by first class mail or overnight courier or by wire transfer of immediately available funds to the holder of Convertible Preferred Shares, as directed by such holder, payment in an amount equal to the Repurchase Payment in respect of all Convertible Preferred Shares or portions thereof so tendered. (e) Notwithstanding anything else herein, to the extent they are applicable to any Repurchase Offer, the Trust will comply with any federal and state securities laws, rules and regulations and all time periods and requirements shall be adjusted accordingly. (f) "Total Debt" means the sum of (without duplication) any indebtedness, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures, or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing the balance deferred and unpaid of the purchase price of any property (including pursuant to capital leases), except any such balance that constitutes an accrued expense or trade payable, if and to the extent such indebtedness would appear as a liability upon a balance sheet of such entity prepared on a consolidated basis in accordance with Generally Accepted Accounting Principles ("GAAP"), and also includes, to the extent not otherwise included, the guarantee of items which would be included within this definition. -34- (g) "Total Market Capitalization" means the sum of: (a) the Fair Market Value of the outstanding Common Shares, assuming (i) the full exchange of outstanding partnership units (in each case not held by the Trust) of the Operating Partnership for Common Shares and (ii) the conversion of the outstanding shares of Convertible Preferred Shares into Common Shares; (b) the aggregate liquidation value of any outstanding preferred shares of beneficial interest other than the Convertible Preferred Shares; and (c) the Total Debt of the Trust. (h) "Consolidated EBITDA" for any period means the consolidated net income of the Trust (before extraordinary income or gains) as reported in the Trust's financial statements filed with the Securities and Exchange Commission increased by the sum of the following (without duplication): a. all income and state franchise taxes paid or accrued according to GAAP for such period (other than income taxes attributable to extraordinary, unusual or non-recurring gains or losses except to the extent that such gains were not included in Consolidated EBITDA), b. all interest expense paid or accrued in accordance with GAAP for such period (including financing fees and amortization of deferred financing fees and amortization of original issue discount), c. depreciation and depletion reflected in such reported net income, d. amortization reflected in such reported net income, including, without limitation, amortization of capitalized debt issuance costs (only to the extent that such amounts have not been previously included in the amount of Consolidated EBITDA pursuant to clause (b) above), goodwill, other intangibles and management fees, and e. any other non-cash charges or discretionary prepayment penalties, to the extent deducted from consolidated net income (including, but not limited to, income allocated to minority interests). (i) "Consolidated Fixed Charges" for any period means the sum of: -35- a. all interest expense paid or accrued in accordance with GAAP for such period (including financing fees and amortization of deferred financing fees and amortization of original issue discount), b. preferred shares of beneficial interest dividend requirements for such period, whether or not declared or paid, and c. regularly scheduled amortization of principal during such period (other than any balloon payments at maturity). (j) Notwithstanding the provisions of this Section 3.3.5, in no event shall the Trust be required to repurchase any Convertible Preferred Shares at any time that such repurchase is prohibited by this Declaration of Trust or the Trust's debt instruments. 3.3.6. SHARES TO BE RETIRED. All Convertible Preferred Shares which shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued preferred shares of beneficial interest, without distinction as to class or series, and subject to applicable limitations set forth in this Declaration of Trust may thereafter be reissued as shares of any series of preferred shares of beneficial interest. 3.3.7. RANKING. Any class or series of shares of beneficial interest of the Trust shall be deemed to rank: (a) prior to the Convertible Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Convertible Preferred Shares; (b) on a parity with the Convertible Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof shall be different from those of the Convertible Preferred Shares, if the holders of such class or series and the Convertible Preferred Shares shall be entitled to the receipt of dividends and of amounts -36- distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Parity Shares"); (c) junior to the Convertible Preferred Shares, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series shall be Junior Shares; and (d) junior to the Convertible Preferred Shares, as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series shall be Fully Junior Shares. 3.3.8. VOTING RIGHTS. If and whenever (i) two consecutive quarterly dividends payable on the Convertible Preferred Shares or any series or class of Parity Shares shall be in arrears (which shall, with respect to any such quarterly dividend, mean that any such dividend has not been paid in full), whether or not earned or declared, or (ii) for two consecutive quarterly dividend periods the Trust fails to pay dividends on the Common Shares in an amount per share at least equal to $0.3375 (subject to adjustment consistent with any adjustment of the Conversion Price pursuant to Section 3.3.4(d) hereof) the number of Trustees then constituting the Board of Trustees shall be increased by one (unless the then current Board of Trustees consists of more than 10 Trustees in which case it shall be increased by two) and the holders of Convertible Preferred Shares, together with the holders of shares of every other series of Parity Shares (any such other series, the "Voting Preferred Shares"), voting as a single class regardless of series, shall be entitled to elect the one or two additional Trustees to serve on the Board of Trustees at any annual meeting of shareholders or special meeting held in place thereof, or at a special meeting of the holders of the Convertible Preferred Shares and the Voting Preferred Shares called as hereinafter provided. Whenever all arrears in dividends on the Convertible Preferred Shares and the Voting Preferred Shares then outstanding shall have been paid and dividends thereon for the current quarterly dividend period shall have been paid or declared and set apart for payment, or the Trust has paid dividends on the Common Shares in an amount per share at least equal to $0.3375 (subject to adjustment consistent with any adjustment of the Conversion Price pursuant to Section 3.3.4(d)) for two consecutive quarters, then the right of the holders of the Convertible Preferred Shares and the Voting Preferred Shares to elect such -37- additional Trustee(s) shall cease (but subject always to the same provision for the vesting of such voting rights in the case of any similar future arrearage in quarterly dividends), and the terms of office of all persons elected as Trustee(s) by the holders of the Convertible Preferred Shares and the Voting Preferred Shares shall forthwith terminate and the number of the Board of Trustees shall be reduced accordingly. At any time after such voting power shall have been so vested in the holders of Convertible Preferred Shares and the Voting Preferred Shares, the Secretary of the Trust may, and upon the written request of any holder of Convertible Preferred Shares (addressed to the Secretary at the principal office of the Trust) shall, call a special meeting of the holders of the Convertible Preferred Shares and of the Voting Preferred Shares for the election of the Trustee(s) to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws for a special meeting of the shareholders or as required by law. If any such special meeting required to be called as above provided shall not be called by the Secretary within 20 days after receipt of any such request, then any holder of Convertible Preferred Shares may call such meeting, upon the notice above provided, and for that purpose shall have access to the records of the Trust. The Trustee(s) elected at any such special meeting shall hold office until the next annual meeting of the shareholders or special meeting held in lieu thereof if such office shall not have previously terminated as above provided. If any vacancy shall occur among the Trustee(s) elected by the holders of the Convertible Preferred Shares and the Voting Preferred Shares, a successor shall be elected by the Board of Trustees, upon the nomination of the then-remaining Trustee elected by the holders of the Convertible Preferred Shares and the Voting Preferred Shares or, if there is no such remaining Trustee, upon the nomination of the holders of a majority of the voting power of the Convertible Preferred Shares and the Voting Preferred Shares, to serve until the next annual meeting of the shareholders or special meeting held in place thereof if such office shall not have previously terminated as provided above. So long as any Convertible Preferred Shares are outstanding, in addition to any other vote or consent of shareholders required by law or by this Declaration of Trust, the affirmative vote of at least 66-2/3% of the votes entitled to be cast by the holders of the Convertible Preferred Shares given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: -38- Any amendment, alteration or repeal of any of the provisions of this Declaration of Trust that materially and adversely affects the voting powers, rights or preferences of the holders of the Convertible Preferred Shares; PROVIDED, HOWEVER, that the amendment of the provisions of this Declaration of Trust so as to authorize or create, or to increase the authorized amount of, any Fully Junior Shares, Junior Shares that are not senior in any respect to the Convertible Preferred Shares or any Parity Shares shall not be deemed to materially adversely affect the voting powers, rights or preferences of the holders of Convertible Preferred Shares; or A share exchange that affects the Convertible Preferred Shares, a consolidation with, or merger of the Trust into, another entity, or a consolidation with, or merger of another entity into, the Trust, unless in each such case each Convertible Preferred Share (i) shall remain outstanding without a material and adverse change to its terms and rights or (ii) shall be converted into or exchanged for convertible preferred shares of the surviving entity having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and term or conditions of redemption thereof identical to that of a Convertible Preferred Share (except for changes that do not materially and adversely affect the holders of the Convertible Preferred Shares); PROVIDED, HOWEVER, that no such vote of the holders of Convertible Preferred Shares shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect, or when the issuance of any such prior shares or convertible security is to be made, as the case may be, provision is made for the redemption of all Convertible Preferred Shares at the time outstanding to the extent such redemption is authorized by Section 3.3.3 hereof. For purposes of the foregoing provisions of this Section 3.3.8, each Convertible Preferred Share shall have one (1) vote per share, except that when any other series of Preferred Shares shall have the right to vote with the Convertible Preferred Shares as a single class on any matter, then the Convertible Preferred Shares and such other series shall have with respect to such matters one (1) vote per $20.00 (or less pursuant to Section 3.3.2(a) hereof) of the stated liquidation preference. Except as otherwise required by applicable law or as set forth herein, the Convertible Preferred Shares shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any Trust action. -39- 3.3.9. RECORD HOLDERS. The Trust and the Transfer Agent may deem and treat the record holder of any Convertible Preferred Shares as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. 3.4. ADDITIONAL PREFERRED SHARES. The Trustees shall have power from time to time to classify or reclassify unissued additional Preferred Shares in one or more series and to establish for each series the terms, preferences, conversion or other rights, voting powers, restrictions, distribution limitations, qualifications and redemption terms and conditions, and to set or change the number of shares in each series, and, in such event, the Trust shall file for record with the State Department of Assessments and Taxation of the State of Maryland (the "SDAT") articles supplementary to this Declaration of Trust in substance and form as prescribed by Maryland law. 3.5. AUTHORIZATION BY BOARD OF SHARE ISSUANCE. The Board of Trustees may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Trustees may deem advisable (or without consideration in the case of a Share split or Share dividend), subject to such restrictions or limitations, if any, as may be set forth herein or in the Bylaws, and all Shares so issued will be fully paid and non-assessable. Notwithstanding any other provision herein, no determination shall be made by the Board of Trustees nor shall any transaction be entered into by the Trust which would cause any Shares or other beneficial interest in the Trust not to constitute "transferable shares" or "transferable certificates of beneficial interest" under Section 856(a)(2) of the Code or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code. 3.6. DIVIDENDS AND DISTRIBUTIONS. Subject to the dividend rights and the preferential rights upon liquidation of the Convertible Preferred Shares, any additional Preferred Shares and the Excess Shares, holders of Common Shares will participate equally in dividends payable to holders of Common Shares when and as authorized and declared by the Board of Trustees and in net assets available for distribution to holders of Common Shares upon liquidation or dissolution. The Board of Trustees may from time to time authorize and declare to shareholders such dividends or -40- distributions, in cash or other assets of the Trust or in securities of the Trust or from any other source as the Board of Trustees in its discretion shall determine. The Board of Trustees shall endeavor to declare and pay such dividends and distributions as shall be necessary for the Trust to qualify as a REIT under the Code; however, shareholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board of Trustees. The exercise of the powers and rights of the Board of Trustees pursuant to this Section 3.6 shall be subject to the provisions of any class or series of Shares at the time outstanding. 3.7. GENERAL NATURE OF SHARES. All Shares shall be personal property entitling the shareholders only to those rights provided in this Declaration of Trust. The shareholders shall have no interest in the property of the Trust and shall have no right to compel any partition, division, dividend or distribution of the Trust or of the property of the Trust. The death of a shareholder shall not terminate the Trust. The Trust is entitled to treat as shareholders only those persons in whose names Shares are registered as holders of Shares on the beneficial interest ledger of the Trust. 3.8. FRACTIONAL SHARES. The Trust may, without the consent or approval of any shareholder, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it, or pay cash for the fair value of a fraction of a Share. 3.9. DECLARATION OF TRUST AND BYLAWS. All shareholders are subject to the provisions of this Declaration of Trust and the Bylaws. 4. RESTRICTIONS ON TRANSFER, ACQUISITION AND REDEMPTION OF EQUITY SHARES; EXCHANGE FOR EXCESS SHARES. 4.1. RESTRICTIONS ON OWNERSHIP AND TRANSFER. (a) Except as provided in Section 4.6 hereof, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, no Person shall Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit. (b) Except as provided in Section 4.6 hereof, from and after the Closing Date of the Initial Public Offering and prior to -41- the Restriction Termination Date, any Transfer that, if effective, would result in any Person Beneficially Owning or Constructively Owning Equity Shares in excess of the Ownership Limit shall be void AB INITIO as to the Transfer of such Equity Shares which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit, and such Person shall acquire no rights in such Equity Shares. (c) Except as provided in Section 4.6 hereof, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in the Equity Shares being Beneficially Owned or Constructively Owned by less than 100 Persons (determined without reference to any rules of attribution) shall be void AB INITIO as to the Transfer of such shares of Equity Shares which would be otherwise Beneficially Owned or Constructively Owned by the transferee, and the intended transferee shall acquire no rights in such Equity Shares; PROVIDED, HOWEVER, that this Section 4.1(c) shall not apply to the Transfer of Equity Shares from the Trust to the underwriters of the Initial Public Offering. (d) Except as provided in Section 4.6 hereof, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code shall be void AB INITIO as to the Transfer of the shares of Equity Shares which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code or any successor statute, and the intended transferee shall acquire no rights in such Equity Shares. 4.2 CONVERSION TO EXCESS SHARES AND TRANSFER TO SHARE TRUST. (a) If, notwithstanding the other provisions contained in this Section 4, at any time from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer, change in the capital structure of the Trust or other event such that any Person would Beneficially Own or Constructively Own Equity Shares in excess of the applicable Ownership Limit, then, subject to Section 4.6 and Section 4.7 hereof, such Equity Shares in excess of such Ownership Limit (rounded up to the nearest whole share) shall be automatically converted into an equal number of "Excess Shares" and, in accordance with the provisions of this Section 4, be transferred automatically, by operation of law, to a Share Trust to be held in accordance with this Section 4. Such conversion and -42- transfer shall be effective as of the close of business on the Business Day prior to the date of the purported Transfer, change in capital structure of the Trust or other event. (b) If, notwithstanding the other provisions contained in this Section 4, at any time from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer, change in the capital structure of the Trust or other event which, if effective, would (i) result in the Equity Shares being Beneficially Owned or Constructively Owned by fewer than 100 Persons (determined without reference to rules of attribution) or (ii) cause the Trust to become "closely held" within the meaning of Section 856(h) of the Code or any successor statute, then such number of Equity Shares (rounded up to the nearest whole share) being transferred which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code or any successor statute shall be automatically converted into an equal number of "Excess Shares" and, in accordance with the provisions of this Section 4, be transferred automatically, by operation of law, to a Share Trust to be held in accordance with this Section 4. Such conversion and transfer shall be effective as of the close of business on the Business Day prior to the date of the purported Transfer, change in capital structure or other event. 4.3. REMEDIES FOR BREACH. If the Trustees or their designee shall at any time determine in good faith that a Transfer has taken place in violation of Section 4.1 hereof, or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any Shares of the Trust in violation of Section 4.1, the Trustees or their designee shall take such action as they deem advisable to refuse to give effect to or to prevent such Transfer, including, but not limited to, refusing to give effect to such Transfer on the books of the Trust, directing the Trust's transfer agent and/or registrar to refuse to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer; PROVIDED, HOWEVER, that any Transfer or attempted Transfer in violation of Section 4.1 shall automatically result in the conversion and transfer described in Sections 4.2(a) and 4.2(b) hereof irrespective of any action (or non-action) by the Trustees or their designee. 4.4. NOTICE TO TRUST OF RESTRICTED TRANSFER. Any Person who acquires or attempts to acquire shares in violation of Section 4.1 hereof, or any Person who is a transferee such that Excess Shares result under Section 4.2 hereof, shall immediately give the Trust written notice of such event and shall provide to the Trust such -43- other information as the Trust may request in order to determine the effect, if any, of such Transfer or attempted Transfer on the Trust's status as a REIT. 4.5. OWNERS REQUIRED TO PROVIDE INFORMATION FOR TRUST. From and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date: (a) Every Beneficial Owner or Constructive Owner of more than 5.0% (or such lower percentage as required pursuant to regulations under the Code) of the number or value of outstanding Equity Shares of the Trust shall, within 30 days after January 1 of each year, give a written statement or affidavit to the Trust stating the name and address of such Beneficial Owner or Constructive Owner, the number of Equity Shares Beneficially Owned or Constructively Owned and a description of how such Equity Shares are held. Each such Beneficial Owner shall provide to the Trust such additional information as the Trust may reasonably request in order to determine the effect, if any, of such Beneficial Ownership or Constructive Ownership on the Trust's status as a REIT or to ensure compliance with the Ownership Limit. (b) Each Person who is a Beneficial Owner or Constructive Owner of Equity Shares and each Person (including the shareholder of record) who is holding Equity Shares for a Beneficial Owner or Constructive Owner shall provide to the Trust a written statement or affidavit stating such information as the Trust may reasonably request in order to determine the Trust's status as a REIT or to ensure compliance with the Ownership Limit. 4.6. EXCEPTIONS TO OWNERSHIP LIMIT. The Ownership Limit shall not apply to the acquisition of Equity Shares by an underwriter that participates in a public offering of such shares for a period of 90 days following the purchase by such underwriter of such shares; PROVIDED, that the restrictions contained in Section 4.1 hereof will not be violated following the distribution by such underwriter of such shares. In addition, the Board of Trustees, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel satisfactory to it, in each case to the effect that the restrictions contained in Section 4.1 hereof will not be violated and that REIT status will not otherwise be lost, and upon such other conditions as the Trustees may direct, may in its discretion exempt a Person from, or provide such Person with a limited exception to, the Ownership Limit if such Person is not an individual for purposes of Section 542(a)(2) of the Code; PROVIDED, HOWEVER, that (i) the Board of Trustees must obtain such representations and undertakings from such Person as are reasonably -44- necessary to ascertain that no individual's Beneficial Ownership or Constructive Ownership of Equity Shares will violate the Ownership Limit, (ii) such Person agrees that any exemption or exception provided pursuant to this Section 4.6 shall only apply to such Person and that any subsequent Transfer by such Person which would cause any violation or attempted violation of the Ownership Limit with respect to any other Person pursuant to Section 4.1 shall cause the revocation of the exemption or exception and any resulting Excess Shares will be transferred to the Share Trust pursuant to Section 4.2 hereof and (iii) such Person agrees that the acquisition of the Equity Shares that is the subject of the exemption or exception does not and will not cause the Trust to actually or Constructively Own more than a certain percentage interest (within the meaning of Section 856(d)(2)(B) of the Code and as determined by the Board of Trustees but in no event more than 9.9%) in any tenant of the Trust's real property determined without regard to any other interests in any such tenant which the Company may actually or Constructively Own, provided that this clause (iii) shall not apply if such ownership would not cause the Trust to fail the income tests set forth in Section 856(c) of the Code for any taxable year. 4.7. SETTLEMENTS ON A NATIONAL SECURITIES EXCHANGE. Notwithstanding any provision contained herein to the contrary, nothing in this Section 4 shall preclude the settlement of any transaction entered into through the facilities of the NYSE. The fact that the settlement occurs shall not negate the effect of any other provision of this Section 4, and any transferee in such a transaction and the Shares so transferred shall be subject to all of the provisions and limitations set forth in this Section 4. 4.8. EXCESS SHARES AND SHARE TRUST. (a) SHARE TRUST. Any Equity Shares transferred to a Share Trust and converted into Excess Shares pursuant to Section 4.2 hereof shall be held for the exclusive benefit of the Beneficiary. The Trust shall name a Beneficiary of each Share Trust within five days after discovery of the existence thereof. Any conversion of Equity Shares into Excess Shares and transfer to a Share Trust pursuant to Section 4.2 shall be effective as of the close of business on the Business Day prior to the date of the purported Transfer, change in capital structure or other event that results in the transfer to the Share Trust. Excess Shares shall remain issued and outstanding shares of the Trust and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding Equity Shares of the same class and series as the class and series from which such -45- Excess Shares were converted. When transferred to a Permitted Transferee in accordance with the provisions of Section 4.8(e) hereof, such Excess Shares shall be automatically converted into shares of the class and series from which they were converted into Excess Shares. (b) DIVIDEND RIGHTS. The Share Trustee shall be entitled to receive all dividends and distributions with respect to Excess Shares as may be declared by the Board of Trustees on the Equity Shares from which such Excess Shares were converted and shall hold such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Transferee with respect to Excess Shares shall repay to the Share Trust the amount of any dividends or distributions received by it that (i) are attributable to any Equity Shares converted into Excess Shares and (ii) the record date for which was on or after the date that such shares became Excess Shares. The Trust shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Transferee, including, if necessary, withholding any portion of future dividends or distributions payable on Equity Shares purported to be Beneficially Owned or Constructively Owned by the Person who, but for the provisions of Section 4.1 hereof, would Constructively Own or Beneficially Own the Excess Shares; and, as soon as reasonably practicable following the Trust's receipt or withholding thereof, shall pay over to the Share Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. (c) RIGHTS UPON LIQUIDATION FOR EXCESS SHARES. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any other distribution of all or substantially all of the assets of, the Trust, each holder of Excess Shares shall be entitled to receive, ratably with each other holder of Equity Shares of the same class and series as the class and series from which such Excess Shares were converted, that portion of the assets of the Trust available for distribution to the holders of such class and series of Equity Shares. The Share Trust shall distribute to the Prohibited Transferee the amounts received upon such liquidation, dissolution, winding up or distribution; PROVIDED, HOWEVER, that the Prohibited Transferee shall not be entitled to receive amounts pursuant to this Section 4.8(c) in excess of, (i) in the case of a purported Transfer in which the Prohibited Transferee gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share, if any, such Prohibited Transferee paid for the Equity Shares and, (ii) in the case of a purported Transfer in -46- which the Prohibited Transfer did not give value for such shares (e.g., if the shares were received through a gift or devise) and which purported Transfer resulted in the transfer of shares to the Share Trust, the price per share equal to the Market Price on the date of such purported Transfer. Any remaining amount in such Share Trust shall be distributed to the Beneficiary. (d) VOTING RIGHTS FOR EXCESS SHARES. The Share Trustee shall be entitled to vote all Excess Shares, which Excess Shares shall have the same voting rights as the Equity Shares of the class and series from which such Excess Shares were converted. Any vote by a Prohibited Transferee as a holder of Equity Shares prior to the discovery by the Trust that the Equity Shares are Excess Shares shall, subject to applicable law, be rescinded and shall be void AB INITIO with respect to such Excess Shares and the Prohibited Transferee shall be deemed to have given, as of the close of business on the Business Day prior to the date of the purported Transfer that results in the transfer to the Share Trust of Equity Shares under Section 4.2 hereof, an irrevocable proxy to the Share Trustee, coupled with an interest, to vote the Excess Shares in the manner in which the Share Trustee, in its sole and absolute discretion, desires. (e) DESIGNATION OF PERMITTED TRANSFEREE. The Share Trustee shall have the exclusive and absolute right, at any time after the 90-day period referred to in Section 4.8(g) hereof, to designate a Permitted Transferee of any and all Excess Shares. In an orderly fashion so as not to materially adversely affect the Market Price of the Excess Shares, the Share Trustee shall designate any Person as Permitted Transferee; PROVIDED, HOWEVER, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale), at a price as set forth in Section 4.8(g), the Excess Shares and (ii) the Permitted Transferee so designated may acquire such Excess Shares without such acquisition resulting in a transfer to a Share Trust and the redesignation of such Equity Shares so acquired as Excess Shares under Section 4.2 hereof. Upon the designation by the Share Trustee of a Permitted Transferee in accordance with the provisions of this Section 4.8(e), (i) the Share Trustee shall, upon receipt of consideration therefor, cause to be transferred to the Permitted Transferee that number of Excess Shares acquired by the Permitted Transferee, (ii) the Share Trustee shall cause to be recorded on the books of the Trust that the Permitted Transferee is the holder of record of such number of Equity Shares, (iii) such number of Excess Shares shall be automatically converted into an equal number of Equity Shares of the class and series from which such Excess Shares were converted and (iv) the Share Trustee shall -47- distribute to the Beneficiary any and all amounts held with respect to the Excess Shares after making the payment to the Prohibited Transferee pursuant to Section 4.8(f) hereof. (f) COMPENSATION TO RECORD HOLDER OF EQUITY SHARES THAT BECOME EXCESS SHARES. Any Prohibited Transferee shall be entitled (following discovery of the Excess Shares and subsequent designation of the Permitted Transferee in accordance with Section 4.8(e) hereof or following the acceptance of the offer to purchase such shares in accordance with Section 4.8(g) hereof) to receive from the Share Trustee following the sale or other disposition of such Excess Shares the lesser of (i) in the case of (a) a purported Transfer in which the Prohibited Transferee gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share such Prohibited Transferee paid for the Equity Shares or (b) a Transfer in which the Prohibited Transferee did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Transfer resulted in the transfer of shares to the Share Trust, the Market Price on the date of such Transfer and (ii) the price per share received by the Share Trustee from the sale or other disposition of such Excess Shares in accordance with Section 4.8(e) or 4.8(g). Any amounts received by the Share Trustee in respect of such Excess Shares and in excess of such amounts to be paid the Prohibited Transferee pursuant to this Section 4.8(f) shall be distributed to the Beneficiary in accordance with the provisions of Section 4.8(e). Each Beneficiary and Prohibited Transferee waive any and all claims that they may have against the Share Trustee and the Share Trust arising out of the disposition of Excess Shares, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section 4.8 by, such Share Trustee or the Trust. (g) PURCHASE RIGHT IN EXCESS SHARES. Excess Shares shall be deemed to have been offered for sale by the Share Trustee to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Excess Shares (or, in the case of devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer for a period of 90 days after the later of (i) the date of the purported Transfer which resulted in such Excess Shares and (ii) the date the Trust determines in good faith that a Transfer resulting in Excess Shares has occurred, if the Trust does not receive a notice of such Transfer pursuant to Section 4.4 hereof. -48- 4.9. REMEDIES NOT LIMITED. Other than with respect to Section 4.7 hereof, nothing contained in this Section 4 shall limit the authority of the Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interest of the shareholders by preservation of the Trust's status as a REIT and to ensure compliance with the Ownership Limit. 4.10. AMBIGUITIES. In the case of an ambiguity in the application of any of the provisions of this Section 4, the Trustees shall have the power to determine the application of the provisions of this Section 4 with respect to any situation based on the facts known to the Trustees. 4.11. LEGEND. Each certificate for Common Shares, Preferred Shares and Convertible Preferred Shares shall bear the following legend: "The Equity Shares represented by this certificate are subject to restrictions on transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions, no Person may (i) Beneficially or Constructively Own Equity Shares in excess of 9.9% of the number of shares or value of outstanding Equity Shares, (ii) Beneficially or Constructively Own Equity Shares that would result in the Equity Shares being Beneficially or Constructively Owned by fewer than 100 Persons (determined without reference to any rules of attribution) or (iii) Beneficially or Constructively Own Equity Shares that would result in the Trust being "closely held" under Section 856(h) of the Code, unless the conditions of Section 4.6 of the Trust's Declaration of Trust are satisfied. Any Person who attempts to Beneficially or Constructively Own Equity Shares in excess of the above limitations must immediately notify the Trust in writing of such proposed or attempted Transfer. If any restrictions described above are violated, the Equity Shares represented hereby will be converted automatically into Excess Shares which will be -49- transferred automatically, by operation of law, to a Share Trust to be held for the exclusive benefit of a Beneficiary to be named by the Trust. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void AB INITIO. All capitalized terms in this legend have the meanings defined in the Trust's Declaration of Trust, as the same may be further amended from time to time, a copy of which, including the restrictions on Transfer, will be sent without charge to each shareholder who so requests. Such requests must be made to the Secretary of the Trust at its principal office." 4.13. SEVERABILITY. If any provision of this Section 4 or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. 5. SHAREHOLDERS. 5.1. MEETINGS. There shall be an annual meeting of the shareholders, to be held on proper notice at such time (after the delivery of the annual report) and convenient location as shall be determined by or in the manner prescribed in the Bylaws, for the election of the Trustees, if required, and for the transaction of any other business within the powers of the Trust. Except as otherwise provided in this Declaration of Trust, special meetings of shareholders may be called in the manner provided in the Bylaws. If there are no Trustees, the officers of the Trust shall promptly call a special meeting of the shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws. 5.2. VOTING RIGHTS. Subject to the provisions of any class or series of Shares then outstanding, the shareholders shall be entitled to vote only on the following matters: (a) termination of REIT status as provided in Section 2.1(c) hereof; (b) election of Trustees as provided in Section 2.2(a) hereof and the removal of Trustees as provided in Section 2.3 hereof; (c) amendment of this Declaration of Trust as provided in Section 7 hereof; (d) -50- termination of the Trust as provided in Section 9.2 hereof; (e) merger or consolidation of the Trust, or the sale or disposition of all or substantially all of the property of the Trust, as provided in Section 8 hereof; (f) any matter for which a vote of shareholders is required by a national securities exchange on which the Shares are traded; and (g) such other matters with respect to which a vote of the shareholders is required by applicable law or the Board of Trustees has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the shareholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the shareholders at any meeting shall in any way bind the Board of Trustees. 5.3. PREEMPTIVE AND APPRAISAL RIGHTS. Except as may be provided by the Board of Trustees in setting the terms of any class or series of Shares pursuant to Section 3.5 hereof, no holder of Shares shall, as such holder: (a) have any preemptive or preferential right to purchase or subscribe for any additional Shares or any other security of the Trust which it may issue or sell or (b) except as expressly required by Maryland law, have any right to require the Trust to pay it the fair value of its Shares in an appraisal or similar proceeding. 6. LIABILITY LIMITATION AND INDEMNIFICATION. 6.1. LIMITATION OF SHAREHOLDER LIABILITY. No shareholder shall be personally liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of its being a shareholder, nor shall any shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the property of the Trust or the affairs of the Trust. 6.2. LIMITATION OF TRUSTEE AND OFFICER LIABILITY. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust, no Trustee or officer of the Trust shall be liable to the Trust or to any shareholder for money damages. Neither the amendment nor repeal of this Section 6.2, nor the adoption or amendment of any other provision of this Declaration of Trust inconsistent with this Section 6.2, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees -51- and officers of a Maryland real estate investment trust for money damages in a suit by or on behalf of the Trust or by any shareholder, no Trustee or officer of the Trust shall be liable to the Trust or to any shareholder for money damages except to the extent that (i) the Trustee or officer actually received an improper benefit or profit in money, property or services, in which case the liability shall not exceed the amount of the benefit or profit in money, property or services actually received; or (ii) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. 6.3. EXPRESS EXCULPATORY CLAUSES IN INSTRUMENTS. Neither the shareholders nor the Trustees, officers, employees or agents of the Trust shall be liable under any written instrument creating an obligation of the Trust, and all Persons shall look solely to the property of the Trust for the payment of any claim under or for the performance of that instrument. The omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any shareholder, Trustee, officer, employee or agent liable thereunder to any third party, nor shall the Trustees or any officer, employee or agent of the Trust be liable to anyone for such omission. 6.4. INDEMNIFICATION AND ADVANCEMENT FOR EXPENSES. The Trust shall indemnify, to the fullest extent permitted by Maryland law, as applicable from time to time, all persons who at any time were or are trustees or officers of the Trust for any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) relating to any action alleged to have been taken or omitted in such capacity as a trustee or an officer. The Trust shall pay or reimburse all reasonable expenses incurred by a present or former trustee or officer of the Trust in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) in which the present or former trustee or officer is a party, in advance of the final disposition of the proceeding, to the fullest extent permitted by, and in accordance with the applicable requirements of, Maryland law, as applicable from time to time. The Trust may indemnify any other persons permitted but not required to be indemnified by Maryland law, as applicable from time to time, if and to the extent indemnification is authorized and determined to be appropriate, in each case in accordance with applicable law, by the Board of Trustees, the majority of the -52- shareholders of the Trust entitled to vote thereon or special legal counsel appointed by the Board of Trustees. No amendment of this Declaration of Trust or repeal of any of its provisions shall limit or eliminate any of the benefits provided to trustees and officers under this Section 6.4 in respect of any act or omission that occurred prior to such amendment or repeal. 7. AMENDMENTS. 7.1. GENERAL. The Trust reserves the right from time to time to make any amendment to this Declaration of Trust, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in this Declaration of Trust, of any Shares. All rights and powers conferred by this Declaration of Trust on shareholders, Trustees and officers are granted subject to this reservation. All references to this Declaration of Trust shall include all amendments thereto. 7.2. BY TRUSTEES. The Trustees by a two-thirds vote may amend this Declaration of Trust from time to time, in the manner provided by Maryland REIT law, without any action by the shareholders, to qualify as a REIT under the Code or under Maryland REIT law. 7.3. BY SHAREHOLDERS. Other than amendments pursuant to Section 3.1 or Section 7.2 hereof, any amendment to this Declaration of Trust shall be valid only if approved by the affirmative vote of at least a majority of all the votes entitled to be cast on the matter, except that any amendment to Section 2.1(c), 2.2(a) or 2.3 or this Section 7.3 of this Declaration of Trust shall be valid only if approved by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter. 8. MERGER, CONSOLIDATION OR SALE OF THE PROPERTY OF THE TRUST. Subject to the provisions of any class or series of Shares at the time outstanding, the Trust may (a) merge with or into another entity, (b) consolidate with one or more other entities into a new entity or (c) sell, lease, exchange or otherwise transfer all or substantially all of the property of the Trust. Any such action must be approved by the Board of Trustees and, after notice to all shareholders entitled to vote on the matter, by the affirmative vote of a majority of all the votes entitled to be cast on the matter. -53- 9. DURATION AND TERMINATION OF TRUST. 9.1. DURATION OF TRUST. The Trust shall continue perpetually unless terminated pursuant to Section 9.2 hereof or pursuant to any applicable provision of Maryland REIT law. 9.2. TERMINATION OF TRUST. (a) Subject to the provisions of any class or series of Shares at the time outstanding, the Trust may be terminated at any meeting of shareholders called for that purpose by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote thereon. Upon the termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs; (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration of Trust shall continue, including the powers to fulfill or discharge the Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining property of the Trust to one or more Persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business; and (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary for their protection, the Trustees may distribute the remaining property of the Trust, in cash or in kind or partly each, among the shareholders according to their respective rights, so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares (other than Common Shares) at the time outstanding shall be entitled, the remaining property of the Trust available for payment and distribution to shareholders shall, subject to any participating or similar rights of Shares (other than Common Shares) at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding. (b) After termination of the Trust, the liquidation of its business and the distribution to the shareholders as herein provided, a majority of the Trustees shall execute and file with -54- the Trust's records a document certifying that the Trust has been duly terminated, and thereupon the Trustees shall be discharged from all liabilities and duties hereunder, and the rights and interests of all shareholders shall cease. 10. MISCELLANEOUS. 10.1. GOVERNING LAW. The rights of all parties and the validity, construction and effect of every provision of this Declaration of Trust shall be subject to and construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof. 10.2 RELIANCE BY THIRD PARTIES. Any certificate shall be final and conclusive as to any Person dealing with the Trust if executed by an individual who, according to the records of the Trust or of any recording office in which this Declaration of Trust may be recorded, appears to be the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a) the number or identity of Trustees, officers of the Trust or shareholders; (b) the due authorization of the execution of any document; (c) the action or vote taken, and the existence of a quorum, at a meeting of the Board of Trustees or shareholders; (d) a copy of this Declaration of Trust or of the Bylaws as a true and complete copy as then in force; (e) an amendment to this Declaration of Trust; (f) the termination of the Trust; or (g) the existence of any fact which relates to the affairs of the Trust. No purchaser, lender, transfer agent or other Person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made on behalf of the Trust by the Trustees or by any officer, employee or agent of the Trust. 10.3. SEVERABILITY. (a) The provisions of this Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the REIT provisions of the Code, the Maryland REIT law or other applicable federal or state laws, the Conflicting Provisions shall be deemed never to have constituted a part of this Declaration of Trust, even without any amendment of this Declaration of Trust pursuant to Section 7 hereof; PROVIDED, HOWEVER, that such determination by the Board of Trustees shall not affect or impair any of the remaining provisions of this Declaration of Trust or render invalid or improper any -55- action taken or omitted prior to such determination. No Trustee shall be liable for making or failing to make such a determination. (b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall not in any manner affect or render invalid or unenforceable such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction. 10.4. CONSTRUCTION. In this Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts are inserted for convenience and shall not affect the meaning, construction or effect of this Declaration of Trust. 10.5. RECORDATION. This Declaration of Trust and any amendment hereto shall be filed for record with the SDAT and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record this Declaration of Trust or any amendment hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of this Declaration of Trust or any amendment hereto. A restated Declaration of Trust shall, upon filing, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration of Trust and the various amendments thereto. THIRD: the amendment and restatement of the Declaration of Trust was approved and advised by the Board of Trustees and approved by the sole shareholder of the Trust in accordance with the Maryland REIT law. [signature page follows] -56- IN WITNESS WHEREOF, these Articles of Amendment and Restatement have been signed on this 14th day of November, 1997, by the undersigned President of the Trust who acknowledges that these Articles of Amendment and Restatement are the act of the Trust and that, to the best of his knowledge, information and belief, the matters and facts set forth herein are true in all material respects and that the statement is made under the penalties for perjury. PRIME GROUP REALTY TRUST By: /s/ Richard S. Curto [Seal] --------------------------- Name: Richard S. Curto Title: President ATTEST: By: /s/ Robert J. Rudnik --------------------------- Name: Robert J. Rudnik Title: Secretary -57- EX-3.2 3 EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF PRIME GROUP REALTY TRUST A MARYLAND REAL ESTATE INVESTMENT TRUST ARTICLE I OFFICES AND FISCAL YEAR Section 1.1. REGISTERED OFFICE. Prime Group Realty Trust (the "Trust") shall maintain a registered office in the State of Maryland as required by law. Section 1.2. PRINCIPAL OFFICE. The Trust also has a principal office located at 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601, telephone number 312/917-1500. Section 1.3. OTHER OFFICES. The Trust may also have offices other than its principal office at such other places both within and without the State of Maryland as the Board of Trustees may from time to time determine or as the business of the Trust may require. Section 1.4. FISCAL AND TAXABLE YEARS. The fiscal and taxable years of the Trust shall begin on January 1 and end on December 31. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1. PLACE. All meetings of shareholders shall be held at the principal office of the Trust or at such other place within the United States as shall be stated in the notice of the meeting. Section 2.2. ANNUAL MEETINGS. An annual meeting of the shareholders for the election of Trustees and the transaction of any business within the powers of the Trust shall be held each year beginning with the year 1998, after the delivery of the annual report referred to in Section 2.14 of this Article II, at a convenient location and on proper notice, on a date and at the time set by the Trustees. Failure to hold an annual meeting does not invalidate the Trust's existence or affect any otherwise valid acts of the Trust. Section 2.3. SPECIAL MEETINGS. The chairman of the Board of Trustees, the president or the Board of Trustees may call special meetings of the shareholders. Special meetings of shareholders shall also be called by the secretary upon the written request of the holders of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The secretary shall inform such shareholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment by such shareholders to the Trust of such costs, the secretary shall give notice to each shareholder entitled to notice of the meeting. Each special meeting shall be held upon such date and at such time and place either within or without the State of Maryland as shall be designated by the person or persons calling such special meeting at least ten (10) days prior to the special meeting. Section 2.4. NOTICE OF MEETING. Not less than ten (10) nor more than ninety (90) days before such meeting of shareholders, the secretary shall give to each shareholder entitled to vote at such meeting and to each shareholder not entitled to vote who is entitled to notice of the meeting, written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such shareholder personally or by leaving it at its residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the shareholder at its post office address which appears in the records of the Trust, with postage thereon prepaid. Section 2.5. SCOPE OF NOTICE. Any business of the Trust may be transacted at an annual meeting of shareholders without being specifically designated in such notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of shareholders except as specifically designated in the notice. Section 2.6. ORGANIZATION. Meetings of shareholders shall be presided over by the chairman of the Board of Trustees, if any, or in his or her absence one of the following officers present shall conduct the meeting in the order stated: the president; the vice presidents in their order of rank and seniority; or a chairman chosen by the shareholders entitled to cast a majority of the votes which all shareholders present in person or by proxy are entitled to cast. The secretary, or, in his or her absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman, shall act as secretary. Section 2.7. QUORUM. Unless otherwise provided by law or the Articles of Amendment and Restatement of Declaration of Trust of the Trust (the "Declaration of Trust"), at each meeting of shareholders, the presence in person or representation by proxy of the holders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum for the transaction of business. In the absence of a quorum, the shareholders so present and represented may, by vote of the holders of a majority of the shares of the Trust so present and represented, adjourn the meeting from time to time until a quorum shall attend, and Section 2.8 of these Bylaws shall apply to each such adjournment. Section 2.8. ADJOURNMENTS. Any meeting of shareholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Trust may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 2.9. VOTING. Subject to the provisions of the Declaration of Trust, a plurality of all the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to elect a Trustee. A majority of the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required herein or by statute or by the Declaration of Trust. Unless otherwise provided in the Declaration of Trust, each share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Shareholders will have no right to cumulative voting for the election of Trustees. Section 2.10. PROXIES. A shareholder may cast the votes entitled to be cast due to the shares owned of record by him or her either in person or by a proxy, executed in writing by the shareholder or by his or her duly authorized agent. Such proxy shall be filed with the secretary of the Trust before or at the time of the meeting. No proxy shall be valid after eleven (11) -3- months from the date of its execution, unless otherwise provided in the proxy. Section 2.11. FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. In order that the Trust may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of Common Shares or for the purpose of any other lawful action, the Board of Trustees may fix, in advance, a record date, which shall not be (i) more than ninety (90) nor less than ten (10) days before the date of such meeting nor (ii) more than ninety (90) days prior to any other action. If no record date is fixed: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Trustees adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Trustees may fix a new record date for the adjourned meeting. Section 2.12. VOTING OF SHARES BY CERTAIN HOLDERS. Any shares registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president, a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the governing board of such corporation or other entity or agreement of the partners of the partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such shares. Any trustee or other fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. Shares of the Trust directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. -4- The Trustees may adopt by resolution a procedure by which a shareholder may certify in writing to the Trust that any shares registered in the name of the shareholder are held for the account of a specified person other than the shareholder. The resolution shall set forth the class of shareholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Trust; and any other provisions with respect to the procedure which the Trustees consider necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the shareholder of record of the specified shares in place of the shareholder who makes the certification. Notwithstanding any other provision contained in the Declaration of Trust or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of beneficial interest of the Trust. This Section 2.12 may be repealed, in whole or in part, at any time. Section 2.13. INSPECTORS. At any meeting of shareholders, the chairman of the meeting may, or upon the request of any shareholder shall, appoint one or more persons as inspectors for such meetings. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. Each report of an inspector shall be in writing and signed by him or her, or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 2.14. REPORTS TO SHAREHOLDERS. (a) The Trustees shall submit to the shareholders at or before the annual meeting of shareholders a report of the business and operations of the Trust during such fiscal year, containing a -5- balance sheet and a statement of income and surplus of the Trust, accompanied by the certification of an independent certified public accountant, and such further information as the Trustees may determine is required pursuant to any law or regulation to which the Trust is subject. Within the earlier of twenty (20) days after the annual meeting of shareholders or one hundred and twenty (120) days after the end of the fiscal year of the Trust, the Trustees shall place the annual report on file at the principal office of the Trust and with any governmental agencies as may be required by law and as the Trustees may deem appropriate. (b) Not later than forty-five (45) days after the end of each of the first three (3) quarterly periods of each fiscal year, the Trustees shall deliver or cause to be delivered an interim report to the shareholders containing unaudited financial statements for such quarter and for the period from the beginning of the fiscal year to the end of such quarter, and such further information as the Trustees may determine is required pursuant to any law or regulation to which the Trust is subject. Section 2.15. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The Secretary shall make, at least ten (10) days before every meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of Common Shares registered in the name of each shareholder. Such list shall be open to the examination of any Shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any shareholder who is present. Section 2.16. NOMINATIONS AND SHAREHOLDER BUSINESS. (a) ANNUAL MEETINGS OF SHAREHOLDERS. (1) Nominations of persons for election to the Board of Trustees and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the Trust's notice of meeting, (ii) by or at the direction of the Trustees or (iii) by any shareholder of the Trust who was a shareholder of record both at the time of giving of notice provided for in this Section 2.16 and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2.16. -6- (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of paragraph (a)(1) of this Section 2.16, the shareholder must have given timely notice thereof in writing to the Secretary of the Trust and such other business must otherwise be a proper matter for action by shareholders. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Trust not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date or if the Trust has not previously held an annual meeting, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Trust. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Trustee all information relating to such person that is required to be disclosed in solicitations of proxies for election of Trustees, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Trustee if elected); (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made: (x) the name and address of such shareholder as they appear on the Trust's books; (y) the name and address of such beneficial owner; and (z) the number of each class of Common Shares of the Trust which are ownd beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 2.16 to the contrary, in the event that the number of Trustees to be elected to the Board of -7- Trustees is increased and there is no public announcement by the Trust naming all of the nominees for Trustee or specifying the size of the increased Board of Trustees at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 2.16 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of the Trust not later than the close of business on the tenth day following the day on which such public announcement is first made by the Trust. (b) SPECIAL MEETING OF SHAREHOLDERS. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Trust's notice of meeting. Nominations of persons for election to the Board of Trustees may be made at a special meeting of shareholders at which Trustees are to be elected (i) pursuant to the Trust's notice of the meeting, (ii) by or at the direction of the Board of Trustees or (iii) provided that the Board of Trustees has determined that Trustees shall be elected at such special meeting, by any shareholder of the Trust who was a shareholder of record both at the time of giving of notice provided for in this Section 2.16 and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2.16. In the event the Trust calls a special meeting of shareholders for the purpose of electing one or more Trustees to the Board of Trustees, any such shareholder may nominate a person or persons (as the case may be) for election to such position as specified in the Trust's notice of meeting, if the shareholder's notice containing the information required by paragraph (a)(2) of this Section 2.16 shall be delivered to the Secretary at the principal office of the Trust not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Trustees to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. (c) GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.16 shall be eligible to serve as Trustees and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with procedures set forth in this -8- Section 2.16. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.16 and, if any proposed nomination or business is not in compliance with this Section 2.16, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 2.16, "public announcement" shall mean disclosure in a press release reported by the Dow Jones New Service, Associated Press or comparable news service or in a document publicly filed by the Trust with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 2.16, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.16. Nothing in this Section 2.16 shall be deemed to affect any rights of shareholder to request inclusion of proposals in, nor any of the rights of the Trust to omit a proposal from, the Trust's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 2.17. INFORMAL ACTION BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by each shareholder entitled to vote on the matter and any other shareholder entitled to notice of a meeting of shareholders (but not to vote thereat) has waived in writing any right to dissent from such action, and such consent and waiver are filed with the minutes of proceedings of the shareholders. Section 2.18. VOTING BY BALLOT. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any shareholder shall demand that voting be by ballot. -9- ARTICLE III BOARD OF TRUSTEES Section 3.1. POWERS; QUALIFICATIONS. Unless otherwise provided by law or the Declaration of Trust, the business and affairs of the Trust shall be managed by or under the direction of the Board of Trustees. Unless otherwise provided by the Declaration of Trust, Trustees need not be shareholders. A Trustee shall be an individual at least 21 years of age who is not under legal disability. Section 3.2. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Trustees shall be held immediately after and at the same place as the annual meeting of shareholders, no notice other than this Bylaw being necessary. The Trustees may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Trustees without other notice than such resolution. Section 3.3 SPECIAL MEETINGS. Special meetings of the Trustees may be called by or at the request of the chairman or chief executive officer or by one-half or more of the Trustees then in office. The person or persons authorized to call special meetings of the Trustees may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Trustees called by them. Section 3.4. NOTICE. Notice of any special meeting shall be given by written notice delivered personally, transmitted by facsimile, telegraphed or mailed to each Trustee at his or her business or residence address or by telephone or facsimile transmission. Personally delivered, facsimile transmitted or telegraphed notices shall be given at least two (2) days prior to the meeting. Telephone notice shall be given at least twenty-four (24) hours prior to the meeting. Notice by mail shall be given at least five (5) days prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Telephone notice shall be deemed given when the Trustee is personally given notice in a telephone call to which such Trustee personally is a party. Facsimile transmission shall be deemed given upon receipt by the sender of confirmation indicating receipt of the transaction. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Trustees need be stated in the notice, unless specifically required by statute or these Bylaws. -10- Section 3.5. QUORUM; VOTE REQUIRED FOR ACTION. A majority of the entire Board of Trustees shall constitute a quorum for transaction of business at any meeting of the Trustees; PROVIDED, that if less than a majority of such Trustees are present at said meeting, a majority of the Trustees present may adjourn the meeting from time to time without further notice; and PROVIDED FURTHER, that if pursuant to the Declaration of Trust or these Bylaws the vote of a majority of a particular group of Trustees is required for action, a quorum must also include a majority of such group. The Trustees present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Trustees to leave less than a quorum. Section 3.6. VOTING. (a) The action of the majority of the Trustees present at a meeting at which a quorum is present shall be the action of the Trustees, unless the concurrence of a greater proportion is required for such action by applicable statute. Section 3.7. TELEPHONIC MEETINGS PERMITTED. The Board of Trustees may participate in a meeting of the Board of Trustees through use of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other. Participation in the meeting pursuant to this Bylaw shall constitute presence in person at such meeting. Section 3.8. INFORMAL ACTION BY TRUSTEES. Unless otherwise provided by the Declaration of Trust, any action required or permitted to be taken at any meeting of the Board of Trustees may be taken without a meeting if all members of the Board of Trustees consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Trustees. Section 3.9. VACANCIES. If for any reason any or all of the Trustees cease to be Trustees, such event shall not terminate the Trust or affect these Bylaws or the powers of the remaining Trustees hereunder (even if fewer than two Trustees remain). Any vacancy (including a vacancy created by an increase in the number of Trustees) shall be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining Trustees. Any individual so elected as Trustee shall hold office for the unexpired term of the Trustee he or she is replacing. -11- Section 3.10. COMPENSATION OF TRUSTEES. Unless otherwise provided by the Declaration of Trust, the Board of Trustees shall have the authority to fix the compensation of Trustees. Such compensation may, by resolution of the Trustees, include a fixed sum of cash and/or shares of beneficial interest of the Trust (or options to acquire shares) per year and/or per visit to real property owned or to be acquired by the Trust and for any service or activity they performed or engaged in as Trustees. Trustees may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Trustees or of any committee thereof; and for their expenses, if any, in connection with each property visit and any other service or activity performed or engaged in as Trustees; but nothing herein contained shall be construed to preclude any Trustees form serving the Trust in any other capacity and receiving compensation therefor. Section 3.11. REMOVAL OF TRUSTEES. The shareholders may, at any time, remove any Trustee in the manner provided in the Declaration of Trust. Section 3.12. LOSS OF DEPOSITS. No Trustee shall be liable for any loss which may occur by reason of the failure of a bank, trust company, savings and loan association, or other institution with whom moneys or shares have been deposited. Section 3.13. SURETY BOND. Unless required by law, no Trustee shall be obligated to give any bond or surety or other security for the performance of any of his or her duties. Section 3.14. RELIANCE. Each Trustee, officer, employee and agent of the Trust shall, in the performance of his or her duties with respect to the Trust, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel or upon reports made to the Trust by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Trustees or officers of the Trust, regardless of whether such counsel or expert may also be a Trustee. Section 3.15. NUMBER AND CLASSIFICATION. The number of Trustees of the Trust shall initially be seven (7). The Trustees shall be classified, with respect to the terms for which they severally hold office, into separate classes in the manner prescribed in the Declaration of Trust. At any regular meeting or at any special meeting called for that purpose, by the affirmative vote of at least two-thirds of the members, the Board of Trustees may increase or decrease the number of Trustees; PROVIDED, that the number thereof shall not be fewer than three (3) nor more than -12- thirteen (13); and PROVIDED FURTHER, that the tenure of office of a Trustee shall not be affected by any decrease in the number of Trustees. ARTICLE IV COMMITTEES Section 4.1. NUMBER, TENURE AND VACANCIES. The Board of Trustees may, by resolution passed by a majority of the Trustees in office, appoint from among its members committees comprised of two (2) or more Trustees. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Trustees. Subject to the provisions hereof, the Board of Trustees shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternative members to replace any absent or disqualified member or to dissolve any such committee. Section 4.2. POWER OF COMMITTEES. The Board of Trustees may delegate to any committee designated under Section 4.1 hereof any of the powers and authority of the Board of Trustees in the management of the business and affairs of the Trust. No such committee, however, shall have power or authority in reference to (i) amending the Declaration of Trust or the Bylaws; (ii) approving any merger or share exchange which does not require shareholder approval; (iii) recommending to the shareholders any action which requires shareholder approval; and (iv) declaring a dividend or a distribution with respect to shares. Section 4.3. MEETINGS. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another Trustee to act in the place of such absent member. One-third, but not less than two (2), of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of the majority present shall be the act of such committee. The Board of Trustees may designate a chairman of any committee, and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Trustee to act at the meeting in the place of such absent or disqualified members; PROVIDED, HOWEVER, that in the event of -13- the absence or disqualification of an Independent Trustee, such appointee shall be an Independent Trustee. Each committee shall keep minutes of its proceedings and shall report the same to the Board of Trustees at the meeting next succeeding, and any action by the committees shall be subject to revision and alteration by the Board of Trustees; PROVIDED that no rights of third persons shall be affected by any such revision or alteration. Section 4.4. TELEPHONE MEETINGS. Members of a committee of the Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 4.5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Trustees may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. ARTICLE V OFFICERS Section 5.1 GENERAL PROVISIONS. The officers of the Trust may consist of a chairman of the board, one or more chief operating officers, one or more chief executive officers, a president, one or more vice presidents, a chief financial officer, a treasurer, one or more assistant treasurers, a secretary, and one or more assistant secretaries. In addition, the Trustees may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Trust shall be elected annually by the Trustees at the first meeting of the Trustees held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his or her successor is elected and qualifies or until his or her death, resignation or removal in the manner hereinafter provided. Any two or more offices may be held by the same person. In their discretion, the Trustees may leave unfilled any office except that of president and secretary. Election of an officer or agent shall not of itself create contract rights between the Trust and such officer or agent. -14- Section 5.2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust may be removed by a majority of the members of the Board of Trustees if in their judgment the best interests of the Trust would be served thereby, but any such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer of the Trust may resign at any time by giving written notice of his or her resignation to the Trustees, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make such resignation effective unless otherwise stated in the resignation. Section 5.3. VACANCIES. A vacancy in any office may be filled by the Trustees for the balance of the term. Section 5.4. CHAIRMAN OF THE BOARD. The chairman of the board shall supervise and direct the chief executive officer and the president, subject to the control of the board of trustees. The chairman of the board shall preside over the meetings of the Trustees and of the shareholders at which he or she shall be present and shall in general oversee all of the business and affairs of the Trust. The chairman shall perform such other duties as may be assigned to him or her by the Trustees. The chairman of the board may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed. Section 5.5. CHIEF EXECUTIVE OFFICER. The Trustees may designate a chief executive officer from among the elected officers. The chief executive officer shall have general responsibility for implementation of the policies of the Trust, as determined by the Trustees, and for the management of the business affairs of the Trust. The chief executive officer shall report directly to the chairman of the board. In the absence of the chairman of the board, the chief executive officer shall preside over the meetings of the Trustees and of the shareholders at which he or she shall be present. Section 5.6. CHIEF OPERATING OFFICER. The Trustees may designate one or more chief operating officers from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees. Section 5.7. CHIEF FINANCIAL OFFICER. The Trustees may designate a chief financial officer from among the elected -15- officers. Said officer will have such responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 5.8. PRESIDENT. In the absence of the chairman of the board and the chief executive officer, the president shall preside over the meetings of the Trustees and of the shareholders at which he or she shall be present. The president shall report directly to the chairman of the board or, if so directed by the Trustees or the chairman of the board, the chief executive officer. In the absence of a designation of a chief executive officer by the Trustees, the president shall be the chief executive officer and shall be ex officio a member of all committees that may, from time to time, be constituted by the Trustees. The president may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Trustees from time to time. Section 5.9. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there by more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president. Such vice president also shall perform such other duties as from time to time may be assigned to him or her by the president or by the Trustees. The Trustees may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. Section 5.10. CONTROLLER. The controller shall have the custody of the funds and securities of the Trust and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Trust and shall deposit all moneys and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Trustees. The controller shall disburse the funds of the Trust as may be ordered by the Trustees, taking proper vouchers for such disbursements, and shall render to the chief executive officer and Trustees, at the regular meetings of the Trustees or whenever they may require it, an account of all his or her transactions as controller and of the financial condition of the Trust. If required by the Trustees, he or she shall give the Trust a bond in such sum and with such surety or sureties as shall be satisfactory to the Trustees for the -16- faithful performance of the duties of his or her office and for the restoration of the Trust, in case of his or her death, resignation, retirement or removal from office, all books, papers, vouchers, moneys and other property of whatever kind in his or her possession or under his or her control belonging to the Trust. Such controller also shall perform such other duties as from time to time may be assigned to him or her by the president, the chief financial officer or the Trustees. Section 5.11. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the shareholders, the Trustees and committees of the Trustees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the trust records and of the seal of the Trust; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) have general charge of the share transfer books of the Trust; and (f) in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or by the Trustees. Section 5.12. ASSISTANT SECRETARIES AND ASSISTANT CONTROLLERS. The assistant secretaries, in general, shall perform such duties as shall be assigned to them by the secretary or by the controller, respectively, or by the president and assistant controllers or the Trustees. The assistant controllers shall, if required by the Trustees, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Trustees. Section 5.13. COMPENSATION. The salaries of the officers shall be fixed from time to time by the Trustees and no officer shall be prevented from receiving such salary by reason of the fact that he or she is also a Trustee. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 6.1. CONTRACTS. The Trustees may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Trust and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Trustees or by an authorized person shall be deemed valid and binding upon the Trustees and upon the Trust when so authorized or ratified by action of the Trustees. -17- Section 6.2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Trust shall be signed by such officer or officers, agent or agents of the Trust and in such manner as shall from time to time be determined by the Trustees. Section 6.3. DEPOSITS. All funds of the Trust not otherwise employed shall be deposited from time to time to the credit of the Trust in such banks, trust companies or other depositories as the Trustees may designate. ARTICLE VII SHARES OF BENEFICIAL INTEREST Section 7.1. CERTIFICATES. Every shareholder shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of beneficial interest held by such shareholder in the Trust. Each certificate shall be signed by or in the name of the Trust by the chairman and the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Trust. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Trust shall, from time to time, issue several classes of shares, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Trust, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement or summary, the Trust may set forth upon the face or back of the certificate a statement that the Trust will furnish to any shareholder, upon request and without charge, a full statement of such information. Section 7.2. TRANSFERS. Certificates shall be treated as negotiable, and title thereto and to the shares they represent shall be transferred by delivery thereof to the same extent as those of a Maryland stock corporation. No transfers of shares of the Trust shall be made if (i) void AB INITIO pursuant to any provision of the Declaration of Trust or (ii) the Board of Trustees, pursuant to any provision of the Declaration of Trust, -18- shall have refused to permit the transfer of such shares. Permitted transfers of shares of the Trust shall be made on the share records of the Trust only upon the instruction of the registered holder thereof, or by its attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed share transfer power and the payment of all taxes thereon. Upon surrender to the Trust or the transfer agent of the Trust of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, as to any transfers not prohibited by any provision of the Declaration of Trust or by action of the Board of Trustees thereunder, it shall be the duty of the Trust to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.3. REPLACEMENT CERTIFICATE. Any officer designated by the Trustees may direct a new certificate to be issued in place of any certificate previously issued by the Trust alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, the officer designated by the Trustees may, in his or her own discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he or she shall require and/or to give bond, with sufficient surety, to the Trust to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 7.4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Trustees may set, in advance, a record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or determining shareholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to made a determination of shareholders for any other purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than ninety (90) days and, in the case of a meeting of shareholders not less than ten (10) days, before the date on which the meeting or particular action requiring such determination of shareholders of record is to be held or taken. In lieu of fixing a record date, the Trustees may provide that the share transfer books shall be closed for a stated period but not longer than twenty (20) days. If the share transfer books are -19- closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days before the date of such meeting. If no record date is fixed and the share transfer books are not closed for the determination of shareholders, (a) the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of shareholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Trustees, declaring the dividend or allotment of rights is adopted. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 7.4, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than one hundred and twenty (120) days after the record date fixed for the original meeting, in either of which case a new record shall be determined as set forth herein. Section 7.5. SHARE LEDGER. The Trust shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each shareholder and the number of shareholders of each class held by such shareholder. Section 7.6. FRACTIONAL SHARES; ISSUANCE OF UNITS. Trustees may issue fractional shares or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the Declaration of Trust or these Bylaws, the Trustees may issue units consisting of different securities of the Trust. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Trust, except that the Trustees may provide that for a specified period securities of the Trust issued in such unit may be transferred on the books of the Trust only in such unit. -20- ARTICLE VIII DIVIDENDS Section 8.1. AUTHORIZATION AND DECLARATION. Dividends upon the shares of the Trust may be declared by the Trustees, subject to the provisions of law and the Declaration of Trust. Dividends may be paid in cash, property or shares of the Trust, subject to the provisions of law and the Declaration of Trust. Section 8.2. CONTINGENCIES. Before payment of any dividends, there may be set aside out of any funds of the Trust available for dividends such sum or sums as the Trustees may from time to time, in their absolute discretion, think proper as the reserve fund for contingencies, for equalizing dividends, for repairing or maintaining any property of the Trust or for such other purpose as the Trustees shall determine to be in the best interest of the Trust, and the Trustees may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX MISCELLANEOUS Section 9.1. RIGHT TO INDEMNIFICATION. The Trust shall indemnify, to the fullest extent permitted by Maryland law, as applicable from time to time, all persons who at any time were or are trustees or officers of the Trust for any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) relating to any action alleged to have been taken or omitted in such capacity as a trustee or an officer. The Trust shall pay or reimburse all reasonable expenses incurred by a present or former trustee or officer of the Trust in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) in which the present or former trustee or officer is a party, in advance of the final disposition of the proceeding, to the fullest extent permitted by, and in accordance with the applicable requirements of, Maryland law, as applicable from time to time. The Trust may indemnify any other persons permitted but not required to be indemnified by Maryland law, as applicable from time to time, if and to the extent indemnification is authorized and determined to be appropriate, in each case in accordance with applicable law, by the Board of Trustees, the majority of the shareholders of the Trust entitled to vote thereon or special legal counsel appointed by the Board of Trustees. No amendment of this amendment and restatement or repeal of any of its provisions shall -21- limit or eliminate any of the benefits provided to trustees and officers under this Section 9.1 in respect of any act or omission that occurred prior to such amendment or repeal. Section 9.2. NON-EXCLUSIVITY OF RIGHTS UNDER THIS ARTICLE. The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Declaration of Trust, Bylaw, agreement, vote of shareholders or disinterested Trustees or otherwise. Section 9.3. INSURANCE. The Trust may, but shall not be required to, purchase and maintain insurance on its own behalf or on behalf of any person who is or was a Trustee, officer, employee or agent of the Trust, or is or was serving at the request of the Trust as a Trustee, director, officer, employee or agent of another Trust, partnership, joint venture, trust or other enterprise against any expense, liability or loss asserted against him or her in any such capacity, or arising out of his or her status as such, whether or not the Trust would have the power to indemnify such person against such expense, liability or loss under Maryland law. Section 9.4. SEAL. (a) The Trust may have a seal which shall have the name of the Trust inscribed thereon and shall be in such form as may be approved from time to time by the Board of Trustees. The Trustees may authorize one or more duplicate seals and provide for the custody thereof. (b) Whenever the Trust is required to place its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Trust. Section 9.5. WAIVER OF NOTICE. Whenever notice is required to be given by law, the Declaration of Trust or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless otherwise provided by the Declaration of Trust, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders, Trustees or members of a -22- committee of Trustees need be specified in any written waiver of notice. Section 9.6. BOOKS AND RECORDS. The books and records of the Trust may be kept within or without the State of Maryland at such place or places as may be designated from time to time by the Board of Trustees. Any records maintained by the Trust in the regular course of its business, including its share ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device provided that the records so kept can be converted into clearly legible form within a reasonable time. The Trust shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 9.7. AMENDMENT OF BYLAWS. The Board of Trustees shall have the exclusive power to amend or repeal any provision of these Bylaws and to adopt new Bylaws; PROVIDED, HOWEVER, that any amendment or repeal of this Section 9.7, Section 3.11 hereof or Section 3.15 hereof shall require the affirmative vote of at least two-thirds of the shareholders entitled to vote thereon. All references to the Declaration of Trust shall include any amendments thereto. -23- EX-3.3 4 EXHIBIT 3.3 Exhibit 3.3 EXECUTION COPY AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. TABLE OF CONTENTS
ARTICLE 1 DEFINED TERMS Section 1.1 Definitions.................................................................................... 1 ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization...................................................................................16 Section 2.2 Name...........................................................................................16 Section 2.3 Resident Agent; Principal Office...............................................................17 Section 2.4 Power of Attorney..............................................................................17 Section 2.5 Term. ........................................................................................18 Section 2.6 Filings........................................................................................18 ARTICLE 3 PURPOSE Section 3.1 Purpose and Business...........................................................................19 Section 3.2 Powers.........................................................................................19 Section 3.3 Representations and Warranties by the Parties..................................................20 ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions of the Partners..........................................................21 Section 4.2 Loans by Third Parties.........................................................................22 Section 4.3 Additional Funding and Capital Contributions...................................................22 Section 4.4 Share Incentive Plan...........................................................................23 Section 4.5 Other Contribution Provisions..................................................................24 Section 4.6 Purchase of Shares by the Managing General Partner.............................................24 Section 4.7 No Interest on Capital Contributions...........................................................24 ARTICLE 5 DISTRIBUTIONS Section 5.1 Requirement and Characterization of Distributions..............................................25 Section 5.2 Distributions in Kind..........................................................................26 Section 5.3 Distributions Upon Liquidation.................................................................26 Section 5.4 Distributions to Reflect Issuance of Additional Partnership Interests..........................26 Section 5.5 Distributions to Limited Partners Exercising Exchange Rights...................................26 ARTICLE 6 ALLOCATIONS Section 6.1 Timing and Amount of Allocations of Net Income and Net Loss....................................27 Section 6.2 General Allocations............................................................................27 Section 6.3 Allocations to Reflect Issuance of Additional Partnership Interests............................28 Section 6.4 Guaranteed Payments............................................................................29 Section 6.5 Allocations with Respect to Transferred Interests..............................................29 Section 6.6 Additional Allocation Provisions...............................................................29 Section 6.7 Tax Allocations................................................................................31 ARTICLE 7 MANAGEMENT AND OPERATION OF BUSINESS Section 7.1 Management.....................................................................................33 Section 7.2 Certificate of Limited Partnership.............................................................37 Section 7.3 Restrictions on Managing General Partner's Authority...........................................37 Section 7.4 Reimbursement of the Managing General Partner..................................................40 Section 7.5 Contracts with Affiliates......................................................................41 Section 7.6 Indemnification................................................................................41 Section 7.7 Liability of the General Partners..............................................................44 Section 7.8 Other Matters Concerning the Managing General Partner..........................................45 Section 7.9 Title to Partnership Assets....................................................................45 Section 7.10 Reliance by Third Parties......................................................................46 ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS AND GENERAL PARTNERS Section 8.1 Limitation of Liability........................................................................46 Section 8.2 No Participation in Management of Business.....................................................46 Section 8.3 Outside Activities of Partners.................................................................47 Section 8.4 Return of Capital..............................................................................47 Section 8.5 Rights of Partners Relating to the Partnership.................................................47 Section 8.6 Grant of Rights................................................................................48 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting.........................................................................48 Section 9.2 Fiscal Year....................................................................................49 Section 9.3 Reports........................................................................................49 ii ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns.....................................................................49 Section 10.2 Tax Elections..................................................................................49 Section 10.3 Tax Matters Partner............................................................................50 Section 10.4 Organizational and Start-Up Expenses...........................................................51 Section 10.5 Withholding....................................................................................51 Section 10.6 Limitation to Preserve REIT Status.............................................................52 ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer.......................................................................................53 Section 11.2 Transfer of General Partner's Partnership Interest.............................................53 Section 11.3 Limited Partners' Rights to Transfer...........................................................55 Section 11.4 Substituted Limited Partners...................................................................56 Section 11.5 Assignees......................................................................................57 Section 11.6 General Provisions.............................................................................57 ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor Managing General Partner................................................59 Section 12.2 Admission of Additional Limited Partners.......................................................59 Section 12.3 Amendment of Agreement and Certificate of Limited Partnership..................................60 ARTICLE 13 DISSOLUTION AND LIQUIDATION Section 13.1 Dissolution....................................................................................60 Section 13.2 Winding Up.....................................................................................61 Section 13.3 Compliance with Timing Requirements of Regulations; Deficit Capital Account................................................................................62 Section 13.4 Deemed Contribution and Interest Distribution..................................................63 Section 13.5 Rights of Partners.............................................................................63 Section 13.6 Notice of Dissolution..........................................................................63 Section 13.7 Cancellation of Certificate of Limited Partnership.............................................63 Section 13.8 Reasonable Time for Winding-Up.................................................................63 Section 13.9 Waiver of Partition............................................................................64 iii ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS Section 14.1 Amendments. ...................................................................................64 Section 14.2 Action by the Partners.........................................................................64 ARTICLE 15 REPRESENTATIONS AND WARRANTIES Section 15.1 Representations and Warranties of Prime........................................................65 Section 15.2 Survival of Representations and Warranties.....................................................65 Section 15.3 Indemnification................................................................................65 Section 15.4 Limitations on Indemnification Obligations.....................................................66 Section 15.5 Remedies.......................................................................................66 Section 15.6 Limitation of Liability........................................................................67 Section 15.7 Subrogation....................................................................................67 ARTICLE 16 GENERAL PROVISIONS Section 16.1 Addresses and Notice...........................................................................67 Section 16.2 Titles and Captions............................................................................67 Section 16.3 Pronouns and Plurals...........................................................................67 Section 16.4 Further Action.................................................................................67 Section 16.5 Binding Effect.................................................................................68 Section 16.6 Creditors......................................................................................68 Section 16.7 Waiver.........................................................................................68 Section 16.8 Counterparts. ................................................................................68 Section 16.9 Applicable Law.................................................................................68 Section 16.10 Invalidity of Provisions.......................................................................68 Section 16.11 Entire Agreement...............................................................................68 Section 16.12 No Rights as Shareholders......................................................................68
Exhibits
Exhibit A Schedule of Partners, Number of Units, Capital Contributions and Capital Accounts (Section 1.1) Exhibit B Schedule for Contributed Assets and Assumed Contracts and Liabilities (Section 1.1) Exhibit C Rights Terms (Section 8.6) Exhibit D [Reserved] Exhibit E Form of Common Unit Certificate (Section 1.1) Exhibit F Limited Partner Ownership of Interests in Tenants (Section 3.3.C(1)) Exhibit G Limited Partner Ownership of Interests in General Partner (Section 3.3.C(2)) iv Exhibit H Representations and Warranties of the General Partner (Section 15.1) Exhibit I Schedule of Contributors (Section 1.1) Exhibit J Schedule of Property Partnerships (Section 1.1)
v THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (the "Partnership"), dated as of November 17, 1997, is entered into by and among Prime Group Realty Trust, a Maryland real estate investment trust (the "Company"), and The Nardi Group, L.L.C., a Delaware limited liability company, as the General Partners and the Persons whose names are set forth on Exhibit A hereof, as the Limited Partners, together with any other Persons who become Partners in the Partnership as provided herein. WHEREAS, the limited partnership was formed on March 19, 1997 and an original agreement of limited partnership was entered into with the Company as general partner; WHEREAS, the Company proposes to effect a public offering of its common shares of beneficial interest, to acquire and cause the Partnership to acquire direct and indirect interests in certain office and industrial properties and other assets, to cause the Partnership to enter into certain financing transactions, and to contribute the remaining net proceeds from the public offering to the Partnership; WHEREAS, the Partnership will issue Partnership Interests to the Company, the other General Partner, the Limited Partners and other persons in accordance with the foregoing transactions; WHEREAS, upon the completion of the foregoing transactions, the Partnership shall return the original capital contributions made by the Company and any ongoing interest in the Partnership of the Company shall be based on its contributions as contemplated below; and WHEREAS, by virtue of its execution of this Agreement, the Company hereby consents to the amendment and restatement of the original agreement of limited partnership; NOW, THEREFORE, BE IT RESOLVED, that for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINED TERMS Section 1.1 Definitions. The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute. "Additional Funds" shall have the meaning set forth in Section 4.3.A hereof. "Additional Limited Partner" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on the books and records of the Partnership. "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Partnership taxable year, after giving effect to the following adjustments: (a) decrease such deficit by any amounts which such Partner is obligated to restore pursuant to this Agreement or is deemed to be obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence of each of Regulations Sections 1.704-2(i)(5) and 1.704-2(g); and (b) increase such deficit by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjustment Date" means, with respect to any Capital Contribution, the close of business on the Business Day last preceding the date of the Capital Contribution; provided, that if such Capital Contribution is being made by the Managing General Partner in respect of the proceeds from the issuance of Shares (or the issuance of the Managing General Partner's securities exercisable for, convertible into or exchangeable for Shares), then the Adjustment Date shall be as of the close of business on the day of the issuance of such securities. "Administrative Expenses" shall mean (i) all administrative and operating costs and expenses incurred by the Partnership, (ii) all administrative, operating and other costs and expenses incurred by the Property Partnerships, which expenses are being assumed by the Partnership pursuant to Section 7.4.B hereof, (iii) those administrative costs and expenses of the Managing General Partner, including salaries paid to officers of the Managing General Partner, and accounting and legal expenses undertaken by the Managing General Partner on behalf or for the benefit of the Partnership, and (iv) to the extent not included in clause (iii) above, REIT Expenses. "Affiliate" means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person. "Agreement" means this Amended and Restated Agreement of Limited Partnership, as it may be amended, modified, supplemented or restated from time to time. "Appraisal" means with respect to any assets, the opinion of an independent third party experienced in the valuation of similar assets, selected by the Managing General Partner in good faith; such opinion may be in the form of an opinion by such independent third party that the 2 value for such asset as set by the Managing General Partner is fair, from a financial point of view, to the Partnership. "Assignee" means a Person to whom one or more Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 hereof. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Chicago, Illinois and New York, New York are authorized or required by law to be closed. "Capital Account" means, with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions: (a) To each Partner's Capital Account there shall be added such Partner's Capital Contributions, such Partner's share of Net Income and any items in the nature of income or gain which are specially allocated to such Partner pursuant to Section 6.6 hereof, and the amount of any Partnership liabilities assumed by such Partner or which are secured by any property distributed to such Partner. (b) From each Partner's Capital Account there shall be subtracted the amount of cash and the Gross Asset Value of any property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of Net Losses and any items in the nature of expenses or losses which are specially allocated to such Partner pursuant to Section 6.6 hereof, and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership. (c) In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement (which does not result in a termination of the Partnership for federal income tax purposes), the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (d) In determining the amount of any liability for purposes of subsections (a) and (b) hereof, there shall be taken into account Code section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Managing General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partners, or the Limited Partners) are computed in order to comply with such Regulations, the Managing General Partner may make such modification. The Managing General Partner also shall (i) make any adjustments that are necessary or appropriate to comply with Regulations Section 1.704-1(b)(2)(iv)(q) and (ii) make any appropriate modifications in the event 3 unanticipated events might otherwise cause this Agreement not to comply with Regulations Sections 1.704-1(b) or 1.704-2 or Section 514(c)(9). "Capital Contribution" means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any property (other than money), net of any liability to which such property is subject or which is secured by such property, contributed to the Partnership by such Partner. "Cash Purchase Price" shall have the meaning set forth in Paragraph 4 of Exhibit C attached hereto. "Certificate" means the Certificate of Limited Partnership relating to the Partnership filed in the office of the Secretary of State of Delaware on March 19, 1997, as amended or restated from time to time in accordance with the terms hereof and the Act. "Charter" means the Declaration of Trust of the Managing General Partner filed with the Maryland State Department of Assessments and Taxation on July 21, 1997, as amended or restated from time to time. "Claim" shall have the meaning set forth in Section 15.4(b) herein. "Code" means the Internal Revenue Code of 1986, as amended from time to time or any successor statute thereto, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Common Shares" means the common shares of beneficial interest, par value $.01 per share, of the Managing General Partner. "Common Unit" means, with respect to any class of Partnership Interest, a fractional, undivided share of such class of Partnership Interest issued pursuant to Sections 4.1 and 4.3 hereof. The ownership of Common Units may be evidenced by a certificate for units substantially in the form of Exhibit E hereof (including the restricted legends thereon) or as the Managing General Partner may determine with respect to any class of Common Units issued from time to time under Sections 4.1 and 4.3 hereof. "Consent" means the consent to, approval of, or vote on a proposed action by a Partner given in accordance with Article 14 hereof. "Consent of the Limited Partners" means the Consent of a Majority in Interest of the Limited Partners, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by a Majority in Interest of the Limited Partners, unless otherwise expressly provided herein, in their sole and absolute discretion. 4 "Consent of the Partners" means the Consent of Partners holding Units that in the aggregate are equal to or greater than 50% of the aggregate Units of all Partners, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by such Partners, in their sole and absolute discretion. "Constructively Own" means ownership under the constructive ownership rules described in Exhibit C hereof. "Contributed Property" means (i) with respect to Prime or the Contributors, each property or other asset as set forth on Exhibit B hereof, and (ii) with respect to any other Partners, each property or other asset as set forth in such Partner's respective contribution agreement. "Contributors" shall mean the parties identified as such on Exhibit I attached hereto. "Convertible Preferred Distribution" means an amount equal to the quarterly dividend payable in respect of the Series A Cumulative Convertible Preferred Shares of the Managing General Partner pursuant to Section 3.3.1 of the Managing General Partner's Declaration of Trust. "Convertible Preferred Distribution Shortfall" shall have the meaning set forth in Section 5.1(i). "Convertible Preferred Shares" means the Series A Cumulative Convertible Preferred Shares of beneficial interest, par value $.01 per share, of the Managing General Partner. "Convertible Preferred Unit Redemption Amount" means, with respect to any Convertible Preferred Unit, the amount payable by the Managing General Partner on account of the redemption of one Convertible Preferred Share pursuant to Section 3.3.3 of the Managing General Partner's Declaration of Trust, using the amount, if any, of Convertible Preferred Distribution Shortfall as the amount of accrued and unpaid dividends thereon. "Convertible Preferred Units" shall mean the Units designated as Series A Cumulative Convertible Preferred Units under this Agreement, received by the Managing General Partner in exchange for a portion of its capital contribution, having the rights described in this Agreement. The initial number of Convertible Preferred Units outstanding is as set forth on Exhibit A. "Debt" means, as to any Person, as of any date of determination, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (b) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (c) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person's interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (d) lease obligations of such Person which, in accordance with generally accepted accounting principles, should be capitalized. 5 "Depreciation" means, for each Partnership taxable year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing General Partner. "Effective Date" means the date of closing of the initial public offering of Common Shares upon which date contributions set forth on Exhibit A hereof shall become effective. "Exchange Exercise Notice" shall have the meaning set forth in Paragraph 2 of Exhibit C attached hereto. "Fair Market Value" means, with respect to any share of beneficial interest of the Managing General Partner, the average of the daily market price for the ten (10) consecutive trading days immediately preceding the date with respect to which "Fair Market Value" must be determined hereunder or, if such date is not a Business Day, the immediately preceding Business Day. The market price for each such trading day shall be: (a) if such shares are listed or admitted to trading on any securities exchange or the NASDAQ National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, (b) if such shares are not listed or admitted to trading on any securities exchange or the NASDAQ National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the Managing General Partner or (c) if such shares are not listed or admitted to trading on any securities exchange or the NASDAQ National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the Managing General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Fair Market Value of such shares shall be determined by the Managing General Partner acting in good faith on the basis of such quotations furnished by a professional market maker making a market in such shares and other information as it considers, in its reasonable judgment, appropriate. In the event such shares include rights that a holder of such shares would be entitled to receive, then the Fair Market Value of such rights shall be determined by the Managing General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; and provided further, that in connection with determining the deemed value of the Partnership Interests for purposes of determining the number of additional Units issuable upon a Capital Contribution funded by an underwritten public offering of shares of beneficial interest of the Managing General Partner (including upon exercise of any over-allotment option granted to the Underwriters in 6 connection with such public offering), the Fair Market Value of such shares shall be the public offering price per share of such class of beneficial interest sold. "Funding Debt" means the incurrence of any Debt by or on behalf of the Managing General Partner for the purpose of providing funds to the Partnership. "General Partner Interest" means a Partnership Interest held by the Managing General Partner or any other General Partner. A General Partner Interest shall be expressed as a number of Units. "General Partners" shall mean collectively, Prime Group Realty Trust, a Maryland real estate investment trust, and The Nardi Group, L.L.C., a Delaware limited liability company, and their successors or assigns, if any. "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Managing General Partner (as set forth on Exhibit A hereof, as such Exhibit may be amended from time to time); provided, that if the contributing Partner is the Managing General Partner then, except with respect to the Managing General Partner's initial Capital Contribution which shall be determined as set forth on Exhibit A hereof, or capital contributions of cash, Shares or other shares of beneficial interest of the Managing General Partner, the determination of the fair market value of the contributed asset shall be determined by (i) the price paid by the Managing General Partner if the asset is acquired by the Managing General Partner contemporaneously with its contribution to the Partnership or (ii) by Appraisal if otherwise acquired by the Managing General Partner. (b) As of the times listed below, the Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Managing General Partner using such reasonable method of valuation as it may adopt; provided, however, that for such purpose, the net value of all of the Partnership assets, in the aggregate, shall be equal to the fair market value of all classes of Partnership Interests then outstanding, regardless of the method of valuation adopted by the Managing General Partner: (i) the acquisition of an additional interest in the Partnership by a new or existing Partner in exchange for more than a de minimis Capital Contribution, if the Managing General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (ii) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership if the Managing General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; 7 (iii) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); and (iv) at such other times as the Managing General Partner shall reasonably determine necessary or advisable in order to comply with Regulations Sections 1.704-1(b) and 1.704-2. (c) The Gross Asset Value of any Partnership asset distributed to a Partner shall be the gross fair market value of such asset on the date of distribution as determined by the distributee and the Managing General Partner or, if the distributee and the Managing General Partner cannot agree on such a determination, by Appraisal. (d) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent that the Managing General Partner reasonably determines that an adjustment pursuant to subparagraph (b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d). (e) If the Gross Asset Value of a Partnership asset has been determined or adjusted pursuant to subparagraph (a), (b) or (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Losses. "Holder" means either the Partner or Assignee owning a Unit. "Immediate Family" means with respect to any natural Person, such natural Person's estate or heirs or current spouse or former spouse, parents, parents-in-law, children, siblings and grandchildren and any trust or estate, all of the beneficiaries of which consist of such Person or such Person's spouse, former spouse, parents, parents-in-law, children, siblings or grandchildren; provided, further that "Immediate Family", means, with respect to a trust, the trust's beneficiary's estate or heirs or current spouse or former spouse, parents, parents-in-law, children, siblings and grandchildren. "Incapacity" or "Incapacitated" means, (a) as to any individual Partner, if any, death, total physical disability or entry by a court of competent jurisdiction adjudicating him or her incompetent to manage his or her Person or his or her estate; (b) as to any corporation or limited liability company, as the case may be, which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or limited liability company, as the case may be, or the revocation of its charter unless reinstated; (c) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (d) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (e) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (f) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a 8 Partner shall be deemed to have occurred when (s) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (t) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (u) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors, (v) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (t) above, (w) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties, (x) any proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof, (y) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment, or (z) an appointment referred to in clause (y) above is not vacated within 90 days after the expiration of any such stay. "Indemnification Claim" shall have the meaning set forth in Section 15.5(b) hereof. "Indemnification Date" shall have the meaning set forth in Section 15.5(c) hereof. "Indemnification Notice" shall have the meaning set forth in Section 15.5(b) hereof. "Indemnitee" means (a) any Person subject to a claim or demand or made or threatened to be made a party to, or involved or threatened to be involved in, an action, suit or proceeding by reason of his or her status as (i) a General Partner or (ii) a director, officer, member, manager, employee or agent of the Partnership or a General Partner, and (b) such other Persons (including Affiliates of a General Partner or the Partnership) as the Managing General Partner may designate from time to time, in its sole and absolute discretion. "IRS" means the Internal Revenue Service, which administers the internal revenue laws of the United States, and any successor agency of the United States federal government. "Limited Partner" means any Person named as a Limited Partner in Exhibit A hereof, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner in the Partnership. "Limited Partner Interest" means a Partnership Interest of a Limited Partner representing part of the Partnership Interests of all Limited Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest shall be expressed as a number of Units. "Liquidating Events" shall have the meaning set forth in Section 13.1 hereof. "Liquidator" shall have the meaning set forth in Section 13.2.A hereof. 9 "Lock-Up Agreements" means the Lock-Up Agreements, dated the date hereof, between each of the Limited Partners, respectively, and the Underwriters. "Majority in Interest of the Limited Partners" means Limited Partners (other than the Managing General Partner and any Limited Partner 50% or more of whose equity is owned, directly or indirectly, by the Managing General Partner) holding Units that in the aggregate are greater than fifty percent (50%) of the aggregate Units of all Limited Partners (other than the Managing General Partner and any Limited Partner 50% or more of whose equity is owned, directly or indirectly, by the Managing General Partner). "Managing General Partner" means the Company or its successors as managing general partner of the Partnership. "Managing General Partner Loan" shall have the meaning set forth in Section 4.3.B hereof. "Managing General Partner Payment" shall have the meaning set forth in Section 10.6 hereof. "Minimum Gain Capital Account" shall mean, with respect to the Managing General Partner, the sum of the Managing General Partner's Capital Account plus the Managing General Partner's share of Partner Minimum Gain, as described in Section 1.704-2(i)(5) of the Regulations, and Partnership Minimum Gain, as described in Section 1.704-2(g) of the Regulations. For purposes of determining Minimum Gain Capital Account, Nonrecourse Deductions and Partner Nonrecourse Deductions for a Partnership taxable year or other applicable period shall be allocated in a manner that is consistent with the method of allocation adopted under Section 6.3 or Section 6.5 (to the extent applicable for such Partnership taxable year). "Net Cash Flow" means, with respect to the applicable period of measurement (i.e., any period beginning on the first day of the fiscal year, quarter or other period commencing immediately after the last day of the fiscal year, quarter or other applicable period for purposes of the most recent calculation of Net Cash Flow for or with respect to which a distribution has been made, and ending on the last day of the fiscal year, quarter or other applicable period immediately preceding the date of the calculation) the excess, if any, as of such date, of (a) the gross cash receipts of the Partnership for such period from all sources whatsoever, including, without limitation, the following: (i) all rents, revenues, income and proceeds derived by the Partnership from its operations, including, without limitation, distributions received by the Partnership from any Person in which the Partnership has an interest; (ii) all proceeds and revenues received by the Partnership on account of any sales of property of the Partnership or as a refinancing of or payments of principal, interest, costs, fees, penalties or otherwise on account of any borrowings or loans made by the Partnership or financings or refinancings of any property of the Partnership; (iii) the amount of any insurance proceeds and condemnation awards received by the Partnership; (iv) all Capital Contributions or loans received by the Partnership from its Partners; (v) any reduction in the cash amounts previously reserved by the Partnership and described in subsection (b)(ix) below, if the 10 Managing General Partner determines that such amounts are no longer needed; and (vi) the proceeds of liquidation of the Partnership's property in accordance with this Agreement, over (b) the sum of: (i) all operating costs and expenses of the Partnership and capital expenditures paid during such period (without deduction, however, for any capital expenditures, charges for Depreciation or other expenses not paid in cash or expenditures from reserves described in (ix) below); (ii) to the extent not included in any other clause of this subparagraph (b), all costs and expenses expended or paid during such period in connection with the sale or other disposition, or financing or refinancing, of property of the Partnership or the recovery of insurance or condemnation proceeds; (iii) to the extent not included in any other clause of this subparagraph (b), all fees provided for under this Agreement and paid by the Partnership during such period (other than fees paid from reserves described in subsection (b)(iv) below); (iv) to the extent not included in any other clause of this subparagraph (b), all debt service, including principal and interest, paid during such period on all indebtedness of the Partnership; (v) all capital contributions, advances, reimbursements or similar payments made to any Person in which the Partnership has an interest; (vi) all loans made by the Partnership in accordance with the terms of this Agreement; (vii) to the extent not included in any other clause of this subparagraph (b), all reimbursements to the Managing General Partner or its Affiliates during such period, including Administrative Expenses (exclusive of REIT Expenses) to the extent not paid or payable by the Managing General Partner pursuant to the third sentence of Section 7.4.B; (viii) any distributions pursuant to the proviso of the second sentence of Section 5.1 hereof; and (ix) any increases in reserves reasonably determined by the Managing General Partner to be necessary for working capital, capital improvements, payments of periodic expenditures, debt service or other purposes for the Partnership or any Person in which the Partnership has an interest. "Net Income" or "Net Loss" shall mean, for each fiscal year or other applicable period, an amount equal to the Partnership's net income or loss for such year or period as determined for federal income tax purposes by the Managing General Partner, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), adjusted as follows: (i) by including as an item of gross income any tax-exempt income received by the Partnership and not otherwise taken into account in computing Net Income or Net Loss; (ii) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code and not otherwise taken into account in computing Net Income or Net Loss, including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership; (iii) by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property which are disallowed pursuant to Sections 267(a)(1) or 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code; (iv) by taking into account Depreciation in lieu of depreciation, depletion, amortization, and other cost recovery deductions taken into account in computing taxable income or loss; (v) by computing gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (vi) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the 11 Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (m) of the Regulations, by taking into account the amount of such adjustment as additional Net Income or Net Loss pursuant to Article VI; and (vii) subject to the immediately preceding clause (vi), by excluding the Partnership items of income, gain, loss or deduction that are specially allocated pursuant to Section 6.6. "New Securities" means (a) any rights, options, warrants or convertible or exchangeable securities having the right to subscribe for or purchase Common Shares or other shares of beneficial interest of the Managing General Partner, excluding grants under any Share Incentive Plan or (b) any Debt issued by the Managing General Partner that provides any of the rights described in clause (a) hereof. "Nonrecourse Deductions" shall have the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). "Nonrecourse Liability" shall have the meaning set forth in Regulations Section 1.752-1(a)(2). "Notice of Breach" shall have the meaning set forth in Section 15.2 hereof. "Partner" means a General Partner or a Limited Partner, and "Partners" means the General Partners and the Limited Partners. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" shall have the meaning set forth in Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" shall have the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). "Partnership" means the limited partnership formed under the Act and pursuant to this Agreement, and any successor thereto. "Partnership Interest" means, an ownership interest in the Partnership of either a Limited Partner or a General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. There may be one or more classes of Partnership Interests as provided in Section 4.3 hereof. A Partnership Interest within a class of Partnership Interests shall be expressed as a number of units of such class. In the event that 12 the Partnership has more than one class of Partnership Interests, the Partnership Interest of a Partner with respect to all classes of Partnership Interests shall be expressed as the sum of each Partnership Interest owned by such Partner for each class of Partnership Interests, weighting each such Partnership Interest for each class based on the relative aggregate fair market value of each class. Unless otherwise expressly provided for by the Managing General Partner at the time of the original issuance of any Partnership Interests, all Partnership Interests (whether of a Limited Partner or a General Partner) shall be of the same class. "Partnership Minimum Gain" shall have the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "Partnership Payment Date" means the payment date established by the Managing General Partner for the distribution of Net Cash Flow pursuant to Section 5.1 hereof, which payment date shall be the same as the payment date established by the Managing General Partner for a distribution to its shareholders of some or all of its portion of such distribution. "Partnership Year" means the fiscal year of the Partnership, which shall be the calendar year. "Permitted Debt Allocation Method" shall mean each of the following methods of allocating the Partnership's excess nonrecourse liabilities for purposes of Regulations Section 1.752-3(a)(3) in any Partnership taxable year: (a) Excess nonrecourse liabilities shall be allocated in accordance with the Partners' respective interests in Partnership profits, determined by reference to reasonably consistent allocations of a significant item of Partnership income or gain, not taking into account how the Partners will share taxable income under Code Section 704(c); (b) Excess nonrecourse liabilities shall be allocated in accordance with how the Partners will share future Profits, taking into account as well how the Partners will share taxable income under Code Section 704(c); one such method will consist of aggregating as of the end of the immediately preceding Partnership taxable year, the excess, computed for each Partner under Code Section 704(c), of the Gross Asset Value of each Property on the relevant Adjustment Date, over the adjusted tax basis of such Property on such Adjusted Date ("net built-in gain"), less any such built-in gain that has been taken into account pursuant to the allocation rule within Section 6.7, and any portion of such built-in gain that was taken into account in making an allocation of Nonrecourse Liabilities under Regulations Section 1.752-3(a)(2) allocating excess nonrecourse liabilities of the Partnership shall be allocated for the relevant Partnership taxable year based upon each Partner's relative percentage of such net built-in gain; or (c) Excess nonrecourse liabilities shall be allocated in accordance with how it is reasonably expected that items of deduction attributable to such excess Nonrecourse Liabilities will be allocated, 13 (d) In each case, as determined by the Managing General Partner in accordance with Regulations Section 1.752-3 and Revenue Ruling 95-41, 1995-1 C.B. 132. "Person" means an individual or a corporation, partnership, limited liability company, trust, unincorporated organization, association or other entity. "Pledge" shall have the meaning set forth in Section 11.3.A hereof. "Preferred Shares" means the preferred shares of beneficial interest, par value $.01 per share, of the Managing General Partner. "Preferred Unit" means, with respect to any preferred class of Partnership Interest, a fractional, undivided share of such class of Partnership Interest issued pursuant to Section 4.1 and 4.3 hereof. The ownership of Preferred Units may be evidenced by a certificate for preferred units substantially in the form of Exhibit E hereof (including the restricted legends thereon) or as the Managing General Partner may determine with respect to any class of Preferred Units issued from time to time under Sections 4.1 and 4.3 hereof. "Prime" means Prime Group Limited Partnership, an Illinois limited partnership and its affiliates. "Primestone Transfer Events" means a Put Event or Change in Control Event, each as defined in that certain partnership agreement dated the date hereof by and among BRE/Primestone Investment Management L.L.C, BRE/Primestone Investment L.L.C. and the Prime Partners (as defined in such partnership agreement). "Properties" means such interests in real property and personal property including without limitation, fee interests, interests in ground leases, interests in joint ventures, interests in mortgages, and Debt instruments as the Partnership may hold from time to time. "Property Partnerships" shall mean the partnerships and limited liability companies identified as such on Exhibit J attached hereto. "Put Option Agreement" shall mean that certain Put Option Agreement dated as of November 17, 1997, between The Nardi Group, L.L.C. and the Partnership and the Company. "Qualified REIT Subsidiary" means any Subsidiary of the Managing General Partner that is a "qualified REIT subsidiary" within the meaning of Section 856(i) of the Code. "Qualified Transferee" means an "Accredited Investor" as defined in Rule 501 promulgated under the Securities Act. "Recapture Gain" shall have the meaning set forth in Section 6.7.D hereof. 14 "Regulations" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Regulatory Allocations" shall have the meaning set forth in Section 6.6 hereof. "REIT" means a real estate investment trust under Sections 856 through 860 of the Code. "REIT Expenses" shall mean (i) costs and expenses relating to the formation and continuity of existence of the Managing General Partner and its subsidiaries, if any, (which subsidiaries shall, for purposes of this definition be included within the definition of Managing General Partner), including taxes, fees and assessments associated therewith and any and all costs, expenses or fees payable to any director, officer or trustee of the Managing General Partner or such subsidiaries (including, without limitation, any costs of indemnification), (ii) costs and expenses relating to any offer or registration of securities by the Managing General Partner and all statements, reports, fees and expenses incidental thereto, including, without limitation, underwriting discounts and selling commissions applicable to any such offer of securities and any costs and expenses associated with any claims made by any holder of such securities or any underwriter or placement agent therefor, (iii) costs and expenses associated with the preparation and filing of any periodic reports by any of the General Partners under federal, state or local laws or regulations, including filings with the SEC, (iv) costs and expenses associated with compliance by any of the General Partners with laws, rules and regulations promulgated by any regulatory body, including the SEC, and (v) all other operating or administrative costs of the Managing General Partner incurred in the ordinary course of its business. "REIT Requirements" shall have the meaning set forth in Section 5.1 hereof. "SEC" means the United States Securities and Exchange Commission and any successor agency of the United States federal government. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. "Specified Exchange Date" means the day of receipt by the Managing General Partner of an Exchange Exercise Notice. "Share" means either a Common Share or a Preferred Share, as the case may be. "Share Incentive Plan" means any share incentive plan of the Managing General Partner. 15 "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of (a) the voting power of the voting equity securities or (b) the outstanding equity interests is owned, directly or indirectly, by such Person. "Subsidiary Partnership" means any partnership that is a Subsidiary of the Partnership. "Substituted Limited Partner" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4 hereof. "Surviving Partnership" shall have the meaning set forth in Section 11.2.C hereof. "Tax Items" shall have the meaning set forth in Section 6.7.A hereof. "Tenant" means any tenant from which the Managing General Partner derives rent either directly or indirectly through partnerships, including the Partnership. "Terminating Capital Transaction" means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. "Underwriter" means any of and "Underwriters" means all of Prudential Securities Incorporated, Friedman, Billings, Ramsey & Co., Inc., Smith Barney Inc. and Morgan Keegan & Company, Inc. "Underwriting Agreement" means that certain Underwriting Agreement, dated November 11, 1997 among the Company, the Partnership and the Underwriters as representatives for the several underwriters named in Schedule 1 thereto. "Unit" means either a Common Unit or a Preferred Unit, as the case may be. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization. The Partnership is a limited partnership formed pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. Except as expressly provided herein, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name. The name of the Partnership is Prime Group Realty, L.P. The Partnership's business may be conducted under any other name or names deemed advisable by the Managing General Partner, including the name of the Managing General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The Managing General Partner in its sole and absolute discretion may 16 change the name of the Partnership at any time and from time to time and shall notify the Partners of such change in the next regular communication to the Partners. Section 2.3 Resident Agent; Principal Office. The name and address of the resident agent of the Partnership in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The address of the principal office of the Partnership in the State of Delaware is Prime Group Realty, L.P., c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The principal office of the Partnership is located at 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601, or such other place as the Managing General Partner may from time to time designate by notice to the Limited Partners. The Managing General Partner, in its sole and absolute discretion, may change the resident agent and appoint successor resident agents. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the Managing General Partner deems advisable. Section 2.4 Power of Attorney. A. Each Partner and each Assignee constitutes and appoints the Managing General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the Managing General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (b) all instruments that the Managing General Partner or any Liquidator deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the Managing General Partner or any Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Articles 11, 12 and 13 hereof or the Capital Contribution of any Partner; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interests; and (2) execute, swear to, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the Managing General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the Managing General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. 17 Nothing contained herein shall be construed as authorizing the Managing General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the Managing General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Partner or Assignee and the transfer of all or any portion of such Partner's or Assignee's Units and shall extend to such Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Partner or Assignee hereby agrees to be bound by any representation made by the Managing General Partner or any Liquidator, acting in good faith pursuant to such power of attorney; and each such Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the Managing General Partner or any Liquidator, taken in good faith under such power of attorney. Each Partner or Assignee shall execute and deliver to the Managing General Partner or any Liquidator, within 15 days after receipt of the Managing General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the Managing General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term. The term of the Partnership commenced on March 19, 1997 upon the filing of the Certificate in accordance with the Act and shall continue until December 31, 2050 unless it is dissolved sooner pursuant to the provisions of Article 13 hereof or as otherwise provided by law. Section 2.6 Filings. A. The Managing General Partner shall take any and all other actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of the State of Delaware. The Managing General Partner shall cause amendments to the Certificate to be filed whenever required by the Act. Such amendments may be executed by the Managing General Partner only. B. The Managing General Partner shall execute and cause to be filed original or amended Certificates and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership or similar type of entity under the laws of any other states or jurisdictions in which the Partnership engages in business. C. Upon the dissolution of the Partnership, the Managing General Partner (or, in the event there is no remaining Managing General Partner, the Person responsible for winding up and dissolution of the Partnership pursuant to Article 13 hereof) shall promptly execute and cause to be filed certificates of dissolution in accordance with the Act and the laws of any other states or jurisdictions in which the Partnership has filed certificates. 18 ARTICLE 3 PURPOSE Section 3.1 Purpose and Business. The purpose and nature of the business to be conducted by the Partnership is (A) to acquire and own real property, to acquire, lease, own, mortgage or otherwise encumber personal property, fixtures and real property, to operate, manage, lease (or, to the extent determined by the Managing General Partner to be appropriate, cause the operation, management and leasing by independent contractors including a Partner or its Affiliates) any Property owned by the Partnership, (B) to develop real property and to construct improvements on real property, (C) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged, directly or indirectly, in any of the foregoing, (D) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act and (E) otherwise deal in and with the business and assets of the Partnership, and to do anything necessary or incidental to the foregoing; provided, however, that such business shall be limited to and conducted in such manner to permit the Managing General Partner at all times to be classified as a REIT for federal income tax purposes, unless the Managing General Partner has determined to cease to qualify as a REIT. In connection with the foregoing, and without limiting the Managing General Partner's right in its sole discretion to cease qualifying as a REIT, the Partners acknowledge that the Managing General Partner's status as a REIT inures to the benefit of all the Partners and not solely to the Managing General Partner. The Managing General Partner shall also be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a "publicly traded partnership" for purposes of Section 7704 of the Code, including but not limited to, imposing restrictions on transfers and restrictions on redemptions; provided, however, that no such restrictions shall be made on The Nardi Group, L.L.C. pursuant to this Section 3.1 except to the extent set forth in the Put Option Agreement. Section 3.2 Powers. The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, including, without limitation, full power and authority, directly or through its ownership interest in other entities, to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness, whether or not secured by mortgage, deed of trust, pledge or other lien, acquire and develop real property, and manage, lease, sell, transfer and dispose of real property; provided, that the Partnership shall not take, or shall refrain from taking, any action which, in the judgment of the Managing General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Managing General Partner to continue to qualify as a REIT, (ii) could subject the Managing General Partner to any additional taxes under Section 857 or Section 4981 of the Code or any successor or newly enacted provisions of the Code imposing other additional taxes or enacted provisions of the Code imposing other additional taxes or penalties on the Managing General Partner or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Managing General Partner or its securities, unless any such action (or inaction) under clauses (i), (ii) or (iii) of this proviso shall have been specifically consented to by the Managing General Partner in writing. 19 Section 3.3 Representations and Warranties by the Parties. In addition to the representations and warranties included in Article 15 and elsewhere in this Agreement: A. Each Partner represents and warrants to each other Partner that (1) such Partner has the power and authority to enter into this Agreement and perform such Partner's obligations hereunder, (2) the execution and delivery of this Agreement by such Partner and the performance by such Partner of all transactions contemplated by this Agreement to be performed by such Partner have been duly authorized by all necessary action, including without limitation, that of its general partner(s), committee(s), trustee(s), member(s), beneficiaries, directors and/or shareholder(s), as the case may be, as required, (3) the consummation of such transactions shall not result in a breach or violation of, or a default under, its certificate of limited partnership, partnership agreement, trust agreement, limited liability company operating agreement, charter, certificate or articles of incorporation or by-laws, as the case may be, any agreement by which such Partner or any of such Partner's properties or any of its partners, beneficiaries, members, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (4) such Partner is neither a "foreign person" within the meaning of Section 1445(f) of the Code nor a "foreign partner" within the meaning of Section 1446(e) of the Code, and (5) this Agreement has been duly executed and delivered by such Partner and is binding upon, and enforceable against, such Partner in accordance with its terms. B. Each Partner represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment. C. Each Partner further represents, warrants and agrees as follows: (1) Except as provided in Exhibit F hereof, it does not and will not, without the prior written consent of the Managing General Partner, actually own or Constructively Own (a) with respect to any Tenant that is a corporation, any stock of such Tenant and (b) with respect to any Tenant that is not a corporation, any interests in either the assets or net profits of such Tenant; provided, however, that each Partner may own or Constructively Own with one or more other Partners (x) with respect to any Tenant that is a corporation, stock of such Tenant possessing less than ten percent (10%) of the total combined voting power of all classes of stock entitled to vote and less than ten percent (10%) of the total number of shares of all classes of stock of such Tenant and (y) with respect to any Tenant that is not a corporation, interests in such Tenant representing less than ten percent (10%) of the assets and ten percent (10%) of the net profits of such Tenant, so long 20 as such actual or Constructive Ownership otherwise permitted under clause (x) or (y) above would not cause the Managing General Partner to receive amounts described in Section 856 (d)(2)(B) of the Code. (2) Except as provided in Exhibit G hereof, it does not, and agrees that it will not without the prior written consent of the Managing General Partner, actually own or Constructively Own, any shares in the Managing General Partner, other than any Common Shares or other shares of beneficial interest of the Managing General Partner such Partner may acquire (a) as a result of an exchange pursuant to Section 8.6 hereof or (b) upon the exercise of options granted or delivery of Shares pursuant to any Share Incentive Plan, in each case subject to the ownership limitations set forth in the Managing General Partner's Charter. (3) Upon request of the Managing General Partner, it will disclose to the Managing General Partner the amount of Common Shares or other shares of beneficial interest of the Managing General Partner that it actually owns or Constructively Owns. (4) It understands that if, for any reason, (a) the representations, warranties or agreements set forth in subparagraph C(1) or (2) of this Section 3.3 are violated or (b) the Partnership's actual or Constructive Ownership of the Common Shares or other shares of beneficial interest of the Managing General Partner violates the limitations set forth in the Charter, then (x) some or all of the exchange rights of the Partners may become non-exercisable, and (y) some or all of the Shares owned by the Partners may be automatically transferred to a trust for the benefit of the Managing General Partner, as provided in the Charter. D. The representations and warranties contained in Sections 3.3.A, 3.3.B and 3.3.C hereof shall survive the execution and delivery of this Agreement by each Partner and the dissolution and winding up of the Partnership. E. Each Partner hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or the Managing General Partner have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, which may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied. ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions of the Partners. At the time of their respective execution of this Agreement, the Partners shall make Capital Contributions as set forth in Exhibit A hereof. The Partners shall own Units of the class and in the amounts set forth in Exhibit A hereof, which shall be adjusted from time to time by the Managing General Partner to the extent necessary to accurately reflect exchanges, Capital Contributions, the issuance of additional Units or similar events having an effect on a Partner's number of Units. Except as required by law or as otherwise 21 provided in Sections 4.3, 4.4 and 10.5 hereof, no Partner shall be required or permitted to make any additional Capital Contributions or loans to the Partnership. Section 4.2 Loans by Third Parties. Subject to Section 4.3 hereof, the Partnership may incur Debt, or enter into other similar credit, guarantee, financing or refinancing arrangements for any purpose (including, without limitation, in connection with any further acquisition of Properties) with any Person that is not the Managing General Partner upon such terms as the Managing General Partner determines to be appropriate; provided, that the Partnership shall not incur any Debt that is recourse to any General Partner, except to the extent otherwise agreed to by such General Partner in the sole discretion of such General Partner, or to any Limited Partner, except to the extent otherwise agreed to by such Limited Partner in the sole discretion of such Limited Partner. Section 4.3 Additional Funding and Capital Contributions. A. General. The Managing General Partner may, at any time and from time to time, determine that the Partnership requires additional funds ("Additional Funds") for the acquisition of additional Properties or for such other Partnership purposes as the Managing General Partner may determine. Additional Funds may be raised by the Partnership, at the election of the Managing General Partner, in any manner provided in, and in accordance with, the terms of this Article 4. No Person shall have any preemptive, preferential or similar right or rights to subscribe for or acquire any Partnership Interest, except as set forth in this Section 4.3. B. Managing General Partner Loans. The Managing General Partner may enter into a Funding Debt, including, without limitation, a Funding Debt that is convertible into Common Shares, and lend to the Partnership the net proceeds received by the Partnership from such Funding Debt (a "Managing General Partner Loan"); provided, however, that the Managing General Partner shall not be obligated to lend the net proceeds of any Funding Debt to the Partnership in a manner that would be inconsistent with the Managing General Partner's ability to remain qualified as a REIT or would trigger any indemnity obligation on the part of the Managing General Partner or the Partnership. If the Managing General Partner enters into such a Funding Debt, the Managing General Partner Loan will consist of the net proceeds from such Funding Debt and will be on comparable terms and conditions, including interest rate, repayment schedule and costs and expenses, as shall be applicable with respect to or incurred in connection with such Funding Debt. C. Issuance of Additional Partnership Interests. The Managing General Partner may raise all or any portion of the Additional Funds by accepting additional Capital Contributions, including, without limitation, the issuance of Units for property or interests in property. In connection with any such additional Capital Contributions (of cash or property), the Managing General Partner is hereby authorized to cause the Partnership from time to time to issue to Partners (including the Managing General Partner) or other Persons (including, without limitation, in connection with the contribution of property to the Partnership) additional Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative participating, optional or other special rights, powers, and duties, including rights, powers, and duties senior to then existing Partnership Interests, all as shall be determined by the Managing General Partner in its sole and absolute discretion subject to Delaware law, and as 22 may be set forth by amendment to this Agreement to reflect the foregoing, including without limitation, (1) the allocations of items of Partnership income, gain, loss, deduction, and credit to such class or series of Partnership Interests; (2) the right of each such class or series of Partnership Interests to share in Partnership distributions; (3) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; and (4) the right to vote, including, without limitation, the approval rights set forth in Section 11.2.A hereof; provided, that no such additional Units or other Partnership Interests shall be issued to the Managing General Partner unless either (a) the additional Partnership Interests are issued in connection with the grant, award, or issuance of shares of the Managing General Partner pursuant to Section 4.3.D below, which shares have designations, preferences, and other rights (except voting rights) such that the economic interests attributable to such shares are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the Managing General Partner in accordance with this Section 4.3.C, or (b) the additional Partnership Interests are issued to all Partners holding Partnership Interests in the same class in proportion to their respective Partnership Interests in such class; provided, however, that any Limited Partner Interests acquired by the Managing General Partner, whether pursuant to exercise by a Limited Partner of its exchange rights, or otherwise, shall be automatically converted into a General Partner Interest comprised of an identical number of Units of the same class. In the event that the Partnership issues additional Partnership Interests pursuant to this Section 4.3.C, the Managing General Partner shall make such revisions to this Agreement (including but not limited to the revisions described in Section 5.4, Section 6.2.B, and Section 8.6 hereof) as it determines are necessary to reflect the issuance of such additional Partnership Interests. D. Issuance of Shares or Other Securities by the Managing General Partner. The Managing General Partner shall not issue any additional Shares (other than Shares issued pursuant to Section 8.6 hereof or pursuant to a dividend or distribution (including any share split) of Shares to all of its shareholders), other shares of beneficial interest of the Managing General Partner or New Securities unless the Managing General Partner shall make a Capital Contribution of the net proceeds from the issuance of such additional Shares, other shares of beneficial interest or New Securities, as the case may be, and from the exercise of the rights contained in such additional New Securities, as the case may be and receive Units from the Partnership with rights, preferences and terms corresponding to such Shares, other shares of beneficial interest or New Securities, as the case may be; provided further, that in the case of Convertible Preferred Shares or other securities senior or junior to the Common Shares as to dividends and distributions on liquidation, the Managing General Partner shall contribute to the Partnership the proceeds or consideration (including any property or other non-cash assets) received for such securities and from any subsequent exercise, exchange or conversion thereof (if applicable), and receive from the Partnership Convertible Preferred Units or other interests in the Partnership in consideration therefor with the same terms and conditions, including dividend, dividend priority and liquidation preference, as are applicable to such securities. Section 4.4 Share Incentive Plan. If at any time or from time to time the Managing General Partner sells or issues Shares pursuant to any Share Incentive Plan, the Managing General Partner shall contribute the net proceeds therefrom to the Partnership as an additional Capital Contribution and shall receive the number of Common Units corresponding to the number of Shares 23 delivered by the Managing General Partner to such exercising party multiplied by a fraction the numerator of which is one and the denominator of which is the Exchange Factor (as defined in Exhibit C hereto) in effect on the date of such contribution. Section 4.5 Other Contribution Provisions. In the event that any Partner is admitted to the Partnership and is given a Capital Account in exchange for services rendered to the Partnership, such transaction shall be treated by the Partnership and the affected Partner as if the Partnership had compensated such Partner in cash, and the Partner had contributed such cash to the capital of the Partnership. In addition, with the written consent of the Managing General Partner (which may be granted or denied in its sole discretion), one or more Partners may enter into agreements or other instruments with the Partnership which have the effect of providing a guarantee of certain obligations of the Partnership or one or more of its Subsidiaries. Section 4.6 Purchase of Shares by the Managing General Partner. In the event the Managing General Partner exercises its rights under the Charter to purchase Shares, then the Managing General Partner shall cause the Partnership to purchase from it a number of Units of the appropriate class equal to the number of Shares so purchased multiplied by a fraction the numerator of which is one and the denominator of which is the Exchange Factor (as defined in Exhibit C hereto) in effect on the date of such contribution, on the same terms that the Managing General Partner purchased such Shares. Section 4.7 No Interest on Capital Contributions. No interest or additional share of Net Income shall be paid or credited to the Partners on their Capital Accounts, or on any undistributed Net Income of funds left on deposit with the Partnership; provided, however, that nothing contained herein shall be construed to prevent or prohibit the payment of interest on account of loans made by the Partners to the Partnership. Any loans made to the Partnership by a Partner shall not increase its Capital Contribution or interest in the Net Income, Net Loss or Net Cash Flow of the Partnership, but shall be a debt due from the Partnership and repaid accordingly. Section 4.8 Conversion of Convertible Preferred Units. A. If at any time holders of the Managing General Partner's Convertible Preferred Shares shall exercise their rights under the Managing General Partner's Declaration of Trust to convert any Convertible Preferred Shares to Common Shares, in whole or in part (including any fractions thereof), then, simultaneously with such conversion, an equal number of Convertible Preferred Units shall be automatically converted into the number of Common Units equal to the product of (x) the number of Common Shares into which the Convertible Preferred Shares are converted, multiplied by (y) a fraction the numerator of which is one and the denominator of which is the Exchange Factor in effect on such date. B. If at any time Convertible Preferred Shares are to be redeemed pursuant to the Managing General Partner's Declaration of Trust or purchased by the Managing General Partner, the Partnership shall redeem an equal number of Convertible Preferred Units by payment of the Convertible Preferred Unit Redemption Amount therefor or purchase price paid by the Managing General Partner immediately prior to or concurrently with such redemption or purchase. 24 C. The Managing General Partner shall amend Exhibit A as applicable to reflect each conversion of Convertible Preferred Units, and the issuance of additional Common Units in connection therewith and each redemption of Convertible Preferred Units. ARTICLE 5 DISTRIBUTIONS Section 5.1 Requirement and Characterization of Distributions. Except as set forth in Section 13.2 hereof, the Managing General Partner shall cause the Partnership to distribute from time to time, but not less frequently than quarterly, all, or such portion as the Managing General Partner may in its discretion determine, of Net Cash Flow generated by the Partnership during such quarter to the Partners who are Partners on the Partnership Payment Date with respect to such quarter, and in the following priority: (i) First, to the extent that the amount of cash already distributed to the Managing General Partner for all prior quarters pursuant to clause (ii) below (other than the immediately preceding quarter) was less than the Convertible Preferred Distribution for each of the outstanding Convertible Preferred Units for all such quarters, and such deficiency was not previously distributed pursuant to this subsection (i) or paid as part of a Convertible Preferred Unit Redemption Amount (a "Convertible Preferred Distribution Shortfall"), Net Cash Flow shall be distributed to the Managing General Partner in an amount equal to such Convertible Preferred Distribution Shortfall for all such prior quarters. (ii) Second, Net Cash Flow shall be distributed to the Managing General Partner in an amount equal to the Convertible Preferred Distribution for the immediately preceding quarter for each outstanding Convertible Preferred Unit then held by the Managing General Partner. (iii) Third, Net Cash Flow shall be distributed to the holders of Common Units, pro rata in accordance with their respective Common Units. Unless otherwise expressly provided for herein or in an agreement at the time a new class of Partnership Interests is created in accordance with Article 4 hereof, no Partnership Interest shall be entitled to a distribution in preference to any other Partnership Interest; provided, however, that notwithstanding any other provision in this Agreement, from time to time and at such times as the Managing General Partner shall determine, and prior to any determination or distribution of Net Cash Flow pursuant to this Section 5.1, there shall be distributed to the applicable General Partner from the revenues, proceeds or other funds of the Partnership, an amount equal to any REIT Expenses (other than those described in clause (ii) of the definition of REIT Expenses), to the extent not paid or payable by the Managing General Partner from cash distributions which it receives directly from any Property Partnerships on account of any interest in the Property Partnership which it holds directly (as opposed to through the Partnership). The Managing General Partner shall take such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with its qualification as a REIT, to cause the Partnership to distribute sufficient amounts to enable the Managing General Partner to pay shareholder dividends that will (X) satisfy the requirements for 25 qualifying as a REIT under the Code and Regulations ("REIT Requirements") and (Y) avoid any federal income or excise tax liability of the Managing General Partner. Section 5.2 Distributions in Kind. No right is given to any Partner to demand and receive property or cash. The Managing General Partner may determine, in its sole and absolute discretion, to make a distribution in kind to the Partners of Partnership assets, and such assets shall be distributed in such a fashion as to ensure that such assets are distributed and allocated in accordance with Articles 5, 6 and 10 hereof based on the fair market value of such assets on the date of such distribution. Section 5.3 Distributions Upon Liquidation. Proceeds from a Terminating Capital Transaction shall be distributed to the Partners in accordance with Section 13.2 hereof. Section 5.4 Distributions to Reflect Issuance of Additional Partnership Interests. In the event that the Partnership issues additional Partnership Interests to a General Partner or any Additional Limited Partner pursuant to Section 4.3 or 4.4 hereof, the Managing General Partner shall make such revisions to this Article 5 as it determines are necessary to reflect the issuance of such additional Partnership Interests, including making preferential distributions to certain classes of Partnership Interests. Section 5.5 Distributions to Limited Partners Exercising Exchange Rights. With respect to any Limited Partner(s) from whom the Managing General Partner receives an Exercise Notice to exercise Rights in accordance with Section 8.6 hereof for which the Managing General Partner elects to pay the Cash Purchase Price pursuant to Exhibit C, the Managing General Partner shall cause the Partnership to distribute to such Limited Partner(s), with respect to the Units for which the Cash Purchase Price is paid, (i) on the Partnership Payment Date, if any, thereafter occurring during the quarter in which the Cash Purchase Price is paid, an amount equal to a full pro rata share of any Net Cash Flow to which such Limited Partner would have been entitled to receive pursuant to Section 5.1 had such Limited Partner held such Units on the Partnership Payment Date occurring in such quarter and (ii) on the Partnership Payment Date, if any, occurring during the next succeeding quarter after such Exercise Notice is received, an amount equal to the Net Cash Flow to which such Limited Partner would have been entitled to receive pursuant to Section 5.1 had such Limited Partner held such Units on the Partnership Payment Date, multiplied by a fraction, the numerator of which is the number of days in the preceding quarter (based on three 30-day months) that the Limited Partner held such Units and the denominator of which is 90. ARTICLE 6 ALLOCATIONS Section 6.1 Timing and Amount of Allocations of Net Income and Net Loss. Net Income and Net Loss of the Partnership shall be determined and allocated with respect to each Partnership taxable year of the Partnership as of the end of each such year. Subject to the other provisions of this Article 6, an allocation to a Partner of a share of Net Income or Net Loss shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Income or Net Loss. 26 Section 6.2 General Allocations. Except as otherwise provided herein, Net Income and Net Loss for any Partnership taxable year or other applicable period of the Partnership shall be allocated in the following order and priority: A. First, subject to Section 6.2.D, Net Income (or, if necessary, Partnership items of income and gain) shall be allocated to the Managing General Partner in an amount equal to the excess of (1) the amount of Net Cash Flow distributed to the Managing General Partner pursuant to subsections (i) and (ii) of Section 5.1 for the current and all prior Partnership taxable years over (2) the amount of Net Income (or Partnership items of income and gain) previously allocated to the Managing General Partner pursuant to this Section 6.2.A (and Section 6.2.D to the extent that Section 6.2.D operates to allocate an amount to the Managing General Partner in respect of an increase in the liquidation preference for the Convertible Preferred Shares under the Managing General Partner's Articles of Incorporation due to accrued but unpaid dividends on the Convertible Preferred Shares). B. Second, subject to Section 6.2.D (and to the extent not already allocated pursuant to Section 6.2.D in respect of an increase in the Convertible Preferred Units Redemption Amount due to accrued but unpaid dividends on the Convertible Preferred Shares), for any Partnership taxable year ending on or after a date in which Convertible Preferred Units are redeemed, Net Income (or Net Loss), or, if necessary, Partnership items of income, gain, loss and deduction thereof, shall be allocated to the Managing General Partner in an amount equal to the excess (or deficit) of (1) the sum of the Convertible Preferred Unit Redemption Amount for Convertible Preferred Units that have been or are being redeemed during the Partnership taxable year over (2) the product of $20.00 times the number of such Convertible Preferred Units. C. Third, subject to Sections 6.2.D and 6.2.E, the remaining Net Income or Net Loss, if any, shall be allocated to each of the Partners in the following order and priority: (i) The remaining Net Income, if any, shall be allocated among the Partners holding Common Units in proportion to, and to the extent of, the aggregate amounts of Net Cash Flow distributed in respect of the Partners' Common Units pursuant to subsection (iii) of Section 5.1 (including those amounts of Net Cash Flow distributed within the fiscal year or other applicable period under Section 5.5 that are in respect of subsection (iii) of Section 5.1, only if either (A) such Net Cash Flow is distributed on or prior to the date on which the Cash Purchase Price is paid or (B) the Partner to whom such Net Cash Flow is distributed otherwise continues to own one or more Common Units on the date such distribution is made), (ii) Upon a Liquidating Capital Event, any remaining Net Income or Net Loss (or remaining Partnership items of income, gain, loss and deduction thereof), computed by including the Net Income or Net Loss resulting from such Liquidating Capital Event, shall be allocated among the Partners holding Common Units to the extent possible, until each Limited Partner has a Capital Account balance equal to (and the Managing General Partner has a Capital Account balance equal to the sum of the Preferred Sum (defined in Section 6.2.D) plus an additional amount equal to) the pro rata portion, based on the number of Common Units held by each Partner, of the net positive 27 sum of the Capital Account balances for all Partners (determined after taking into account the allocations required under Section 6.6) less the Preferred Sum. (iii) Any remaining Net Income or Net Loss shall be allocated to the Partners holding Common Units pro rata in accordance with their respective Common Units. D. Notwithstanding Sections 6.2.A, B and C the Managing General Partner shall allocate Net Income or Net Loss (or Partnership items of income, gain, loss and deduction thereof) among the Partners to the extent possible such that the Minimum Gain Capital Account balance, as of the end of the Partnership taxable year or other applicable period for which such allocations are made, is not less than the sum (the "Preferred Sum") of the product of the number of Convertible Preferred Units held by the Managing General Partner multiplied by the liquidation preference for a share of Convertible Preferred Shares pursuant to the Managing General Partner's Articles of Incorporation. E. In the event allocations are made pursuant to Section 6.2.D ("Reallocated Income" and "Reallocated Loss") in prior Partnership taxable years or other applicable periods, any Net Income or Net Loss (or Partnership items of income, gain, loss and deduction thereof) that would otherwise have been allocated pursuant to subsection (iii) of Section 6.2.C shall be allocated among the Partners so that, to the extent possible, the net amount of such allocations of Net Income or Net Loss (or Partnership items of income, gain, loss or deduction thereof) under subsection (iii) of Section 6.2.C and the allocations of Reallocated Income and Reallocated Loss to each Partner shall be equal to the net amount that would have been allocated to each such Partner if the allocations of Reallocated Income and Reallocated Loss had not occurred; provided, however, that allocations under this Section 6.2.E shall not be made to the extent such allocations would cause the Minimum Gain Capital Account balance to be less than the Preferred Sum. Section 6.3 Allocations to Reflect Issuance of Additional Partnership Interests. In the event that the Partnership issues additional Partnership Interests to a General Partner or any Additional Limited Partner pursuant to Section 4.3 or 4.4 hereof, the Managing General Partner shall make such revisions to this Article 6 as it determines are necessary to reflect the terms of the issuance of such additional Partnership Interests, including making preferential allocations to certain classes of Partnership Interests. Section 6.4 Guaranteed Payments. To the extent that a General Partner receives any reimbursement of REIT Expenses pursuant to Section 5.1, such General Partner shall be allocated items of income and gain equal to the amount of such payment. Section 6.5 Allocations with Respect to Transferred Interests. Unless otherwise required by the Code and/or the Regulations or as agreed to and by the Managing General Partner, in its sole and absolute discretion, any Net Income or Net Loss allocable to a Partnership Interest which has been transferred during any year shall be allocated among the Persons who were holders of such Partnership Interest during such year in the manner described in Section 11.6 below. 28 Section 6.6 Additional Allocation Provisions. Notwithstanding the foregoing provisions of this Article 6 the following special allocations shall be made in the following order and priority: A. Regulatory Allocations. (1) Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(f), notwithstanding the provisions of Section 6.2 hereof, or any other provision of this Article 6, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent Partnership taxable years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.6.A(1) is intended to qualify as a "minimum gain chargeback" within the meaning of Regulation Section 1.704-2(f) which shall be controlling in the event of a conflict between such Regulation and this Section 6.6.A(1). (2) Partner Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(i)(4), and notwithstanding the provisions of Section 6.2 hereof, or any other provision of this Article 6 (except Section 6.6.A(1) hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership taxable year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent Partnership taxable years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each General Partner and Limited Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 6.6.A(2) is intended to qualify as a "chargeback of partner nonrecourse debt minimum gain" within the meaning of Regulation Section 1.704-2(i) which shall be controlling in the event of a conflict between such Regulation and this Section 6.6.A(2). (3) Nonrecourse Deductions and Partner Nonrecourse Deductions. Any Nonrecourse Deductions for any Partnership taxable year generally shall be allocated to the Partners in accordance with their Partnership Interests; provided, however, that the Managing General Partner may allocate Nonrecourse Deductions in a different manner so long as such allocation is reasonably consistent with allocations of some other significant Partnership item attributable to the Property securing the relevant Nonrecourse Liability that have substantial economic effect in accordance with Regulations Section 1.702-2(e)(2). Any Partner Nonrecourse Deductions for any Partnership taxable year shall be specially allocated to the Partner(s) who bears the economic risk of loss with respect 29 to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable, in accordance with Regulations Sections 1.704-2(b)(4) and 1.704-2(i). (4) Qualified Income Offset. If any Partner unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain shall be allocated, in accordance with Regulations Section 1.704-1(b)(2)(ii)(d), to the Partner in an amount and manner sufficient to eliminate, to the extent required by such Regulations, the Adjusted Capital Account Deficit of the Partner as quickly as possible; provided, that an allocation pursuant to this Section 6.6.A(4) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.6.A(4) were not in the Agreement. It is intended that this Section 6.6.A(4) qualify and be construed as a "qualified income offset" within the meaning of Regulations 1.704-1(b)(2)(ii)(d), which shall be controlling in the event of a conflict between such Regulations and this Section 6.6.A(4). (5) Gross Income Allocation. In the event any Partner has a deficit Capital Account at the end of any Partnership taxable year which is in excess of the sum of (a) the amount (if any) such Partner is obligated to restore to the Partnership, and (b) the amount such Partner is deemed to be obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially allocated items of Partnership income and gain, pro rata, in proportion to the amount of such excess Capital Account deficit, as quickly as possible until no Partner has such an excess Capital Account deficit; provided, that an allocation pursuant to this Section 6.6.A(5) shall be made if and only to the extent that such Partner would have an excess Capital Account deficit after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.6.A(5) and Section 6.6.A(4) hereof were not in the Agreement. (6) Limitation on Allocation of Loss. No items of loss or deduction will be allocated to any Partner to the extent that any such allocation would cause the Partner to have an, or increase the amount of an existing, Adjusted Capital Account Deficit at the end of any Partnership taxable year. All items of loss or deduction in excess of the limitation set forth in this Section 6.6.A(6) will be allocated among such other Partners, which do not have Adjusted Capital Account Deficit balances, pro rata, in proportion to their Partnership Interests, until no Partner may be allocated any such items of loss or deduction without having or increasing an Adjusted Capital Account Deficit. Thereafter, any remaining items of loss or deduction will be allocated to the Managing General Partner. (7) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Partner in complete liquidation of his interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in accordance with their interests in the Partnership in the event 30 that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. (8) Curative Allocation. The allocations set forth in Sections 6.6.A(1), (2), (3), (4), (5), (6) and (7) hereof (the "Regulatory Allocations") are intended to comply with certain regulatory requirements, including the requirements of Regulations Sections 1.704-1(b) and 1.704-2. Notwithstanding the provisions of Sections 6.1 and 6.2 hereof, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each such Partner if the Regulatory Allocations had not occurred. B. Nonrecourse Liability Allocation. For purposes of Regulations Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the amount of Partnership Minimum Gain, shall be allocated in each Partnership taxable year in accordance with a Permitted Debt Allocation Method. C. Distributions of Proceeds from Nonrecourse Liabilities. To the extent permitted by Sections 1.704-2(h)(3) and 1.704-2(i)(6) of the Regulations, the Partners shall endeavor to treat distributions of Net Cash Flow as having been made from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt only to the extent that such distribution would not cause or increase an Adjusted Capital Account Deficit for any Partner. D. Interpretation. The foregoing provisions of this Section 6.6 are intended to comply with Treasury Regulation Sections 1.704-1(b) and 1.704-2 and shall be interpreted consistently with this intention. Any terms used in such provisions that are not specifically defined in this Agreement shall have the meaning, if any, given such terms in the Regulations cited above. Section 6.7 Tax Allocations. A. In General. Except as otherwise provided in this Section 6.7, for income tax purposes each item of income, gain, loss and deduction (collectively, "Tax Items") shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Sections 6.2 and 6.6 hereof. B. Allocations Respecting Section 704(c) Revaluations. Notwithstanding Section 6.7.A hereof, Tax Items with respect to Partnership property that is contributed to the Partnership by a Partner shall be shared among the Partners for income tax purposes pursuant to Regulations promulgated under Section 704(c) of the Code, so as to take into account the variation, if any, between the adjusted tax basis of the property to the Partnership and its initial Gross Asset Value. With respect to Partnership property that is initially contributed to the Partnership upon its formation pursuant to Section 4.1 hereof, such variation between basis and initial Gross Asset Value shall be taken into account under the "traditional method" as described in Regulations Section 1.704-3(b). With respect to properties subsequently contributed to the Partnership, the Partnership shall account for such variation under any method approved under Section 704(c) of the Code and the applicable 31 regulations as chosen by the Managing General Partner. In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subparagraph (b) of the definition of Gross Asset Value (provided in Article 1 of this Agreement), subsequent allocations of Tax Items with respect to such asset shall take account of the variation, if any, between the adjusted basis of such asset and its Gross Asset Value in the same manner as under Section 704(c) of the Code and the applicable regulations consistent with the requirements of Regulations Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c) of the Code and the applicable regulations as chosen by the Managing General Partner. C. Alternative Minimum Tax. If any taxable item of income or gain is computed differently from the taxable item of income or gain which results for purposes of the alternative minimum tax, then to the extent possible, without changing the overall allocations of items for purposes of either the Partners' Capital Accounts or the regular federal income tax (i) each Partner will be allocated items of taxable income or gain for alternative minimum tax purposes taking into account the prior allocations of originating tax preferences or alternative minimum tax adjustments to such Partner (and its predecessors) and (ii) other Partnership items of income or gain for alternative minimum tax purposes of the same character that would have been recognized, but for the originating tax preferences or alternative minimum tax adjustments, will be allocated away from those Partners that are allocated amounts pursuant to clause (i) so that, to the extent possible, the other Partners are allocated the same amount, and type, of alternative minimum tax income and gain that would have been allocated to them had the originating tax preferences or alternative minimum tax adjustments not occurred. D. Recapture Gain. If any portion of gain recognized from the disposition of property by the Partnership represents the "recapture" of previously allocated deductions by virtue of the application of Code Section 1245 or 1250 ("Recapture Gain"), such Recapture Gain will be allocated as follows: First, to the Partners, pro rata, in proportion to the lesser of each Partner's (i) allocable share of the total gain recognized from the disposition of such Partnership property and (ii) share of depreciation or amortization with respect to such property (as determined under Regulations Sections 1.1245-1(e)(2) and (3)), until each such Partner has been allocated Recapture Gain equal to such lesser amount; and Second, the balance of Recapture Gain will be allocated among the Partners whose allocable shares of total gain exceed their shares of depreciation or amortization with respect to such property (as determined under Regulations Section 1.1245-1(e)(2) and (3)), in proportion to their shares of total gain (including Recapture Gain) from the disposition of such property; provided, however, that no Partner will be allocated Recapture Gain under this Section 6.7.D in excess of the total gain allocated to such Partner from such disposition. 32 ARTICLE 7 MANAGEMENT AND OPERATION OF BUSINESS Section 7.1 Management. A. Except as otherwise expressly provided in this Agreement or as required by applicable law, all management powers over the business and affairs of the Partnership are fully, exclusively and completely vested in the Managing General Partner, and no other Partner shall have any right to transact business for, participate in the management or decisions of, or exercise control or management power over the business and affairs of, the Partnership. The Managing General Partner may not be removed by the other Partners with or without cause, except with the consent of the Managing General Partner. In addition to the powers now or hereafter granted a general partner of a limited partnership under the Act and other applicable law or which are granted to the Managing General Partner under any other provision of this Agreement, the Managing General Partner, subject to the other provisions hereof including Section 7.3, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the Managing General Partner (so long as the Managing General Partner has determined to qualify as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its shareholders sufficient to permit the Managing General Partner to maintain REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by mortgage, deed of trust or other lien or encumbrance on all or any of the Partnership's assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership, the registration of any class of securities of the Partnership under the Securities Exchange Act of 1934, as amended, and the listing of any debt securities of the Partnership on any exchange; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership or the merger or other combination of the Partnership with or into another entity; (4) the mortgage, pledge, encumbrance or hypothecation of all or any assets of the Partnership, and the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct or the operations of the Managing General Partner 33 or the Partnership, the lending of funds to other Persons (including, without limitation, the Managing General Partner (if necessary to permit the financing or capitalization of a subsidiary of the Managing General Partner or the Partnership) and any Subsidiaries of the Partnership) and the repayment of obligations of the Partnership, any of its Subsidiaries and any other Person in which it has an equity investment; (5) the negotiation, execution, and performance of any contracts, leases, conveyances or other instruments that the Managing General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the Managing General Partner's powers under this Agreement; (6) the distribution of Partnership Net Cash Flow or other Partnership assets in accordance with this Agreement; (7) the selection and dismissal of employees of the Partnership (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer"), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, the determination of their compensation and other terms of employment or hiring, including waivers of conflicts of interest and the payment of their expenses and compensation out of the Partnership's assets; (8) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate; (9) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, any Subsidiary and any other Person in which the Partnership has an equity investment from time to time); provided, that as long as the Managing General Partner has determined to continue to qualify as a REIT, the Partnership may not engage in any such formation, acquisition or contribution that would cause the Managing General Partner to fail to qualify as a REIT; (10) the control of any matters affecting the rights and obligations of the Partnership, including the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law; (11) the undertaking of any action in connection with the Partnership's direct or indirect investment in any Person (including, without limitation, contributing or loaning Partnership funds to, incurring indebtedness on behalf of, or guarantying the obligations of any such Persons); (12) subject to the other provisions in this Agreement, the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as it may adopt; provided, that such methods are otherwise consistent with requirements of this Agreement; 34 (13) the management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by the Partnership or any Subsidiary of the Partnership or by any other Person in which the Partnership has made a direct or indirect equity investment; (14) holding, managing, investing and reinvesting cash and other assets of the Partnership; (15) the collection and receipt of revenues and income of the Partnership; (16) the exercise, directly or indirectly through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the Managing General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the Managing General Partner enumerated in this Agreement on behalf of any Person, pursuant to contractual or other arrangements between the Partnership and such Person; (19) the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or other agreements in writing necessary or appropriate in the judgment of the Managing General Partner for the accomplishment of any of the powers of the Managing General Partner enumerated in or granted by this Agreement; (20) the amendment and restatement of Exhibit A to reflect accurately at all times the Capital Contributions and Units ownership of the Partners as the same are adjusted from time to time to the extent necessary to reflect redemptions, conversions, Capital Contributions, the issuance of Units (including Convertible Preferred Units), the admission of any Additional Limited Partner or any Substituted Limited Partner or otherwise, which amendment and restatement, notwithstanding anything in this Agreement to the contrary, shall not be deemed an amendment of this Agreement, as long as the matter or event being reflected in Exhibit A otherwise is authorized by this Agreement; (21) the maintenance of the Partnership's books and records; and (22) the preparation and delivery, or causing to be prepared and delivered by the Partnership's accountants, all financial and other reports with respect to the operations of the Partnership, and the preparation and filing of all Federal and state tax returns and reports. 35 B. Each of the Partners agrees that the Managing General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provisions of this Agreement (except as provided in Section 7.3 hereof), the Act or any applicable law, rule or regulation; provided, that the Partners agree that the Partnership shall not take, or refrain from taking, any action which, in the judgment of the Managing General Partner, in its sole and absolute discretion, (A) could adversely affect the ability of the Managing General Partner to continue to qualify as a REIT, (B) could subject the Managing General Partner to any taxes under Section 857 or Section 4981 of the Code, or (C) could violate any law or regulation of any governmental body or agency having jurisdiction over the Managing General Partner or its securities, unless any such action (or inaction) under (A), (B) or (C) above shall have been specifically consented to by the Managing General Partner in writing. The execution, delivery or performance by the Managing General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the Managing General Partner of any duty that the Managing General Partner may owe the Partnership, any other General Partner or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. Except as otherwise provided in this Agreement, no Partner shall have any authority to act for, bind, commit or assume any obligation or responsibility on behalf of the Partnership, its properties or any other Partner. No Partner, in its capacity as a Partner under this Agreement, shall be responsible or liable for any indebtedness or obligation of another Partner, nor shall the Partnership be responsible or liable for any indebtedness or obligation of any Partner, incurred either before or after the execution and delivery of this Agreement by such Partner, except as to those responsibilities, liabilities, indebtedness or obligations incurred pursuant to and as limited by the terms of this Agreement and the Act. C. At all times from and after the date hereof, the Managing General Partner may cause the Partnership to obtain and maintain (1) casualty, liability and other insurance on the properties of the Partnership and (2) liability insurance for the Indemnitees hereunder. D. At all times from and after the date hereof, the Managing General Partner may cause the Partnership to establish and maintain working capital and other reserves in such amounts as the Managing General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. E. In exercising its authority under this Agreement, the Managing General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner (including the Managing General Partner) of any action taken by the Managing General Partner. The Managing General Partner, any other General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the Managing General Partner pursuant to its authority under this Agreement, except as may be otherwise provided in any separate agreement between the Managing General Partner or the Partnership and any Limited Partner; provided, that any such separate agreement which subjects a General Partner or the Partnership to liability to a 36 Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the Partnership or the Managing General Partner pursuant to its authority under this Agreement, must be approved by such General Partner or the Partnership. The Partners expressly acknowledge that, in any action undertaken by the Managing General Partner or the Partnership in accordance with the terms of this Agreement, the Managing General Partner is acting for the benefit of the Partnership, any other General Partners, the Limited Partners, itself, and the Managing General Partner's shareholders, collectively. F. Except as otherwise provided herein, to the extent the duties of the Managing General Partner require expenditures of funds to be paid to third parties, the Managing General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to authorize or require the Managing General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Partnership. Section 7.2 Certificate of Limited Partnership. To the extent that such action is determined by the Managing General Partner to be reasonable and necessary or appropriate, the Managing General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and to maintain the Partnership's qualification to do business as a foreign limited partnership in each other state, the District of Columbia or other jurisdiction, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the Managing General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. The Managing General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware, and any other state, or the District of Columbia or other jurisdiction, in which the Partnership may elect to do business or own property. Section 7.3 Restrictions on Managing General Partner's Authority. A. The Managing General Partner may not take any action in contravention of this Agreement, including, without limitation: (1) take any action that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement; (2) possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose except as otherwise provided in this Agreement; (3) admit a Person as a Partner, except as otherwise provided in this Agreement; 37 (4) perform any act that would subject a Limited Partner to liability as a general partner in any jurisdiction or any other liability except as provided herein or under the Act; or (5) enter into any contract, mortgage, loan or other agreement that prohibits or restricts, or has the effect of prohibiting or restricting, the ability of a Partner to exercise in full its rights under Section 8.6 hereof, except with the written consent of such Partner. B. The Managing General Partner shall not, without the prior Consent of the Partners, undertake, on behalf of the Partnership, any of the following actions or enter into any transaction which would have the effect of such transactions: (1) except as provided in Sections 7.1(A) and 7.3.D hereof, amend, modify or terminate this Agreement other than to reflect the admission, substitution, termination or withdrawal of partners pursuant to Article 12 hereof; (2) make a general assignment for the benefit of creditors or appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of the Partnership; or (3) institute any proceeding for bankruptcy on behalf of the Partnership; (4) approve or acquiesce to the transfer of the Partnership Interest of the Managing General Partner to any Person other than the Partnership; (5) admit into the Partnership any additional or substitute General Partners; or (6) except as provided in Section 7.9, take title to any property of the Partnership other than in the name of the Partnership or a Property Partnership. C. If the aggregate Limited Partner Interests of all Limited Partners represents 10.0% or more of the aggregate Partnership Interests, the Managing General Partner shall not, without the prior Consent of the Limited Partners, undertake, on behalf of the Partnership, to dissolve the Partnership. D. Notwithstanding Sections 7.3.B and 7.3.C hereof, but subject to Section 7.3.E hereof, the Managing General Partner shall have the power, without the Consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the Managing General Partner or surrender any right or power granted to the Managing General Partner or any Affiliate of the Managing General Partner for the benefit of the other Partners; 38 (2) to reflect the issuance of additional Partnership Interests pursuant to Sections 4.3.C and 4.4 hereof or the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to reflect a change that is of an inconsequential nature and does not adversely affect the Partners in any material respect, or to cure any ambiguity in, correct or supplement any provision in, or make other changes with respect to matters arising under, this Agreement that will not be inconsistent with law or with the provisions of this Agreement; (4) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; (5) to reflect such changes as are reasonably necessary for the Managing General Partner to maintain its status as a REIT, including changes which may be necessitated due to a change in applicable law (or an authoritative interpretation thereof) or a ruling of the IRS; and (6) to modify, as set forth in the definition of "Capital Account," the manner in which Capital Accounts are computed. The Managing General Partner will provide notice to the other Partners when any action under this Section 7.3.D is taken. E. Notwithstanding Sections 7.3.B, 7.3.C, and 7.3.D hereof, this Agreement shall not be amended, and no action may be taken by the Managing General Partner, without the Consent of each Partner adversely affected if such amendment or action would (1) convert a Limited Partner's interest in the Partnership into a general partner's interest (except as the result of the Managing General Partner acquiring such interest), (2) modify the limited liability of a Limited Partner, (3) alter rights of the Partner to receive distributions pursuant to Article 5 or Section 13.2.A(4) hereof, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.3 and Section 7.3.D(2) hereof), (4) alter or modify the rights set forth in Section 8.6 hereof, and related definitions herein, (5) reduce the percentage of Partners required to consent to any matter in this Agreement or (6) amend this Section 7.3.E. Further, no amendment may alter the restrictions on the Managing General Partner's authority set forth elsewhere in this Section 7.3 without the Consent specified in such section. In addition, notwithstanding Sections 7.3.B, 7.3.C and 7.3.D hereof, Section 11.2 hereof shall not be amended, and no action in contravention of Section 11.2 hereof shall be taken, without the Consent of the Limited Partners. F. Notwithstanding Section 7.3.B, no General Partner may, without the prior written consent of each of the other General Partners, undertake, except as set forth in the Put Option Agreement, any of the following actions or enter into any transaction which would have the effect of such transactions: 39 (1) approve or acquiesce to the transfer of all or any portion of the General Partner Interest (whether by sale, statutory merger or consolidation, liquidation or otherwise) of such General Partner to any Person other than the Partnership; or (2) admit into the Partnership any additional or substitute General Partners; or (3) withdraw from the Partnership or assign all or any part of its General Partner Interest in the Partnership. Section 7.4 Reimbursement of the Managing General Partner. A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 hereof regarding distributions, payments and allocations to which it may be entitled), the Managing General Partner shall not be compensated for its services as general partner of the Partnership. B. Subject to Article 15 hereof, the Partnership shall assume and pay when due, or reimburse the Managing General Partner for, on a monthly basis, or such other basis as the Managing General Partner may determine in its sole and absolute discretion, all costs and expenses it incurs. The Partnership shall also assume, and pay when due, all Administrative Expenses other than REIT Expenses, but only to the extent not paid or payable by the Managing General Partner from cash distributions received by the Managing General Partner directly from any Property Partnership. The Managing General Partner shall use any cash distributions which it receives directly from any Property Partnerships on account of any interest in the Property Partnership which it holds directly (as opposed to through the Partnership) to pay REIT Expenses. The Partners acknowledge that the Managing General Partner's sole business is the ownership of interests in and operation of the Partnership and that such expenses are incurred for the benefit of the Partnership; provided, that the Managing General Partner shall not be reimbursed for expenses it incurs relating to the organization of the Partnership and the Managing General Partner or the initial public offering or subsequent public offerings of Common Shares, other shares of beneficial interest or Funding Debt by the Managing General Partner, but shall be reimbursed for expenses it incurs with respect to any other issuance of additional Partnership Interests pursuant to the provisions hereof. Any amounts paid pursuant to this Section 7.4 shall be in addition to, but not duplicative of, any amounts paid to the Managing General Partner as indemnification pursuant to Section 7.6 hereof. C. Any reimbursements to the Managing General Partner pursuant to this Section 7.4 which constitute gross income of the Managing General Partner shall be reported as distributions for purposes of computing the Partners' Capital Accounts, and shall not be reported as guaranteed payments within the meaning of Section 707(c) of the Code. Section 7.5 Contracts with Affiliates. A. The Partnership may lend or contribute to Persons in which the Partnership has an equity investment, and such Persons may borrow funds from the Partnership, on terms and 40 conditions established in the sole and absolute discretion of the Managing General Partner. The foregoing authority shall not create any right or benefit in favor of any Person. B. The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law. C. The Managing General Partner, in its sole and absolute discretion and without the approval of the Partners, may propose and adopt on behalf of the Partnership employee benefit plans funded by the Partnership for the benefit of employees of the Managing General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the Managing General Partner, or any of the Partnership's Subsidiaries. The Managing General Partner also is expressly authorized to cause the Partnership to issue to it Units corresponding to Shares issued by the Managing General Partner pursuant to its Share Incentive Plan or any similar or successor plan and to repurchase such Units from the Managing General Partner to the extent necessary to permit the Managing General Partner to repurchase such Shares in accordance with such plan. D. The Managing General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of the Partnership and the Managing General Partner, on such terms as the Managing General Partner, in its sole and absolute discretion, believes are advisable. E. Except as expressly permitted by this Agreement and except for those transactions occurring on the date hereof in connection with the formation of the Partnership and the Company, no General Partner nor any Affiliate of a General Partner shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, unless the Managing General Partner determines in good faith that such transactions are fair and reasonable. Section 7.6 Indemnification. A. The Partnership shall indemnify an Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including reasonable legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership as set forth in this Agreement in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, and the Company shall indemnify The Nardi Group, L.L.C. from and against claims, losses, damages, liabilities, reasonable expenses, judgments, fines and settlements relating to any environmental liability with regard to the properties owned by the Company, the Partnership or affiliates thereof and which were not contributed to the Partnership or its affiliates by The Nardi Group, L.L.C. or any of its affiliates unless it is established that: (1) the act or omission of the Indemnitee (or The Nardi Group, L.L.C.) was material to the matter giving rise to the claim, demand, action, suit or proceeding and either was committed in bad faith by the Indemnitee (or The Nardi Group, L.L.C.) or was the result of active and deliberate dishonesty of the Indemnitee (or The Nardi Group, L.L.C.); (2) the Indemnitee (or The Nardi Group, 41 L.L.C.) actually received an improper personal benefit in money, property or services; or (3) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the Managing General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.6 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.6.A. Any indemnification pursuant to this Section 7.6 shall be made only out of the assets of the Partnership, and neither the General Partners nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.6. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding may be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (1) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in subparagraph A of this Section 7.6 has been met and (2) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. C. The indemnification provided by this Section 7.6 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in a capacity which affords such Person the rights of an Indemnitee. D. The Partnership may purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the Managing General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.6, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan of the Managing General Partner or the Partnership whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to such plan or participants or beneficiaries of such plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 7.6; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. 42 F. In no event may an Indemnitee subject the Limited Partners or any of the General Partners (except for the liability of the Managing General Partner to The Nardi Group, L.L.C. pursuant to Section 7.6 A) to personal liability by reason of the indemnification provisions set forth in this Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the Indemnitee would otherwise be entitled to indemnification. H. The provisions of this Section 7.6 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.6 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership's liability to any Indemnitee under this Section 7.6 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. I. If and to the extent any reimbursements to any General Partner pursuant to this Section 7.6 constitute gross income of such General Partner (as opposed to the repayment of advances made by the such General Partner on behalf of the Partnership) such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be treated consistently therewith by the Partnership and all Partners, and shall not be treated as distributions for purposes of computing the Partners' Capital Accounts. J. Any indemnification hereunder is subject to, and limited by, the provisions of Section 17-108 of the Act. K. In the event the Partnership is made a party to any litigation or otherwise incurs any loss or expense as a result of or in connection with any Partner's personal obligations or liabilities unrelated to Partnership business, such Partner shall indemnify and reimburse the Partnership for all such loss and expense incurred, including legal fees, and the Partnership Interest of such Partner may be charged therefor. The liability of a Partner under this Section 7.6.K shall not be limited to such Partner's Partnership Interest, and shall be enforceable against such Partner personally. Section 7.7 Liability of the General Partners. A. Notwithstanding anything to the contrary set forth in this Agreement, to the maximum extent that Maryland law or Delaware law, as the case may be, in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust or limited liability company, as the case may be, no trustee, member, manager or officer of a General Partner shall be liable to the Partnership or any Partner for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of this Agreement inconsistent with this Section, shall apply to or affect in any respect the applicability of the 43 preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute or Delaware statute, as the case may be, limiting the liability of trustees and officers of a Maryland real estate investment trust or members or managers of a Delaware limited liability company, as the case may be, for money damages in a suit by or on behalf of the Partnership or by any Partner, no trustee, member, manager or officer of a General Partner shall be liable to the Partnership or to any Partner for money damages except to the extent that (i) the trustee, member, manager or officer actually received an improper benefit or profit in money, property or services, in which case the liability shall not exceed the amount of the benefit or profit in money, property or services actually received; or (ii) a judgment or other final adjudication adverse to the trustee, member, manager or officer is entered in a proceeding based on a finding in the proceeding that, the trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. B. The Limited Partners and the General Partners expressly acknowledge that, as stated in Section 7.1.E, the Managing General Partner is acting for the benefit of the Partnership, itself, the Limited Partners, the other General Partners and the Managing General Partner's shareholders collectively, and that the Managing General Partner is under no obligation to give priority to the separate interests of the Limited Partners, the other General Partners or the Managing General Partner's shareholders (including, without limitation, the tax consequences to the Limited Partners, the General Partners or Assignees or to shareholders) in deciding whether to cause the Partnership to take (or decline to take) any actions and that the Managing General Partner shall not be liable to the Partnership or to any General Partner or Limited Partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by General Partners or Limited Partners in connection with such decisions. C. Subject to its obligations and duties as Managing General Partner set forth in Section 7.1.A hereof, the Managing General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. D. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of the General Partners and any of their officers, members, managers, directors, agents and employees to the Partnership and the Limited Partners under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.8 Other Matters Concerning the Managing General Partner. A. The Managing General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. 44 B. The Managing General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such Managing General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The Managing General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the Managing General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the Managing General Partner hereunder. D. Notwithstanding any other provisions of this Agreement or any non-mandatory provision of the Act, any action of the Managing General Partner on behalf of the Partnership or any decision of the Managing General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (1) to protect the ability of the Managing General Partner to continue to qualify as a REIT or (2) to avoid the Managing General Partner incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Partners. Section 7.9 Title to Partnership Assets. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partners, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Subject to Section 7.5, title to any or all of the Partnership assets may be held in the name of the Partnership, the Managing General Partner or one or more nominees, as the Managing General Partner may determine, including Affiliates of the Managing General Partner. The Managing General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the Managing General Partner or any nominee or Affiliate of the Managing General Partner shall be deemed held by the Managing General Partner or such nominee or Affiliate for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the Managing General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Any such title holder shall perform any and all of its respective functions to the extent and upon such terms and conditions as may be determined from time to time by the Managing General Partner. Section 7.10 Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the Managing General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and such 45 Person shall be entitled to deal with the Managing General Partner as if it were the Partnership's sole party in interest, both legally and beneficially. Each Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the Managing General Partner in connection with any such dealing. In no event shall any Person dealing with the Managing General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the Managing General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the Managing General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (A) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (B) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (C) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS AND GENERAL PARTNERS Section 8.1 Limitation of Liability. The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or under the Act. Section 8.2 No Participation in Management of Business. No Limited Partner, General Partner or Assignee (other than the Managing General Partner, any of its Affiliates or any officer, director, employee, general partner, member, manager, agent or trustee of the Managing General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operations, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the Managing General Partner, any of its Affiliates or any officer, director, employee, general partner, agent or trustee of the Managing General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Partners. Subject to any agreements entered into by a Partner or its Affiliate with the Managing General Partner, Partnership or a Subsidiary, any Partner and any officer, director, employee, agent, trustee, member, manager, Affiliate or shareholder of, or partner in, any Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Partner or Assignee. Subject to such agreements, none of the Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any other Person, other than the Partners benefitting 46 from the business conducted by the Partnership in accordance with this Agreement, and such other Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Partner or such other Person, could be taken or pursued by such other Person. Section 8.4 Return of Capital. Except pursuant to the exchange rights set forth in Section 8.6, no Partner shall be entitled to the withdrawal or return of his or her Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. No Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions, or, except as otherwise expressly provided in this Agreement, as to profits, losses, distributions or credits. Section 8.5 Rights of Partners Relating to the Partnership. A. In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.B hereof, each Partner shall have the right, for a purpose reasonably related to such Partner's interest as a partner in the Partnership, upon written demand with a statement of the purpose of such demand and at the Partnership's expense: (1) to obtain a copy of the most recent annual and quarterly reports filed with the SEC by the Managing General Partner pursuant to the Securities Exchange Act, and each communication sent to the shareholders of the Managing General Partner; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership taxable year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner. B. Notwithstanding any other provision of this Section 8.5, the Managing General Partner may keep confidential from the Limited Partners, for such period of time as the Managing General Partner determines in its sole and absolute discretion to be reasonable, any information that (1) the Managing General Partner believes to be in the nature of trade secrets or other information the disclosure of which the Managing General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or (2) the Partnership or the Managing 47 General Partner is required by law or by agreements with unaffiliated third parties to keep confidential. Section 8.6 Grant of Rights. A. The Managing General Partner does hereby grant to the Limited Partners and the Limited Partners do hereby accept the right, but not the obligations (hereinafter such right sometimes referred to as the "Rights"), to exchange all or a portion of their Units on the terms and subject to the conditions and restrictions contained in Exhibit C. The Rights granted hereunder may be exercised by any one or more of the Limited Partners, on the terms and subject to the conditions and restrictions contained in Exhibit C, upon delivery to the Managing General Partner of an Exchange Exercise Notice in the form of Schedule 1 to Exhibit C, which notice shall specify the Units to be exchanged by such Limited Partner. Once delivered, the Exchange Exercise Notice shall be irrevocable, subject to payment by the Managing General Partner of the Purchase Price in respect of such Units in accordance with the terms hereof. B. The terms and provisions applicable to the Rights shall be as set forth in Exhibit C. C. Any Units acquired by the Managing General Partner pursuant to an exercise by any Limited Partner of the Rights shall be deemed to be acquired by and reallocated or reissued to the Managing General Partner. The Managing General Partner shall amend Exhibit A hereto to reflect each such exchange and reallocation or reissuance of Units and each corresponding recalculation of the Units of the Partners. ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting. A. The Managing General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership's business, including without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device; provided, that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, consistently applied. B. The Managing General Partner shall provide Stephen J. Nardi and any other duly authorized representatives of any other General Partners the right at any reasonable time during normal business hours to visit and inspect any of the properties of the Partnership and to examine and take copies or extracts from its books of record and accounts. 48 Section 9.2 Fiscal Year. The fiscal year of the Partnership shall be the calendar year. Section 9.3 Reports. A. As soon as practicable, but in no event later than 105 days after the close of each Partnership Year, or such earlier date as they are filed with the SEC, the Managing General Partner shall cause to be mailed to each Partner as of the close of the Partnership Year, an annual report containing financial statements of the Partnership, or of the Managing General Partner if such statements are prepared solely on a consolidated basis with the Managing General Partner, for such Partnership Year, presented in accordance with generally accepted accounting principles, consistently applied, such statements to be audited by a nationally recognized firm of independent public accountants selected by the Managing General Partner. B. As soon as practicable, but in no event later than 45 days after the close of each calendar quarter (except the last calendar quarter of each year), or such earlier date as they are filed with the SEC, the Managing General Partner shall cause to be mailed to each Partner as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the Managing General Partner, if such statements are prepared solely on a consolidated basis with the Managing General Partner, presented in accordance with the applicable law or regulation, or as the Managing General Partner determines to be appropriate. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns. The Managing General Partner shall arrange for the preparation and timely filing of all tax returns of the Partnership and shall use all reasonable efforts to furnish, within 90 days of the close of each taxable year, the tax information reasonably required by Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections. Except as otherwise provided herein, the Managing General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code, including the election under Section 754 of the Code; provided, however, the Managing General Partner may file an election on behalf of the Partnership pursuant to Section 754 of the Code to adjust the basis of the Partnership property in the case of a transfer of a Partnership Interest, including transfers made in connection with the exercise of Rights, made in accordance with the provisions of this Agreement. The Managing General Partner shall have the right to seek to revoke any such election (including without limitation, any election under Section 754 of the Code) upon the Managing General Partner's determination in its sole and absolute discretion that such revocation is the best interests of the Partners. However, no Partner shall file an election for the Partnership to be taxed as a corporation under the Code without the written consent of all the Partners. Section 10.3 Tax Matters Partner. 49 A. The Managing General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6223(c) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address and profit interest of each of the Partners and Assignees; provided, however, that such information is provided to the Partnership by the Partners and Assignees. B. The tax matters partner is authorized, but not required: (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (a) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (b) who is a "notice partner" (as defined in Section 6231 of the Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of 50 the Managing General Partner set forth in Section 7.6 hereof shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm or law firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. Section 10.4 Organizational and Start-Up Expenses. The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Sections 709(b) and 195(b) of the Code. Section 10.5 Withholding. Each Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Partner any amount of federal, state, local, or foreign taxes that the Managing General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445 or 1446 of the Code. Any amount paid on behalf of or with respect to a Partner shall constitute a loan by the Partnership to such Partner, which loan shall be repaid by such Partner within 15 days after notice from the Managing General Partner that such payment must be made unless (A) the Partnership withholds such payment from a distribution which would otherwise be made to the Partner or (B) the Managing General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Partner. Any amounts withheld pursuant to the foregoing clauses (A) or (B) shall be treated as having been distributed to such Partner. Each Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Partner's Partnership Interest to secure such Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the Managing General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Partner, and in such event shall be deemed to have loaned such amount to such defaulting Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Partner (including, without limitation, the right to receive distributions and the holding of a security interest in such Partner's Partnership Interest). Any amounts payable by a Partner hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus two percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Partner shall take such actions as the Partnership or the Managing General Partner shall request in order to perfect or enforce the security interest created under this Section 10.5. Section 10.6 Limitation to Preserve REIT Status. To the extent that any amount paid or credited to the Managing General Partner or its officers, directors, employees or agents pursuant to 51 Section 7.4 or 7.6 hereof would constitute gross income to the Managing General Partner for purposes of Sections 856 (c) (2) or 856 (c) (3) of the Code (a "Managing General Partner Payment") then, notwithstanding any other provision of this Agreement, the amount of such Managing General Partner Payments for any Partnership taxable year shall not exceed the lesser of: (A) the amount of such Managing General Partner Payments derived from sources other than those described in subsections (A) through (H) at Section 856(c)(2) of the Code cannot exceed 5% of the total amount of the Managing General Partner Payments for the taxable year and; (B) the amount of such Managing General Partner Payments derived from sources other than those described in subsections (A) through (I) of Section 856(c)(3) of the Code cannot exceed 25% of the total amount of the Managing General Partner Payments for the taxable year; provided, however, that Managing General Partner Payments in excess of the amounts set forth in subparagraphs (A) and (B) above may be made if the Managing General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts would not adversely affect the Managing General Partner's ability to qualify as a REIT. To the extent Managing General Partner Payments may not be made in a year due to the foregoing limitations, such Managing General Partner Payments shall carry over and be treated as arising in the following year; provided, however, that such amounts shall not carry over for more than five years, and if not paid within such five year period, shall expire; provided further, that (a) as Managing General Partner Payments are made, such payments shall be applied first to carry over amounts outstanding, if any and (b) with respect to carry over amounts for more than one Partnership taxable year, such payments shall be applied to the earliest Partnership taxable year first. ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer. A. The term "transfer," when used in this Article 11 with respect to a Partnership Interest, shall be deemed to refer to a transaction by which a General Partner purports to assign its General Partner Interest to another Person or by which a Limited Partner purports to assign its Limited Partner Interest to another Person, and includes a sale, assignment, gift (outright or in trust), pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any exchange for Shares pursuant to Section 8.6 hereof. No part of the interest of a Limited Partner shall be subject to the claims of any creditor, any spouse for alimony or support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered, except as may be specifically provided for in this Agreement. B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void. 52 Section 11.2 Transfer of General Partner's Partnership Interest. A. Except as may be provided in the Put Option Agreement, no General Partner may withdraw from the Partnership or transfer or assign all or any portion of its General Partner Interest in the Partnership (whether by sale, statutory merger or consolidation, liquidation or otherwise) without the Consent of the Partners, which may be given or withheld by each Partner in its sole and absolute discretion, and only upon the admission of a successor General Partner pursuant to Section 12.1 hereof; provided, that, as provided in Section 7.3.G, neither the Managing General Partner nor any other General Partner may withdraw from the Partnership or assign all or any part of its General Partner Interest in the Partnership without the prior consent of all other General Partners, except as may be provided in the Put Option Agreement. Upon any transfer of a General Partner Interest in accordance with the provisions of this Section 11.2, the transferee shall become a substitute General Partner for all purposes herein, and shall be vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the transferor General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the General Partner Interest so acquired. It is a condition to any transfer otherwise permitted hereunder that the transferee assumes, by operation of law or express agreement, all of the obligations of the transferor General Partner under this Agreement with respect to such transferred General Partner Interest, and no such transfer (other than pursuant to (i) a statutory merger or consolidation wherein all obligations and liabilities of the transferor General Partner are assumed by a successor corporation by operation of law or (ii) the Put Option Agreement, which shall remove The Nardi Group, L.L.C. from all obligations hereunder) shall relieve the transferor General Partner of its obligations under this Agreement without the Consent of the Partners, in their reasonable discretion. In the event the Managing General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, or otherwise dissolves or terminates, or upon the Incapacity of the Managing General Partner, all of the remaining Partners may elect to continue the Partnership business by selecting a substitute Managing General Partner in accordance with the Act. Notwithstanding anything contained herein to the contrary, neither the Limited Partners nor the other General Partners shall have any right whatsoever to remove the Managing General Partner from the Partnership. B. Neither the Managing General Partner nor the Partnership shall engage in any merger, consolidation or other combination with or into another person, sale of all or substantially all of its assets or any reclassification, recapitalization or change of its outstanding equity interests (each, a "Termination Transaction"), unless (1) if the holders of the Shares approve the Termination Transaction, the Managing General Partner will not consummate such Termination Transaction unless (i) the Managing General Partner first conducts a vote of holders of Units (including the Managing General Partner) on the matter, (ii) the Managing General Partner votes the Units held by it in the same proportion as the holders of the Shares voted on the matter at the shareholder vote and (iii) the result of such vote of the holders of the Units (including the proportionate vote of the Units of the Managing General Partner) is that had such vote been a vote of holders of Shares, the Termination Transaction would have been approved (provided, however, that this Section 11.2.B(1) shall not be interpreted to enable or require the Managing 53 General Partner to engage in a Termination Transaction which requires the approval of the holders of the Shares if the Managing General Partner did not receive such required approval) and (2) (x) such Termination Transaction has been approved by a Consent of the Limited Partners or (y) except as otherwise provided in Section 11.2.C hereof, in connection with such Termination Transaction all Limited Partners either will receive or will have the right to elect to receive for each Common Unit an amount of cash, securities, or other property equal to the product of the number of Common Shares into which the Common Units held by such Limited Partner are exchangeable and the greatest amount of cash, securities or other property paid to a holder of one Common Share in consideration of one Common Share pursuant to the terms of the Termination Transaction; provided, that if, in connection with the Termination Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of a majority of the outstanding Shares, each holder of Units shall receive, or shall have the right to elect to receive, the greatest amount of cash, securities, or other property which such holder would have received had it exercised its Exchange Rights (as set forth in Section 8.6 hereof) and received Shares in exchange for its Units immediately prior to the expiration of such purchase, tender or exchange offer and had thereupon accepted such purchase, tender or exchange offer and then such Termination Transaction shall have been consummated. C. A Managing General Partner or the Partnership may merge, or otherwise combine its assets, with another entity without satisfying the requirements of Section 11.2.B hereof if: (1) immediately after such merger or other combination, substantially all of the assets directly or indirectly owned by the surviving entity, other than Units held by such Managing General Partner, are owned directly or indirectly by the Partnership or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with the Partnership (in each case, the "Surviving Partnership"); (2) the Limited Partners own a Partnership Interest of the Surviving Partnership based on the relative fair market value of the net assets of the Partnership (as determined pursuant to Section 11.2.D hereof) and the other net assets of the Surviving Partnership (as determined pursuant to Section 11.2.D hereof) immediately prior to the consummation of such transaction; (3) the rights, preferences and privileges of the Limited Partners in the Surviving Partnership are at least as favorable as those in effect immediately prior to the consummation of such transaction and as those generally applicable to limited partners or non-managing members of the Surviving Partnership holding a comparable class of interest; and (4) such rights of the Limited Partners include the right to exchange their interests in the Surviving Partnership for at least one of: (a) the consideration available to such Limited Partners pursuant to Section 11.2.B hereof or (b) if the ultimate controlling person of the Surviving Partnership has publicly traded common equity securities, such common equity securities, with an exchange ratio based on the relative fair market value of such securities (as determined pursuant to Section 11.2.D hereof) and the Shares. D. In connection with any transaction permitted by Section 11.2.B or 11.2.C hereof, the relative fair market values shall be reasonably determined by the Managing General Partner as of the time of such transaction and, to the extent applicable, shall be no less favorable to the Limited Partners than the relative values reflected in the terms of such transaction. Section 11.3 Limited Partners' Rights to Transfer. 54 A. In addition to the restrictions set forth in the Lock-Up Agreements, no Limited Partner shall, for a period of one year from the date hereof, transfer all or any portion of its Partnership Interest to any transferee without the consent of the Managing General Partner, which consent may be withheld in the Managing General Partner's sole and absolute discretion; provided, however, Primestone Investment Partners, L.P., a Delaware limited partnership, may, at any time, without such consents, transfer its Partnership Interest upon the occurrence of a Primestone Transfer Event; and provided further that any Limited Partner may, at any time, without such consents, (1) transfer all or any portion of its Partnership Interest to the Managing General Partner, (2) transfer all or any portion of its Partnership Interest to an Affiliate or to an Immediate Family member, subject to the provisions of Section 11.6 hereof, or to such Limited Partner's shareholders, members, partners or beneficiaries, as the case may be, (3) transfer all or any portion of its Partnership Interest to a trust for the benefit of a charitable beneficiary or to a charitable foundation, subject to the provisions of Section 11.6 hereof and (4) subject to the provisions of Section 11.6 hereof, pledge or transfer (a "Pledge") all or any portion of its Partnership Interest to a lender, which is not an Affiliate of such Limited Partner, as collateral or security for a bona fide loan or other extension of credit, and transfer such pledged Partnership Interest to such lender in connection with the exercise of remedies under such loan or extension or credit. After the first anniversary of the date hereof, each Limited Partner or Assignee (resulting from a transfer made pursuant to clauses (1)-(4) of the proviso of the preceding sentence) shall have the right to transfer all or any portion of its Partnership Interest to a Qualified Transferee, subject to the provisions of Section 11.6 hereof (in addition to the right of each such Limited Partner or Assignee to continue to make any such transfer permitted by clauses (1)-(4) of the proviso of the immediately preceding sentence). It is a condition to any transfer otherwise permitted hereunder that the transferee assumes by operation of law or express agreement all of the obligations of the transferor Limited Partner under this Agreement with respect to such transferred Partnership Interest and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor Partner are assumed by a successor corporation by operation of law) shall relieve the transferor Partner of its obligations under this Agreement without the approval of the Managing General Partner, in its reasonable discretion; provided, however, that such transfer shall relieve the transferor Partner from any future obligations under this Agreement from and after the date of the transfer. Notwithstanding the foregoing, any transferee of any transferred Partnership Interest shall be subject to any and all ownership limitations contained in the Charter and the representations in Section 3.3.D hereof. Any transferee, whether or not admitted as a Substituted Limited Partner, shall take subject to the obligations of the transferor hereunder. Unless admitted as a Substitute Limited Partner, no transferee, whether by a voluntary transfer, by operation of law or otherwise, shall have rights hereunder, other than the rights of an Assignee as provided in Section 11.5 hereof. B. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator, or receiver of such Limited Partner's estate shall have all the rights of a Limited Partner, but no more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate, and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. 55 C. The Managing General Partner may prohibit any transfer otherwise permitted under this Section 11.3 by a Limited Partner of his or her Units if, in the opinion of legal counsel to the Partnership, such transfer would require the filing of a registration statement under the Securities Act by the Partnership or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Unit. Section 11.4 Substituted Limited Partners. A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in place of such Limited Partner (including any transferee permitted by Section 11.3 hereof). The Managing General Partner shall, however, have the right to consent to the admission of a permitted transferee of the interest of a Limited Partner as a Substituted Limited Partner, pursuant to this Section 11.4 hereof, which consent may be given or withheld by the Managing General Partner in its sole and absolute discretion. The Managing General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. The admission of any transferee as a Substituted Limited Partner shall be subject to (i) the transferee executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement (including without limitation, the provisions of Section 2.4 hereof and such other documents or instruments as may be required to effect the admission, each in form and substance satisfactory to the Managing General Partner), (ii) the acknowledgment by such transferee that each of the representations and warranties set forth in Section 3.3.D hereof are true and correct with respect to such transferee as of the date of the transfer of the Partnership Interest to such transferee and (iii) if requested by the Managing General Partner, an opinion of counsel to the transferee that favorably covers the matters set forth in clauses (i) through (xii) of Section 11.6.E. C. Upon the admission of a Substituted Limited Partner, the Managing General Partner shall amend Exhibit A to reflect the name, address, and number of Units of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Limited Partner. Section 11.5 Assignees. If the Managing General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 hereof as a Substituted Limited Partner, as described in Section 11.4 hereof, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be entitled to all the rights of an assignee of a limited partner interest under the Act, including the right to receive distributions from the Partnership and the share of Net Income, Net Losses, gain and loss attributable to the Units assigned to such transferee, the rights to transfer the Units provided in this Article 11, and the exchange rights provided in Section 8.6 hereof, but shall not be deemed to be a holder of Units for any other purpose under this Agreement, and shall not be entitled to effect a Consent of the Partners or Consent of the Limited Partners with respect to such Units on any matter presented 56 to the Limited Partners for approval (such Consent of the Partners or Consent of the Limited Partners remaining with the transferor Limited Partner). In the event any such transferee desires to make a further assignment of any such Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Units. Section 11.6 General Provisions. A. No Limited Partner may withdraw from the Partnership other than as a result of (1) a permitted transfer of all of such Limited Partner's Units in accordance with this Article 11 and the transferee(s) of such Units being admitted to the Partnership as a Substituted Limited Partner(s) or (2) pursuant to the exercise of its exchange rights of all of such Limited Partner's Units under Section 8.6 hereof. B. Any Limited Partner who shall transfer all of such Limited Partner's Units in a transfer permitted pursuant to this Article 11 where such transferee was admitted as a Substituted Limited Partner or pursuant to the exercise of its exchange rights of all of such Limited Partner's Units under Section 8.6 hereof shall cease to be a Limited Partner. C. If any Partnership Interest is transferred, assigned or exchanged during any quarterly segment of the Partnership's taxable year in compliance with the provisions of this Article 11 or transferred or exchanged pursuant to Section 8.6 hereof on any day other than the first day of a Partnership taxable year, then Net Income, Net Losses, each item thereof and all other items attributable to such Partnership Interest for such Partnership taxable year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership taxable year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Except as otherwise required by Section 706(d) of the Code, solely for purposes of making such allocations, each of such items for the calendar month in which the transfer, assignment or exchange occurs shall be allocated to the Person who is a Partner as of midnight on the last day of said month and none of such items for the calendar month in which an exchange occurs will be allocated to the transferring, assigning or exchanging Partner. All distributions of Net Cash Flow attributable to such Partnership Interest with respect to which the Partnership Payment Date is before the date of such transfer, assignment or exchange shall be made to the transferor Partner, and all distributions of Net Cash Flow thereafter, in the case of a transfer or assignment, shall be made to the transferee Partner, or in the case of an exchange, the Managing General Partner. D. No transfer of any Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the consent of the Managing General Partner, in its sole and absolute discretion; provided, that as a condition to such consent, the lender will be required to enter into an arrangement with the Partnership and the Managing General Partner to exchange for Shares any Units in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. 57 E. In addition to any other restrictions on transfer herein contained, including without limitation the provisions of this Article 11, in no event may any transfer or assignment of a Partnership Interest by any Partner be made (1) to any person or entity who lacks the legal right, power or capacity to own a Partnership Interest; (2) in violation of applicable law; (3) of any component portion of a Partnership Interest, such as the Capital Account, or rights to distributions, separate and apart from all other components of a Partnership Interest; (4) if in the opinion of legal counsel for the Partnership such transfer would cause a termination of the Partnership for federal or state income tax purposes (except as a result of the exchange for Shares of all Units held by all Partners or pursuant to a Termination Transaction expressly permitted under Section 11.2 hereof); (5) if in the opinion of legal counsel for the Partnership such transfer would cause the Partnership to cease to be classified as a partnership for federal or state income tax purposes (except as a result of the exchange for Shares of all Units held by all Limited Partners); (6) if such transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (7) if such transfer would, in the opinion of counsel to the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (8) if such transfer requires the registration of such Partnership Interest pursuant to any applicable federal or state securities laws; (9) if such transfer is effectuated through an "established securities market" or a "secondary market" (or the substantial equivalent thereof) within the meaning of Section 7704 of the Code or such transfer causes there to be more than 100 Partners for purposes of Code Section 7704 or otherwise causes the Partnership to become a "Publicly Traded Partnership," as such term is defined in Sections 469(k)(2) or 7704(b) of the Code; (10) if such transfer subjects the Partnership to be regulated under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; (11) if the transferee or assignee of such Partnership Interest is unable to make the representations set forth in Section 3.3.D hereof or such transfer could otherwise adversely affect the ability of the Managing General Partner to remain qualified as a REIT; or (12) if in the opinion of legal counsel for the Partnership such transfer would adversely affect the ability of the Managing General Partner to continue to qualify as a REIT or subject the Managing General Partner to any additional taxes under Section 857 or Section 4981 of the Code. F. The Managing General Partner shall monitor the transfers of interests in the Partnership to determine (1) if such interests are being traded on an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code and (2) whether additional transfers of interests would result in the Partnership being unable to qualify for at least one of the "safe harbors" set forth in Regulations Section 1.7704-1 (or such other guidance subsequently published by the IRS setting forth safe harbors under which interests will not be treated as "readily tradable on a secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code) (the "Safe Harbors"). The Managing General Partner shall take all steps reasonably necessary or appropriate to prevent any trading of interests or any recognition by the Partnership of transfers made on such markets and, except as otherwise provided herein, to insure that at least one of the Safe Harbors is met. 58 ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor Managing General Partner. A successor to all of the Managing General Partner's General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor Managing General Partner shall be admitted to the Partnership as the Managing General Partner, effective upon such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor Managing General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership taxable year, all items attributable to the General Partner Interest for such Partnership taxable year shall be allocated between the transferring Managing General Partner and such successor as provided in Article 11 hereof. Section 12.2 Admission of Additional Limited Partners. A. After the admission to the Partnership of the Limited Partners on the date hereof, a Person who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner subject to (i) the transferee executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement (including without limitation, the provisions of Section 2.4 hereof and such other documents or instruments as may be required to effect the admission, each in form and substance satisfactory to the Managing General Partner), (ii) the acknowledgment by such transferee that each of the representations and warranties set forth in Section 3.3.D hereof are true and correct with respect to such transferee as of the date of the transfer of the Partnership Interest to such transferee and (iii) if requested by the Managing General Partner, an opinion of counsel to the transferee that favorably covers the matters set forth in clauses (i) through (xii) of Section 11.6.E. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the Managing General Partner, which consent may be given or withheld in the Managing General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the receipt of the Capital Contribution in respect of such Limited Partner, the documents set forth in paragraph A of this Section 12.2 and the consent of the Managing General Partner to such admission. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership taxable year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership taxable year shall be allocated among such Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership taxable year in accordance with Section 706(d) of the Code, using the interim closing books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of an Additional Limited Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner. All distributions of Net Cash Flow with respect to which the 59 Partnership Payment Date is before the date of such admission shall be made solely to Partners and Assignees other than the Additional Limited Partner (other than in its capacity as an Assignee) and except as otherwise agreed to by the Additional Limited Partners and the Managing General Partner, and all distributions of Net Cash Flow thereafter shall be made to all Partners and Assignees including such Additional Limited Partner. Section 12.3 Amendment of Agreement and Certificate of Limited Partnership. For the admission to the Partnership of any Partner, the Managing General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A hereof) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE 13 DISSOLUTION AND LIQUIDATION Section 13.1 Dissolution. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor Managing General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the Managing General Partner, any successor Managing General Partner (selected as described in Section 13.1.B hereof) shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. an event of withdrawal of the Managing General Partner, as defined in the Act, unless, within 90 days after the withdrawal, all of the remaining Partners agree in writing, in their sole and absolute discretion, to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a substitute Managing General Partner; C. subject to the provisions of Section 7.3.C hereof, an election to dissolve the Partnership made by the Managing General Partner; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; E. the sale of all or substantially all of the assets and properties of the Partnership unless the Managing General Partner, with the Consent of the Limited Partners (which consent may not be unreasonably withheld), elects to continue the Partnership business for the purpose of the receipt and the collection of indebtedness or the collection of any other consideration to be received in exchange for the assets of the Partnership (which activities shall be deemed to be part of the winding up of the affairs of the Partnership); 60 F. the Incapacity of the Managing General Partner, unless all of the remaining Partners in their sole and absolute discretion agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such Incapacity, of a substitute Managing General Partner; or G. the exchange for Shares of all Units (other than those of the Managing General Partner). Section 13.2 Winding Up. A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and of the Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The Managing General Partner (or, in the event there is no remaining Managing General Partner, any Person elected by a Majority in Interest of the Limited Partners) (the "Liquidator") shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and assets, and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the Managing General Partner, include shares of beneficial interest of the Managing General Partner) shall be applied and distributed in the following order: (1) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than the Partners; (2) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the Managing General Partner, including any Convertible Preferred Distribution Shortfall; (3) Third, to the payment and discharge of all of the Partnership's debts and liabilities to the other Partners; and (4) The balance, if any, to the General Partners and Limited Partners in accordance with their positive Capital Account balances, determined after taking into account all Capital Account adjustments for the Partnership taxable year during which the liquidation occurs (other than those made as a result of the liquidating distribution set forth in this Section 13.2.A(4)). The Managing General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13 other than reimbursement of its expenses as provided in Section 7.4 hereof. B. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the 61 Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2.A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. Section 13.3 Compliance with Timing Requirements of Regulations; Deficit Capital Account. In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partners and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for the taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. In the discretion of the Liquidator or the Managing General Partner, a pro rata portion of the distributions that would otherwise be made to the General Partners and Limited Partners pursuant to this Article 13 may be: A. distributed to a trust established for the benefit of the General Partners and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the Managing General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partners and Limited Partners from time to time, in the reasonable discretion of the Liquidator, in the same proportions and the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partners and Limited Partners pursuant to this Agreement; or B. withheld to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership; provided, that such withheld amounts shall be distributed to the General Partners and Limited Partners as soon as practicable. Section 13.4 Deemed Contribution and Interest Distribution. Notwithstanding any other provision of this Article 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Instead, the Partnership shall be deemed to have contributed the Partnership property in kind to a new partnership which shall be deemed to have assumed and taken such property subject to all Partnership liabilities. Immediately thereafter, the 62 General Partners and Limited Partners shall be deemed to have been distributed interests in such new partnership consisting of their Partnership Interests. Section 13.5 Rights of Partners. Except as otherwise provided in this Agreement, each Partner shall look solely to the assets of the Partnership for the return of such Partner's Capital Contribution and shall have no right or power to demand or receive property from the Managing General Partner. No Partner shall have priority over any other Partner as to the return of such Partner's Capital Contributions, distributions or allocations. Section 13.6 Notice of Dissolution. In the event a Liquidating Event occurs, the Managing General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners and to all other parties with whom the Partnership regularly conducts business (as determined in the discretion of the Managing General Partner) and shall publish notice thereof in a newspaper of general circulation in each place in which the Partnership regularly conducts business (as determined in the discretion of the Managing General Partner). Section 13.7 Cancellation of Certificate of Limited Partnership. Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.2 hereof, the Partnership shall be terminated and the Certificate and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.8 Reasonable Time for Winding-Up. A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation; provided, however, that such winding up shall be completed not later than 90 days after the end of the Partnership taxable year in which the Liquidating Event occurred. Section 13.9 Waiver of Partition. Each Partner hereby waives any right to partition of the Partnership property. ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS Section 14.1 Amendments. A. The actions requiring consent or approval of the Partners or of the Limited Partners pursuant to this Agreement, including Section 7.3 hereof, or otherwise pursuant to applicable law, are subject to the procedures in this Article 14. B. Amendments to this Agreement requiring the consent or approval of Limited Partners may be proposed by the Managing General Partner, by any other General Partner or by any Limited Partner or Limited Partners holding, in the aggregate, 10% or more of the Partnership Interests. Following such proposal, the Managing General Partner shall submit any proposed amendment to 63 the Partners. The Managing General Partner shall seek the written consent or approval of the Partners or of the Limited Partners, as applicable, on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written consent, the Managing General Partner may require a response within a reasonable specified time, but not less than 15 days, and failure to respond in such time period shall constitute a consent which is consistent with the Managing General Partner's recommendation (if so recommended) with respect to the proposal; provided, that an action shall become effective at such time as requisite consents are received even if prior to such specified time. Section 14.2 Action by the Partners. A. Meetings of the Partners may be called by the Managing General Partner and shall be called upon the receipt by the Managing General Partner of a written request by Partners holding 25 percent or more of the Partnership Interests held by all Partners other than the Managing General Partner. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote of the Partnership Interests of the Partners, or the Consent of the Partners or Consent of the Limited Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 14.1 hereof. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by the percentage as is expressly required by this Agreement for the action in question. Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of such percentage of the Partners (expressly required by this Agreement). Such consent shall be filed with the Managing General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Partner may authorize any Person or Persons to act for such Partner by proxy on all matters in which a Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Partner or such Partner's attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Partner executing it at any time prior to the time the holder of the proxy votes or otherwise acts pursuant to the proxy. D. Each meeting of Partners shall be conducted by the Managing General Partner or such other Person as the Managing General Partner may appoint pursuant to such rules for the conduct of the meeting as the Managing General Partner or such other Person deems appropriate. ARTICLE 15 REPRESENTATIONS AND WARRANTIES 64 Section 15.1 Representations and Warranties of Prime. Prime represents and warrants to the Partnership and the General Partners the matters set forth in Exhibit H. Section 15.2 Survival of Representations and Warranties. All representations and warranties in this Article 15 and in attached Exhibit H shall survive formation of the Partnership; provided, however, that no claim for a breach of any representation or warranty contained in this Article 15 or attached Exhibit H may be maintained by the Partnership or the Managing General Partner unless the Partnership or the Managing General Partner shall have delivered a written notice ("Notice of Breach") specifying the details of such claimed breach to Prime on or before the first to occur of (a) one (1) year after the date on which the independent directors of the Managing General Partner knew of such breach, or (b) the second (2nd) anniversary of the date on which the initial public offering of the Company is completed. The time period set forth above shall be extended and shall not lapse with respect to Prime if, prior to the expiration of such time period, there has been delivered to Prime a Notice of Breach and the indemnification obligation with respect thereto remains unsatisfied, or there is pending a dispute with respect to such obligation, until such dispute is finally resolved or satisfied in accordance with Section 15.5; provided, however, the time period shall be so extended only with respect to the matters specifically set forth in such Notice of Breach. Section 15.3 Indemnification. A. Prime shall be obligated with respect to all indemnification obligations arising from its representations and warranties to indemnify and hold harmless the Partnership (or any of the General Partners, to the extent a loss, cost, damage or expense is suffered or incurred directly by any of the General Partners (as opposed to indirectly in connection with any loss, cost, damage or expense of the Partnership)) against and from all liability, demands, claims, actions or causes of action, assessments, losses, fines, penalties, costs, damages and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) sustained or incurred by the Partnership (or the General Partners, if applicable) as a result of or arising out of (i) any inaccuracy in any representation or warranty or (ii) any liability of the Partnership or the General Partners arising from any inaccuracy in any representation or warranty under the Underwriting Agreement. B. Notwithstanding anything herein to the contrary, any right or claim for indemnification pursuant to this Section 15.3 arising out of an inaccuracy of the representation and warranty made by Prime in item (h) of Exhibit H shall first be satisfied by recourse to any applicable title insurance before the Partnership or any of the General Partners shall be entitled to recovery from Prime. Section 15.4 Limitations on Indemnification Obligations. A. The Partnership and the General Partners shall not be entitled to indemnification under Section 15.3 hereof unless a Notice of Breach has been respectively delivered by the Partnership or the General Partners within the time period specified in Section 15.2 hereof. B. If a claim for indemnification is asserted by the Partnership or any of the General Partners against a Partner, such Partner shall have the right, at its own expense, to participate in the 65 defense of any claim, action or proceeding ("Claim") asserted against the Partnership or any of the General Partners which resulted in the claim for indemnification, and if such right is exercised, the parties shall cooperate in the defense of such action or proceeding. C. Indemnification of the Partnership and the General Partners pursuant to Section 15.3 hereof and the remedies in respect thereof as set forth in Section 15.5 hereof shall be the exclusive remedy of the Partnership and the General Partners for any breach of any representation or warranty contained herein, and the only legal action which may be asserted against Prime under this Article 15 shall be an action asserted pursuant to Section 15.5 hereof. Section 15.5 Remedies. A. Each indemnification obligation of Prime under this Agreement shall be payable by Prime, subject to any limitations contained in a separate agreement between Prime and the Partnership in existence on the date hereof. B. In the event the Partnership asserts, within the time period set forth in Section 15.2 hereof, that Prime has an indemnification obligation to the Partnership under this Article 15, the Managing General Partner shall deliver written notice (the "Indemnification Notice") to Prime describing in reasonable detail the circumstances giving rise to such obligation and the amount of the Indemnification obligation (an "Indemnification Claim"). In the event Prime objects to any such Indemnification Claim and provides a written response to the Partnership within thirty (30) days after delivery of the Indemnification Notice, which response describes in reasonable detail Prime's objection to such Indemnification Claim (whether as to the facts giving rise thereto, the amount thereof, or otherwise) and, if applicable, providing a recalculation of the amount thereof, Prime and the Managing General Partner shall meet within ten (10) days to discuss and negotiate in good faith the Indemnification Claim and Prime's objection thereto. In the event that no resolution or compromise is reached within thirty (30) days of such meeting, the dispute regarding the Indemnification Claim shall be submitted to and determined by the U.S. District Court, Northern District of Illinois or, if such court does not have jurisdiction over such dispute, such dispute shall be submitted to and determined by the Circuit Court of Cook County, Cook County, Illinois. Section 15.6 Limitation of Liability. Notwithstanding anything contained in this Article 15 (except as contemplated by Section 15.7.B in the event of a Transfer or exercise of Rights), the aggregate amount of liability of Prime to the Partnership pursuant to this Article 15 shall be $69,300,000.00. Section 15.7 Subrogation. In the event that Prime has paid an indemnification obligation pursuant to this Article 15, and a third party is or may have liability to the Partnership with respect to the matter which resulted in the indemnification obligation, Prime shall be subrogated to the rights of the Partnership against or with respect to such party. Neither the Partnership nor the Managing General Partner shall have any affirmative obligation or shall be obligated to incur any cost or expense, as a result of any such subrogation of rights to Prime. 66 ARTICLE 16 GENERAL PROVISIONS Section 16.1 Addresses and Notice. Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by certified first class United States mail, nationally recognized overnight delivery service or facsimile transmission to the Partner or Assignee at the address set forth in Exhibit A hereof or such other address as the Partners shall notify the Managing General Partner in writing. Section 16.2 Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 16.3 Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 16.4 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 16.5 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 16.6 Creditors. Other than as expressly set forth herein with respect to Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 16.7 Waiver. No failure or delay by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon any breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. Section 16.8 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 16.9 Applicable Law. This Agreement 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. 67 Section 16.10 Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. Section 16.11 Entire Agreement. This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto; provided, however, that the Partners agree and acknowledge that the Partnership and the Contributors have signed separate Tax Indemnity Agreements (individually, a "TIA"), dated as of November 17, 1997. To the extent there is or arises a conflict between a provision in any of the TIA and this Agreement, the provision of the applicable TIA shall supersede this Agreement. Further, to the extent there is or arises a conflict between a provision of the Put Option Agreement and this Agreement, the provision of the Put Option Agreement shall supersede this Agreement. Section 16.12 No Rights as Shareholders. Nothing contained in this Agreement shall be construed as conferring upon the holders of Units any rights whatsoever as shareholders of the Managing General Partner, including without limitation any right to receive dividends or other distributions made to shareholders of the Managing General Partner or to vote or to consent or to receive notice as shareholders in respect of any meeting of shareholders for the election of directors of the Managing General Partner or any other matter. [SIGNATURE PAGE FOLLOWS] 68 IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of the date first written above. MANAGING GENERAL PARTNER: PRIME GROUP REALTY TRUST By: /s/ W. Michael Karnes Name:W. Michael Karnes Title:Executive VP GENERAL PARTNER: THE NARDI GROUP, L.L.C. By:/s/ Stephen J. Nardi Name: Stephen J. Nardi Title: CEO LIMITED PARTNERS: EDWARD S. HADESMAN TRUST DATED MAY 22, 1992 By: /s/ Edward S. Hadesman Name: Edward S. Hadesman Title: Trustee GRANDVILLE/NORTHWESTERN MANAGEMENT CORPORATION, an Illinois corporation By:/s/ Edward S. Hadesman Name: Edward S. Hadesman Title: President CAROLYN B. HADESMAN TRUST DATED MAY 21, 1992 By: /s/ Carolyn B. Hadesman Name: Carolyn B. Hadesman Title: Trustee LISA HADESMAN 1991 TRUST By:/s/ Edward S. Hadesman Name: Edward S. Hadesman Title: Trustee CYNTHIA HADESMAN 1991 TRUST By:/s/ Edward S. Hadesman Name: Edward S. Hadesman Title: Trustee TUCKER B. MAGID /s/ Tucker B. Magid FRANCES S. SHUBERT /s/ Frances S. Shubert GRANDVILLE ROAD PROPERTY, INC., an Illinois corporation By:/s/ Edward S. Hadesman Name: Edward S. Hadesman Title: President SKY HARBOR ASSOCIATES, an Illinois limited partnership By:/s/ Edward S. Hadesman Name: Edward S. Hadesman Title: Managing General Partner JEFFREY A. PATTERSON /s/ Jeffrey A. Patterson PRIMESTONE INVESTMENT PARTNERS, L.P. By: PG/PRIMESTONE. L.L.C. Its general partner By:THE PRIME GROUP, INC. Its Administrative Member By: /s/ Robert J. Rudnik Name: Robert J. Rudnik Title: Executive VP By:BRE/PRIMESTONE INVESTMENT MANAGEMENT L.L.C. its General Partner By: /s/ Steve J. Orbuch Name: Steve J. Orbuch Title: PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership By: /s/ Michael W. Reshcke Name: Michael W. Reschke Title: Managing General Partner EXHIBIT A PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
NUMBER OF CAPITAL MANAGING GENERAL PARTNER COMMON UNITS CONTRIBUTION - ------------------------------- -------------- -------------- Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman 12,380,000 */ General Partner The Nardi Group, L.L.C c/o Stephen J. Nardi 4100 Madison Street Hillside, IL 60162 927,100 $ 18,542,000 Limited Partners Edward S. Hadesman Trust Dated May 22, 1992 c/o Edward S. Hadesman 2500 North Lakeview, Unit 1401 Chicago, IL 60614 388,677 $ 7,773,540 Grandville/Northwestern Management Corporation c/o Edward S. Hadesman 2500 North Lakeview, Unit 1401 Chicago, IL 60614 9,750 $ 195,000 Carolyn B. Hadesman Trust Dated May 21, 1992 c/o Edward S. Hadesman 2500 North Lakeview, Unit 1401 Chicago, IL 60614 54,544 $ 1,090,880 NUMBER OF CAPITAL MANAGING GENERAL PARTNER COMMON UNITS CONTRIBUTION - ------------------------------- -------------- -------------- Limited Partners Lisa Hadesman 1991 Trust c/o Edward S. Hadesman 2500 North Lakeview, Unit 1401 Chicago, IL 60614 169,053 $ 3,381,060 Cynthia Hadesman 1991 Trust c/o Edward S. Hadesman 2500 North Lakeview, Unit 1401 Chicago, IL 60614 169,053 $ 3,381,060 Tucker B. Magid 545 Ridge Road Highland Park, IL 60035 33,085 $ 661,700 Frances S. Shubert 511 Lynn Terrace Waukegan, IL 60085 28,805 $ 576,100 Grandville Road Property, Inc. c/o Ms. Frances S. Shubert 511 Lynn Terrace Waukegan, IL 60085 7,201 $ 144,020 Sky Harbor Associates c/o Howard I. Bernstein 6541 North Kilbourn Lincolnwood, IL 60646 62,149 $ 1,242,980 Jeffrey A. Patterson c/o Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601 110,000 $ 2,200,000 Limited Partners Primestone Investment Partners, L.P. c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Paul A. Roehri 7,944,893 */ Prime Group Limited Partnership c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Michael W. Reshcke Robert J. Rudnik 90,000 $ 1,800,000
- ------------------------------- */ This amount shall be inserted by the Managing General Partner. EXHIBIT A - CONTD PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
NUMBER OF CONVERTIBLE CAPITAL MANAGING GENERAL PARTNER PREFERRED UNITS CONTRIBUTION - ------------------------------- ----------------------- ---------------- Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman 2,000,000 */
- ------------------------ */ This amount shall be inserted by the Managing General Partner. EXHIBIT B Contributed Assets and Assumed Contracts and Liabilities See attached Schedules 1,2,3,4, and 5. EXHIBIT B Contributed Assets and Assumed Contracts and Liabilities SCHEDULE 1
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- K/77 Investors Limited Partnership (dissolve after assignments)................. 98.9% L.P. .1% L.P. PGLP 1% G.P. Kilico Realty 77 West Wacker Limited Partnership.................. 5% G.P. Kilico Realty 5% G.P. PGI 34.9% L.P. % L.P. PGI 55% L.P. K/77 Investors Limited Partnership 77 Fitness Center Limited Partnership.................. 89.9% L.P. % L.P. PGLP 10% G.P. PGI (from Prime 77 Fitness Center, Inc.) 1669 Woodfield Road, L.L.C.................. 98% L.L.C. PGLP (includes 1% from PGLP, Inc. and 1% from Prime International, Inc.
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- 1% L.L.C. PGI 1% L.L.C. Prime Group II, L.P. Triad Development Company (dissolve after assignments) 25% G.P. Kilico Realty (PGC Development, Ltd. to distribute its ownership interests prior to assignments) 25% L.P. KILICO 1% G.P. PGI (from Prime of Tennessee, Inc.) .48% L.P. (from PGC PGI (from PGC, Inc.) Development, Ltd.) 16.04% L.P. (from PGC Professional Plaza, Development, Ltd.) Ltd. (from R. Dan Culp) 32.38% L.P. (31.48% .1% L.P. PGI from PGC Development, Ltd.) Nashville Office Building I, Ltd. 49% G.P. Triad 50.9% L.P. .1% L.P. PGI (from Suzette Rand)(1) Professional Plaza, Ltd. (1) 49% G.P. Triad - --------------------------- (1) Use Power of Attorney granted to Triad Development Company to assign to PGI and then assign to Operating Partnership and the Company. (2) Operating Partnership will assign a 1% L.P. interest in this limited partnership to R. Dan Culp.
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- 50.9% L.P. .1% L.P. PGI (from Tom Dolinak(2) Centre Square II, Ltd....... 49% G.P Triad 50.9% L.P. .1% L.P. PGI (from Peter Rowley(2) - Old Kingston Properties, Ltd. ....... 49% G.P. Triad 50.9% L.P. .1% L.P. PGI (from Donna Wadzita)(2) Triad Parking Corporation (dissolve after assignments)......... 50% stock PGI 50% stock Kilico Realty Triad Parking Company, Ltd........... 98.9% L.P. .1% L.P. Triad 1% G.P. Triad Parking Corporation Prime Columbus Industrial, L.L.C.................... 98% LLC PGLP (includes 1% from Prime International, Inc. - ------------------------------------------------------------------ (2) Use Power of Attorney granted to Triad Development Company to assign to PGI and then assign to Operating Partnership and the Company.
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- and 1% from PGLP, Inc.) 1% LLC PGI 1% LLC Prime Group II, L.P. Arlington Heights I, L.P..... 48.9% L.P. .1% L.P. Prime Group IV, L.P. 50% L.P. PGLP 1% G.P.* PGI Arlington Heights II, L.P.... 48.9% L.P. .1% L.P. Prime Group IV, L.P. 50% L.P. PGLP 1% G.P.* PGI Arlington Heights III, L.P... 48.9% L.P. .1% L.P. Prime Group IV, L.P. 50% L.P. PGLP 1% G.P.* PGI Prime IRB Holdings, L.P (to be dissolved after assignments and transfer of Bonds).................... 98.9% L.P. .1% L.P. PGI 1% G.P. PGLP (from Prime - ------------------------------------ * 1% G.P. interest to be assigned to PGI from Prime/AH Industrial Center, Inc. prior to assignments.
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- IRB, Inc.) East Chicago Enterprise Center Limited Partnership................. 50% L.P. Prime Group IV, L.P. 22.5% G.P. PGI 27.4% L.P. .1% L.P. PGI Kemper/Prime Industrial Partners.................... 50% G.P. Prime Group IV, L.P. 49.9% G.P. .1% G.P. PGI Hammond Enterprise Center Limited Partnership......... 50% L.P. Prime Group IV, L.P. 25% G.P. PGI 24.9% L.P. .1% L.P. PGI K-P Enterprise Centers, Inc. 50% stock PGLP (dissolve after assignments). 50% stock Prime Group IV, L.P. K-P Enterprise Centers Limited Partnership (dissolve after assignments).......... 49% L.P. PGLP 50% L.P. Prime Group IV, L.P. 1% G.P. K-P Enterprise
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- Centers, Inc. Enterprise Center I, L.P.... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center II, L.P.... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center III, L.P.... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center IV, L.P..... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center V, L.P...... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center VI, L.P..... 50% G.P. K-P Enterprise Centers Limited Partnership
Interest Being Interest Being Transferred to Transferred to Entity Operating Partnership the Company Assignor - ---------------------------- ---------------------- --------------- ---------- 49.9% L.P. .1% L.P. PGLP Enterprise Center VII, L.P... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center VIII, L.P... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center IX, L.P..... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP Enterprise Center X, L.P...... 50% G.P. K-P Enterprise Centers Limited Partnership 49.9% L.P. .1% L.P. PGLP ---------------------------- All entities on this Schedule 1 are Prime Entities other than 1669 Woodfield Road, L.L.C. and Prime Columbus Industrial, L.L.C. which are Prime Contribution Entities.
EXHIBIT C RIGHTS TERMS The Rights granted by the Managing General Partner to the Limited Partners pursuant to Section 8.6 of the Agreement shall be subject to the following terms and conditions: 1. Definitions. The following terms and phrases shall, for purposes of this Exhibit C and the Agreement, have the meanings set forth below: "Beneficially Own" shall mean the ownership of Common Shares by a Person who would be treated as an owner of such Common Shares either directly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. "Cash Purchase Price" shall have the meaning set forth in Paragraph 4 hereof. "Change of Control Event" means the occurrence after the date of this Agreement of any of the following events: (i) any person (as defined in or for purposes of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision to either of such sections, including any "group" acting for purposes of acquiring, holding, or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than Prime or any other current Limited Partner or a group (as defined below) controlling, controlled by or under common control with Prime or any other Limited Partner, together with such persons' associates (as defined in Rule 12b-2 under the Exchange Act) and their respective affiliates (as defined in Rule 12b-2 under the Exchange Act) (A) shall become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of, and shall have the right to control and exercise, more than 10% of the total voting power of all of the outstanding Common Shares; or (B) shall succeed in having a sufficient number of its nominees elected to the Managing General Partner's board of trustees such that such nominees so elected (whether new or continuing) shall constitute a majority of the board of trustees of the Managing General Partner; or (ii) a tender offer is commenced (within the meaning of Rule 14d-2 under the Exchange Act) which, if completed, would result in the offeror owning beneficially 20% or more of the outstanding Common Shares; or (iii) any person or group of persons solicits a proxy (as those terms are defined in Rule 14a-1 under the Exchange Act) for the purpose of opposing a solicitation of proxies by management of the Managing General Partner with respect to any matter, including the election or removal of trustees of the Managing General Partner, at any annual or special meeting of shareholders. "Closing Price" on any date shall mean the average of the daily market price for the ten (10) consecutive trading days immediately preceding the date with respect to which the "Closing Price" must be determined hereunder or, if such date is not a business day, the immediately preceding business day. The market price for each such trading day shall be: (a) if such shares are listed or admitted to trading on any securities exchange or the NASDAQ National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, (b) if such shares are not listed or admitted to trading on any securities exchange or the NASDAQ National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the Company, or (c) if such shares are not listed or admitted to trading on any securities exchange or the NASDAQ National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the Company, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been no reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Closing Price of such shares shall be determined by the Company acting in good faith on the basis of such C-2 quotations and other information as it considers, in its reasonable judgment, appropriate. "Computation Date" shall mean the date on which an Exchange Exercise Notice is delivered to the Managing General Partner. "Current Per Share Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days (as defined herein) ending on such date. "Election Notice" shall mean the written notice to be given by the Managing General Partner to the Exercising Partner(s) in response to the receipt by the Managing General Partner of an Exchange Exercise Notice from such Exercising Partner(s), the form of which Election Notice is attached hereto as Schedule 2. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor statute. "Exchange Exercise Notice" shall have the meaning set forth in Paragraph 2 hereof. "Exchange Factor" shall mean 100%; provided, that such factor shall be adjusted in accordance with the Antidilution Provisions of Paragraph 11 hereof. "Exchange Rights" shall have the meaning set forth in Paragraph 2 hereof. "Exercising Partners" shall have the meaning set forth in Paragraph 2 hereof. "Hart Scott Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Offered Common Units" shall mean the Common Units of the Exercising Partner(s) identified in an Exchange Exercise Notice which, pursuant to the exercise of Exchange Rights, can be acquired by the Managing General Partner under the terms hereof. "Ownership Limit" shall have the meaning set forth in Paragraph 3 hereof. "Purchase Price" shall mean the Cash Purchase Price or the Share Purchase Price. C-3 "Registration Rights Agreement" shall mean the agreement respecting the registration rights attributable to Common Shares, if any, issued to Limited Partners in accordance with the provisions hereof, the form of which is attached hereto as Schedule 3. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor statute. "Share Purchase Price" shall have the meaning set forth in Paragraph 4 hereof. 2. Delivery of Exchange Exercise Notices and Election Notices. Any one or more Limited Partners ("Exercising Partners") may, subject to the limitations set forth herein, deliver to the Managing General Partner written notice (the "Exchange Exercise Notice") pursuant to which such Exercising Partners elect to exercise their rights to convert (the "Exchange Rights") all or any portion of their Common Units into Common Shares subject to the limitations contained in Paragraph 3 below. Within thirty (30) days after receipt by the Managing General Partner of the Exchange Exercise Notice, the Managing General Partner shall deliver a notice (the "Election Notice")substantially in the form of Schedule 2 attached hereto, specifying the election by the Managing General Partner to deliver either the Share Purchase Price or the Cash Purchase Price to the Exercising Partner(s). 3. Limitation on Exercise of Exchange Rights. The Exchange Rights shall expire with respect to any Common Units for which an Exchange Exercise Notice has not been delivered to the Managing General Partner on January 1, 2051. Exchange Rights may be exercised at any time after the first anniversary of the date hereof and from time to time thereafter prior to January 1, 2051, subject to the limitations contained herein and in the Managing General Partner's Declaration of Trust, as amended (the "Ownership Limit"). For purposes of computing the Ownership Limit as of any date, each Limited Partner and its Affiliates shall be deemed to own all Common Shares issuable to such Limited Partner and its Affiliates upon the exercise of stock options granted on or before such date under the Share Incentive Plan. If an Exchange Exercise Notice is delivered to the Managing General Partner but, as a result of the Ownership Limit, the Exchange Rights cannot be exercised in full, the Exchange Exercise Notice shall be deemed to be modified such that the Exchange Rights shall be exercised only to the extent permitted under the Ownership Limit, with the exercise of the remainder of such Exchange Rights being deemed to have been withdrawn. 4. Computation of Purchase Price/Form of Payment. The C-4 Purchase Price payable by the Managing General Partner to each Exercising Partner for the Offered Common Units shall be payable by the issuance by the Managing General Partner of the number of shares of its Common Shares equal to the product, expressed as a whole number, of (i) the number of Common Units being converted, multiplied by (ii) the Exchange Factor (the "Share Purchase Price"). At the election of the Managing General Partner exercisable by the independent trustees of the Managing General Partner in their sole and absolute discretion, the Purchase Price may be paid in whole (but not in part) in cash rather than in Common Shares (the "Cash Purchase Price"). The Cash Purchase Price shall mean, with respect to the applicable number of Offered Common Units which are being purchased for cash upon the exercise of any Exchange Right, an amount of cash (in immediately available funds) equal to (i) the number of Common Shares of the Managing General Partner that would be issued to the Exercising Partner if the Share Purchase Price were paid for such Offered Common Units (taking into account the adjustments required pursuant to the definition of "Exchange Factor") multiplied by (ii) the Current Per Share Market Price computed as of the Computation Date. The Cash Purchase Price shall, in the sole and absolute discretion of the Managing General Partner, be paid in the form of cash, or cashier's or certified check, or by wire transfer of immediately available funds to the Exercising Partner's designated account. 5. Closing; Delivery of Election Notice. The closing of the acquisition of Offered Common Units shall, unless otherwise mutually agreed, be held at the principal office of the Managing General Partner, on the following date(s): (a) With respect to the exercise of Exchange Rights for which the Managing General Partner elects to pay the Share Purchase Price, the closing shall occur on the date agreed to by the Managing General Partner and the Exercising Partner(s), which date shall in no event be on or after the date which is the later of (i) ten (10) days after the delivery of the Election Notice; (ii) the expiration or termination of the waiting period applicable to each Exercising Partner, if any, under the Hart Scott Act; and (iii) forty (40) days after receipt of the Exchange Exercise Notice delivered in accordance with the requirements of Paragraph 3 hereof; and (b) With respect to the exercise of Exchange Rights for which the Managing General Partner elects to pay the Cash Purchase Price, the closing shall occur on the date agreed to by the Managing General Partner and the Exercising Partner(s), which date shall in no event be later than sixty (60) days after the Computation Date for such Exchange Exercise Notice; provided, however, that such sixty (60) day period may be C-5 extended for an additional period of up to thirty (30) additional days to the extent required for the Managing General Partner to cause additional Common Shares to be issued to provide financing to be used to acquire the Offered Common Units. Notwithstanding the foregoing, the Managing General Partner agrees to use its best efforts to cause the closing of the acquisition of Offered Common Units hereunder to occur as quickly as possible. 6. Further Limitations on Exercise. (a) Any exercise of Exchange Rights that would cause the Partnership to cease to qualify as a partnership for Federal income tax purposes (including for purposes of Code Section 7704) or would violate the Managing General Partner's Declaration of Trust shall be null and void, and shall not be recognized by the Managing General Partner or the Partnership for any purpose whatsoever. This requirement may be waived by the independent trustees of the Managing General Partner, and shall not apply to (i) the exercise by the sole remaining Limited Partner of the Exchange Rights with respect to all of his or its Common Units or (ii) the exercise by any of the Limited Partners or any of their Affiliates if (A) all of the Limited Partners and their Affiliates (whether or not they are beneficiaries of any pledge of Common Units by Prime) are exercising Exchange Rights with respect to all Common Units then held by them; (B) after the consummation of the proposed Exchange, all Limited Partners beneficially and constructively own less than twenty percent (20%) of the Managing General Partner's outstanding Common Shares; or (C) all of the Common Shares to be received by such Limited Partners or their Affiliates as a result of such Exchange are registered under the Securities Act for sale to the public and are sold to the public contemporaneously with the Exchange. (b) Each Limited Partner acknowledges and agrees that the issuance of Common Shares pursuant to the exercise of the Exchange Rights will not be registered under the Securities Act or any state securities laws. Accordingly, Common Shares issued to such Limited Partner may be required to be held indefinitely and the Managing General Partner shall have no obligation to register such shares under the Securities Act or any state securities laws unless required to do so pursuant to the Registration Rights Agreement. In addition, such Limited Partner will be required to meet such other requirements and to provide such other information and representations as the Managing General Partner may require, which are required in the opinion of its counsel to lawfully allow it to issue such Common Shares without registration under the Securities Act and any applicable state securities laws. Each Limited Partner acknowledges that the certificates representing C-6 Common Shares issued will also bear a legend with respect to any restrictions on transfer required in the opinion of counsel for the Managing General Partner. (c) The Exchange Rights shall not be exercised with respect to fewer than one thousand (1000) Common Units at any one time or all Common Units then owned by such Person exercising such Exchange Rights. 7. Closing Deliveries. At the closing, payment of the Purchase Price shall be accompanied by proper instruments of transfer and assignment and by the delivery of (i) representations and warranties of (A) the Exercising Partner with respect to its due authority to sell all of the right, title and interest in and to such Offered Common Units to the Managing General Partner and with respect to the status of the Offered Common Units being sold, free and clear of all Liens and (B) the Managing General Partner with respect to due authority for the purchase of such Offered Common Units, and (ii) to the extent that Common Shares are issued in payment of the Share Purchase Price, (A) an opinion of counsel for the Managing General Partner, reasonably satisfactory to the Exercising Partner(s), to the effect that such Common Shares have been duly authorized, are validly issued, fully-paid and nonassessable and (B) a certificate or certificates evidencing the Common Shares to be issued and registered in the name of the Exercising Partner(s) or its (their) designee. The delivery of the Offered Common Units to the Managing General Partner shall be a condition to the receipt by the Exercising Partner of the Purchase Price. 8. Term of Rights. Unless sooner terminated, the rights of the parties to exercise the Exchange Rights shall lapse for all purposes and in all respects on January 1, 2051; provided, however, that the parties hereto shall continue to be bound by an Exchange Exercise Notice delivered to the Managing General Partner prior to such date. 9. Covenants of the Managing General Partner. To facilitate the Managing General Partner's ability to fully perform its obligations hereunder, the Managing General Partner covenants and agrees as follows: (a) At all times during the pendency of the Exchange Rights, the Managing General Partner shall reserve for issuance such number of Common Shares as may be necessary to enable the Managing General Partner to issue such shares in full payment of the Share Purchase Price in regard to all Common Units held by Limited Partners and which are from time to time outstanding. C-7 (b) As long as the Managing General Partner shall be obligated to file periodic reports under the Exchange Act, the Managing General Partner will timely file such reports in such manner as shall enable any recipient of Common Shares issued to Limited Partners hereunder in reliance upon an exemption from registration under the Securities Act to continue to be eligible to utilize Rule 144 promulgated by the Securities and Exchange Commission pursuant to the Securities Act, or any successor rule or regulation or statute thereunder, for the resale thereof. (c) During the pendency of the Exchange Rights, the Limited Partners shall receive in a timely manner all reports filed by the Managing General Partner with the Securities and Exchange Commission and all other communications transmitted from time to time by the Managing General Partner to its shareholders generally. (d) The Managing General Partner shall cooperate with the Limited Partners in the exercise of their Exchange Rights hereunder. 10. Limited Partners' Covenants. (a) Each Limited Partner covenants and agrees with the Managing General Partner that all Offered Common Units tendered to the Managing General Partner in accordance with the exercise of Exchange Rights herein provided shall be delivered to the Managing General Partner free and clear of all Liens (or will be released from such Liens concurrently with the exchange of offered Common Units) and should any Liens exist or arise with respect to such Offered Common Units, the Managing General Partner shall be under no obligation to acquire the same unless, in connection with such acquisition, the Managing General Partner has elected to pay a portion of the purchase price in the form of the Cash Purchase Price in circumstances where such Cash Purchase Price will be sufficient to cause such existing Lien to be discharged in full upon application of all or a part of the Cash Purchase Price and the Managing General Partner is expressly authorized to apply such portion of the Cash Purchase Price as may be necessary to satisfy any indebtedness in full and to discharge such Lien in full. Each Limited Partner further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Offered Common Units to the Managing General Partner (or its designee), such Limited Partner shall assume and pay such transfer tax. Finally, each Limited Partner agrees that, to the extent it receives an amount of Net Cash Flow under Section 5.5 of the Agreement in respect of Section 5.1 of the Agreement that is treated as a distribution to the Managing General Partner for purposes of determining the Capital Account of the Managing General Partner, such Limited Partner will treat such C-8 amount of Net Cash Flow for income tax purposes as an additional amount paid by the Managing General Partner and realized by it in exchange for the Offered Common Units. 11. Antidilution Provisions. (a) The Exchange Factor shall be subject to adjustment from time to time effective upon the occurrence of the following events and shall be expressed as a percentage, calculated to the nearest one-thousandth of one percent (.001%): (i) In case the Managing General Partner shall pay or make a dividend or other distribution in Common Shares to all holders of the Common Shares, the Exchange Factor in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be increased in proportion to the increase in outstanding Common Shares resulting from such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following the record date fixed for such dividend or other distribution. (ii) In case outstanding Common Shares shall be subdivided into a greater number of shares, the Exchange Factor in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case the outstanding Common Shares shall be combined into a smaller number of shares, the Exchange Factor in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (b) In case the Managing General Partner shall issue rights, options or warrants to all holders of its Common Shares entitling them to subscribe for or purchase Common Shares at a price per share less than the current market price per share (as determined in the next sentence), each holder of a Common Unit shall be entitled to receive such number of rights, options or warrants for Common Units, as the case may be, as he would have been entitled to receive had he converted his Common Units immediately prior to the record date for such issuance by the Managing General Partner (except to the extent such receipt shall cause such holder to exceed the Ownership Limit). For the purpose of any computation pursuant to the preceding sentence, the current market price per C-9 share of Common Shares on any date shall be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Managing General Partner commencing not more than twenty (20) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this Exhibit C, the term "Trading Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day which securities are not traded on such exchange or in such market and the term "'ex' date", when used in respect of any issuance or distribution, shall mean the first date on which the shares trade regular way on such exchange or in such market without the right to receive such issuance or distribution. (c) In case the Common Shares shall be changed into the same or a different number of shares of any class or classes of shares, whether by capital reorganization, reclassification, or otherwise (other than subdivision or combination of shares or a share dividend described in subparagraph (a)(ii) of this Paragraph 11) then and in each such event the Limited Partners shall have the right thereafter to convert their Common Units into the kind and amount of shares and other securities and property which would have been received upon such reorganization, reclassification or other change by holders of the number of shares into which the Common Units might have been converted immediately prior to such reorganization, reclassification or change. (d) The Managing General Partner may, but shall not be required to, make such adjustments to the number of Common Shares issuable upon conversion of a Common Unit, in addition to those required by this Paragraph 11, as the Managing General Partner's board of trustees considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. The Managing General Partner's board of trustees shall have the power to resolve any ambiguity or correct any error in the adjustments made pursuant to this Paragraph and its actions in so doing shall be final and conclusive. 12. Fractions of Shares. No fractional Common Shares shall be issued upon conversion of Common Units. If more than one Common Unit shall be surrendered for conversion at one time by the same Exercising Partner, the number of full Common Shares which shall be issuable upon conversion thereof (or the cash equivalent amount thereof if the Cash Purchase Price is paid) shall be computed on the basis of the aggregate amount of Common Units so surrendered. Instead of any fractional Common Share which would otherwise be issuable upon conversion of any Common Unit or Common Units, the C-10 Managing General Partner shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the current market price per share at the close of business on the day of closing specified in Paragraph 5(b) hereof (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day). 13. Notice of Adjustments of Exchange Factor. Whenever the Exchange Factor is adjusted as herein provided: (a) the Managing General Partner shall compute the adjusted Exchange Factor in accordance with Paragraph 11 hereof and shall prepare a certificate signed by the chief financial officer or the Treasurer of the Managing General Partner setting forth the adjusted Exchange Factor and showing in reasonable detail the facts upon which such adjustment is based; and (b) a notice stating that the Exchange Factor has been adjusted and setting forth the adjusted Exchange Factor shall forthwith be mailed by the Managing General Partner to all holders of Exchange Rights at their last addresses on record under this Agreement. 14. Notice of Certain Corporate Actions. In case: (a) the Managing General Partner shall declare a dividend (or any other distribution) on its Common Shares payable otherwise than in cash; or (b) the Managing General Partner shall authorize the granting to the holders of its Common Shares of rights, options or warrants to subscribe for or purchase any shares of any class or of any other rights; or (c) of any reclassification of the Common Shares (other than a subdivision or combination of its outstanding Common Shares, or of any consolidation, merger or share exchange to which the Managing General Partner is a party and for which approval of any shareholders of the Managing General Partner is required), or of the sale or transfer of all or substantially all of the assets of the Managing General Partner; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Managing General Partner; then the Managing General Partner shall cause to be mailed to all holders of Exchange Rights at their last addresses on record under C-11 this Agreement, at least 20 days (or 12 days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined or (ii) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. 15. Provisions in Case of Consolidation, Merger or Sale of Assets. In case of (i) any consolidation of the Managing General Partner with, or merger of the Managing General Partner into, any other Person, (ii) any merger or consolidation of another Person into the Managing General Partner (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Shares of the Managing General Partner), or (iii) any sale or transfer of all or substantially all of the assets of the Managing General Partner, the Person formed by such consolidation or resulting from such merger or which acquires such assets of the Managing General Partner, as the case may be, shall execute and deliver to each holder of Exchange Rights an agreement providing that such holder shall have the right thereafter, during the period such Exchange Rights shall be exercisable as specified herein, to require the conversion of Common Units for the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of Common Shares into which such Common Unit might have been converted immediately prior to such consolidation, merger, sale or transfer, assuming such holder of Common Shares is not a Person with which the Managing General Partner consolidated or into which the Managing General Partner merged or which merged into the Managing General Partner, or to which such sale or transfer, was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person, and failed to exercise his right of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, sale or transfer; provided, that if the kind or amount of securities, C-12 cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each Common Share in respect of which such rights of election shall not have been exercised (a "non-electing Share"), then for the purpose of this Paragraph 15 the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by each non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing Shares. Such agreement shall provide for adjustments which, for events subsequent to the effective date of such agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Exhibit C. The above provisions of this Paragraph 15 shall similarly apply to successive consolidations, mergers, sales or transfers. C-13 SCHEDULE 1 EXCHANGE EXERCISE NOTICE To: Prime Group Realty Trust Reference is made to that certain Agreement of Limited Partnership of Prime Group Realty, L.P. dated November 17, 1997 (the "Partnership Agreement"), pursuant to which Prime Group Realty Trust, a Maryland real estate investment trust, and certain other persons, including the undersigned, formed a Delaware limited partnership known as Prime Group Realty, L.P. (the "Partnership"). Capitalized terms used but not defined herein shall have the meanings set forth in the Partnership Agreement. Pursuant to Section 8.6 and Paragraph 2 of Exhibit C of the Partnership Agreement, each of the undersigned, being a limited partner of the Partnership (an "Exercising Partner"), hereby elects to exercise its Exchange Rights as to the number of Offered Common Units specified opposite its name below: Dated: _________________ Number of Offered Name of Exercising Partner Common Units - --------------------------- ------------------ Exercising Partners: - -------------------------- - -------------------------- (Authorized Signatory) C-14 SCHEDULE 2 ELECTION NOTICE To: Exercising Partner(s) Reference is made to that certain Agreement of Limited Partnership of Prime Group Realty, L.P. dated November 17, 1997 (the "Partnership Agreement"), pursuant to which the undersigned and certain other persons, including the Exercising Partners, formed a Delaware limited partnership known as Prime Group Realty, L.P. (the "Partnership"). All capitalized terms used but not defined herein shall have the meanings set forth in the Partnership Agreement. Pursuant to subsection (b) of Paragraph 5 of Exhibit C to the Partnership Agreement, the undersigned, being the managing general partner of the Partnership, hereby notifies the Exercising Partner(s) that [(a) the Share Purchase Price is payable by issuance of the number of Common Shares to the Exercising Partner(s), as set forth below,] [(b) it has elected to pay the Cash Purchase Price by payment of cash to the Exercising Partner(s) for the number of Offered Common Units, as set forth below,] (c) the computation of the [Share Purchase Price and Cash Purchase Price] is as set forth on an attachment hereto, (d) the closing of the purchase and sale of the Offered Common Units by payment of the [Share Purchase Price shall take place at the offices of __________________ on [date]] and [(e) the closing of the payment of the Cash Purchase Price shall take place at the offices of _____________________ on [date].
NUMBER OF EXERCISING OFFERED SHARE CASH PARTNER(S) COMMON UNITS PURCHASE PRICE PURCHASE PRICE - ------------- ---------------- ----------------- ---------------- Dated:_______________
PRIME GROUP REALTY TRUST, a Maryland real estate investment trust By: ________________________________ Its:________________________________ C-15 EXHIBIT E FORM OF SPECIMEN COMMON UNIT CERTIFICATE COMMON UNITS Certificate No. THIS CERTIFICATE IS TRANSFERABLE IN CHICAGO, ILLINOIS AT THE OFFICES OF PRIME GROUP REALTY, L.P. PRIME GROUP REALTY, L.P. ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE SEE THE REVERSE FOR CERTAIN RESTRICTIONS THIS CERTIFIES THAT -------------------------------------------- IS THE OWNER OF ------------------------------------------------ Common Units of Prime Group Realty, L.P., a limited partnership organized under the laws of the State of Delaware (the 'Partnership'), transferable only on the books of the Partnership by the holder hereof in person or by duly authorized attorney upon the surrender of this Certificate properly endorsed. The Common Units evidenced by this Certificate are subject to the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended from time to time. The holder hereof has no interest, legal or equitable, in any specific property of the Partnership. This Certificate is not valid unless countersigned by the Managing General Partner of the Partnership. WITNESS the signatures of duly authorized officers of the Managing General Partner of the Partnership. Dated: -------------- Prime Group Realty Trust Managing General Partner By: ----------------------- President Attest: -------------------- PRIME GROUP REALTY, L.P. THE PARTNERSHIP IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF UNIT. THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (THE "PARTNERSHIP AGREEMENT") OF THE PARTNERSHIP ON FILE IN THE OFFICE OF THE MANAGING GENERAL PARTNER OF THE PARTNERSHIP SETS FORTH A FULL STATEMENT OF (A) ALL OF THE DESIGNATIONS, PREFERENCES, RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTIONS, AND OTHER RELATIVE RIGHTS OF THE UNITS OF EACH CLASS OF UNITS AUTHORIZED TO BE ISSUED AND (B) THE AUTHORITY OF THE MANAGING GENERAL PARTNER TO ISSUE ANY PREFERRED OR SPECIAL CLASS IN SERIES, THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE UNITS OF EACH SERIES TO THE EXTENT THEY HAVE BEEN SET AND THE AUTHORITY OF THE MANAGING GENERAL PARTNER TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES OF PREFERRED UNITS. THE COMMON UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND THE UNITS CANNOT BE SOLD UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS, OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. THE TRANSFER OF THESE COMMON UNITS IS RESTRICTED AS SET FORTH IN THE PARTNERSHIP AGREEMENT AND MAY ONLY BE TRANSFERRED BY THE COMPLIANCE BY THE TRANSFEROR AND TRANSFEREE WITH ALL THE TERMS AND CONDITIONS SET FORTH IN THE PARTNERSHIP AGREEMENT. All capitalized terms in this legend have the meanings defined in the Partnership Agreement, a copy of which, including information regarding classes of units authorized to be issued by the Partnership and the restrictions on transfer, will be sent without charge to each unitholder on request to the Secretary of the Managing General Partner of the Partnership at 77 West Wacker Drive, Suite 3900, Chicago, Illinois or at such other address as the Managing General Partner shall direct. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in fulfill to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with the right of survivorship and not as tenants in common For Value Received,----------------- hereby sells, assigns, and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) - ---------------------------------------------------- Common Units represented by the within Certificate, and do hereby irrevocably constitute and appoint -------------------------------- - --------------------------- Attorney to transfer the said shares on the books of the within named Partnership with full power of substitution in the premises. Dated ------------------ Signature:--------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT F LIMITED PARTNER OWNERSHIP OF INTERESTS IN TENANTS The Prime Group, Inc. or Prime Group Limited Partnership has an interest in three of the tenants of the 77 West Wacker Drive Building: 1. Brookdale Living Communities, Inc. 2. The Prime Group, Inc. 3. Ambassador Apartments, Inc. EXHIBIT G Limited Partner Ownership of Interests (Common Shares) in Managing General Partner NONE EXHIBIT H REPRESENTATIONS AND WARRANTIES OF PRIME Prime hereby represents and warrants as to the same matters and to the same extent as set forth in Section 6 of the Formation Agreement dated as of November 17, 1997 among Prime Group Realty Trust, Prime Group Realty, L.P., Prime Group Realty Services, Inc., Prime, Prime Group Limited Partnership and Jeffrey A. Patterson. EXHIBIT I CONTRIBUTORS The Nardi Group, L.L.C. Edward S. Hadesman Trust Dated May 22, 1992 Grandville/Northwestern Management Corporation Carolyn B. Hadesman Trust Dated May 21, 1992 Lisa Hadesman 1991 Trust Cynthia Hadesman 1991 Trust Tucker B. Magid Frances S. Shubert Grandville Road Property, Inc. Sky Harbor Associates EXHIBIT J PROPERTY PARTNERSHIPS 77 West Wacker Limited Partnership Enterprise Center I, L.P. Enterprise Center II, L.P. Enterprise Center III, L.P. Enterprise Center IV, L.P. Enterprise Center V, L.P. Enterprise Center VI, L.P. Enterprise Center VII, L.P. Enterprise Center VIII, L.P. Enterprise Center IX, L.P. Enterprise Center X, L.P. Arlington Heights I, L.P. Arlington Heights II, L.P. Arlington Heights III, L.P. East Chicago Enterprise Center Limited Partnership Hammond Enterprise Center Limited Partnership Nashville Office Building I, Ltd. Old Kingston Properties, Ltd. Professional Plaza, Ltd. Centre Square II, Ltd. Triad Parking Company, Ltd. 1990 Algonquin Road, L.L.C. 2010 Algonquin Road, L.L.C. 555 Huehl Road, L.L.C. 1669 Woodfield Road, L.L.C. 475 Superior Avenue, L.L.C. Enterprise Drive, L.L.C. 280 Shuman Blvd., L.L.C. 77 Fitness Center Limited Partnership Libertyville Tech Way, L.L.C. 3818 Grandville, L.L.C. 306 Era Drive, L.L.C. 1301 Ridgeview Drive, L.L.C. 515 Huehl Road, L.L.C. 455 Academy Drive, L.L.C. 801 Technology Way, L.L.C. Prime Columbus Industrial, L.L.C. Kemper/Prime Industrial Partners 1051 N. Kirk Road, L.L.C. 4211 Madison Street, L.L.C. 200 E. Fullerton L.L.C. 350 Randy Road, L.L.C. 4300 Madison Street, L.L.C. 370 Carol Lane, L.L.C. 388 Carol Lane, L.L.C. 941 Weigel Drive, L.L.C. 342 Carol Lane, L.L.C. 343 Carol Lane, L.L.C. 371 N. Gary Avenue, L.L.C. 350 N. Mannheim Road, L.L.C. 1600 167th Street, L.L.C. 1301 E. Tower Road, L.L.C. 4343 Commerce Court, L.L.C. 11039 Gage Avenue, L.L.C. 11045 Gage Avenue, L.L.C. 1401 S. Jefferson, L.L.C. 4100 Madison Street, L.L.C. 4160 Madison Street, L.L.C. 550 Kehoe Blvd., L.L.C. AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. This AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of December 15, 1997 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) of the Partnership. 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 (the "Limited Partnership Agreement"). W I T N E S S E T H: WHEREAS, on December 15, 1997, 600,000 Common Shares (the "Over-Allotment Shares") were issued and sold by PGRT to the Underwriters (as defined in the Underwriting Agreement) pursuant to the Underwriters' over-allotment option granted under the Underwriting Agreement; WHEREAS, pursuant to Section 4.3.D. of the Limited Partnership Agreement, (i) PGRT has made a Capital Contribution of the net proceeds from the issuance and sale of the Over-Allotment Shares, and (ii) PGRT shall receive Common Units corresponding to such Over-Allotment Shares; WHEREAS, the Partners desire to amend the Limited Partnership Agreement to reflect the increase in outstanding Common Units as a result of the issuance of 600,000 Common Units to PGRT in connection with the issuance and sale by PGRT of the Over-Allotment Shares to the Underwriters; and WHEREAS, Section 2.4 of the Limited Partnership Agreement authorizes, 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. Issuance of Common Units Pursuant to Section 4.3.D. of the Limited Partnership Agreement. The net proceeds from the issuance and sale of the Over-Allotment Shares have been received by the Partnership as a Capital Contribution from PGRT. The Partnership hereby issues 600,000 Common Units of General Partner Interest to PGRT, pursuant to Section 4.3.D. of the Limited Partnership Agreement, which shall correspond to the Over-Allotment Shares. Such Common Units of General Partner Interest issued pursuant to this Section 1 shall not be evidenced by a Common Unit certificate unless hereafter requested by PGRT. Section 2. Amendment of Exhibit A to 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 herein above, 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. 1 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: /s/ W. Michael Karnes ---------------------- Name: W. Michael Karnes ------------------ Title: Chief Financial Officer ----------------------- 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: /s/ W. Michael Karnes --------------------- Name: W. Michael Karnes ------------------ Its: Chief Financial Officer ----------------------- -3- -4- EXHIBIT A*/ Partners, Number of Units and Capital Contributions
- ------------------------------------------------------------------------------- Number of Capital Common Units Contribution ------------ ------------ Managing General Partner - ------------------------ Prime Group Realty Trust 12,980,000 **/ 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 - ---------------- 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 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
*/ As amended by Amendment No. 2 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 Common Units Contribution ------------ ------------ Limited Partners - ---------------- 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 Limited Partners - ---------------- Primestone Investment Partners, L.P. 7,944,893 **/ c/o The Prime Group, Inc. -- 77 West Wacker Drive Suite 3900 Chicago, IL 60601
**/ This amount shall be inserted by the Managing General Partner.
- ------------------------------------------------------------------------------- Number of Capital Common Units Contribution ------------ ------------ Attn: Paul A. Roehri Prime Group Limited Partnership 90,000 $1,800,000 c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Michael W. Reshcke Robert J. Rudnik
EXHIBIT A - CONT'D Partners, Number of Units and Capital Contributions
Number of Convertible Capital Preferred Units Contribution --------------- ------------ Managing General Partner - ------------------------ Prime Group Realty Trust 2,000,000 **/ 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman
**/ This amount shall be inserted by the Managing General Partner. AMENDMENT NO. 2 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. This AMENDMENT NO. 2 TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of December 15, 1997 by and between 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) and H Group LLC, a Delaware limited liability company ("HG"). 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 therafter (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 HG and the Partnership (the "Exchange Agreement"), HG has agreed, among other things, to exchange (the "Exchange") its rights (the "Allstate Loan Acquisition Rights") to acquire the Allstate Loan (as defined in the Exchange Agreement) for $5,000,000, which $5,000,000 is payable in that number of Common Units of Limited Partner Interest ("Common Units") equal to (i) $5,000,000 divided by (ii) $19.875, which is the average of the closing sale prices of PGRT's Common Shares of Beneficial Interest ("Common Shares") on the New York Stock Exchange during the seven (7) trading days immediately preceding the date hereof; WHEREAS, pursuant to the Exchange Agreement, the Partnership has agreed, among other things, to exchange such number of Common Units for HG's Allstate Loan Acquisition Rights; WHEREAS, pursuant to the Exchange Agreement, HG has also agreed 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 (subject to adjustment pursuant to the terms of the Exchange Agreement), which grant of the First Option contemplates the transfer by the Partnership to HG of 5,000 Common Units on the date hereof and, subject to the terms of the First Option, 5,000 Common Units (subject to adjustment pursuant to the terms of the Exchange Agreement) on the 15th day of each month hereafter 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; WHEREAS, it is a condition to the closing of the Exchange Agreement that HG be admitted as an Additional Limited Partner of the Partnership; WHEREAS, pursuant to Section 12.2.A. of the Limited Partnership Agreement, a Person who makes a Capital Contribution to the Partnership in accordance with the Limited Partnership Agreement shall be admitted to the Partnership as an Additional Limited Partner subject to, among other things, (i) the transferee of the Partnership Interest executing and delivering to the Partnership an acceptance of all of the terms and conditions of the Limited Partnership Agreement (including without limitation, the provisions of Section 2.4 thereof and such other documents or instruments as may be required to effect such admission, each in form and substance satisfactory to the Managing General Partner and (ii) the acknowledgment by such transferee of Partnership Interest that each of the representations and warranties set forth in Section 3.3.D. thereof are true and correct with respect to such transferee as of the date of the transfer of the Partnership Interest to such transferee; WHEREAS, the Partners desire to amend the Limited Partnership Agreement to reflect (i) the increase in outstanding Common Units resulting from the issuance of Common Units to HG in connection with the Exchange and the grant of the First Option; and (ii) the admission of HG as an Additional Limited Partner; WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement authorizes, 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 Allstate Loan Acquisition Rights from HG as a Capital Contribution having a value on the date hereof of $5,000,000, in exchange for 251,572 Common 2 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. 20 of the Partnership. (b) 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 initial month of the term of First Option from HG as a Capital Contribution having a value on the date hereof of $100,000, in exchange for 5,000 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. 21 of the Partnership. (c) 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 the first anniversary of the date of this Amendment (as opposed to November 17, 1998) and (ii) such Common Units of Limited Partner Interest will be subject to the New Registration Rights Agreement (as hereinafter defined) as opposed to the Registration Rights Agreement entered into by PGRT and the Partnership on November 17, 1997. Section 2. Acceptance of Terms and Conditions of the Limited Partnership Agreement. HG hereby acknowledges its receipt of a true and complete copy of the Limited Partnership Agreement and hereby further agrees to be bound by all of the terms and conditions of the Limited Partnership Agreement, including without limitation, the provisions of Section 2.4 of the Limited Partnership Agreement. Section 3. Representations and Warranties of Additional Limited Partner. HG hereby acknowledges, represents and warrants to PGRT and the other Partners that each of the representations and warranties set forth in Section 3.3.D. of the Limited Partnership Agreement are true and correct with respect to HG as of the date hereof. Section 4. Admission of Additional Limited Partner. HG is hereby admitted to the Partnership as an Additional Limited Partner and shall have the rights, and be subject to the obligations, of a Limited Partner of the Partnership. Section 5. 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 3 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 6. Conditions to Effectiveness. This Amendment shall become effective contemporaneously with (and subject to): (i) the consummation of the closing transactions contemplated by the Exchange Agreement; (ii) the execution and delivery by the Partnership to HG of (x) a Common Unit certificate evidencing 251,572 Common Units and (y) a Common Unit certificate evidencing 5,000 Common Units, in each case in the form of Exhibit E attached to the Limited Partnership Agreement; and (iii) the execution and delivery by the Partnership and HG of a Registration Rights Agreement in the form of Exhibit B attached hereto (the "New Registration Rights Agreement"). Section 7. 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 herein above, 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 8. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Amendment immediately upon affixing its signatories hereto. Section 9. 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] 4 AMENDMENT NO. 2 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: /s/ Jeffrey A. Patterson ------------------------- Name: Jeffrey A. Patterson ----------------------- Title: Executive VP ---------------------- 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: /s/ Jeffrey A. Patterson ---------------------------- Name: Jeffrey A. Patterson -------------------------- Title: Executive VP ------------------------- ADDITIONAL LIMITED PARTNER: --------------------------- H GROUP LLC, a Delaware limited liability company By: /s/ Eric D. Mayer ---------------------------- Name: Eric D. Mayer -------------------------- Its: President --------------------------- 5 6 EXHIBIT A*/ Partners, Number of Units and Capital Contributions
Number of Capital Common Units Contribution ------------ ------------ Managing General Partner - ------------------------ Prime Group Realty Trust 12,980,000 **/ 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 - ---------------- 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 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
- ----------------------------- */ As amended by Amendment No. 1 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 Common Units Contribution ------------ ------------ Limited Partners - ---------------- 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 Limited Partners - ---------------- Primestone Investment Partners, L.P. 7,944,893 **/ -- c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, IL 60601
- ----------------------------- **/ This amount shall be inserted by the Managing General Partner.
Number of Capital Common Units Contribution ------------ ------------ Attn: Paul A. Roehri Prime Group Limited Partnership 90,000 $1,800,000 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 256,572 $5,100,000 c/o Heitman Financial Ltd. 180 N. LaSalle Suite 3600 Chicago, IL 60601 Attn: Norman Perlmutter
EXHIBIT A - CONT'D Partners, Number of Units and Capital Contributions
Number of Convertible Capital Preferred Units Contribution --------------------- ------------ Managing General Partner - ------------------------ Prime Group Realty Trust 2,000,000 **/ 77 West Wacker Drive Suite 3900 Chicago, IL 60601 Attn: Richard S. Curto James F. Hoffman
- ----------------------------- **/ This amount shall be inserted by the Managing General Partner. EX-10.1 5 EXHIBIT 10.1 Exhibit 10.1 FORM OF INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT between Prime Group Realty Trust, a Maryland real estate investment trust (the "Trust"), and ________________, an officer and/or trustee of the Trust (the "Indemnitee"), dated as of November 17, 1997. WHEREAS, the Indemnitee has agreed to serve as an officer and /or trustee of the Trust; and WHEREAS, the Articles of Amendment and Restatement of the Declaration of Trust of the Trust (the "Declaration of Trust") and the Amended and Restated Bylaws of the Trust (the "Bylaws") provide for certain indemnification of certain of the Trust's officers and each of the Trust's trustees; NOW, THEREFORE, in consideration of the Indemnitee's agreement to serve as an officer and/or trustee of the Trust and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Trust has agreed to the covenants set forth herein for the purpose of further securing to the Indemnitee the indemnification provided by the Declaration of Trust and the Bylaws. Section 1. In the event that the Indemnitee was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that the Indemnitee is or was a trustee, officer or employee of the Trust or a nominee for any such office or is or was serving at the request of the Trust as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such actual or threatened proceeding is alleged action in an official capacity as a director, officer, employee or agent or a nominee for any such office or in any other capacity while serving as a director, officer, employee or agent, the Indemnitee shall be indemnified and held harmless by the Trust to the fullest extent permitted by the law of the State of Maryland ("Maryland Law") as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Trust to provide broader indemnification rights than said law permitted the Trust to provide prior to such amendment), against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Indemnitee in connection therewith and such indemnification shall continue as to the Indemnitee if the Indemnitee ceases to be a director, officer, employee, agent or a nominee for any such office and shall inure to the benefit of the Indemnitee's heirs, executors and administrators; provided, however, that except as provided in Section 2 of this Indemnification Agreement with respect to proceedings seeking to enforce rights to indemnification, the Trust shall indemnify the Indemnitee in connection with a proceeding (or part hereof) initiated by the Indemnitee only if such proceeding (or part thereof) was authorized by the Board of Trustees of the Trust. Section 2. If a claim under Section 1 of this Indemnification Agreement is not paid in full by the Trust within 30 days after a written claim has been received by the Trust, the Indemnitee may at any time thereafter bring suit against the Trust to recover the unpaid amount of the claim and, if successful in whole or in part, the Indemnitee shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any actual or threatened proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Trust) that the Indemnitee has not met the standards of conduct which make it permissible under Maryland Law for the Trust to indemnify the Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Trust. Neither the failure of the Trust (including its Board of Trustees, independent legal counsel or shareholders) to have made a determination prior to the commencement of such action that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in Maryland Law, nor an actual determination by the Trust (including its Board of Trustees, independent legal counsel or shareholders) that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. Section 3. Following any "change in control" of the Trust of the type required to be reported under Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended, any determination as to entitlement to indemnification shall be made by independent legal counsel selected by the Indemnitee, which independent legal counsel shall be retained by the Board of Trustees on behalf of the Trust. Section 4. The right to indemnification and the payment 2 of expenses incurred in defending any actual or threatened proceeding in advance of its final disposition conferred in this Indemnification Agreement shall not be exclusive of any other right which the Indemnitee may have or hereafter acquire under any statute, provision of the Declaration of Trust, Bylaws, agreement, vote of shareholders or disinterested trustees or otherwise. Section 5. In the event that the Trust maintains insurance to protect itself and any trustee or officer of the Trust against any expense, liability or loss, such insurance shall cover the Indemnitee to at least the same extent as any other trustee or officer of the Trust. Section 6. The right to indemnification conferred by this Indemnification Agreement shall include the right to be paid by the Trust the expenses incurred in defending any actual or threatened proceeding in advance of its final disposition; provided, however, that if Maryland Law requires, the payment of such expenses incurred by the Indemnitee in the Indemnitee's capacity as a trustee or officer (and not in any other capacity in which service was or is rendered by the Indemnitee while a trustee or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of any actual or threatened proceeding, shall be made only upon delivery to the Trust of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified under this Indemnification Agreement or otherwise. Section 7. This Indemnification Agreement may not be changed, modified or amended except in writing signed by the parties hereto. [signature page follows] 3 IN WITNESS WHEREOF, the Trust and the Indemnitee have executed this Indemnification Agreement in duplicate on the day and year first above written. PRIME GROUP REALTY TRUST By: ----------------------- Name: ----------------------- Title: ------------------------ ------------------------------ 4 EX-10.2 6 EXHIBIT 10.2 Exhibit 10.2 EXECUTION COPY RIGHT OF FIRST OFFER AGREEMENT by and between PRIME GROUP REALTY, L.P. a Delaware limited partnership and THE PRIME GROUP, INC., an Illinois corporation Dated as of: November 17, 1997 RIGHT OF FIRST OFFER AGREEMENT ------------------------------ THIS RIGHT OF FIRST OFFER AGREEMENT (the "Agreement") is made as of the 17th day of November, 1997, by and between PRIME GROUP REALTY, L.P., a Delaware limited partnership ("Purchaser") and THE PRIME GROUP, INC., an Illinois corporation ("Seller"). WITNESSETH: ----------- WHEREAS, Huntley Development Limited Partnership, an Illinois limited partnership ("HDLP"), an affiliate of Seller, is the fee owner of that certain parcel of unimproved real estate comprising approximately 360 acres in the Village of Huntley, County of Kane and State of Illinois, which parcel is legally described on Exhibit A attached hereto and made a part hereof (the "Property"); and WHEREAS, concurrently with the execution and delivery of this Agreement, Purchaser is acquiring from Seller and/or certain affiliates of Seller, interests in certain other buildings, facilities and parcels of land in which Seller and/or certain of its affiliates have an interest; and WHEREAS, Purchaser desires to acquire, a right of first offer to develop (or develop and acquire an ownership interest in) (to "Develop") the Property, or a portion thereof, upon and subject to the terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of Purchaser's acquisition of interests in the certain buildings, facilities and parcels of land from Seller and certain of its affiliates, the mutual covenants and agreements contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows: 1. Grant of Right of First Offer. Seller hereby grants, or agrees to cause to be granted, to Purchaser the exclusive right of first offer to Develop the Property (the "Right") upon the following terms and conditions: If, at any time prior to the termination of this Agreement, Seller or HDLP should determine, in its sole discretion, that all or a portion of the Property shall be utilized for the construction of an office or industrial facility to be either (a) owned and leased to third parties by Seller, HDLP or another affiliate of Seller or (b) held by Seller, HDLP or another affiliate of Seller for sale to a third party after such construction, Seller shall offer, or shall cause HDLP or such other affiliate of Seller to offer, Purchaser the right to Develop such office or industrial facility before developing, or allowing the development of, the Property for such uses. Seller shall notify, or shall cause HDLP or such other affiliate of Seller to notify (the entity providing such notice is referred to as the "Offeree"), Purchaser of the offer in the manner provided herein for the giving of notice of their decision to so Develop the Property and the general terms and conditions of the proposed development, and Purchaser shall have the right of first offer to Develop that portion of the Property to be Developed (which may be all of the Property) (the "Subject Parcel") by notifying Offeree of the general terms and conditions upon which Purchaser is willing to Develop the Subject Parcel (the "Offer"), which Offer may differ from the terms of the notice from the Offeree. Purchaser shall give the Offer to Offeree within thirty (30) days after Purchaser's receipt of the notice from Offeree. In the event Purchaser fails to notify Offeree of its election within said thirty (30) day period or elects not to Develop the Subject Parcel, or Purchaser and Offeree are unable to reach agreement on all the material terms and conditions of the development of the Subject Parcel, Seller, HDLP, or such affiliate of Seller shall be entitled to offer to third parties the opportunity to Develop the Subject Parcel on commercially reasonable terms in an arms' length transaction or Seller, HDLP or such affiliate of Seller may develop the Subject Parcel substantially in accordance with the terms described in the notice from Offeree described above, provided, however, that in the event either Seller, HDLP, such affiliate of Seller or another party does not commence to Develop the Subject Parcel, or the sale of the Subject Parcel to a third party does not close within one hundred fifty (150) days of the date of the delivery of the Offer, Seller shall renotify Purchaser and the Subject Parcel shall again be subject to all of the terms and provisions of this Agreement. Notwithstanding anything to the contrary contained herein, Seller and HDLP reserve the right, and shall be entitled, at any time, to sell or otherwise convey, dedicate or grant the Property or any portion thereof or any interest therein to a third party or parties which intends to use the Property for any purpose whatsoever (including for use as an office or industrial building or facility) so long as neither Seller, HDLP nor any affiliate of Seller participates in the development of such portion of the Property that is contemplated to be used for office or industrial purposes, and the Right shall not apply in connection with any such sale, conveyance, dedication or grant. The construction of public and common infrastructure improvements (including roads, utility lines, storm and sanitary sewer lines and detention ponds) serving such portions of the Property shall not be deemed to be participation by Seller, HDLP or any affiliate of Seller in the development of such Property. 2. Expiration Date. If Purchaser does not timely exercise the Right in the manner provided herein on or before November 17, 2012 (the "Expiration Date"), regardless of whether or not Purchaser has an opportunity to exercise the Right, or if Purchaser elects not to exercise the Right (or is deemed to have so elected because of its failure to timely exercise the Right) and the Property is developed by a third-party developer, or if the property is sold or otherwise conveyed, dedicated or granted to a party which intends to use the Property for primarily non-office or non-industrial purposes, or if construction of improvements on the Property which thereafter will be used for primarily non-office or non-industrial purposes at all times prior to the Expiration Date is commenced, then in any such event this Agreement and the Right shall, without further action of any party, automatically terminate and be null, void and of no further force or effect, and neither party shall have any further rights or obligations hereunder or with respect to the Right. 3. Entry onto the Property. Upon the receipt by Offeree of the Offer described in Section 1 hereof, Purchaser and/or Purchaser's agents shall have the right during the period of time when this Agreement is in effect, at reasonable times and on reasonable advance notice to Offeree, to enter onto the Property or portion thereof set forth in the Offer for purposes of surveying the Property and undertaking soil boring and other tests. All surveying and soil boring and other tests shall be performed at Purchaser's sole cost and expense and Purchaser shall deliver copies of all such surveys and the results of all such tests to Offeree at no cost or expense to Offeree. Purchaser hereby indemnifies, protects and holds Seller, HDLP and the affiliates of Seller harmless and agrees to defend 2 Seller, HDLP and the affiliates of Seller from and against any and all claims, demands, loss, cost, damage, expense and liability (including, without limitation, personal injury and property damage claims and mechanics' or other liens), including reasonable attorneys' fees and litigation costs, caused by or occurring in connection with the presence of Purchaser or Purchaser's agents on the Property or the exercise by Purchaser of any of its surveying and testing rights under this Section 3. In addition, Purchaser shall keep the Property free from any liens of its surveying and testing rights under this Section 3. Purchaser, at its sole cost and expense, shall restore the Property to the same condition as existed prior to its entry onto the Property. Notwithstanding anything to the contrary contained herein, the provisions of this Section shall survive the term of this Agreement (regardless of whether or not the Right is exercised), as well as any closing of the sale of the Property pursuant hereto or to any contract entered into between Seller, HDLP or an affiliate of Seller and Purchaser pursuant to any Offer. 4. Time of the Essence. Purchaser and Seller hereby acknowledge and agree that time is and shall be of the essence hereof. Notwithstanding anything to the contrary contained herein, in the event the due date for performance of any obligation hereunder falls on a day other than a business day, the date for performance of such obligation shall be extended to the next following business day. 5. Covenants Running with the Land; Specific Performance. The covenants and agreements of Seller under this Agreement are intended to be and shall be covenants running with the land with respect to the Property and shall be binding upon Seller and Seller's heirs, representatives, successors and assigns. This Agreement shall be specifically enforceable by Purchaser and by Purchaser's heirs, representatives, successors and assigns. 6. Notices. Any notice, request, demand, instruction or other document to be given or served hereunder or under any documents or instrument executed pursuant hereto shall be in writing and shall be delivered personally or sent by United States registered or certified mail, return receipt requested, or by overnight express courier, postage prepaid and addressed to the parties at their respective addresses set forth below, and the same shall be effective upon receipt if delivered personally or two (2) business days after deposit in the mails or deposit with an overnight express courier. A party may change its address for receipt of notices by service of a notice of such change in accordance herewith. If to Purchaser: Prime Group Realty Trust 35 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: General Counsel With a copy to: Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attn: Wayne Boberg 3 If to Seller: The Prime Group, Inc. 35 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: President With a copy to: The Prime Group, Inc. 35 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: General Counsel 7. Successors and Assigns; No Merger. All the terms and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The terms and provisions of this Agreement shall survive the entity and shall not merge or be deemed to merge, into any contract entered into between Seller and Purchaser pursuant to any Offer. 8. Severability. In the event that any term or provisions of this Agreement, or the application thereof to any particular party or circumstance, is found by a court of competent jurisdiction to be invalid or unenforceable (in whole or in its application to a particular party or circumstance), the remaining terms and provisions of this Agreement or the application thereof to different parties or circumstances, as the case may be, shall not be affected thereby and this agreement shall remain in full force and effect in all other respects. 9. Governing Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. This Agreement and any document or instrument executed pursuant hereto may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 10. Due Authorization; Binding Agreement. Seller and Purchaser each hereby represent and warrant to each other that the execution, delivery and performance of this Agreement has been duly and validly authorized by all necessary action of such party, and constitutes a legal, valid and binding obligation of such party enforceable against such party in accordance with the terms hereof. 11. Consents and Approvals. Seller and Purchaser each hereby represent and warrant to each other that no consent, waiver, approval or authorization of, or notice to, any other person, is required to be obtained or given by such party in connection with the execution, delivery and performance of this Agreement, except for such consents, approvals or authorizations which have been obtained. 4 12. Further Assurances; Good Faith. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use his or its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary and proper under applicable laws and regulations or otherwise to consummate and effect the transactions contemplated by this Agreement including, without limitation, obtaining all required consents and approvals, making all required filings and applications and complying with or responding to any requests by governmental agencies, in each case to the extent reasonably required. The parties hereto agree to negotiate the terms and conditions to Develop the Subject Parcel in good faith with one another. [signature page follows] 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PURCHASER: PRIME GROUP REALTY, L.P., a Delaware limited partnership By: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust, its Managing General Partner By: /s/ W. Michael Karnes ---------------------------------- Name: W. Michael Karnes ----------------------------- Title: Executive VP ---------------------------- SELLER: THE PRIME GROUP, INC., an Illinois corporation By: /s/ Robert J. Rudnik ------------------------------------- Name: Robert J. Rudnik ------------------------------------- Title Executive VP ----------------------------------- EXHIBIT A TO RIGHT OF FIRST OFFER AGREEMENT That portion of the following that is still owned by Huntley Development Limited Partnership, an Illinois limited partnership: The West Half of the Northwest Quarter, the West Half of the East Half of the Northwest Quarter and the West Half of the Southwest Quarter of Section 9; that part of the Northwest Quarter of Section 16 lying northerly of a line drawn parallel with and 150.0 feet northerly of the center line (measured at right angles thereto) of the Illinois State Toll Highway Commission except the premises conveyed to the Illinois State Toll Highway Authority by Document 1212496 and that part of the premises conveyed to the Illinois State Toll Highway Commission by Document 831056 lying 33.0 feet southerly of the north line (measured at right angles to said north line) of the Northwest Quarter of said Section 16; that part of the South Half of Section 7 lying northerly of the northerly right of way line of the Illinois State Toll Highway Commission; that part of the South Half of Section 8 lying northerly of the northerly line of premises conveyed to the Illinois State Toll Highway Commission by Warranty Deed recorded as Document 903854 and Quit Claim Deed recorded as Document 824832, excepting there- from the premises described in Grant of Easement recorded as Document 824833; that part of the Southwest Quarter of Section 4, part the South-east Quarter of Section 5, part of the North Half of Section 8, part of the Southeast Quarter of Section 6 and part of the North Half of Section 7 lying southerly of the following described line: Commencing at the point of intersection of a line drawn parallel with and 60.0 feet easterly of the center line (measured at right angles thereto) of Illinois State Route No. 47 with the south line of the Southwest Quarter of Section 9; thence northerly along said parallel line 5469.12 feet for a point of beginning; thence westerly at right angles to the last described course 940.0 feet; thence northerly at right angles to the last described course 565.0 feet; thence westerly at right angles to the last described course 140.0 feet; thence southwesterly along a line forming an angle of 128DEG.00'49" with the last described course (measured clockwise therefrom) 252.02 feet; thence southwesterly along a line forming an angle of 141DEG.21'07" with the last described course (measured counter-clockwise therefrom) 295.0 feet; thence northwesterly along a line forming an angle of 134DEG.20'16" with the last described course (measured counter-clockwise therefrom) 200.0 feet; thence southwesterly, along a line forming an angle of 96DEG.16'40" with the last described course (measured clockwise therefrom) 200.0 feet; thence southeasterly along a line forming an angle of 86DEG.03'40" with the last described course (measured clockwise therefrom) 525.0 feet; thence southerly along a line forming an angle of 124DEG.53'15" with the last described course (measured counter-clockwise therefrom) 215.0 feet; thence southwesterly along a line forming an angle of 143DEG.54'11" with the last described course (measured counter-clockwise therefrom) 350.0 feet; thence southwesterly along a line forming an angle of 158DEG.06'47" with the last described course (measured counter-clockwise therefrom) 730.0 feet; thence southerly along a line forming an angle of 122DEG.24'21" with the last described course (measured clockwise therefrom) 354.58 feet; thence westerly and northwesterly along a curve to the right having a radius of 4210.0 feet tangent to a line forming an angle of 86DEG.43'27" with the prolongation of the last described course (measured clockwise therefrom) 2541.42 feet; thence northwesterly tangent to the last described curve at the last described point 674.67 feet; thence northwesterly along a curve to the left having a radius of 1300.0 feet tangent to the last described course 169.33 feet to the northwest corner of the Northwest Quarter of said Section 8; thence continuing northwesterly and westerly along the prolongation of the last described curve 819.43 feet; thence westerly tangent to the last described curve at the last described point 200.0 feet; thence westerly along a curve to the right having a radius of 2440.0 feet tangent to the last described course 516.61 feet; thence westerly tangent to the last described curve at the last described point, being along the north line extended and the north line of the Northwest Quarter of said Section 7, 3653.57 feet to a point on said north line that is 197.91 feet easterly of the northwest corner of said Northwest Quarter; thence southwesterly, along a line forming an angle of 134DEG.59'21" with the last described course (measured clockwise therefrom) 279.83 feet to the west line of the Northwest Quarter of said Section 7 for the terminus of said line (except that part thereof lying within premises acquired by the Illinois State Toll Highway Commission through condemnation proceedings of the Circuit Court of the Sixteenth Judicial Circuit filed in Kane County as Case No. 56-1213, and also except Lots 2 and 3 in Fred Ahrens Subdivision), and also; that part of the Northeast Quarter of Section 17 lying northerly of the northeasterly right of way line of the Illinois State Toll Highway Commission, northerly of the northerly line of Parcel N-4C-38.5 as conveyed by Document 1230382 and westerly of a line drawn parallel with and 250.0 feet westerly of the westerly line (measured at right angles thereto) of Parcel N-4C-38.1 as ac-quired through proceedings of the Circuit Court of the Sixteenth Judicial Circuit as Case No. 56-1242, all in Township 42 North, Range 7 East of the Third Principal Meridian, Rutland Township, Kane County, Illinois, 2 EXCEPTING THOSE PARTS THEREOF DESCRIBED AS FOLLOWS: That part of the Northeast Quarter of Section 8 described as follows: Commencing at the point of intersection of a line drawn parallel with and 60.0 feet westerly of the center line (measured at right angles thereto) of Illinois State Route No. 47 with the south line of the Southeast Quarter of said Section 8; thence northerly along said parallel line 3107.14 feet for a point of beginning; thence continuing northerly along said parallel line 1427.89 feet; thence westerly at right angles to the last de-scribed course 157.85 feet; thence westerly and southwesterly along a curve to the left having a radius of 900.0 feet tangent to the last described course 349.42 feet; thence southwesterly tangent to the last described curve at the last described point 200.15 feet; thence southwesterly and westerly along a curve to the right having a radius of 4310.0 feet tangent to the last described course 1370.75 feet; thence southerly along a line forming an angle of 94DEG.01'19" with a line drawn tangent to the last described curve at the last described point (measured clockwise therefrom) 354.76 feet; thence southerly, southeasterly, easterly and northeasterly along a curve to the left having a radius of 980.0 feet tangent to the last described course 2407.19 feet to a line drawn at right angles to said center line from the point of beginning; thence easterly along said line 274.33 feet to the point of beginning, also excepting; that part of the Northeast Quarter of Section 7 and part of the Northwest Quarter of Section 8 described as follows: Commencing at the point of intersection of a line drawn parallel with and 60.0 feet westerly of the center line (measured at right angles thereto) of Illinois State Route No. 47 with the south line of the Southeast Quarter of said Section 8; thence northerly along said parallel line 4535.03 feet; thence westerly at right angles to the last described course 157.85 feet; thence westerly and southwesterly along a curve to the left having a radius of 900.0 feet tangent to the last described course 349.42 feet; thence southwesterly tangent to the last described curve at the last described point 200.15 feet; thence southwesterly, westerly and northwesterly along a curve to the right having a radius of 4310.0 feet tangent to the last described course 3277.40 feet for a point of beginning; thence continuing along the prolongation of the last described curve 763.69 feet; thence northwesterly tangent to the last described curve at the last described point 674.67 feet; thence northwesterly along a curve to the left having a radius of 1200.0 feet tangent to the last described course 274.09 feet; thence southwesterly along a line forming an angle of 96DEG.07'33" with a line drawn tangent to the last de- scribed curve at the last described point (measured counter-clockwise therefrom) 338.62 feet; thence southwesterly along a line forming an angle of 133DEG.23'16" with the last described course (measured counter-clockwise therefrom) 355.0 feet; thence southwesterly along a line forming an angle of 224DEG.19'51" with 3 the last described course (measured counter-clockwise therefrom) 130.0 feet; thence southeasterly along a line forming an angle of 237DEG.59'12" with the last described course (measured counter- clockwise therefrom) 420.0 feet; thence southeasterly along a line forming an angle of 146DEG.E24'47" with the last described course (measured counter-clockwise therefrom) 810.0 feet; thence easterly along a line forming an angle of 101DEG.36'55" with the last described course (measured clockwise therefrom) 744.17 feet; thence northeasterly along a line forming an angle of 159DEG.01'15" with the last described course (measured clockwise therefrom) 550.0 feet; thence northeasterly along a line forming an angle of 125DEG.18'11" with the last described course (measured clockwise therefrom) 810.06 feet to the point of beginning, also excepting; that part Of the North Half of Section 7 described as follows: Commencing at the point of intersection of a line drawn parallel with and 60.0 feet westerly of the center line (measured at right angles thereto) of Illinois State Route No. 47 with the south line of the Southeast Quarter of said Section 8; thence northerly along said parallel line 4535.03 feet; thence westerly at right angles to the last described course 157.85 feet; thence westerly and southwesterly along a curve to the left having a radius of 900.0 feet tangent to the last described course 349.42 feet; thence southwesterly tangent to the last described curve at the last described point 200.15 feet; thence southwesterly, westerly and northwesterly along a curve to the right having a radius of 4310.0 feet tangent to the last described course 4041.09 feet; thence northwesterly tangent to the last described curve at the last described point 674.67 feet; thence northwesterly, westerly and southwesterly along a curve to the left having a radius of 1200.0 feet tangent to the last described course 912.70 feet; thence southwesterly tangent to the last described curve at the last described point 200.0 feet; thence southwesterly and westerly along a curve to the right having a radius of 2540.0 feet tangent to the last described course 514.51 feet for a point of beginning; thence southerly along a line forming an angle of 90DEG.31'29" with a line drawn tangent to the last described curve at the last described point (measured clockwise therefrom) 925.11 feet; thence westerly at right angles to the last described course 340.0 feet; thence southerly at right angles to the last described course 100.0 feet; thence southwesterly along a line forming an angle of 156DEG.38'08" with the last described course (measured clockwise therefrom) 282.56 feet; thence southwesterly, along a line forming an angle of 173DEG.53'10" with the last described course (measured counter-clockwise therefrom) 418.99 feet; thence westerly along a line forming an angle of 120DEG.08'51" with the last described course (measured counter-clockwise therefrom) 577.26 feet; thence westerly and northwesterly along a curve to the right having a radius of 675.0 feet tangent to the last described course 649.78 feet; thence northwesterly, tangent to the last described curve at the last 4 described point 282.06 feet; thence northwesterly and westerly along a curve to the left having a radius of 390.0 feet tangent to the last described course 373.26 feet; thence westerly tangent to the last described curve at the last described point 172.68 feet; thence northerly at right angles to the last described course 981.08 feet to a line drawn parallel with and 100.0 feet southerly of the north line of the Northwest Quarter of said Section 7 (measured at right angles thereto); thence easterly along said parallel line 2431.89 feet; thence easterly along a curve to the left having a radius of 2540.0 feet tangent to the last described course 23.27 feet to the point of beginning, also excepting; that part of the Northeast Quarter of Section 7 described as follows: Commencing at the point of intersection of a line drawn parallel with and 60.0 feet westerly of the center line (measured at right angles thereto) of Illinois State Route No. 47 with the south line of the Southeast Quarter of said Section 8; thence northerly along said parallel line 4535.03 feet; thence westerly at right angles to the last described course 157.85 feet; thence westerly and southwesterly along a curve to the left having a radius of 900.0 feet tangent to the last described course 349.42 feet; thence southwesterly tangent to the last described curve at the last described point 200.15 feet; thence southwesterly, westerly and northwesterly along a curve to the right having a radius of 4310.0 feet tangent to the last described course 4041.09 feet; thence northwesterly tangent to the last described curve at the last described point 674.67 feet; thence northwesterly, westerly and southwesterly along a curve to the left having a radius of 1200.0 feet tangent to the last described course 912.70 feet; thence southwesterly tangent to the last described curve at the last described point 200.0 feet; thence southwesterly and westerly along a curve to the right having a radius of 2540.0 feet tangent to the last described course 514.51 feet; thence southerly along a line forming an angle of 90DEG.31'29" with a line drawn tangent to the last described curve at the last described point (measured clockwise therefrom) 925.11 feet; thence westerly at right angles to the last described course 340.0 feet; thence southerly at right angles to the last described course 100.0 feet; thence southwesterly along a line forming an angle of 156DEG.38'08" with the last described course (measured clockwise therefrom) 282.56 feet; thence southwesterly along a line forming an angle of 173DEG.53'10" with the last described course (measured counter-clockwise therefrom) 418.99 feet; thence easterly along a line forming an angle of 59DEG.51'09" with the last described course (measured clockwise therefrom) 34.85 feet; thence easterly and southeasterly along a curve to the right having a radius of 675.0 feet tangent to the last described course 161.19 feet for a point of beginning; thence continuing southeasterly along the prolongation of the last described curve 226.37 feet; thence southeasterly tangent to the last described curve at the last described point 717.92 feet; 5 thence southeasterly along a curve to the left having a radius of 1550.0 feet tangent to the last described course 513.47 feet; thence northerly along a line forming an angle of 107DEG.14'53" with a line drawn tangent to the last described curve at the last described point (measured counter-clockwise therefrom) 832.17 feet; thence northwesterly along a line forming an angle of 128DEG.20'47" with the last described course (measured clockwise therefrom) 910.0 feet; thence southwesterly along a line forming an angle of 90DEG.51'35" with the last described course (measured clockwise therefrom) 827.91 feet to the point of beginning, and also excepting; that part of the Northwest Quarter of Section 7, lying southerly of the southerly right of way line of the Illinois State Toll Highway Commission, all in Township 42 North, Range 7 East of the Third Principal Meridian, Rutland Township, Kane County, Illinois. 6 EX-10.3 7 EXHIBIT 10.3 Exhibit 10.3 PRIME GROUP REALTY TRUST SHARE INCENTIVE PLAN PRIME GROUP REALTY TRUST SHARE INCENTIVE PLAN TABLE OF CONTENTS
Page ---- Article 1. Establishment, Objectives and Duration. . . . . . . . . . .1 Article 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . .2 Article 3. Administration. . . . . . . . . . . . . . . . . . . . . . .7 Article 4. Shares Subject to the Plan and Maximum Awards . . . . . . .7 Article 5. Eligibility and Participation . . . . . . . . . . . . . . .9 Article 6. Stock Options . . . . . . . . . . . . . . . . . . . . . . .9 Article 7. Stock Appreciation Rights . . . . . . . . . . . . . . . . 11 Article 8. Restricted Stock and Restricted Units . . . . . . . . . . 13 Article 9. Performance Units . . . . . . . . . . . . . . . . . . . . 14 Article 10. Performance Measures. . . . . . . . . . . . . . . . . . . 16 Article 11. Beneficiary Designation . . . . . . . . . . . . . . . . . 17 Article 12. Deferrals . . . . . . . . . . . . . . . . . . . . . . . . 17 Article 13. Rights of Employees . . . . . . . . . . . . . . . . . . . 18 Article 14. Change in Control . . . . . . . . . . . . . . . . . . . . 18 Article 15. Amendment, Modification and Termination . . . . . . . . . 19 Article 16. Withholding . . . . . . . . . . . . . . . . . . . . . . . 20 Article 17. Indemnification . . . . . . . . . . . . . . . . . . . . . 20 Article 18. Successors. . . . . . . . . . . . . . . . . . . . . . . . 21 Article 19. Legal Construction. . . . . . . . . . . . . . . . . . . . 21 i Article 20. Shareholder Approval. . . . . . . . . . . . . . . . . . . 22
ii PRIME GROUP REALTY TRUST SHARE INCENTIVE PLAN ARTICLE 1. ESTABLISHMENT, OBJECTIVES AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. Prime Group Realty Trust, a Maryland real estate investment trust (hereinafter referred to as the "COMPANY"), hereby establishes a long-term incentive compensation plan to be known as the "Prime Group Realty Trust Share Incentive Plan" (hereinafter referred to as the "PLAN"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units and Performance Units. Subject to the approval of the Company's shareholders, the Plan shall become effective as of November __, 1997 (the "EFFECTIVE DATE") and shall remain in effect as provided in Section 1.3 hereof. 1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the profitability and growth of the Company through long-term incentives which are consistent with the Company's objectives and which link the interests of Participants to those of the Company's shareholders; to provide Participants with an incentive for excellence in individual performance; and to promote teamwork among Participants; and to give the Company a significant advantage in attracting and retaining officers, key employees and trustees. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make significant contributions to the Company's success and to allow Participants to share in the success of the Company. 1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of Trustees to amend or terminate the Plan at any time pursuant to Article 15 hereof, until all Shares subject to the Plan pursuant to Article 4 shall have been purchased or acquired according to the provisions hereof. In no event, however, may an Award be granted under the Plan on or after October 31, 2007. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized: 2.1 "AWARD" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Units. 2.2 "AWARD AGREEMENT" means an agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award or Awards granted under this Plan to such Participant. 2.3 "BOARD" or "BOARD OF TRUSTEES" means the Board of Trustees of the Company. 2.4 "CAUSE" shall have the meaning set forth in any unexpired employment or severance agreement between the Participant and the Company or another Employer, in the absence of any such agreement, shall mean (i) the willful and continued failure of the Participant to substantially perform his or her duties with or for the Company or another Employer, (ii) the engaging by the Participant in conduct which is significantly injurious to the Company or another Employer, monetarily or otherwise, (iii) the Participant's conviction of a felony, (iv) the Participant's abuse of illegal drugs or other controlled substances or (v) the Participant's habitual intoxication. Unless otherwise defined in the Participant's employment or severance agreement, an act or omission is "willful" for this purpose if such act or omission was knowingly done, or knowingly omitted to be done, by the Participant not in good faith and without reasonable belief that such act or omission was in the best interest of the Company or another Employer. 2.5 "CHANGE IN CONTROL"shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, a corporation or trust owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the Shares, Michael W. Reschke or The Prime Group, Inc. or any of their respective affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding securities which vote generally in the election of Trustees (referred to herein as "Voting Securities"); (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new Trustees whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the Trustees then still in office who either were Trustees at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (c) the shareholders of the Company approve a merger or consolidation of the Company with any other trust or corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) more than 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets. 2.6 "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 2.7 "COMMITTEE" means, as specified in Article 3 herein, the Compensation Committee of the Board or such other committee as may be appointed by the Board to administer the Plan. 2.8 "COMPANY" means Prime Group Realty Trust, a Maryland real estate investment trust, and any successor thereto as provided in Article 18 herein. 2.9 "DISABILITY" shall mean (a) long-term disability as defined under a long-term disability plan maintained by an Employer and covering that individual, or (b) if the individual is not covered by such a long-term disability plan, disability as defined for purposes of eligibility for a disability award under the Social Security Act. 2.10 "EFFECTIVE DATE" shall have the meaning ascribed to such term in Section 1.1 hereof. 2.11 "ELIGIBLE EMPLOYEE" means any officer or other key employee of the Company or of any other Employer. Trustees who are not employed by the Company or another Employer shall not be considered Eligible Employees under this Plan. 2.12 "EMPLOYER" means, individually, the Company, each Subsidiary, the Operating Partnership, the Services Company and any other corporation, trust or partnership in which the Company owns directly or indirectly at least 50% in value of the outstanding capital or profits interest. 2.13 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.14 "EXERCISE PRICE" means the price at which a Share may be purchased pursuant to the exercise of an Option. 2.15 "FAIR MARKET VALUE" means the per share value of the Shares as of a given date, determined as follows: (a) If the Shares are listed or admitted for trading on the New York Stock Exchange (or if not, on another national securities exchange upon which the Shares are listed), the Fair Market Value of a Share is the closing quotation for such shares based on composite transactions for the New York Stock Exchange (or if not listed on it, such other national securities exchange) on the last trading day for the Shares prior to such given date. (b) If the Shares are not traded on any national securities exchange, but are quoted on the National Association of Securities Dealers, Inc. Automated Quotation System (NASDAQ System) or any similar system of automated dissemination of quotations of prices in common use, the Fair Market Value of a Share is the last sales price (if the Shares are then listed as a national market issue under the NASDAQ System) or the mean between the closing representative bid and asked prices (in all other cases) for the Shares on the last 5 trading days for the Shares preceding such given date as reported by the NASDAQ System (or such similar quotation system). (c) If neither clause (a) nor clause (b) of this Section 2.15 is applicable, the Fair Market Value of a Share is the fair market value per share as of such valuation date, as determined by the Board in good faith and in accordance with uniform principles consistently applied; provided, however, that the Fair Market Value of a Share on the date of the completion of an initial public offering of the Shares shall be the initial public offering price. 2.16 "FREESTANDING SAR" means an SAR that is granted independently of any Option, as described in Article 7 herein. 2.17 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares granted under Article 6 herein which is designated as an Incentive Stock Option and that is intended to meet the requirements of Code Section 422. 2.18 "NONEMPLOYEE TRUSTEE" means an individual who is a member of the Board of Trustees of the Company but who is not an employee of the Company or any other Employer. 2.19 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase Shares granted under Article 6 herein that is not intended to meet the requirements of Code Section 422. 2.20 "OPERATING PARTNERSHIP" means Prime Group Realty, L.P., a Delaware limited partnership. 2.21 "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein. 2.22 "PARTICIPANT" means an Eligible Employee who has been selected by the Committee to participate in the Plan pursuant to Section 5.2 and who has outstanding an Award granted under the Plan. The term "Participant" shall not include Nonemployee Trustees. 2.23 "PERFORMANCE-BASED EXCEPTION" means the performance-based exception from the tax deductibility limitations of Code Section 162(m) and any regulations promulgated thereunder. 2.24 "PERFORMANCE UNIT" means a Share equivalent Award granted to a Participant, as described in Article 9 herein. 2.25 "RESTRICTION PERIOD" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance objectives, or upon the occurrence of other events as determined by the Committee, at its discretion), and/or the Restricted Stock/Units are not vested. 2.26 "RESTRICTED STOCK" means a contingent grant of Shares awarded to a Participant pursuant to Article 8 herein. 2.27 "RESTRICTED UNIT" means a Share equivalent Award granted to a Participant, as described in Article 8 herein. 2.28 "RETIREMENT" shall mean termination of employment on or after (a) attaining the age established as the normal retirement age in any unexpired employment agreement between the Participant and the Company or another Employer or, in the absence of such an agreement, the normal retirement age under the tax-qualified defined benefit retirement plan or, if none, the tax-qualified defined contribution retirement plan, sponsored by the Company or another Employer in which the Participant participates, or (b) attaining age sixty-two with ten years of continuous service with one or more Employers provided that the retirement is approved by the Chief Executive Officer of the Company unless the Participant is an officer subject to Section 16 of the Exchange Act in which case the retirement must be approved by the Committee. 2.29 "SERVICES COMPANY" means Prime Group Realty Services, Inc., a Maryland corporation. 2.30 "SHARES" means the Company's common shares. 2.31 "STOCK APPRECIATION RIGHT" or "SAR" means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Article 7 herein. 2.32 "SUBSIDIARY" means a subsidiary corporation of the Company within the meaning of Code Section 424(f). 2.33 "TANDEM SAR" means an SAR that is granted in connection with a related Option pursuant to Article 7 herein, the exercise of which requires forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled). 2.34 "TRUSTEE" means any individual who is a member of the Board of Trustees. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Compensation Committee of the Board, or by any other Committee appointed by the Board, which Committee (unless otherwise determined by the Board) shall satisfy the "nonemployee director" requirements of Rule 16b-3 under the Exchange Act and the regulations thereunder and the "outside director" provisions of Code Section 162(m), or any successor regulations or provisions. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board. The Committee shall act by a majority of its members at the time in office and eligible to vote on any particular matter, and such action may be taken either by a vote at a meeting or in writing without a meeting. 3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law and subject to the provisions herein, the Committee shall have full power and discretion to: select Eligible Employees who shall participate in the Plan; select Nonemployee Trustees to receive Awards under Article 6; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend or waive rules and regulations for the Plan's administration; and, subject to the provisions of Article 15 herein, amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law and consistent with Section 3.1, the Committee may delegate its authority as identified herein. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company, its Board of Trustees, its shareholders, all Employers, employees, Participants and their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS 4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as provided in Section 4.3 herein, the number of Shares that may be issued or transferred to Participants under the Plan shall be 1,800,000 Shares. The maximum number of Shares and Share equivalent units that may be granted during any calendar year to any one Participant under Options, Freestanding SARs, Restricted Stock, Restricted Units or Performance Units, shall be 200,000 (on an aggregate basis for all such types of Awards), which limit shall apply regardless of whether such compensation is paid in Shares or in cash. 4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled, terminates, expires or lapses for any reason, any Shares subject to such Award again shall be available for the grant of an Award under the Plan, but shall continue to count for the purpose of the annual individual award limit set forth in Subsection 4.1 above. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. (a) In the event the Shares, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of securities of the Company or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split, reverse split, combination of shares, or otherwise) or if the number of such Shares shall be increased through the payment of a share dividend, then there shall be substituted for or added to each Share theretofore appropriated or thereafter subject or which may become subject to an Award under this Plan, the number and kind of shares of securities into which each outstanding Share shall be so changed, or for which each such Share shall be exchanged, or to which each such Share shall be entitled, as the case may be. Outstanding Awards shall also be appropriately amended as to price and other terms as may be necessary to reflect the foregoing events. In the event there shall be any other change in the number or kind of the outstanding Shares, or of any stock or other securities into which such Shares shall have been changed, or for which it shall have been exchanged, then, if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in any Award therefore granted or which may be granted under the Plan, such adjustments shall be made in accordance with such determination. (b) Fractional Shares resulting from any adjustment in Awards pursuant to this section may be settled in cash or otherwise as the Committee shall determine. Notice of any adjustment shall be given by the Company to each Participant who holds an Award which has been so adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan. 4.4 EMPLOYER PAYMENT. In the case of Shares delivered pursuant to an Award granted to an employee of an Employer other than the Company or a Subsidiary, such Employer shall make a payment to the Company with respect to such Shares in an amount equal to (i) the Fair Market Value of the Shares on the date as of which they are so delivered, less (ii) in the case of an option, the aggregate exercise price for such Shares. For this purpose, the obligation to deliver Shares shall first be satisfied from any Shares transferred in payment of an exercise price. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Individuals eligible to participate in this Plan consist of all Eligible Employees, including Eligible Employees who are members of the Board, and Nonemployee Trustees but only to the extent provided herein. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from all Eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Eligible Employees in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. Options granted to Eligible Employees who are employees of the Company or a Subsidiary may be either ISOs or NQSOs. Options granted to other Eligible Employees may only be NQSOs. In addition, NQSOs may be granted to Nonemployee Trustees in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. 6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award Agreement that shall specify the Exercise Price, the duration of the Option, the number of Shares to which the Option pertains, the manner, time and rate of exercise or vesting of the Option, and such other provisions as the Committee shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Code Section 422 or an NQSO which is not intended to qualify under the provisions of Code Section 422. 6.3 EXERCISE PRICE. The Exercise Price for each Share subject to an Option granted under this Plan shall be at least equal to one hundred percent of the Fair Market Value of a Share on the date the Option is granted; provided, however, that, in the case of an ISO, the price per share shall not be less than 110% of the Fair Market Value of such Share if on the date of grant the Participant owns (within the meaning of Code Section 424(d)) more than 10% of the total combined voting power of all classes of shares of beneficial interest of the Company or any Subsidiary. 6.4 DURATION OF OPTIONS. Each Option granted to an Eligible Employee or a Nonemployee Trustee shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth anniversary of the date of its grant; provided, further, that in the case of an ISO granted to a Participant owning (within the meaning of Code Section 424(d)), on the date of grant, more than 110% of the total combined voting power of all classes of shares of beneficial interest of the Company or any Subsidiary, the Option shall not be exercisable later than the fifth anniversary of the date of its grant. 6.5 DIVIDEND EQUIVALENTS. The Committee may grant dividend equivalents in connection with Options granted under this Plan. Such dividend equivalents may be payable in cash or in Shares, upon such terms as the Committee, in its sole discretion, deems appropriate. 6.6 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each Award or for each Participant. To the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by the Participant during any calendar year (under the Plan and all other incentive stock option plans of the Company) exceeds $100,000, such Options shall be treated as Nonqualified Options. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. 6.7 PAYMENT. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised accompanied by full payment for the Shares and any withholding tax relating to the exercise of the Option. The Exercise Price, and any related withholding taxes, upon exercise of any Option shall be payable: (a) in cash, or its equivalent, in United States dollars, or (b) if permitted in the governing Award Agreement, by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price, or (c) if permitted in the governing Award Agreement, by a combination of (a) and (b). The Committee also may allow cashless exercise as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. 6.8 TERMINATION OF EMPLOYMENT. Each Option Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's employment with the Company and all other Employers. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with each Participant or Nonemployee Trustee, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination of employment. 6.9 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during the Participant's lifetime only by such Participant or the Participant's guardian or legal representative. The Committee may require a Participant's guardian or legal representative to supply it with such evidence as the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs or any combination of these forms of SAR. Subject to Article 4 hereof, the Committee shall determine the number of SARs granted to each Participant and, consistent with the provisions of the Plan, determine the terms and conditions pertaining to such SARs. The grant price of a Freestanding SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR. The grant price of Tandem SARs shall equal the Exercise Price of the related Option. 7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. 7.3 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised upon whatever terms and conditions the Committee imposes upon them. 7.4 AWARD AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR and such other provisions as the Committee shall determine. 7.5 DURATION OF SARS. The term of an SAR granted under the Plan shall be determined by the Committee; provided, however, that such term shall not exceed ten years. 7.6 PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall be entitled to receive payment from his or her Employer in an amount determined by multiplying: (a) the excess (or some portion of such excess as determined at the time of the grant by the Committee) if any, of the Fair Market Value of a Share on the date of exercise of the SAR over the grant price specified in the Award Agreement; by (b) the number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent Fair Market Value or in some combination thereof. 7.7 TERMINATION OF EMPLOYMENT. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant's employment with the Company and all other Employers. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with Participants, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment. 7.8 NONTRANSFERABILITY OF SARS. Except as otherwise provided in a Participant's Award Agreement, no SAR granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all SARs granted to a Participant under the Plan shall be exercisable during the Participant's lifetime only by such Participant or the Participant's guardian or legal representative. The Committee may require a Participant's guardian or legal representative to supply it with such evidence as the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. ARTICLE 8. RESTRICTED STOCK AND RESTRICTED UNITS 8.1 GRANT OF RESTRICTED STOCK/UNITS. Subject to the terms and provisions of the Plan, the Committee may, at any time and from time to time, grant Restricted Stock and/or Restricted Units to Participants in such amounts as the Committee shall determine. Each grant of Restricted Stock shall be represented by the number of Shares to which the Award relates. Each grant of Restricted Units shall be represented by the number of Share equivalent units to which the Award relates. 8.2 AWARD AGREEMENT. Each Restricted Stock/Unit grant shall be evidenced by an Award Agreement that shall specify the Restriction Periods, the number of Shares or Share equivalent units granted, and such other provisions as the Committee shall determine. 8.3 NONTRANSFERABILITY. Except as provided in this Article 8, the Restricted Stock/Units granted herein may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until the end of the applicable Restriction Period established by the Committee and as specified in the Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee and as set forth in the Award Agreement. All rights with respect to Restricted Stock/Units granted to a Participant under the Plan shall be available during the Participant's lifetime only to such Participant or the Participant's guardian or legal representative. The Committee may require a Participant's guardian or legal representative to supply it with such evidence as the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. 8.4 OTHER RESTRICTIONS. The Committee may impose such other conditions and/or restrictions on any restricted Stock/Units granted pursuant to the Plan as it deems advisable including, without limitation, restrictions based upon the achievement of specific performance objectives (Company-wide, business unit, and/or individual), time-based restrictions on vesting following the attainment of the performance objectives, and/or restrictions under applicable federal or state securities laws. The Company shall retain the certificates representing Shares of restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. 8.5 PAYMENT OF AWARDS. Except as otherwise provided in this Article 8, (i) Shares covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Restriction Period and (ii) Share equivalent units covered by each Restricted Unit under Section 8.1 shall be paid out in cash or Shares to the Participant following the last day of the applicable Restriction Period or such later date as provided in the Award Agreement. 8.6 VOTING RIGHTS. During the Restriction Period, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 8.7 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Restriction Period, Participants holding Shares of Restricted Stock/Units hereunder shall be credited with regular cash dividends or dividend equivalents paid with respect to the underlying Shares or Share equivalent units while they are so held. Such dividends may be paid currently, accrued as contingent cash obligations, or converted into additional Shares or units of Restricted Stock/Units, upon such terms as the Committee establishes. The Committee may apply any restrictions to the crediting and payment of dividends and other distributions that the Committee deems advisable. Without limiting the generality of the preceding sentence, if the grant or vesting of Restricted Stock/Units is designed to qualify for the Performance-Based Exception, the Committee may apply any restrictions it deems appropriate to the payment of dividends declared with respect to such Restricted Stock/Units, such that the dividends and/or the Restricted Stock/Units maintain eligibility for the Performance-Based Exception. 8.8 TERMINATION OF EMPLOYMENT. Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain unvested Restricted Stock/Units following termination of the Participant's employment with the Company and all other Employers. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Awards of Restricted Stock/Units issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment. ARTICLE 9. PERFORMANCE UNITS 9.1 GRANT OF PERFORMANCE UNITS. Subject to the terms of the Plan, Performance Units may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee. 9.2 VALUE OF PERFORMANCE UNITS. Each grant of Performance Units shall be represented by the number of Share equivalent units to which the Award relates. The Committee shall set performance objectives in its discretion which, depending on the extent to which they are met, will determine the number of Performance Units that will be paid out to the Participant. For purposes of this Article 9, the time period during which the performance objectives must be met shall be called a "PERFORMANCE PERIOD" and shall be set by the Committee in its discretion. 9.3 EARNING OF PERFORMANCE UNITS. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units shall be entitled to receive payout on the number of Performance Units earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives have been achieved. 9.4 AWARD AGREEMENT. Each grant of Performance Units shall be evidenced by an Award Agreement which shall specify the material terms and conditions of the Award, and such other provisions as the Committee shall determine. 9.5 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS. Except as provided in Article 12, payment of earned Performance Units shall be made within seventy-five calendar days following the close of the applicable Performance Period in a manner determined by the Committee. Payment of earned Performance Units may be in the form of cash or in Shares (or in a combination thereof). 9.6 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. Unless determined otherwise by the Committee and set forth in the Participant's Award Agreement, in the event the employment of a Participant is terminated by reason of death, Disability or Retirement during a Performance Period, the Participant shall receive a payout of the Performance Units which is prorated, as specified by the Committee in the Award Agreement. Payment of earned Performance Units shall be made at a time specified by the Committee and set forth in the Participant's Award Agreement. 9.7 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant's employment terminates during a Performance Period for any reason other than those reasons set forth in Section 9.6 herein, all Performance Units shall be forfeited by the Participant, unless determined otherwise by the Committee in the Participant's Award Agreement. 9.8 NONTRANSFERABILITY. Except as otherwise provided in a Participant's Award Agreement, Performance Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by such Participant or Participant's guardian or legal representative. The Committee may require a Participant's guardian or legal representative to supply it with such evidence as the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. ARTICLE 10. PERFORMANCE MEASURES Unless and until the Committee proposes for shareholder approval and the Company's shareholders approve a change in the general performance measures set forth in this Article 10, the attainment of which may determine the degree of payout and/or vesting with respect to Awards which are designed to qualify for the Performance-Based Exception, the performance measure(s) to be used for purposes of such awards shall be chosen from among the following alternatives: (a) return to shareholders (absolute or peer-group comparative); (b) stock price increase (absolute or peer-group comparative); (c) cumulative net income (absolute or competitive growth rates comparative); (d) return on equity; (e) return on capital; (f) cash flow, including operating cash flow, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital; (g) economic value added (income in excess of capital costs); or (h) market share. The Committee shall have the discretion to adjust the determinations of the degree of attainment of the preestablished performance objectives; provided, however, that Awards which are designed to qualify for the Performance-Based Exception may not be adjusted except to the extent permitted under Code Section 162(m). In the event that Code Section 162(m) or applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards which shall not qualify for the Performance-Based Exception, the Committee may make such grants without satisfying the requirements of Code Section 162(m). ARTICLE 11. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of the death of the Participant before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee during the Participant's lifetime. If the Participant's designated beneficiary predeceases the Participant or no beneficiary has been designated, benefits remaining unpaid at the Participant's death shall be paid to the Participant's spouse or if none, the Participant's estate. ARTICLE 12. DEFERRALS The Committee may permit or require a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock/Units, or the satisfaction of any requirements or objectives with respect to Performance Units. If any such deferral election is permitted or required, the Committee shall, in its sole discretion, establish rules and procedures for such deferrals. Notwithstanding the foregoing, the Committee in its sole discretion may defer payment of cash or the delivery of Shares that would otherwise be due to a Participant under the Plan if such payment or delivery would result in compensation not deductible by the Company or any other Employer by virtue of Code Section 162(m). Such a deferral may continue until the payment or delivery would result in compensation deductible by the Company or such other Employer under Code Section 162(m). ARTICLE 13. RIGHTS OF EMPLOYEES 13.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any other Employer to terminate any Participant's employment at any time, or confer upon any Participant any right to continue in the employ of the Company or any other Employer. 13.2 PARTICIPATION. No Eligible Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. ARTICLE 14. CHANGE IN CONTROL 14.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges: (a) Any and all outstanding Options and SARs granted hereunder shall become immediately exercisable, and shall remain exercisable throughout their entire term. (b) Any Periods of Restriction and restrictions imposed on Restricted Stock/Units shall lapse; provided, however, that the degree of vesting associated with Restricted Stock/Units which has been conditioned upon the achievement of performance conditions pursuant to Section 8.4 herein shall be determined in the manner set forth in Section 14.1(c) herein. (c) Except as otherwise provided in the Award Agreement, the vesting of all Performance Units shall be accelerated as of the effective date of the Change in Control, and there shall be paid out in cash to Participants within thirty days following the effective date of the Change in Control a pro rata amount based upon an assumed achievement of all relevant performance objectives at target levels, and upon the length of time within the Performance Period which has elapsed prior to the effective date of the Change in Control; provided, however, that in the event the Committee determines that actual performance to the effective date of the Change in Control exceeds target levels, the prorated payouts shall be made at levels commensurate with such actual performance (determined by extrapolating such actual performance to the end of the Performance Period), based upon the length of time within the Performance Period which has elapsed prior to the effective date of the Change in Control. 14.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE IN CONTROL PROVISIONS. Notwithstanding any other provision of this Plan or any Award Agreement provision, the provisions of this Article 14 may not be terminated, amended, or modified on or after the effective date of a Change in Control to affect adversely any Award theretofore granted under the Plan without the prior written consent of the Participant with respect to his or her outstanding Awards. ARTICLE 15. AMENDMENT, MODIFICATION AND TERMINATION 15.1 AMENDMENT, MODIFICATION AND TERMINATION. Subject to Section 14.2 herein, the Board may at any time and from time to time, alter, amend, modify or terminate the Plan in whole or in part. Subject to the terms and conditions of the Plan, the Committee may modify, extend or renew outstanding Awards under the Plan, or accept the surrender of outstanding Awards (to the extent not theretofore exercised) and grant new Awards in substitution therefor (to the extent not theretofore exercised). The Committee shall not, however, modify any outstanding Incentive Stock Option so as to specify a lower Exercise Price. Notwithstanding the foregoing, no modification of an Award shall, without the consent of the Participant, alter or impair any rights or obligations under any Award theretofore granted under the Plan. 15.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR NONRECURRING EVENTS. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.3 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, subject to the requirements of Code Section 162(m) for the Performance-Based Exception in the case of Awards designed to qualify for the Performance-Based Exception. 15.3 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. 15.4 COMPLIANCE WITH CODE SECTION 162(m). Awards, when Code Section 162(m) is applicable, shall comply with the requirements of Code Section 162(m); provided, however, that in the event the Committee determines that such compliance is not desired with respect to any Award or Awards available for grant under the Plan, then compliance with Code Section 162(m) will not be required. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards available under the Plan, the Committee may, subject to this Article 15, make any adjustments it deems appropriate. ARTICLE 16. WITHHOLDING 16.1 TAX WITHHOLDING. Each Employer shall have the power and the right to deduct or withhold, or require a Participant to remit to the Employer, an amount (either in cash or Shares) sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan. 16.2 SHARE WITHHOLDING. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, an Employer may satisfy the minimum withholding requirement for supplemental wages, in whole or in part, by withholding from the Award Shares having a Fair Market Value (determined on the date the Participant recognizes taxable income on the Award) equal to the withholding tax required to be collected on the transaction. The Participant may elect, subject to the approval of the Committee, to deliver the necessary funds to satisfy the withholding obligation to an Employer, in which case there will be no reduction in the Shares otherwise distributable to the Participant. ARTICLE 17. INDEMNIFICATION Each person who is or has been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit, or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by such person in a settlement approved by the Company, or paid by such person in satisfaction of any judgment in any such action, suit, or proceeding against such person, provided such person shall give the Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE 18. SUCCESSORS All obligations of an Employer under the Plan or any Award Agreement with respect to Awards granted hereunder shall be binding on any successor to the Employer, whether the existence of such successor is the result of a direct or indirect purchase of all or substantially all of the business and/or assets of the Employer, or a merger, consolidation, or otherwise. ARTICLE 19. LEGAL CONSTRUCTION 19.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 19.2 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 19.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Share and/or cash payouts under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. The Committee may impose such restrictions on any Shares delivered pursuant to any Award granted under this Plan as the Committee deems necessary or advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 19.4 SECURITIES LAW COMPLIANCE. With respect to any individual who is, on the relevant date, an officer, director or ten percent beneficial owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange Act, or any successor rule. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 19.5 AWARDS TO FOREIGN NATIONALS AND EMPLOYEES OUTSIDE THE UNITED STATES. To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law of practice and to further the purposes of this Plan, the Committee may, without amending the Plan, (i) establish rules applicable to Awards granted to Participants who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Awards to such Participants in accordance with those rules. 19.6 UNFUNDED STATUS OF THE PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments or deliveries of Shares not yet made to a Participant by the Company or any other Employer, nothing contained herein shall give any rights that are greater than those of a general creditor. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Shares or payments hereunder consistent with the foregoing. 19.7 GOVERNING LAW. To the extent not preempted by federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Maryland. ARTICLE 20. SHAREHOLDER APPROVAL This Plan will be submitted for the approval of the Company's shareholders within twelve months before or after the date of the Board's initial adoption of the Plan. Awards may be granted prior to such shareholder approval; provided, however, that such Awards shall not be exercisable or payable prior to the time when the Plan is approved by the shareholders; provided, further, that if such approval has not been obtained at the end of said twelve-month period, all Awards previously granted under the Plan shall thereupon be cancelled and become null and void. EX-10.4 8 EXHIBIT 10.4 Exhibit 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and among Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), Prime Group Realty, L.P., a Delaware limited partnership and the operating partnership for PGRT ("Prime") (Prime and PGRT are hereinafter sometimes collectively referred to as "Employer"), and Michael W. Reschke, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of office properties and the management thereof. C. Executive wishes to commit to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. EMPLOYMENT AND DUTIES. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the Chairman of the Board of Employer on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer. The Board of Directors of Employer may from time to time further define and clarify Executive's duties and services hereunder as Chairman of the Board of Employer. Executive agrees to devote Executive's sufficient time, attention, energy and skill to perform Executive's duties as Chairman of the Board of Employer. Executive shall have no obligation to devote full-time to Executive's duties, it being expressly understood that Executive has other professional and managerial duties and responsibilities to companies other than Employer. Further, during the Employment Term, Employer agrees to recommend Executive to be elected as a member of the Board of Trustees of PGRT (the "Board"). 2. TERM. The initial term of this Agreement (the "Initial Term") shall commence on November 17, 1997 and expire on November 17, 2000, provided, however, this Agreement shall automatically extend for one year terms following the Initial Term (each a "Renewal Term", together with the Initial Term, the "Employment Term"), unless prior to six (6) months, in the case of a non-renewal by Employer, or prior to thirty (30) days, in the case of a non-renewal by Executive, before the end of the Initial Term or any Renewal Term, as applicable, either party shall give the other written notice of its intention to terminate this Agreement. 3. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than One Hundred Fifty Thousand Dollars ($150,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board based on periodic reviews of Executive's performance conducted on at least an annual basis. (b) BONUS. In addition to Base Compensation, the Board and the Committee, in their sole and absolute discretion, may, but in no event shall be obligated to, authorize the payment of a cash bonus (a "Performance Bonus Distribution") to Executive based upon achievement of such corporate and individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time. (c) BENEFITS. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. (d) EXPENSES. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of 2 Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. 4. SHARE OPTIONS. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 175,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately (i) upon the death or disability of Executive or (ii) upon termination of this Agreement and Executive's employment for any reason other than (A) a termination for cause by Employer or (B) or if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof. In the case of a termination for cause or if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Share Incentive Plan all Options vested prior to such termination. 5. TERMINATION AND TERMINATION BENEFITS. (a) TERMINATION BY EMPLOYER. (i) WITHOUT CAUSE. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c) and 3(d) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(e) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, the "effective date of termination" shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination. (ii) WITH CAUSE. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with 3 Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c) and 3(d) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (1) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (2) Executive's conviction of (or pleading nolo contendere to) a felony, (3) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (4) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (3) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (5) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) DISABILITY. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent) and 3(d) hereof up to the effective date of such termination. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, 4 Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) TERMINATION BY EXECUTIVE. (i) AFTER CHANGE OF CONTROL. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following any "change of control" of Employer and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c) and 3(d) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(e) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). For purposes of this Section 5(b)(i), (A) a "change of control" of Employer shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer's assets or combination of the foregoing transactions (a "Transaction"), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were directors of Employer immediately before the beginning of 5 such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or a majority of the board of directors of any successor to Employer, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change unless the new title is not Chairman of the Board) or (2) the compensation package for Executive. (ii) WITHOUT GOOD REASON. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c) and 3(d) hereof up to the effective date of such termination. (c) DEATH. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent) and 3(d) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (d) REMOVAL AS DIRECTOR. Notwithstanding any other provision of this Agreement, if Executive shall be removed from office as a director of Employer at any time during the Employment Term, then Executive may notify Employer in writing of Executive's election to terminate this Agreement with good reason upon written notice to Employer and such notice shall be effective immediately upon receipt by Employer. In such event, Executive shall (A) be paid 6 Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (B) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent) and 3(d) hereof up to the effective date of such termination and (C) be entitled to the Termination Compensation specified in Section 5(e) hereof. (e) TERMINATION COMPENSATION. In the event of a termination of this Agreement pursuant to Section 5(a)(i), 5(b)(i) or 5(d) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to (i) in the case of a termination pursuant to Section 5(a)(i) or 5(d) hereof, Executive's annual Base Compensation as of the effective date of such termination, or (ii) in the case of a termination pursuant to Section 5(b)(i) hereof, two times (A) the average annual Base Compensation paid or payable to Executive for or with respect to the two full calendar years immediately preceding the calendar year in which the date of termination occurs, plus (B) the average annual Performance Bonus Distribution paid or payable to Executive for or with respect to the two full calendar years immediately preceding the calendar year in which the date of termination occurs. For purposes of calculating Employee's Termination Compensation pursuant to clause (ii) above, if the termination takes place prior to December 31, 1999, the Termination Compensation for any applicable calendar year in which the termination takes place shall be determined as follows: (1) if the termination takes place on or prior to December 31, 1998, the full Termination Compensation described in clause (d)(ii) above shall be deemed to be 350% of Executive's Base Compensation for the 1998 calendar year; or (2) if the termination takes place after December 31, 1998 but on or prior to December 31, 1999, the Performance Bonus Distribution component of the Termination Compensation calculation described in clause (d)(ii) above shall be deemed to be two times the average of (A) the amount of the Performance Bonus Distribution paid to Executive or to which Executive is entitled for the 1998 calendar year pursuant to Section 3(b) hereof and (B) the greater of (1) 75% of Executive's Base Compensation for the 1998 calendar year or (2) 133% of the Performance Bonus Distribution paid to Executive or to which Executive is entitled for the 1998 calendar year pursuant to Section 3(b) hereof. 6. PRIOR AGREEMENTS. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 7. ASSIGNMENT. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer 7 may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 8. SUCCESSOR TO EMPLOYER. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(b)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 9. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: (a) if to Executive, to: Michael W. Reschke c/o Prime Group Realty Trust 77 W. Wacker Drive Suite 3900 Chicago, IL 60601 (b) if to Employer, to: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer WITH A COPY TO: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 8 Attn: General Counsel AND TO: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg Any notice, claim, demand, request or other communication given as provided in this Section 9, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 9. 10. AMENDMENT. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 11. WAIVER OF BREACH. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 12. SEVERABILITY. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 13. INDEMNIFICATION BY EXECUTIVE. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 9 14. GOVERNING LAW. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY TRUST By: /s/ Richard S. Curto ------------------------------- Title: President ------------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its General Partner By: /s/ Richard S. Curto -------------------------- Title: President -------------------------- EXECUTIVE: /s/ Michael W. Reschke ------------------------------------- Michael W. Reschke 11 EX-10.5 9 EXHIBIT 10.5 Exhibit 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and among Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), Prime Group Realty, L.P., a Delaware limited partnership and the operating partnership for PGRT ("Prime") (Prime and PGRT are hereinafter sometimes collectively referred to as "Employer"), and Richard S. Curto, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of office properties and the management thereof. C. Executive wishes to commit to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. Employment and Duties. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the President and Chief Executive Officer of Employer on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer. The Chairman of the Board of Employer may from time to time further define and clarify Executive's duties and services hereunder as President and Chief Executive Officer of Employer. Executive agrees to devote Executive's best efforts and substantially all of Executive's business time, attention, energy and skill to perform Executive's duties as President and Chief Executive Officer of Employer. Further, during the Employment Term, Employer agrees to recommend Executive to be elected as a member of the Board of Trustees of PGRT (the "Board"). 2. Term. The initial term of this Agreement (the "Initial Term") shall commence on November 17, 1997 and expire on November 17, 2000, provided, however, this Agreement shall automatically extend for one year terms following the Initial Term (each a "Renewal Term", together with the Initial Term, the "Employment Term"), unless prior to six (6) months, in the case of a non-renewal by Employer, or prior to thirty (30) days, in the case of a non-renewal by Executive, before the end of the Initial Term or any Renewal Term, as applicable, either party shall give the other written notice of its intention to terminate this Agreement. 3. Compensation and Related Matters. (a) Base Salary. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than Two Hundred Seventy-Five Thousand Dollars ($275,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board based on periodic reviews of Executive's performance conducted on at least an annual basis. (b) Bonus. In addition to Base Compensation, the Board and the Committee, in their sole and absolute discretion, may, but in no event shall be obligated to, authorize the payment of a cash bonus (a "Performance Bonus Distribution") to Executive based upon achievement of such corporate and individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time. (c) Benefits. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. (d) Expenses. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. 2 (e) Vacations. During the Employment Term, Executive shall be entitled to vacation in accordance with Employer's practices, as such practices may be amended or modified from time to time by Employer, provided that Executive shall be entitled to at least three (3) weeks paid vacation in each full calendar year. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is two (2) weeks. Executive shall be entitled to a payment for any vacation time which has accrued but has not been used as of the date of the termination of Executive's employment with Employer, unless Executive's employment is terminated pursuant to Section 5(a)(ii) hereof. 4. Share Options. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 175,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately (i) upon the death or disability of Executive or (ii) upon termination of this Agreement and Executive's employment for any reason other than (A) a termination for cause by Employer or (B) if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof. In the case of a termination for cause or if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Share Incentive Plan all Options vested prior to such termination. 5. Termination and Termination Benefits. (a) Termination by Employer. (i) Without Cause. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, the "effective date of termination" shall mean the 3 last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination. (ii) With Cause. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (1) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (2) Executive's conviction of (or pleading nolo contendere to) a felony, (3) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (4) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (3) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (5) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) Disability. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the effective date of such termination and (D) be entitled to the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata 4 portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) Termination by Executive. (i) After Change of Control. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following any "change of control" of Employer and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). For purposes of this Section 5(b)(i), (A) a "change of control" of Employer shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of 5 Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer's assets or combination of the foregoing transactions (a "Transaction"), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were directors of Employer immediately before the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or a majority of the board of directors of any successor to Employer, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change unless the new title is not Chief Executive Officer or President) or (2) the compensation package for Executive. (ii) Without Good Reason. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. (c) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by 6 Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (d) Termination Compensation. In the event of a termination of this Agreement pursuant to Section 5(a)(i), 5(a)(iii) or 5(b)(i) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to (i) in the case of a termination pursuant to Section 5(a)(i) or 5(a)(iii) hereof, Executive's annual Base Compensation as of the effective date of such termination, or (ii) in the case of a termination pursuant to Section 5(b)(i) hereof, two times (A) the average annual Base Compensation paid or payable to Executive for or with respect to the two full calendar years immediately preceding the calendar year in which the date of termination occurs, plus (B) the average annual Performance Bonus Distribution paid or payable to Executive for or with respect to the two full calendar years immediately preceding the calendar year in which the date of termination occurs. For purposes of calculating Employee's Termination Compensation pursuant to clause (ii) above, if the termination takes place prior to December 31, 1999, the Termination Compensation for any applicable calendar year in which the termination takes place shall be determined as follows: (1) if the termination takes place on or prior to December 31, 1998, the full Termination Compensation described in clause (d)(ii) above shall be deemed to be 350% of Executive's Base Compensation for the 1998 calendar year; or (2) if the termination takes place after December 31, 1998 but on or prior to December 31, 1999, the Performance Bonus Distribution component of the Termination Compensation calculation described in clause (d)(ii) above shall be deemed to be two times the average of (A) the amount of the Performance Bonus Distribution paid to Executive or to which Executive is entitled for the 1998 calendar year pursuant to Section 3(b) hereof and (B) the greater of (1) 75% of Executive's Base Compensation for the 1998 calendar year or (2) 133% of the Performance Bonus Distribution paid to Executive or to which Executive is entitled for the 1998 calendar year pursuant to Section 3(b) hereof. 6 Covenants of Executive. (a) No Conflicts. Executive represents and warrants that Executive is not personally subject to any agreement, order or decree which restricts Executive's acceptance of this Agreement and the performance of Executive's duties with Employer hereunder. (b) Non-Competition. In return for the performance of the management duties described in Section 1 hereof, during the Employment Term and, in the event of the termination of this Agreement pursuant to the provisions of Section 5(a)(ii) or 5(b)(ii) hereof, for a period of two years thereafter, Executive shall not, directly or indirectly, in any capacity whatsoever, either on Executive's own behalf or on behalf of any other person or entity with whom Executive may be employed or associated, own any interest in, participate or engage in the day-to-day supervision, management, development, marketing or operation of any office or industrial real estate facilities or 7 such other business as Employer may be engaged in during the Employment Term (the "Business") which is competitive with any of Employer's facilities. For purposes hereof, a facility will be deemed competitive with one of Employer's facilities if such facility is located within ten (10) miles of a facility owned, operated or managed by Employer or within ten (10) miles of a facility which Employer is developing or with respect to which Employer has signed a letter of intent or term sheet or binding contract for the acquisition, development or management thereof dated on or prior to the date of such termination. Furthermore, for a period of two years after any applicable Section 5 termination event, Executive shall not, directly or indirectly, solicit, attempt to hire or hire any employee or client of Employer or solicit or attempt to lease space to or lease space to any tenant of Employer. Notwithstanding the foregoing, nothing herein shall prohibit Executive from owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise. (c) Non-Disclosure. During the Employment Term and for a period of two years after the expiration or termination of this Agreement for any reason, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information which derives independent economic value, actual or potential, with respect to Employer from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive prior to or during the course of Executive's service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense which does not relate to Employer. (d) Business Opportunities. During the Employment Term, Executive agrees to bring to Employer any and all business opportunities which come to Executive's attention for the acquisition, development, management, leasing or marketing of real estate for industrial or office use. In the event that Employer elects not to participate or take advantage of any such business opportunity, upon termination of Executive's employment with Employer for any reason, Executive shall be free to pursue such business opportunity, provided that such business opportunity does not cause any tenant to relocate from a facility owned and/or operated by Employer, PGRT or any of their respective subsidiaries. (e) Return of Documents. Upon termination of Executive's services with Employer, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Employer within Executive's possession or under Executive's control. (f) Equitable Relief. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Employer shall be 8 entitled, in addition to any other remedy which it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to the terms and conditions hereof. (g) Acknowledgment. Executive acknowledges that Executive will be directly and materially involved as a senior executive in all important policy and operational decisions of Employer. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Employer and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect Employer, its other partners and the public from the unfair competition of Executive who, as a result of Executive's performance of services on behalf of Employer, will have had unlimited access to the most confidential and important information of Employer, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that Executive will be able to earn a reasonable livelihood following termination of Executive's services notwithstanding enforcement of the covenants contained herein. 7. Prior Agreements. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 8. Assignment. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 9. Successor to Employer. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(b)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 9 10. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: (a) if to Executive, to: Richard S. Curto c/o Prime Group Realty Trust 77 W. Wacker Dr. Suite 3900 Chicago, IL 60601 Attn: Connie Klimkowski (b) if to Employer, to: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer With a copy to: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: General Counsel and to: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg 10 Any notice, claim, demand, request or other communication given as provided in this Section 10, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 10. 11. Amendment. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 12. Waiver of Breach. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 13. Severability. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 14. Indemnification by Executive. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 15. Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY TRUST By: /s/ Michael W. Reschke --------------------------------- Title: Chairman of the Board ------------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its General Partner By: /s/ Michael W. Reschke ------------------------ Title: Chairman of the Board --------------------- EXECUTIVE: /s/ Richard S. Curto -------------------------------------- Richard S. Curto 12 EX-10.6 10 EXHIBIT 10.6 Exhibit 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and among Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), Prime Group Realty, L.P., a Delaware limited partnership and the operating partnership for PGRT ("Prime") (Prime and PGRT are hereinafter sometimes collectively referred to as "Employer"), and W. Michael Karnes, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of office properties and the management thereof. C. Executive wishes to commit to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. Employment and Duties. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the Executive Vice President and Chief Financial Officer of Employer on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer. The Chief Executive Officer or the President of Employer may from time to time further define and clarify Executive's duties and services hereunder as Executive Vice President and Chief Financial Officer of Employer. Executive agrees to devote Executive's best efforts and substantially all of Executive's business time, attention, energy and skill to perform Executive's duties as Executive Vice President and Chief Financial Officer of Employer. 2. Term. The term of this Agreement shall commence on November 17, 1997 and expire on November 17, 2000 (the "Employment Term"). 3. Compensation and Related Matters. (a) Base Salary. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than Two Hundred Thousand Dollars ($200,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board of Trustees of PGRT (the "Board"), based on periodic reviews of Executive's performance conducted on at least an annual basis. Executive's Base Compensation shall be increased to Two Hundred Fifteen Thousand Dollars ($215,000) on July 1, 1998 and to Two Hundred Twenty-Five Thousand Dollars ($225,000) on July 1, 1999. (b) Bonus. In addition to Base Compensation, Executive shall be entitled to payment of a cash bonus in the amount of $20,000 on January 15, 1998 and the Board and the Committee, in their sole and absolute discretion, may, but in no event shall be obligated to, authorize the payment of additional cash bonuses (a "Performance Bonus Distribution") to Executive based upon achievement of such corporate and individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time. (c) Benefits. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. (d) Expenses. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. (e) Vacations. During the Employment Term, Executive shall be entitled to vacation in accordance with Employer's practices, as such practices may be amended or modified 2 from time to time by Employer, provided that Executive shall be entitled to at least three (3) weeks paid vacation in each full calendar year. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is two (2) weeks. Executive shall be entitled to a payment for any vacation time which has accrued but has not been used as of the date of the termination of Executive's employment with Employer, unless Executive's employment is terminated pursuant to Section 5(a)(ii) hereof. 4. Share Options and Grants. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 70,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately (i) upon the death or disability of Executive or (ii) upon termination of this Agreement and Executive's employment for any reason other than (A) a termination for cause or by Employer or (B) if Executive terminates Executives employment for any reason other than pursuant to Section 5(b)(i) hereof. In the case of a termination for cause or if Executive terminates Executives employment for any reason other than pursuant to Section 5(b)(i) hereof, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Stock Incentive Plan all Options vested prior to such termination. In addition, on the date hereof, PGRT shall grant to Executive 10,000 shares of beneficial interests of PGRT. 5. Termination and Termination Benefits. (a) Termination by Employer. (i) Without Cause. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, the "effective date of termination" shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination. 3 (ii) With Cause. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (1) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (2) Executive's conviction of (or pleading nolo contendere to) a felony, (3) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (4) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (3) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (5) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) Disability. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend 4 Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) Termination by Executive. (i) After Change of Control. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following (x) any "change of control" of Employer and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event or (y) any relocation of Executive's office to a location outside of the Chicago metropolitan area. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). For purposes of this Section 5(b)(i), (A) a "change of control" of Employer shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer's assets or combination of the foregoing transactions (a 5 "Transaction"), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were directors of Employer immediately before the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or a majority of the board of directors of any successor to Employer, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change) or (2) the compensation package for Executive. (ii) Without Good Reason. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. (c) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. 6 (d) Termination Compensation. In the event of a termination of this Agreement pursuant to Section 5(a)(i) or 5(b)(i) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to the greater of (i) one hundred percent (100%) of Executive's then current annual Base Compensation and (ii) one hundred percent (100%) of the remaining aggregate Base Compensation payable to Executive over the remainder of the Employment Term. 6. Covenants of Executive. (a) No Conflicts. Executive represents and warrants that Executive is not personally subject to any agreement, order or decree which restricts Executive's acceptance of this Agreement and the performance of Executive's duties with Employer hereunder. (b) Non-Competition. In return for the performance of the management duties described in Section 1 hereof, during the Employment Term and, in the event of the termination of this Agreement pursuant to the provisions of Section 5(a)(ii) or 5(b)(ii) hereof, for a period of two years thereafter, Executive shall not, directly or indirectly, in any capacity whatsoever, either on Executive's own behalf or on behalf of any other person or entity with whom Executive may be employed or associated, own any interest in, participate or engage in the day-to-day supervision, management, development, marketing or operation of any office or industrial real estate facilities or such other business as Employer may be engaged in during the Employment Term (the "Business") which is competitive with any of Employer's facilities. For purposes hereof, a facility will be deemed competitive with one of Employer's facilities if such facility is located within ten (10) miles of a facility owned, operated or managed by Employer or within ten (10) miles of a facility which Employer is developing or with respect to which Employer has signed a letter of intent or term sheet or binding contract for the acquisition, development or management thereof dated on or prior to the date of such termination. Furthermore, for a period of two years after any applicable Section 5 termination event, Executive shall not, directly or indirectly, solicit, attempt to hire or hire any employee or client of Employer or solicit or attempt to lease space to or lease space to any tenant of Employer. Notwithstanding the foregoing, nothing herein shall prohibit Executive from owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise. (c) Non-Disclosure. During the Employment Term and for a period of two years after the expiration or termination of this Agreement for any reason, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information which derives independent economic value, actual or potential, with respect to Employer from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade 7 secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive prior to or during the course of Executive's service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense which does not relate to Employer. (d) Business Opportunities. During the Employment Term, Executive agrees to bring to Employer any and all business opportunities which come to Executive's attention for the acquisition, development, management, leasing or marketing of real estate for industrial or office use. In the event that Employer elects not to participate or take advantage of any such business opportunity, upon termination of Executive's employment with Employer for any reason, Executive shall be free to pursue such business opportunity, provided that such business opportunity does not cause any tenant to relocate from a facility owned and/or operated by Employer, PGRT or any of their respective subsidiaries. (e) Return of Documents. Upon termination of Executive's services with Employer, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Employer within Executive's possession or under Executive's control. (f) Equitable Relief. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Employer shall be entitled, in addition to any other remedy which it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to the terms and conditions hereof. (g) Acknowledgment. Executive acknowledges that Executive will be directly and materially involved as a senior executive in all important policy and operational decisions of Employer. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Employer and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect Employer, its other partners and the public from the unfair competition of Executive who, as a result of Executive's performance of services on behalf of Employer, will have had unlimited access to the most confidential and important information of Employer, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that Executive will be able to earn a reasonable livelihood following termination of Executive's services notwithstanding enforcement of the covenants contained herein. 7. Prior Agreements. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 8 8. Assignment. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 9. Successor to Employer. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(b)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 10. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: (a) if to Executive, to: W. Michael Karnes C/O Prime Group Realty Trust 77 W. Wacker Dr. Suite 3900 Chicago, IL. 60601 9 (b) if to Employer, to: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer With a copy to: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: General Counsel and to: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg Any notice, claim, demand, request or other communication given as provided in this Section 10, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 10. 11. Amendment. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 12. Waiver of Breach. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 13. Severability. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual 10 Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 14. Indemnification by Executive. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 15. Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY TRUST By: /s/ Richard S. Curto ------------------------------ Title: President ----------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its General Partner By: /s/ Richard S. Curto ------------------------ Title: President --------------------- EXECUTIVE: /s/ W. Michael Karnes ---------------------------------- W. Michael Karnes Document Number: 237155.8 March 28, 1998 12 EX-10.7 11 EXHIBIT 10.7 Exhibit 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and among Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), Prime Group Realty, L.P., a Delaware limited partnership and the operating partnership for PGRT ("Prime") (Prime and PGRT are hereinafter sometimes collectively referred to as "Employer"), and Robert J. Rudnik, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of office properties and the management thereof. C. Executive wishes to commit to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. EMPLOYMENT AND DUTIES. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the Executive Vice President, General Counsel and Secretary of Employer on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer. The Chief Executive Officer or the President of Employer may from time to time further define and clarify Executive's duties and services hereunder as Executive Vice President, General Counsel and Secretary of Employer. Executive shall have no obligation to devote full time to Executive's duties, it being expressly understood that Executive has other professional and management duties and responsibilities to companies other than Employer. 2. TERM. The term of this Agreement shall commence on November 17, 1997 and expire on November 17, 2000 (the "Employment Term"). 3. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than One Hundred Fifty Thousand Dollars ($150,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board of Trustees of PGRT (the "Board"), based on periodic reviews of Executive's performance conducted on at least an annual basis. (b) BONUS. In addition to Base Compensation, the Board and the Committee, in their sole and absolute discretion, may, but in no event shall be obligated to, authorize the payment of a cash bonus (a "Performance Bonus Distribution") to Executive based upon achievement of such corporate and individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time. (c) BENEFITS. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. (d) EXPENSES. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. (e) VACATIONS. During the Employment Term, Executive shall be entitled to vacation in accordance with Employer's practices, as such practices may be amended or modified from time to time by Employer, provided that Executive shall be entitled to at least three (3) weeks paid vacation in each full calendar year. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that 2 Executive may accrue and carry over to the next year is two (2) weeks. Executive shall be entitled to a payment for any vacation time which has accrued but has not been used as of the date of the termination of Executive's employment with Employer, unless Executive's employment is terminated pursuant to Section 5(a)(ii) hereof. 4. SHARE OPTIONS. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 85,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately (i) upon the death or disability of Executive or (ii) upon termination of this Agreement and Executive's employment for any reason other than (A) a termination for cause by Employer or (B) if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof. In the case of a termination for cause or if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Share Incentive Plan all Options vested prior to such termination. 5. TERMINATION AND TERMINATION BENEFITS. (a) TERMINATION BY EMPLOYER. (i) WITHOUT CAUSE. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, the "effective date of termination" shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination. (ii) WITH CAUSE. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice 3 of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (1) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (2) Executive's conviction of (or pleading nolo contendere to) a felony, (3) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (4) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (3) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (5) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) DISABILITY. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive 4 commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) TERMINATION BY EXECUTIVE. (i) AFTER CHANGE OF CONTROL. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following any "change of control" of Employer and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). For purposes of this Section 5(b)(i), (A) a "change of control" of Employer shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer's assets or combination of the foregoing transactions (a "Transaction"), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company 5 involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were directors of Employer immediately before the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or a majority of the board of directors of any successor to Employer, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change) or (2) the compensation package for Executive. (ii) WITHOUT GOOD REASON. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. (c) DEATH. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (d) TERMINATION COMPENSATION. In the event of a termination of this Agreement pursuant to Section 5(a)(i), 5(a)(iii) or 5(b)(i) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to (i) in 6 the case of a termination pursuant to Section 5(a)(i) or 5(a)(iii) hereof, the greater of (A) fifty percent (50%) of Executive's then current annual Base Compensation and (B) fifty percent (50%) of the remaining aggregate Base Compensation payable to Executive over the remainder of the Employment Term or (ii) in the case of a termination pursuant to Section 5(b)(i) hereof, the greater of (A) one hundred percent (100%) of Executive's then current annual Base Compensation and (B) one hundred percent (100%) of the remaining aggregate Base Compensation payable to Executive over the remainder of the Employment Term. 6. COVENANTS OF EXECUTIVE. (a) NO CONFLICTS. Executive represents and warrants that Executive is not personally subject to any agreement, order or decree which restricts Executive's acceptance of this Agreement and the performance of Executive's duties with Employer hereunder. (b) NON-COMPETITION. In return for the performance of the management duties described in Section 1 hereof, during the Employment Term and, in the event of the termination of this Agreement pursuant to the provisions of Section 5(a)(ii) or 5(b)(ii) hereof, for a period of two years thereafter, Executive shall not, directly or indirectly, in any capacity whatsoever, either on Executive's own behalf or on behalf of any other person or entity with whom Executive may be employed or associated, own any interest in, participate or engage in the day-to-day supervision, management, development, marketing or operation of any office or industrial real estate facilities or such other business as Employer may be engaged in during the Employment Term (the "Business") which is competitive with any of Employer's facilities. For purposes hereof, a facility will be deemed competitive with one of Employer's facilities if such facility is located within ten (10) miles of a facility owned, operated or managed by Employer or within ten (10) miles of a facility which Employer is developing or with respect to which Employer has signed a letter of intent or term sheet or binding contract for the acquisition, development or management thereof dated on or prior to the date of such termination. Furthermore, for a period of two years after any applicable Section 5 termination event, Executive shall not, directly or indirectly, solicit, attempt to hire or hire any employee or client of Employer or solicit or attempt to lease space to or lease space to any tenant of Employer. Notwithstanding the foregoing, nothing herein shall prohibit Executive from owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise. (c) NON-DISCLOSURE. During the Employment Term and for a period of two years after the expiration or termination of this Agreement for any reason, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information which derives independent economic value, actual or potential, with respect to Employer from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade 7 secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive prior to or during the course of Executive's service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense which does not relate to Employer. (d) BUSINESS OPPORTUNITIES. During the Employment Term, Executive agrees to bring to Employer any and all business opportunities which come to Executive's attention for the acquisition, development, management, leasing or marketing of real estate for industrial or office use. In the event that Employer elects not to participate or take advantage of any such business opportunity, upon termination of Executive's employment with Employer for any reason, Executive shall be free to pursue such business opportunity, provided that such business opportunity does not cause any tenant to relocate from a facility owned and/or operated by Employer, PGRT or any of their respective subsidiaries. (e) RETURN OF DOCUMENTS. Upon termination of Executive's services with Employer, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Employer within Executive's possession or under Executive's control. (f) EQUITABLE RELIEF. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Employer shall be entitled, in addition to any other remedy which it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to the terms and conditions hereof. (g) ACKNOWLEDGMENT. Executive acknowledges that Executive will be directly and materially involved as a senior executive in all important policy and operational decisions of Employer. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Employer and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect Employer, its other partners and the public from the unfair competition of Executive who, as a result of Executive's performance of services on behalf of Employer, will have had unlimited access to the most confidential and important information of Employer, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that Executive will be able to earn a reasonable livelihood following termination of Executive's services notwithstanding enforcement of the covenants contained herein. 7. PRIOR AGREEMENTS. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 8. ASSIGNMENT. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer 8 may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 9. SUCCESSOR TO EMPLOYER. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(b)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 10. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: (a) if to Executive, to: Robert J. Rudnik 1366 Kimmer Court Lake Forest, IL 60045 (b) if to Employer, to: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer WITH A COPY TO: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: General Counsel 9 AND TO: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg Any notice, claim, demand, request or other communication given as provided in this Section 10, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 10. 11. AMENDMENT. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 12. WAIVER OF BREACH. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 13. SEVERABILITY. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 14. INDEMNIFICATION BY EXECUTIVE. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 10 15. GOVERNING LAW. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY TRUST By: /s/ Richard S. Curto ----------------------------- Title: President ----------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its General Partner By: /s/ Richard S. Curto ----------------------------- Title: President ----------------------------- EXECUTIVE: /s/ Robert J. Rudnik ----------------------------- Robert J. Rudnik 12 EX-10.8 12 EXHIBIT 10.8 Exhibit 10.8 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and among Prime Group Realty Trust, a Maryland real estate investment trust ("PGRT"), Prime Group Realty, L.P., a Delaware limited partnership and the operating partnership for PGRT ("Prime") (Prime and PGRT are hereinafter sometimes collectively referred to as "Employer"), and Jeffrey A. Patterson, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of office properties and the management thereof. C. Executive wishes to commit to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. EMPLOYMENT AND DUTIES. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the Executive Vice President and Chief Investment Officer of Employer on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer. The Chief Executive Officer or the President of Employer may from time to time further define and clarify Executive's duties and services hereunder as Executive Vice President and Chief Investment Officer of Employer. Executive agrees to devote Executive's best efforts and substantially all of Executive's business time, attention, energy and skill to perform Executive's duties as Executive Vice President and Chief Investment Officer of Employer. 2. TERM. The term of this Agreement shall commence on November 17, 1997 and expire on November 17, 2000 ("Employment Term"). 3. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than Two Hundred Thousand Dollars ($200,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board of Trustees of PGRT (the "Board"), based on periodic reviews of Executive's performance conducted on at least an annual basis. (b) BONUS. In addition to Base Compensation, the Board and the Committee, in their sole and absolute discretion, may, but in no event shall be obligated to, authorize the payment of a cash bonus (a "Performance Bonus Distribution") to Executive based upon achievement of such corporate and individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time. (c) BENEFITS. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. (d) EXPENSES. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. (e) VACATIONS. During the Employment Term, Executive shall be entitled to vacation in accordance with Employer's practices, as such practices may be amended or modified from time to time by Employer, provided that Executive shall be entitled to at least three (3) weeks paid vacation in each full calendar year. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that 2 Executive may accrue and carry over to the next year is two (2) weeks. Executive shall be entitled to a payment for any vacation time which has accrued but has not been used as of the date of the termination of Executive's employment with Employer, unless Executive's employment is terminated pursuant to Section 5(a)(ii) hereof. 4. SHARE OPTIONS AND GRANTS. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 85,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately (i) upon the death or disability of Executive or (ii) upon termination of this Agreement and Executive's employment for any reason other than (A) a termination for cause by Employer or (B) if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof. In the case of a termination for cause or if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Share Incentive Plan all Options vested prior to such termination. In addition, on the date hereof, PGRT Executive shall be entitled to receive 110,000 shares of beneficial interests of PGRT in exchange for certain assets contributed by Executive to Prime pursuant to the Formation Agreement dated November 17, 1997 among PGRT, Prime, Prime Group Services, Inc., The Prime Group, Inc., Prime Group Limited Partnership and Executive, which shares shall be subject to pro-rata forfeiture (based on number of days) if Executive voluntarily terminates Executive's employment with Employer prior to November 17, 1998. Such shares shall not be subject to forfeiture in the event of termination of Executive's employment with Employer for any other reason. 5. TERMINATION AND TERMINATION BENEFITS. (a) TERMINATION BY EMPLOYER. (i) WITHOUT CAUSE. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base 3 Compensation. For purposes of this Agreement, the "effective date of termination" shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination. (ii) WITH CAUSE. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (1) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (2) Executive's conviction of (or pleading nolo contendere to) a felony, (3) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (4) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (3) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (5) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) DISABILITY. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of calculating Executive's 4 pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) TERMINATION BY EXECUTIVE. (i) AFTER CHANGE OF CONTROL. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following any "change of control" of Employer and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). For purposes of this Section 5(b)(i), (A) a "change of control" of Employer shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of 5 Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer's assets or combination of the foregoing transactions (a "Transaction"), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were directors of Employer immediately before the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or a majority of the board of directors of any successor to Employer, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change) or (2) the compensation package for Executive. (ii) WITHOUT GOOD REASON. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. (c) DEATH. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by 6 Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (d) TERMINATION COMPENSATION. In the event of a termination of this Agreement pursuant to Section 5(a)(i) or 5(b)(i) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to the greater of (i) one hundred percent (100%) of Executive's then current annual Base Compensation and (ii) one hundred percent (100%) of the remaining aggregate Base Compensation payable to Executive over the remainder of the Employment Term. 6. COVENANTS OF EXECUTIVE. (a) NO CONFLICTS. Executive represents and warrants that Executive is not personally subject to any agreement, order or decree which restricts Executive's acceptance of this Agreement and the performance of Executive's duties with Employer hereunder. (b) NON-COMPETITION. In return for the performance of the management duties described in Section 1 hereof, during the Employment Term and, in the event of the termination of this Agreement pursuant to the provisions of Section 5(a)(ii) or 5(b)(ii) hereof, for a period of two years thereafter, Executive shall not, directly or indirectly, in any capacity whatsoever, either on Executive's own behalf or on behalf of any other person or entity with whom Executive may be employed or associated, own any interest in, participate or engage in the day-to-day supervision, management, development, marketing or operation of any office or industrial real estate facilities or such other business as Employer may be engaged in during the Employment Term (the "Business") which is competitive with any of Employer's facilities. For purposes hereof, a facility will be deemed competitive with one of Employer's facilities if such facility is located within ten (10) miles of a facility owned, operated or managed by Employer or within ten (10) miles of a facility which Employer is developing or with respect to which Employer has signed a letter of intent or term sheet or binding contract for the acquisition, development or management thereof dated on or prior to the date of such termination. Furthermore, for a period of two years after any applicable Section 5 termination event, Executive shall not, directly or indirectly, solicit, attempt to hire or hire any employee or client of Employer or solicit or attempt to lease space to or lease space to any tenant of Employer. Notwithstanding the foregoing, nothing herein shall prohibit Executive from owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise. (c) NON-DISCLOSURE. During the Employment Term and for a period of two years after the expiration or termination of this Agreement for any reason, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information which derives independent economic value, actual or potential, with respect to Employer 7 from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive prior to or during the course of Executive's service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense which does not relate to Employer. (d) BUSINESS OPPORTUNITIES. During the Employment Term, Executive agrees to bring to Employer any and all business opportunities which come to Executive's attention for the acquisition, development, management, leasing or marketing of real estate for industrial or office use. In the event that Employer elects not to participate or take advantage of any such business opportunity, upon termination of Executive's employment with Employer for any reason, Executive shall be free to pursue such business opportunity, provided that such business opportunity does not cause any tenant to relocate from a facility owned and/or operated by Employer, PGRT or any of their respective subsidiaries. (e) RETURN OF DOCUMENTS. Upon termination of Executive's services with Employer, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Employer within Executive's possession or under Executive's control. (f) EQUITABLE RELIEF. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Employer shall be entitled, in addition to any other remedy which it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to the terms and conditions hereof. (g) ACKNOWLEDGMENT. Executive acknowledges that Executive will be directly and materially involved as a senior executive in all important policy and operational decisions of Employer. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Employer and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect Employer, its other partners and the public from the unfair competition of Executive who, as a result of Executive's performance of services on behalf of Employer, will have had unlimited access to the most confidential and important information of Employer, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that Executive will be able to earn a reasonable livelihood following termination of Executive's services notwithstanding enforcement of the covenants contained herein. 7. PRIOR AGREEMENTS. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and 8 Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 8. ASSIGNMENT. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 9. SUCCESSOR TO EMPLOYER. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(b)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 10. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: (a) if to Executive, to: Jeffrey A. Patterson 403 N. Lincoln Hinsdale, IL 60521 WITH A COPY TO: Donatelli & Coules 15 Salt Creek Lane, Suite 312 Hinsdale, IL 60521 Attn: Mark R. Donatelli (b) if to Employer, to: Prime Group Realty Trust Suite 3900 9 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer WITH A COPY TO: Prime Group Realty Trust Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: General Counsel AND TO: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg Any notice, claim, demand, request or other communication given as provided in this Section 10, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 10. 11. AMENDMENT. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 12. WAIVER OF BREACH. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 13. SEVERABILITY. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the 10 Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 14. INDEMNIFICATION BY EXECUTIVE. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 15. GOVERNING LAW. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY TRUST By:/s/ Richard S. Curto --------------------------- Title: President --------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its General Partner By:/s/ Richard S. Curto --------------------------- Title: President --------------------------- EXECUTIVE: /s/ Jeffrey A. Patterson -------------------------------- Jeffrey A. Patterson DOCUMENT NUMBER: 237990.6 March 23, 1998 12 EX-10.9 13 EXHIBIT 10.9 EMPLOYMENT AGREEMENT Exhibit 10.9 THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and between Prime Group Realty, L.P., a Delaware limited partnership ("Employer"), and Kevork M. Derderian, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of office properties and the management thereof. C. Executive wishes to commit to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. EMPLOYMENT AND DUTIES. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the President of Employer's Office Division on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer. The Chief Executive Officer or the President of Employer may from time to time further define and clarify Executive's duties and services hereunder as President of Employer's Office Division, which principal duties will include the development, management, leasing, marketing and acquisition of office properties. Executive agrees to devote Executive's best efforts and substantially all of Executive's business time, attention, energy and skill to perform Executive's duties as President of Employer's Office Division. 2. TERM. The term of this Agreement shall commence on November 17, 1997 and expire on November 17, 2000 (the "Employment Term"). 3. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than Two Hundred Thousand Dollars ($200,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board of Trustees (the "Board") of Prime Group Realty Trust ("PGRT"), the general partner of Prime, based on periodic reviews of Executive's performance conducted on at least an annual basis. (b) BONUS. In addition to Base Compensation, Executive shall have the right to receive, and Employer agrees to distribute to Executive, a performance bonus distribution for each calendar year during the Employment Term, commencing on January 1, 1998, in such amounts as determined by the two point formula delineated hereinbelow (collectively, a yearly "Performance Bonus Distribution"); provided, however, that the aggregate Performance Bonus Distribution for any calendar year distributable in accordance with the provisions of this Section 3(b) shall in no event exceed 100% of the Base Compensation for such calendar year. The amount of the Performance Bonus Distribution for each calendar year distributable to Executive hereunder shall be determined by the Committee based upon the achievement of Employer's annual business plan approved by the Board for such calendar year, as reflected in the audited financial statements of Employer prepared in accordance with generally accepted accounting principles and auditing standards and practices, consistently applied ("GAAP"). Prior to issuance of the final audited financial statements for each calendar year, Executive shall have the right to review and approve or challenge any calculation or determination of the amount of the Performance Bonus Distribution distributable for such calendar year. Any amount of Performance Bonus Distribution required to be distributed to Executive for any calendar year during the Employment Term shall be distributed by Employer to Executive during the pay period of Employer following finalization of the audit for such calendar year and final review and approval of the bonus calculation by the Committee and, in all events, on or before April 15 of the year immediately following the end of the calendar year for which such Performance Bonus Distribution is attributable. The two point formula to determine a Performance Bonus Distribution for any calendar year during the Employment Term shall be as follows: (i) FUNDS FROM OPERATIONS. Executive's Performance Bonus Distribution in an amount of up to seventy-five percent (75%) of Executive's Base Compensation for any given calendar year shall be based on Employer's Funds From Operations publicly announced by Employer ("FFO") such calendar year in relation to projected budget for FFO disclosed to shareholders of PGRT set forth in Employer's Board approved annual business plan for such calendar year ("Public FFO") as follows: (A) If FFO is less than Public FFO, Executive shall not be entitled to any Performance Bonus Distribution under this Section 3(b)(i). (B) If FFO is one hundred and three percent (103%) or more of Public FFO, Executive shall be entitled to a Performance Bonus Distribution under this Section 3(b)(i) equal to seventy-five percent (75%) of Executive's Base Compensation for such calendar year. 2 (C) If FFO is equal to Public FFO but less than one hundred and three percent (103%) of Public FFO, Executive shall be entitled to a Performance Bonus Distribution under this Section 3(b)(i) equal to thirty seven and one-half percent (37.5%) of Executive's Base Compensation for such calendar year. (D) If FFO is greater than Public FFO but less than one hundred and three percent (103%) of Public FFO, then a pro rata adjustment shall be made to the Performance Bonus Distribution to which Executive is entitled under this Section 3(b)(i) for such calendar year. (ii) DISCRETIONARY. Executive's Performance Bonus Distribution in an amount of up to twenty-five percent (25%) of Executive's Base Compensation for any given calendar year shall be determined at the sole discretion of the Board or the Committee based upon achievement of such corporate or individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time. Within ninety (90) days after the date hereof, Employer and Executive shall negotiate in good faith a revised Performance Bonus Distribution formula which more accurately measures the performance by Executive of Executive's duties and responsibilities related to Employer's Office Division for which Executive has direct authority and oversight. (c) BENEFITS. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. (d) EXPENSES. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. Subject to the policies and procedures referred to in the previous sentence, Employer agrees to reimburse Executive 3 for membership dues for the following organizations (i) NACORE, (ii) ULI and (iii) U.S. Green Building - Council and for travel and related expenses incurred by Executive to attend the annual conventions and board and council meetings of such organizations. (e) VACATIONS. During the Employment Term, Executive shall be entitled to vacation in accordance with Employer's practices, as such practices may be amended or modified from time to time by Employer, provided that Executive shall be entitled to at least four (4) weeks paid vacation in each full calendar year. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is two (2) weeks. Executive shall be entitled to a payment for any vacation time which has accrued but has not been used as of the date of the termination of Executive's employment with Employer, unless Executive's employment is terminated pursuant to Section 5(a)(ii) hereof. 4. SHARE OPTIONS. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 70,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately (i) upon the death or disability of Executive or (ii) upon termination of this Agreement and Executive's employment for any reason other than (A) a termination for cause by Employer or (B) if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof. In the case of a termination for cause or if Executive terminates Executive's employment for any reason other than pursuant to Section 5(b)(i) hereof, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Share Incentive Plan all Options vested prior to such termination. 5. TERMINATION AND TERMINATION BENEFITS. (a) TERMINATION BY EMPLOYER. (i) WITHOUT CAUSE. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus 4 Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, the "effective date of termination" shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination. (ii) WITH CAUSE. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (1) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (2) Executive's conviction of (or pleading nolo contendere to) a felony, (3) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (4) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (3) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (5) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) DISABILITY. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs 5 and (C) be entitled to the benefits set forth in Sections 3(c) hereof (or the after-tax cash equivalent) up to the effective date of such termination, and be entitled to the benefits set forth in Sections 3(d) and 3(e) hereof up to the date of such termination. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) TERMINATION BY EXECUTIVE. (i) AFTER CHANGE OF CONTROL. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following any "change of control" of PGRT and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). For purposes of this Section 5(b)(i), (A) a "change of control" of PGRT shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any 6 group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of PGRT), becomes the beneficial owner of shares of beneficial interests of PGRT having at least fifty percent (50%) of the total number of votes that may be cast for the election of trustees of PGRT; (2) the merger or other business combination of PGRT or Employer, sale of all or substantially all of PGRT's or Employer's assets or combination of the foregoing transactions (a "Transaction"), other than a Transaction immediately following which the shareholders of PGRT immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were trustees of PGRT immediately before the beginning of such period (the "Incumbent Trustees") shall cease to constitute at least a majority of the Board or a majority of the board of trustees of any successor to PGRT, provided that, any trustee who was not a trustee as of the date hereof shall be deemed to be an Incumbent Trustee if such trustee was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the trustees who then qualified as Incumbent Trustees either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change, unless the new title is not President) or (2) the compensation package for Executive. (ii) WITHOUT GOOD REASON. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination. (c) DEATH. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or 7 beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (d) TERMINATION COMPENSATION. In the event of a termination of this Agreement pursuant to Section 5(a)(i) or 5(b)(i) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to (i) in the case of a termination pursuant to Section 5(a)(i) hereof, the product of (A) the sum of (1) Executive's then current annual Base Compensation and (2) Executive's last annualized Performance Bonus Distribution times (B) a fraction, the numerator of which is the number of days between such date of termination and expiration of the Employment Term (but in no event less than 365) and the denominator of which is 365 or (ii) in the case of a termination pursuant to Section 5(b)(i) hereof, two times the sum of (A) Executive's then current annual Base Compensation and (B) Executive's last annualized Performance Bonus Distribution. For purposes of calculating Executive's Termination Compensation, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution component of the Termination Compensation calculation shall be deemed to be 50% of Executive's then current annual Base Compensation. 6. COVENANTS OF EXECUTIVE. (a) NO CONFLICTS. Executive represents and warrants that Executive is not personally subject to any agreement, order or decree which restricts Executive's acceptance of this Agreement and the performance of Executive's duties with Employer hereunder. (b) NON-COMPETITION. In return for the performance of the management duties described in Section 1 hereof, during the Employment Term, and for a period of two years after any applicable Section 5 termination event, Executive shall not, directly or indirectly, attempt to hire or hire any employee or client of Employer or solicit or attempt to lease space to or lease space to any tenant of Employer. Notwithstanding the foregoing, nothing herein shall prohibit Executive from owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise. (c) NON-DISCLOSURE. During the Employment Term and for a period of two years after the expiration or termination of this Agreement for any reason, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information which derives independent economic value, actual or potential, with respect to Employer from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to 8 maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive prior to or during the course of Executive's service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense which does not relate to Employer. (d) BUSINESS OPPORTUNITIES. During the Employment Term, Executive agrees to bring to Employer any and all business opportunities which come to Executive's attention for the acquisition, development, management, leasing or marketing of real estate for industrial or office use. In the event that Employer elects not to participate or take advantage of any such business opportunity, upon termination of Executive's employment with Employer for any reason, Executive shall be free to pursue such business opportunity, provided that such business opportunity does not cause any tenant to relocate from a facility owned and/or operated by Employer, PGRT or any of their respective subsidiaries. (e) RETURN OF DOCUMENTS. Upon termination of Executive's services with Employer, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Employer within Executive's possession or under Executive's control. (f) EQUITABLE RELIEF. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Employer shall be entitled, in addition to any other remedy which it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to the terms and conditions hereof. (g) ACKNOWLEDGMENT. Executive acknowledges that Executive will be directly and materially involved as a senior executive in all important policy and operational decisions of Employer. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Employer and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect Employer, its other partners and the public from the unfair competition of Executive who, as a result of Executive's performance of services on behalf of Employer, will have had unlimited access to the most confidential and important information of Employer, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that Executive will be able to earn a reasonable livelihood following termination of Executive's services notwithstanding enforcement of the covenants contained herein. 7. PRIOR AGREEMENTS. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 9 8. ASSIGNMENT. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 9. SUCCESSOR TO EMPLOYER. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(b)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 10. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: (a) if to Executive, to: Kevork M. Derderian 680 Leland Court Lake Forest, IL 60045 WITH A COPY TO: J. Steve Santacruz Continental Offices, Ltd. 2700 River Road, Suite 109 Des Plaines, IL 60018 10 (b) if to Employer, to: Prime Group Realty, L.P. Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer WITH A COPY TO: Prime Group Realty, L.P. Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: General Counsel AND TO: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg Any notice, claim, demand, request or other communication given as provided in this Section 10, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 10. 11. AMENDMENT. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 12. WAIVER OF BREACH. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 13. SEVERABILITY. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual 11 Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 14. INDEMNIFICATION BY EXECUTIVE. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 15. GOVERNING LAW. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its General Partner By: /s/ Jeffrey A. Patterson ----------------------------- Jeffrey A. Patterson Title: Executive VP EXECUTIVE: /s/ Kevork M. Derderian ----------------------------- Kevork M. Derderian DOCUMENT NUMBER: 230515.5 March 23, 1998 13 EX-10.10 14 EXHIBIT 10.10 Exhibit 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 17th day of November, 1997 by and between Prime Group Realty, L.P., a Delaware limited partnership ("Employer"), and Edward S. Hadesman, an individual domiciled in the State of Illinois ("Executive"). W I T N E S S E T H A. Employer is engaged primarily in the ownership, management, leasing, marketing, acquisition, development and construction of office and industrial real estate facilities throughout the United States. B. Employer believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the development of industrial properties and the management thereof. C. Executive wishes to commit himself to serve Employer in the position set forth herein on the terms herein provided. D. The parties wish by this Agreement to set forth the terms and conditions of the employment relationship between Employer and Executive. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, Employer and Executive hereby agree as follows: 1. EMPLOYMENT AND DUTIES. During the Employment Term (as defined in Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to be employed by Employer, as the President of Employer's Industrial Division on the terms and conditions provided in this Agreement. Executive shall conduct, operate, manage and promote the business and business concept of Employer, and exercise such other powers and authority as are provided by the Partnership Agreement of Employer ("Partnership Agreement"). The Chief Executive Officer or the President of Employer may from time to time further define and clarify Executive's duties and services hereunder or under the Partnership Agreement as President of Employer's Industrial Division, which principal duties will include the development, management, leasing, marketing and acquisition of industrial properties. Executive agrees to devote Executive's best efforts and substantially all of Executive's business time, attention, energy and skill to perform Executive's duties as President of Employer's Industrial Division. Employer agrees to maintain the suburban office currently located at 3184 MacArthur Boulevard, Northbrook, Illinois or such other suburban location as may be mutually agreeable to Employer and Executive. Employer represents to Executive that it currently intends to engage in the acquisition and development of industrial properties. 2. TERM. The initial term of this Agreement (the "Initial Term") shall commence on November 17, 1997 and expire on November 17, 2000, provided, however, this Agreement shall automatically extend for one year terms following the Initial Term (each a "Renewal Term", together with the Initial Term, the "Employment Term"), unless prior to six (6) months, in the case of a non-renewal by Employer, or prior to thirty (30) days, in the case of a non-renewal by Executive, before the end of the Initial Term or any Renewal Term, as applicable, either party shall give the other written notice of its intention to terminate this Agreement. 3. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. As compensation for performing the services required by this Agreement during the Employment Term, Employer shall pay to Executive an annual salary of no less than Two Hundred Thousand Dollars ($200,000) ("Base Compensation"), payable in accordance with the general policies and procedures for payment of salaries to its executive personnel maintained, from time to time, by Employer (but no less frequently than monthly), subject to withholding for applicable federal, state, and local taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee (the "Committee") of the Board of Trustees (the "Board") of Prime Group Realty Trust ("PGRT"), the general partner of Employer, based on periodic reviews of Executive's performance conducted on at least an annual basis. (b) BONUS. In addition to Base Compensation, the Board and the Committee in its sole and absolute discretion may, but in no event shall be obligated to, authorize the payment of a cash bonus (a "Performance Bonus Distribution") to Executive based upon achievement of such partnership and individual performance goals and objectives as may be established or determined by the Board or the Committee from time to time which shall be determined in part by (i) the profitability of industrial properties acquired or developed by Employer for which Executive had primary responsibility and (ii) the profitability or success of PGRT. (c) BENEFITS. During the Employment Term and subject to the limitations and alternative rights set forth in this Section 3(c), Executive and Executive's eligible dependents shall have the right to participate in the medical and dental benefit plan to be established by Employer (which may include contributions by Executive) and in any other retirement, pension, insurance, health or other benefit plan or program that has been or is hereafter adopted by Employer (or in which Employer participates), as such plans and programs may be amended or modified from time to time by Employer, according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other executive officers of Employer. Employer expects to have in place a life insurance program in which Executive will be entitled to participate. If the participation of Executive would adversely affect the qualification of a plan intended to be qualified under Section 401(a) of the Internal Revenue Code as the same may be amended from time to time (the "Code"), Employer shall have the right to exclude Executive from that plan in return for Executive's participation in (i) a nonqualified deferred compensation plan or (ii) an arrangement providing substantially comparable benefits under a plan that is either a qualified or nonqualified under the Code at Employer's option. Employer agrees to provide Executive, at Employer's cost and expense, a membership in the Executive Sports and Fitness Center located at 77 W. Wacker Drive, Chicago, Illinois. (d) EXPENSES. Executive shall be reimbursed, subject to Employer's receipt of invoices or similar records as Employer may reasonably request in accordance with its policies and procedures, as such policies and procedures may be amended or modified from time to time by Employer, for all reasonable and necessary expenses incurred by Executive in the performance of Executive's duties hereunder, including expenses for business entertainment and meals (whether in or out of town) and gas for business travel, but excluding automobile insurance. (e) VACATIONS. During the Employment Term, Executive shall be entitled to vacation in accordance with Employer's practices, as such practices may be amended or modified from time to time by Employer, provided that Executive shall be entitled to at least three (3) weeks paid vacation in each full calendar year. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is two (2) weeks. Executive shall be entitled to a payment for any vacation time which has accrued but has not been used as of the date of the termination of Executive's employment with Employer, unless Executive's employment is terminated pursuant to Section 5(a)(ii) hereof. (f) AUTOMOBILE. During the Employment Term, Employer shall pay Executive an automobile allowance of $1350 per month. 4. SHARE OPTIONS. PGRT has established a share incentive plan (the "Share Incentive Plan"). The Share Incentive Plan initially provides, among other things, for the issuance from time to time to certain officers, directors and other employees of PGRT and Employer, including Executive, of share options. Pursuant to the Share Incentive Plan, on the date hereof, PGRT shall grant to Executive 70,000 share options ("Options") that will have such terms and conditions as are set forth in the Share Incentive Plan and the Share Option Agreement to be entered into between PGRT and Executive. Such Options granted to Executive shall vest immediately upon the death or disability of Executive or upon termination of this Agreement and Executive's employment for any reason other than a termination for cause by Employer. In the case of a termination for cause, all unvested Options shall be forfeited by Executive, but Executive shall have the right to exercise within the time period provided for in the Share Incentive Plan all Options vested prior to such termination for cause. 5. TERMINATION AND TERMINATION BENEFITS. (a) TERMINATION BY EMPLOYER. (i) WITHOUT CAUSE. Employer may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d), 3 3(e) and 3(f) hereof up to the effective date of such termination and (D) receive the Termination Compensation specified in Section 5(d) hereof. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (ii) WITH CAUSE. Employer may terminate this Agreement with cause immediately upon written notice to Executive. Employer may elect to require Executive to continue to perform Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In connection with the termination of Executive's employment pursuant to this Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to any bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d), 3(e) and 3(f) hereof up to the effective date of such termination. For purposes of this Section 5(a)(ii), "cause" shall mean (A) a finding by the Board that Executive has materially harmed Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance, (B) Executive's conviction of (or pleading nolo contendere to) a felony, (C) Executive's failure to perform (which shall not include inability to perform due to disability) in any material respects Executive's material duties under this Agreement after written notice specifying the failure and a reasonable opportunity to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion), (D) the breach by Executive of any of Executive's material obligations hereunder (other than those covered by clause (C) above) and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of Employer specifying in reasonable detail the nature of the breach, or (E) Executive's sanction (including restrictions, prohibitions and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation (provided that in the case of a sanction, such sanction materially impedes or impairs the ability of Executive to perform Executive's duties and exercise Executive's responsibilities hereunder in a satisfactory manner). (iii) DISABILITY. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days' written notice to Executive, either terminate this Agreement or suspend Executive's right to any Base Compensation or Performance Bonus Distributions without terminating this Agreement. In any such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such disability occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, 4 Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (C) be entitled to the benefits set forth in Sections 3(c) hereof (or the after-tax cash equivalent) up to the effective date of such termination, and be entitled to the benefits set forth in Sections 3(d), 3(e), and 3(f) hereof up to the date of such termination. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. In the event Employer elects to suspend Executive's right to Base Compensation and Performance Bonus Distributions, at such time as Executive is able to resume the duties required under this Agreement, Executive shall be entitled to receive Base Compensation and Performance Bonus Distributions from the date Executive commences the performance of such duties following the disability in accordance with the terms and provisions of this Agreement. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive's estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of this Agreement, the "date of disability" shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity. (b) TERMINATION BY EXECUTIVE. (i) AFTER CHANGE OF CONTROL. Executive may terminate this Agreement upon thirty (30) days' written notice to Employer following any "change of control" of Employer and a resulting "diminution event", each as defined below, but in no event later than two years after the change of control event. Executive shall continue to perform, at the election of Employer, Executive's duties under this Agreement for an additional thirty (30) days following notice of termination. In such event, Executive shall (A) be paid Executive's Base Compensation up to the effective date of such termination, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) be entitled to the benefits set forth in Sections 3(c), 3(d), 3(e) and 3(f) hereof up to the effective date of such termination and (D) receive an amount equal to two times the sum of (1) Executive's then current annual Base Compensation and (2) Executive's last annualized Performance Bonus Distribution (if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution shall be deemed to be 50% of Executive's then current Base Compensation). For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. For purposes of this Agreement, in the event Employer defaults in its obligation under Section 9 hereof and, as a consequence thereof, Executive's employment with Employer (or Employer's successor or assign) terminates, such termination shall be deemed to be a termination under this Section 5(b)(i). 5 For purposes of this Section 5(b)(i), (A) a "change of control" of Employer shall be deemed to have occurred if: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including a "group" as defined in Section 13(d)(3) of the Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or any group in which The Prime Group, Inc. or any of its affiliates has a significant interest and excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), becomes the beneficial owner of shares of common stock of Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer's assets or combination of the foregoing transactions (a "Transaction"), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder, other than The Prime Group, Inc. and its affiliates, owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the date hereof, the persons who were directors of Employer immediately before the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or a majority of the board of directors of any successor to Employer, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a "diminution event" shall mean any material diminution in (1) the duties and responsibilities of Executive (other than a mere title change, unless the new title is not President) or (2) the compensation package for Executive. (ii) WITHOUT GOOD REASON. Executive may terminate this Agreement and Executive's employment at any time for any reason or for no reason at all upon thirty (30) days' written notice to Employer, during which period Executive shall continue to perform Executive's duties under this Agreement if Employer so elects. In connection with the termination of Executive's employment pursuant to this Section 5(b)(ii), Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs and (B) be entitled to the benefits set forth in Sections 3(c), 3(d), 3(e) and 3(f) hereof up to the effective date of such termination. (c) DEATH. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In such event, Executive shall (A) be paid Executive's Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion of any bonus otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) hereof up to the 6 effective date of such death and, to the extent not previously paid, Executive shall be entitled to all bonuses payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such death occurs and (C) be entitled to the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d), 3(e) and 3(f) hereof up to the date of such death. This Section 5(c) shall not limit the entitlement of Executive, Executive's estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive's benefit. For purposes of calculating Executive's pro rata portion of any bonus pursuant to clause (B) in the previous sentence, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution, a pro rata portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive's then current annual Base Compensation. (d) TERMINATION COMPENSATION. In the event of a termination of this Agreement pursuant to Section 5(a)(i) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum ("Termination Compensation") equal to the product of (i) the sum of (a) Executive's then current annual Base Compensation and (b) Executive's last annualized Performance Bonus Distribution times (ii) a fraction, the numerator of which is the number of days between such date of termination and expiration of the Employment Term, and the denominator of which is 365. For purposes of calculating Executive's Termination Compensation, if the termination takes place prior to receipt by Executive of any Performance Bonus Distribution, the Performance Bonus Distribution component of the Termination Compensation calculation shall be deemed to be 50% of Executive's then current annual Base Compensation. 6. COVENANTS OF EXECUTIVE. (a) NO CONFLICTS. Executive represents and warrants that Executive is not personally subject to any agreement, order or decree which restricts Executive's acceptance of this Agreement and the performance of Executive's duties with Employer hereunder. (b) NON-COMPETITION. In return for the performance of the management duties described in Section 1 hereof, during the Employment Term, Executive shall not, directly or indirectly, in any capacity whatsoever, either on Executive's own behalf or on behalf of any other person or entity with whom Executive may be employed or associated, own any interest in, participate or engage in the day-to-day supervision, management, development, marketing or operation of any office or industrial real estate facilities or such other business as Employer may be actively engaged in during the Employment Term (the "Business"). Furthermore, for a period of one year after any applicable Section 5 termination event, Executive shall not, directly or indirectly, solicit, attempt to hire or hire any employee or client of Employer or solicit or attempt to lease space to or lease space to any tenant of Employer. Notwithstanding the foregoing, nothing herein shall prohibit Executive from (i) owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise, (ii) owning that certain 69-acre semi-improved industrial park located in Libertyville, Illinois, the office/industrial building located at 901 Technology Way, Libertyville Business Park, 7 Libertyville, Illinois, and any other real property not purchased by Employer under the terms of the Contribution Agreement between Executive, certain limited partnership controlled by Executive and Employer, (iii) soliciting, attempting to hire or hiring Tucker Magid and (iv) responding to contacts initiated by those tenants identified in Exhibit A attached hereto which occupy facilities owned and/or operated by Edward Hadesman and Executive (the "Tenants") and entering into leasing transactions with such Tenants provided that such transactions do not result in such Tenants relocating from a facility owned and/or operated by Employer, PGRT, or any of their respective subsidiaries. Executive shall be entitled to manage the building located at 901 Technology Way, Libertyville Business Park, Libertyville, Illinois, prior to their acquisition by PGRT, on the business time of Employer and Employer or PGRT or any of their respective subsidiaries will not receive any fees with respect to such property. (c) NON-DISCLOSURE. During the Employment Term and for a period of two years after the expiration or termination of this Agreement for any reason, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information which derives independent economic value, actual or potential, with respect to Employer from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive prior to or during the course of Executive's service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense which does not relate to Employer. (d) BUSINESS OPPORTUNITIES. During the Employment Term, Executive agrees to bring to Employer any and all business opportunities which come to Executive's attention for the acquisition, development, management, leasing or marketing of real estate for industrial or office use. In the event that Employer elects not to participate or take advantage of any such business opportunity, upon termination of Executive's employment with Employer for any reason, Executive shall be free to pursue such business opportunity, provided that such business opportunity does not cause any tenant to relocate from a facility owned and/or operated by Employer, PGRT or any of their respective subsidiaries. (e) RETURN OF DOCUMENTS. Upon termination of Executive's services with Employer, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Employer within Executive's possession or under Executive's control. (f) EQUITABLE RELIEF. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Employer shall be entitled, in addition to any other remedy which it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to 8 the terms and conditions hereof. (g) ACKNOWLEDGMENT. Executive acknowledges that Executive will be directly and materially involved as a senior executive in all important policy and operational decisions of Employer. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Employer and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect Employer, its other partners and the public from the unfair competition of Executive who, as a result of Executive's performance of services on behalf of Employer, will have had unlimited access to the most confidential and important information of Employer, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that Executive will be able to earn a reasonable livelihood following termination of Executive's services notwithstanding enforcement of the covenants contained herein. 7. PRIOR AGREEMENTS. This Agreement, together with the Stock Incentive Plan, supersedes and is in lieu of any and all other employment arrangements between Executive and Employer or its predecessor or any subsidiary and any and all such employment agreements and arrangements are hereby terminated and deemed of no further force or effect. 8. ASSIGNMENT. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Employer may assign all or any of its rights hereunder provided that substantially all of the assets of Employer are also transferred to the same party. 9. SUCCESSOR TO EMPLOYER. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement, in which case Executive shall be entitled to receive the compensation specified in Section 5(a)(i) hereof. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. 10. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered, sent by courier or by certified mail, postage or delivery charges prepaid, to the following addresses: 9 (a) if to Executive, to: Edward S. Hadesman 3184 MacArthur Blvd. Northbrook, IL 60062 WITH A COPY TO: Shefsky & Froelich Ltd. 444 N. Michigan Avenue Suite 2500 Chicago, IL 60611 Attn: James M. Teper (b) if to Employer, to: Prime Group Realty, L.P. Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: Chief Executive Officer WITH A COPY TO: Prime Group Realty, L.P. Suite 3900 77 West Wacker Drive Chicago, IL 60601 Attn: General Counsel AND TO: Winston & Strawn 35 West Wacker Drive Chicago, IL 60601 Attn: Wayne D. Boberg Any notice, claim, demand, request or other communication given as provided in this Section 10, if delivered personally, shall be effective upon delivery; and if given by courier, shall be effective one (1) business day after deposit with the courier if next day delivery is guaranteed; and if given by certified mail, shall be effective three (3) business days after deposit in the mail. Either party may change the address at which it is to be given notice by giving written notice to the other party as provided in this Section 10. 10 11. AMENDMENT. This Agreement may not be changed, modified or amended except in writing signed by both parties hereto. 12. WAIVER OF BREACH. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 13. SEVERABILITY. Employer and Executive each expressly agree and contract that it is not the intention of either party to violate any public policy, statutory or common law, and that if any covenant, sentence, paragraph, clause or combination of the same of this Agreement (a "Contractual Provision") is in violation of the law of any state where applicable, such Contractual Provision shall be void in the jurisdictions where it is unlawful, and the remainder of such Contractual Provision, if any, and the remainder of this Agreement shall remain binding on the parties such that such Contractual Provision shall be binding only to the extent that such Contractual Provision is lawful or may be lawfully performed under then applicable laws. In the event that any part of any Contractual Provision of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the Contractual Provision unenforceable, the parties hereto agree, and it is their desire, that such court shall substitute a judicially enforceable limitation in its place, and that the Contractual Provision, as so modified, shall be binding upon the parties as if originally set forth herein. 14. INDEMNIFICATION BY EXECUTIVE. Executive shall indemnify Employer for any and all damages, costs and expenses resulting from any material harm to Employer, its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance by Executive. Executive also shall indemnify Employer for any and all damages, costs and expenses resulting from Executive's acts of omission constituting reckless disregard of Executive's duties to Employer following notice thereof by Employer after it becomes aware of such conduct and Executive's failure to so cure within thirty (30) days. 15. INDEMNIFICATION BY EMPLOYER AND INSURANCE. The Partnership Agreement will contain normal and customary indemnification provisions whereby Employer agrees to indemnify the partners and officers of Employer, including Executive. In addition, during the Employment Term, Employer shall maintain appropriate D&O insurance coverage in such amount as may be determined by Employer in Employer's reasonable business judgment for the benefit of Employer's partners and officers, including Executive. 16. GOVERNING LAW. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Illinois, exclusive of the conflict of laws provisions of the State of Illinois. [signature page follows] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYER: PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust., its General Partner By: /s/ Jeffrey A. Patterson ---------------------------- Title: Executive Vice President ------------------------------ EXECUTIVE: /s/ Edward S. Hadesman - ------------------------------- Edward S. Hadesman 12 EXHIBIT A TENANTS 1. Rank Video Services America, Inc. 2. Motorola, Inc. 3. Major Reflector/National Service Industries 4. Arlington Industries 5. Laboratory Corporation of America 6. Northern Illinois Clinical Laboratories 7. Lionstone International 8. Sun Space Designs 9. Production Associates 10. Moore USA, Inc. 13 EX-10.13 15 EXHIBIT 10.13 Exhibit 10.13 EXECUTION COPY OPTION AGREEMENT by and between PRIME GROUP REALTY, L.P., a Delaware limited partnership and 300 N. LASALLE, L.L.C., an Illinois limited liability company Dated as of: November 17, 1997 OPTION AGREEMENT THIS OPTION AGREEMENT is made as of the 17th day of November, 1997, by and between 300 N. LASALLE, L.L.C., an Illinois liability company ("SELLER") and PRIME GROUP REALTY, L.P., a Delaware limited partnership ("PURCHASER"). WITNESSETH: WHEREAS, Seller, an affiliate of The Prime Group, Inc., an Illinois corporation ("PGI"), is the fee owner of the Parcel (as hereinafter defined) consisting of approximately 58,000 square feet of land located at 300 North LaSalle Street in Chicago, Illinois; and WHEREAS, on the date hereof, Purchaser is acquiring from PGI and certain of its affiliates interests in certain buildings, facilities and parcels of land; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows: ARTICLE I DEFINITIONS 1.01 CERTAIN DEFINITIONS. When used herein, the following terms shall have the respective meanings set forth opposite each such term: "AGREEMENT" means this Option Agreement, including the Exhibits attached hereto, which are by this reference incorporated herein and made a part hereof. "CLOSING" means the closing of the sale and purchase of the Parcel as evidenced by the delivery of the Deed thereto by Seller to Purchaser and the payment of the Purchase Price to Seller. "DEED" means a special warranty deed to be delivered by Seller to Purchaser at the Closing, conveying the Parcel to Purchaser subject only to the Permitted Title Exceptions. "LEGAL REQUIREMENTS" means all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, orders, directions and requirements of all governments and governmental authorities (including any local Board of Fire Underwriters) having jurisdiction of or over the Parcel or the operation thereof. "OPTION" shall mean the Purchaser's option to purchase the Parcel pursuant to the terms of this Agreement. -1- "OPTION PRICE" means a sum equal to 95.0% of the fair market value of the Parcel at the time of the exercise of the Option as determined by the parties hereto or (if the parties hereto do not agree), by a duly licensed independent third-party appraiser mutually agreed to by the Purchaser and the Seller. "PARCEL" means the real property containing approximately 58,000 square feet of land which is legally described on EXHIBIT A attached hereto, together with all improvements thereon and therein and all privileges, rights, easements, hereditaments and appurtenances thereto belonging. "PERMITTED TITLE EXCEPTIONS" means the matters listed and described on EXHIBIT B attached hereto. "TITLE COMMITMENT" means a commitment for an ALTA Form B Owner's Title Insurance Policy for the Parcel issued by the Title Insurer in the amount of the Option Price, covering title to the Parcel showing Seller as owner of the Parcel in fee simple, subject only to the Permitted Title Exceptions and other exceptions pertaining to liens or encumbrances of a definite or ascertainable amount with respect to the Parcel which may be removed by the payment of money at the Closing and which Seller shall so remove, and providing for full extended coverage over all general title exceptions contained in such policies and special endorsements mutually and reasonably agreed upon by Seller and Purchaser. In the event the Title Commitment discloses exceptions to title other than the Permitted Title Exceptions, Seller shall have the right to cause the Title Insurer to insure over such exceptions so long as the manner thereof is reasonably acceptable to Purchaser. "TITLE INSURER" means Chicago Title Insurance Company, First American Title Insurance Company or another reputable title insurance company designated by Seller and reasonably acceptable to Purchaser. "TITLE POLICY" means the title policies to be issued for the Parcel pursuant to Title Commitment, in the amount of the Option Price, insuring good and marketable fee simple title to the Parcel in Purchaser as of the Closing applicable to the Parcel, subject only to the Permitted Title Exceptions applicable thereto. 1.02 ADDITIONAL DEFINITIONS. The definitions of certain other terms are contained in the text of this Agreement. ARTICLE II PURCHASE AND SALE; OPTION; PURCHASE PRICE 2.01 PURCHASE AND SALE. Upon the exercise of the Option by the Purchaser, subject to the conditions and on the terms contained in this Agreement, Seller agrees to sell and convey and Purchaser agrees to purchase and acquire from Seller good and marketable fee simple title to the Parcel, subject to the Permitted Title Exceptions applicable thereto. -2- 2.02 THE OPTION. Purchaser shall have the right to exercise the Option at any time commencing on or after the date hereof and ending on November 17, 2007. Upon Purchaser's exercise of the Option, Purchaser shall have the right to select the date of the Closing, which date shall be reasonably acceptable to Seller and shall be no earlier than the date which is ninety (90) days after Purchaser's exercise of the Option and no later than November 17, 2007. 2.03 METHOD OF EXERCISE. Purchaser shall exercise the Option by giving Seller written notice of its election to exercise such Option at any time during the applicable time periods described in SECTIONS 2.02, in the manner provided in SECTION 9.08 for the giving of notices. 2.04 PURCHASE PRICE. At the Closing, Purchaser shall pay to Seller the Purchase Price in cash, by wire transfer of immediately available funds to a bank account designated by Seller. ARTICLE III CONDITIONS PRECEDENT TO CLOSING 3.01 The obligation of Purchaser to purchase the Parcel is subject to the condition that Seller shall perform each and every obligation of Seller under this Agreement to be performed by Seller on or before the date of the Closing. ARTICLE IV CLOSING MATTERS 4.01 POSSESSION, CLOSING ADJUSTMENTS AND EXPENSES. (a) Sole and exclusive possession of the Parcel, subject to the Permitted Title Exceptions applicable thereto shall be delivered to Purchaser concurrently with the Closing. (b) Following the Closing, Purchaser shall pay to Seller all rents which Purchaser shall collect with respect to the Parcel which are attributable to periods preceding the Closing, except that all such rents collected by Purchaser shall first be applied to satisfy all current rents due Purchaser; and Seller shall pay to Purchaser all rents received by Seller from any tenant with respect to the Parcel after the Closing which are attributable to periods succeeding the Closing. (c) All title charges and premiums shall be paid by Seller. All charges for additional title endorsements shall be paid by Purchaser. All state and county transfer taxes shall be paid by Seller. All municipal transfer taxes shall be paid by Purchaser. The parties shall each be solely responsible for the fees and disbursements of their respective counsel and other professional advisers. -3- 4.02 CLOSING. (a) On or before the Closing, Seller shall deliver to Purchaser the following: (i) the original Deed, in appropriate recordable form, for the Parcel, executed by Seller; (ii) an original affidavit executed by Seller, sufficient to exempt the transactions contemplated hereby from the withholding tax requirement imposed by Section 1445A of the Internal Revenue Code; (iii) an updated Title Commitment with respect thereto dated not earlier than fifteen (15) days prior to the Closing showing good and marketable fee simple title to the Parcel in Seller, subject only to the Permitted Title Exemptions applicable to the Parcel; and (iv) such other documents, instruments, certifications and confirmations as may be reasonably required and designated by Purchaser or the Title Insurer to fully effect and consummate the transactions contemplated hereby. (b) On or before the Closing, Purchaser shall deliver to Seller the following: (i) the Purchase Price; (ii) an original assumption agreement executed by Purchaser, pursuant to which Purchaser agrees to assume Seller's obligations, from and after the Closing Date, with respect to the Parcel, except to the extent otherwise specified by Purchaser and Seller; and (iii) such other documents, instruments, certifications and confirmations as may be reasonably required and designated by Seller or the Title Insurer to fully effect and consummate the transactions contemplated hereby. (c) Seller and Purchaser shall cooperate to provide original, executed certificates complying with the provisions of state, county and local law applicable to the determination of documentary and transfer taxes. -4- ARTICLE V COVENANTS, REPRESENTATIONS AND WARRANTIES 5.01 COVENANTS OF SELLER. (a) On the Closing, Seller shall tender possession of the Parcel to Purchaser in the same or similar condition the Parcel was in when last inspected by Purchaser or its agents or contractors prior to the date of this Agreement, except for ordinary wear and tear or changes resulting from actions taken by or on behalf of Purchaser or approved by Purchaser. (b) Seller has previously delivered or made available to Purchaser at Seller's sole cost and expense true, correct and complete copies of the following: (i) the title insurance policy insuring Seller's interest in the Parcel, disclosing no exceptions to title other than the Permitted Title Exceptions (and liens and encumbrances which will be removed at the Closing); (ii) the most recent real estate tax bills pertaining to the Parcel; and (iii) an environmental report relating to the Parcel. 5.02 REPRESENTATIONS AND WARRANTIES OF SELLER. Purchaser hereby acknowledges that Seller has made no representations or warranties whatsoever to Purchaser with respect to the subject matter of this Agreement or in connection with the execution and delivery hereof. 5.03 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Seller hereby acknowledges that Purchaser has made no representations or warranties whatsoever to Seller with respect to the subject matter of this Agreement or in connection with the execution and delivery hereof. ARTICLE VI INDEMNIFICATION 6.01 SELLER'S INDEMNITY. As acknowledged by Purchaser in SECTION 5.02 above, Seller has made no representations or warranties to Purchaser with respect to the subject matter of this Agreement or in connection with the execution and delivery hereof. Accordingly, Purchaser shall have no rights or remedies against Seller by reason of any alleged inaccuracy of any such alleged representation or warranty, and Seller shall have no indemnification obligations hereunder with respect thereto. 6.02 PURCHASER'S INDEMNITY. Purchaser hereby agrees to indemnify, defend and hold Seller, and the partners, members, officers, shareholders, directors, employees and agents of Seller and its -5- partners, members and shareholders harmless from and against any and all claims, losses, damages, liabilities and expenses which arise out of, are with respect to, or are based upon: (i) the inaccuracy in any material respect of any representation or warranty, or a material breach of any covenant of Purchaser contained herein or in any certificate or instrument furnished to Seller by or on behalf of Purchaser; (ii) any obligations, liabilities or charges of Seller that are expressly assumed by Purchaser; or (iii) the operation and management of any portion of the Parcel by or for Purchaser after the Closing. ARTICLE VII ADDITIONAL PROVISIONS 7.01 AMENDMENTS AND WAIVERS. This Agreement may not be amended, modified or discharged nor may any of its terms be waived except by an instrument in writing signed by the party to be bound thereby. 7.02 FURTHER ASSURANCES. The parties each agree to do, execute, acknowledge and deliver all such further acts, instruments assurances and to take all such further action after the Closing as shall be necessary or desirable to fully carry out this Agreement and to fully consummate and effect the transaction contemplated hereby. 7.03 SURVIVAL AND BENEFIT. All agreements, obligations and indemnities of Purchaser hereunder shall survive for a period of one (1) year from and after the Closing, and the same shall inure to the benefit of Seller's successors and assigns and be binding upon Purchaser's successors and assigns. 7.04 NO THIRD PARTY BENEFITS. This Agreement is for the sole and exclusive benefit of the parties hereof and their respective successors and assigns, and no third party is intended to or shall have any rights hereunder. 7.05 PURCHASER'S INVESTIGATION AND INSPECTIONS. Any investigation or inspection conducted by Purchaser, or any agent or representative of Purchaser, pursuant to this Agreement or the transaction contemplated hereby, in order to verify independently Seller's satisfaction of any conditions precedent to Purchaser's obligations hereunder or to determine whether Seller's warranties are true and accurate, shall not affect, or constitute a waiver by Purchaser of, any of Seller's obligations hereunder or Purchaser's reliance thereon. 7.06 BROKERAGE. Each party hereby represents and warrants to that it has not dealt with any broker or finder with the transaction contemplated hereby, and each party hereby agrees to -6- indemnify the other for any claim for brokerage commission or finder's fee asserted by a person, firm or corporation claiming to have been engaged by the indemnifying party. 7.07 NOTICES. Any notice, request, demand, instructions or other document to be given or served hereunder or under any document or instrument executed pursuant hereto shall be in writing and shall be delivered personally or sent by United States registered or certified mail, return receipt requested, or by overnight express courier guaranteeing next business day delivery, postage prepaid and addressed to the parties at their respective addresses set forth below, and the same shall be effective upon receipt if delivered personally or three (3) business days after deposit in the mails or one (1) business day after deposit with an overnight express courier. A party may change its address for receipt of notices by service of a notice of such change in accordance herewith. If to Purchaser: Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: Richard S. Curto With a copy to: Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attn: Wayne D. Boberg If to Seller: c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: Michael W. Reschke With a copy to: The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: Robert J. Rudnik 7.08 INTERPRETATION. (a) The headings and captions herein are inserted for convenient reference only and the same shall not limit or construe the Articles or Sections to which they apply or otherwise affect the interpretation hereof. (b) Words importing persons shall include firms, associations, partnerships (including limited partnerships), trusts, corporations and other legal entities, including public bodies, as well as natural persons. -7- (c) The terms "include", "including" and similar terms shall be construed as if followed by the phrase "without being limited to". (d) This Agreement and any document or instrument executed pursuant hereto may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (e) Whenever under the terms of this Agreement the time for performance of a covenant or condition falls upon a Saturday, Sunday or holiday, such time for performance shall be extended to the next business day. Otherwise, all references herein to "days" shall mean calendar days. (f) This Agreement shall be governed by and construed by and construed in accordance with the laws of the State of Illinois. (g) Time is of the essence of this Agreement. 7.9 DEFAULTS/REMEDIES. Except as otherwise provided in or limited by SECTION 6.01, in the event of a breach or default by Seller of any of the terms and provisions of this Agreement, Purchaser shall have all of its rights and remedies available at law or in equity. In the event of a breach or default by Purchaser of any of the terms and provisions of this Agreement, Seller shall have all of its rights and remedies available at law or in equity. [Signature Page Follows] -8- IN WITNESS WHEREOF, this Agreement has been executed and delivered by Seller and Purchaser each as of the date first hereinabove set forth. PURCHASER: PRIME GROUP REALTY, L.P., a Delaware limited partnership By: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust, its Managing General Partner By: /s/ W. Michael Karnes ------------------------------------ Name: W. Michael Karnes ------------------------------------ Title: Executive VP ------------------------------------ SELLER: 300 N. LASALLE, L.L.C., an Illinois limited liability company By: PRIME GROUP LIMITED PARTNERSHIP, its Administrative Member By: /s/ Michael W. Reschke ------------------------------------ Name: Michael W. Reschke ------------------------------------ Title: Managing General Partner ------------------------------------ EXHIBIT A LEGAL DESCRIPTION OF PARCEL PARCEL 1: LOT 1, (EXCEPT THE EAST 20 FEET THEREOF, CONVEYED TO THE CITY OF CHICAGO FOR THE WIDENING OF NORTH LASALLE STREET); ALL OF LOT 2, AND THE EAST 79 FEET 1.5 INCHES OF LOT 3 (EXCEPT THE NORTH 11 FEET OF SAID LOTS) IN BLOCK 4, IN ORIGINAL TOWN OF CHICAGO, IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. PARCEL 2: THAT PIECE OF PARCEL OF LAND, LYING SOUTH OF AND ADJACENT TO LOTS 1, 2, AND THE EAST 79 FEET 1.5 INCHES OF LOT 3, AS SAID LOTS ARE SHOWN ON THE PLAT OF THE ORIGINAL TOWN OF CHICAGO, RECORDED MAY 29, 1837, IN BOOK "H" OF PLATS, PAGE 298, AND SOUTH OF THE NORTH LINE OF OLD NORTH WATER STREET, AS LOCATED ON SAID PLAT, WEST OF THE WEST LINE OF THE EAST 20 FEET OF LOT 1, EXTENDED SOUTH, TO THE NORTH DOCK LINE OF THE CHICAGO RIVER, SAID LINE BEING THE WEST LINE OF NORTH LASALLE STREET, AS WIDENED, EAST OF A LINE, DRAWN 79 FEET 1.5 INCHES, WEST OF AND PARALLEL WITH THE EAST LINE OF SAID LOT 3, EXTENDED, AND NORTH OF THE DOCK LINE ON THE NORTH SIDE OF THE CHICAGO RIVER, IN THE SOUTH EAST 1/4 OF SECTION 9, TOWNSHIP 39 NORTH, RANGE 14 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. PARCEL 3: LOT 3, AND THE EAST 6 FEET OF LOT 4, (EXCEPT THAT PART OF SAID LOTS, TAKEN AND USED FOR WEST CARROLL AVENUE), IN THE SUBDIVISION OF LOT 6; ALL IN BLOCK 4, IN THE CANAL TRUSTEES' SUBDIVISION OF LOTS IN THE ORIGINAL TOWN OF CHICAGO, IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. PARCEL 4: THAT PART OF THE FOLLOWING DESCRIBED PROPERTY LYING ABOVE A HORIZONTAL PLANE 22.6 FEET ABOVE CHICAGO CITY DATUM AND DESCRIBED AS FOLLOWS: THE NORTH 11 FEET OF LOT 1 (EXCEPT THE EAST 20 FEET THEREOF), ALL OF LOT 2 AND THE EAST 79 FEET 1.5 INCHES OF LOT 3 IN BLOCK 4 IN ORIGINAL TOWN OF CHICAGO AND THAT PART OF THE ORIGINAL 18 FOOT PUBLIC ALLEY (NOW FALLING IN THE CENTER OF CARROLL AVENUE) AS SHOWN ON THE PLAT OF THE ORIGINAL TOWN OF CHICAGO, WHICH LIES NORTH OF ADJOINING SAID LOTS, AND THOSE PARTS OF LOT 3 AND THE EAST 6 FEET OF LOT 4 IN THE SUBDIVISION OF LOT 6 IN BLOCK 4 IN THE CANAL TRUSTEES' SUBDIVISION OF LOTS IN THE ORIGINAL TOWN OF CHICAGO LYING SOUTH OF THE NORTH LINE OF WEST CARROLL AVENUE, IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. Common Address: 320 North LaSalle Street Chicago, Illinois 60610 PIN Numbers: 17-09-404-015-0000 17-09-405-004-0000 17-09-404-005-0000 EXHIBIT B PERMITTED TITLE EXCEPTIONS 1. REAL ESTATE TAXES NOT YET DUE AND PAYABLE. 2. MATTERS CLAIMED BY OR THROUGH PURCHASER, IF ANY. 3. RIGHTS OF THE PUBLIC, THE CITY OF CHICAGO AND ALL PERSONS OR CORPORATIONS CLAIMING UNDER SAID CITY OF CHICAGO, UNDER ANY OF ITS GRANTS OR ORDINANCES TO THAT PORTION OF THE LAND AS TAKEN OR USED FOR NEW NORTH WATER STREET, NOW CALLED CARROLL AVENUE. (AFFECTS PARCEL 1) 4. EASEMENT FOR PRIVATE ALLEY IN, OVER AND UPON THE WEST 10 FEET OF THE EAST 79 FEET 1 1/2 INCHES OF LOT 3 IN BLOCK 4 IN ORIGINAL TOWN OF CHICAGO RUNNING SOUTH FROM NORTH WATER STREET TO A POINT 20 FEET NORTH FROM THE RIVER CREATED BY AGREEMENT BETWEEN MATTHEW LAFLIN, AND OTHERS AND WESTERN WAREHOUSING COMPANY DATED NOVEMBER 18, 1886 AND RECORDED DECEMBER 4, 1886 AS DOCUMENT 778847 IN BOOK 2004 PAGE 359. (AFFECTS PARCELS 1, 2 AND OTHER PROPERTY) 5. RIGHTS OF THE UNITED STATES OF AMERICA, THE STATE OF ILLINOIS, THE PUBLIC, THE CITY OF CHICAGO AND OF THE SANITARY DISTRICT OF CHICAGO IN THE CHICAGO RIVER AND THE FLOWAGE OF THE WATER THEREOF. (AFFECTS PARCEL 2) 6. RIGHTS OF THE CHICAGO AND NORTHWESTERN RAILROAD COMPANY, ITS SUCCESSORS AND ASSIGNS, TO MAINTAIN RAILROAD TRACKS BENEATH PARCEL 4. (AFFECTS PARCEL 4) 7. RIGHTS OF THE PUBLIC AND QUASI-PUBLIC UTILITIES IN AND TO THAT PART OF THE LAND FALLING IN (VACATED) CARROLL AVENUE. (AFFECTS PARCELS 1 AND 4) 8. EASEMENT RESERVED BY THE CITY OF CHICAGO IN THE ORDINANCE OF VACATION, A COPY OF WHICH WAS RECORDED MAY 17, 1984 AS DOCUMENT 27090087, FOR THE BENEFIT OF THE COMMONWEALTH EDISON COMPANY, THE ILLINOIS BELL TELEPHONE COMPANY, AND WESTERN UNION, TO OPERATE, MAINTAIN, CONSTRUCT, REPLACE, AND RENEW OVERHEAD POLES, WIRES, AND ASSOCIATED EQUIPMENT AND UNDERGROUND CONDUIT, CABLES, AND ASSOCIATED EQUIPMENT FOR THE TRANSMISSION AND DISTRIBUTION OF ELECTRICAL ENERGY AND TELEPHONIC AND ASSOCIATED SERVICES UNDER, OVER, AND ALONG ALL OF WEST CARROLL AVENUE AS THEREIN VACATED. (AFFECTS PARCEL 4) 9. POSSIBLE RIGHTS AND INTEREST OF DEPARTMENT OF PUBLIC WORKS TO MAINTAIN UNDERGROUND FREIGHT TUNNELS AS DISCLOSED BY LETTER DATED OCTOBER 30, 1989 AND FREIGHT TUNNELS ATLAS ATTACHED THERETO, WHICH IS ALSO SHOWN ON THE PLAT OF SURVEY MADE BY NATIONAL SURVEY SERVICE, INC., DATED MARCH 15, 1991, AS ORDER NO. N-116015. (AFFECTS PARCELS 1 AND 4) 10. POSSIBLE RIGHTS AND INTEREST OF WESTERN UNION TELEGRAPH COMPANY AS DISCLOSED BY LETTER DATED OCTOBER 30, 1989 AND PLAT ATTACHED THERETO. (AFFECTS PARCELS 1 AND 4) 11. POSSIBLE RIGHTS AND INTEREST OF DEPARTMENT OF WATER AS DISCLOSED BY LETTER DATED NOVEMBER 9, 1989, ATLAS AND SERVICE PIPE PLAT ATTACHED THERETO. (AFFECTS PARCEL 4) 12. POSSIBLE RIGHTS AND INTEREST OF THE COMMONWEALTH EDISON COMPANY, TO MAINTAIN UNDERGROUND FACILITIES AS DISCLOSED BY LETTER DATED NOVEMBER 21, 1989 AND THE DRAWINGS ATTACHED THERETO. (AFFECTS PARCELS 1, 2, 3 AND 4) 13. POSSIBLE ENCROACHMENT OF CONCRETE RAMP AND STEEL SUPPORTS AND BRACES ONTO THE PROPERTY LYING BELOW PARCEL 4 AND ALSO ONTO CARROLL AVENUE. (AFFECTS PARCEL 4) 14. ENCROACHMENT OF BRICK FACING ONTO THE PROPERTY EAST AND ADJOINING BY APPROXIMATELY 0.39 FEET AS DISCLOSED BY SURVEY MADE BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991 AS ORDER NO. N-116015. (AFFECTS PARCEL 1) 15. ENCROACHMENT OF PARKING GARAGE ONTO THE PRIVATE ALLEY NOTED AT EXCEPTION C BY APPROXIMATE 11 INCHES RUNNING THE LENGTH OF THE ALLEY AS DISCLOSED BY B. A. FENGER DATED SEPTEMBER 18, 1974 AND RECERTIFIED SEPTEMBER 6, 1989 AS ORDER NO. 74-8-13A. (AFFECTS PARCEL 1) 16. ENCROACHMENT OF SIGN ONTO THE PUBLIC PROPERTY EAST AND ADJOINING AS DISCLOSED BY SURVEY MADE BY B. A. FENDER DATED SEPTEMBER 18, 1974 AND RECERTIFIED SEPTEMBER 6, 1989 AS ORDER NO. 74-8-13A. (AFFECTS PARCEL 1) 17. ENCROACHMENT OF 12 INCH CONCRETE RAIL LOCATED MAINLY ON THE PROPERTY AND ONTO THE PUBLIC PROPERTY NORTH AND ADJOINING BY APPROXIMATELY 8 FEET AS DISCLOSED BY SURVEY MADE BY B. A. FENDER DATED SEPTEMBER 18, 1974 AND RECERTIFIED SEPTEMBER 6, 1989 AS ORDER NO. 74-8-13A. (AFFECTS PARCEL 1) 18. ENCROACHMENT OF CONCRETE CANOPY LOCATED MAINLY ON THE LAND ONTO THE PUBLIC LAND NORTH AND ADJOINING BY APPROXIMATE 1.22 FEET AS DISCLOSED BY PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991. (AFFECTS PARCEL 3) 19. ENCROACHMENT OF CONCRETE PILLAR LOCATED MAINLY ON THE LAND ONTO THE PUBLIC LAND NORTH AND ADJOINING BY APPROXIMATE 0.11 FEET AS DISCLOSED ON PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991. 20. ENCROACHMENT OF CONCRETE BUMPER ONTO THE PUBLIC WAY NORTH AND ADJOINING BY APPROXIMATE 1 FOOT AND NORTH WESTERLY AND ADJOINING BY APPROXIMATE .77 FEET AS DISCLOSED BY SURVEY MADE BY B. A. FENDER DATED SEPTEMBER 18, 1974 AND RECERTIFIED SEPTEMBER 6, 1989 AS ORDER NO. 74-8-13B. (AFFECTS PARCEL 3) [NOTE: ENCROACHMENT ENDORSEMENT APPROVED FOR POLICY.] 21. ENCROACHMENT OF 4 FOOT BY 6 FOOT, 1 STORY METAL STRUCTURE ON A 6 BY 6 FOOT CONCRETE BASE ONTO THE PROPERTY WEST AND ADJOINING AS DISCLOSED ON PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991. (AFFECTS PARCEL 3) 22. RIGHTS OF SOUTHWESTERN BELL MOBILE SYSTEMS, INC., DOING BUSINESS AS CELLULAR ONE - CHICAGO, UNDER MICROCELL SITE AGREEMENT. 23. ENCROACHMENT OF THE BLACKTOP LOCATED MAINLY ON THE PROPERTY WEST AND ADJOINING ONTO THE LAND BY APPROXIMATELY 1.21 FEET, AS SHOWN ON PLAT OF SURVEY NUMBER N-116014 PREPARED BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991. (AFFECTS PARCEL 1) 24. ENCROACHMENT OF THE BUILDING LOCATED MAINLY ON THE LAND ONTO THE PROPERTY EAST AND ADJOINING BY APPROXIMATELY 0.05 FEET, AS SHOWN ON PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991. (AFFECTS PARCEL 2) 25. ENCROACHMENT OF THE 3 STORY BRICK BUILDING LOCATED MAINLY ON THE PROPERTY EAST AND ADJOINING ONTO THE LAND BY APPROXIMATELY 0.45 FEET, AS SHOWN ON PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC., DATED MARCH 15, 1991. (AFFECTS PARCEL 3) 26. ENCROACHMENT OF THE OVERHEAD SIGN LOCATED MAINLY ON THE LAND ONTO THE PROPERTY NORTH AND ADJOINING BY APPROXIMATELY 8.0 FEET, AS SHOWN ON PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC. DATED MARCH 15, 1991. (AFFECTS PARCEL 3) 27. ENCROACHMENT OF THE WOOD DOCK AND CONCRETE DOCK LOCATED MAINLY ON THE PROPERTY EAST AND ADJOINING ONTO THE LAND BY APPROXIMATELY 8.0 FEET, AS SHOWN ON PLAT OF SURVEY NUMBER N-116015 PREPARED BY NATIONAL SURVEY SERVICE, INC., DATED MARCH 15, 1991. (AFFECTS PARCEL 3) 28. COVENANTS CONTAINED IN PARKING AGREEMENT DATED AS OF MARCH 14, 1991 AND RECORDED MARCH 18, 1991 AS DOCUMENT 91119741 AND RECORDED MAY 16, 1991 AS DOCUMENT 91233616 MADE BY AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS TRUSTEE UNDER TRUST AGREEMENT DATED DECEMBER 19, 1989 AND KNOWN AS TRUST NUMBER 110024-09 TO 77 W. WACKER LIMITED PARTNERSHIP, AN ILLINOIS LIMITED PARTNERSHIP; RE: EASEMENT APPURTENANT IN FAVOR OF THE PARTNERSHIP, FOR PARKING PURPOSES IN THE LAND CONSISTING OF 169 PARKING SPACES, TOGETHER WITH THE TERMS, PROVISIONS, CONDITIONS AND LIMITATIONS CONTAINED THEREIN. 29. THE LAND LIES WITHIN THE BOUNDARIES OF A SPECIAL SERVICE AREA AS DISCLOSED BY ORDINANCE RECORDED AS DOCUMENT 91075841, AND IS SUBJECT TO ADDITIONAL TAXES UNDER THE TERMS OF SAID ORDINANCE AND SUBSEQUENT RELATED ORDINANCES. NOTE: EACH ENCROACHMENT LISTED IN THIS EXHIBIT B SHALL NOT BE DEEMED A PERMITTED TITLE EXCEPTION UNLESS THE TITLE INSURER PROVIDES PURCHASER WITH AN ENCROACHMENT ENDORSEMENT IN THE FORM PROVIDED ON SCHEDULE 1 ATTACHED HERETO. EX-10.14 16 EXHIBIT 10.14 Exhibit 10.14 EXECUTION COPY REGISTRATION RIGHTS AGREEMENT AMONG PRIME GROUP REALTY TRUST PRIME GROUP REALTY, L.P. PRIME GROUP LIMITED PARTNERSHIP PRIMESTONE INVESTMENT PARTNERS L.P. and THE OTHER INVESTORS NAMED HEREIN REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT is made as of the 17th day of November, 1997 (this "Agreement"), among PRIME GROUP REALTY TRUST, a Maryland real estate investment trust (the "Company"), PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "Partnership"), EDWARD S. HADESMAN TRUST DATED MAY 22, 1992, GRANDVILLE/NORTHWESTERN MANAGEMENT CORPORATION, an Illinois corporation, CAROLYN B. HADESMAN, TRUST DATED MAY 21, 1992, LISA HADESMAN 1991 TRUST, CYNTHIA HADESMAN 1991 TRUST, TUCKER B. MAGID, FRANCES S. SHUBERT, GRANDVILLE ROAD PROPERTY, INC., an Illinois corporation, SKY HARBOR ASSOCIATES, an Illinois limited partnership (the foregoing other than the Company and the Partnership being hereafter referred to collectively as a "Contributor"), PRIMESTONE INVESTMENT PARTNERS, L.P., a Delaware limited partnership ("Primestone"), PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership ("Prime") and the Permitted Transferees (as defined below) of each of the foregoing entities (such entities or Permitted Transferees are sometimes referred to herein individually as an "Investor" and collectively as the "Investors"). Jeffrey Patterson is referred to herein as a "Management Investor". W I T N E S S E T H: WHEREAS, the Investors and the Management Investor will hold the limited partnership interests in the Partnership set forth in Exhibit A hereto (the "Common Units"), which Common Units may be exchanged for common shares of beneficial interest of the Company (the "Common Shares") pursuant to certain exchange rights set forth on Exhibit C to that certain Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P., dated November 17, 1997 (the "Partnership Agreement"); and WHEREAS, the Company has agreed to provide the Investors and the Management Investor with certain registration rights as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: ARTICLE I CERTAIN DEFINITIONS I.1. "Agreement" is defined in the first paragraph of this Agreement. I.2. "Blackout Termination Right" is defined in Section 5.3(b) hereof. I.3. "Business Day" means any day on which the New York Stock Exchange is open for trading. I.4. "Company" is defined in the first paragraph of this Agreement. I.5. "Contributor" is defined in the first paragraph of this Agreement. I.6. "Contributor Investor Group" means collectively the Contributor and their Permitted Transferees. I.7. "Effectiveness Period" is defined in Section 4.3 hereof. 2 I.8. "Eligible Securities" means all or any portion of the Common Shares acquired by the Investors and the Management Investor upon exchange of the Common Units. As to any proposed offer or sale of Eligible Securities, such securities shall cease to be Eligible Securities with respect to such proposed offer or sale when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement or (ii) such securities are permitted to be disposed of pursuant to Rule 144(k) (or any successor provision to such Rule) under the Securities Act as confirmed in a written opinion of counsel to the Company addressed to the Investors and the Management Investor, (iii) such securities shall have been otherwise transferred pursuant to Rule 144 (or any successor rule) or pursuant to another applicable exemption under the Securities Act, new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company and such securities shall be freely transferable to the public without registration under the Securities Act or (iv) such securities are no longer outstanding. I.9. "Information Blackout" is defined in Section 5.3(a) hereof. I.10. "Investor Group" means any of the Contributor Investor Group, the Primestone Investor Group or the Prime Investor Group. I.11. "Investor" means any of the Contributors, the Primestone Investor Group and the Prime Investor roup, and any of their Permitted Transferees. I.12. "IPO" means the Company's initial public offering of Common Shares and any other capital stock of the Company offered simultaneously with the Common Shares. I.13. "IPO Date" means the date of the final prospectus used by the Company in the IPO. 3 I.14. "Lock-Up Agreements" means (i) the Lock-Up Agreement, dated November 11, 1997, among the Prime Investor Group and the Underwriter, (ii) the Lock-Up Agreement, dated November 11, 1997, 1997, among the Contributor and the Underwriter, (iii) the Lock-Up Agreement, dated November 11, 1997, among the Management Investor and the Underwriter, and (iv) the Lock-Up Agreement, dated November 11, 1997 among Primestone Investor Group and the Underwriter. I.15. "Management Investor" is defined in the first paragraph of this Agreement. I.16. "Partnership" is defined in the first paragraph of this Agreement. I.17. "Partnership Agreement" means that certain Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P., dated November 17, 1997. I.18. "Participating Investor" is defined in Section 3.3(a) hereof. I.19. "Person" means an individual, a partnership (general or limited), corporation, real estate investment trust, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi-governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity. I.20. "Permitted Transferees" with respect to each Investor means the Persons which qualify as Qualified Transferees under the Partnership Agreement. The parties hereto agree that Prudential Securities Credit Corporation, as Lender is a Permitted Transferee of Primestone. I.21. "Prime" is defined in the first paragraph of this Agreement. 4 I.22. "Primestone" is defined in the first paragraph of this Agreement. I.23. "Prime Investor Group" means collectively Prime and its Permitted Transferees. I.24. "Primestone Investor Group" mean collectively Primestone and its Permitted Transferees. I.25. "Primestone Registration" means at any time after the occurrence of the Twelve Month Date the request for registration under the Securities Act and the subsequent registration of all of the Eligible Securities requested by Primestone to be registered. I.26. "Registration Date" is defined in Section 2.1 hereof. I.27. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with the registration requirements set forth in this Agreement including, without limitation, the following: (i) the fees, disbursements and expenses of the Company's counsel(s) (United States and foreign), accountants and experts in connection with the registration of Eligible Securities to be disposed of under the Securities Act; (ii) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof to the underwriters and dealers; (iii) the cost of printing or producing any agreement(s) among underwriters, underwriting agreement(s) and blue sky or legal investment memoranda, any selling agreements and any other documents in connection with the offering, sale or delivery of Eligible Securities to be disposed of; (iv) all expenses in connection with the qualification of Eligible Securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such 5 qualification and in connection with any blue sky and legal investment surveys; (v) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Eligible Securities to be disposed of; and (vi) fees and expenses incurred in connection with the listing of Eligible Securities on each securities exchange or quotation system on which the Common Shares are then listed; provided, however, that Registration Expenses with respect to any registration pursuant to this Agreement shall not include underwriting discounts or commissions attributable to Eligible Securities, SEC or blue sky registration fees attributable to Eligible Securities or transfer taxes applicable to Eligible Securities. I.28. "Requesting Investor" means an Investor requesting registration of its Eligible Securities in accordance with the terms hereof. I.29. "Sales Blackout Period" is defined in Section 5.3(a)(iii) hereof. I.30. "SEC" means the United States Securities and Exchange Commission. I.31. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. I.32. "Selling Investor" means the Requesting Investor and each Participating Investor or any Investor or Management Investor who has requested registration pursuant to Section 4.1 hereof, as applicable. I.33. "Shelf Registration Statement" is defined in Section 4.3 hereof. I.34. "Twelve Month Date" means the date that is twelve months after the IPO Date, and if such date is not a Business Day, the next succeeding date that is a Business Day. I.35. "Underwriter" means Prudential Securities Incorporated. 6 ARTICLE II EFFECTIVENESS OF REGISTRATION RIGHTS SECTION 2.1 Effectiveness of Registration Rights. This Agreement shall become effective on the date hereof, provided, however, that the registration of any Eligible Securities pursuant to Articles 3 and 4 hereof by the Investors and Management Investor prior to the Twelve- Month Date (each such dates being hereinafter referred to as a "Registration Date"), shall be subject to the prior receipt of the written consent of the Company and the Underwriter to the waiver of the restrictions on transfer of the Common Shares held by the Investors or the Management Investor requesting such consent under the terms of the Partnership Agreement and their respective Lock-Up Agreements. ARTICLE III REGISTRATION REQUEST SECTION 3.1 Request. Upon written request from an Investor requesting that the Company effect the registration under the Securities Act of all or part of the Eligible Securities held by such Investor, which notice may be delivered at any time after 90 days prior to the Registration Date for the applicable Investor Group and which notice shall specify the intended method or methods of disposition of such Eligible Securities, the Company will use all reasonable efforts to effect (at the earliest possible date) the registration, under the Securities Act, of such Eligible Securities for disposition in accordance with the intended method or methods of disposition stated in such request; provided that: 7 III.1. if the Company shall have previously effected a registration with respect to Eligible Securities pursuant to Article IV hereof, the Company shall not be required to effect a registration pursuant to this Article III until a period of one hundred twenty (120) days shall have elapsed from the effective date of the most recent such previous registration; III.2. if, upon receipt of a registration request pursuant to this Article 3, the Company is advised in writing (with a copy to the Selling Investors) by a nationally recognized independent investment banking firm selected by the Company to act as lead underwriter in connection with a public offering of securities by the Company that, in such firm's opinion, a registration at the time and on the terms requested would materially adversely affect such public offering of securities by the Company (other than an offering in connection with employee benefit and similar plans) (a "Company Offering") that prior to the receipt of the notice by the Requesting Investor had been contemplated by the Company's Board of Trustees to be filed (and which is in fact filed) within sixty (60) days of receipt of the notice by the Requesting Investors, the Company shall not be required to effect a registration pursuant to this Article III until the earliest of (i) three months after the completion of such Company Offering, (ii) the termination of any blackout period, if any, required by the underwriters to be applicable to the Selling Investors in connection with such Company Offering and agreed to in writing by the Selling Investors, (iii) promptly after abandonment of such Company Offering or (iv) four months after the date of written notice requesting registration from the Investor who initially requested registration; 8 III.3. if, while a registration request is pending pursuant to this Article III, the Company determines in the good faith judgment of the Board of Trustees of the Company, with the advice of counsel, that the filing of a registration statement would require the disclosure of non-public material information the disclosure of which would have a material adverse effect on the Company or would otherwise adversely affect a material financing, acquisition, disposition, merger or other comparable transaction, the Company shall deliver a certificate to such effect signed by its Chief Executive Officer, President, or any Executive Vice President to the Selling Investors, and the Company shall not be required to effect a registration pursuant to this Article III until the earlier of (i) the date upon which such material information is disclosed to the public or ceases to be material or (ii) 60 days after the Company makes such good faith determination; and III.4. the Company shall not be required to effect (i) more than two registrations pursuant to this Article III in any calendar year per each Investor Group and (ii) a registration of Eligible Securities, the Fair Market Value of which on the date of the registration request (determined as set forth in the Partnership Agreement) is less than $2,500,000. No registration of Eligible Securities under this Article IV shall relieve the Company of its obligation (if any) to effect registrations of Eligible Securities pursuant to Article 4 hereof. SECTION 3.2 Registration Expenses. With respect to the registrations requested pursuant to this Article III and any registration arising from an exercise of a Blackout Termination Right (as defined below), the Company shall pay all Registration Expenses. 9 SECTION 3.3 Other Investor Shares. (a) Upon receipt of the written notice from a Requesting Investor, the Company shall give written notice to each other Investor and to the Management Investor. Subject to Section 3.3(b) hereof, the Company shall be required to cause the registration of securities for sale for the account of any Investor or the Management Investor (the "Participating Investor") in any registration of Eligible Securities requested pursuant to this Article III who has delivered written notice to the Company within fifteen (15) Business Days of the date of receipt by such Participating Investor of the above-referenced written notice from the Company (which notice from the Participating Investor to the Company shall specify the number of shares to be disposed of and the intended method of disposition); provided, that the Company shall not be required to cause the registration of all of the securities requested to be registered by Participating Investors if the Requesting Investor is advised in writing (with a copy to the Company) by a nationally recognized independent investment banking firm selected by the Requesting Investors (or as determined by Section 3.3(c)) that, in such firm's opinion, registration of all of such securities would materially adversely affect the offering and sale of Eligible Securities then contemplated by the Requesting Investor. (b) If the Company cannot, pursuant to the terms of this Section 3.3, register all of the shares requested to be registered, the Company shall register the Maximum Amount (as defined below), and, other than for a Primestone Registration, such amount shall be allocated between the Contributor Investor Group, the Primestone Investor Group and the Prime Investor Group, pro rata according to the number of shares for which registration was initially requested by each Investor Group without giving any effect to any shares requested to be registered by the Management 10 Investor. The amount allocated to each Investor Group shall be further allocated to each Selling Investor within such Investor Group pro rata according to the number of shares for which registration was initially requested by each Selling Investor within such Investor Group. Solely for purposes of the preceding sentence, the Management Investor shall be treated as a Selling Investor within the Prime Investor Group. Notwithstanding the foregoing, in the event the Requesting Investor is Primestone requesting a Primestone Registration, then the amount of Eligible Securities which the Contributor Investor Group, Prime Investor Group and the Management Investor shall be allowed to register shall be the Maximum Amount less the number of Eligible Securities requested to be registered by Primestone in the Primestone Registration. For purposes of this Section 3.3, "Maximum Amount" shall mean the largest number of shares (if any) that, in the opinion of the nationally recognized underwriter selected by the Requesting Investor (or as determined by Section 3.3(c) hereof), for purposes of Section 3.3(a) hereof, could be offered to the public without materially adversely affecting the offering and sale of Eligible Securities as then contemplated by the Selling Investors. (c) In the event that more than one Investor exercises registration rights on the same day, the Investor who requested a registration of the larger number of shares on such day shall be entitled to select the lead underwriter for such registered offering (if such offering will be underwritten). In all other cases, the first Investor to exercise registration rights with respect to any particular registration demand shall be entitled to select the lead underwriter for such registered offering (if such offering will be underwritten). 11 Notwithstanding this Article III, each Selling Investor may elect, in writing prior to the effective date of the registration statement filed in connection with a registration under this Article III, not to register its Eligible Securities in connection with such registration; provided, that if such Selling Investor is one of the Requesting Investors, such Selling Investor will be deemed to have used one of the two rights each year to request registration of Eligible Securities under this Article III allocated to the Investor Group of which it is a member pursuant to Section 3.1(d) hereof. ARTICLE IV INCIDENTAL REGISTRATION SECTION 4.1 Notice and Registration. If the Company proposes to register any Common Shares, any equity securities exercisable for, convertible into or exchangeable for Common Shares, or other securities issued by it having terms substantially similar to Eligible Securities ("Other Securities") for public sale under the Securities Act (whether proposed to be offered for sale by the Company or by any other Person) on a form and in a manner which would permit registration of Eligible Securities for sale to the public under the Securities Act, it will give prompt written notice to the Investors and the Management Investor of its intention to do so, and upon the written request of any Investor or the Management Investor delivered to the Company within fifteen (15) Business Days after the giving of any such notice (which request shall specify the number of Eligible Securities intended to be disposed of by such Investor or Management Investor and the intended method of disposition thereof), the Company will use all reasonable efforts to effect, in connection with the registration of the Other Securities, the registration under the Securities Act of all Eligible Securities 12 which the Company has been so requested to register by the Selling Investor(s), to the extent required to permit the disposition (in accordance with the intended method or methods thereof as aforesaid) of Eligible Securities so to be registered; provided that: IV.1. if, at any time after giving such written notice of its intention to register any Other Securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register the Other Securities, the Company may, at its election, give written notice of such determination to the Investors and the Management Investor and thereupon the Company shall be relieved of its obligation to register such Eligible Securities in connection with the registration of such Other Securities (but not from its obligation to pay Registration Expenses to the extent incurred in connection therewith as provided in Section 4.2 hereof), without prejudice, however, to the rights (if any) of the Investors immediately to request that such registration be effected as a registration under Article III hereof; IV.2. The Company will not be required to effect any registration pursuant to this Article IV if the Company shall have been advised in writing (with a copy to the Selling Investors) by a nationally recognized independent investment banking firm selected by the Company to act as lead underwriter in connection with the public offering of securities by the Company that, in such firm's opinion, a registration of Eligible Securities requested to be registered at that time would materially and adversely affect the Company's own scheduled offering of Other Securities; provided, however, that if an offering of some but not all of the Eligible Securities requested to be registered by the Investor(s) and the Management Investor 13 would not materially adversely affect the Company's offering of Other Securities, the aggregate number of Eligible Securities requested to be included in such offering by the Investors and the Management Investor shall be reduced pro rata according to the total number of Eligible Securities requested to be registered by such Persons; IV.3. The Company shall not be required to effect any registration of Eligible Securities under this Article IV incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or share options or other employee benefit plans. IV.4. Notwithstanding any request under Section 4.1(a) hereof, a Selling Investor may elect in writing prior to the effective date of a registration under this Article IV, not to register its Eligible Securities in connection with such registration. IV.5. No registration of Eligible Securities effected under this Article IV shall relieve the Company of its obligation (if any) to effect registrations of Eligible Securities pursuant to Article III hereof. SECTION 4.2 Registration Expenses. The Company shall be responsible for the payment of all Registration Expenses in connection with any registration pursuant to this Article IV. SECTION 4.3 Shelf Registration Statement (a) Shelf Registration Statement. The Company shall as promptly as reasonably practicable subsequent to the Twelve Month Date file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Eligible Securities (the "Shelf Registration Statement"). If the Shelf Registration Statement shall be on the appropriate 14 form permitting registration of such Eligible Securities for resale by Investors in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company will notify each Investor when such Shelf Registration Statement has become effective. The Company shall use its best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act as promptly as practicable after the filing of the Shelf Registration Statement and (subject to compliance with the restrictions on registrations set forth in Articles III and IV hereof which shall be applicable with respect to the Shelf Registration) to keep the Shelf Registration Statement continuously effective under the Securities Act until the date which is two and one half years from the date of its initial effectiveness ("Effectiveness Period"), or such period ending when all Eligible Securities covered by the Shelf Registration Statement have been sold in the manner set forth and as contemplated in the Shelf Registration Statement. (b) Withdrawal of Stop Orders. If the Shelf Registration Statement ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof. (c) Supplement and Amendments. The Company shall promptly supplement and amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration Statement, if required by the Securities Act. ARTICLE V REGISTRATION PROCEDURES 15 SECTION 5.1 Registration and Qualification. If and whenever the Company is required to use all reasonable efforts to effect the registration of any Eligible Securities under the Securities Act as provided in Articles 3 or 4 hereof, the Company will, as promptly as is practicable: V.1. prepare, file and use all reasonable efforts to cause to become effective a registration statement under the Securities Act regarding the Eligible Securities to be offered; V.2. prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Eligible Securities until the earlier of such time as all of such Eligible Securities have been disposed of in accordance with the intended methods of disposition by the Selling Investors set forth in such registration statement or the expiration of twelve months after such Registration Statement becomes effective; V.3. furnish to the Selling Investors and to any underwriter of such Eligible Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents as the Selling Investors or such underwriter may reasonably request; 16 V.4. use all reasonable efforts to register or qualify all Eligible Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Selling Investors or any underwriter of such Eligible Securities shall reasonably request, and do any and all other acts and things which may be reasonably requested by the Selling Investors or any underwriter to consummate the disposition in such jurisdictions of the Eligible Securities covered by such registration statement, except the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any jurisdiction where it is not then subject to taxation, or to consent to general service of process in any jurisdiction where it is not then subject to service of process; V.5. use all reasonable efforts to list the Eligible Securities on each national securities exchange or quotation system on which the Common Shares are then listed, if the listing of such securities is then permitted under the rules of such exchange; V.6. (i) furnish to the Selling Investors an opinion of counsel for the Company, addressed to them, dated the date of the closing under the underwriting agreement, and (ii) upon such Selling Investor's request, use all reasonable efforts to furnish to the Selling Investors a "comfort letter" signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, addressed to them; provided that with respect to such opinion and "comfort letter," the following shall apply: (A) the opinion and "comfort letter" shall cover substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered 17 in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Investors may reasonably request; and (B) the "comfort letter" also shall cover events subsequent to the date of such financial statements; and V.7. notify the Selling Investors immediately upon the happening of any event as a result of which a prospectus included in a registration statement, relating to a registration pursuant to Article III or 4 hereof, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and at the request of the Selling Investors prepare and furnish to the Selling Investors as many copies of a supplement to or an amendment of such prospectus as the Selling Investors reasonably request so that, as thereafter delivered to the purchasers of such Eligible Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company may require the Selling Investors to furnish the Company such information regarding the Selling Investors and the distribution of such securities as the Company may from time to time reasonably request in writing and as shall be required by law or by the SEC in connection with any registration. Failure of the Selling Investors to provide such information will relieve the Company of its obligation to register such Selling Investor's Eligible Securities. 18 SECTION 5.2 Underwriting. (a) If requested by the underwriters for any underwritten offering of Eligible Securities pursuant to a registration described in this Agreement, the Company will enter into and perform its obligations under an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution to the effect and to the extent provided in Article VII hereof and the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 5.1(f) hereof. The holders of Eligible Securities on whose behalf Eligible Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Eligible Securities. (b) In the event that any registration pursuant to Article IV hereof shall involve, in whole or in part, an underwritten offering, the Company may require Eligible Securities requested to be registered pursuant to Article IV hereof to be included in such underwriting on the same terms and conditions as shall be applicable to the Other Securities being sold through underwriters under such registration. In such case, the holders of Eligible Securities on whose behalf Eligible Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement. Such agreement shall contain such representations and warranties by the Company and the Selling Investors and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution to the 19 effect and to the extent provided in Article VII hereof. The representations and warranties in such underwriting agreement by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Eligible Securities. SECTION 5.3 Blackout Periods. (a) At any time when a registration statement effected pursuant to Article III hereof relating to Eligible Securities is effective, upon written notice from the Company to the Selling Investors that the Company determines in the good faith judgment of the Board of Trustees of the Company, with the advice of counsel, that the Selling Investors' sale of Eligible Securities pursuant to the registration statement would require disclosure of non-public material information the disclosure of which would have a material adverse effect on the Company (an "Information Blackout"), the Selling Investors shall suspend sales of Eligible Securities pursuant to such registration statement until the earliest of: (i) the date upon which such material information is disclosed to the public or ceases to be material; (ii) 60 days after the Company makes a good faith determination that such material information ceases to be material; and (iii) such time as the Company notifies the Selling Investors that sales pursuant to such registration statement may be resumed. (The number of days from such suspension of sales by the Selling Investors until the day when such sales may be resumed under clause (i), (ii) or (iii) hereof is hereinafter called a "Sales Blackout Period".) 20 (b) Any delivery by the Company of notice of an Information Blackout during the 90 days immediately following effectiveness of any registration statement effected pursuant to Article III hereof shall give the Investors the right, by written notice to the Company within 20 Business Days after the end of such Sales Blackout Period, to cancel such registration and obtain one additional registration right during such calendar year (a "Blackout Termination Right") under Article III hereof. (c) If there is an Information Blackout and if the Investors do not exercise their cancellation right, if any, pursuant to Section 5.3(b) hereof, or, if such cancellation right is not available, the time period set forth in Section 5.1(b) hereof shall be extended for a number of days equal to the number of days in the Sales Blackout Period. SECTION 5.4 Qualification for Rule 144 Sales. The Company will take all actions reasonably necessary to comply with the filing requirements described in Rule 144(c)(1) so as to enable the Investors or the Management Investor to sell Eligible Securities without registration under the Securities Act and, upon the written request of any Investor or the Management Investor, the Company will deliver to such Investor or Management Investor a written statement as to whether it has complied with such filing requirements. ARTICLE VI PREPARATION; REASONABLE INVESTIGATION SECTION 6.1 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement registering Eligible Securities under the Securities Act, the 21 Company will give the Selling Investors and the underwriters, if any, and their respective counsel and accountants, drafts of such registration statement for their review and comment prior to filing and such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers, counsel and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of the Selling Investors and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. ARTICLE VII INDEMNIFICATION AND CONTRIBUTION SECTION 7.1 Indemnification. (a) In the event of any registration of Eligible Securities hereunder, the Company and the Partnership jointly and severally will, and hereby do, indemnify and hold harmless, each Selling Investor, its respective directors, trustees, officers, partners, agents, employees and affiliates and each other person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls each such Selling Investor or any such underwriter within the meaning of the Securities Act, against any and all losses, claims, damages, expenses or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof, to which each such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company and the Partnership will reimburse each such Selling Investor and each such director, trustee, officer, partner, agent, employee or affiliate, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, expense, liability, action, or proceeding; provided, however, that (i) the Company and the Partnership shall not be liable in any such case to the extent that any such loss, claim, damage, expense or liability (or action or proceeding 23 in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Selling Investor or underwriter specifically stating that it is for use in the preparation thereof and (ii) the Company and the Partnership shall not be liable to any person who participates as an underwriter in the offering or sale of Eligible Securities or any other person, if any, who controls or is controlled by such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, expense or liability (or action or proceeding in respect thereof) arises out of such underwriter's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Eligible Securities to such person if such statement or omission was corrected in such final prospectus. (b) Each Selling Investor severally will, and hereby does, indemnify and hold harmless the Company, its trustees, its officers who sign the registration statement, each Person who participates as an underwriter in the offering or sale of such securities, and each Person, if any, who controls the Company or any such underwriter within the meaning of the Securities Act against any and all losses, claims, damages, expenses or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof, to which each such indemnified party may become subject under the Securities Act or otherwise insofar as such losses, claims, damages, 24 expenses or liabilities (or actions or proceedings, whether commenced or threatened in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact in or omission or alleged omission to state a material fact in such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, but only to the extent that such statement or omission was made in reliance upon and in conformity with written information furnished by such Selling Investor to the Company through an instrument duly executed by or on behalf of such Selling Investor specifically stating that it is for use in preparation thereof. (c) Promptly after receipt by any indemnified party hereunder of notice of the commencement of any action or proceeding involving a claim referred to in paragraphs (a) or (b) of this Section 7.1, the indemnified party will notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party under paragraphs (a) or (b) of this Section 7.1. (d) If for any reason the indemnity under this Section 7.1 is unavailable or is insufficient to hold harmless any indemnified party under paragraphs (a) or (b) of this Section 7.1, then the indemnifying parties shall contribute to the amount paid or payable to the indemnified party as a result of any loss, claim, expense, damage or liability (or actions or proceedings, whether commenced or threatened, in respect thereof), and legal or other expenses reasonably incurred by the indemnified party in connection with investigating or defending any such loss, claim, expense, damage, liability, action or proceeding, in such proportion as is appropriate to reflect the relative fault 25 of the indemnifying party on the one hand and the indemnified party on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Investor and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. If, however, the allocation provided in the second preceding sentence is not permitted by applicable law, or if the allocation provided in the second preceding sentence provides a lesser sum to the indemnified party than the amount hereinbefore calculated, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party in such proportion as is appropriate to reflect not only such relative fault but also the relative benefits of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this paragraph (d) of Section 7.1 were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentences of this paragraph (d) of Section 7.1. (e) Indemnification and contribution similar to that specified in this Section 7.1 (with appropriate modifications) shall be given by the Company and the Partnership and the Selling Investors with respect to any required registration or other qualification of securities under any federal, state or blue sky law or regulation of any governmental authority other than the Securities Act. 26 (f) Notwithstanding any other provision of this Section 7.1, to the extent that any director, trustee, officer, partner, agent, employee, affiliate, or other representative (current or former) of any indemnified party is a witness in any action or proceeding, the indemnifying party agrees to pay to the indemnified party all expenses reasonably incurred by, or on the behalf of, the indemnified party and such witness in connection therewith. (g) All legal and other expenses incurred by or on behalf of any Selling Investor in connection with investigating or defending any loss, claim, expense, damage, liability, action or proceeding shall be paid by the Company or the Partnership in advance of the final disposition of such investigation, defense, action or proceeding within twenty days after the receipt by the Company or the Partnership of a statement or statements from the Selling Investor requesting from time to time such payment, advance or advances. The entitlement of each Selling Investor to such payment or advancement of expenses shall include those incurred in connection with any action or proceeding by the Selling Investor seeking an adjudication or award in arbitration pursuant to this Section 7.1. Such statement or statements shall reasonably evidence such expenses incurred by the Selling Investor in connection therewith. (h) The termination of any proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the rights of any indemnified party to indemnification hereunder or create a presumption that any indemnified party violated any federal or state securities laws. (i) (i) In the event that advances are not made pursuant to this Section 7.1 or payment has not otherwise been timely made, each indemnified party shall be entitled to seek a final 27 adjudication in an appropriate court of competent jurisdiction of the entitlement of the indemnified party to indemnification or advances hereunder. (ii) The Company, the Partnership and the Selling Investors agree that they shall be precluded from asserting that the procedures and presumptions of this Section 7.1 are not valid, binding and enforceable. The Company, the Partnership and the Selling Investors further agree to stipulate in any such court that the Company, the Partnership, and the Selling Investors are bound by all the provisions of this Section 7.1 and are precluded from making any assertion to the contrary. (iii) To the extent deemed appropriate by the court, interest shall be paid by the indemnifying party to the indemnified party at a reasonable interest rate for amounts which the indemnifying party has not timely paid as the result of its indemnification and contribution obligations hereunder. (j) In the event that any indemnified party is a party to or intervenes in any proceeding in which the validity or enforceability of this Section 7.1 is at issue or seeks an adjudication to enforce the rights of any indemnified party under, or to recover damages for breach of, this Section 7.1, the indemnified party, if the indemnified party prevails in whole in such action, shall be entitled to recover from the indemnifying party and shall be indemnified by the indemnifying party against, any expenses incurred by the indemnified party. If it is determined that the indemnified party is entitled to indemnification for part (but not all) of the indemnification so requested, expenses incurred in seeking enforcement of such partial indemnification shall be reasonably prorated among 28 the claims, issues or matters for which the indemnified party is entitled to indemnification and for such claims, issues or matters for which the indemnified party is not so entitled. (k) The indemnity agreements contained in this Section 7.1 shall be in addition to any other rights (to indemnification, contribution or otherwise) which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of any Eligible Securities by any Investor or the Management Investor. ARTICLE VIII BENEFITS OF REGISTRATION RIGHTS SECTION 8.1 Benefits of Registration Rights. Subject to the limitations of Sections 3.1 and 4.1 hereof, each member of the Contributor Investor Group and the Prime Investor Group, and their Permitted Transferees of Eligible Securities may severally or jointly exercise the registration rights hereunder in such proportion as they shall agree among themselves. No consent of any Investor shall be required for Permitted Transferees to exercise registration rights under this Agreement or otherwise to be entitled to the benefits of this Agreement as applicable to all Investors. The Management Investor may not transfer his rights under this Agreement to any other Person. The Company agrees that monetary damages would not compensate the Investors and Management Investor for a breach by the Company hereof and the Investors and the Management Investor shall be entitled to specific performance of this Agreement. 29 ARTICLE IX MISCELLANEOUS SECTION 9.1 Captions. The captions or headings in this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope or intent of this Agreement. SECTION 9.2 Severability. If any clause, provision or section of this Agreement shall be invalid or unenforceable, the invalidity or unenforceability of such clause, provision or section shall not affect the enforceability or validity of any of the remaining clauses, provisions or sections hereof to the extent permitted by applicable law. SECTION 9.3 Governing Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Maryland, without reference to its rules as to conflicts or choice of laws. SECTION 9.4 Modification and Amendment. This Agreement may not be changed, modified, discharged or amended, except by an instrument signed by all of the parties hereto. SECTION 9.5 Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. SECTION 9.6 Entire Agreement. This Agreement constitutes the entire agreement and understanding among the parties and supersedes any prior understandings and/or written or oral agreements among them respecting the subject matter herein. SECTION 9.7 Notices. All notices, requests, demands, consents and other communications required or permitted to be given pursuant to this Agreement shall be in writing and 30 delivered by hand, by overnight courier delivery service or by certified mail, return receipt requested, postage prepaid. Notices shall be deemed given when actually received, which shall be deemed to be not later than the next Business Day if sent by overnight courier or after five (5) Business Days if sent by mail. Notice to Investors and Management Investor shall be made to the address listed on the share transfer records of the Company. 31 IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused this Agreement to be executed as of the day and year first above written. PRIME GROUP REALTY TRUST By: /s/ W. Michael Karnes ------------------------- Name: W. Michael Karnes Title: Executive VP PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust its general partner By: /s/ W. Michael Karnes ------------------------- Name: W. Michael Karnes Title: Executive VP PRIME GROUP LIMITED PARTNERSHIP By: /s/ W. Michael Karnes ------------------------ Name: Michael W. Reschke Title: Managing General Partner 32 PRIMESTONE INVESTMENT PARTNERS, L.P. By: PG/PRIMESTONE, L.L.C. its general partner By: THE PRIME GROUP, INC. its Administrative Member By: /s/ Robert J. Rudnik -------------------------- Name: Robert J. Rudnik Title: Executive Vice President By: BRE/PRIMESTONE INVESTMENT MANAGEMENT L.L.C. its general partner By: /s/ Steven J. Orbuch -------------------- Name: Steven J. Orbuch Title: Vice President 33 EDWARD S. HADESMAN TRUST DATED MAY 22, 1992 By: /s/ Edward S. Hadesman ------------------------ Name: Edward S. Hadesman Title: Trustee GRANDVILLE/NORTHWESTERN MANAGEMENT CORPORATION, an Illinois corporation By: /s/ Edward S. Hadesman ------------------------ Name: Edward S. Hadesman Title: President CAROLYN B. HADESMAN TRUST DATED MAY 21, 1992 By: /s/ Carolyn S. Hadesman ------------------------ Name: Carolyn B. Hadesman Title: Trustee LISA HADESMAN 1991 TRUST By: /s/ Edward S. Hadesman ------------------------ Name: Edward S. Hadesman Title: Trustee CYNTHIA HADESMAN 1991 TRUST By: /s/ Edward S. Hadesman ------------------------ Name: Edward S. Hadesman Title: Trustee 34 TUCKER B. MAGID /s/ Tucker B. Magid ------------------- FRANCES S. SHUBERT /s/ Frances S. Shubert ---------------------- GRANDVILLE ROAD PROPERTY, INC., an Illinois corporation By: /s/ Edward S. Hadesman ------------------------ Name: Edward S. Hadesman Title: President SKY HARBOR ASSOCIATES, an Illinois limited partnership By: /s/ Edward S. Hadesman -------------------------- Name: Edward S. Hadesman Title: Managing General Partner 35 JEFFREY A. PATTERSON /s/ Jeffrey A. Patterson ------------------------ 36 PRIME GROUP LIMITED PARTNERSHIP, an Illinois Limited Partnership By: /s/ Michael W. Reschke -------------------------- Name: Michael W. Reschke Title: Managing General Partner 37 EXHIBIT A
Prime Group Limited Partnership 90,000 Common Units Jeffrey Patterson 110,000 Common Units Primestone Investment Partners, L.P. 7,944,893 Common Units Edward S. Hadesman Trust Dated May 22, 1992 388,677 Common Units Grandville/Northwestern Management Corporation 9,750 Common Units Carolyn B. Hadesman Trust dated May 21, 1992 54,544 Common Units Lisa Hadesman 1991 Trust 169,053 Common Units Cynthia Hadesman 1991 Trust 169,053 Common Units Tucker B. Magid 33,085 Common Units Frances S. Shubert 28,805 Common Units Grandville Road Property, Inc. 7,201 Common Units Sky Harbor Associates 62,149 Common Units
EX-10.17 17 EXHIBIT 10.17 Exhibit 10.17 FORMATION AGREEMENT THIS FORMATION AGREEMENT (this "Agreement") is made and entered into as of the 17th day of November, 1997 by and among (i) PRIME GROUP REALTY TRUST, a Maryland real estate investment trust (the "Company"), (ii) PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "Operating Partnership"), (iii) PRIME GROUP REALTY SERVICES, INC., a Delaware corporation ("Services Company"), (iv) THE PRIME GROUP, INC., an Illinois corporation ("PGI"), (v) PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership ("PGLP"), and (vi) JEFFREY A. PATTERSON ("Patterson"). RECITALS: A. The Company is a recently organized real estate investment trust formed for the purpose of, among other things, acquiring substantially all of the office and industrial real estate business and operations of PGI and its affiliates (including, without limitation, PGI's contractual rights to acquire additional office and industrial properties). Concurrently with the contributions contemplated by this Agreement, the Company will issue in an initial public offering (the "Offering") Common Shares of Beneficial Interest in the Company (the "Common Shares"). B. The business and operations of the Company will be conducted through the Operating Partnership and the Services Company. The Operating Partnership will issue limited partnership interests (the "Common Units") to the Company and to other entities, including PGI and/or its affiliates, in connection with contributions contemplated hereby and the other transactions contemplated to occur in connection with the formation of the Company and the Offering (the "Formation Transactions"). C. PGI and PGLP (collectively, the "Prime Transferors") desire to convey and cause to be conveyed to the Company and to the Operating Partnership all the right, title and interest held by the Prime Transferors and their affiliates in and to (i) the entities identified on Schedule 1 hereto (such entities being hereinafter referred to collectively as the "Prime Entities"), together with all other interests of PGI and PGLP in and to each of the businesses and facilities operated and owned by the Prime Entities (the Prime Entities and all of such other assets being together referred to herein as the "Prime Projects") and (ii) the entities identified on Schedule 1 hereto (such entities being hereinafter referred to collectively as the "Prime Contribution Entities" and together with the Prime Entities, the "Contributed Entities"), together with all other interests of PGI and PGLP in and to each of the businesses and facilities operated and owned by the Prime Contribution Entities (Contributed Entities and all of such other assets being together referred to herein as the "Contributed Projects"). D. Patterson desires to convey his rights and interests in the Contributed Projects to the Operating Partnership in exchange for Common Units. E. PGI has entered into (i) that certain option agreement dated as of August 4, 1997 (the "Lumbermens Agreement") with Lumbermens Mutual Casualty Company, an Illinois insurance corporation ("Lumbermens"), pursuant to which Lumbermens granted to PGI an option to purchase all right, title and interest of Lumbermens in the LMCC 77 Subordinate Loan Interests (as defined in the Lumbermens Agreement) and (ii) that certain Amended and Restated Agreement dated as of July 15,1997 (the "Kemper Subordinate Agreement") by and among Kemper Investors Life Insurance Company, an Illinois insurance corporation ("KILICO"), Federal Kemper Life Assurance Company, an Illinois insurance corporation ("FKLA"), KILICO Realty Corporation an Illinois corporation ("KRC"), FKLA Realty Corporation, an Illinois corporation ("FRC"), KR 77 Fitness Center, Inc., a Delaware corporation ("KR Fitness"), 77 West Wacker Limited Partnership, an Illinois limited partnership ("77 L.P."), K/77 Investors Limited Partnership, an Illinois limited partnership ("K/77 L.P."), PGLP and Prime 77 Fitness Center, Inc., an Illinois corporation (KILICO, FKLA, KRC, FRC and KR Fitness are hereinafter referred to as the "Kemper Parties") pursuant to which the Kemper Parties have granted to PGI an option to purchase all right, title and interest of the Kemper Parties in and to the Subordinate Loan Documents (as defined therein); such interests, among other things, encumber the real estate commonly known as 77 West Wacker Drive, Chicago, Illinois, owned by 77 L.P.; F. PGI has entered into that certain (i) letter agreement dated July 18, 1997 (the "Triad Agreement") with KILICO, KRC and KRC Portfolio Corp. and (ii) Option To Purchase Partnership Interests dated as of June 17, 1994 but made effective as of March 22, 1994, as amended by that certain Amendment To Option To Purchase Partnership Interests dated as of January 21, 1997 and that certain Second Amendment To Option To Purchase Partnership Interests dated as of July 15, 1997 (as amended, the "Partnership Option Agreement"), pursuant to which it has the right to acquire the partnership interests in 77 L.P. and K/77 L.P. held by one or more of the Kemper Parties. G. PGI has agreed to convey and assign to the Operating Partnership, the rights under the Lumbermens Agreement, the Kemper Subordinate Agreement, the Triad Agreement and the Partnership Option Agreement (the Lumbermens Agreement, the Kemper Subordinate Agreement, the Triad Agreement and the Purchase Option Agreement and the related agreements and documents are hereinafter referred to as the "Kemper Agreements"), and the Operating Partnership has agreed to assume the obligation to pay the purchase price therefor as set forth in the Kemper Agreements. H. The Prime Transferors desire to convey to the Operating Partnership all of their respective right, title and interest in substantially all the assets and liabilities relating to their office and industrial development, leasing and management business, which assets and liabilities are set forth on Schedules 2 and 3 attached hereto (collectively, the "Contributed Personal Property"). I. PGI has entered into that certain Contribution Agreement dated as of July 8, 1997 with (i) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated June 15, 1982 and known as Trust No. 10-40113-09, (ii) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated September 7, 1994 and known as Trust No. 11-9051, (iii) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated March 30, 1984 and known as Trust No. 11-107825, (iv) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated August 1, 1986 and 2 known as Trust No. 11-1358, (v) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated August 1, 1986 and known as Trust No. 11-1357, (vi) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated January 17, 1974 and known as Trust No. 286-34, (vii) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated October 15, 1995 and known as Trust No. 11-9869, (viii) LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated December 1, 1987 and known as Trust No. 11-2868, (ix) 310 ERA Limited Partnership, (x) MacArthur Drive Properties, (xi) CLE Limited Partnership, (xii) 500 Lindberg Limited Partnership, (xiii) 515 Huehl Limited Partnership, (xiv) 555 Huehl Limited Partnership, (xv) Sky Harbor Associates, (xvi) 1001 Technology Way, LLC, (xvii) The Grandville Road Limited Partnership and (xviii) Industrial Building and Development Company (collectively, the "Contributors") as amended by the First Amendment to the Contribution Agreement dated as of August 12, 1997, with LaSalle National Trust, NA, as Trustee under the Trust Agreements identified in clauses (i) through (viii) above (as amended, the "IBD Contribution Agreement") pursuant to which the Contributors will contribute their interests in such entities to the Operating Partnership in exchange for Common Units. J. PGI has entered into that certain Contribution Agreement dated as of October 20, 1997 (the "NAC Contribution Agreement") with (i) the Operating Partnership, (ii) the Company, (iii) Narco River Business Center, (iv) Narco Tower Road Associates, (v) Olympian Office Center, (vi) Tri-State Industrial Park Joint Venture, (vii) Carol Stream Industrial Park Joint Venture, (viii) Narco Enterprises, Inc., (ix) The Nardi Group Ltd., (x) Narco Construction Inc., (xi) Nardi & Co., (xii) Nardi Asset Management, Inc., (xiii) Nardi Asset Management, Inc., and (xiv) Nardi Architectural, Inc. (collectively the entities identified in clauses (iii) through (xiv), the "NAC Contributors") pursuant to which the NAC Contributors will contribute their interests in properties owned by them to the Operating Partnership in exchange for Common Units. K. PGI has agreed to convey to the Operating Partnership or its designee all of PGI's rights under the IBD Contribution Agreement and the NAC Contribution Agreement, and the Operating Partnership has agreed to assume all of PGI's obligations under the IBD Contribution Agreement and the NAC Contribution Agreement. L. PGI has entered those certain purchase agreements set forth on Schedule 4 hereto (the "Facility Acquisition Agreements") with certain third parties (the "Facility Transferors") pursuant to which PGI has the contractual right to acquire the certain office and industrial facilities, or interests therein, owned or held by the Facility Transferors as set forth on Schedule 4 hereto. M. PGI has agreed to convey and assign to the Operating Partnership or its designee all of PGI's rights under the Facility Acquisition Agreements, and the Operating Partnership has agreed to assume all of PGI's obligations under the Facility Acquisition Agreements. N. PGI has entered into those certain option agreements set forth on Schedule 5 hereof (the "Land Option Agreements") pursuant to which it has been granted the right to purchase the real estate indicated on Schedule 5 hereto. 3 O. PGI has agreed to convey and assign to the Operating Partnership or its designee all of PGI's rights under the Land Option Agreements, and the Operating Partnership has agreed to assume all of PGI's obligations under the Land Option Agreements. P. The parties desire to enter into this Agreement to set forth their understanding with respect to the manner in which the Company, Operating Partnership or their designee will acquire interests in the Contributed Projects, the Contributed Personal Property, the operations relating thereto and the rights of PGI under the Contributed Contracts (as hereinafter defined) in exchange for Common Units, cash and the assumption of certain liabilities. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. TRANSFER OF CONTRIBUTED ENTITIES, CONTRACTUAL RIGHTS AND CERTAIN OTHER ASSETS. As part of a single plan, on the Closing Date (as hereinafter defined) the Prime Transferors and Patterson will convey to the Company, the Operating Partnership, or their designees, (w) their interests in the Contributed Entities, (x) the contractual rights of PGI and PGLP under the Kemper Agreements and the Facility Acquisition Agreements, (y) the Contributed Personal Property and (z) the contractual rights of PGI under the Land Option Agreements, the IBD Contribution Agreement and the NAC Contribution Agreement (the Kemper Agreements, the Facility Acquisition Agreements, the Land Option Agreements, the IBD Contribution Agreement and the NAC Contribution Agreement are hereinafter referred to collectively as the "Contributed Contracts"; and the assets and rights described in clauses (w), (x), (y) and (z) are hereinafter collectively referred to as the "Contributed Assets") in consideration for, among other things, the issuance by the Operating Partnership of Common Units (which are exchangeable into Common Shares subject to the conditions and restrictions contained in Section 8.6 and Exhibit C to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership dated as of the date hereof) to the Prime Transferors or their designees and Patterson as provided in Section 3 hereof, the assumption by the Company, the Operating Partnership or their designee of the liabilities associated with the Contributed Projects, the Contributed Contracts and the other Contributed Assets referred to herein and the cash payments required to be made in accordance with Section 4 hereof, all in a transaction designed to meet the requirements of section 351(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company and the Operating Partnership will acquire the Contributed Projects subject to the existing debt, liabilities and contractual and other obligations of such Contributed Entities existing on the date hereof, except for the liabilities and obligations identified on Schedule 9 hereof. In furtherance of the foregoing, on the Closing Date: (a) PGI shall transfer or cause to be transferred to the Operating Partnership the following: 4 (i) The general partnership interests, the limited partnership interests, stock interests and limited liability company interests set forth on Schedule 1 hereof. (ii) All of its right, title and interest in the Facility Acquisition Agreements, the Kemper Agreements and the Land Option Agreements. (iii) All of its interests in all other assets and properties of the office and industrial real estate division of PGI and its affiliates, all as more fully described on Schedule 2 hereto. (b) PGLP shall transfer or cause to be transferred to the Operating Partnership the following: (i) The general partnership interests, limited partnership interests and limited liability company interests set forth on Schedule 1 hereof. (ii) All of its rights under the Kemper Agreements. (c) PGLP shall transfer to the Company a one tenth of one percent (.1%) limited partnership interest in the entities listed on Schedule 1 hereof. (d) PGI shall pay the transfer taxes relating to the transfer to the Company of the Contributed Entities to the extent such taxes exceed $2,500,000. (e) PGI shall transfer to the Company a one tenth of one percent (.1%) limited partnership interest in the entities listed on Schedule 1 hereto and a one tenth of one percent (.1%) general partnership interest in Kemper/Prime Industrial Partners. (f) Patterson shall transfer to the Operating Partnership all of his rights and interests in the Contributed Projects. 2. CERTAIN DISTRIBUTIONS. On or prior to the Closing Date, the Prime Transferors shall have the right to receive distributions from the Contributed Entities, net of all advances to PGI by the Contributed Entities. 3. ISSUANCE OF COMMON UNITS. In partial consideration of the transfer of the assets provided for in Section 1, on the Closing Date, the Operating Partnership shall issue (a) an aggregate of 3,465,000 of its Common Units to Prime Transferors and (b) 110,000 of its Common Units to Patterson subject to the terms of the employment agreement between the Company and Patterson. All such Common Units shall be fully paid and nonassessable. 4. ASSUMPTION OF LIABILITIES; CERTAIN PAYMENTS. (a) As further consideration for the transfer of the assets by the Prime Transferors to the Company, the Operating Partnership or their designees as provided for in Section 1, on the Closing Date the Operating Partnership will enter into an Assignment and Assumption Agreement 5 substantially in the form of Exhibit A hereto pursuant to which the Operating Partnership shall assume all of the outstanding liabilities of each Prime Transferor and their affiliates with respect to the Contributed Assets (including the assets and operations of the Contributed Projects, the Contributed Contracts and the operations of the office and industrial real estate division of PGI and its affiliates), whether or not reflected on the books and records of the Prime Transferors or the Contributed Entity, and whether known or unknown, accrued or unaccrued, absolute, contingent or otherwise, except for those liabilities and obligations identified on Schedule 9 hereto. (b) In addition, on the Closing Date, the Operating Partnership or its designee will make cash payments as described in Schedule 6 to this Agreement. 5. CLOSING DATE. The closing of the transactions contemplated by this Agreement (the "Closing") shall occur on the day (the "Closing Date") immediately following the day that all of the conditions precedent of the parties under this Agreement have been met or waived by the party entitled to the benefit thereof, but in any event no later than the date of closing of the Offering. 6. REPRESENTATIONS AND WARRANTIES. (a) Each of PGI and PGLP hereby represents and warrants to the Company and the Operating Partnership as follows (except as set forth in the Disclosure Schedule attached hereto as Schedule 7): (i) Organization; Authority. Each of PGI and PGLP and each of the Contributed Entities (collectively, the "Applicable Partnerships"), are either (A) in the case of such Persons (as hereinafter defined) which are corporations, duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation or (B) in the case of such Persons which are partnerships or limited liability companies, a partnership or a limited liability company, as the case may be, duly formed, validly existing and in good standing (to the extent applicable) under the laws of its jurisdiction of formation. Each of PGI and PGLP has the requisite authority to enter into and perform its obligations under this Agreement. For the purposes hereof, "Person" means a natural person, partnership, corporation, limited liability company, association, joint stock company, trust, estate, joint venture, unincorporated organization or other entity. (ii) Due Authorization; Binding Agreement. The execution, delivery and performance of this Agreement by each of PGI and PGLP has been duly and validly authorized by all necessary action of each of PGI and PGLP. This Agreement has been duly executed and delivered by each of PGI and PGLP, and constitutes a legal, valid and binding obligation of each of PGI and PGLP, enforceable against each of PGI and PGLP in accordance with the terms hereof, except to the extent enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors rights generally or general principles of equity. (iii) Consents and Approvals. No consent, waiver, approval or authorization of, or filing, registration or qualification with, or notice to, any governmental unit or any other 6 Person is required to be made, obtained or given by any Applicable Partnership in connection with the execution, delivery and performance by the Prime Transferors of their obligations under this Agreement, except for such consents, approvals or authorizations which have been obtained or for which the failure to obtain would not have a Material Adverse Effect. For the purposes hereof, "Material Adverse Effect" means a material adverse effect on the business, assets or financial condition of the Company and its affiliates, taken as a whole. (iv) No Violation. None of the execution, delivery or performance of this Agreement by either of PGI or PGLP does or will, with or without the giving of notice, lapse of time or both, (A) violate, conflict with or constitute a default (which violation, conflict or default would result in a Material Adverse Effect) under any term or condition of (y) the organizational documents of any Applicable Partnership or any Significant Agreement (as defined below) to which any Applicable Partnership is a party or by which it is bound, or (z) any term or provision of any judgment, decree, order, statute, injunction, rule or regulation of a governmental unit applicable to an Applicable Partnership or (B) result in the creation of any Lien or other encumbrance upon the interest of either of PGI or PGLP in any Contributed Entity or the assets or properties of the Contributed Entities. For the purposes hereof, "Liens" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance for the payment of money, lien (statutory or otherwise), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, but not limited to, any conditional sale or other title retention agreement or the interest of a lessor under a capital lease. (v) Ownership of the Contributed Entities. Other than for the interests of the Kemper Parties which are to be acquired by the Operating Partnership and the Company on the date hereof, each of the Persons identified as an Assignor on Schedule 1 hereto is the sole owner of the partnership interests of a Contributed Entity contributed by it to the Company or the Operating Partnership (the "Contributed Partnership Interests") and has good and valid title to such interests, free and clear of all Liens (subject to the rights and interests of Patterson that are being contributed pursuant to this Agreement). The Contributed Partnership Interests have been issued in compliance with the partnership agreements (as then in effect) of the Contributed Entities and were not issued in violation of any federal or state securities laws. There are no rights, subscriptions, warrants, options, conversion rights or agreements of any kind outstanding to purchase or to otherwise acquire any securities or obligations of any kind convertible into any partnership interest or other equity interests or profit participation of any kind in the Contributed Entities or the real estate owned by them (the "Properties")(or any part thereof) which will not be terminated or contributed to the Operating Partnership prior to Closing. (vi) Compliance with Laws. Each of the Prime Entities has complied with all laws (excepting, however, Environmental Laws (as hereinafter defined), which are specifically covered by subsection (vii) below) applicable to the conduct of the business of the Prime Entities and the ownership, use and operation of the Property owned by a Prime Entity and has obtained all licenses and permits required for the conduct thereof, except where the failure to so comply or obtain could not have a Material Adverse Effect. To the best of the 7 knowledge of each of PGI and PGLP, (A) such licenses and permits are in full force and effect and (B) neither PGI nor PGLP has received any notice of violation from any federal, state or municipal entity or notice of an intention by any such government entity to revoke any certificate of occupancy or other certificate, license or permit issued by it in connection with the use of any of the Properties owned by a Prime Entity, that in each case has not been cured or otherwise resolved to the satisfaction of such government entity, except where such failure or such action could not have a Material Adverse Effect. For the purposes hereof, "Environmental Laws" means all federal, state and local laws, ordinances and rules of common law relating to environmental safety or health matters, including those relating to fines, orders, injunctions, penalties, damages, contribution, cost recovery compensation, losses or injuries resulting from the release or threatened release of hazardous substances and the generation, use, storage, transportation or disposal of hazardous substances. (vii) Environmental Matters. Except as disclosed in environmental reports, no Prime Entity has knowingly caused or permitted any Hazardous Material (as defined under applicable Environmental Laws) to be improperly maintained or disposed of on, under or at the Prime Entity's Property or any part thereof in violation of any Environmental Law. To the knowledge of each of PGI and PGLP and except for such matters as disclosed in environmental reports and except for such matters as would not have a Material Adverse Effect: (A) the Prime Entities are in compliance, and have heretofore complied, with all Environmental Laws, (B) none of the Prime Entities has received any written notice from any governmental unit or other person that it, its current or former operations or the properties now or heretofore owned, leased or used by it or any of its predecessors, are not or have not been in compliance with the Environmental Laws or that it has any material liability with respect thereto, (C) there are no administrative, regulatory or judicial proceedings pending or threatened against the Prime Entities pursuant to, or alleging any material violation of, or material liability under, any Environmental Laws, (D) none of the properties now or heretofore owned, leased or used by the Prime Entities has been used as a disposal site for any Hazardous Materials. (viii) Ownership of Properties. With respect to each of the Prime Entities, said Prime Entity (A) is the sole owner of the Property as indicated on the Schedules hereto and (B) has good, valid and marketable title to such Property, free and clear of all Liens other than the Permitted Exceptions. For purposes hereof, "Permitted Exceptions" shall mean with respect to real property or any interest or estate therein owned by any Person: A. Liens or deposits made to secure the release of such Liens, securing taxes, the payment of which is at the time not delinquent or the payment of which is actively being contested in good faith by appropriate proceedings diligently pursued and for which appropriate reserves shall have been established on the Applicable Partnership's books in accordance with generally accepted accounting principles consistently applied ("GAAP"); B. attachments, judgments and other similar Liens arising in connection with court or administrative proceedings, provided that the execution or other enforcement of such Liens is effectively stayed or secured and the claims secured by 8 such Liens are actively being contested in good faith by appropriate proceedings diligently pursued and for which appropriate reserves shall have been established on the Applicable Partnership's books in accordance with GAAP; C. zoning laws and ordinances; provided that the Prime Entities' Property is not in violation thereof and that such laws and ordinances do not require the demolition, vacation or cessation of the present use of such Property or require the discontinuance of the use of all or any material portion of such Property as an office building, an industrial building or a parking facility, as applicable; D. any laws, ordinances, deeds of trust, mortgages, Liens, easements, rights of way, restrictions, exemptions, reservations, conditions, limitations, covenants, adverse rights or interests, matters disclosed in the title reports delivered in connection with the transactions contemplated hereby (the "Title Reports") and other matters described as exceptions on the Disclosure Schedule; provided that the applicable Property is not in violation thereof and the same do not require the demolition, vacation or cessation of the present use of such Property or require the discontinuance of the use of all or any material portion of such Property as an office building, an industrial building or a parking facility, as applicable; E. any other easements, rights of way, restrictions, exceptions, reservations, conditions, limitations, covenants, adverse rights or interests, licenses, minor irregularities in title and other similar encumbrances which do not in the aggregate have a Material Adverse Effect; F. any law or governmental regulation or other right of any governmental unit, which (Y) requires the person to maintain certain facilities or perform certain acts as a condition of its occupancy or use of its assets and properties, or (Z) condemns, appropriates or recaptures the person's assets or property; and G. Liens imposed by laws, such as carriers', warehouseman's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves shall have been established as of the date hereof on the Applicable Partnership's books in accordance with GAAP. (ix) Tenant Leases. The rent roll described in subparagraph (xvi) below lists each of the leases to which a Prime Entity is a party which is currently in effect with respect to the Property owned by such Prime Entity, as the same have been amended or modified to the date hereof. The parties hereto acknowledge that the Disclosure Schedule does not list, and neither PGI nor PGLP makes any representation with respect to, (A) subleases, concessions, or license agreements which may have been entered into by tenants or subtenants or (B) license or concession agreements which have terms not in excess of sixty (60) days; provided that, in the case of a sublease or assignment, each of PGI and PGLP represents that the tenant 9 listed in the rent roll described in subparagraph (xvi) below remains liable for the performance of the lease. (x) Absence of Undisclosed Liabilities and Contractual Obligations. Except for liabilities arising in the ordinary course of business, since the date of the Applicable Partnerships' most recent financial statements and for those matters specifically and adequately accrued or reserved for in the financial statements of the Applicable Partnerships, the Prime Entities have no liabilities of any material nature, required by GAAP to be included in the financial statements of such Prime Entity, and which would have, individually or in the aggregate, a Material Adverse Effect. To the knowledge of each of PGI and PGLP, there are no Significant Agreements of the Prime Entities other than as set forth in the Title Reports or reflected in the final prospectus for the initial public offering of securities of the Company or in the most recent financial statements of the Applicable Partnerships delivered to the Company. For purposes hereof, "Significant Agreement" of a Prime Entity means and includes any of the following to which such Person is a party or by which such Person or any of its assets or properties may be subject or bound, in each such case as amended and currently in effect, inclusive of any waivers relating thereto: A. all agreements, instruments and documents evidencing or securing the contractual obligations of the Prime Property that involve annual payments in excess of $100,000; B. all leases where the Prime Entity is the lessee (including capital leases), contracts, agreements or commitments (whether written or oral) that are not terminable without penalty on not more than 90 days' notice and that involve annual gross payments in excess of $100,000; C. all ground leases where the Prime Entity is a ground lessee; and D. all reciprocal easement agreements affecting the Prime Entities. (xi) Significant Agreements; Binding Agreements. To the knowledge of PGI and PGLP, each of the Significant Agreements is valid and binding obligation of the applicable Prime Entity enforceable against the Prime Entity party thereto in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors rights generally and general equitable principles. (xii) Litigation. There are no claims, actions, suits or proceedings pending, and, to the knowledge of each of PGI and PGLP, there are no investigations pending or claims, actions, suits, proceedings or investigations threatened, before any court, governmental unit or any arbitrator with respect to the Prime Entities in which an adverse determination is reasonably likely and would have a Material Adverse Effect. 10 (xiii) Property Improvements. To the knowledge of each of PGI and PGLP, except as previously disclosed, the improvements at each Property owned by a Prime Entity is in good condition and repair, ordinary wear and tear excepted, and has not suffered any material casualty or other material damage which has not been repaired in all material respects. To the knowledge of each of PGI and PGLP except as previously disclosed, there is no material latent or patent structural, mechanical or other significant defect or deficiency in the improvements owned by a Prime Entity. (xiv) Condemnation Proceedings. Except as disclosed in the Title Reports or as otherwise previously disclosed, no proceedings have been commenced, or, to the knowledge of each of PGI and PGLP, threatened, by an authority having the power of eminent domain to condemn any part of any Property owned by a Prime Entity or any improvements thereon or, to the knowledge of each of PGI and PGLP, any property owned by a party to a reciprocal easement agreement affecting any Prime Entity, except such as would not have a Material Adverse Effect. (xv) Bankruptcy and Insolvency. To the knowledge of each of PGI and PGLP, none of the tenants now occupying any Property owned by a Prime Entity, is the subject of any bankruptcy, reorganization, insolvency or similar proceedings. (xvi) Rent Roll. The rent roll for the Property owned by a Prime Entity, contained in the closing certificates dated November 17, 1997 for each such entity, is true, correct and complete and, as of the date thereof, there are no prospective tenant cancellation rights, prospective renewal or extension options or future rent abatements or unpaid tenant concessions or other unpaid landlord obligations other than those summarized on such rent roll, except in each case to the extent any inaccuracies would not, individually or in the aggregate, have a Material Adverse Effect. (xvii) Neither PGI nor PGLP is a "foreign person" within the meaning of Section 1445 (f) of the Code nor a "foreign partner" within the meaning of Section 1446 of the Code. (xviii) Neither PGI nor PGLP owns, directly or indirectly, (i) five percent (5%) or more of the total combined voting power of all classes of stock entitled to vote, or five percent (5%) or more of the total number of shares of all classes of stock, of any corporation that is a tenant in a Property owned by a Prime Entity or (ii) an interest of five percent (5%) or more in the assets or net income of any tenant in a Property owned by a Prime Entity. (xix) To the knowledge of each of PGI and PGLP, no condition exists which, with the giving of notice or the passage of time, or both, would permit any party to cancel its obligations under any reciprocal easement agreement to which any Prime Entity is a party or to be relieved of its operating covenants thereunder, except as set forth in the rent roll described in subparagraph (xvi) above. (xx) Neither PGI nor PGLP has received or been informed in writing of the receipt of any written notice which is still in effect that there is any violation of a condition 11 or agreement contained in any easement, restrictive covenant or any similar instrument or agreement affecting any Property or any portion thereof. (xxi) Transfer Taxes. There are no transfer taxes payable, accruing or otherwise arising out of the transfer of the Contributed Entities to the Company or to the Operating Partnership (including any reconstitution of the limited partnership interests to general partnership interests) which shall not have been paid on or prior to the date hereof, other than transfer taxes relating to the transfer to the Company of the Contributed Entities in the amount of no more than $2,500,000. (b) For the purposes of the representations and warranties of PGI and PGLP made pursuant hereto, a statement that a fact is true to "the knowledge" means, that after reasonable investigation, none of the following Persons actually knows such statement to be untrue: Michael W. Reschke, Richard S. Curto, Jeffrey A. Patterson, Gary J. Skoien, Robert J. Rudnik and Donald Faloon. For purposes of this Agreement, any written notice given to the on-site property manager of a Property shall be deemed to have been given to the Contributed Entity and PGI. (c) Patterson hereby represents and warrants to the Company and the Operating Partnership as follows: (i) This Agreement constitutes his valid and legally binding obligation, enforceable against him in accordance with its terms. (ii) He owns the rights and interests to be conveyed by him to the Operating Partnership pursuant to the terms of this Agreement free and clear of all liens and encumbrances. (d) Except as specifically warranted in this Section, the Prime Transferors and Patterson make no representations and warranties to the Company or the Operating Partnership whatsoever regarding the Contributed Entities, the assets or properties to be acquired under the Contributed Contracts, or the assets of the Contributed Entities, including, but not limited to, THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WHICH ARE SPECIFICALLY DISCLAIMED. The Operating Partnership acknowledges that all of the assets to be conveyed by the Prime Transferors and Patterson to the Operating Partnership (and all of the assets of the Contributed Entities) will be conveyed "as is, where is." The Prime Transferors and Patterson make no representation or warranty with respect to any asset which is the subject of any of the Facility Acquisition Agreements. (e) The Company hereby represents, warrants and covenants with and to the Prime Transferors and Patterson as follows: (i) It is a real estate investment trust duly organized and validly existing under the laws of the State of Maryland. 12 (ii) It has the full power and authority under the terms of its trust agreement to execute and deliver this Agreement and to consummate the transactions contemplated hereby. (iii) This Agreement constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms. (iv) On the Closing Date, except as otherwise agreed to by PGI, the Operating Partnership and/or the Services Company will hire all of the employees of the Prime Transferors associated with the Contributed Entities and will assume all liabilities and obligations to or with respect to such employees, including any accrued but unpaid benefits, bonuses and vacation pay. (f) The Operating Partnership hereby represents, warrants and covenants with and to the Prime Transferors and Patterson as follows: (i)It is a limited partnership duly organized and validly existing under the laws of the State of Delaware. (ii) It has full legal power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. (iii) This Agreement constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms. (iv) On the Closing Date, except as otherwise agreed to by PGI, the Operating Partnership and/or the Services Company will hire all of the employees of the Prime Transferors associated with the Contributed Entities and will assume all liabilities and obligations to or with respect to such employees, including any accrued but unpaid benefits, bonuses and vacation pay. (v) The Common Units to be issued by the Operating Partnership to the Prime Transferors and Patterson pursuant to the terms of this Agreement will, when issued in accordance herewith be duly authorized, fully paid and nonassessable. (vi) The Operating Partnership will not take any action which would cause the transfers provided for in Section 1 not to qualify for tax-free treatment under section 351 of the Code. (g) All of the representations and warranties provided for in this Section 6 shall survive the Closing Date and the delivery of the closing documents on the Closing Date for a period of two years. 7. CONDITIONS PRECEDENT. 13 (a) The obligation of the Prime Transferors and Patterson to consummate the transactions contemplated hereby is subject to the satisfaction of the following conditions (any of which may be waived by the Prime Transferors and Patterson in writing): (i) All the terms, covenants and conditions of this Agreement to be complied with and performed by the Company or the Operating Partnership on or before the Closing Date shall have been fully complied with and performed in all respects. (ii) All the representations and warranties made by the Company and Operating Partnership herein shall be true and correct in all material respects on and as of the Closing Date. (iii) All consents required for the valid and effective transfer of the assets to be transferred in accordance with Section 1 shall have been obtained and the consent to the assumption by the Operating Partnership of the obligations to be assumed by the Operating Partnership pursuant to Section 4 shall have been obtained, except for any approvals and consents described in Schedule 8 to this Agreement. (iv) There shall be no pending or threatened litigation against any of the parties hereto concerning or relating to the transactions contemplated hereby. (v) The approval of all administrative agencies, if any, whose approval of the transactions contemplated hereby is necessary or desirable shall have been obtained. (vi) The Company, the Operating Partnership, PGI and the other parties signatory thereto shall have entered into a Registration Rights Agreement in a form mutually agreeable to the parties thereto. (vii) The Company, the Operating Partnership, Michael W. Reschke and PGI shall have entered into a Non-Compete Agreement substantially in a form mutually agreeable to the parties thereto. (viii) PGI shall have entered into an Indemnity Agreement in a form mutually agreeable to the parties thereto. (ix) PGI and the Operating Partnership shall have entered into a Right of First Offer Agreement in a form mutually agreeable to the parties thereto. (b) The obligations of the Company and the Operating Partnership to consummate the transactions contemplated hereby are subject to the satisfaction of the following conditions (any of which may be waived by the Company and Operating Partnership in writing): (i) All the terms, covenants and conditions of this Agreement to be complied with and performed by the Prime Transferors and Patterson on or before the Closing Date shall have been fully complied with and performed in all respects. 14 (ii) All the representations and warranties made by the Prime Transferors and Patterson herein shall be true and correct in all material respects on and as of the Closing Date. (iii) All required consents necessary for the valid and effective transfer of the assets to be transferred to the Operating Partnership in accordance with the provisions of Section 1 shall have been obtained and the consent to the assumption by the Operating Partnership of the obligations to be assumed by the Operating Partnership pursuant to Section 4 shall have been obtained, except for any approvals and consents described in Schedule 8 to this Agreement. (iv) The Operating Partnership shall have obtained title insurance (or endorsed commitment) insuring that all real property owned by the Contributed Entities are vested in the respective entities free and clear of all mortgages, liens and encumbrances except those reasonably acceptable to the Operating Partnership. (v) The conditions referred to in Sections 7(a)(iv) through 7(a)(ix) shall have been complied with or otherwise satisfied. (vi) PGI shall have entered into an Environmental Remediation and Indemnification Agreement with the Operating Partnership in a form mutually agreeable to the parties thereto. 8. INDEMNIFICATION (a) Each Prime Transferor and Patterson hereby agrees to indemnify the Company and the Operating Partnership for, and to hold the Company and the Operating Partnership harmless from, the following: (i) Any and all liabilities, damages, losses, costs or deficiencies including any liabilities, damages, losses, costs or deficiencies under the Securities Act of 1933, as amended, resulting from any misrepresentation, breach of any warranty or nonfulfillment of any agreement or covenant on the part of the Prime Transferor or Patterson, whether contained in this Agreement or in any document furnished in connection with the transactions contemplated hereby; and (ii) Any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to the foregoing, including reasonable attorney's fees. (b) Each of the Company and the Operating Partnership hereby agrees to indemnify each Prime Transferor and Patterson for, and to hold each Prime Transferor and Patterson harmless from, the following: 15 (i) Any and all indebtedness, lease, contract or other liabilities and obligations assumed by the Company and the Operating Partnership in accordance with the terms hereof; (ii) Any and all liabilities, losses, costs, damages or deficiencies resulting from any misrepresentations, breach of any warranty or nonfulfillment of any agreement or covenant on the part of the Company or the Operating Partnership, whether contained in this Agreement or in any document furnished in connection with the transactions contemplated hereby; (iii) Any and all liabilities, damages, losses, costs or deficiencies resulting from any act or circumstance relating to any of the assets transferred (including the assets and operations of the Contributed Entities and operations of PGI's office and industrial real estate division) whenever occurring; (iv) Any loss, claim, damage, or liability, including any loss, claim, damage, or liability under the Securities Act of 1933, as amended, or any applicable state securities laws, arising out of, or attributable to the Offering, except for losses, claims, damages or liabilities arising from the inaccuracy of information supplied by PGI for inclusion in the prospectus relating to the Offering; and (v) Any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing, including reasonable attorneys' fees. (c) Any party seeking indemnification ("Indemnitee") pursuant to this Section 8 shall promptly (within 20 days of service to the Indemnitee if a third party has commenced actual litigation against the Indemnitee) give written notice to the party from which indemnification is sought ("Indemnitor") after the Indemnitee has knowledge of any claim against the Indemnitor as to which recovery may be sought against the Indemnitee pursuant to this Section 8, or of the commencement of any legal proceedings against the Indemnitee as to such claim after the Indemnitee has knowledge of such proceedings, whichever shall first occur, and shall permit the Indemnitor to assume the defense of any such claim or any litigation resulting from such claim. Such notice shall specify in reasonable detail the facts known to the Indemnitee giving rise to such indemnification rights and, if possible, an estimate of the amount of liability which could result therefrom. The right of the Indemnitee to indemnification hereunder shall be deemed agreed to unless, within ten days after the receipt of such notice, the Indemnitee is notified in writing by the Indemnitor that it disputes the right to indemnification as set forth in such notice. Failure by the Indemnitor to notify the Indemnitee of the Indemnitor's election to defend such action within ten days after notice thereof shall have been given to the Indemnitor, or failure to deliver notification to the Indemnitee by the Indemnitor that the Indemnitee's right to indemnification is being disputed, shall be deemed an acknowledgment by Indemnitor that Indemnitee is entitled to indemnification hereunder and shall be deemed to be an election by Indemnitor to defend such action. The Indemnitor shall not, in the defense of such claim or any litigation resulting therefrom, consent to entry of any judgment (except with the consent of the Indemnitee) or enter into any settlement (except with the consent of the Indemnitee) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnitee of a full, absolute and unconditional release from all liability in respect of such claim or litigation. 16 (d) If the Indemnitor shall not assume the defense of any such claim or litigation resulting therefrom, the Indemnitee may defend against such claim or litigation in such manner as it may deem appropriate. The Indemnitee may settle such claim or litigation on such terms as it may deem appropriate and the Indemnitor shall promptly reimburse the Indemnitee for the amount of such settlement, and all expenses, legal or otherwise, incurred by the Indemnitee in connection with the defense against, or settlement of, such claim or litigation. If no settlement of such claim or litigation is made, the Indemnitor shall promptly reimburse the Indemnitee for the amount of any judgment rendered with respect to such claim or in such litigation, and of all expenses, legal or otherwise, incurred by the Indemnitee in the defense against such claim or litigation. Notwithstanding the foregoing, if the Indemnitor has disputed the Indemnitee's right to indemnification in accordance with the provisions of Section 8(c), the Indemnitor shall not be obligated to pay the Indemnitee the amount provided for in this Section 8(d) until such dispute has been resolved and it has been determined that the Indemnitor is required to make such indemnification payment. (e) The right of any party to seek indemnification hereunder shall expire as to any claim not made on or prior to the second anniversary of the Closing whether or not the basis for any such claim was known on such date. (f) The Prime Transferors maximum liability under this Section 8 shall be limited to $69,300,000. (g) The recourse against Patterson for indemnity claims under this Section 8 shall be limited to the reconveyance by Patterson to the Operating Partnership of that certain amount of Common Units equal in value (based on the then trading value of the Common Shares of the Company) to the amount of the indemnity claim. Further, in no event shall Patterson be liable for further amounts after the reconveyance to the Operating Partnership of his full 110,000 Common Units received on the date hereof. Without the prior written consent of the Operating Partnership, Patterson agrees not to assign, transfer, pledge or otherwise convey such 110,000 Common Units for a period expiring on the later of (i) November 17, 1999, or (ii) the satisfaction of any claim for indemnification made of Patterson pursuant to this Section 8. (h) As between the Prime Transferors and Patterson all liabilities under this Section 8 shall be shared on a pro-rata basis in accordance with the maximum amount of liability under this Section 8 of the Prime Transferors as set forth in Section 8(f) of $69,300,000 and an amount for Patterson of $2,200,000, unless the liability is caused by the gross negligence or willful misconduct of either the Prime Transferors or Patterson, in which event, as between the Prime Transferors and Patterson, the Person guilty of the gross negligence or willful misconduct shall be solely liable. 17 9. MISCELLANEOUS. (a) Each of the parties hereto hereby covenants and agrees that subsequent to the Closing Date they will, at any time, and from time to time, upon the request and at the expense of the Company, do, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may reasonably be required to fully effectuate the transactions contemplated by this Agreement. Each of the Prime Transferors and Patterson hereby constitutes and appoints the Company as its true and lawful attorney-in-fact, with full power of substitution, to collect for the account of the Company or the Operating Partnership, as applicable, any receivables and other items conveyed to the Company or the Operating Partnership, as applicable, pursuant to the provisions of Section 1, to endorse in the name of the Prime Transferor, Patterson, the Company or the Operating Partnership, or any of them, any check received on account of any receivable, claim or other item, to institute and prosecute in the name of a Prime Transferor, Patterson or otherwise, any and all proceedings which the Company or the Operating Partnership may deem proper in order to collect, assert or enforce any claim, right or title of any kind in and to any of such transferred assets. (b) All notices, requests, demands or other communications required or permitted under this Agreement shall be in writing and be personally delivered against a written receipt, delivered to a reputable overnight courier, for overnight delivery, transmitted by confirmed telephonic facsimile (fax) or transmitted by mail, registered, express or certified, return receipt requested, postage prepaid, addressed as follows: If to the Company or the Operating Partnership: Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: President Fax: (312) 782-5867 With a copy to: Prime Group Realty Trust 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: General Counsel Fax: (312) 917-1684 18 If to PGI or PGLP: c/o The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: Michael W. Reschke Fax: (312) 917-1511 With a copy to: The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: Robert J. Rudnik Fax: (312) 917-1684 and Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attn: Wayne D. Boberg Fax: (312) 558-5700 If to Patterson: Jeffrey A. Patterson 403 North Lincoln Street Hinsdale, Illinois 60521 All notices, demands and requests shall be effective upon being properly personally delivered, one (1) business day after delivery to a reputable overnight courier, upon transmission of a confirmed fax, or upon being deposited in the United States mail in the manner provided in this Section 9. However, the time period in which a response to any such notice, demand or request must be given shall commence to run from the date of personal delivery, one (1) business day after delivery to a reputable overnight courier, the date on the confirmation of a fax, or the date on the return receipt, as applicable. If any party refuses delivery, the notice, demand or request shall be deemed received (i) one business day after personal delivery of the notice, demand or request was attempted or the notice, demand or request was delivered to a reputable overnight courier or was transmitted by fax or (ii) three business days after the notice, demand or request was deposited in the United States mail. (a) This Agreement may be modified or amended from time to time only by a written instrument executed by all of the parties hereto. 19 (b) Captions contained in this Agreement are inserted only as a matter of convenience and reference, and in no way define, limit, extend or describe the scope of this Agreement, or the intent of any provision hereof. All references to Sections herein shall refer to Sections of this Agreement unless the context clearly requires otherwise. (c) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (d) This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Illinois without regard to its conflicts of laws rules. (e) This Agreement represents the entire agreement of the parties hereto with respect to the subject matter hereof. (f) This Agreement may be executed in counterparts which, taken together, shall constitute one and the same instrument. (g) Notwithstanding anything in this Agreement to the contrary, there shall be no recourse for any of the obligations set forth herein against the partners of PGLP or to or against their personal assets. [signature page follows] 20 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written. PRIME GROUP REALTY TRUST By: /s/ W. Michael Karnes ----------------------------------- Its: Executive VP ------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Group Its General Partner By: /s/ W. Michael Karnes ----------------------------------- Its Executive VP -------------------------- PRIME GROUP REALTY SERVICES, INC. By: /s/ W. Michael Karnes ----------------------------------- Its Executive VP -------------------------- THE PRIME GROUP, INC. By: /s/ Ray Grinvalds ------------------------------------ Name: Ray Grinvalds --------------------------------- Title: SVP -------------------------------- PRIME GROUP LIMITED PARTNERSHIP By: /s/ Michael W. Reshcke ----------------------------------- Michael W. Reschke, Managing General Partner /s/ Jeffrey A. Patterson ----------------------------------- 21 SCHEDULE 1 TO FORMATION AGREEMENT
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- K/77 Investors Limited Partnership (dissolve after assignments)........... 98.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P. Kilico Realty - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 77 West Wacker Limited Partnership..... 5% G.P. Kilico Realty - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 5% G.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 34.9% L.P. .1% L.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 55% L.P. K/77 Investors Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 77 Fitness Center Limited Partnership.. 89.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 10% G.P. PGI (from Prime 77 Fitness Center, Inc.) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1669 Woodfield Road, L.L.C............................ 98% L.L.C. PGLP (includes 1% from PGLP, Inc. and 1% from Prime International, Inc.) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% L.L.C. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% L.L.C. Prime Group II, L.P. - ------------------------------------------- ------------------------------- -------------------------- -------------------------
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Triad Development Company (dissolve after assignments) 25% G.P. Kilico Realty - ------------------------------------------- ------------------------------- -------------------------- ------------------------- (PGC Development, Ltd. to distribute its 25% L.P. KILICO ownership interests prior to assignments) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P. PGI (from Prime of Tennessee, Inc.) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- .48% L.P. (from PGC PGI (from PGC, Inc.) Development, Ltd.) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 16.04% L.P. (from PGC Professional Plaza, Development, Ltd.) Ltd. (from R. Dan Culp) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 32.38% L.P. (31.48% from PGC .1% L.P. PGI Development, Ltd.) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Nashville Office Building I, Ltd...... 49% G.P. Triad - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50.9% L.P. .1% L.P. PGI (from Suzette Rand)(1) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Professional Plaza, Ltd.(1)............ 49% G.P. Triad - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50.9% L.P. .1% L.P. PGI (from Tom Dolinak(2) - ------------------------------------------- ------------------------------- -------------------------- -------------------------
- ------------------- (1) Use Power of Attorney granted to Triad Development Company to assign to PGI and then assign to Operating Partnership and the Company. (2) Operating Partnership will assign a .1% L.P. interest in this limited partnership to R. Dan Culp.
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Centre Square II, Ltd.................. 49% G.P Triad - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50.9% L.P. .1% L.P. PGI (from Peter Rowley(2) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Old Kingston Properties, Ltd. ....... . 49% G.P. Triad - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50.9% L.P. .1% L.P. PGI (from Donna Wadzita)(2) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Triad Parking Corporation (dissolve after 50% stock PGI assignments)........................... - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50% stock Kilico Realty - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Triad Parking Company, Ltd............. 98.9% L.P. .1% L.P. Triad - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P. Triad Parking Corporation - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Prime Columbus Industrial, L.L.C...................... 98% LLC PGLP (includes 1% from Prime International, Inc. and 1% from PGLP, Inc.) - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - -------------------
(2) Use Power of Attorney granted to Triad Development Company to assign to PGI and then assign to Operating Partnership and the Company.
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% LLC PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% LLC Prime Group II, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Arlington Heights I, L.P............... 48.9% L.P. .1% L.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P.* PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Arlington Heights II, L.P.............. 48.9% L.P. .1% L.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P.* PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Arlington Heights III, L.P............. 48.9% L.P. .1% L.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P.* PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Prime IRB Holdings, L.P (to be dissolved after assignments and transfer of Bonds) 98.9% L.P. .1% L.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P. PGLP (from Prime IRB, Inc.) - ------------------------------------------- ------------------------------- -------------------------- -------------------------
* 1% G.P. interest to be assigned to PGI from Prime/AH Industrial Center, Inc. prior to assignments.
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- East Chicago Enterprise Center Limited Partnership............................ 50% L.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 22.5% G.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 27.4% L.P. .1% L.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Kemper/Prime Industrial Partners....... 50% G.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% G.P. .1% G.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Hammond Enterprise Center Limited Partnership............................ 50% L.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 25% G.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 24.9% L.P. .1% L.P. PGI - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- K-P Enterprise Centers, Inc. 50% stock PGLP (dissolve after assignments)........... 50% stock Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- K-P Enterprise Centers Limited Partnership (dissolve after assignments)........................... 49% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 50% L.P. Prime Group IV, L.P. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 1% G.P. K-P Enterprise Centers, Inc. - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center I, L.P............... 50% G.P. K-P Enterprise - ------------------------------------------- ------------------------------- -------------------------- -------------------------
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center II, L.P.............. 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center III, L.P............. 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center IV, L.P.............. 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center V, L.P............... 50% G.P. . K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center VI, L.P.............. 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- -------------------------
- ------------------------------------------- ------------------------------- -------------------------- ------------------------- Interest Being Transferred to Interest Being Operating Partnership Transferred to Entity the Company Assignor - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center VII, L.P............. 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center VIII, L.P............ 50% G.P. . K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center IX, L.P.............. 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- - ------------------------------------------- ------------------------------- -------------------------- ------------------------- Enterprise Center X, L.P............... 50% G.P. K-P Enterprise Centers Limited Partnership - ------------------------------------------- ------------------------------- -------------------------- ------------------------- 49.9% L.P. .1% L.P. PGLP - ------------------------------------------- ------------------------------- -------------------------- -------------------------
- ------------------- All entities on this Schedule 1 are Prime Entities other than 1669 Woodfield Road, L.L.C. and Prime Columbus Industrial, L.L.C. which are Prime Contribution Entities. SCHEDULE 4 TO FORMATION AGREEMENT Asset Purchase Agreement by and among Continental Offices, Ltd., Continental Offices Ltd. Realty and Prime Group Realty, L.P. Agreement for Purchase or Exchange dated June 13, 1997 by and between Sun Annex Partners and Salt Creek Partners, Ltd. and The Prime Group, Inc. Assignment and Assumption of Real Estate Purchase and Sale Agreement dated November 16, 1997 by and between The Prime Group, Inc. and 1990 Algonquin Road, L.L.C. and 2010 Algonquin Road, L.L.C. Purchase and Sale Agreement dated October, 1997, by and between The Mutual Life Insurance Company of New York, a New York mutual life insurance company and The Prime Group, Inc. Contract of Sale dated October 13, 1997, by and between The Mutual Life Insurance Company of New York, a New York mutual life insurance company and The Prime Group, Inc. Contract of Sale dated October 13, 1997 between MGI Properties (formerly known as Mortgage Growth Investors), One Winthrop Square, Boston, Massachusetts 02110 (Seller) and The Prime Group, Inc., 77 West Wacker Limited Partnership (Purchaser). Purchase and Sale Agreement and Joint Escrow instructions dated October 1, 1997 by and between Mission Land Company and The Prime Group, Inc. SCHEDULE 5 TO FORMATION AGREEMENT NONE Schedule 6 ESCROW RECEIPT AND DISBURSEMENT AUTHORIZATION PAGE 1 ESCROW NUM: 097070239-001 ORDER NUM: 01401-097070239 D2 CLOSER: NANCY CASTRO BUYER: XX SELLER: XX PROPERTY: RECEIPTS THE PRIME GROUP, INC. 31,865.20 PARTNERSHIP FUNDING (KNOXV) 273,560.00 PARTNERSHIP FUNDING RE: 77 893,827.00 PRIMESTONE - PGI PRIMESTON 240,000.00 PRIMESTONE - BLACKSTONE 45,160,000.00 PRIMESTONE - PRUDENTIAL SE 39,600,000.00 SECURITY CAPITAL 39,000,000.00 PRUDENTIAL SECURITIES LOAN 82,613,370.00 PRUDENTIAL SECURITIES RE: 232,125,000.00 EM/TICOR TO COME 373,579.61 CT&TCO./JO EM TO COME 800,000.00 -------------- TOTAL RECEIPTS 441,711,202.01 -------------- -------------- DISBURSEMENTS A BANK OF MONTREAL, CHICAGO BRANCH W 000000002390 11/17/97 230,802,639.78 CHECK TOTAL 230,802,639.78 B HELLER FINANCIAL, INC. W 000000002391 11/17/97 8,512,403.26 CHECK TOTAL 8,512,403.26 C ALLIED CAPITAL W 000000002392 11/17/97 11,258,519.92 2,011,805.55 CHECK TOTAL 13,270,325.47 D MCHENRY STATE BANK W 000000002473 11/17/97 7,707,033.45 CHECK TOTAL 7,707,033.45 E NATIONWIDE LIFE INSURANCE COMPANY W 000000002396 11/17/97 6,443,983.60 CHECK TOTAL 6,443,983.60 F NATIONWIDE LIFE INSURANCE COMPANY W 000000002398 11/17/97 690,426.27 CHECK TOTAL 690,426.27 G GENERAL AMERICAN LIFE INS CO W 000000002399 11/ 17/97 5,423,246.28 H GENERAL AMERICAN LIFE INS CO W 000000002402 11/ 17/97 2,480,104.36 CHECK TOTAL 2,480,104.36 ESCROW RECEIPT AND DISBURSEMENT AUTHORIZATION PAGE 2 ESCROW NUM: 097070239-001 ORDER NUM: 01401-097070239 D2 CLOSER: NANCY CASTRO I GENERAL AMERICAN LIFE INS CO W 000000002403 11/ 17/97 1,756,335.41 CHECK TOTAL 1,756,335.41 J GENERAL AMERICAN LIFE INS CO W 000000002404 11/ 17/97 4,006,541.08 CHECK TOTAL 4,006,541.08 K FIRST TENNESSEE BK NATL ASOC KNOXVILLE W 000000002405 11/ 17/97 1,123,676.59 CHECK TOTAL 1,123,676.59 L FIRST TENNESSEE BK NATL ASSOC KNOXVILLE W 000000002406 11/17/97 5,293,736.78 CHECK TOTAL 5,293,736.78 M MID NORTH FINANCIAL SERVICES, INC W 000000002461 11/17/97 1,380,605.72 CHECK TOTAL 1,380,605.72 N BANK ONE ILLINOS, NA W 000000002408 11/17/97 6,851,602.96 CHECK TOTAL 6,851,602.96 O LASALLE BANK NI W 000000002409 11/17/97 3,586,653.61 CHECK TOTAL 3,586,653.61 P LASALLE NATIONAL BANK W 000000002411 11/17/97 1,916,681.97 CHECK TOTAL 1,916,681.97 Q LASALLE BANK NA W 000000002412 11/17/97 3,830,113.09 CHECK TOTAL 3,830,113.09 R MELLON MORTGAGE COMPANY W 000000002413 11/17/97 647,496.75 CHECK TOTAL 647,496.75 S WEST SUBURBAN BANK W 000000002415 11/17/97 495,084.05 CHECK TOTAL 495,084.05 T LASALLE BANK NA W 000000002416 11/17/97 498,577.10 CHECK TOTAL 498,577.10 U AID ASSOCIATION FOR LUTHERANS W 000000002417 11/17/97 3,711,924.67 CHECK TOTAL 3,711,924.67 ESCROW RECEIPT AND DISBURSEMENT AUTHORIZATION PAGE 3 ESCROW NUM: 097070239-001 ORDER NUM: 01401-097070239 D2 CLOSER: NANCY CASTRO V MIDLAND LOAN SERVICES W 000000002418 11/17/97 13,988,172.25 CHECK TOTAL 13,988,172.25 W WEST SUBURBAN BANK W 000000002421 11/17/97 153,383.85 CHECK TOTAL 153,383.85 X LASALLE BANK NA W 000000002423 11/17/97 1,057,253.72 CHECK TOTAL 1,057,253.72 Y LASALLE BANK NA W 000000002424 11/17/97 254,109.37 CHECK TOTAL 254,109.37 A LASALLE BANK NA W 000000002426 11/17/97 3,302,323.64 CHECK TOTAL 3,302,323.64 AA MERCANTILE BANK W 000000002428 11/17/97 4,705,340.59 CHECK TOTAL 4,705,340.59 AB MERCANTILE BANK W 000000002430 11/17/97 1,077,115.42 CHECK TOTAL 1,077,115.42 AC MERCANTILE BANK W 000000002434 11/17/97 2,350,893.56 CHECK TOTAL 2,350,893.56 AD NATIONAL CANADA CORPORATION W 0000000002419 11/17/97 19,444,186.94 CHECK TOTAL 19,444,186.94 AE CHICAGO TITLE AND TRUST COMPANY 200,000.00 CHECK TOTAL 200,000.00 AF RICHARD S. HOMER W 000000002436 11/17/97 144,026.72 CHECK TOTAL 144,026.72 AG LUMBERMANS MUTUAL CASUALTY COMPANY W 000000002437 11/17/97 PER CLOSING STATEMENT (KEMPER) 3,050,000.00 CHECK TOTAL 3,050,000.00 AH KILICO REAL ESTATE ACCOUNT W 000000002439 11/17/97 2,524,272.00 CHECK TOTAL 2,524,272.00 AI U.S. TITLE GUARANTY CO, INC W 000000002463 11/17/97 SALT CREEK NET PROCEEDS 1,365,284.71 CHECK TOTAL 1,365,284.71 AJ AMERICAN UNITED LIFE INSURANCE COMPANY W 000000002441 11/17/97 2,350,950.57 ESCROW RECEIPT AND DISBURSEMENT AUTHORIZATION PAGE 4 ESCROW NUM: 097070239-001 ORDER NUM: 01401-097070239 D2 CLOSER: NANCY CASTRO CHECK TOTAL 2,350,950.57 AK NARCO 4300 ASSOCIATES W 000000002442 11/17/97 PYT. AS DIR., PROCEEDS 334,676.00 CHECK TOTAL 334,676.00 AL CAROL STREAM INDUSTRIAL PARK W 000000002443 11/17/97 PYT. AS DIR., PROCEEDS 348,335.00 CHECK TOTAL 348,335.00 AM NARCO ENTERPRISES, INC. W 000000002445 11/17/97 PYT. AS DIR., PROCEEDS 238,774.00 CHECK TOTAL 238,774.00 AN NARCO LISLE ASSOCIATES W 000000002446 11/17/97 PYT. AS DIR., PROCEEDS 3,228,760.00 CHECK TOTAL 3,228,760.00 AO RAWLS 130 W 000000002450 11/17/97 PYT. AS DIR., PROCEEDS 952,036.00 CHECK TOTAL 952,036.00 AP TRI-STATE INDUSTRIAL PARK W 000000002451 11/17/97 PYT. AS DIR., PROCEEDS 51,869.00 CHECK TOTAL 51,869.00 AQ UTAH FIRST EXCHANGE, INC. W 000000002452 11/17/97 EDWARD E. JOHNSON PROCEEDS 169,522.98 CHECK TOTAL 169,522.98 AR IBD W 000000002453 11/17/97 PROCEEDS 427,987.00 CHECK TOTAL 47,987.00 AS SHEFSKY FORELICH & DIVINE LTD. W 000000002454 11/17/97 LEGAL FEES 111,000.00 CHECK TOTAL 111,000.00 AT CREDIT SUISSE, FIRST BOSTON W 000000002454 11/17/97 LETTER OF CREDIT EXTENSION FEE 75,000.00 CHECK TOTAL 75,000.00 AU CHICAGO TITLE 97970059 5,856,255.57 143,744.43 CHECK TOTAL 6,000,000.00 AW STEPHEN J. NARDI W 000000002502 11/17/97 AFFILIATE LOAN PAYMENT 6,114,204.00 CHECK TOTAL 6,114,204.00 AX SAM SAX PROCEEDS/HADESMAN 100,000.00 CHECK TOTAL 100,000.00 ESCROW RECEIPT AND DISBURSEMENT AUTHORIZATION PAGE 5 ESCROW NUM: 097070239-001 ORDER NUM: 01401-097070239 D2 CLOSER: NANCY CASTRO AY TO COME PYT RE: SURVEY 4,700.00 CHECK TOTAL 4,700.00 B CT&T CO. TITLE - OTHER HADESMAN 17,665.00 CHECK TOTAL 17,665.00 BA CT&T CO. PYT RE TECHNOLOGY 1,337.00 CHECK TOTAL 1,337.00 BB CT&T CO. TRANSFER TAX RE 801N TECHNOLOGY 6,075.00 CHECK TOTAL 6,075.00 BC CT&T CO. ALL OTHER TRANSFER TAX 70,632.00 CHECK TOTAL 70,632.00 BD BENNETT & KAHNWEILER BROKER 50,000.00 CHECK TOTAL 50,000.00 BE PRUDENTIAL SECURITIES, INC. W 000000002485 11/17/97 PYT RE FINANCIAL ADVISORY FEE 1,841,618.50 CHECK TOTAL 1,841,618.50 BF BANK OF BOSTON W 000000002494 11/17/97 940,062.27 CHECK TOTAL 940,062.27 BG PRUDENTIAL SECURITIES, BK OR NY W 000000002497 11/17/97 562,500.00 CHECK TOTAL 562,500.00 BH VERRILL & DANA 132,500.00 CHECK TOTAL 132,500.00 BI BELL, BOYD & LLOYD PYT. AS DIR., FEES & EXPENSES 291,200.00 CHECK TOTAL 291,200.00 BJ THE PRIME GROUP, INC. W 000000002491 11/17/97 PROCEEDS 7,420,509.79 CHECK TOTAL 7,420,509.79 BK FIRST AMERICAN TITLE W 000000002521 11/17/97 PYT. AS DIR., RE NARDI 202,824.30 CHECK TOTAL 202,824.30 BL BAKER DONELSON BOND COUNSEL FEE 30,600.00 CHECK TOTAL 30,600.00 ESCROW RECEIPT AND DISBURSEMENT AUTHORIZATION PAGE 6 ESCROW NUM: 097070239-001 ORDER NUM: 01401-097070239 D2 CLOSER: NANCY CASTRO BM KEMPER LETTER OF CREDIT FEE 9,776.00 ASSET MANAGEMENT FEE 6,209.72 CHECK TOTAL 15,985.72 BN SAM SAX PARTNERSHIP PORTION 100,000.00 CHECK TOTAL 100,000.00 BO TO COME SURVEYS RE HADESMAN 14,878.02 CHECK TOTAL 14,878.02 BQ AMERICAN NATIONAL BANK TRUST FEES RE NARDI 125.00 CHECK TOTAL 125.00 BR WINSTON & STRAWN CONTINENTAL OFFICE ESCROW 700,000.00 CHECK TOTAL 700,000.00 BS CONTINENTAL OFFICES LIMITED PURCHSE OF ASSETS 5,225,129.00 CHECK TOTAL 5,225,129.00 BT KEMPER PYT. AS DIR., RE TRIAD 1,597,851.41 CHECK TOTAL 1,597,851.41 BU TICOR TITLE 33,186.02 CHECK TOTAL 33,186.02 BV CB COMMERCIAL 270,000.00 CHECK TOTAL 270,000.00 BW STEPHEN J. NARDI W 00000002520 11/17/97 PROCEEDS 3,277,025.00 CHECK TOTAL 3,277,025.00 BX CHICAGO TITLE RETAIN RE MUNSTER 13,450,000.00 CHECK TOTAL 13,450,000.00 -------------- TOTAL DISBURSEMENTS 431,486,698.00 -------------- -------------- BALANCE 10,224,503.41 -------------- -------------- Schedule 7 To Formation Agreement Disclosure Schedule 1. All matters disclosed in any title insurance reports or commitments delivered in connection with the transactions contemplated by the Formation Agreement. 2. All matters disclosed in any environmental assessments or reports delivered in connection with the transactions contemplated by the Formation Agreement. 3. All matters disclosed in the Registration Statement and Prospectus, dated November 11, 1997, including the exhibits thereto and the financial statements included therein. 4. Tenants in which The Prime Group, Inc. or Prime Group Limited Partnership has a 5% or more interest:
Entity Address of Project Brookdale Living Communities, Inc. 77 West Wacker Drive 48th Floor Chicago, IL 60601 The Prime Group, Inc. 77 West Wacker Drive 42nd Floor Chicago, IL 60601 Ambassador Apartments, Inc. 77 West Wacker Drive 40th Floor Chicago, IL 60601 The Prime Group, Inc.* 77 West Wacker Drive 39th Floor Chicago, IL 60601
*Will be assumed by Prime Group Realty Trust 5. Pending litigation: (a) Karen McIntosh v. The Prime Group, Inc. . Pepper Construction Company, 77 West Wacker Limited Partnership, and all unknown owners of 77 West Wacker, Case No. 94 M2 1646, filed on June 9, 1994, in the Circuit Court of Cook County, Illinois, Municipal Department - Second District. Plaintiff, an employee of a tenant in the 77 West Wacker Drive Building (the "77 Project'), alleges that she was struck by a board providing protection to the wood paneling in the elevator cab in the 77 Project and, as a result thereof, sustained injuries. Pepper Construction Company ("Pepper") constructed the protective barrier in the elevator cab. The plaintiff alleges that The Prime Group, Inc. ("PGI") and 77 West Wacker Limited Partnership (the "77 Partnership") were negligent in failing to maintain, inspect and repair the elevator cab in a reasonable manner and, that her injuries were proximately caused by such negligence. This matter has been forwarded to the 77 Partnership's insurance carrier. The 77 Partnership's insurance carrier has tendered the defense of this action to the insurance carrier for Pepper, which has accepted the tender. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership or PGI will be fully covered by insurance. (b) Michael Spiezio v. Schal Associates, Inc. , Pepper Construction, The Prime Group, Inc. and Carrera Marble & Mosaics, Case No. 92L15284, filed on December 15, 1992, in the Circuit Court of Cook County, Illinois, County Department, Law Division. Plaintiff alleges that he was an employee of Carrera Marble & Mosaics ("Carrera"), which performed work and/or supplied materials for or in connection with the construction of the 77 Project. The plaintiff alleges that, while working on the 77 Project, the plaintiff sustained injuries, and is seeking damages therefor. The defense of this case is being handled by Carrera's insurance carrier. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership or PGI will be fully covered by insurance. (c) Giuseppe Fricano v. Schal Associate, Inc. and 77 West Wacker Limited Partnership, Case No. 92LI4542, filed in the Circuit Court, Cook County, Illinois on November 20, 1992. The plaintiff in this action, alleges that he was an employee of GMI Corporation ("GMI") , a subcontractor retained by Schal to perform work in connection with the construction of the 77 Project, and that he was injured while performing work on the 77 Project. The 77 Partnership has tendered defense of this lawsuit to the 77 Partnership's insurance carrier, which, in turn, tendered defense of the action to Massachusetts Bay Insurance Company ("MBIC") , the insurance carrier of GMI, which has accepted the defense of this lawsuit. The defense of this action is being handled by attorneys retained by MBIC. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (d) Charles O. Dowler v. Schal Associates, Inc., The Prime Group, Inc., Prime Group Realty, Inc. and 77 West Wacker Limited Partnership, Case No. 93L07708, filed on June 25, 1993, in the Circuit Court of Cook County, Illinois, County Department, Law Division. Plaintiff in this action alleges that he was employed by PDM Structural Group ("PDM") , a subcontractor retained by Schal to perform work in connection with the construction of the 77 Project, and that, on or about July 2, 1991, the plaintiff was injured while working on the 77 Project. The defense of PGI, Prime Group Realty, Inc. and the 77 Partnership in this action was tendered to the insurance carrier for Schal, which, in turn, tendered the defense on behalf of Schal, PGI, Prime Grout) Realty, Inc. and the 77 Partnership to the insurance carrier for PDM. The insurance carrier for PDM has accepted tender of the defense on behalf of all defendants of this action. The defense of this action is being handled by attorneys retained by PDM's insurance carrier. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership, PGI or Prime Group Realty, Inc. will be fully covered by insurance. 2 (e) Robert Ochoa v. 77 West Wacker Limited Partnership, American National Bank as Trustee under Trust Agreement No. 110025-08, The Prime Group, Inc. , R.R. Donnelley Building, Schal Construction Company, Pepper Construction, LaSalle Construction, Robert Irsay Company and TOR Construction, Case No. 93L010010, filed on August 17, 1993, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff alleges that he was an employee of Great Lakes Plumbing Heating Company ("Great Lakes"), a subcontractor of Schal, and that, on or about May 2, 1992, plaintiff fell off scaffolding while performing work in connection with the construction of the 77 Project and, as a result thereof, sustained injuries. The 77 Partnership has tendered defense of this action on behalf of the 77 Partnership to the 77 Partnership's insurance carrier, which, in turn, tendered defense of this action to the insurance carrier for Schal. The insurance carrier for Schal, in turn, tendered defense of this action to the insurance carrier for Great Lakes, which has accepted such tender. The defense of this action was being handled by attorneys retained by the insurance carrier for Great Lakes. it is expected that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (f) Michael Schumacher v. Schal Associates, Inc. and The Prime Group, Inc., Case No. 94L08011, filed on June 29, 1994, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff alleges that he was an employee of Riggio Caulking, Inc., a subcontractor of Schal, and that he was injured on September 16, 1992 while performing work on or with respect to the 77 Project. This matter has been forwarded to the 77 Partnership's insurance carrier, which tendered defense of this action to Schal's insurance carrier. The defense of this action is being handled by attorneys retained by Schal's insurance carrier. The 77 Partnership expects that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered (g) Terrance Sullivan v. The Prime Group, Inc., Schal Associates, Inc. n/k/a Schal Bovis, Inc., 77 West Wacker Limited Partnership, Pitt-Des Moines, Inc. and Tribco Construction Co., Case No. 94L09311, filed on July 27, 1994, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff, alleges that he was an employee of Gateway Steel which, in turn, was a subcontractor of Schal, and that, on August 18, 1990, the plaintiff was injured while performing work in connection with the construction of the 77 Project. This matter has been forwarded to the 77 Partnership's insurance carrier, which tendered defense of this action to Schal's insurance carrier. Schal's insurance carrier subsequently tendered this action to the insurance carrier for Tribco Construction Co. ("Tribco") . The defense of this action is being handled by attorneys retained by Tribco's insurance carrier. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (h) Terrance Sullivan v. The Prime Group, Inc., Schal Associates, Inc. and n/k/a Schal Bovis, Inc., and PDM Structural Group, a division of Pitt-Des Moines, Inc., Case No. 95L00481, filed on January 11, 1995 in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff alleges that he was an employee of Gateway Erectors, which, in turn, was a subcontractor of Schal, and that, on or about, May 30, 1991, while working at the 77 Project, 3 the plaintiff was injured when the plaintiff was required to lift a metal re-enforcing bar at the 77 Project. Defense of this action on behalf of all defendants is being handled by attorneys retained by the insurance carrier for a subcontractor of Schal. It is expected that any and all damages awarded to plaintiff against the 77 Partnership will be fully covered by insurance. This case is in the discovery stage. (i) Roger P. Ward d/b/a Roger Ward & Company v. Bank of Montreal, Kemper Investors Life Insurance Company, 77 West Wacker Limited Partnership, The Prime Group, Inc., The John Buck Company and Keck, Mahin & Cate, Case No. 96CH02007284, filed on July 11, 1996, in the Circuit Court of Cook County, Illinois, County Department, Chancery Division. The plaintiff in this action alleges that he provided real estate brokerage services in connection with a sublease between Keck, Mahin & Cate, as sublandlord, and Michael, Best & Friedrich, as subtenant, for space in the 77 Project. Plaintiff claims he is entitled to a commission payment of $117,530.00 for such services, plus interest, fees and costs. The plaintiff seeks foreclosure and other available relief. Motions to Dismiss this action, filed by the defendants, have been granted. The defendants are seeking to recover attorneys' fees and costs. The plaintiff has indicated that he intends to appeal the granting of the Motions to Dismiss. The 77 Partnership and PGI are represented in this matter by Kenneth P. Purcell, Esq. of Winston & Strawn. (j) McOuay Services v. The Prime Group, Inc., Case No. 97MI-158877, filed on October 29, 1997, in the Circuit Court of Cook County, Illinois, Municipal Department, First District, Contract. The plaintiff in this action seeks $10,353.01, plus interest, which plaintiff alleges is due for a piece of equipment supplied by plaintiff for the 77 Project. PGI and 77 Partnership claim that the equipment was defective and, therefore, no amount is owed to plaintiff. PGI and 77 Partnership intend to defend this action. (k) In Re: Clark Material Handling, Inc. In 1995, Clark Material Handling, Inc. ("Clark") filed for protection against creditors under Chapter 11 of the United States Bankruptcy Code (Case No. 95-60258 in the United States Bankruptcy Court, Northern District of Indiana, Hammond Division at Gary/LaFayette). Clark was the lessee under the Lease for space in the facility now owned by Enterprise Center I, L.P. ("ECLLP"). The business conducted in the premises leased by Clark was conducted under the name of Rubber Material Handling, Inc. ("RMH") , which, to the best knowledge of the undersigned, is an affiliate of Clark. Clark is delinquent in the payment of rent and other amounts under its Lease. EC1LP has made a claim in the bankruptcy proceedings in the amount of $2,208,432.46 for administrative costs and expenses and for contingent and unliquidated pre-petition costs and expenses. Clark has disputed EC1LP's claim, and, based on Clark's financial condition, it is unlikely that EC1LP will recover the full amount of its claims against Clark. EC1LP is represented in this matter by Terry Malik, Esq. and John B. Griffith, Esq. of Winston & Strawn. (l) Cametco Illinois, Inc.; Granulation Services, Inc. Cametco Illinois, Inc. ("Cametco") leases space in the building owned by Enterprise Center II, L.P. ("EC2LP") . Cametco apparently sublet this space to Granulation Services, Inc. ("Granulation") . EC2LP made 4 demands on Cametco that Cametco repair damages to the building owned by EC2LP caused by the corrosive nature of the substances used in the business operated in the leased premises. EC2LP, Cametco, Granulation and Boyd Cass (the guarantor of a portion of Cametco's obligations under its lease with EC2LP) entered into that certain Second Amendment to Lease Agreement (the "Second Amendment") , dated as of January 28, 1997, in connection with the settlement of this dispute. The Second Amendment provides, in part, (i) that Granulation will pay $208,348.00 to EC2LP, (ii) that Cametco and Boyd Cass will pay $90,000.00 to EC2LP, and (iii) that Granulation will make certain repairs to the leased premises, which obligation is secured by a cash escrow of $100,000.00 (the "Escrowed Funds") made by Granulation. The foregoing payments have been made by Granulation, Cametco and Boyd Cass, as applicable, and the required repairs have been completed by Granulation. EC2LP has delivered a Joint Order to Granulation for the release of the Escrowed Funds to the contractor which performed the work, but the Joint Order has not yet been returned to EC2LP, and, therefore the Escrowed Funds have not been released. The Second Amendment also extends the termination date of Cametco's lease with EC2LP from January 31, 1997 to July 31, 1997. EC2LP is represented in this matter by Daniel J. Biederman, Esq. of Hinshaw & Culbertson. (m) Illiana Steel, Inc. Illiana Steel, Inc. ("Illiana") , a tenant in the building owned by Enterprise Center IV, L.P. ("EC4LP"), has not paid all amounts which EC4LP has determined is owed under its lease. Illiana has disputed the calculation of additional rent under the lease and, as a result, has not paid all of the amounts invoiced by EC4LP. In addition, a dispute exists between Illiana. and EC4LP over whether EC4LP is responsible for tuckpointing brick on the exterior of the leased premises or for the repairs of certain cranes in the leased premises. The parties currently are negotiating a settlement of the matter. (n) David Van Lul, Kathleen Van Lul and Sean Holloway v. The Prime Group, Inc., Cause No 450049702CT00144, filed on February 19, 1997, in the Superior Court of Lake County, Indiana, Civil Division, Room Four. In August, 1995, a trailer on the property owned by EC1LP was blown over by wind, injuring David van Lul's left arm, wrist and back, injuring Sean Holloway's spine and extremities and causing damage to the car owned by Mr. Holloway. The plaintiffs allege that Prime was negligent and that such negligence caused the incident. The defense in this action is being handled by EC1LP's insurance carrier. It is expected that any damages awarded against PGI in this action will be fully covered by insurance. (o) Slitting Services, Inc. Slitting Services, Inc. ("Slitting"), a former tenant in the project owned by EC5LP, has claimed that Enterprise Center V, L.P. ("EC5LP") has not satisfied its obligations to perform certain tenant improvement work under its lease with Slitting. Slitting and EC5LP have agreed on a settlement of this dispute under which EC5LP will make certain payments to Slitting. In addition, EC5LP has demanded Slitting to pay approximately $107,100, representing the estimated cost to remediate a petroleum spill on EC5LP's property which was allegedly caused by Slitting. EC5LP has withheld this amount from amounts otherwise payable by EC5LP to Slitting under the terms of the above-referenced settlement. 5 (p) Kerola Enterprises, Inc. On or about April 25, 1995, HECLP sent a letter to Kerola Enterprises, Inc. ("Kerola") , a former tenant in the facility owned by Hammond Enterprise Center Limited Partnership ("HECLP") , demanding payment by Kerola of past due a-mounts aggregating $156,871.08. HECLP and Kerola had agreed to settle this dispute for the payment by Kerola to HECLP in the aggregate amount of $28,725.38, plus interest thereon at the rate of twelve percent (12!k) per annum, payable in monthly installments of $1,500.00 each, commencing December 1, 1995, but Kerola has not made the required payments. Kerola currently owes at least $45,053.90 in past due rent and $387,914.05 in late charges. HECLP is currently considering initiating litigation against Kerola. (q) John Garcia and Norma Garcia v. Brian Moore, The Prime Group, Inc. and Deeann B. Auto Sales, Inc., Cause No. 45D019605CT 447, filed on May 6, 1996, in the Lake County Superior Court, Room 1, Hammond, Indiana. The plaintiffs in this action allege that, on or about May 16, 1994, John Garcia was involved in an automobile accident with a vehicle driven by Brian Moore, who, at the time, was employed by PGI and worked through PGI's office in Hammond, Indiana. PGI has tendered the defense of this action to its insurance carrier. It is expected that all damages awarded to plaintiffs against PGI in this action will be fully covered by insurance. (r) Carol Riepe, Special Administratrix of the estate of Frank J. Rieve, deceased v. Sterling Steel Services, Ltd., Sterling Steel, Inc., The Prime Group, Inc. and Whiting Corporation, Case No. 96L02402, filed on March 1, 1996, in the Circuit Court of Cook County, Illinois County Department, Law Division. The plaintiff in this action seeks damages allegedly suffered by the plaintiff by reason of the death of Frank J. Riepe. Mr. Riepe was an employee of Whiting Corporation ("Whiting"). Whiting was retained by Enterprise Center X, L.P. ("EC10LP") to perform certain work in the space leased by Sterling. While working in the space leased by Sterling, Mr. Riepe fell off scaffolding and died. It is expected that any damages awarded in this action to plaintiff against PGI or EC10LP will be fully covered by insurance. The defense of this action on behalf of PGI and EC10LP is being handled by attorneys retained by EC10LP's insurance carrier. (s) Norfolk and Western Railway Company v. Torrence Partners Limited Partnership, Saville Chicago, Inc., Principal Mutual Life Insurance Company, Container Recycling Alliance, L.P., Kemper/Prime Industrial Partners, The Prime Group, Inc. Enterprise Center VII. L.P. , Enterprise Center VIII, L.P., Enterprise Center IX, L.P., Enterprise Center X, L.P., K-P Enterprise Centers, Inc., Galaxy Steel & Tube, Inc., LaSalle National Bank, Limited Partners of Torrence Partners Limited Partnership), Edward J. Rosewell, as County Treasurer and unknown owners, Case No. 97L 50613, filed on June 4, 1997, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff filed a Complaint for Condemnation to condemn the property owned by Torrence Partners Limited Partnership (the "Torrence Property"). The Torrence Property is located in the Chicago Enterprise Center, but is not owned by any of the CEC Partnerships (defined below). The CEC Partnerships were named in this action on account of their interests in the Torrence Property by reason of various easement agreements. 6 (t) Wojciech Chryczyk and Boquska Chryczvk v. The Prime Group, Inc., Arlington Heights I, L.P., Arlington Heights II, L.P., Arlington Heights III, L.P., International Components Corporation, Lech Construction Company and Belcore Electric Construction Co., Case No. 96-L-009297, filed on August 13, 1996, in the Circuit Court of Cook County, Illinois, County Department, Law Division. This action was brought by the plaintiffs to recover damages suffered on account of an incident which occurred on or about April 28, 1995, in the facility owned by Arlington Heights I, L.P. ("AHlLP"), Arlington Height II, L.P. ("AH2LP") and Arlington Heights III, L.P. ("AH3LP"; collectively the "AH Partnerships"). On or about such date, Wojciech Chryczyk, an electrician working in the facility owned by the AH Partnerships, was severely burned as a result of an electrical explosion which occurred from an electrical panel in the facility. Mr. Chryczyk sustained burns over more than sixty percent off his body and, thus far, has incurred more than $780,000.00 in medical expenses. Mr. Chryczyk was employed by Sigma Electric Company, a subcontractor of Lech Construction Company, which was retained by International Components Corporation ("ICC"), a tenant in the facility, to perform certain tenant build-out work for ICC. This action is in the discovery stage. PGI and the AH Partnerships are represented in this action by attorneys retained by the insurance carrier for PGI and the AH Partnerships. It is expected that any damages awarded to plaintiffs against Prime and the AH Partnership will by fully covered by insurance. 6. Pending Litigation - Retained Liabilities: (a) Jesse Garcia, Gilbert Garcia, Sr., Ted Zagar on behalf of themselves and all other similarly situated v. The Prime Group Real Estate Investment Trust, Rubber Material Handling, Inc., Dan McArdle, Enterprise Center I, L.P., K-P Enterprise Centers Limited Partnership, K-P Enterprise Centers, Inc., East Chicago Enterprise Center Limited Partnership, KILICO Realty Corporation and The Prime Group, Inc., Case No. 45C019408CT01629, filed in the Circuit Court of Lake County, Crown Point, Indiana, on August 9, 1994 (First Amended Complaint filed on March 18, 1995). This class action was brought on behalf of the people residing in the vicinity of the building owned by Enterprise Center I, L.P. ("EC1LP") The plaintiffs alleged that the storing of tires and shredded tires on the premises owned by EC1LP was an ultrahazardous activity and that the smoke released as a result of the fire contained hazardous and toxic substances. The plaintiffs further allege that, as a result of the fire and the smoke released as a result thereof, the plaintiffs suffered personal injuries, bodily pain, mental anguish and property damage and were deprived of the use and enjoyment of their homes, for which they are entitled to damages in unspecified amounts. The plaintiffs alleged that EC1LP, its general partner (K-P Enterprise Centers Limited Partnership), the general partner of its general partner (K-P Enterprise Centers, Inc.), its predecessor in interest (East Chicago Enterprise Center Limited Partnership) and the general partners of its predecessor in interest (KILICO Realty Corporation and Prime) were negligent in allowing the allegedly hazardous situation to exist. A settlement in this action was reached in October, 1996, and, in February, 1997, pursuant to the terms of the settlement agreement, EC1LP make a payment of $400,000 in full and final settlement of this action. EC1LP, The Prime Group, Inc. and the other related defendants were represented in this action by Scott J. Szala, Esq. of Winston & Strawn. Recently, approximately 60 additional people who 7 were not included in the certified class have sought to intervene in this action. If these people are not allowed to intervene, it is expected that they will file a separate action. Liability resulting from the foregoing will be retained by PGI. (b) Enterprise Center VII, L.P., Enterprise Center VIII . L.P., Enterprise Center IX, L.P. , Enterprise Center X, L.P. and Kemper/Prime Industrial Partners v. USX Corporation, Illinois Tool Works, Inc. and Signode Corporation; and USX Corporation v. The Prime Group, Inc., Case No. 96C 5283, filed on August 22, 1996, in the United States District Court for the Northern District of Illinois, Eastern Division. The CEC Partnerships brought this action to recover from USX Corporation ("USX"), Illinois Tool Works, Inc. ("ITW") and Signode Corporation ("Signode"), a division or an affiliate of ITW, response costs incurred by Kemper/Prime Industrial Partners ("KPIP"), Enterprise Center VII, L.P. ("EC7LP"), Enterprise Center VIII , L.P. ("EC8LP"), Enterprise Center IX, L.P. ("EC9LP") or Enterprise Center X, L.P. ("ECl0LP"; collectively, the CEC Partnerships") in investigating and responding to releases and threatened releases of hazardous waste from the property owned by the CEC Partnerships (the "Property") and to obtain a declaratory judgment to the effect that USX is responsible for all future response costs for the remediation of the environmental conditions on the Property. USX is the former owner of the Property. Signode is a tenant at the Property. On October 10, 1996, USX filed a Third-Party Complaint against PGI for contribution. There have been many settlement meetings and discussions among the CEC Partnerships and USX relating to this action, and, on May 12, 1997, USX made a payment to the CEC Partnerships in the amount of $591,443.26 to reimburse the CEC Partnerships for a portion of the costs previously incurred by the CEC Partnerships in connection with this matter. This payment was made "as a good faith effort to demonstrate [USX's] willingness to achieve a fair and final settlement" of this action. The terms of the settlement which have been discussed between the CEC Partnerships and USX relating to this action involve the payment by USX to the CEC Partnerships of an additional $1,822,305. The CEC Partnerships believe that USX is responsible for most of the environmental conditions on the Property that will be required to be remediated. The CEC Partnerships and Prime are represented in this matter by Daniel J. Biederman, Esq. of Hinshaw & Culbertson. This claim and any liability resulting from this action will be retained by PGI. (c) Kemper/Prime Industrial Partners v. Montgomery Watson Americas, Inc. (as successor by merger to Warzyn Inc. f/k/a Warzyn Engineering, Inc.), Case No. 97 C 4278, filed on June 13, 1997, in the United States District Court for the Northern District of Illinois, Eastern Division (the "Court") . Kemper/Prime Industrial Partners ("KPIP") brought this action against Montgomery Watson Americas, Inc. . the successor in interest to Warzyn Engineering ("Warzyn"). In connection with the acquisition by KPIP of the property owned by the CEC Partnerships (the "Property") , KPIP retained Warzyn to conduct an environmental assessment of the Property. In conducting such assessment, Telarzyn failed to discover 26 underground storage tanks on the Property. On account of the presence of these storage tanks, KPIP has incurred and may incur significant costs in remediating the environmental conditions on the Property caused by leakage from the storage tanks on the Property. KPIP believes that Warzyn may be liable to KPIP for failing to discover and/or disclose the presence of these storage tanks. Warzyn, 8 however, has disclaimed any liability and has asserted that period in which KPIP could make a claim has expired. Warzyn filed an Answer and Affirmative Defenses and has filed a Motion for Summary Judgment. The Court has not yet set a briefing schedule for this Motion. KPIP is represented in this matter by Daniel J. Biederman, Esq. of Hinshaw & Culbertson. This claim will be retained by PGI. (d) Howard White, et al., including 67 individuals in United States Steelworkers of America, Local 3127-12 v. The Prime Group Real Estate Investment Trust, Rubber Material Handling Enterprise Center I, L.P, Enterprise Centers Limited Partnership. K-P Enterprise Centers, Inc., East Chicago Enterprise Center Limited Partnership, KILICO Realty Corporation and The Prime Group, Inc., Cause No. 45C019606CT01208, filed on June 14, 1996, in the Lake County Circuit Court, Sitting in Crown Point, Indiana. This action was filed by and on behalf of certain workers at the General American Transportation Corporation ("GATX") plant in East Chicago, Indiana, located in the vicinity of the facility owned by EC1LP (the "EC1LP Facility"). The plaintiffs allege that, on account of the fire which occurred at the Facility, the GATX plant was shut down for approximately three weeks. The plaintiffs seek to recover wages lost during the period during which the GATX plant was shut down. PGI, EC1LP and the related defendants, K-P Enterprise Centers Limited Partnership and K-P Enterprise Centers, Inc., believe that they have meritorious defenses to this action. Such defendants are represented in this action by Scott J. Szala, Esq. of Winston Strawn. This liability will be retained by PGI. (e) Other Claims. As a consequence of the abovementioned fire, several businesses located in the vicinity of the building owned by EC1LP were shut down for various periods of time. Shortly after the fire, EC1LP received a notice from General American Transportation Corporation ("GATX") indicating that GATX suffered both property damage and business interruption as a result of the fire and that GATX and its insurance carrier intend to hold EC1LP responsible for the damages incurred. GATX has not made a formal claim against EC1LP. It is possible that other businesses will make similar claims against EC1LP. Although EC1LP may have meritorious defenses to such claims, it currently is not possible to evaluate EC1LP's potential liability in connection with GATX's claims or any similar claims which other businesses, or their insurance carriers, may make. This liability will be retained by PGI. (f) Teresa Long v. The Prime Group, Inc., Prime of Tennessee, Inc., Triad Development Company Centre Square II, Ltd., and R. Dan Culp, case number 131388-2, filed in the Chancery Court for Knox County, Tennessee. In this action, plaintiff, a former employee of Triad, seeks a declaratory judgment as to plaintiff's status with respect to the Centre Square II, Ltd. ("CS2") and seeks an unspecified amount of compensatory and punitive damages for breach of contract. This dispute arose from an improper assumption made by Triad, the managing general partner of CS2, that plaintiff was an assignee of the limited partnership interests in CS2. When notified by plaintiff's counsel that plaintiff never accepted an assignment of such partnership interests, Triad acknowledged this and corrected its files accordingly. In this action, plaintiff asserts that plaintiff should be found to be a limited partner in the Partnership and that the defendants, by involving plaintiff in the Partnership without plaintiff's knowledge or consent, are 9 liable for breach of contract. The defendants have denied all material allegations made by plaintiff in this action and intend to vigorously defend this action. The defendants have filed a motion to dismiss this action, which motion in pending. CS2 and all other defendants are represented in this matter by Baker, Donelson, Bearman & Caldwell. This liability will be retained by PGI. 10 SCHEDULE 8 TO FORMATION AGREEMENT POST-CLOSING CONSENTS NONE ---- ---- Schedule 9 Retained Liabilities 1. All liability arising or resulting from the items described in Schedule 7 under item 6 Pending Litigation - Retained Liabilities. 2. "Known Contamination", as such term is defined in the Environmental Remediation and Indemnification Agreement, dated as of November 17, 1997, between The Prime Group, Inc., and Prime Group Realty, L.P., relating to existing environmental conditions at Chicago Enterprise Center, Hammond Enterprise Center and East Chicago Enterprise Center. EXHIBIT A TO FORMATION AGREEMENT FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT FOR TRANSFER OF CONTRIBUTED ASSETS FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, JEFFREY A. PATTERSON, an individual, THE PRIME GROUP, INC., an Illinois corporation, and PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership (collectively, "Assignors") do hereby assign, transfer and convey to PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "Operating Partnership" or the "Assignee"), any and all of their respective rights, title and interests in and to the assets (collectively, the "Contributed Assets") described on Schedule A attached hereto and made a part hereof and any other rights, privileges and benefits appertaining thereto. Assignee hereby (i) accepts the assignment and transfer of the Contributed Assets and expressly assumes any and all duties, obligations and liabilities, whether arising prior to or after the date hereof, with respect to the Contributed Assets and the properties and assets owned by the Contributed Entities (as defined in the hereinafter defined Formation Agreement) as further described on Schedule A (collectively the "Assumed Obligations") and (ii) agrees to indemnify and hold harmless Assignors, and Assignors' respective partners, directors, officers, employees and agents, and its and their respective heirs, legal representatives, successors and assigns, from and against any liability, demand, claim or action in relation to any and all duties, obligations and liabilities so assumed. Assignors hereby certify that they have full power to make this Assignment. Except as expressly set forth herein and for the warranties made by the Assignors in that certain Formation Agreement dated as of the date hereof (the "Formation Agreement") among Assignors, Assignee, Prime Group Realty Trust and the other parties signatory thereto, this Assignment is made without representation or warranty. All capitalized terms used in this Assignment and the Schedule hereto without definition have the meanings assigned to them in the Formation Agreement. [signature page follows] IN WITNESS WHEREOF, Assignors and Assignee have executed this Assignment as of the 17th day of November, 1997. ASSIGNORS: ---------------------------------------- JEFFREY A. PATTERSON THE PRIME GROUP, INC., an Illinois corporation By: ----------------------------------- Name: ----------------------------------- Its: ----------------------------------- PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership By: ----------------------------------- Michael W. Reschke, Managing General Partner ASSIGNEE: PRIME GROUP REALTY, L.P., a Delaware limited partnership By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- SCHEDULE A TO ASSIGNMENT AND ASSUMPTION AGREEMENT I. ASSUMED OBLIGATIONS A. Kemper Agreements B. Facility Acquisition Agreements C. Land Option Agreements D. Liabilities associated with Contributed Projects and with office and industrial real estate division of PGI and its affiliates except for those liabilities identified on Schedule 9 to the Formation Agreement which will be retained by the Prime Transferor identified on such Schedule 9 E. IBD Contribution Agreement F. NAC Contribution Agreement G. Lease, dated May 1, 1992, between 77 West Wacker Limited Partnership, as landlord, and The Prime Group, Inc., as tenant, relating to the 39th Floor (the "Office Lease") II. CONTRIBUTED ASSETS A. General partnership interests, limited partnership interests, stock interests, limited liability company interests and other interests in the entities identified on Schedule 1 to the Formation Agreement B. Kemper Agreements C. Facility Acquisition Agreements D. Contributed Personal Property E. Land Option Agreements F. IBD Contribution Agreement G. NAC Contribution Agreement H. the Office Lease I. All of PGI's interests in all assets and properties of the office and industrial real estate division of PGI and its affiliates, all as more fully described on Schedule 2 to the Formation Agreement EX-10.19 18 EX-10.19 Exhibit 10.19 NON-COMPETITION AND RESTRICTION AGREEMENT THIS NON-COMPETITION AND RESTRICTION AGREEMENT (this "Agreement") is made and entered into as of November 17, 1997, by and among PRIME GROUP REALTY TRUST, a Maryland real estate investment trust (the "Company"), PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "Operating Partnership"), THE PRIME GROUP, INC., an Illinois corporation ("TPG"), PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership ("PGLP" and, together with TPG, the "TPG Group"), and MICHAEL W. RESCHKE, an individual ("Reschke"). W I T N E S S E T H: WHEREAS, the Company, through its subsidiaries and affiliates, is engaged primarily in the business of the acquisition, development, leasing, marketing and management of office and industrial real estate properties; WHEREAS, on the date hereof the Company and the Operating Partnership are entering into a series of related transactions pursuant to which, among other things, they will acquire substantially all of the interests of the office and industrial real estate development, leasing and management business of the TPG Group and its affiliates (the "Formation"); WHEREAS, Reschke and the TPG Group will continue to engage in certain real estate-related activities after the date hereof; and WHEREAS, as a condition to the consummation of the transactions described above, and in an effort to eliminate potential conflicts of interest that may arise in the future as a result of the continuing activities of Reschke and the TPG Group, the parties hereto desire, subject to certain conditions and exceptions set forth herein, to enter into this Agreement restricting certain activities of Reschke and the TPG Group while Reschke is Chairman of the Board of the Company or while the TPG Group, Reschke and their Affiliates (as hereinafter defined) own, in the aggregate, five percent (5%) or more of the issued and outstanding common shares of beneficial interest of the Company ("Common Shares") and limited partner interests in the Operating Partnership exchangeable into Common Shares on a fully diluted basis after giving effect to the exchange into Common Shares of all limited partner interests in the Operating Partnership and after taking into consideration the interests of all general partners in the Operating Partnership. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. Certain capitalized terms used but not otherwise defined herein shall have the meanings set forth below: "Affiliate" means (i) any entity in which Reschke and the TPG Group (either individually or collectively) own or control, directly or indirectly, fifty percent (50%) or more of the outstanding equity interests, (ii) any entity with respect to which Reschke and the TPG Group (either individually or collectively) have the right or power, directly or indirectly, to cause such entity to acquire an interest in any property within the Primary Business of the Company without the consent or approval of a third party equity owner and (iii) any entity with respect to which Reschke and the TPG Group (either individually or collectively) have the right or power, directly or indirectly, to withhold consent or approval of an acquisition by such entity of an interest in any property within the Primary Business of the Company where such consent or approval is required as a condition to consummation of such acquisition. "Primary Business of the Company" means any interest in any real property within the office and industrial real estate acquisition, ownership, development, leasing and management business, unless and until any such business is no longer within the primary business of the Company, as determined from time to time by a majority vote of the independent trustees of the Company. 2. PROHIBITIONS RELATING TO OFFICE AND INDUSTRIAL PROPERTIES. (a) Subject to SUBSECTIONS 2(b) AND 2(c) below, from and after the date hereof and during the term of this Agreement, neither Reschke, the TPG Group nor any Affiliate will own any real estate property or acquire any real estate property or any direct or indirect interest therein (except any ownership resulting from foreclosure of indebtedness), or manage any real estate property, that is within the Primary Business of the Company, PROVIDED, HOWEVER, that the foregoing shall not prohibit Reschke, the TPG Group or any Affiliate from providing any mortgage financing, from acting as lessor in a sale-leaseback transaction, from providing any other subordinated debt with respect to any facilities or properties of the type included within the Primary Business of the Company or from obtaining a preferred equity position in any owner or lessee of any such type of facilities or properties. (b) Excluded from the restrictions set forth in SUBSECTION 2(a) are the following properties and interests: (i) any interest in the Company or the Operating Partnership; (ii) any activity which a majority of the independent members of the board of trustees of the Company determine not to be competitive with any -2- facility or property which the Company or Operating Partnership owns or intends to acquire; (iii) any properties in which the TPG Group or Reschke or any Affiliate had a direct or indirect interest prior to the Formation; and (iv) the ownership by the TPG Group or Reschke or any Affiliate of less than five percent (5%) of any class of securities listed on a national securities exchange or included in the Nasdaq National Market. (c) The restrictions set forth in SUBSECTION 2(a) shall not prohibit the sale, lease or other disposition, or any activities incident thereto, of any property in which the TPG Group or Reschke or any Affiliate has an interest on the date hereof. 3. TERM. This Agreement shall be in effect from and after the date hereof and shall continue in effect until (a) Reschke ceases to serve as Chairman of the Board of the Company and (b) Reschke, the TPG Group and their Affiliates cease to own five percent (5%) or more of the Common Shares of the Company and limited partner interests in the Operating Partnership exchangeable for Common Shares, on a fully-diluted basis after giving effect to the exchange into Common Shares of any limited partner interests in the Operating Partnership owned by such parties and any other party and after taking into consideration the interests of all general partners in the Operating Partnership. 4. REASONABLE LIMIT. The parties hereto have attempted to set forth certain restrictions only to the extent necessary to protect the interests of the Company. Each of Reschke and the TPG Group expressly acknowledges that the restrictive covenant contained in SUBSECTION 2(a) above along with the exceptions thereto contained in SUBSECTIONS 2(b) AND 2(c) above, constitutes a reasonable restriction. If, however, the scope of enforceability of the restrictive covenant contained in this Agreement is disputed at any time, a court or other trier of fact may modify and enforce the covenant to the extent that it believes is reasonable under the circumstances existing at the time. 5. BREACH OF AGREEMENT. (a) A party aggrieved shall notify the other party in writing of any conflicts, disputes or claims of breach arising under this Agreement. Within ten (10) business days after such notice is sent, the parties shall meet, shall develop, as fully as possible, the facts relating to the conflict, dispute or alleged breach, and shall attempt to resolve the same, it being understood and agreed that any such resolution shall be subject to the consent and approval of a majority of the Company's independent trustees. If resolution of the dispute is not made to the satisfaction of the aggrieved party within thirty (30) days after the notice is sent, the aggrieved party may pursue its legal and equitable remedies. -3- (b) In the event of breach of this Agreement, each of Reschke and the TPG Group acknowledges that the remedy at law would be inadequate and that, in addition to monetary damages, the Company shall be entitled, after compliance with the dispute mechanism described in SUBSECTION 5(a) above, to seek an injunctive order restraining such breach. 6. TRANSFERABILITY. The parties hereto agree that this Agreement shall inure to the benefit of the Company, and its successors and assigns and shall be transferrable and assignable by the Company in connection with the sale or other transfer of a controlling (50%) interest in the Company to an entity that is not an Affiliate. Upon such transfer or assignment, this Agreement shall remain in full force and effect, under the terms herein, between Reschke, the TPG Group and such transferees, assignees or successors in interest. This Agreement shall be binding upon the successors and assigns of all or substantially all of the business of the TPG Group. 7. WAIVER. The waiver by an party to this Agreement of a breach by any party or any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any other party. No waiver of any provision of this Agreement shall be effective, unless in writing and signed by the party waiving its rights, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, provided further that no waiver by the Company shall be effective unless accompanied by a certificate of an executive officer of the Company certifying that a majority of the independent trustees of the Company have consented to and approved such waiver. 8. NOTICES. All notices, requests, demands and other communications given by any party hereto shall be in writing and shall be deemed to be duly given if delivered, or if mailed first class, return receipt requested addressed as follows: To the Company or the Operating To the TPG Group or any member thereof: Partnership: Prime Group Realty Trust c/o The Prime Group, Inc. 77 West Wacker Drive 77 W. Wacker Drive Chicago, IL 60601 Chicago, IL 60601 Attention: Chief Executive Attention: Michael W. Reschke Officer With a copy to: With a copy to: Prime Group Realty Trust The Prime Group, Inc. -4- 77 West Wacker Drive 77 West Wacker Drive Chicago, IL 60601 Chicago, IL 60601 Attention: General Counsel Attention: General Counsel To Michael W. Reschke: c/o The Prime Group, Inc. 77 W. Wacker Drive Chicago, IL 60601 Attention: Michael W. Reschke 9. ENTIRE AGREEMENT. This instrument supersedes all prior understandings and agreements of the parties hereto and contains the entire agreement of the parties with respect to the subject matter hereof and may not be amended or changed, except by an agreement in writing entered into by the parties hereto. 10. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois. 11. SEVERABILITY. If a court of competent jurisdiction adjudicates any one or more of provisions of this Agreement as invalid, illegal or unenforceable in any respect, such provision(s) shall be ineffective only to the extent and duration of such invalidity, illegality or unenforceability and such invalidity, illegality or unenforceability shall not affect the remaining substance of such provision or any of this Agreement's other provisions, and this Agreement shall be construed as if it had never contained such invalid, illegal and unenforceable provision. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [signature page follows] -5- IN WITNESS WHEREOF, the parties hereto have caused this Non-Competition and Restriction Agreement to be duly executed as of the date first above written. COMPANY: RESCHKE AND THE TPG GROUP: PRIME GROUP REALTY TRUST, a Maryland real estate investment trust /s/ Michael W. Reschke ------------------------------ Michael W. Reschke By: /s/ W. Michael Karnes ------------------------------- Its: Executive VP ------------------------------- THE PRIME GROUP, INC., an Illinois corporation PRIME GROUP REALTY, L.P., a Delaware limited partnership By: /s/ Robert J. Rudnik -------------------------- By: Prime Group Realty Trust, its Managing General Its: Executive Vice President Partner -------------------------- PRIME GROUP LIMITED By: /s/ W. Michael Karnes PARTNERSHIP, an Illinois -------------------------------- limited partnership Its: Executive VP -------------------------------- By: /s/ Michael W. Reschke -------------------------- Michael W. Reschke, Managing General Partner -6- EX-10.23 19 EX-10.23 Exhibit 10.23 SERIES A PREFERRED SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER 11, 1997 AMONG SECURITY CAPITAL PREFERRED GROWTH INCORPORATED, PRIME GROUP REALTY, L.P. AND PRIME GROUP REALTY TRUST Table of Contents
Page ------- I. PURCHASE AND SALE OF SECURITIES 1.1 Sale and Issuance of Series A Preferred Shares 1.2 Closing II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2.1 Organization, Good Standing and Qualification 2.2 Power, Authority and Enforceability 2.3 Capitalization; Registration Rights 2.4 Valid Issuance of Series A Preferred Shares 2.5 Compliance with Other Instruments 2.6 No Registration Under the Securities Act; No General Solicitation 2.7 Conformity to Securities Act; No Misstatement or Omission 2.8 Financial Statements 2.9 No Material Adverse Changes 2.10 Litigation 2.11 Title to Properties; Leasehold Interests 2.12 Environmental Compliance 2.13 Taxes 2.14 Insurance 2.15 Employees; ERISA 2.16 REOC Status 2.17 Legal Compliance 2.18 Governmental Consent 2.19 Investment Company 2.20 Knowledge Defined III. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR 3.1 Power, Authority and Enforceability 3.2 Compliance with Other Instruments 3.3 Ownership Limitations 3.4 Sophisticated Investor 3.5 Unregistered Securities 3.6 Access to Information IV. CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT CLOSING 4.1 Execution and Delivery of Amended and Restated Partnership Agreement 4.2 Series A Preferred Designation 4.3 Representations and warranties 4.4 Performance 4.5 No Material Adverse Change 4.6 Opinion of Company Counsel 4.7 Registration Rights Agreement 4.8 Tag-Along Agreement Page ------- 4.9 Officer's Certificate 4.10 Payment of Placement Fee 4.11 Proceedings 4.12 Limited Waiver of Ownership Limitations 4.13 No Injunction 4.15 Consummation of the IPO V. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING 5.1 Representations and Warranties 5.2 Performance 5.3 No Injunction 5.4 Officer's Certificate VI. COVENANTS 6.1 No Sale of Security 6.2 No General Solicitation 6.3 Filing of Exchange Act Reports 6.4 Consultation and Related Rights 6.5 Maintenance of REIT Status 6.6 Change of Control 6.7 Waiver of Ownership Limitations 6.8 No Public Disclosure 6.9 Annual Certificate of Independent Public Accountants Company Counsel 6.10 Prohibition on Issuance of Series A Preferred Shares 6.11 Structure of Operating Partnership Agreement 6.12 Standstill Provisions 6.13 Certificate of Company Security Ownership 6.14 Ownership in Strategic Hotel Capital Incorporated VII. TERMINATION 7.1 Termination 7.2 Notice of Termination 7.3 Effect of Termination VIII. MISCELLANEOUS 8.1 Survival of Warranties 8.2 Successors and Assigns 8.3 Governing Law 8.4 Counterparts 8.5 Titles and Subtitles 8.6 Notices 8.7 Finder's Fees 8.8 Expenses 8.9 Amendments and Waivers 8.10 Severability Page ------- 8.11 Entire Agreement
SERIES A PREFERRED SECURITIES PURCHASE AGREEMENT This SERIES A PREFERRED SECURITIES PURCHASE AGREEMENT (this "Agreement") is made as of the 11th day of November, 1997 by and among Prime Group Realty Trust, a Maryland real estate investment trust (the "Company"), Prime Group Realty, L.P., a Delaware limited partnership (the "Operating Partnership"), and Security Capital Preferred Growth Incorporated, a Maryland corporation (the "Investor"). W I T N E S S E T H WHEREAS, the Company wishes to issue and sell to the Investor Series A Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value per share (the "Series A Preferred Shares"), the terms of which shall be as set forth in the Articles of Amendment and Restatement of the Company's Declaration of Trust (the "Declaration") to be filed with the SDAT (as defined below) in connection with the IPO (as defined below) in substantially the form of Exhibit A hereto, in accordance with and subject to the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the foregoing and the mutual covenants, agreements and warranties herein contained, the parties hereby agree as follows: I. PURCHASE AND SALE OF SECURITIES. 1.1 Sale and Issuance of Series A Preferred Shares. (a) Company shall adopt and file with the State Department of Assessments and Taxation of Maryland (the "SDAT") on or before the Closing Date (as defined below) the Declaration. (b) Subject to the terms and conditions of this Agreement, the Company agrees to issue and sell to the Investor, and the Investor agrees to purchase from the Company, 2 million Series A Preferred Shares. (c) The aggregate purchase price (the "Aggregate Purchase Price") for the Series A Preferred Shares issued and sold pursuant to this Agreement shall be equal to $40 million. (d) The price per Series A Preferred Share (the "Per Share Price") shall be equal to $20.00. 1.2 Closing. Upon the terms and subject to the satisfaction or waiver of all the conditions to closing set forth in this Agreement, the closing (the "Closing") of the purchase and sale of the Series A Preferred Shares shall take place at the offices of Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois or at such other location as may be agreed upon by the Company and the Investor. Such Closing shall take place at 10:00 a.m., Chicago time, on the date of the closing of the IPO, which shall be the third or fourth business day following the pricing of the Company's initial public offering (the "IPO"), or at such other time as may be agreed upon by the Company and the Investor (the "Closing Date"). At the Closing, the Company shall issue and deliver to the Investor a certificate or certificates in definitive form, registered in the name of the Investor, representing the Series A Preferred Shares being purchased by the Investor hereunder and the Investor shall deliver to the Company, against delivery of the certificate or certificates representing the Series A Preferred Shares, the Aggregate Purchase Price by wire transfer of immediately available funds payable to the Company's order. II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Each of the Company and the Operating Partnership represents and warrants, as of the date of this Agreement and as of the Closing Date, that: 2.1 Organization, Good Standing and Qualification. (a) The Company has been duly organized and is validly existing as a real estate investment trust in good standing under the laws of the State of Maryland with full power and authority to own, lease and operate its properties and conduct its business as now being conducted, and has been duly qualified to transact business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the operations, assets, business, affairs, prospects, properties, or financial or other condition of the Company, the operating Partnership and the Subsidiaries (as defined below) taken as a whole. (b) The operating Partnership has been duly formed and is validly existing as a limited partnership in good standing under the Delaware Revised Uniform Limited Partnership Act with partnership power and authority to own, lease and operate its properties and conduct its business as now being conducted and has been duly qualified to transact business and is in good standing under the laws of each jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a Material Adverse Effect. (c) The subsidiaries of the Company and the operating Partnership set forth on Schedule 2.1 (the "Subsidiaries") have each been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of incorporation or formation and have full power and authority to own, lease and operate their Properties and to conduct their businesses as now being conducted, and each Subsidiary has been duly qualified to transact business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to be in good standing or to so qualify would not have a Material Adverse Effect. None of the Company's or the Operating Partnership's subsidiaries that are not included on Schedule 2.1 individually or in the aggregate constitute a "Significant Subsidiary" as defined in Rule 1-02 of Regulation S-X. 3 2.2 Power, Authority and Enforceability (a) Each of the Company and the Operating Partnership has all requisite trust or partnership power and authority, and has taken all required trust or partnership action necessary, to execute, deliver, and perform its obligations under, this Agreement. The Company has all requisite trust power and authority, and has taken all required trust action necessary, to issue and sell the Series A Preferred Shares and the Common Shares. (b) This Agreement has been duly executed and delivered by each of the Company and the Operating Partnership and constitutes the legal, valid and binding obligation of each of the Company and the operating Partnership enforceable against each of the Company and the Operating Partnership in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) equitable principles of general applicability relating to the availability of specific performance, injunctive relief, or other equitable remedies. 2.3 Capitalization; Registration Rights. After giving effect to the Company's adoption of the Declaration, the authorized beneficial interests of the Company consists of 30 million preferred shares, par value $.01 per share, of which 2 million shares are designated as "Series A Cumulative Convertible Preferred Shares," 65 million excess shares, $.01 par value per share, and 100 million common shares, $.01 par value per share. All of the issued and outstanding shares of beneficial interest of the Company have been duly and validly authorized and issued and are fully paid and are nonassessable. All of the issued and outstanding partnership interests of the Operating Partnership have been duly and validly authorized and issued. Except as disclosed in the Company's Registration Statement on Form S-11, Registration No. 333-33547 (the "Registration Statement") , there are no persons with registration rights or other similar rights with respect to any securities of the Company or the Operating Partnership. 2.4 Valid Issuance of Series A Preferred Shares. The Series A Preferred Shares when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued and nonassessable. The common shares of Beneficial Interest of the Company issuable upon the conversion or redemption of the Series A Preferred Shares (the "Common Shares"), when issued upon such conversion in accordance with the Declaration will be duly and validly issued, fully paid and nonassessable and, subject to the accuracy of the Investor's representations set forth in Article III, will be issued in compliance with all applicable federal and state securities laws. 2.5 Compliance with Other Instruments. The execution, delivery and performance of this Agreement by the Company and the Operating Partnership and the consummation by the company and the Operating Partnership of the 4 transactions contemplated hereby do not (i) result in a violation of the Declaration, the Company's Amended and Restated Bylaws (the "Bylaws") or of the operating Partnership's Amended and Restated Agreement of Limited Partnership or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company, the Operating Partnership or any of the Subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Company, the Operating Partnership or any of the Subsidiaries or by which any property or asset of the Company, the Operating Partnership or any of the Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect or materially impair the Company's or the Operating Partnership's ability to perform its obligations under this Agreement). 2.6 No Registration Under the Securities Act; No General Solicitation. Assuming the accuracy of the Investor's representations set forth in Article III, it is not necessary in connection with the offer, sale and delivery of the Series A Preferred Shares and the Common Shares in the manner contemplated by this Agreement to register the Series A Preferred Shares or the Common Shares under the Securities Act of 1933, as amended (the "Securities Act"). None of the Company, the Operating Partnership nor any of their respective affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated n respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Series A Preferred Shares in a manner that would require registration under the Securities Act of the Series A Preferred Shares or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Series A Preferred Shares (as those terms are used in Regulation D under the Securities Act), or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. 2.7 Conformity to Securities Act; No Misstatement or Omission. As of the date hereof, as of the time the Company's prospectus with respect to its IPO, dated November 11, 1997 (the "Prospectus"), is filed with the Securities and Exchange Commission (the "Commission") pursuant to Rule 424 (b) under the Securities Act, at any time prior to the Closing Date that any subsequent amendment or supplement to the Company's Registration Statement on Form S-11 (No. 333-33547) (the "Registration Statement") or the Prospectus is filed with the Commission and at the Closing Date: (i) the Registration Statement, as amended as of any such time and the Prospectus, as amended or supplemented as of any such time will comply in all material respects with the applicable requirements of the Securities Act and the respective rules and regulations of the Commission thereunder, (ii) the Registration Statement, as amended as of any such time, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) the Prospectus, as 5 amended or supplemented as of any such time, will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2.8 Financial Statements. The financial statements and supporting schedules included in the Registration Statement are complete and correct in all material respects and present fairly the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates specified and the consolidated results of their operations for the periods specified, in each case, in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved, except as indicated therein or in the notes thereto. 2.9 No Material Adverse Changes. Since December 31, 1996, (i) there has been no change in the business, operations or financial condition, of the Company, the Operating Partnership or the Subsidiaries or in the earnings or the ability to continue to conduct business in the usual and ordinary course of the Company, the Operating Partnership and the Subsidiaries, whether or not arising in the ordinary course of business, which has a Material Adverse Effect; and (ii) except for the transactions contemplated by this Agreement or described in the Registration Statement, there has been no transaction entered into by the Company, the Operating Partnership or any of the Subsidiaries other than transactions in the ordinary course of business or transactions which would not, individually or in the aggregate, have a Material Adverse Effect; and (iii) there have not been any changes in the Company's or the Operating Partnership's authorized capital (except as set forth in Section 2.3 of this Agreement) or any material increases in the debt of the Company, the Operating Partnership and the Subsidiaries considered as one enterprise; and (iv) there has been no actual or, to the knowledge of the Company or the Operating Partnership, threatened revocation of, or default under, any material contract to which the Company, the Operating Partnership or any of the Subsidiaries is a party, which could reasonably be expected to result in a Material Adverse Effect, except for the default by Keck, Mahin & Cate under its lease at the 77 West Wacker Drive building. 2.10 Litigation. Except as set forth in the Registration Statement, after giving effect to the IPO and the transactions contemplated thereby, there is no action, suit or proceeding (whether or not purportedly on behalf of the Company, the Operating Partnership or any of the Subsidiaries) before or by any court or governmental agency or body, domestic or foreign, now pending, or to the knowledge of the Company or the Operating Partnership, threatened against or affecting the Company, the Operating Partnership or any of the Subsidiaries which, either alone or in the aggregate, could reasonably be expected to have a Material Adverse Effect or materially impair the Company's or the Operating Partnership's ability to perform its obligations under this Agreement or the compliance by the Company with the terms, conditions and provisions of the Series A Preferred Shares or the Common 6 Shares. 2.11 Title to Properties; Leasehold Interests. (a) Schedule 2.11(a) sets forth a complete and accurate list and the address of all real property owned or leased by the Company, the Operating Partnership or any Subsidiaries or are otherwise used in the operation or conduct of the Company's or Operating Partnership's business (collectively, and together with the land at each address referenced in Schedule 2.11(a) and all buildings, structures and other improvements and fixtures located on or under such land and all easements, rights and other appurtenances to such land, the "Company Properties"). The Company, the Operating Partnership, or in the case of Company Properties owned by Subsidiaries that are not wholly owned Subsidiaries of the Company, to the Company's knowledge, such Subsidiaries, owns or own, as the case may be, good and marketable fee simple title (or, if so indicated in Schedule 2.11(a), leasehold title) to each of the Company Properties, in each case free and clear of any Liens, title defects, contractual restrictions or covenants, laws, ordinances or regulations affecting use or occupancy (including zoning regulation and building codes) or reservations of interests in title (collectively, "Property Restrictions"), except for (i) mortgage liens disclosed in the Registration Statement or on Schedule 2.11(a); (ii) Property Restrictions imposed or promulgated by law or by any Government Authority (as hereinafter defined) which are customary and typical for similar properties and (iii) other Property Restrictions that do not individually or in the aggregate materially impair the use or operation of any Company Property (collectively, "Permitted Liens"). To the Company's knowledge, none of the matters described in clauses (i), (ii) or (iii) of the immediately preceding sentence materially interferes with, materially impairs, or is materially violated by, the existence of any building or other structure or improvement which constitutes a part of, or the present use, occupancy or operation (or, if applicable, development) of, the Company Properties taken as a whole, and such matters do not, individually or in the aggregate, have a Material Adverse Effect. At or prior to the closing of the IPO, American Land Title Association policies of title insurance (or marked title insurance commitments having the same force and effect as title insurance policies) will have been issued by national title insurance companies insuring the fee simple or leasehold, as applicable, title of the Company, the Operating Partnership or any Subsidiaries, as applicable, to each of the Company Properties in amounts at least equal to the original cost thereof, subject only to Permitted Liens and, to the Company's knowledge, such policies are valid and in full force and effect and no claim has been made under any such policy. (b) Except as set forth in Schedule 2.11(b), and except for matters which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Company has no knowledge (i) that any currently required certificate, permit or license (including building permits and certificates of occupancy for tenant spaces) from any Government Authority having jurisdiction over any Company Property or any agreement, easement or other right which is necessary to permit the lawful use, occupancy or operation of the existing buildings, structures or other improvements which constitute a part of any of the Company Properties or which are necessary to permit the lawful use and operation of utility service to any Company Property or of any existing driveways, roads or other means or egress and ingress to and from any of the Company Properties has 7 not been obtained or is not in full force and effect, or of any pending threat of modification or cancellation of any of same, or (ii) of any violation by any Company Property of any federal, state or municipal law, ordinance, order, regulation or requirement, including any applicable zoning law or building code, as a result of the use or occupancy of such Company Property or otherwise. Except as set forth in Schedule 2.11(b), the Company has no knowledge of uninsured physical damage to any Company Property which would individually or in the aggregate have a Material Adverse Effect. To the Company's knowledge, except for repairs identified in Schedule 2.11(b), each Company Property, identified as an operating property in Schedule 2.11(a) (the "Operating Properties"), (i) is in good operating condition and repair and is structurally sound and free of defects, with no material alterations or repairs being required thereto under applicable law or insurance company requirements, and (ii) consists of sufficient land, parking areas, driveways and other improvements and lawful means of access and utility service and capacity to permit the use thereof in the manner and for the purposes to which it is presently devoted, except, in such case, to the extent that failure to meet such standards would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (c) The Company has no knowledge (i) that any condemnation, eminent domain or rezoning proceedings are pending or threatened with respect to any of the Company Properties, (ii) that any road widening or change of grade of any road adjacent to any Company Property is underway or has been proposed, (iii) of any proposed change in the assessed valuation of any Company Property other than customarily scheduled revaluations, (iv) of any special assessment made or threatened against any Company Property, or (v) that any of the Company Properties is subject to any so-called "impact fee" or to any agreement with any Government Authority to pay for sewer extension, oversizing utilities, lighting or like expenses or charges for work or services by such Government Authority, except, in the case of each of the foregoing, to the extent that same would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) To the Company's knowledge, each of the Operating Properties is an independent unit which does not rely on any facilities located on any property not included in such Operating Property to fulfill any municipal or governmental requirement or for the furnishing to such Operating Property of any essential building systems or utilities, other than facilities the benefit of which inures to the Operating Properties pursuant to one or more valid easements. Each of the Operating Properties is served by public water and sanitary systems and all other utilities, and, to the Company's knowledge, each of the Operating Properties has lawful access to public roads, in all cases sufficient for the current use and occupancy of each Operating Property. To the Company's knowledge, all parcels of land included in each operating Property that purport to be contiguous are contiguous and are not separated by strips or gores. To the Company's knowledge, no portion of any Company Property lies in any flood plain area (as defined, as of the date hereof, by the U.S. Army Corps of Engineers (the "Army Corps of Engineers") or otherwise) or includes any wetlands or vegetation or species protected by any applicable laws. None of the Company Properties lies in any 100-year flood plain area, as established by the Army Corps of Engineers. To the Company's knowledge, no improvements constituting a part of any Company Property encroach on real property not constituting a part of such Company Property. No representation set forth in this subsection (d) shall be deemed to be untrue unless such untruths are, individually or in the aggregate, reasonably 8 expected to have a Material Adverse Effect. (e) To the knowledge of the Company, no Operating Property fails to comply with the requirements of the Americans with Disabilities Act (the "ADA") except for such non-compliance as the Company believes will not, individually or in the aggregate, have a Material Adverse Effect. (f) With respect to each lease of space in each Company Property (collectively, the "Company Leases") for premises larger than 100,000 square feet of rentable space as identified on Schedule 2. 11(f) or if leased to a tenant or affiliate of a tenant listed on Schedule 2.11(f) (collectively, the "Material Company Leases"), except for matters which are not, individually or in the aggregate, reasonably expected to have a Material Adverse Effect, (i) except as noted on Schedule 2.11(f), each of the Material Company Leases is valid and subsisting and in full force and effect as against the Company or Subsidiary, as applicable, and, to the Company's knowledge, as against the tenant, and has not been amended, modified or supplemented, (ii) except as noted on Schedule 2.11(f), the tenant under each of the Material Company Leases is in actual possession of the premises leased thereunder, (iii) except as set forth on Schedule 2.11(f), no tenant under any Material Company Lease is more than 60 days in arrears in the payment of regular recurring monthly rent, (iv) except as noted on Schedule 2.11(f), none of the Company, the Operating Partnership or any Subsidiaries has received any written notice from any tenant under any Material Company Lease of its intention to vacate, (v) none of the Company, the Operating Partnership or any Subsidiaries has collected payment of rent under any Material Company Lease (other than security deposits) accruing for a period which is more than one month in advance, (vi) no notice of default has been sent or received by the landlord under any Material Company Lease which remains uncured as of the date hereof, except as noted on Schedule 2.11(f), no default has occurred under any Material Company Lease and, to the Company's knowledge, no event has occurred and is continuing which, with notice or lapse of time or both, would constitute a default under any Material Company Lease, (vii) except as disclosed in the Registration Statement, no tenant under any of the Material Company Leases has any purchase options or kick-out rights or is entitled to any concessions, allowances, abatements, set-offs, rebates or refunds, (viii) except as assigned in connection with Mortgages discussed in the Registration Statement and except for Collateral Assignments by tenants in connection with the financing of fixtures and inventory in the premises with bona fide institutional lenders, none of the Material Company Leases and none of the rents or other amounts payable thereunder has been mortgaged, assigned, pledged or encumbered by any party thereto or otherwise, (ix) no space of a material size in the Company Property is occupied by a tenant rent-free, (x) no tenant under any of the Material Company Leases has asserted any claim which is likely to affect the collection of rent from such tenant, and (xi) the landlord under each Material Company Lease has fulfilled all of its obligations thereunder in respect of tenant improvements and capital expenditures. Other than parties to easement agreements, no third party has any right to occupy or use any portion of any Company Property, with the exception of kiosk or pushcart operators, that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (g) Except as disclosed in the Registration Statement, Schedule 2.11(g) sets forth a complete and accurate list of all material commitments, letters of intent, options or similar written 9 understandings made or entered into by the Company or any of its Subsidiaries as of the date hereof, (i) to sell, mortgage, pledge or hypothecate any Company Property or Properties, which, individually or in the aggregate, constitute at least $50 million, or to otherwise enter into a material transaction in respect of the ownership or financing of any Company Property, or (ii) to purchase or to acquire an option, right of first refusal or similar right in respect of any real property, which, individually or in the aggregate, constitute at least $50 million, which, in any such case, has not yet been reduced to a written lease or contract, and sets forth with respect to each such commitment, letter of intent or other understanding the principal terms thereof, with the exception of the rights of the Company to acquire vacant land, in which case Schedule 2.11(g) shall only set forth the location where the Company has the rights to acquire such vacant land. (h) The Company has disclosed to Investor all adverse matters known to the Company with respect to or in connection with the Company Properties which arose subsequent to the period covered by the Registration Statement (including the Company Leases and the Tenancy Leases (as defined below)), which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (i) The ground leases underlying the leased Company Properties referenced in Schedule 2.11(a) (collectively, the "Tenancy Leases") are accurately described in Schedule 2.11(i). Each of the Tenancy Leases is valid, binding and in full force and effect as against the Subsidiary and, to the Company's knowledge, as against the other party thereto. Except as indicated in Schedule 2.11(i) or disclosed in the Registration Statement in connection with only mortgage liens, none of the Tenancy Leases is subject to any mortgage, pledge, Lien, sublease, assignment, license or other agreement granting to any third party any interest therein, collateral or otherwise, or any right to the use or occupancy of any premises leased thereunder with the exception of sub-leases with tenants of the centers constructed on the land. To the Company's knowledge, except as set forth in Schedule 2.11(i), there is no pending or threatened proceeding which is reasonably likely to interfere with the quiet enjoyment of the tenant under any of the Tenancy Leases. Except as set forth in Schedule 2.11(i), as of the last day of the month preceding the date hereof and as of the last day of the month preceding the date of the Closing, no payments under any Tenancy Lease are delinquent and no notice of default thereunder has been sent or received by the Company, the Operating Partnership or any Subsidiaries. There does not exist under any of the Tenancy Leases any default, and, to the Company's knowledge, no event has occurred which, with notice or lapse of time or both, would constitute such a default, except as would not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. (j) The Company, the Operating Partnership and all Subsidiaries have good and sufficient title to all personal and non-real properties and assets reflected in their books and records as being owned by them (including those reflected in the balance sheets of the Company, the Operating Partnership and all Subsidiaries as of December 31, 1996, except as since sold or otherwise disposed of in the ordinary course of business), free and clear of all Liens, except for Permitted Liens which are not, individually or in the aggregate, reasonably expected to have a Material Adverse Effect. 10 2.12 Environmental Compliance. (a) Except as disclosed in the Registration Statement, the Company, the Operating Partnership and each of the Subsidiaries has complied and is in compliance with all Environmental Statutes (as hereinafter defined) except as such non-compliance would not have a Material Adverse Effect. (b) Except as disclosed in the Registration Statement, none of the Company, the Operating Partnership or any of the Subsidiaries intends to use any real property owned or occupied by any such party for the purpose of handling, burying, storing, retaining, refining, transporting, processing, manufacturing, generating, producing, spilling, seeping, leaking, escaping, leaching, pumping, pouring, emitting, emptying, discharging, injecting, dumping, transferring or otherwise disposing of or dealing with Hazardous Materials. (c) Except as disclosed in the Registration Statement, none of the Company, the Operating Partnership or any of the Subsidiaries has any knowledge of any seepage, leak, escape, leach, discharge, injection, release, emission, spill, pumping, pouring, emptying or dumping of Hazardous Materials into waters on or adjacent to any real property owned or occupied by any such party, or onto lands from which Hazardous Materials might seep, flow or drain into such waters. (d) Except as disclosed in the Registration Statement, none of the Company, the operating Partnership or any of the Subsidiaries has any knowledge of any occurrence or circumstance that, with notice or passage of time or both, would give rise to a claim under or pursuant to any federal, state or local Environmental Statute pertaining to Hazardous Materials on or originating from any real property owned or occupied by the Company, the Operating Partnership or any of the Subsidiaries arising out of the conduct of any such party, including without limitation pursuant to any Environmental Statute. (e) Except as disclosed in the Registration statement, to the knowledge of the Company, no land owned by the Company, the Operating Partnership or any of the Subsidiaries is included or proposed for inclusion on the National Priorities List issued pursuant to CERCLA (as hereinafter defined) by the United States Environmental Protection Agency (the "EPA") or on the inventory of other potential "Problem" sites issued by the EPA and has not otherwise been publicly identified by the EPA as a potential CERCLA site or included or proposed for inclusion on any list or inventory issued pursuant to any other Environmental Statute or issued by any other Governmental Authority (as hereinafter defined). (f) As used herein, "Hazardous Material" shall include without limitation any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, toxic substances or related materials, asbestos or any hazardous material as defined by any federal, state or local environmental law, ordinance, rule or regulation, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 et seq. ("CERCLA"), the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sections 1801 et 11 seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Sections 9601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Sections 11001 et seq., the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq., the Clean Air Act, 42 U.S.C. Sections 7401 et seq., the Clean Water Act (Federal Water Pollution Control Act), 33 U.S.C. Sections 1251 et seq., the Safe Drinking Water Act, 42 U.S.C. Sections 300F to 300j-11, and the Occupational Safety and Health Act, 29 U.S.C. Sections 651 et seq, as any of the above statutes may be amended from time to time, and in the regulations adopted and publications promulgated pursuant to each of the foregoing (individually, an "Environmental Statute") or by any federal, state or local governmental authority having or claiming jurisdiction over the properties and assets described in the Company's periodic reports filed pursuant to the Exchange Act (a "Governmental Authority"). 2.13 Taxes. (a) The Company, the Operating Partnership and the Subsidiaries have filed or caused to be filed all federal, state, local, foreign and other tax returns, reports, information returns and statements (except for returns, reports, information returns and statements the failure to file which will not result in any Material Adverse Effect) required to be filed by them. The Company, the Operating Partnership and the Subsidiaries have paid or caused to be paid all taxes (including interest and penalties) that are shown as due and payable on such returns or claimed by any taxing authority to be due and payable with respect to such returns, except those which are being contested by them in good faith by appropriate proceedings and in respect of which adequate reserves are being maintained on their books in accordance with generally accepted accounting principles consistently applied. The Company, the Operating Partnership and the Subsidiaries do not have any material liabilities for taxes other than those incurred in the ordinary course of business and in respect of which adequate reserves are being maintained by them in accordance with generally accepted accounting principles consistently applied. Federal and state income tax returns for the Company, the Operating Partnership and the Subsidiaries have not been audited by the Internal Revenue Service or state authorities. No deficiency, assessment with respect to or proposed adjustment of the Company's, the Operating Partnership's or any of the Subsidiaries' federal, state, local, foreign or other tax returns is pending or, to the best of the Company's, the Operating Partnership's or any of the Subsidiaries, knowledge, threatened. There is no tax lien, whether imposed by any federal, state, local or other tax authority, outstanding against the assets, properties or business of the Company, the Operating Partnership or any of the Subsidiaries. There are no applicable taxes, fees or other governmental charges payable by the Company, the Operating Partnership or any of the Subsidiaries in connection with the execution and delivery of this Agreement or the issuance by the Company of the Series A Preferred Shares or the Common Shares. (b) The Company has qualified, and will elect, to be taxed as a real estate investment trust pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), for its taxable year ending December 31, 1997, and the Company expects under present law to so qualify in the future. (c) The Operating Partnership is not a publicly traded partnership that is taxed as a 12 corporation under Section 7704 of the Code. 2.14 Insurance. The Company, the operating Partnership and each of the Subsidiaries carries or is entitled to the benefits of insurance in such amounts and covering such risks as is reasonably sufficient under the circumstances or is customary in the industry and all such insurance is in full force and effect. 2.15 Employees; ERISA. The Company and the Operating Partnership have good relationships with their employees and have not had any substantial labor problems. Neither the Company nor the Operating Partnership has any knowledge as to any intentions of any key employee or any group of employees to leave the employ of the Company or the Operating Partnership. Other than as disclosed in the Registration Statement, neither the Company nor the Operating Partnership has established, sponsored, maintained, made any contributions to or been obligated by law to establish, maintain, sponsor or make any contributions to any "employee pension benefit plan" or "employee welfare benefit plan" (as such terms are defined in ERISA), including, without limitation, any "multi-employer plan." Each of the Company and the Operating Partnership is in compliance with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of Social Security and other taxes, and with ERISA, except where the failure to so comply would not have a Material Adverse Effect. 2.16 REOC Status. The Operating Partnership is, at all times since its creation has been, and will continue to be a real estate operating company ("REOC") (as such term is defined in 29 CFR 2510.3-101(e)). 2.17 Legal Compliance. (a) Each of the Company, the Operating Partnership and each of the Subsidiaries is in compliance with all applicable laws, rules, regulations, orders, licenses, judgments, writs, injunctions, decrees or demands of any court or administrative body, domestic or foreign, or of any other governmental agency or instrumentality, domestic or foreign, except to the extent that failure to comply would not have a Material Adverse Effect. The Company, the Operating Partnership and each of the Subsidiaries have all necessary permits, licenses and other authorizations required to conduct their businesses as currently conducted, and as proposed to be conducted, except where the failure to have such permits, licenses or other authorizations would not have a Material Adverse Effect. (b) Except as disclosed in the Registration Statement, there are no adverse orders, judgments, writs, injunctions, decrees or demands of any court or administrative body, domestic or foreign, or of any other governmental agency or instrumentality, domestic or foreign, outstanding 13 against the Company, the operating Partnership or any of the Subsidiaries which could reasonably be expected to result in a Material Adverse Effect. 2.18 Governmental Consent. Other than such consents, approvals, authorizations, declarations or filings as have already been obtained or made or which will be made at or prior to the Closing Date, no consent, approval or authorization of, or declaration or filing with, any governmental authority on the part of the Company is required for the valid execution and delivery of this Agreement or performance hereunder or the valid offer, issue, sale and delivery of the Series A Preferred Shares pursuant to this Agreement. 2.19 Investment Company. The Company is not an "investment company", as defined in the Investment Company Act of 1940, as amended, nor is the Company controlled by an "investment company." 2.20 Knowledge Defined. As used herein the phrase "to the Company's knowledge" or words of similar import means the actual knowledge of the individuals listed on Schedule 2.20. III. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor represents and warrants, as of the date of this Agreement and as of the Closing Date, that: 3.1 Power, Authority and Enforceability. (a) The Investor is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Maryland. The Investor has the requisite corporate power and authority, and has taken all required corporate action necessary, to execute, deliver, and perform its obligations under, this Agreement and to purchase the Series A Preferred Shares hereunder. (b) This Agreement has been duly executed and delivered by the Investor and constitutes the legal, valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors, rights generally, and (ii) equitable principles of general applicability relating to the availability of specific performance, injunctive relief, or other equitable remedies. 14 3.2 Compliance with Other Instruments. The execution, delivery and performance of this Agreement by the investor and the consummation by the Investor of the transactions contemplated hereby do not (i) result in a violation of the Investor's Articles of Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Investor is a party, or result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Investor or by which any property or asset of the Investor is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, materially impair the Investor's ability to perform its obligations under this Agreement). 3.3 Ownership Limitations. The Investor has received a copy of the Declaration and understands the restrictions on transfer and ownership of the Company's shares of beneficial interest included therein related to the qualification by the Company as a real estate investment trust for federal income tax purposes pursuant to Sections 856 through 860 of the Code. 3.4 Sophisticated Investor. In the normal course of its business or its investing activities, the Investor invests in or purchases securities similar to the Series A Preferred Shares and it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing the Series A Preferred Shares. The Investor is aware that it may be required to bear the economic risk of an investment in the Series A Preferred Shares for an indefinite period of time and it is able to bear such risk for an indefinite period. 3.5 Unregistered Securities. The Investor understands and acknowledges and agrees that the Series A Preferred Shares and Common Shares have not been registered under the Securities Act or any other applicable securities law and, unless so registered, may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act or any other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto. 3.6 Access to Information. The Investor has had access to such financial and other information concerning the Company or any of its affiliates and the Series A Preferred Shares as it 15 deemed necessary in connection with its decision to purchase any of the Series A Preferred Shares, including an opportunity to ask questions and request information from the Company. IV. CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT CLOSING. The Investor's obligations at the Closing under Section 1.2 of this Agreement are subject to the satisfaction or waiver by the Investor on or before the Closing of each of the following conditions: 4.1 Execution and Delivery of Amended and Restated Partnership Agreement. At or prior to the Closing, the Amended and Restated Partnership Agreement contemplated by Section 6.11 shall have been executed and delivered. 4.2 Series A Preferred Designation. At or prior to the Closing, the Declaration shall have been filed with and accepted for recording by the SDAT. 4.3 Representations and Warranties. The representations and warranties of each of the Company and the Operating Partnership contained in Article II shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.4 Performance. Each of the Company and the Operating Partnership shall have performed and complied in all material respects with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing Date. 4.5 No Material Adverse Change. After the date of this Agreement and through the Closing Date, there shall not have occurred any change or event that has had a Material Adverse Effect. 4.6 Opinion of Company Counsel. The Investor shall have received from each of Winston & Strawn and Miles & Stockbridge, counsel for the Company, an opinion in form and substance reasonably satisfactory to the Investor. In rendering such opinion, Winston & Strawn may rely, as to 16 matters governed by the laws of the State of Maryland, upon the opinion of Miles & Stockbridge. 4.7 Registration Rights Agreement. Simultaneous with the Closing, the Company and the Investor shall have entered into a Registration Rights Agreement in substantially the form attached hereto as Exhibit B. 4.8 Tag-Along Agreement. Simultaneous with the Closing, the Investor shall have entered into a Tag-Along Agreement with the other parties named therein in substantially the form attached hereto as Exhibit C. 4.9 Officer's Certificate. Each of the Company and the Operating Partnership shall have delivered to the Investor on the Closing Date a certificate or certificates signed by an authorized officer of such entity to the effect that the facts required to exist by Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4,12, and 4,13 continue to exist on the Closing Date. 4.10 Payment of Placement Fee. At or prior to the Closing, the Company shall have entered into a letter agreement with Security Capital Markets Group Incorporated in the form attached hereto as Exhibit D and shall have paid, or shall simultaneously pay, a placement fee equal to 1% of the Aggregate Purchase Price to Security Capital Markets Group Incorporated. 4.11 Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incidental thereto, shall be reasonably satisfactory in form and substance to the Investor; and the Investor shall have received copies of all documents which the Investor may reasonably request in connection with said transactions and copies of the records of all proceedings of the Company in connection therewith in form and substance reasonably satisfactory to the Investor. 4.12 Limited Waiver of Ownership Limitations. Subject to the Company's receipt of a certificate (the "Certificate") from the Investor in form and substance acceptable to the Company containing the representations and undertakings of the nature set forth in Section 4.6 of the Declaration, the Board of Trustees of the Company shall have duly adopted a resolution in form and substance reasonably 17 satisfactory to the Investor, thereby waiving the application of the Ownership Limit defined therein to the Investor and its Affiliates to the extent provided in such resolution. 4.13 No Injunction There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby and there shall be no actual or threatened action, suit, arbitration, inquiry, proceedings or investigation by or before any Governmental Authority, court or agency of competent jurisdiction, which would reasonably be expected to materially impair the ability of the Company to consummate the transactions contemplated hereby or to issue the Series A Preferred Shares or the Common Shares. 4.14 Consummation of the Formation Transactions. The Company shall have consummated the Formation Transactions (as defined in the Registration Statement) and the gross issue price per common Share in the IPO shall not exceed the product of 11.0 times Fully Diluted Pro Forma 1998 Funds from Operations per Share. "Fully Diluted Pro Forma 1998 Funds from Operations per Share" means (x) the Company's estimated "Funds from Operations," computed in accordance with the resolution adopted by the Board of Governors of the National Association of Real Estate Investments Trusts, Inc. in its March 1995 White Paper, except with base rents reported on a cash basis rather than a straight-line GAAP basis, for the 12 months ended June 30, 1998 divided by (y) the number of outstanding common shares of beneficial interest of the Company (assuming all securities exchangeable for, exercisable for, or convertible into common shares of beneficial interest are so exchanged, exercised or converted). 4.15 Consummation of the IPO. The Company shall have closed the IPO on or before December 31, 1997. V. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The obligations of the Company under Section 1.2 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of the Investor contained in Article III shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 18 5.2 Performance. The Investor shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the date of the Closing. 5.3 No Injunction. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby and there shall be no actual or threatened action, suit, arbitration, inquiry, proceedings or investigation by or before any Governmental Authority, court or agency of competent jurisdiction, which would reasonably be expected to materially impair the ability of the Investor to consummate the transactions contemplated hereby. 5.4 Officer's Certificate. The Investor shall have delivered to the Company and the Operating Partnership on the Closing Date a certificate or certificates signed by an authorized officer of the Investor to the effect that the circumstances described in the Certificate and the facts required to exist by Sections 5.1, 5.2 and 5.3 continue to exist on the Closing Date. VI. COVENANTS. 6.1 No Sale of Security. None of the Company, the Operating Partnership or any Affiliate of either party will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which would be integrated with the sale of the Series A Preferred Shares or the Common Shares in a manner which would require registration under the Securities Act of the Series A Preferred Shares or the Common Shares. 6.2 No General Solicitation. None of the Company, the Operating Partnership or any Affiliate of either party will solicit any offer to buy or offer to sell the Series A Preferred Shares or the Common Shares by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. 19 6.3 Filing of Exchange Act Reports. After the date of this Agreement, the Company will timely file all documents required to be filed with the Commission pursuant to Section 13 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") , and so long as any of the Series A Preferred Shares or the Common Shares remain issued and outstanding, shall provide to the Investor copies of all such documents, including, without limitation, all financial statements of the Company required to be filed with the Commission. 6.4 Consultation and Related Rights. For so long as the Investor holds at least 50% of the Series A Preferred Shares that it held immediately after the Closing Date (or 50% of the Common Shares that the investor could have obtained at that time upon conversion of such Series A Preferred Shares whether or not such shares are then convertible), the Investor shall have the right to directly participate (within the meaning of 29 CFR 2510.3 -101(d)(3)(ii) ) in the management of the Company and the Operating Partnership through and by the following rights and powers: (a) The right to be consulted on the appointment and dismissal of (i) the chief executive officer, the chief operating officer and the chief financial officer (or any person fulfilling similar duties) and the public accountants and public auditors for the Company and its subsidiaries and (ii) the managing general partner, the chief executive officer, the chief operating officer and the chief financial officer, or any person or persons fulfilling similar duties, and the public auditors and public accountants for the Operating Partnership and its subsidiaries. (b) The right to inspect the books and records of the Company and the Operating Partnership. (c) The right to be consulted concerning the development of the Company' s and the Operating Partnership's and their subsidiaries, annual strategic plan that incorporates a specific business strategy, an operating agenda, investment and disposition objectives, and capitalization and funding strategies. (d) The right to be consulted concerning the annual operating and capital budgets of the Company and the Operating Partnership and their subsidiaries. (e) The right to be consulted concerning Major Transactions. "Major Transactions" means (i) any acquisition or disposition of any assets in any single transaction or any series of related transactions where the aggregate purchase price paid or received by the Company, the Operating Partnership or 20 their subsidiaries exceeds $50,000,000, or, in the case of dispositions, where the purchase price received does not approximate the fair market value of the asset sold, (ii) additional financings in excess of $50,000,000 and (iii) a determination by the Company's Board of Trustees to terminate the Company's status as a real estate investment trust pursuant to Sections 856 through 860 of the Code. Notwithstanding the foregoing, the Company shall have no obligation to comply with any advice offered by the Investor in any consultation referred to in this Section 6.3. Investor agrees that any information obtained through the foregoing consultation rights which is not public shall be kept confidential, and shall not be disclosed to any persons other than the directors, officers, employees, financial advisors, legal advisors, and accountants of Investor who reasonably need to have access to such information and who are advised of the confidential nature of such information and agree to maintain the confidentiality of such information; provided that the foregoing obligation of Investor shall not (a) relate to any information that (i) is or becomes generally available other than as a result of unauthorized disclosure by Investor or by persons to whom Investor has made such information available, or (ii) is or becomes available to investor on a non-confidential basis from a third party that is not, to Investor's knowledge, bound by any other confidentiality agreement with the Company or its Subsidiaries, or (b) prohibit disclosure of any information if required by law, rule, regulation, court order, or other legal or governmental process. 6.5 Maintenance of REIT Status. (a) So long as any of the Series A Preferred Shares or the Common Shares remain issued and outstanding, the Company will continue to be taxed as a real estate investment trust pursuant to Sections 856 through 860 of the Code. (b) If the Company shall fail to continue to be taxed as a real estate investment trust pursuant to Sections 856 through 860 of the Code (a "REIT-Repurchase Event") , the Investor shall have the right to require the Company, to the extent the Company shall have funds legally available therefor, to repurchase any or all of the Series A Preferred Shares or the Common Shares held by the Investor at a repurchase price payable in cash in an amount equal to 115% of the liquidation preference thereof, plus accrued and unpaid dividends whether or not declared, if any (the "REIT-Repurchase Payment"), to the date of repurchase or the date payment is made available (the "REIT-Repurchase Date") , pursuant to the offer described in subsection (c) below (the "REIT-Repurchase offer"). (c) Within 15 days following the Company becoming aware that a REIT-Repurchase Event has occurred, the Company shall mail by first class mail or 21 overnight courier a notice to the Investor stating (A) that a REIT-Repurchase Event has occurred and that the Investor has the right to require the Company to repurchase any or all of the Series A Preferred Shares or the Common Shares then held by the investor in cash, (3) the date of repurchase (which shall be a business day, no earlier than 30 days and no later than 60 days from the date such notice is mailed, or such later date as may be necessary to comply with the requirements of the Exchange Act) , (C) the repurchase price and (D) the instructions determined by the Company, consistent with this subsection, that the Investor must follow in order to have the Series A Preferred Shares or the Common Shares repurchased. (d) On the REIT-Repurchase Date, the Company, to the extent lawful, shall accept for payment Series A Preferred Shares or Common Shares or portions thereof tendered by the Investor or an affiliate of the Investor pursuant to the REIT-Repurchase offer and promptly mail by first class mail or overnight courier or by wire transfer of immediately available funds to the Investor, as directed by the Investor, in an amount equal to the REIT-Repurchase Payment in respect of all Series A Preferred Shares or Common shares or portions thereof so tendered. (e) Notwithstanding anything else herein, to the extent they are applicable to any REIT-Repurchase Offer, the Company will comply with any federal and state securities laws, rules and regulations and all time periods and requirements shall be adjusted accordingly. (f) Notwithstanding the provisions of this Section 6.4, in no event shall the Company be required to repurchase any Series A Preferred Shares at any time that such repurchase is prohibited by the Declaration or the Company's debt instruments. 6.6 Change of Control (a) If a Change of Control (as defined in Section 3.3.4(a) of the Declaration) occurs (a "Change of Control Repurchase Event"), the Investor shall have the right to require the Company, to the extent the Company shall have funds legally available therefor, to redeem any or all of the Series A Preferred Shares or the Common Shares held by the Investor at a repurchase price payable in cash in an amount equal to 100% of the liquidation preference thereof, plus accrued and unpaid dividends whether or not declared, if any (the "Change of Control"), to the date of repurchase or the date payment is made available (the "Change of Control Date"), pursuant to the offer described in subsection (c) below (the "Change of Control-Repurchase Offer"). 22 (b) Within 15 days following the Company becoming aware that a Change of Control Repurchase Event has occurred, the Company shall mail by first class mail or overnight courier a notice to the investor stating (A) that a Change of Control Repurchase Event has occurred and that the Investor has the right to require the Company to repurchase any or all of the Series A Preferred Shares or the Common Shares then held by the Investor in cash, (B) the date of repurchase (which shall be a business day, no earlier than 30 days and no later than 60 days from the date such notice is mailed, or such later date as may be necessary to comply with the requirements of the Exchange Act), (C) the repurchase price and (D) the instructions determined by the Company, consistent with this subsection, that the Investor must follow in order to have the Series A Preferred Shares or the Common Shares repurchased. (c) On the change of Control Repurchase Date, the Company, to the extent lawful, shall accept for payment Series A Preferred Shares or Common Shares or portions thereof tendered by the Investor or an affiliate of the Investor pursuant to the Change of Control Repurchase Offer and promptly mail by first class mail or overnight courier or by wire transfer of immediately available funds to the Investor, as directed by the Investor, in an amount equal to the Change of Control Repurchase Payment in respect of all Series A Preferred Shares or Common Shares or portions thereof so tendered. (d) Notwithstanding anything else herein, to the extent they are applicable to any Change of Control Repurchase Offer, the Company will comply with any federal and state securities laws, rules and regulations and all time periods and requirements shall be adjusted accordingly. (e) Notwithstanding the provisions of this Section 6.5, in no event shall the Company be required to repurchase any Series A Preferred Shares at any time that such repurchase is prohibited by the Declaration or the Company's debt instruments. 6.7 Waiver of Ownership Limitations. So long as any of the Series A Preferred Shares remain issued and outstanding or the Investor owns more than 9.9% of the Company's outstanding common shares of beneficial interest, the Company shall not reverse or rescind the waiver required to be granted pursuant to Section 4.12 of this Agreement. 6.8 No Public Disclosure. Neither the Company nor any affiliate of the Company will make any public disclosure concerning the transactions contemplated by this Agreement unless the Investor has had a reasonable time to review such disclosure. Unless in the reasonable opinion of counsel to the Company that such disclosure is required by applicable law, neither the Company nor any 23 affiliate of the Company will make any such public disclosure without the Investor's Prior written consent. 6.9 Annual Certificate of Independent Public Accountants or Company Counsel. So long as any of the Series A Preferred Shares or the Common Shares remain outstanding, the Company shall, on an annual basis no later than March 31 of each year, cause its independent public accountants or a nationally recognized law firm to provide the Investor an opinion in form and substance reasonably satisfactory to the Investor. 6.10 Prohibition on Issuance of Series A Preferred Shares. The Company will not issue any Series A Preferred Shares to any party other than the Investor or any direct or indirect transferee and then only in compliance with the terms of the Declaration. 6.11 Structure of Operating Partnership Agreement. The Company and Operating Partnership shall use their best efforts to structure the Agreement of Limited Partnership in order to effect the transactions contemplated hereby. 6.12 Standstill Provisions. (a) During the Standstill Period (as defined below), except as provided in Section 6.12(a)(iii), each Security Capital Investor will not, and will cause each of its controlled Affiliates not to, and will use its reasonable best efforts to cause each of its other Affiliates not to, directly or indirectly: (i) act in concert with any other person or Group by becoming a member of a 13D Group (as defined below) , other than any 13D Group comprised exclusively of Investor and one or more of its Affiliates; (ii) sell, transfer, pledge (other than pledges made to commercial lending institutions securing indebtedness for borrowed money) or otherwise dispose of (collectively, "Transfer") any Series A Preferred Shares or Common Shares to any person if the acquisition of such capital stock by such person would violate the provisions of Section 4.1 of the Declaration; provided that this Section shall not prohibit Transfers (A) between the Investor and an Affiliate of the Investor or (2) between one or more Affiliates of the Investor; (iii) so long as the sum of (i) the aggregate number of common shares of beneficial interest held by all Security Capital Investors and (ii) the aggregate number of common shares of beneficial interest into which the Series A Preferred Shares held by all Security Capital Investors are convertible (assuming that all such Series A Preferred Shares 24 are immediately convertible) is greater than 9.9% of the Company's outstanding common shares of beneficial interest, purchase or otherwise acquire any common shares of beneficial interest or other securities of the Company if, after giving effect to such purchase or acquisition, the Security Capital Investors and their Affiliates (and any persons that are members of a 13D Group of which any Security Capital Investor or any of their Affiliates may be a member, notwithstanding the provisions of clause W above) collectively would Beneficially Own more than 20.'6 of the outstanding common shares of beneficial interest of the Company; provided that the Security Capital Investors shall not be deemed to have breached this covenant solely as a result of a decrease in the aggregate number of common shares of beneficial interest outstanding. (iv) solicit or propose to effect or negotiate any merger, consolidation, other business combination, liquidation, sale of the Company or all or substantially all of the assets of the Company and its subsidiaries or any other change of control of the Company or similar extraordinary transaction; (v) except with respect to seeking representation on the Board of Trustees of the Company or a change in the size of the Board of Trustees as provided in Section 6.12 (a)(vi), solicit, initiate or participate in any "solicitation" of "proxies" or become a "participant" in an "election contest" (as such terms are defined or used in Regulation 14A under the 1934 Act, disregarding clause (iv) of Rule 14a-1(1) (2) and including an exempt solicitation pursuant to Rule 14a-2 (b) (i) ; call, or in any way participate in a call for, any special meeting of stockholders of the Company (or take any action with respect to acting by written consent of the stockholders of the Company); request, or take any action to obtain or retain any list of holders of any securities of the Company; or initiate or propose any stockholder proposal or participate in the making of, or solicit stockholders of the Company for the approval of, one or more stockholder proposals; provided that Investor shall not he prohibited from communicating with a security holder who is engaged in any "solicitation" of "proxies" or who is a "a participant" in any "election contest"; (vi) seek representation on the Board of Trustees of the Company or a change in the size of the Board of Trustees other than in accordance with the provisions of the Series A Preferred Shares following a default in the payment of dividends thereon for two or more quarters; (vii) Transfer any capital stock of such Security Capital Investor or any capital stock of any Affiliate of such Security Capital Investor that owns any capital stock of the Company, or Transfer any options, warrants, convertible securities, or other similar rights to acquire any capital stock of such Security Capital Investor or any such Affiliate, if, after giving effect thereto, the Beneficial Owner of such shares of capital stock of the Company would (A) Beneficially own more than 20% of the outstanding common shares of beneficial interest of the Company or (B) violate the Provisions of Section 4.1 of the Declaration; 25 (viii) request the Company or any of its trustees, officers, employees or agents to amend or waive the provisions of this Section 6.12 or seek to challenge the legality or effect thereof; or (ix) assist, advise, encourage or act in concert with any person with respect to, or seek to do, any of the foregoing. (b) As used in this Section, the following terms have the respective meanings set forth below: "Affiliate" shall have the meaning ascribed thereto in Rule 12b-2 promulgated under the 1934 Act, as such rule is in effect on the date hereof. "Beneficially Own" shall mean, with respect to any security, having direct or indirect (including through any Affiliate) "beneficial ownership" of such security, as determined pursuant to Rule 13d-3 under the 1934 Act, including pursuant to any agreement, arrangement or understanding, whether or not in writing. "Beneficial ownership" and "Beneficial Owner" shall have correlative meanings. As used with respect to the common shares of beneficial interest of the Company, the term shall include any common shares of beneficial interest issuable, without regard to any requirement of notice or the passage of time or the occurrence of any event, pursuant to any options, warrants, or other convertible or exchangeable securities held by the applicable person, its Affiliates, or any member of a 13D Group of which such person is a member. "Covered Transaction" shall mean any merger, consolidation, other business combination, liquidation, sale of the Company or all or substantially all of the assets of the Company and its subsidiaries or any other change of control of the Company or similar extraordinary transaction, other than any transaction in which the Company is the surviving and acquiring corporation and in which the business or assets so acquired do not, or would not reasonably be expected to, have a value greater than 50% of the assets of the Company (on a consolidated basis) prior to such transaction. "Group" shall mean a "group" as such term is used in Section 13(d)(3) of the 1934 Act. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "person" shall mean any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, or other form of business or legal entity. "Prime Investor" shall mean The Prime Group, Inc., an Illinois corporation ("Prime"), and any Affiliate thereof. 26 "Security Capital Investor" shall mean the investor and any person controlled (as such term is defined in Rule 12b-2 under the 1934 Act) , directly or indirectly, by Security Capital Group Incorporated, to which any Series A Preferred Shares or Common Shares are transferred and to which the rights under this Agreement are assigned, by the Investor or another Security Capital Investor, and which agrees to be bound by the terms of this Agreement. "Standstill Period" shall mean the period beginning on the date hereof and ending on the first date following the date on which the aggregate Beneficial Ownership by the Security Capital Investors and their Affiliates (and any persons that are members of a 13D Group of such Security Capital Investors or any of their Affiliates are members, notwithstanding the provisions of clause W of Section 6.12(a)) of common shares of beneficial interest of the Company shall have been less than 9.9% of the number of outstanding common shares of beneficial interest of the Company (treating any common shares of beneficial interest issuable under options, warrants, or other convertible or exchangeable securities Beneficially owned by such Security Capital Investors, their Affiliates, and any member of such a 13D Group as being outstanding for this purpose) for a continuous period of 180 days. Notwithstanding the foregoing, the Standstill Period also shall be terminated on the earliest of: (i) the acquisition by any person or Group other than a Security Capital Investor or any Affiliate thereof or a Prime Investor of Beneficial Ownership of 20% or more of the outstanding common shares of beneficial interest of the Company, on a fully diluted basis; (ii) the fifteenth business day after the written submission by any person or Group other than a Security Capital Investor or Affiliate of a proposal to the Company (including to the Board or any agent, representative or Affiliate of the Company) with respect to, or otherwise expressing an interest in pursuing, a Covered Transaction; provided that, except as described in the next paragraph, the Standstill Period shall not terminate pursuant to this clause (ii) if, within such period, the Board of Trustees determines that such proposal is not in the best interest of the Company and its stockholders and for so long as the Board continues to reject such proposal as a result of such determination. If any Security Capital Investor desires to tender any common shares of beneficial interest into a tender offer made by a third party, which tender offer has not been approved by the Board of Trustees, such Security Capital Investor shall provide a notice (the "Tender Notice") the Company does not so elect to purchase the Tender Shares, the Security Capital Investor may tender the Tender Shares into the tender offer; (iii) any breach by the Company of this Agreement that is neither cured nor desisted from within 30 days of receipt of written notice of such breach and 27 which would reasonably be expected to materially adversely affect a Security Capital Investor; or (iv) if and whenever the Company shall be in arrears in the payment of dividends on the Series A Preferred Shares for two consecutive quarters (which shall, with respect to any such quarterly dividend, mean that any such dividend has not been paid in full) , whether or not earned or declared, or (ii) for two consecutive quarterly dividend periods the Company fails to pay dividends on its common shares of beneficial interest in an amount per share at least equal to $1.35 (subject to adjustment). whenever all arrears in dividends on the Series A Preferred Shares shall have been paid and dividends thereon for the current quarterly dividend period shall have been paid or declared and set apart for payment, or the Corporation has paid dividends on the Company's common shares of beneficial interest in an amount per share at least equal to $1.35 (subject to adjustment) for two consecutive quarters, the Standstill Period shall be reinstated, unless the Standstill Period is terminated pursuant to any other provisions of this Section. "13D Group" shall mean any group of persons acquiring, holding, voting, or disposing of capital stock of the Company that would be required under Section 13 (d) of the 1934 Act and the rules and regulations thereunder (as in effect, and based on legal interpretations thereof existing, on the date hereof) to file a statement on Schedule 13D with the Securities and Exchange Commission as a "person" within the meaning of Section 13(d) (3) for the 1934 Act if such group Beneficially Owned capital stock representing more than 5% of any class of capital stock of the Company then outstanding. 6.13 Certificate of Company Security Ownership. Upon the Company's written request, within 30 days after December 31 of each year, the Investor shall provide to the Company written notice stating the name and address of the Investor, the number of Series A Preferred Shares, Common Shares or other stock of the Company owned by the Investor or its Affiliates, and a description of the manner in which such shares are owned, together with such other additional information as the Company may reasonably request in order to determine the effect, if any, of such ownership on the Company's status as a REIT and to ensure compliance with its undertakings, if any, set forth in the Certificate. 6.14 Ownership in Strategic Hotel Capital Incorporated. The Company acknowledges that an entity that may be deemed to be an affiliate of the Investor owns more than 100% of the capital stock of Strategic Hotel Capital Incorporated, which is a tenant of the Company. The Company agrees that such ownership shall not result in any shares of beneficial interest of the Company owned by the Investor 28 being treated as Excess Shares (as defined in the Declaration). VII. TERMINATION. 7.1 Termination This Agreement may be terminated as follows: (a) Mutual Consent. With the mutual written consent of the Investor and the Company; or (b) By the Company. By the Company, if by the Closing Date any of the conditions provided in Article V shall not have been satisfied, complied with or performed in any material respect, and the Company shall not have waived the failure of satisfaction, noncompliance, or nonperformance; or (c) By the Investor. By the Investor, if by the Closing Date any of the conditions provided in Article IV shall not have been satisfied, complied with or performed in any material respect, and the Investor shall not have waived the failure of satisfaction, noncompliance, or nonperformance; or (d) Automatic Termination. Automatically if the Closing Date shall not have occurred on or before December 31, 1997, or such later date as shall have been agreed to in writing by the Company and the Investor. 7.2 Notice of Termination. In the event of any termination pursuant to Section 7.1 (other than pursuant to Section 7.1(a) or Section 7.1(d) ) , written notice setting forth the reasons for termination shall promptly be given by the terminating party to the other in writing. 7.3 Effect of Termination. (a) In the event of termination of this Agreement, no party hereto shall have any liability to any other party to this Agreement, except as provided in this Section 7.3 and except that nothing herein shall relieve any party from liability for any breach of this Agreement. (b) If this Agreement shall have been terminated for any reason other than (i) the Investor's failure to perform any material obligation under this Agreement or (ii) the reasons described in Section 7.3(c), then the Company shall promptly, and in no event later than two days after such termination, reimburse the Investor for its reasonable out-of-pocket expenses, including fees and disbursements of counsel. 29 (c) Notwithstanding the termination of this Agreement, if the IPO is consummated after December 31, 1997, the Investor shall have the right (but not the obligation) to participate in the IPO. VIII. MISCELLANEOUS 8.1 Survival of Warranties. The representations and warranties of the Company, the Operating Partnership and the Investor contained in or made pursuant to Articles II or III of this Agreement shall survive the Closing hereunder through and until one year following the Closing. The covenants contained in or made pursuant to Article VI of this Agreement shall survive the Closing indefinitely, except for any provisions which expire by their terms. The representations and warranties contained in this Agreement shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 8.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement. Except as specifically provided hereby, the Investor shall not be permitted to assign any of its rights hereunder to any third party, provided, however, that the Investor's rights hereunder may be assigned to another entity controlled directly or indirectly by Security Capital Group Incorporated that agrees in writing to be bound by the terms of this Agreement. 8.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without giving effect to the conflict of law Provisions thereof. 8.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.5 Titles and Subtitles. The title and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 30 8.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) on the fifth business day after deposit with the United States Post Office, by registered or certified mail, postage prepaid, (c) on the next business day after dispatch via nationally recognized overnight courier or (d) upon confirmation of transmission by facsimile, all addressed to the party to be notified at the address indicated for such party below, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. Notices should be provided in accordance with this Section at the following addresses: If to the Investor, to: Security Capital Preferred Growth Incorporated 11 South LaSalle Street Chicago, Illinois 60603 Attention: Daniel F. Miranda David E. Rosenbaum Joshua D. Goldman Facsimile (312) 345-5888 with a copy to: Philip J. Niehoff Mayer, Brown & Platt 190 South LaSalle Chicago, IL 60603 Facsimile: (312) 701-7711 If to the Company or the Operating Partnership, to: Richard S. Curto 77 West Wacker Drive, Suite 3900 Chicago, Illinois 60601 Facsimile: (312)782-5867 with a copy to: Robert J. Rudnik Prime Group Realty Trust 77 West Wacker Drive, Suite 3900 Chicago, Illinois 60601 31 Facsimile (312) 917-1684 and a copy to: Wayne D. Boberg Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Facsimile: (312) 558-5700 8.7 Finder's Fees. Each party represents that it neither is nor will be obligated for any finders, fee or commission in connection with this transaction, except that the Company shall pay a placement fee equal to 1% of the Aggregate Purchase Price to Security Capital Markets Group Incorporated, a broker-dealer affiliate of the Investor. The Investor agrees to indemnify and hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, employees or representatives is responsible. The Company agrees to indemnify and hold harmless the Investor from any liability for any commission or compensation in the nature of a finders, fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 8.8 Expenses. Except as described in Article VII or in this Section 8.8, each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Amended and Restated Agreement of Limited Partnership or the Declaration, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 8.9 Amendments and Waivers. Any term of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) , only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 32 8.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 8.11 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein. [SIGNATURE PAGE FOLLOWS] 33 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SECURITY CAPITAL PREFERRED GROWTH INCORPORATED By: -------------------------------- Name: /s/ Daniel F. Miranda -------------------------------- Its: Managing Editor -------------------------------- PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its managing general partner By: -------------------------------- Name: /s/ W. Michael Karnes -------------------------------- Its: -------------------------------- PRIME GROUP REALTY TRUST By: -------------------------------- Name: /s/ W. Michael Karnes -------------------------------- Its: Executive Vice President -------------------------------- 34 EX-10.24 20 EX-10.24 Exhibit 10.24 TAX INDEMNIFICATION AGREEMENT TAX INDEMNIFICATION AGREEMENT (the "Agreement"), dated as of November 17, 1997 between ED HADESMAN, an individual ("Hadesman"),EDWARD S. HADESMAN TRUST DATED MAY 22, 1992, Edward S. Hadesman, Trustee; GRANDVILLE/NORTHWESTERN MANAGEMENT CORPORATION, an Illinois corporation; CAROLYN B. HADESMAN TRUST DATED MAY 21, 1992, Carolyn B. Hadesman, Trustee; LISA HADESMAN 1991 TRUST, Edward S. Hadesman, Trustee; CYNTHIA HADESMAN 1991 TRUST, Edward S. Hadesman, Trustee; TUCKER B. MAGID, an individual; FRANCES S. SHUBERT, an individual; GRANDVILLE ROAD PROPERTY, INC., an Illinois corporation; and SKY HARBOR ASSOCIATES, an Illinois limited partnership (Hadesman and the foregoing persons are "Hadesman Indemnitees"), and PRIME GROUP REALTY, L.P., a Delaware limited partnership ("UpREIT"). WHEREAS, each Hadesman Indemnitee has an interest ("Hadesman Partnership Interest") in one or more of those certain partnerships set forth on Exhibit A hereto ("Hadesman Partnerships"); WHEREAS, each Hadesman Indemnitee has entered into the that certain Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. (the "Partnership Agreement"), pursuant to which the Hadesman Partnerships contributed certain real properties ("Hadesman Properties") or the Hadesman Indemnitees contributed certain Hadesman Partnership Interests to the UpREIT, all as set forth on Exhibit A hereto; NOW THEREFORE, in consideration of the premises and of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. For purposes of the Agreement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Partnership Agreement. Any term defined by reference to an agreement, instrument or other document shall have the meaning so assigned to it whether or not such document is in effect. Unless otherwise indicated, references in the Agreement to articles, Sections, paragraphs, clauses, appendices, schedules and exhibits are to the same contained in or attached to this Agreement. For purposes of this Tax Indemnification Agreement, the following terms shall apply: (a) The term "After-Tax Basis" shall mean, with respect to any payment to be received hereunder, the amount of such payment supplemented by a further amount so that, after deduction of the amount of all federal and applicable state income taxes that are required to be paid by the recipient thereof (assuming that the recipient is taxable at the highest marginal federal and applicable state income tax rate then applicable to the recipient and taking into account any tax benefits to be realized by such recipient from the receipt of the indemnified amount) with respect to the receipt by it of such amounts, the net amount received is equal to the payment required to be made. (b) The term "Realistic Possibility of Success" shall mean such circumstances that tax counsel may properly advise reporting such position on a tax return in accordance with Section 10.34 of 31 C.F.R. part 10, governing practice before the Internal Revenue Service. (c) The term "Indemnity Term" shall mean the period beginning as of the date of the Partnership Agreement and ending December 31, 2007. (d) The term "Final Determination" shall mean (i) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals by either party to the action have been exhausted or the time for filing such appeal has expired, or in any case where judicial review shall at the time be unavailable because the proposed adjustment involves a decrease in net operating loss carry forward or a business credit carry forward, a decision, judgment, decree or other order of an administrative official or agency of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., where all administrative appeals have been exhausted by all parties thereto), (ii) a closing agreement entered into under Section 7121 of the Code, or any other final settlement agreement entered into in connection with an administrative or judicial proceeding and with the consent of UpREIT or as otherwise permitted in Section 6 or the Partnership Agreement, or (iii) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto. (e) The term "Indemnity Debt Allocation Method" shall mean the allocation of the Partnership's excess nonrecourse liabilities in any UpREIT taxable year for purposes of Regulations Section 1.752-3(a)(3) based upon each Partner's relative ownership of Common Units as of the beginning of such UpREIT taxable year; provided, that nothing in this Agreement shall be interpreted as prohibiting the UpREIT from actually using a different debt allocation than that based upon the Indemnity Debt Allocation Method. Section 2. Tax Representations. Each Hadesman Indemnitee represents, warrants and covenants as follows: (a) immediately prior to the relevant Adjustment Date, the Hadesman Properties are subject to aggregate Nonrecourse Liabilities, allocable among the Hadesman Properties, as shown on Exhibit B to be attached hereto; (b) each Nonrecourse Liability, described in Section 2(a) of this Agreement, was incurred by the Hadesman Partnership, which owned the Hadesman Properties to which such Nonrecourse -2- Liability is allocated, either (i) more than two years prior to the date of that certain Contribution Agreement, dated July 8, 1997, by and between The Prime Group, Inc. and the parties set forth on Schedule 1 to such agreement (the "Contribution Agreement"), or (ii) not in anticipation of the transfer of such Hadesman Property to the UpREIT (within the meaning of Regulations Section 1.707-5(a)(6); (c) each Nonrecourse Liability, described in Section 2(a) of this Agreement, has encumbered such Hadesman Properties throughout the period beginning on the earlier of the date two years prior to the date of the Contribution Agreement and the date such liability was incurred by the Hadesman Partnership, and ending on the Adjustment Date in respect of such Hadesman Properties; (d) each Nonrecourse Liability, described in Section 2(a) of this Agreement, is nonrecourse for purposes of Regulations Section 1.752-1(a)(2); (e) immediately prior to the relevant Adjustment Date, the adjusted tax basis in each Hadesman Partnership Interest is as shown on Exhibit B hereto, and each Hadesman Partnership has an adjusted tax basis in each Hadesman Property as shown on Exhibit B hereto; (f) immediately prior to the relevant Adjustment Date, each Hadesman Indemnitee's share of Partnership Minimum Gain under Regulations Section 1.704-2(g)(1) is as shown on Exhibit B to be attached hereto; (g) immediately prior to the relevant Adjustment Date, each Hadesman Indemnitee is allocated Nonrecourse Liabilities under Code Section 752 and the Regulations as shown on Exhibit B to be attached hereto; (h) immediately prior to the relevant Adjustment Date, each Hadesman Indemnitee has "passive losses" under Code Section 469(d) and the Regulations from the activity in respect of the Hadesman Partnerships, as shown on Exhibit B to be attached hereto; (i) immediately prior to the relevant Adjustment Date, each Hadesman Indemnitee has an amount "at risk" under Code Section 465(a)(2) and the Regulations from the activity in respect of the Hadesman Partnerships, and "suspended losses" in respect of such activity under Code Section 465 and the Regulations, as shown on Exhibit B to be attached hereto; (j) the gross fair market value of any Hadesman Property or Hadesman Interest equals the initial Gross Asset Value of such Property credited to the relevant Hadesman Indemnitee's Capital Account; (k) each Hadesman Indemnitee will report any payment received by it under this Agreement as a payment made within Section 707(a) of the Code. -3- (l) each Hadesman Indemnitee has and will have a taxable year that is the calendar year; and (m) each Hadesman Property constitutes nonresidential real property under Code Section 168. Section 3. Indemnified Income Inclusions. If any Hadesman Indemnitee shall be required to include in its gross income for federal or applicable state income tax purposes, with respect to any of its taxable years ending on or prior to the end of the Indemnity Term, any of the following: (a) UpREIT items of income and gain attributable to such Hadesman Indemnitee's share of the net decrease in Partnership Minimum Gain from Hadesman Interests or Hadesman Properties (to the extent not duplicative with subsection (c)); (b) Gain under Code Section 731 from a deemed distribution under Code Section 752 from the retirement or refinancing of either the Nonrecourse Liabilities shown on Exhibit B to be attached hereto, or the debt which refinances or replaces such Nonrecourse Liabilities (to the extent not duplicative with subsection (f)); (c) gain from the sale or disposition of Hadesman Properties; (d) income under Code Section 465(e) from a refinancing or retirement of either the Nonrecourse Liabilities shown on Exhibit B to be attached hereto, or the debt which refinances or replaces such Nonrecourse Liabilities (to the extent not duplicative with subsection (f)); (e) income under Code Section 704(c) in excess of that allocable to such Hadesman Indemnitee under the "traditional method" of Regulations Section 1.704-3(b); or (f) solely in respect of Sky Harbor Associates, either (i) gain under Code Section 731 from a deemed distribution under Code Section 752 that constitutes a recapture of all or a portion of the negative Capital Accounts of the Sky Harbor Associates partners, as determined as of the date hereof and set forth on Exhibit B, or (ii) income under Code Section 465(e) that constitutes a recapture of all or a portion of the aggregate amount described in Code Section 465(e)(2) for the Sky Harbor Associates partners, determined as of the date hereof and as set forth on Exhibit B, (such an inclusion being an "Income Inclusion"), UpREIT shall pay to such Hadesman Indemnitee an indemnity with respect to the additional federal and applicable state income tax liability from such Income Inclusion in the amount determined in Section 4 hereof. -4- Section 4. Amount of Indemnification. (a) In the case of any Income Inclusion that is indemnifiable pursuant to Section 3 of this Agreement, the relevant Hadesman Indemnitee shall give UpREIT a written certificate setting forth in reasonable detail (i) the computation of the amount of such Income Inclusion and (ii) the computation of such amount or amounts that shall equal, on an After-Tax Basis, the actual net increase in federal and applicable state income tax (including any interest, penalties, fines, or other additions thereto) ("Inclusion Taxes") actually payable by a Hadesman Indemnitee as a result of such Income Inclusion, determined after (1) offsetting such Income Inclusion by the amount of such Hadesman Indemnitee's "passive losses" under Code Section 469(d) and the Regulations from the activity in respect of the Hadesman Partnerships, and (to the extent not duplicative) "suspended losses" in respect of such activity under Code Section 465 and the Regulations, each as shown on Exhibit B to be attached hereto (to the extent such losses would be available under the Code and Regulations and have not already been taken into account in offsetting other Income Inclusions indemnifiable under this Agreement), and (2) taking into account all deductions, credits, or other federal and applicable state income tax benefits then realized and resulting from (a) such Income Inclusion, (b) the incurrence of the tax liability indemnified under this Agreement, or (c) the receipt of any indemnity payment made under this Agreement (computed in accordance with Sections 3 and 6 of this Agreement). (b) Each Hadesman Indemnitee agrees to act in good faith to claim any tax benefits (including filing claims for refunds and amended tax returns) and take such other actions as may be reasonable to minimize the net amount of any indemnity payment due from UpREIT hereunder and to maximize the amount of its tax savings; provided, however, that such Hadesman Indemnitee shall not be required to take any action which, in its good faith judgment, would have any material adverse business consequences to it. If UpREIT shall disagree with such computation and so requests in a written notice delivered to such Hadesman Indemnitee within thirty (30) days following UpREIT's receipt of the certificate, such amount shall be reviewed and determined by an independent public accounting firm of national recognition selected by Hadesman and reasonably acceptable to UpREIT. The costs of such verification shall be borne by UpREIT unless such verification shall result in an adjustment in UpREIT's favor by an amount of more than 5% of the Inclusion Taxes actually due, in which case such costs shall be borne by such Hadesman Indemnitee. Each Hadesman Indemnitee agrees to cooperate with such independent accounting firm and to supply it with all information reasonably necessary to permit it to accomplish such review and determination. Such information shall be for the confidential use of such accountants and shall not be disclosed to UpREIT or any other person. UpREIT and each Hadesman Indemnitee agree that the sole responsibility of the independent public accounting firm shall be to verify the amount of a payment pursuant to this Agreement and that matters of interpretation of this Agreement are not within the scope of the independent accounting firm's responsibilities. (c) To the extent an Income Inclusion is indemnifiable pursuant to Section 3(c) of this Agreement, UpREIT will pay each Hadesman Indemnitee as its indemnity obligation under this -5- Agreement a percentage of the amount described in Section 4(a) based upon the period in which the relevant taxable sale or disposition of Hadesman Properties occurs, as follows:
Period Ending Percentage of Amount Calculated ------------- in Section 4(a) --------------- December 31, 1998 100% December 31, 1999 90% December 31, 2000 80% December 31, 2001 70% December 31, 2002 60% December 31, 2003 50% December 31, 2004 40% December 31, 2005 30% December 31, 2006 20% December 31, 2007 10%
(d) To the extent that a Hadesman Indemnitee recognizes an amount in respect of an Income Inclusion that is indemnifiable pursuant to Section 3(a), 3(b), 3(d), 3(e) or 3(f) of this Agreement for any UpREIT taxable year ending within the Indemnity Term, UpREIT will pay such Hadesman Indemnitee as its indemnity obligation under this Agreement 100% of the amount described in Section 4(a). (e) Any payment due to a Hadesman Indemnitee pursuant to this Section 4 shall be paid upon the earlier of the date that (1) the additional federal income tax in respect of such Income Inclusion is due from the Hadesman Indemnitee, or (2) the Hadesman Indemnitee has filed a return that reflects or would reflect such additional federal income tax; provided, however, that (A) obligations of such Hadesman Indemnitee and UpREIT will first be set off against each other, and (B) no payment shall be due earlier than completion of the computation of such indemnity amount as described in Section 4(a). Section 5. Exclusions. -6- (a) Notwithstanding the foregoing, UpREIT shall not have any liability for indemnification under this Agreement for any Inclusion Taxes to the extent such Inclusion Taxes are payable by such Hadesman Indemnitee as a result of one or more of the following: (i) Any Hadesman Indemnitee recognizing gain in respect of the Capital Contribution of its Hadesman Partnership Interests or Hadesman Properties under Code section 707(a)(2) (including notwithstanding the agreed treatment of such Capital Contribution as described in Section 3.05 of the Contribution Agreement), assuming that each Nonrecourse Liability described in Section 2(a) of this Agreement is a "qualified liability" within the meaning of Regulations Section 1.707-5(a)(6), except as a result of a sale or disposition of such Hadesman Property or an indemnity payment under this Agreement; (ii) Any Hadesman Indemnitee's receipt of cash in respect of the Capital Contribution of its Hadesman Partnership Interests or Hadesman Properties (including notwithstanding the agreed treatment of such cash as described in Section 3.04 of the Contribution Agreement); (iii) Any Hadesman Indemnitee's Interest in the UpREIT not being respected as a partnership interest to the extent, and as provided in, the Partnership Agreement; (iv) The allocations of income, gain, loss, deduction and credit set forth in the Partnership Agreement not being respected under Sections 704(b) and 704(c) of the Code, except as a result of the exercise of discretion by the General Partner of the UpREIT in respect of (A) an adjustment to the "Gross Asset Values" of UpREIT assets, as described in clause (b) of the definition thereof, or (B) the allocation of Nonrecourse Deductions under the proviso within Section 6.6.A of the Partnership Agreement; (v) The UpREIT not being the owner of the Hadesman Properties for federal income tax purposes as of the relevant Adjustment Date; (vi) Immediately after the relevant Adjustment Date, any Hadesman Indemnitee's share of Partnership Minimum Gain under Regulations Section 1.704-2(g)(1) not being as shown on Exhibit B to be attached hereto; (vii) Immediately after the relevant Adjustment Date, any Hadesman Indemnitee's amount at risk under Code Section 465 from the activity in respect of the UpREIT not being as shown on Exhibit B to be attached hereto; (viii) (1) any change in, or amendment to, the Code or any other federal tax statute, which is effective on or after the relevant Adjustment Date, (2) any final or temporary regulation, which is enacted or adopted after the relevant Adjustment Date, or (3) any court decision issued after the relevant Adjustment Date; -7- (ix) The status of any Hadesman Indemnitee or any Hadesman Partnership for federal income tax purposes; (x) A determination that any Hadesman Indemnitee did not enter the transactions contemplated by the Partnership Agreement for profit or with a sufficient business purpose; (xi) A voluntary or involuntary sale, assignment, transfer or other disposition by any Hadesman Indemnitee of any interest in the UpREIT or any part thereof; (xii) The failure of any Hadesman Indemnitee to claim or to follow the proper procedure in claiming in a timely manner any UpREIT item allocated to such Hadesman Indemnitee by the Partnership; (xiii) The failure of any Hadesman Indemnitee to take timely action or follow the proper procedures in reporting his distributive share from the UpREIT or contesting a claim made by the Internal Revenue Service in accordance with the Partnership Agreement; (xiv) The gross negligence or the willful misconduct of any Hadesman Indemnitee or any affiliate thereof; (xv) Any breach by any Hadesman Indemnitee of any of its representations, warranties or covenants in Sections 7.1.A., 8.2, 10.5, 11.3.A., 11.6.A., D or E., of the Partnership Agreement, Sections 2 or 6 of this Agreement, or Sections 2.01(b), 11.01, or 12.01 of the Contribution Agreement; (xvi) Any guarantee by any Hadesman Indemnitee or a person related to any Hadesman Indemnitee of any Nonrecourse Liability encumbering a Hadesman Property or Hadesman Interest or any other debt of the UpREIT or its affiliates; (xvii) Any Hadesman Indemnitee recognizing taxable income under Code Section 704(c), except to the extent such income results from either a sale or other disposition of a Hadesman Property or income under Code Section 704(c) in excess of that allocable to such Hadesman Indemnitee under the "traditional method" of Regulations Section 1.704-3(b); or (xviii) Any recapture under Code Section 1245 or 1250 of depreciation attributable to Hadesman Properties that was allocated to any Hadesman Indemnitee after the relevant Adjustment Date. (b) Further, notwithstanding anything to the contrary within this Agreement, after taking into account any amounts thereof excluded under Section 5(a), the cumulative Income -8- Inclusions for all Hadesman Indemnitees in respect of Section 3(a), 3(b), 3(c) and 3(f) that will be indemnifiable by the UpREIT shall not exceed the following: (i) For any Income Inclusion under Section 3(b), the aggregate negative Capital Accounts of all Hadesman Indemnitees as set forth on Exhibit B; (ii) For any Income Inclusion under Section 3(a), the aggregate Minimum Gain of all Hadesman Indemnitees as set forth on Exhibit B; (iii) For any Income Inclusion under Section 3(c), the excess of the aggregate Gross Asset Value of the Hadesman Properties and Hadesman Interests contributed to the UpREIT on the relevant Adjustment Dates, over the aggregate initial adjusted tax bases of such Hadesman Properties and Hadesman Interests on such relevant Adjustment Dates; and (iv) For any Income Inclusion under Section 3(f), the aggregate negative Capital Accounts of Sky Harbor Associates partners, as set forth on Exhibit B. (c) Finally, notwithstanding anything to the contrary within this Agreement, after taking into account any amounts thereof excluded under Sections 5(a) and 5(b), UpREIT shall not be liable for indemnification under this Agreement in respect of an Income Inclusion under Section 3(a) or (b), to the extent of that such Income Inclusion arises from a Final Determination that the amount of debt of UpREIT allocable to such Hadesman Indemnitee for purposes of Section 752 of the Code and Regulations Section 1.752-3(a)(3) is less than the amount of debt such Hadesman Indemnitee would be allocated if the UpREIT used the Indemnity Debt Allocation Method for purposes of Section 752 of the Code and Regulations Section 1.752-3(a)(3); provided, however, that UpREIT actually allocates to such Hadesman Indemnity, on the UpREIT's applicable federal and state income tax returns, debt at least equal to the amount of debt such Hadesman Indemnitee would be allocated if the UpREIT used the Indemnity Debt Allocation Method for purposes of Section 752 of the Code and Regulations Section 1.752-3(a)(3). Section 6. Contests. (a) Nothing in this Agreement shall be construed to prevent UpREIT from contesting, as the Tax Matters Partner in accordance with the Partnership Agreement as part of the unified audit of the Partnership, any claim involving a UpREIT item that, if successful, would result in an Income Inclusion (a "Partnership Level Issue"). (b) If UpREIT contests a Partnership Level Issue that, if successful, would result in an Income Inclusion, UpREIT's liability for indemnification under Section 4 hereof shall, at UpREIT's election, be deferred until thirty (30) days after a Final Determination of such Hadesman Indemnitee's federal income tax liability in respect of an Income Inclusion. -9- (c) If any audit or proceeding involving an indemnifiable adjustment is being conducted in a proceeding involving such Hadesman Indemnitee, which cannot be transferred to the UpREIT as a partnership item (a "Hadesman Level Issue"), such Hadesman Indemnitee hereby agrees (i) promptly to notify UpREIT in writing of such adjustment (and the failure of such Hadesman Indemnitee to so notify UpREIT shall preclude any indemnity hereunder to the extent UpREIT's right to effect its contest rights hereunder has been precluded by such failure), and (ii) upon UpREIT's delivery to Hadesman of a written opinion of nationally recognized tax counsel reasonably acceptable to such Hadesman Indemnitee ("Tax Counsel") to the effect that there is a Realistic Possibility of Success upon contest, such Hadesman Indemnitee will contest that adjustment by filing a protest and administrative appeal and prosecuting the same in good faith; provided, however, that such Hadesman Indemnitee will not be obligated to pursue an administrative appeal if such Hadesman Indemnitee instead pursues relief in Tax Court or a court having refund jurisdiction. (d) If, within 30 days following the failure of such administrative proceedings with respect to a Hadesman Level Issue, UpREIT delivers to Hadesman Indemnitee written opinion of Tax Counsel to the effect that there is a Realistic Possibility of Success if the proposed adjustment is presented to a court for resolution, then such Hadesman Indemnitee will contest the proposed adjustment in good faith in the Tax Court or by paying the tax (and any applicable interest and penalties) and suing for refund in the Court of Federal Claims or appropriate Federal District Court. If, within 30 days following a final adverse decision of such court with respect to such Hadesman Level Issue, UpREIT delivers to such Hadesman Indemnitee a written opinion of Tax Counsel to the effect that it is more likely than not that such decision would be reversed on appeal, then such Hadesman Indemnitee will appeal such decision to the appropriate Federal Court of Appeals. With respect to any of the above-described proceedings, such Hadesman Indemnitee will keep UpREIT and its counsel informed as to the progress of such proceedings, give UpREIT and its counsel the opportunity to review and comment in advance on all written submissions and filings relevant to indemnifiable issues (after making appropriate redactions to preserve the confidentiality of the such Hadesman Indemnitee return as to other issues), and consider in good faith any suggestions made by UpREIT or its counsel. (e) Such Hadesman Indemnitee shall present any settlement offer provided to such Hadesman Indemnitee pursuant to a Hadesman Level Issue to UpREIT. If UpREIT recommends acceptance of a settlement offer of a Hadesman Level Issue or if the Tax Matters Partner recommends acceptance of a settlement offer in respect of a Partnership Level Issue, but such Hadesman Indemnitee declines to accept such offer in writing within 30 days (if such Hadesman Indemnitee does not respond within 30 days, such lack of response shall be treated as acceptance of UpREIT's or the Tax Matters Partner's recommendation, respectively), (1) the obligation of UpREIT to make indemnity payments as the result of any such contest or proceedings shall not thereafter exceed the obligation that it would have had if such contest had been settled or proceeding terminated on the basis recommended by UpREIT or the Tax Matters -10- Partner, as applicable, and (2) in the case of a Hadesman Level Issue, UpREIT shall have no further liability for costs or other expenses in respect of such contest. (f) Notwithstanding the foregoing, such Hadesman Indemnitee will have no obligation to contest any action with respect to a Hadesman Level Issue (i) unless such items could give rise to a federal income tax liability (disregarding other items in the assessment and considering effects in future years) in excess of $25,000, (ii) without UpREIT paying when due, reasonable third-party costs and out-of-pocket expenses including reasonable legal, witness and accounting fees and other expenses and, in the case of proceedings before the Court of Federal Claims or Federal District Court, the amount of tax (and any applicable interest and penalties) for which refund is claimed, and (iii) to the extent such Hadesman Indemnitee waives in writing UpREIT's obligation to indemnify such Hadesman Indemnitee for such items, in which case all third-party costs and out-of-pocket expenses described in clause (ii) thereafter incurred and all taxes would be paid by such Hadesman Indemnitee. (g) such Hadesman Indemnitee shall not settle any such Hadesman Level Issue without UpREIT's consent; provided that such Hadesman Indemnitee shall not be required to contest any proposed adjustment and may settle any such proposed adjustment if such Hadesman Indemnitee shall waive its right to indemnity under this Agreement with respect to such adjustment and any Income Inclusion that results from such adjustment and, in the case of proceedings before the Court of Federal Claims or Federal District Court, shall pay to UpREIT the amount of tax (and any applicable interest and penalties) previously paid or advanced by UpREIT with respect to such adjustment or the contest of such adjustment under Section 6(f), plus interest at the rate under Code Section 6621(a)(2) computed from the time such amounts were paid or advanced by UpREIT. (h) Within thirty (30) days after a Final Determination of the liability of such Hadesman Indemnitee in respect of a Hadesman Level Issue, UpREIT and each Hadesman Indemnitee agree to pay each other, as applicable, the net amount of (i) the payment owed by the UpREIT to such Hadesman Indemnitee of any indemnification hereunder, not theretofore paid resulting from the outcome of such contest, and (ii) in the case of proceedings before the Court of Federal Claims or Federal District Court, the repayment owed by such Hadesman Indemnitee to UpREIT of the amount of tax (and any applicable interest and penalties) previously paid or advanced by UpREIT with respect to such adjustment or the contest of such adjustment under Section 6(f), together with any interest received by or credited to such Hadesman Indemnitee that is attributable to such advance. Section 7. State Tax. For purposes of this Agreement, each Hadesman Indemnitee will be treated as having an Income Inclusion, realizing any deductions, credits or other income tax benefits, having the same tax savings and having the same tax attributes and status for applicable state income tax purposes at the same time, in the same amount and in the same manner, as such Hadesman Indemnitee does for federal income tax purposes. -11- Section 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. Section 9. Notices. All notices, demands, declarations, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof shall be given in the manner described in Section 14.1 of the Partnership Agreement. Section 10. Successors and Assigns. The terms of this Tax Indemnification Agreement may not be assigned by any Hadesman Indemnitee (including, without limitation, by descent or will), without the written consent of UpREIT. Section 11. Miscellaneous. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one Agreement. Any provision of this Agreement which is prohibited and unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification is sought. Section 12. Anticipated Hadesman Indemnitee Debt Allocation Methodology. UpREIT acknowledges and agrees with each Hadesman Indemnitee that the aggregate nonrecourse indebtedness of UpREIT that is apportioned to the Hadesman Indemnities collectively under this Agreement and the Partnership Agreement pursuant to Code Section 752 and Regulations Sections 1.702-3(a)(2) and (a)(3) shall be apportioned among the various Hadesman Indemnitees using a method substantially similar to that within the debt allocation model set forth on Exhibit C hereto. Section 13. Term. The term of this Agreement shall be from the date hereof until such time as the applicable statute of limitations under the Code bars any claim by the Internal Revenue Service against a Hadesman Indemnitee for Inclusion Taxes otherwise indemnifiable under this Agreement. Section 14. Exhibits. Each of the Hadesman Indemnitees agrees to reasonably cooperate to supply all information required to be set forth in Exhibit A and Exhibit B referred to herein as promptly as possible, but in no event later than December 31, 1997. Section 15. Application of Definitions to Section 3(f). If there is an indemnified income inclusion under Section 3(f), the definition of the term "Hadesman Indemnitee" shall be -12- expanded to include the partners of Sky Harbor Associates wherever necessary to fulfill the purposes of this Agreement. [SIGNATURE PAGE FOLLOWS] -13- IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of the date first written above. 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 EDWARD S. HADESMAN TRUST DATED MAY 22, 1992 By: /s/ Edward S. Hadesman -------------------------- Name: Edward S. Hadesman Title: Trustee GRANDVILLE/NORTHWESTERN MANAGEMENT CORPORATION, an Illinois corporation By:/s/ Edward S. Hadesman ------------------------- Name: Edward S. Hadesman Title: President CAROLYN B. HADESMAN TRUST DATED MAY 21, 1992 By:/s/ Carolyn B. Hadesman -------------------------- Name: Carolyn B. Hadesman Title: Trustee -14- LISA HADESMAN 1991 TRUST By: /s/ Edward S. Hadesman -------------------------- Name: Edward S. Hadesman Title: Trustee CYNTHIA HADESMAN 1991 TRUST By: /s/ Edward S. Hadesman -------------------------- Name: Edward S. Hadesman Title: Trustee TUCKER B. MAGID /s/ Tucker B. Magid ------------------- FRANCES S. SHUBERT /s/ Frances S. Shubert ---------------------- GRANDVILLE ROAD PROPERTY, INC., an Illinois corporation By:/s/ Edward S. Hadesman ------------------------- Name: Edward S. Hadesman Title: President -15- SKY HARBOR ASSOCIATES, an Illinois limited partnership By: /s/ Edward S. Hadesman -------------------------- Name: Edward S. Hadesman Title: Managing General Partner -16- EX-10.25 21 EXHIBIT 10.25 Exhibit 10.25 TAX INDEMNIFICATION AGREEMENT TAX INDEMNIFICATION AGREEMENT (the "Agreement"), dated as of November 17, 1997 between STEPHEN J. NARDI, an individual ("SJ Nardi"), NARCO ENTERPRISES, INC., an Illinois corporation, and NARDI GROUP LIMITED, a Delaware corporation, (collectively, the "Nardi Indemnitees"), and PRIME GROUP REALTY, L.P., a Delaware limited partnership ("UpREIT"). WHEREAS, certain of the Nardi Indemnitees (or their predecessors in interest) had interests in one or more of those certain partnerships set forth on Exhibit A hereto ("Nardi Partnerships"), which owned the "Nardi Properties" (as such term is defined in that certain Contribution Agreement, between the parties set forth on Schedule I attached to such agreement, The Prime Group, Inc., Prime Group Realty, L.P. and Prime Group Realty Trust, dated October 20, 1997 (the "Contribution Agreement"); WHEREAS, certain each of the Nardi Indemnitees is a member of a limited liability company, (the "Nardi LLC"), which has entered into the that certain Agreement of Limited Partnership of Prime Group Realty, L.P. (the "Partnership Agreement"), dated the date hereof, NOW THEREFORE, in consideration of the premises and of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. For purposes of the Agreement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Partnership Agreement or the Contribution Agreement. Any term defined by reference to an agreement, instrument or other document shall have the meaning so assigned to it whether or not such document is in effect. Unless otherwise indicated, references in the Agreement to articles, Sections, paragraphs, clauses, appendices, schedules and exhibits are to the same contained in or attached to this Agreement. For purposes of this Tax Indemnification Agreement, the following terms shall apply: (a) The term "After-Tax Basis" shall mean, with respect to any payment to be received, the amount of such payment supplemented by a further amount so that, after deduction of the amount of all federal, applicable state and Burr Ridge income taxes that are required to be paid by the recipient thereof (assuming that the recipient is taxable at the highest marginal federal, applicable state and Burr Ridge income tax rates then applicable to the recipient and taking into account any tax benefits to be realized by such recipient from the receipt of the indemnified amount) with respect to the receipt by it of such amounts, the net amount received is equal to such payment. (b) The term "Realistic Possibility of Success" shall mean such circumstances that tax counsel may properly advise reporting such position on a tax return in accordance with Section 10.34 of 31 C.F.R. part 10, governing practice before the Internal Revenue Service. (c) The term "GP Termination Date" shall mean the period beginning the date hereof and ending on the date on which the Nardi LLC (or its successor) is no longer a General Partner in the Partnership. (d) The term "Indemnity Term" shall mean the period beginning on the GP Termination Date and ending on the tenth anniversary thereof. (e) The term "Final Determination" shall mean (i) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals by either party to the action have been exhausted or the time for filing such appeal has expired, or in any case where judicial review shall at the time be unavailable because the proposed adjustment involves a decrease in net operating loss carry forward or a business credit carry forward, a decision, judgment, decree or other order of an administrative official or agency of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., where all administrative appeals have been exhausted by all parties thereto), (ii) a closing agreement entered into under Section 7121 of the Code, or any other final settlement agreement entered into in connection with an administrative or judicial proceeding and with the consent of UpREIT or as otherwise permitted in Section 6 of the Partnership Agreement, or (iii) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto. (f) The term "Indemnity Debt Allocation Method" shall mean the allocation of the Partnership's excess nonrecourse liabilities in any UpREIT taxable year for purposes of Regulations Section 1.752-3(a)(3) based upon each Partner's relative ownership of Units as of the beginning of such UpREIT taxable year-provided, that nothing in this Agreement shall be interpreted as prohibiting the UpREIT from actually using a different debt allocation than that based upon the Indemnity Debt Allocation Method. (g) The term "Burr Ridge" shall mean the municipality of the Village of Burr Ridge, Illinois. Section 2. Tax Representations. The Nardi Indemnitees jointly and severally represent, warrant and covenant as follows: (a) immediately prior to the relevant Adjustment Date, the Nardi Properties are subject to aggregate Nonrecourse Liabilities, allocable among the Nardi Properties, as shown on Exhibit B attached hereto; (b) each Nonrecourse Liability, described in Section 2(a) of this Agreement, was incurred by the Nardi Partnership or Nardi Indemnitee, which owned the Nardi Properties to which such Nonrecourse Liability is allocated, either (i) more than two years prior to the date of the Contribution Agreement, or (ii) not in anticipation of the transfer of such Nardi Property to UpREIT (within the meaning of Regulations Section 1.707-5(a)(6)); (c) each Nonrecourse Liability, described in Section 2(a) of this Agreement, has encumbered such Nardi Properties throughout the period beginning on the earlier of the date two years prior to the date of the Contribution Agreement and the date such liability was incurred by the Nardi Partnership or Nardi Indemnitee, as applicable, and ending on the Adjustment Date in respect of such Nardi Properties; (d) each Nonrecourse Liability, described in Section 2(a) of this Agreement, is nonrecourse for purposes of Regulations Section 1.752-1(a)(2), (e) immediately prior to the relevant Adjustment Date, each Nardi Indemnitee's share of Partnership Minimum Gain under Regulations Section 1.704-2(g)(1) is as shown on Exhibit B attached hereto; (f) immediately prior to the relevant Adjustment Date, each Nardi Indemnitee is allocated Nonrecourse Liabilities under Code Section 752 and the Regulations as shown on Exhibit B attached hereto; (g) intentionally omitted; (h) intentionally omitted; (i) the gross fair market value of any Nardi Property equals the initial Gross Asset Value of such Property credited to the Capital Account of the relevant contributing Nardi Partnership or Nardi Indemnitee; (j) each Nardi Indemnitee will report any payment received by it under this Agreement as a payment made within Section 707(a) of the Code. (k) each Nardi Indemnitee has and will have a taxable year that is the calendar year; and (l) each Nardi Property constitutes nonresidential real property under Code Section 168; provided, however that the breach of any of the foregoing representations, warranties and covenants shall operate only to reduce the UpREIT's indemnity obligation under this Agreement, and no one shall have any other rights, damages or recoveries in respect of any such breach. Section 3. Indemnified Income Inclusions. If any Nardi Indemnitee shall be required to include in its gross income for federal, applicable state or Burr Ridge income tax purposes (including by way of either an adjustment proposed by an examining agent during audit or at a closing conference or the receipt of a "30-day letter" by a Nardi Indemnitee or a `60-day letter" by the Tax Matters Partner of the UpREIT proposing an adjustment to the tax returns of the Nardi Indemnitee or the UpRE1T, respectively, and treating the Nardi Indemnitee's distributive share of taxable items of the UpREIT allocated to the Nardi Indemnitee under the Partnership Agreement as "required" for this purpose), with respect to any of its taxable years which begin prior to the end of the Indemnity Term, any of the following: (a) UpREIT items of income and gain attributable to such Nardi Indemnitee's share of the net decrease in Partnership Minimum Gain from Nardi Properties (to the extent not duplicative with subsection (c)); (b) Gain under Code Section 731 from a deemed distribution under Code Section 752 from the retirement or refinancing of either the Nonrecourse Liabilities shown on Exhibit B attached hereto, or the debt which refinances or replaces such Nonrecourse Liabilities; or (c) gain from the sale, transfer or disposition of Nardi Properties, (d) income under Code Section 704(c) in excess of that allocable to such Nardi Indemnitee under the "traditional method" of Regulations Section 1.704-3(b), (such an inclusion being an "Income Inclusion"), UpREIT shall pay to such Nardi Indemnitee an indemnity with respect to the additional federal, applicable state and Burr Ridge income tax liability from such Income Inclusion in the amount determined in Section 4 hereof. Section 4. Amount of Indemnification. (a) In the case of any Income Inclusion that is indemnifiable pursuant to Section 3 of this Agreement, the relevant Nardi Indemnitee (x) shall notify UpREIT orally and in writing as soon as possible (so as to minimize indemnifiable costs and expenses incurred under this Agreement prior to such Income Inclusion), and (y) shall give UpREIT a written certificate setting forth in reasonable detail (i) the computation of the amount of such Income Inclusion and (ii) the computation of such amount or amounts that shall equal the sum of (1) the actual net increase in federal, applicable state and Burr Ridge income tax (including any interest, penalties, fines, or other additions thereto) ("Inclusion Taxes") actually payable by a Nardi Indemnitee on an After-Tax Basis, as a result of such Income Inclusion, determined after taking into account all deductions, credits, or other federal, applicable state and Burr Ridge income tax benefits then realized and resulting from (a) such Income Inclusion, (b) the incurrence of the tax liability indemnified under this Agreement, or (c) the receipt of any indemnity payment made under this Agreement (computed in accordance with Sections 3 and 6 of this Agreement), plus (2) the reasonable costs and expenses incurred by such Nardi Indemnitee in respect of such Income Inclusion. (b) Each Nardi Indemnitee agrees to act in good faith to claim any tax benefits (including filing claims for refunds and amended tax returns) and take such other actions as may be reasonable to minimize the net amount of any indemnity payment due from UpREIT hereunder and to maximize the amount of its tax savings; provided, however that such Nardi Indemnitee shall not be required to take any action which, in its good faith judgment, would have any material adverse business consequences to it. If UpREIT shall disagree with such computation and so requests in a written notice delivered to such Nardi Indemnitee within thirty (30) days following UpREIT's receipt of the certificate, such amount shall be reviewed and determined by an independent public accounting firm of national recognition selected by SJ Nardi and reasonably acceptable to UpREIT. The costs of such verification shall be borne by UpREIT unless such verification shall result in an adjustment in UpREIT's favor by an amount of more than 5 % of the Inclusion Taxes actually due, in which case such costs shall be borne by such Nardi Indemnitee. Each Nardi Indemnitee agrees to cooperate with such independent accounting firm and to supply it with all information reasonably necessary to permit it to accomplish such review and determination. Such information shall be for the confidential use of such accountants and shall not be disclosed to UpREIT or any other person. UpREIT and each Nardi Indemnitee agree that the sole responsibility of the independent public accounting firm shall be to verify the amount of a payment pursuant to this Agreement and that matters of interpretation of this Agreement are not within the scope of the independent accounting firm's responsibilities. (c) To the extent that a Nardi Indemnitee recognizes an amount in respect of an Income Inclusion that is indemnifiable pursuant to Section 3 of this Agreement for any UpREIT taxable year beginning prior to the Indemnity Term, UpREIT will pay such Nardi Indemnitee as its indemnity obligation under this Agreement 100% of the amount described in Section 4(a). (d) Any payment due to a Nardi Indemnitee pursuant to this Section 4 shall be paid upon the earlier of the date that (1) the additional federal income tax in respect of such Income Inclusion is due from the Nardi Indemnitee, or (2) the Nardi Indemnitee has filed a return that reflects or would reflect such additional federal income tax; provided, however that (A) obligations of such Nardi Indemnitee and UpREIT under this Agreement will first be set off against each other, and (B) no payment shall be due earlier than completion of the computation of such indemnity amount as described in Section 4(a). Section 5. Exclusions. (a) Notwithstanding the foregoing, UpREIT shall not have any liability for indemnification under this Agreement (other than for reasonable costs and expenses incurred by a Nardi Indemnitee in accordance with this Agreement) to the extent the amount otherwise indemnifiable is payable by such Nardi Indemnitee as a result of one or more of the following: (i) Any Nardi Indemnitee recognizing gain in respect of the Capital Contribution of Nardi Properties under Code section 707(a)(2), assuming that each Nonrecourse Liability described in Section 2(a) of this Agreement is a "qualified liability" within the meaning of Regulations Section 1.707-5(a)(6), except as a result of either a sale or disposition of such Nardi Property, an indemnity payment under this Agreement, or the general partner nature of the Nardi LLC's interest in the Partnership and the put right described in the Put Agreement; (ii) Any payment of cash to a Contributor under Section 3.02(a)(i) of the Contribution Agreement; (iii) Any Nardi Indemnitee's Interest in the UpREIT not being respected as a partnership interest to the extent, and as provided in, the Partnership Agreement; (iv) The allocations of income, gain, loss, deduction and credit set forth in the Partnership Agreement not being respected under Sections 704(b) and 704(c) of the Code, except as a result of the exercise of discretion by the Managing General Partner of the UpREIT in respect of (A) an adjustment to the "Gross Asset Values" of UpREIT assets, as described in clause (b) of the definition thereof, or (B) the allocation of Nonrecourse Deductions under the proviso within Section 6.6.A. of the Partnership Agreement; (v) The UpREIT not being the owner of the Nardi Properties for federal income tax purposes as of the relevant Adjustment Date; (vi) Immediately after the relevant Adjustment Date, any Nardi Indemnitee's share of Partnership Minimum Gain under Regulations Section 1.704-2(g)(1) not being as shown on Exhibit B attached hereto; (vii) (1) any change in, or amendment to, the Code or any other federal tax statute, which is effective on or after the relevant Adjustment Date, (2) any final or temporary regulation, which is enacted or adopted after the relevant Adjustment Date, or (3) any court decision issued after the relevant Adjustment Date; (viii) No Nardi Indemnitee is or will be a tax-exempt entity or person; (ix) A determination that any Nardi Indemnitee did not enter the transactions contemplated by the Partnership Agreement for profit or with a sufficient business purpose; (x) A voluntary or involuntary sale, assignment, transfer or other disposition by any Nardi Indemnitee of any interest in the UpREIT or any part thereof, (xi) The failure of any Nardi Indemnitee to claim or to follow the proper procedure in claiming in a timely manner any UpREIT item allocated to such Nardi Indemnitee by the Partnership; (xii) The failure of any Nardi Indemnitee to take timely action or follow the proper procedures in reporting his distributive share from the UpREIT or contesting a claim made by the Internal Revenue Service in accordance with the Partnership Agreement; (xiii) The gross negligence or the willful misconduct of any Nardi Indemnitee or any affiliate thereof, (xiv) Any breach by any Nardi Indemnitee of any of its representations, warranties or covenants in Sections 7.1.A. or 8.2 of the Partnership Agreement (prior to the GP Termination Date), Sections 10.5, 11.3.A., 11.6.A., D or E. of the Partnership Agreement, Sections 2 or 6 of this Agreement, or the Contribution Agreement; (xv) Any guarantee by any Nardi Indemnitee or a person related to any Nardi Indemnitee of any Nonrecourse Liability encumbering a Nardi Property or Nardi Interest or any other debt of the UpREIT or its affiliates; (xvi) Any Nardi Indemnitee recognizing taxable income under Code Section 704(c), except to the extent such income results from either a sale or other disposition of a Nardi Property or income under Code Section 704(c) in excess of that allocable to such Nardi Indemnitee under the "traditional method" of Regulations Section 1.704-3(b); (xvii) Any recapture under Code Section 1245 or 1250 of depreciation attributable to Nardi Properties that was allocated to any Nardi Indemnitee after the relevant Adjustment Date.; (xviii) the sale, transfer or other disposition of any Nardi Property after the fifth anniversary of the GP Termination Date; provided, however, that the UpREIT uses its best efforts to cause such sale, transfer or other disposition to be on a tax-deferred or tax-exempt basis- or (xix) the sale, transfer or other disposition of all or any portion of the land described in Exhibit D hereto (the "Land"); provided, however, that the UpREIT uses its best efforts to cause such sale, transfer or other disposition of the Land that occurs within the period ending on or prior to the fifth anniversary of the GP Termination Date, to be on a tax-deferred or tax-exempt basis; (xx) The exercise of the lessee purchase option with respect to the property at 1301 E. Tower Road (but not including any purchase pursuant to the right of first refusal thereto). (b) Further, notwithstanding anything to the contrary within this Agreement, after taking into account any amounts thereof excluded under Section 5(a), the cumulative Income Inclusions for all Nardi Indemnitees in respect of Section 3(a), 3(b) and 3(c) that will be indemnifiable by the UpREIT shall not exceed the following: (i) For any Income Inclusion under Section 3(b),the aggregate negative Capital Accounts of all Nardi Indemnitees as set forth on Exhibit B; (ii) For any Income Inclusion under Section 3(a), the aggregate Minimum Gain of all Nardi Indemnitees as set forth on Exhibit B; and (iii) For any Income Inclusion under Section 3(c), the excess of the aggregate Gross Asset Value of the Nardi Properties contributed to the UpREIT on the relevant Adjustment Dates, over the aggregate initial adjusted tax bases of such Nardi Properties on such relevant Adjustment Dates. (c) Finally, notwithstanding anything to the contrary within this Agreement, after taking into account any amounts thereof excluded under Sections 5(a) and 5(b), UpREIT shall not be liable for indemnification under this Agreement in respect of an Income Inclusion under Section 3(a) or (b), to the extent of that such Income Inclusion arises from a Final Determination that the amount of debt of UpREIT allocable to such Nardi Indemnitee for purposes of Section 752 of the Code and Regulations Section 1.752-3(a)(3) is less than the amount of debt such Nardi Indemnitee would be allocated if the UpREIT allocated the Nardi Indemnitees collectively an aggregate amount of debt, using the Indemnity Debt Allocation Method for purposes of Section 752 of the Code and Regulations Section 1.752-3(a)(3), of at least $25,000,000 (with such amount to be increased in respect of the contribution subsequent to the date hereof of the Rawls Road Property, the Craig Place Property, the property located at 2050 Hammond Drive, Schaumburg, Illinois or the property located at 5600 Proviso Drive, Berkeley, Illinois, by $600,000, $4,000,000, $500,000 and $2,000,000, respectively- provided, however, that UpREIT actually allocates to the Nardi Indemnitee, collectively, on the UpREIT's federal, applicable state and Burr Ridge income tax returns, at least such aggregate amount of debt. Section 6. Contests. (a) Nothing in this Agreement shall be construed to prevent UpREIT from contesting, through its Tax Matters Partner in accordance with the Partnership Agreement as part of the unified audit of the UpREIT, any claim in respect of any "partnership" item of the UpREIT that, if successful, would result in an Income Inclusion (a "Partnership Level Issue"). (b) If UpREIT contests a Partnership Level Issue that, if successful, would result in an Income Inclusion, UpREIT's liability for indemnification under Section 4 hereof (other than reasonable costs and expenses described in Section 6(f) of the Agreement) shall, at UpREIT's election, be deferred until thirty (30) days after a Final Determination of such Nardi Indemnitee's federal income tax liability in respect of an Income Inclusion. (c) If any audit or proceeding involving an indemnifiable adjustment is being conducted in a proceeding involving such Nardi Indemnitee, which cannot be transferred to the UpREIT as a partnership item (a "Nardi Level Issue"), such Nardi Indemnitee hereby agrees (i) promptly to notify UpREIT in writing of such adjustment (and the failure of such Nardi Indemnitee to so notify UpREIT shall preclude any indemnity hereunder to the extent UpREIT's right to effect its contest rights hereunder has been precluded by such failure), and (ii) upon UpREIT's delivery to of a written opinion of nationally recognized tax counsel reasonably acceptable to such Nardi Indemnitee ("Tax Counsel") to the effect that there is a Realistic Possibility of Success upon contest of such Nardi Level Issue, such Nardi Indemnitee will contest that adjustment by filing a protest and administrative appeal and prosecuting the same in good faith; provided, however, that such Nardi Indemnitee will not be obligated to pursue an administrative appeal if such Nardi Indemnitee instead pursues relief in Tax Court or a court having refund jurisdiction. (d) If , within 30 days following the failure of such administrative proceedings with respect to a Nardi Level Issue, UpREIT delivers to a Nardi Indemnitee a written opinion of Tax Counsel to the effect that there is a Realistic Possibility of Success if the proposed adjustment is presented to a court for resolution, then such Nardi Indemnitee will contest the proposed adjustment in good faith in the Tax Court or by paying the tax (and any applicable interest and penalties) and suing for refund in the Court of Federal Claims or appropriate Federal District Court. If, within 30 days following a final adverse decision of such court with respect to such Nardi Level Issue, UpREIT delivers to such Nardi Indemnitee a written opinion of Tax Counsel to the effect that it is more likely than not that such decision would be reversed on appeal, then such Nardi Indemnitee will appeal such decision to the appropriate Federal Court of Appeals. With respect to any of the above-described proceedings, such Nardi Indemnitee will keep UpREIT and its counsel informed as to the progress of such proceedings, give UpREIT and its counsel the opportunity to review and comment in advance on all written submissions and filings relevant to indemnifiable issues (after making appropriate redactions to preserve the confidentiality of the such Nardi Indemnitee return as to other issues), and consider in good faith any suggestions made by UpREIT or its counsel. (e) Such Nardi Indemnitee shall present any settlement offer provided to such Nardi Indemnitee pursuant to a Nardi Level Issue to UpREIT. If UpREIT recommends acceptance of a settlement offer of a Nardi Level Issue or if the Tax Matters Partner recommends acceptance of a settlement offer in respect of a Partnership Level Issue, but such Nardi Indemnitee declines to accept such offer in writing within 30 days (if such Nardi Indemnitee does not respond within 30 days, such lack of response shall be treated as acceptance of UpREIT's or the Tax Matters Partner's recommendation, respectively), (1) the obligation of UpREIT to make indemnity payments as the result of any such contest or proceedings shall not thereafter exceed the obligation that it would have had if such contest had been settled or proceeding terminated on the basis recommended by UpREIT or the Tax Matters Partner, as applicable, and (2) in the case of a Nardi Level Issue, UpREIT shall have no further liability for costs or other expenses in respect of such contest. (f) Notwithstanding the foregoing, such Nardi Indemnitee will have no obligation to contest any action with respect to a Nardi Level Issue (i) unless such items could give rise to a federal income tax liability (disregarding other items in the assessment and considering effects in future years) in excess of $10,000, (ii) without UpREIT paying when due, reasonable third-party costs and out-of-pocket expenses including reasonable legal, witness and accounting fees and other expenses and, in the case of proceedings before the Court of Federal Claims or Federal District Court, the amount of tax (and any applicable interest and penalties) for which refund is claimed, and (iii) to the extent such Nardi Indemnitee waives in writing UpREIT's obligation to indemnify such Nardi Indemnitee for such items, in which case all third-party costs and out-of-pocket expenses described in clause (ii) thereafter incurred and all taxes would be paid by such Nardi Indemnitee. (g) such Nardi Indemnitee shall not settle any such Nardi Level Issue without UpREIT's consent; provided that such Nardi Indemnitee shall not be required to contest any proposed adjustment and may settle any such proposed adjustment if such Nardi Indemnitee shall waive its right to indemnity under this Agreement with respect to such adjustment and any Income Inclusion that results from such adjustment and, in the case of proceedings before the Court of Federal Claims or Federal District Court, shall pay to UpREIT the amount of tax (and any applicable interest and penalties) previously paid or advanced by UpREIT with respect to such adjustment or the contest of such adjustment under Section 6(f), plus interest at the rate per annum equal to the weighted average cost of debt capital to the UpREIT, computed from the time such amounts were paid or advanced by UpREIT. (h) Within thirty (30) days after a Final Determination of the liability of such Nardi Indemnitee in respect of a Nardi Level Issue, UpREIT and each Indemnitee agree to pay each other, as applicable, the net amount of (i) the payment owed by the UpREIT to such Nardi Indemnitee of any indemnification hereunder, not theretofore paid resulting from the outcome of such contest, and (ii) in the case of proceedings before the Court of Federal Claims or Federal District Court, the repayment owed by such Nardi Indemnitee to UpREIT of the amount of tax (and any applicable interest and penalties) previously paid or advanced by UpREIT with respect to such adjustment or the contest of such adjustment under Section 6(f), together with any interest received by or credited to such Nardi Indemnitee that is attributable to such advance. Section 7. Tax Savings. (a) In the event that UpREIT makes an indemnity payment pursuant to Section 4, if such Nardi Indemnitee shall realize with respect to any year, any federal, applicable state or Burr Ridge income tax savings that would not have been realized but for receipt of such payment, the related Income Inclusion or the event giving rise thereto, (and which tax savings were not taken into account in calculating UpREIT's indemnity payment to such Nardi Indemnitee), such Nardi Indemnitee shall pay to UpREIT, on an After-Tax Basis, an amount equal to the actual net reduction in federal, applicable state and Burr Ridge income tax actually realized by such Nardi Indemnitee. Each Nardi Indemnitee agrees to act in good faith to claim any tax benefits or savings (including filing claims for refunds and amended tax returns) and take such other actions as may be reasonable to minimize the net amount of any indemnity payment due from UpREIT hereunder and to maximize the amount of its tax savings; provided, however, that such Nardi Indemnitee shall not be required to take any action which, in its good faith judgment, would have any material adverse business consequences to it. (b) Any payment due to UpRE1T pursuant to this Section 7 shall be paid within one business day after such Nardi Indemnitee has (1) received (or is deemed to have received) a refund or (2) has filed a return that reflects or would reflect such tax saving; provided, however, that (A) obligations of such Nardi Indemnitee and UpREIT under this Agreement will first be set off against each other, and (B) any loss of such tax savings by such Nardi Indemnitee subsequent to the year of realization by such Nardi Indemnitee shall be treated as an Income Inclusion that is indemnifiable pursuant to the provisions of this Agreement. Section 8. State and Burr Ridge Tax. For purposes of this Agreement, each Indemnitee will be treated as having an Income Inclusion, realizing any deductions, credits or other income tax benefits, having the same tax savings and having the same tax attributes and status for applicable state income and Burr Ridge tax purposes at the same time, in the same amount and in the same manner, as such Nardi Indemnitee does for federal income tax purposes. Section 9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. Section 10. Notices. All notices, demands, declarations, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof shall be given in the manner described in Section 14.1 of the Partnership Agreement. Section 11. Successors and Assigns. The terms of this Tax Indemnification Agreement may not be assigned by any Indemnitee (including, without limitation, by descent or will), without the written consent of UpREIT. Section 12. Miscellaneous. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one Agreement. Any provision of this Agreement which is prohibited and unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification is sought. Section 13. Anticipated Indemnitee Debt Allocation Methodology. UpREIT acknowledges and agrees with each Indemnitee that the aggregate nonrecourse indebtedness of UpREIT that is apportioned to the Indemnities collectively under this Agreement and the Partnership Agreement pursuant to Code Section 752 and Regulations Sections 1.702-3(a)(2) shall be apportioned among the various Indemnitees using a method substantially similar to that within the debt allocation model set forth on Exhibit C hereto. Section 14. Term. The term of this Agreement shall be from the date hereof until such time as the applicable statute of limitations under the Code bars any claim by the Internal Revenue Service against a Indemnitee for Inclusion Taxes otherwise indemnifiable under this Agreement. Section 15. Exhibits. The parties to this Agreement acknowledge and agree that future Capital Contributions may be made to the UpREIT pursuant to Section 3.02(b) of the Contribution Agreement, and agree to reasonably cooperate to update the Exhibits and other factual information referenced or contained in this Agreement to take such Capital Contributions into account. Section 16. Assumption of Recourse Liabilities. Prior to the GP Termination Date, upon 30 days written notice to the Managing General Partner, the Nardi LLC may agree to indemnify the Managing General Partner for the debt obligations of the UPREIT that are recourse to the general partners of the UpREIT under relevant state law, but only to the extent necessary for the Nardi LLC to be allocated a greater share of recourse liabilities of the UpREIT for the purposes of Regulations Section 1.752.-2 to avoid an Income Inclusion; and provided, however, that such indemnification shall not be allowed to the extent it would cause adverse tax consequences to the Managing General Partner, another partner in the UpREIT or the REIT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective Officers thereunto duly authorized as of the day and year first above written. PRIME GROUP REALTY, L.P. By: PRIME GROUP REALTY TRUST Its: Managing General Partner By: /s/ W. Michael Karnes ------------------------------------ Name: W. Michael Karnes Title: Executive Vice President NARCO ENTERPRISES, INC., an Illinois corporation By: /s/ Stephen J. Nardi ------------------------------------ Title: President ---------------------------------- NARDI GROUP LIMITED, a Delaware corporation By: /s/ Stephen J. Nardi ------------------------------------ Title: President ---------------------------------- STEPHEN J. NARDI /s/ Stephen J. Nardi ---------------------------------- THE NARDI GROUP, LTD, ETAL PARTNERSHIP AND PROPERTIES EXHIBIT A
Partnership Property Name/Location City/State ----------- ---------------------- ---------- Madison Group 1021 Kirk Road Batavia, IL Madison Group 90 4211 Madison St. Hillside, IL Madison Group 200 200 E. Fullerton Carol Stream, IL Narco 350 Associates 350 Randy Rod Carol Stream, IL Narco 4300 Associates 4300 Madison Street Hillside, IL Narco Elmhurst Center 370 Carol Lane Elmhurst, IL 388 Carol Lane Elmhurst, IL 941-961 Weigal Dr Elmhurst, IL 342-46 Carol Lane Elmhurst, IL 343 Carol Lane Elmhurst, IL Narco Gary Avenue Associates 371-385 Gary Ave. Carol Stream, IL Narco Mannheim I 350 N Mannheim Road Hillside, IL Narco River Business Center West 1600-1700 167th St. Calumet City, IL Narco Schaumburg J.V, 2050 Hammond Drive Schaumburg, IL Narco Tower Road 1301 Tower Road Schaumburg, IL Olympian Office Center J.V. 4343 Commerce Ct. Lisle, IL Proviso Park J.V. 5600 Proviso Dr. Berkeley, IL Rawls 130 130 E. Rawl Road Des Plaines, IL Tri-State Industrial Park 11039 Gage Avenue Franklin Park, IL 11045 Gage Avenue Franklin Park, IL Steve Nardi 1401 S. Jefferson Chicago, IL 4100 Madison Street Hillside, IL 4100-41900 Madison Street Hillside, IL 300-320 Craig Place Hillside, IL 550 Kehoe Blvd. Carol Stream, IL Carol Stream Industrial Park Carol Stream Land Parcel Carol Stream Batavia Land Parcel Batavia
EX-10.26 22 EXHIBIT 10.26 Ex. 10.31 CREDIT AGREEMENT AMONG PRIME GROUP REALTY, L.P. and PRIME GROUP REALTY TRUST and BANKBOSTON, N.A. and PRUDENTIAL SECURITIES CREDIT CORPORATION November 17, 1997 Amended 12/15/97 TABLE OF CONTENTS Section 1 DEFINITIONS AND RULES OF INTERPRETATION........................ 1 Section 1.1 Definitions........................................... 1 Section 1.2 Rules of Interpretation............................... 19 Section 2 REVOLVING CREDIT FACILITY...................................... 20 Section 2.1 Commitment to Lend; Limitation on Total Commitment.... 20 Section 2.2 Reduction of Commitment............................... 20 Section 2.3 The Notes............................................. 20 Section 2.4 Interest on Loans..................................... 21 Section 2.5 Requests for Loans.................................... 21 Section 2.6 Conversion Options.................................... 22 Section 2.7 Funds for Loans....................................... 22 Section 2.8. IRB Indebtedness Account.............................. 23 Section 2.9. Letters of Credit..................................... 24 Section 3 REPAYMENT OF THE LOANS......................................... 26 Section 3.1 Maturity.............................................. 26 Section 3.2 Mandatory Repayments of Loan.......................... 26 Section 3.3 Optional Repayments of Loans.......................... 27 Section 4 CERTAIN GENERAL PROVISIONS..................................... 28 Section 4.1 Revolving Credit Facility Fees and Agent's Fee........ 28 Section 4.2 Commitment Fee........................................ 28 Section 4.3 Funds for Payments.................................... 30 Section 4.4 Computations.......................................... 30 Section 4.5 Additional Costs, Etc................................. 30 Section 4.6 Capital Adequacy...................................... 32 Section 4.7 Certificate........................................... 32 Section 4.8 Indemnity............................................. 32 Section 4.9 Interest on Overdue Amounts........................... 32 Section 4.10 Inability to Determine Eurodollar Rate................ 33 Section 4.11 Illegality............................................ 33 Section 4.12 Replacement of Lenders................................ 33 Section 5 COLLATERAL SECURITY; NO LIMITATION ON RECOURSE................. 34 Section 5.1 Collateral Security................................... 34 Section 5.2. No Limitation on Recourse............................. 34 Section 5.3. Additional Properties................................. 34 Section 5.4. Conditions to Approval of Additional Properties....... 35 Section 5.5. Release of Mortgaged Properties....................... 36 Section 6. REPRESENTATIONS AND WARRANTIES................................. 36 Section 6.1. Authority; Etc........................................ 37 Section 6.2. Governmental Approvals................................ 38 Section 6.3. Title to Properties................................... 38 Section 6.4. Financial Statements.................................. 38 Section 6.5. No Material Changes, Etc.............................. 39 Section 6.6. Franchises, Patents, Copyrights, Etc.................. 39 Section 6.7. Litigation............................................ 39 Section 6.8. No Materially Adverse Contracts, Etc.................. 40 Section 6.9. Compliance With Other Instruments, Laws, Etc.......... 40 Section 6.10. Tax Status............................................ 40 Section 6.11. Event of Default...................................... 40 Section 6.12. Investment Company Act................................ 40 Section 6.13. Absence of Financing Statements, Etc.................. 41 Section 6.14. Setoff, Etc........................................... 41 Section 6.15. Certain Transactions.................................. 41 Section 6.16. Benefit Plans: Multiemployer Plans: Guaranteed Pension Plans.............................................. 41 Section 6.17. Regulations U and X................................... 41 Section 6.18. Environmental Compliance.............................. 41 Section 6.19. Subsidiaries and Affiliates........................... 43 Section 6.20. Major Leases.......................................... 43 Section 6.21. Loan Documents........................................ 43 Section 6.22. Mortgaged Properties.................................. 43 Section 7. AFFIRMATIVE COVENANTS OF THE BORROWER.......................... 47 Section 7.1. Punctual Payment...................................... 47 Section 7.2. Maintenance of Office................................. 47 Section 7.3. Records and Accounts.................................. 47 Section 7.4. Financial Statements, Certificates and Information.... 47 Section 7.5. Notices............................................... 49 Section 7.6. Existence; Maintenance of REIT Status; Maintenance of Properties......................................... 50 Section 7.7. Insurance............................................. 51 Section 7.8. Taxes................................................. 51 Section 7.9. Inspection of Properties and Books; Confidential Information........................................ 52 Section 7.10. Compliance with Laws, Contracts, Licenses, and Permits............................................ 52 Section 7.11. Use of Proceeds....................................... 52 Section 7.12. Appraisals............................................ 52 Section 7.13. Leases; Lease Approvals............................... 53 Section 7.14. Further Assurance..................................... 53 Section 7.15. Environmental Indemnification......................... 53 Section 7.16. Response Actions...................................... 54 Section 7.17. Environmental Assessments............................. 54 Section 7.18. Employee Benefit Plans................................ 54 Section 7.19. Required Interest Rate Contracts...................... 55 Section 8. CERTAIN NEGATIVE COVENANTS OF THE BORROWER..................... 55 Section 8.1 Restrictions on Indebtedness.......................... 56 Section 8.2. Restrictions on Liens, Etc............................ 56 Section 8.3. Restrictions on Investments........................... 58 Section 8.4. Merger, Consolidation and Disposition of Properties... 58 Section 8.5. Sale and Leaseback.................................... 59 Section 8.6. Compliance with Environmental Laws.................... 59 Section 8.7. Distributions......................................... 59 Section 8.8. Leases................................................ 60 Section 9. FINANCIAL COVENANTS OF THE BORROWER............................ 60 Section 9.1. Collateral Value...................................... 60 Section 9.2. Minimum Debt Service Coverage......................... 60 Section 9.3. Total Liabilities to Total Adjusted Assets............ 61 Section 9.4. Minimum Tangible Net Worth............................ 61 Section 9.5. Total Operating Cash Flow to Interest Expense......... 61 Section 9.6. EBITDA to Fixed Charges............................... 61 Section 10. CONDITIONS TO EFFECTIVENESS.................................... 61 Section 10.1. Loan Documents........................................ 61 Section 10.2. Certified Copies of Organization Documents; Good Standing Certificates.............................. 61 Section 10.3. By-laws; Resolutions.................................. 62 Section 10.4. Incumbency Certificate; Authorized Signers............ 62 Section 10.5. Opinions of Counsel................................... 62 Section 10.6. Payment of Fees....................................... 62 Section 10.7. Validity of Liens..................................... 62 Section 10.8. Survey................................................ 63 Section 10.9. Title Insurance; Title Exception Documents............ 63 Section 10.10. Leases............................................... 63 Section 10.11. Estoppel and Attornment Agreements................... 63 Section 10.12. Certificates of Insurance............................ 63 Section 10.13. Environmental Reports................................ 63 Section 10.14. Environmental Indemnity.............................. 63 Section 10.15. Appraisals........................................... 64 Section 10.16. Inspecting Engineers' Reports........................ 64 Section 10.17. Initial Letters of Credit............................ 64 Section 10.18. UCC Lien Searches.................................... 64 Section 10.19. Formation Transactions Complete...................... 64 Section 11. CONDITIONS TO ALL BORROWINGS................................... 64 Section 11.1. Representations True; No Event of Default; Compliance Certificate........................................ 64 Section 11.2. No Legal Impediment................................... 65 Section 11.3. Governmental Regulation............................... 65 Section 11.4. Proceedings and Documents............................. 65 Section 12. EVENTS OF DEFAULT; ACCELERATION; ETC........................... 65 Section 12.1. Events of Default and Acceleration.................... 65 Section 12.2. Termination of Commitments; Drawing of IRB Letters of Credit............................................. 68 Section 12.3. Remedies.............................................. 68 Section 12.4. Distribution of Collateral Proceeds................... 69 Section 12.5. Addition of Real Estate Assets to Cure Default........ 69 Section 13. SETOFF......................................................... 70 Section 14. THE AGENT...................................................... 71 Section 14.1. Authorization......................................... 71 Section 14.2. Employees and Agents.................................. 71 Section 14.3. No Liability.......................................... 71 Section 14.4. No Representations.................................... 71 Section 14.5. Payments.............................................. 72 Section 14.6. Holders of Notes...................................... 73 Section 14.7. Indemnity............................................. 73 Section 14.8. Agent as Lender ...................................... 73 Section 14.9. Resignation........................................... 73 Section 14.10. Notification of Defaults and Events of Default....... 74 Section 14.11. Duties in the Case of Enforcement.................... 74 Section 15. EXPENSES....................................................... 74 Section 16. INDEMNIFICATION................................................ 75 Section 17. SURVIVAL OF COVENANTS, ETC..................................... 76 Section 18. ASSIGNMENT; PARTICIPATIONS; ETC................................ 77 Section 18.1. Conditions to ASection gnment by Lenders.............. 77 Section 18.2. Certain Representations and Warranties; Limitations; Covenants.......................................... 77 Section 18.3. Register.............................................. 78 Section 18.4. New Notes............................................. 78 Section 18.5. Participations........................................ 79 Section 18.6. Pledge by Lender...................................... 79 Section 18.7. No Assignment by Borrower............................. 79 Section 18.8. Disclosure............................................ 80 Section 19. NOTICES, ETC................................................... 80 Section 20. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE............. 80 Section 21. HEADINGS....................................................... 81 Section 22. COUNTERPARTS................................................... 81 Section 23. ENTIRE AGREEMENT............................................... 81 Section 24. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS................. 81 Section 25. CONSENTS, AMENDMENTS, WAIVERS, ETC............................. 82 Section 26. SEVERABILITY................................................... 82 Section 27. ACKNOWLEDGMENTS................................................ 82 Section 28. PARTNER LIABILITY.............................................. 83 Exhibit A Form of Note Exhibit B Form of Loan Request Exhibit C Form of Compliance Certificate Exhibit D Form of Letter of Credit Request Exhibit E Opinion Requirements Exhibit F Form of Assignment and Acceptance Schedule 1 Lenders; Domestic and Eurodollar Lending Offices Schedule 1.1 Mortgaged Properties Schedule 1.2 Commitments and Commitment Percentages Schedule 1.3 Related Companies, Guarantor Subsidiaries and Permitted Joint Ventures Schedule 1.4 Initial Letters of Credit Schedule 5.3(b) Required Additional Properties Schedule 6.3 Title to Properties Schedule 6.7 Litigation Schedule 6.18 Environmental Reports Schedule 6.22(d) Engineering Reports Schedule 6.22(l) Rent Rolls Schedule 6.22(m) Service Agreements Schedule 6.22(n) Other Material Agreements Schedule 8.3(d) Investments CREDIT AGREEMENT This CREDIT AGREEMENT is made as of the 17th day of November, 1997, 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"), 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 Prudential, the "Lenders") and BANKBOSTON, N.A., as agent for itself and such other lending institutions (the "Agent"). WHEREAS, the Borrower has requested and BankBoston and Prudential have agreed to provide a revolving credit facility, and to attempt to syndicate such facility to other lending institutions, and Borrower has agreed to provide real 0property collateral and other collateral to BankBoston, Prudential and such other lending institutions, as set forth herein; NOW, THEREFORE, to accomplish these purposes, the Agent, the Borrower and the Lenders hereby agree as follows: Section 1. DEFINITIONS AND RULES OF INTERPRETATION Section 1.1. Definitions. The following terms shall have the meanings set forth in this Section l or elsewhere in the provisions of this Agreement referred to below: Additional Properties. Real Estate Assets which hereafter become Mortgaged Properties pursuant to Section 5.3. Affiliated Lenders. Any commercial bank or other commercial lender which is (i) the parent corporation of any of the Lenders, (ii) a wholly-owned subsidiary of any of the Lenders or (iii) a wholly-owned subsidiary of the parent corporation of any of the Lenders. Agent. BankBoston, N.A. acting as agent for the Lenders or any successor agent. Agent's Head Office. The Agent's head office located at 100 Federal Street, Boston, Massachusetts 02110, or at such other location as the Agent may designate from time to time in writing to the Borrower. Agreement. This Credit Agreement, including the Schedules and Exhibits hereto. Applicable Margin. As of any date of determination: (i) 1.20%, if Total Liabilities are less than 30% of Total Adjusted Assets, or (ii) 1.35%, if Total Liabilities are equal to or less than 45% of Total Adjusted Assets but the condition set forth in clause (i) of this definition is not satisfied, (iii) 1.50% if Total Liabilities exceed 45% of Total Adjusted Assets. Any change in the Applicable Margin caused by a change in the ratio of Total Liabilities to Total Adjusted Assets shall become effective on the 46th day following the end of the fiscal quarter at which such ratio was computed as shown on a Compliance Certificate which reflects such change in said ratio above or below the 30% level or the 45% level. Appraisals. Appraisals of the value of the Mortgaged Properties determined on an "as is" market value basis, prepared in writing independently and impartially by qualified MAI appraisers selected and retained by the Agent and paid for by Borrower, the form and substance of such appraisals and final determination of market value of the Mortgaged Properties thereunder to be reviewed and subject to approval by the Lead Lenders based on their respective reviews of such appraisals pursuant to their internal appraisal review policies and procedures. All appraisals shall be prepared in accordance with the Uniform Standards of Professional Appraisal Practice, Supplemental Standards Applicable To Federally Related Transactions, as further described in Title XI of the "Financial Institutions Reform, Recovery and Enforcement Act of 1989" ("FIRREA"), and any additional standards and conditions required for appraisals prepared for the Lead Lenders. Appraised Value. The market value of each of the Mortgaged Properties, determined by the Lead Lenders based upon the most recent Appraisals obtained pursuant to Section 5.4(b), Section 7.12 or Section 10.14. In determining Appraised Value the Lead Lenders shall exclude any value associated with any unimproved land or unoccupied Buildings located on the applicable Mortgaged Property. Assignment and Acceptance. See Section 18. Assignments of Leases and Rents. The assignments of rents and leases from the Mortgagor to the Agent pursuant to which the Mortgagor shall grant and assign to the Agent as agent for the Lenders a security interest in and assignment of the Mortgagor's interest as lessor with respect to all Leases and rents thereunder of all or any part of the Mortgaged Properties as security for the Obligations. BankBoston. As defined in the preamble hereto. Borrowing Base Value. With respect to each Mortgaged Property, an amount equal to (i) two times the Net Operating Income for the most recently completed two fiscal quarters, minus the Reserve Amount for such Mortgaged Property, divided by (ii) a capitalization rate equal to 0.09 for the West Wacker Drive Property or 0.10 for any other Mortgaged Property. 2 Base Rate. The higher of (a) the annual rate of interest announced from time to time by BankBoston at the Agent's Head Office as its "base rate", and (b) one half of one percent (1/2%) above the overnight federal funds effective rate as published by the Board of Governors of the Federal Reserve System, as in effect from time to time. Base Rate Loans. Those Loans bearing interest calculated by reference to the Base Rate. Borrower. As defined in the preamble hereto. Borrowing Date. The date on which any Loan is made or is to be made, and the date on which any Loan is converted or continued in accordance with Section 2.6. Buildings. The buildings, structures and other improvements now or hereafter located on the Mortgaged Properties. Building Service Equipment. All apparatus, fixtures and articles of personal property owned by the Mortgagor now or hereafter attached to or used or procured for use in connection with the operation or maintenance of any Building located on or included in the Mortgaged Properties, including, but without limiting the generality of the foregoing, all engines, furnaces, boilers, stokers, pumps, heaters, tanks, dynamos, motors, generators, switchboards, electrical equipment, heating, plumbing, lifting and ventilating apparatus, air-cooling and air-conditioning apparatus, gas and electric fixtures, elevators, escalators, fittings, and machinery and all other equipment of every kind and description, used or procured for use in the operation of the Buildings (except apparatus, fixtures or articles of personal property belonging to lessees or other occupants of such building or to persons other than the Mortgagor unless the same be abandoned by any such lessee or other occupant or person), together with any and all replacements thereof and additions thereto. Business Day. Any day on which banking institutions in Boston, Massachusetts and Chicago, Illinois are open for the transaction of banking business and, in the case of Eurodollar Rate Loans, also a day which is a Eurodollar Business Day. Capitalized Leases. Leases under which the Borrower is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the Borrower in accordance with generally accepted accounting principles. CERCLA. See Section 6.18. Closing Balance Sheet. The pro-forma consolidated balance sheet of the Company dated June 30, 1997 and reflecting the closing of the Formation Transactions contained in the Prospectus Financial Statements and the related notes thereto. 3 Code. The Internal Revenue Code of 1986, as amended and in effect from time to time. Collateral. All of the properties of the Borrower or of any Guarantor that are or are intended to be subject to the security interests, liens and mortgages created by the Security Documents, including, without limitation, the Mortgaged Properties, the Leases, the Permits and the Service Agreements. Collateral Value. With respect to each Mortgaged Property an amount equal to the lesser of its Appraised Value or its Borrowing Base Value. Commitment. With respect to each Lender, the amount set forth from time to time on Schedule 1.2 hereto as the amount of such Lender 's commitment to make Loans to the Borrower. Commitment Percentage. With respect to each Lender , the percentage set forth from time to time on Schedule 1.2 hereto as such Lender 's percentage of the Total Commitment. Common Shares. All common shares of beneficial interest of the Company, including, without limitation, those offered pursuant to the Equity Prospectus. Common Units. Partnership interests representing the common equity in the Borrower which interests are not subject to any mandatory redemption or entitled to any distributions other than distributions based on the dividends paid on the Common Shares. Company. As defined in the preamble hereto. Conversion Request. A notice given by the Borrower to the Agent of its election to convert or continue a Loan in accordance with Section 2.6. Default. See Section 12.1. Delinquent Lender. See Section 14.5(c). Distribution. The declaration or payment of any dividend or distribution of cash or cash equivalents to the holders of any of the Equity Interests, or any distribution or payment to any officer, employee or director of the Borrower or the Company, other than reasonable employee compensation. Dollars or $. Dollars in lawful currency of the United States of America. 4 Domestic Lending Office. Initially, the office of each Lender designated as such in Schedule 1 hereto; thereafter, such other office of such Lender, if any, located within the United States that will be making or maintaining Base Rate Loans. Drawing. The drawing of any Letter of Credit by the beneficiary thereof which is paid by the Agent pursuant thereto. Drawing Date. The date on which a draft under a Letter of Credit is paid by the Agent. EBITDA. The Borrower's earnings before interest, taxes, depreciation and amortization, as determined on a consolidated basis in accordance with Generally Accepted Accounting Principles, except that rental income shall be determined on a cash basis. Effective Date. The date upon which this Agreement shall become effective pursuant to Section 10. Eligible Assignee. Any of (a) a commercial bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (b) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (c) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; and (d) the central bank of any country which is a member of the OECD. Notwithstanding anything to the contrary, the term Eligible Assignee shall exclude any Person controlling, controlled by or under common control with, the Borrower or the Company. Employee Benefit Plan. Any employee benefit plan within the meaning of Section 3 (3) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate, other than a Multiemployer Plan. Environmental Laws. See Section 6.18(a). Environmental Reports. Reports addressed to the Agent (or addressed to the Borrower with an acceptable reliance letter addressed to the Agent) prepared by environmental engineering firms reasonably acceptable to the Lead Lenders relating to environmental site assessments and other evaluations of environmental conditions which may have been conducted with respect to the Mortgaged Properties described in Schedule 6.18 hereto and conducted with respect to prospective Additional Properties pursuant to Section 5.3. 5 Equity Interests. Collectively, all equity ownership interests in the Borrower or the Company including, without limitation, the Common Shares, the Preferred Shares, the Common Units and the Preferred Units. Equity Prospectus. The prospectus dated November 12, 1997 relating to 12,380,000 Common Shares included in the Registration Statement (No. 333-33547) of the Company on Form S-11 as filed with the Securities Exchange Commission on August 13, 1997, as amended, as the same has been or may be further amended or supplemented from time to time. ERISA. The Employee Retirement Income Security Act of 1974, as amended and in effect from time to time. ERISA Affiliate. Any Person which is treated as a single employer with the Borrower under Section 414 of the Code. ERISA Reportable Event. A reportable event with respect to a Guaranteed Pension Plan within the meaning of Section 4043 of ERISA and the regulations promulgated thereunder as to which the requirement of notice has not been waived. Eurocurrency Reserve Rate. For any day with respect to a Eurodollar Rate Loan, the maximum rate (expressed as a decimal) at which any of the Lenders would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against "Eurocurrency Liabilities" (as that term is used in Regulation D) , if such liabilities were outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on and as of the effective date of any change in the Eurocurrency Reserve Rate and the Agent shall provide the Borrower with prompt written notice of any such change. Eurodollar Business Day. Any day on which commercial banks are open for international business (including dealings in Dollar deposits) in London or such other eurodollar interbank market as may be selected by the Agent in its sole discretion acting in good faith. Eurodollar Lending Office. Initially, the office of each Lender designated as such in Schedule 1 hereto; thereafter, such other office of such Lender, if any, that shall be making or maintaining Eurodollar Rate Loans. Eurodollar Rate. For any Interest Period with respect to a Eurodollar Rate Loan, the rate per annum equal to the quotient (rounded upwards to the nearest 1/16 of one percent) of (a) the rate at which the Agent is offered Dollar deposits two Eurodollar Business Days prior to the beginning of such Interest Period in an interbank eurodollar market where the eurodollar and foreign currency and exchange operations of the Agent are customarily conducted, for delivery on the first day of such Interest Period, for the number of days comprised therein and in an 6 amount comparable to the amount of the Eurodollar Rate Loan to which such Interest Period applies, divided by (b) a number equal to 1.00 minus the Eurocurrency Reserve Rate. Eurodollar Rate Loans. Loans bearing interest calculated by reference to the Eurodollar Rate. Event of Default. See Section 12.1. Fixed Charges. With respect to any fiscal period of the Borrower, an amount determined on a consolidated basis equal to the sum of (i) Interest Expense, (ii) regularly scheduled installments of principal payable with respect to all Indebtedness of Borrower, (iii) Indebtedness which matured during such fiscal period and was not refinanced with replacement Indebtedness plus (iv) all Distributions paid during such period to the holders of any Preferred Shares or Preferred Units. Fixed Rate Prepayment Fee. See Section 3.3. Formation Transactions. The transactions described in the Equity Prospectus to be consummated on or before the Effective Date pursuant to which (i) the Common Shares will be sold pursuant to an initial public offering of such Common Shares and certain Preferred Shares, Common Units and Preferred Units will be sold or issued in exchange for the contribution of properties; (ii) the net proceeds thereof received by the Company will be contributed as capital to the Borrower; (iii) the Borrower will directly or indirectly acquire all assets reflected on the Closing Balance Sheet, and (iv) certain Indebtedness secured by Liens on the Mortgaged Properties or other Real Estate Assets will be repaid and such Liens discharged. Funds From Operations. With respect to any fiscal period of the Borrower, an amount equal to the Borrower's Funds From Operations determined in accordance with the definition approved by the National Association of Real Estate Investment Trusts, except that rental income shall be determined on a cash basis. Generally Accepted Accounting Principles. Principles that are (a) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect from time to time and (b) consistently applied with past financial statements of the Borrower adopting the same principles and with the Prospectus Financial Statements. Guaranteed Pension Plan. Any employee pension benefit plan within the meaning of Section 3(2) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan. 8 Guarantor. Each of the Guarantor Subsidiaries. Guarantor Subsidiaries. The partnerships, limited liability companies and corporations designated as Guarantor Subsidiaries on Schedule 1.3 hereto and any other partnerships, limited liability companies or corporations hereafter approved by the Requisite Lenders which are at least 99% owned by Borrower and which execute and deliver a Guaranty. Guaranty. The Unconditional Guaranty of Payment and Performance from each Guarantor to the Agent pursuant to which such Guarantor has guaranteed the Obligations. Hazardous Materials. See Section 6.18(b). Indebtedness. All obligations, contingent and otherwise, that in accordance with Generally Accepted Accounting Principles should be classified upon the obligor's balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event the following whether or not so classified: (a) the Obligations, (b) all debt and similar monetary obligations for borrowed money, whether direct or indirect; (c) all liabilities secured by any mortgage, pledge, negative pledge, security interest, lien, negative lien, charge, or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; (d) all guarantees, endorsements and other contingent obligations whether direct or indirect in respect of indebtedness or obligations of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through a master lease transaction or an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit; and (e) joint venture and partnership obligations, contingent or otherwise of the type set forth in (a) through (d) above. Indebtedness shall not be deemed to include obligations under a purchase and sale agreement or contribution agreement for the acquisition of assets by Borrower or the Related Companies unless entered into for the purpose of supporting the Indebtedness of the seller or contributor. Indemnity Agreement. The Indemnity Agreement regarding Hazardous Materials from the Borrower and the Company with respect to the Mortgaged Properties, and any similar agreements which may be executed with respect to Additional Properties. Initial Letters of Credit. The Letters of Credit described on Schedule 1.4 hereto. Interest Expense. With respect to any fiscal period of the Borrower, an amount equal to the sum of the following with respect to all Indebtedness of the Borrower and the Related Companies: (i) total interest expense, accrued in accordance with Generally Accepted 8 Accounting Principles plus (ii) all capitalized interest determined in accordance with Generally Accepted Accounting Principles, plus (iii) the amortization of deferred financing costs. Interest Payment Date. As to any Base Rate Loan or Eurodollar Rate Loan, the first day of each calendar month. Interest Period. With respect to each Loan, (a) initially, the period commencing on the Borrowing Date of such Loan and ending on the last day of one of the periods set forth below, as selected by the Borrower in a Loan Request (i) for any Base Rate Loan, the last day of the calendar month; and (ii) for any Eurodollar Rate Loan, 1, 2 or 3 months; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Loan and ending on the last day of one of the periods set forth above, as selected by the Borrower in a Conversion Request; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (A) if any Interest Period with respect to a Eurodollar Rate Loan would otherwise end on a day that is not a Eurodollar Business Day, that Interest Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day; (B) if any Interest Period with respect to a Base Rate Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day; (C) if the Borrower shall fail to give notice as provided in Section 2.6, the Borrower shall be deemed to have requested a conversion of the affected Eurodollar Rate Loan to a Base Rate Loan on the last day of the then current Interest Period with respect thereto; (D) any Interest Period relating to any Eurodollar Rate Loan that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (E) the Borrower may not select any Interest Period relating to any Eurodollar Rate Loan that would extend beyond the Maturity Date. Interest Rate Contracts. Interest rate swaps, caps or similar agreements providing for interest rate protection. Investments. All expenditures made and all liabilities incurred (contingently or otherwise) for the acquisition of stock, partnership or membership interests or Indebtedness of, or for loans, advances, capital contributions or transfers of property to, or in respect of any 9 guaranties (or other commitments as described under Indebtedness), or obligations of, any Person or for the acquisition of real property or other assets. In determining the aggregate amount of Investments outstanding at any particular time Investments shall be counted at their acquisition cost, including the value of any Equity Interests issued in exchange for the contribution of property, subject to the following: (a) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed and still outstanding; (b) there shall be included as an Investment all interest accrued with respect to Indebtedness constituting an Investment unless and until such interest is paid; (c) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution) ; (d) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise, except that accrued interest included as provided in the foregoing clause (b) may be deducted when paid; and (e) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof. IRB Documents. The Indentures of Trust, Financing Agreements, Loan Agreements, Bonds, Notes and other documents relating to the IRB Indebtedness. IRB Indebtedness. The Indebtedness of certain of the Guarantor Subsidiaries with respect to fourteen (14) issues of industrial development bonds, the proceeds of which were used to acquire or develop certain of the Additional Properties listed on Schedule 5.3(b), excluding the Indebtedness of certain Guarantor Subsidiaries with respect to such Properties in Arlington Heights, Illinois for so long as the bonds relating thereto are held by the Borrower or a Related Company. IRB Indebtedness Account. A deposit account established by the Borrower with the Agent into which the Borrower will deposit funds as required by Section 2.8 and which the Agent will debit to reimburse the amount of Drawings paid under the IRB Letters of Credit. IRB Letters of Credit. The Letters of Credit issued with respect to the IRB Indebtedness for the benefit of the respective trustees named in the IRB Documents and the Letter of Credit expiring on or before April 15, 1998 for the benefit of Credit Suisse First Boston, which is the issuer of certain prior letters of credit relating to certain of the IRB Indebtedness. Lead Lenders. BankBoston and Prudential. If a Lead Lender shall enter into one or more assignments pursuant to Section 18 which have the effect of reducing the Commitment of such Lender to less than $20,000,000 (which number will be proportionately reduced in the event of any reduction in the Total Commitment pursuant to Section 2.2), then such Lender shall no longer be a Lead Lender. If by virtue of this immediately preceding sentence there are no longer any Lead Lenders, then all approvals, consents and other matters which require the action by the Lead Lenders hereunder shall thereafter require the specified action by the Requisite Lenders. 10 Leases. Leases, licenses and agreements whether written or oral, relating to the use or occupation of space in or on the Buildings or on the Mortgaged Properties by persons other than Mortgagor, including but not limited to the leases listed on Schedule 6.22(1). Lenders. BankBoston, Prudential and the other lending institutions listed from time to time on Schedule 1 hereto and any other Person who becomes an assignee of any rights of a Lender pursuant to Section 18 or a Person who acquires all or substantially all of the stock or assets of a Lender . Letter of Credit. A letter of credit which is one of the Initial Letters of Credit or is hereafter issued by the Agent for the account of the Borrower pursuant to Section 2.9. Letter of Credit Request. See Section 2.9. Lien. Any lien, encumbrance, mortgage, deed of trust, pledge, restriction or other security interest. If title to any Real Estate Asset is held by a Subsidiary of Borrower then any pledge or assignment of Borrower's stock, partnership interest, limited liability company interest or other ownership interest in such Subsidiary shall be deemed to be a Lien on the Real Estate Assets owned by such Subsidiary. Loan Documents. This Agreement, the Notes, the Guaranties, the Security Documents, the Indemnity Agreement and any and all other agreements, documents and instruments now or hereafter evidencing, securing or otherwise relating to the Loans or the Letters of Credit. Loan Request. See Section 2.5. Loans. Loans made or to be made by the Lenders to the Borrower pursuant to Section 2. Major Lease. A Lease of (i) 100,000 square feet or more of the gross leasable area of a Building which is used primarily for industrial or warehouse purposes or (ii) 25,000 square feet or more of the gross leasable area of a Building which is used primarily for office purposes, and any guaranty of the tenant's obligations under any such Lease. Major Tenants. As to any Major Lease, those tenants that are parties to that Major Lease and any guarantors of those tenants' obligations thereunder. Material Adverse Effect. A material adverse effect on (i) any of the Mortgaged Properties, (ii) the business, results of operations or financial condition of the Borrower and the Related Companies taken as a whole, (iii) the ability of the Borrower, the Company or any Guarantor to perform its obligations under the Loan Documents, or (iv) the validity or enforceability of any of the Loan Documents or the remedies or material rights of the Agent or the Lenders thereunder. 11 Maturity Date. November 17, 2000, or such earlier date on which the Loans shall become due and payable pursuant to the terms hereof. Maximum Principal Amount. Maximum Principal Amount shall mean the least of the following: (i) the maximum Outstanding Principal Amount which may exist without causing a violation of Section 9.1; (ii) the maximum Outstanding Principal Amount which may exist without causing a violation of Section 9.2; and (iii) the Total Commitment. Mortgaged Properties. The (a) Real Estate Assets described on Schedule 1.1 hereto and such other Real Estate Assets which may be subsequently conveyed to the Agent as Additional Properties to secure the Obligations in accordance with Section 5.3 hereof, excluding from the foregoing any Real Estate Assets which the Agent may release pursuant to Section 5.5 hereof, as such Real Estate Assets are more particularly described in the Security Deeds; (b) the Buildings and Building Service Equipment located thereon and (to the extent assignable) all Permits relating thereto; and (c) all other property incident to any of same described in any Security Document or other Loan Document. Mortgagor. With respect to each of the Mortgaged Properties, the owner thereof. Multiemployer Plan. Any multiemployer plan within the meaning of Section 3(37) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate. Net Offering Proceeds. All net cash proceeds received after the date hereof by the Borrower or the Company as a result of the sale of common, preferred or other classes of stock of the Company or the issuance of limited partnership interests in the Borrower after deducting customary costs and discounts of issuance paid by Company or Borrower in connection therewith. Net Operating Income. With respect to any fiscal period of the Borrower and with respect to any one or more of the Real Estate Assets, the total rental and other operating income from the operation of such Real Estate Assets after deducting all expenses and other proper charges incurred by the Borrower in connection with the operation of the Mortgaged Properties during such fiscal period, including, without limitation, real estate taxes, bad debt expenses and management fees (which fees shall not be lower than the market rate for management fees for similar properties in the same general location and such management fees shall be deducted when computing Net Operating Income without regard to the extent to which such management fees are passed through to the tenants), but before payment or provision for Fixed Charges, income taxes, and depreciation, amortization, and other non-cash expenses, all as determined in accordance with Generally Accepted Accounting Principles except that (a) rental income will be determined on a cash basis, provided, however, that each payment of prepaid rent shall be allocated to the period for which it applies, (b) adjustments will be made so that each fiscal 12 quarter will include one quarter of annual real estate tax and insurance expenses, and (c) any non-recurring income or income not directly from the operation of such Real Estate Asset, such as interest income, shall be excluded. Notes. See Section 2.3. Obligations. All indebtedness, obligations and liabilities of the Borrower or any Guarantor to any of the Lenders and the Agent, individually or collectively, under this Agreement or any of the other Loan Documents or in respect of any of the Loans, the Letters of Credit or the Notes or other instruments at any time evidencing any thereof, whether existing on the date of this Agreement or arising or incurred hereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law of otherwise. Outstanding Principal Amount. The sum of (i) the aggregate amount of unpaid principal of the Loans as of any date of determination plus (ii) the aggregate face amount of each Letter of Credit issued under Section 2.9 which has not expired or terminated prior to such date of determination, excluding from the face amount of any Letter of Credit the amount by which any Unreimbursed Drawing has reduced the availability thereunder until such availability is reinstated pursuant to the terms of such Letter of Credit. PBGC. The Pension Benefit Guaranty Corporation created by Section 4002 of ERISA and any successor entity or entities having similar responsibilities. Permits. All governmental permits, licenses, and approvals necessary for the lawful operation and maintenance of the Mortgaged Properties. Permitted Acquisition. The acquisition by Borrower or any Related Company of Real Estate Assets which are located in the continental United States and are leased or intended to be leased primarily for industrial or office purposes. Permitted Joint Ventures. Any entity in which Borrower has any direct or indirect ownership interest, except the Company and the Related Companies and except Prime Group Realty Services, Inc., including general partnerships, corporations, trusts and limited liability companies, which own or propose to develop industrial or office properties provided that neither Borrower or any Guarantor shall have any recourse liability for the Indebtedness of such entity. Permitted Joint Ventures existing on the date hereof are set forth in Schedule 1.3. Permitted Developments. The construction of any new buildings or the construction of additions expanding existing buildings or the rehabilitation of the existing buildings (other than normal refurbishing and tenant fit up work when one tenant leases space previously occupied by another tenant) relating to any Real Estate Assets of the Borrower or any of the Related 13 Companies and each Permitted Development shall be counted for purposes of Section 8.3 from the time of commencement of the applicable construction work until the later of (i) the date that leases for at least 70% of the gross leasable area of such project have been executed or (ii) the date that a final certificate of occupancy has been issued with respect to such project, in the amount of the total projected cost of such project. Permitted Liens. Liens, security interests and other encumbrances permitted by Section 8.2. Person. Any individual, corporation, partnership, trust, unincorporated association, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. Pledge Agreements. The Pledge and Security Agreements between each Guarantor Subsidiary which is a borrower under any IRB Documents and the Agent pursuant to which certain bonds purchased with the proceeds of Drawings under the IRB Letters of Credit would be pledged to the Agent until such bonds are remarketed or redeemed. Pledged Bonds. Bonds pledged to the Agent pursuant to any Pledge Agreement. Preferred Shares. All Preferred Shares of beneficial interest of the Company including, without limitation, the 2,000,000 shares of Series A Cumulative Convertible Preferred Shares as described in the Equity Prospectus. Preferred Units. All partnership interests in the Borrower other than the Common Units, including, without limitation, the Preferred Units described in the Equity Prospectus. Prepayment Date. See Section 3.3. Prime. The Prime Group, Inc., an Illinois corporation. Pro Forma Debt Service Charges for the Mortgaged Properties. For any fiscal quarter of the Borrower, an amount equal to three monthly principal and interest payments based on a twenty-five (25) year mortgage style amortization schedule, calculated on the Pro Forma Principal Amount and an interest rate equal to the greater of (i) the then current weighted average interest rate per annum on the Loans or (ii) the then current ten (10) year U.S. Treasury bill yield plus 1.75% per annum. Pro Forma Principal Amount. (a) With respect to Compliance Certificates delivered pursuant to Section 7.4(e), the maximum Outstanding Principal Amount at any time during the applicable fiscal quarter; (b) with respect to Compliance Certificates delivered pursuant to Section 2.5(a), 2.9(b) or Section 11.1, the Outstanding Principal Amount after giving effect to the requested Loan or the issuance of the requested Letter of Credit; (c) with respect to Compliance 14 Certificates delivered pursuant to Section 5.5(a) or Section 8.4(b), the Outstanding Principal Amount after giving effect to any proposed sale or transfer including any payments on the Loans or cancellation of Letters of Credit to be made in connection therewith. Properties. All Real Estate Assets, Real Estate, and all other assets, including, without limitation, intangibles and personalty owned by the Borrower. Prospectus Financial Statements. The Financial Statements relating to the Company and relating to certain properties to be acquired by the Borrower or its Subsidiaries in connection with the Formation Transactions as set forth in the Equity Prospectus. Prudential. As defined in the preamble thereto. Real Estate. All real property at any time owned, leased (as lessee or sublessee) or operated by the Borrower, any Guarantor, or any of the Related Companies or any Permitted Joint Venture. Real Estate Assets. Those fixed and tangible properties consisting of land, buildings and/or other improvements owned by the Borrower, by any Guarantor, by any of the Related Companies or by any Permitted Joint Venture at the relevant time of reference thereto, including without limitation, the Mortgaged Properties, but excluding all leaseholds other than leaseholds under ground leases having an unexpired term of at least 30 years. Record. The grid attached to any Note, or the continuation of such grid, or any other similar record, including computer records, maintained by any Lender with respect to any Loan referred to in such Note. Recourse Indebtedness. All Indebtedness except Indebtedness with respect to which recourse for payment is contractually limited (except for customary exclusions) to specific assets encumbered by a lien securing such Indebtedness. Register. See Section 18.3. Related Companies. The entities listed and described on Schedule 1.3 hereto, or thereafter, any entity whose financial statements are consolidated or combined with the Borrower's pursuant to Generally Accepted Accounting Principles, or any ERISA Affiliate. Release. See Section 6.18(c)(iii). Requisite Lenders. As of any date, the Lenders whose aggregate Commitments constitute at least sixty-six percent (66%) of the Total Commitment provided that the Agent must always be among the Requisite Lenders (except that after an Event of Default all actions by the 15 Requisite Lenders with respect to acceleration of the Loans and the enforcement of the Loan Documents as provided in Section 12 and in Section 14.11 shall be made without regard to whether the Agent is among the Requisite Lenders) and provided that the Commitments of any Delinquent Lenders shall be disregarded when determining the Requisite Lenders. Reserve Amount. With respect to any Real Estate Assets or group of Real Estate Assets, a normalized annual reserve for capital expenditures, tenant improvements, replacement reserves and leasing costs at the rate of $0.25 per year per square foot of gross leasable area contained in all buildings on such Real Estate Assets. When the Reserve Amount is used in computing an amount with respect to a fiscal period which is shorter than a year, said amount shall be appropriately prorated. Responsible Officer. With respect to the Company, any one of its Chief Executive Officer, Chief Financial Officer, Treasurer or Executive Vice Presidents. Security Deeds. The mortgages and deeds of trust from the Mortgagor to the Agent pursuant to which the Mortgagor shall convey the Mortgaged Properties as security for the Obligations. Security Documents. The Security Deeds, the Assignments of Leases and Rents, the Pledge Agreements and the UCC-1 financing statements. Service Agreements. All service agreements between the Borrower and third parties, whether written or oral, relating to the operation, maintenance, security, finance or insurance of the Mortgaged Properties. Subsidiary. Any corporation, partnership, limited liability company, association, trust, or other business entity of which the designated parent or other controlling Person shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding Voting Interests. Surveys. Instrument surveys of the Mortgaged Properties dated or updated to a date not more than six (6) months prior to the date the applicable property becomes a Mortgaged Property hereunder, which shall show the location of all Buildings, easements and utility lines on the Mortgaged Properties, shall be sufficient to remove the survey exception from the Title Policy, shall show that all Buildings are within the lot lines of the Mortgaged Properties, shall not show any material encroachments by others, and shall show whether or not the Mortgaged Properties are located in any flood hazard district as established by the Federal Emergency Management Agency or any successor agency or are located in any flood plain, flood hazard or wetland protection district established under federal, state or local law and in addition shall meet the then applicable standards of the Agent. 16 Tangible Net Worth. Total Assets minus Total Liabilities minus all intangibles determined in accordance with Generally Accepted Accounting Principles. Title Insurance Company. Chicago Title Insurance Company. Title Policy. For each Mortgaged Property an ALTA standard form title insurance policy issued by the Title Insurance Company (with such reinsurance or co-insurance as the Agent may require, any such reinsurance to be with direct access endorsements) insuring the priority of the Security Deed and Assignment of Leases and Rents and that the Mortgagor holds good and clear record marketable fee simple title to the Mortgaged Property, subject only to the encumbrances permitted by the Security Deed and which shall not contain exceptions for mechanics liens, persons in occupancy (other than Leases listed on Schedule 6.22(1)) or matters which would be shown by a survey (other than matters approved by the Agent in its reasonable discretion), shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to the Agent in its sole discretion (after consultation with the Lead Lenders), and shall contain such endorsements and affirmative insurance as the Agent in its reasonable discretion may require, including but not limited to (a) comprehensive endorsement, (b) variable rate of interest endorsement, (c) usury endorsement, (d) revolving credit endorsement, (e) doing business endorsement, (f) ALTA form 3.1 zoning endorsement, with parking, (g) survey (same-as) endorsement (h) access endorsement, (i) tie-in endorsement, (j) first loss endorsement, and (k) tax parcel endorsement, to the extent that such endorsements are available in the state where the applicable Mortgaged Property is located. Total Adjusted Assets. The sum of (i) the assets classified as cash or cash equivalents on the consolidated balance sheet of Borrower prepared in accordance with Generally Accepted Accounting Principles as of the end of the most recent fiscal quarter (including any restricted cash other than tenant deposits), plus (ii) the product of (a) EBITDA for the most recent two fiscal quarters, times (b) two, divided by (c) 0.0975. To the extent necessary EBITDA used to compute Total Adjusted Assets will be computed on a pro forma basis as though the Formation Transactions had closed, and the Effective Date had been, as of the first day of the applicable period of two fiscal quarters. Total Assets. The aggregate book value of all assets of the Borrower and the Related Companies consolidated and determined in accordance with Generally Accepted Accounting Principles plus accumulated depreciation and amortization related to Real Estate Assets. Total Commitment. The sum of the Commitments of the Lenders, as in effect from time to time. Total Liabilities. The sum of the following (without duplication): (i) all liabilities of the Borrower and the Related Companies consolidated and determined in accordance with Generally Accepted Accounting Principles excluding accounts payable incurred in the ordinary course of 17 business, (ii) all Indebtedness of the Borrower and the Related Companies whether or not so classified, including, without limitation, all outstanding Loans under this Agreement, and (iii) the balance available for drawing under letters of credit issued for the account of the Borrower or any of the Related Companies. Total Operating Cash Flow. With respect to any fiscal period of the Borrower (i) EBITDA minus (ii) the Reserve Amount with respect to all Real Estate Assets owned by the Borrower or any of the Related Companies. Type. As to any Loan its nature as a Base Rate Loan or a Eurodollar Rate Loan. Unreimbursed Drawing. Any Drawing other than a Drawing which is reimbursed by the Agent debiting the IRB Indebtedness Account pursuant to Section 2.8. If any reimbursement from the IRB Indebtedness Account or any part thereof is rescinded or must otherwise be restored or returned by the Agent upon the insolvency, bankruptcy or reorganization of the Borrower or any Guarantor, the Drawing reimbursed thereby shall be deemed to be an Unreimbursed Drawing. Unused Amount. See Section 4.2 Variable Rate Indebtedness. The Loans and all other Indebtedness of the Borrower which bears interest at a rate which is not fixed through the maturity of such Indebtedness. Voting Interests. Stock or similar ownership interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, (a) to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, partnership, trust or other business entity involved, or (b) to control, manage or conduct the business of the corporation, partnership, association, trust or other business entity involved. West Wacker Drive Property. The Mortgaged Property located at 77 West Wacker Drive, Chicago, Illinois, as more particularly described in the Security Deed with respect thereto. Section 1.2. Rules of Interpretation. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. 18 (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms not otherwise defined herein have the meanings assigned to them by Generally Accepted Accounting Principles applied on a consistent basis by the accounting entity to which they refer and, except as otherwise expressly stated, all use of accounting terms with respect to the Borrower shall reflect the consolidated financial statements of Borrower and the Related Companies. (f) The words "include", "includes" and "including" are not limiting. (g) All terms not specifically defined herein or by Generally Accepted Accounting Principles, which terms are defined in the Uniform Commercial Code as in effect in Massachusetts, have the meanings assigned to them therein. (h) Reference to a particular "Section" refers to that section of this Agreement unless otherwise indicated. (i) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Agreement as a whole and not to any particular section or subdivision of this Agreement. (j) The words "so long as any Loan or Note is outstanding" shall mean so long as such Loan or Note is not paid in full in cash. Section 2. REVOLVING CREDIT FACILITY. Section 2.1. Commitment to Lend; Limitation on Total Commitment. Subject to the provisions of Section 2.5 and the other terms and conditions set forth in this Agreement, each of the Lenders severally agrees to lend to the Borrower and the Borrower may borrow, repay, and reborrow from time to time between the Effective Date and the Maturity Date upon notice by the Borrower to the Agent given and approved by the Agent in accordance with Section 2.5, such sums as are requested by the Borrower up to a maximum aggregate principal amount outstanding (after giving effect to all amounts requested) at any one time equal to such Lender's Commitment (minus such Lender's Commitment Percentage of the face amount of the Letters of Credit outstanding), provided that the Outstanding Principal Amount (after giving effect to all amounts requested) shall not at any time exceed the Maximum Principal Amount. The Loans shall be made pro rata in accordance with each Lender's Commitment Percentage and the Lenders shall at all times immediately adjust inter se any inconsistency between each Lender's outstanding principal amount and each Lender's Commitment. Each request for a Loan hereunder shall constitute a representation and warranty by the Borrower that the conditions set forth in Section 10 or Section 11 (whichever is applicable) have been satisfied on the date of such request and will be satisfied on the proposed Borrowing Date of the requested Loan, provided that the making of such 19 representation and warranty by Borrower shall not limit the right of any Lender not to lend upon a determination by the Requisite Lenders that such conditions have not been satisfied. Section 2.2. Reduction of Commitment. The Borrower shall have the right prior to the Maturity Date, upon at least ten (10) Business Days' prior written notice to the Agent, to reduce by $1,000,000 or an integral multiple of $100,000 in excess thereof, a portion of the Total Commitment which exceeds the Outstanding Principal Amount, provided that the Total Commitment shall not be reduced to less than the sum of $100,000,000 plus the aggregate face amount of Letters of Credit then outstanding rounded up to the nearest $1,000,000, whereupon the Commitments of the Lenders shall be reduced pro rata in accordance with their respective Commitment Percentages by the amount specified in such notice. Upon the effective date of any such reduction, the Borrower shall pay to the Agent for the respective accounts of the Lenders the full amount of any commitment fee then accrued on the amount of the reduction. No reduction of the Commitments may be reinstated. Section 2.3. The Notes. The Loans shall be evidenced by separate promissory notes of the Borrower in substantially the form of Exhibit A hereto (each a "Note"), and completed with appropriate insertions. A Note shall be payable to the order of each Lender in a principal amount equal to such Lender's Commitment. The Borrower irrevocably authorizes each Lender to make or cause to be made, at or about the time of the Borrowing Date of any Loan or at the time of receipt of any payment of principal on such Lender's Note, an appropriate notation on such Lender's Record reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on such Lender's Record shall (absent manifest error) be prima facie evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on the Record shall not limit or otherwise affect the obligations of the Borrower hereunder or under any Note to make payments of principal of or interest on any Note when due. Section 2.4. Interest on Loans. (a) Each Base Rate Loan shall bear interest for the period commencing with the Borrowing Date thereof and ending on the last day of the Interest Period with respect thereto at the Base Rate. (b) Each Eurodollar Rate Loan shall bear interest for the period commencing with the Borrowing Date thereof and ending on the last day of the Interest Period with respect thereto at the rate equal to the Applicable Margin per annum above the Eurodollar Rate determined for such Interest Period. (c) The Borrower unconditionally promises to pay interest on each Loan in arrears on each Interest Payment Date with respect thereto. 20 (d) It is the intention of the parties hereto to conform strictly to the usury and similar laws relating to interest from time to time in force, and all agreements among Borrower, Guarantors, the Agent and the Lenders set forth in the Loan Documents are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity of Loans or otherwise, shall the amount paid or agreed to be paid as interest hereunder or under the other Loan Documents exceed the maximum rate or amount of interest permissible under applicable usury laws or such other laws (the "Maximum Interest Amount"). In the event, for any reason whatsoever, any payment by or act of Borrower or any Guarantor pursuant to the terms or pursuant to any requirements of any of the Loan Documents shall result in or require payment of interest which would exceed the Maximum Interest Amount, then ipso facto the obligation of Borrower or such Guarantor, as the case may be, to pay interest or fees or other amounts shall be reduced to the Maximum Interest Amount, so that in no event shall Borrower or any Guarantor be obligated to pay any interest, perform any act, or be bound by any requirement which would result in payment of interest in excess of a sum which is lawfully collectible, and all sums in excess of those lawfully collectible as interest shall, without further agreements or notice between or by any party to this Agreement or any other Loan Document, be deemed applied to pay the principal of the Loans immediately upon receipt of such moneys by Agent or any Lender, with the same force and effect as though Borrower or any Guarantor had specifically designated such sums to be applied to principal prepayment. The provisions of this Section 2.4(d) shall control every other provision of the Loan Documents. Section 2.5. Requests for Loans. The Borrower shall give to the Agent written notice in the form of Exhibit B hereto of each Loan requested hereunder (a "Loan Request") no less than (a) three (3) Business Days prior to the proposed Borrowing Date of any Base Rate Loan and (b) four (4) Eurodollar Business Days prior to the proposed Borrowing Date of any Eurodollar Rate Loan. Each such notice shall specify (i) the principal amount of the Loan requested, (ii) the proposed Borrowing Date of such Loan, (iii) the Interest Period for such Loan, (iv) the Type of such Loan, and (v) the purpose of such Loan, and shall be accompanied by a statement in the form of Exhibit C hereto signed by a Responsible Officer setting forth in reasonable detail computations evidencing compliance with the covenants contained in Section 9 hereof after giving effect to such requested Loan (a "Compliance Certificate"). Within one (1) Business Day after receipt of a Loan Request, the Agent shall provide to each of the Lenders by facsimile a copy of such Loan Request and accompanying Compliance Certificate and each Lender shall, within 24 hours thereafter, notify the Agent if it believes that any of the conditions contained in Section 11 of this Agreement has not been met or waived. If such a notice is given the Requisite Lenders shall promptly determine whether all of the conditions contained in Section 11 of this Agreement have been met or waived. If no such notice is given by any Lender or if following such notice the Requisite Lenders determine that the conditions contained in Section 11 have been met or waived, each of the Lenders shall be obligated to fund its Commitment Percentage of the requested Loans. Each such Loan Request shall be irrevocable and binding on the Borrower and the Borrower shall be obligated to accept the Loan requested from the Lenders on the proposed Borrowing Date. Each 21 Loan Request shall be in a minimum aggregate amount of $3,000,000 or an integral multiple of $1,000,000 in excess thereof. Section 2.6. Conversion Options. (a) The Borrower may elect from time to time to convert any outstanding Loan to a Loan of another Type, provided that (i) with respect to any such conversion of a Eurodollar Rate Loan to a Base Rate Loan, the Borrower shall give the Agent at least three (3) Business Days, prior written notice of such election; (ii) with respect to any such conversion of a Eurodollar Rate Loan into a Base Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto; (iii) subject to the further proviso at the end of this section and subject to Section 2.6(b) and Section 2.6(d) hereof with respect to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the Borrower shall give the Agent at least four (4) Eurodollar Business Days' prior written notice of such election and (iv) no Loan may be converted into a Eurodollar Rate Loan when any Default or Event of Default has occurred and is continuing. On the date on which such conversion is being made, each Lender shall take such action as is necessary to transfer its Commitment Percentage of such Loans to its Domestic Lending Office or its Eurodollar Lending Office, as the case may be. All or any part of outstanding Loans of any Type may be converted as provided herein, provided further that each Conversion Request relating to the conversion of a Base Rate Loan to a Eurodollar Rate Loan shall be for an amount equal to $3,000,000 or an integral multiple of $1,000,000 in excess thereof and shall be irrevocable by the Borrower. (b) Any Loans of any Type may be continued as such upon the expiration of an Interest Period with respect thereto by compliance by the Borrower with the notice provisions contained in Section 2.6 (a); provided that no Eurodollar Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default of which the officers of the Agent active upon the Borrower's account have actual knowledge. (c) In the event that the Borrower does not notify the Agent of its election hereunder with respect to any Loan, such Loan shall be automatically converted to a Base Rate Loan at the end of the applicable Interest Period. (d) The Borrower may not request a Eurodollar Rate Loan pursuant to Section 2.5, elect to convert a Base Rate Loan to a Eurodollar Rate Loan pursuant to Section 2.5(a) or elect to continue a Eurodollar Rate Loan pursuant to Section 2.6(b) if, after giving effect thereto, there would be greater than eight (8) Eurodollar Rate Loans outstanding. Any Loan Request for a Eurodollar Rate Loan that would create greater than eight (8) Eurodollar Rate Loans outstanding shall be deemed to be a Loan Request for a Base Rate Loan. 22 Section 2.7. Funds for Loans. (a) Subject to Section 2.5 and other provisions of this Agreement, not later than 11:00 a.m. (Boston time) on the proposed Borrowing Date of any Loans, each of the Lenders will make available to the Agent, at the Agent's Head office, in immediately available funds, the amount of such Lender's Commitment Percentage of the amount of the requested Loans. Upon receipt from each Lender of such amount, and upon receipt of the documents required by Sections 10 or 11 (whichever is applicable) and the satisfaction of the other conditions set forth therein, to the extent applicable, the Agent will make available to the Borrower the aggregate amount of such Loans made available to the Agent by the Lenders. The failure or refusal of any Lender to make available to the Agent at the aforesaid time and place on any Borrowing Date the amount of its Commitment Percentage of the requested Loans shall not relieve any other Lender from its several obligation hereunder to make available to the Agent the amount of such other Lender's Commitment Percentage of any requested Loans but shall not obligate any other Lender or Agent to fund more than its Commitment Percentage of the requested Loans or to increase its Commitment Percentage. (b) The Agent may, unless notified to the contrary by any Lender prior to a Borrowing Date, assume that such Lender has made available to the Agent on such Borrowing Date the amount of such Lender's Commitment Percentage of the Loans to be made on such Borrowing Date, and the Agent may (but it shall not be required to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If any Lender makes available to the Agent such amount on a date after such Borrowing Date, such Lender shall pay to the Agent on demand an amount equal to the product of (i) the average computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Agent for federal funds acquired by the Agent during each day included in such period, times (ii) the amount of such Lender 's Commitment Percentage of such Loans, times (iii) a fraction, the numerator of which is the number of days or portion thereof that elapsed from and including such Borrowing Date to the date on which the amount of such Lender 's Commitment Percentage of such Loans shall become immediately available to the Agent, and the denominator of which is 365. Section 2.8. IRB Indebtedness Account. On or before each date on which there is scheduled to be a Drawing under any IRB Letter of Credit pursuant to the IRB Documents, the Borrower will deposit in the IRB Indebtedness Account sufficient funds such that there will be available therein on the applicable Drawing Date the amount needed to reimburse the Agent for the amount of such Drawing. The Borrower hereby authorizes the Agent to debit the IRB Indebtedness Account on each Drawing Date as necessary to reimburse the Agent for each draft paid by the Agent pursuant to any IRB Letter of Credit. All payments made by the Agent pursuant to any drafts under the IRB Letters of Credit shall be made from funds of the Agent, but in no event shall any such payments be made with funds from the IRB Indebtedness Account or with any 23 other funds obtained from the Borrower, any Guarantor or any issuer of bonds with respect to any IRB Indebtedness. Section 2.9. Letters of Credit. (a) A portion of the Commitments may be used by Borrower for the issuance of Letters of Credit by the Agent for the account of the Borrower subject to the terms and conditions set forth herein, provided that the aggregate face amount of all Letters of Credit shall not exceed $105,000,000 during the period from the Effective Date until the earlier to occur of (i) the date that the Letter of Credit for the benefit of Credit Suisse First Boston is drawn on so as to reduce the amount available thereunder, or is amended or replaced so as to reduce the face amount thereof, by more than $15,000,000 or (ii) April 16, 1998, and thereafter shall not exceed $90,000,000. Each Letter of Credit shall be denominated in dollars and shall be a either a direct pay IRB Letter of Credit, a direct pay letter of credit supporting bond related Indebtedness similar to the IRB Letters of Credit or a standby letter of credit issued to support the obligations of Borrower in connection with Permitted Developments. Each Letter of Credit shall expire no later than five (5) Business Days prior to the Maturity Date. Although the Agent shall be the issuing bank of the Letter of Credit, each Lender hereby accepts for its own account and risk an undivided interest equal to its Commitment Percentage in the Agent's obligations represented by each Letter of Credit issued hereunder, and unconditionally and irrevocably agrees with the Agent that, upon any Unreimbursed Drawing, such Lender shall promptly pay to the Agent an amount equal to such Lender's Commitment Percentage of the amount of such Unreimbursed Drawing. Upon the issuance of each Letter of Credit hereunder, there shall be reserved from each Lender's Commitment an amount equal to such Lender's Commitment Percentage of the face amount of the Letter of Credit. Such reserved amounts shall remain in place and shall be unavailable for borrowing under Section 2.1 until the date that the Letter of Credit expires or is terminated. (b) If the Borrower shall desire the issuance of any Letters of Credit or the extension or renewal of any outstanding Letters of Credit, it shall give to the Agent a written notice in the form of Exhibit D hereto of each Letter of Credit requested hereunder (a "Letter of Credit Request") no less than ten (10) Business Days prior to the proposed issuance date of the requested Letter of Credit or prior to the expiration date of any Letter of Credit to be renewed or extended. Each Letter of Credit Request shall specify (i) the name and address of the beneficiary of the requested Letter of Credit, (ii) the face amount of the requested Letter of Credit, (iii) the proposed issuance date and expiration date of the requested Letter of Credit, (iv) the proposed form of the requested Letter of Credit, and (v) the permitted purpose for which the Letter of Credit will be used, and shall be accompanied by a Compliance Certificate in the form of Exhibit C hereto signed by a Responsible Officer setting forth in reasonable detail computations evidencing compliance with the covenants contained in Section 9 hereof after including in the Outstanding Principal Amount the face amount of the requested Letter of Credit. The Agent may also require that the Borrower complete its standard letter of credit application form and 24 submit the same and the standard application fee together with the Letter of Credit Request. The Letter of Credit Requests with respect to the Initial Letters of Credit are hereby approved. Within two (2) Business Days after receipt of any other Letter of Credit Request, the Agent shall provide to each of the Lenders by facsimile a copy of such Letter of Credit Request and accompanying Compliance Certificate and each Lender shall, within 24 hours thereafter, notify the Agent if it believes that any of the conditions contained in Section 11 of this Agreement has not been met or waived such that a Loan in an amount equal to the face amount of the requested Letter of Credit could be made on the proposed issuance date of such Letter of Credit. If such a notice is given the Requisite Lenders shall promptly determine whether all of the conditions contained in Section 11 of this Agreement have been met or waived. If no such notice is given by any Lender or if following such notice the Requisite Lenders determine that the conditions contained in Section 11 have been met or waived, and if the Agent determines, in its discretion, that it is willing to issue, extend or renew the requested Letter of Credit, and that it is satisfied with the proposed form thereof, the Letter of Credit shall be issued, extended or renewed by the Agent and each of the Lenders shall then be obligated to the Agent with respect to its Commitment Percentage of the Letter of Credit (as extended or renewed, if applicable) as provided above in Section 2.9(a). (c) On or before the issuance date of any Letters of Credit having an expiration date of one year or less after its issuance date, the Borrower shall pay to the Agent for its own account an issuance fee equal to one-eighth percent (.125%) of the face amount of the Letter of Credit. The issuance fee for any Letter of Credit with a later expiration date will be determined by the Agent. On or before the date of any extension or renewal of a Letter of Credit, the Borrower shall pay to the Agent for its own account a renewal fee for each year of the extension renewal term equal to one-tenth percent (.10%) of the face amount of the applicable Letter of Credit. The Borrower shall pay to the Agent for the account of the Lenders a Letter of Credit fee equal to the then prevailing Applicable Margin per annum of the face amount of the Letter of Credit, which Letter of Credit fee shall be due and payable in advance on the issuance date of the Letter of Credit and on the first day of each calendar quarter for so long as such Letter of Credit remains outstanding, and shall be prorated for any partial quarter and paid for the actual number of days between the issuance date and the expiration date of such Letter of Credit. Promptly after its receipt thereof the Agent shall distribute such Letter of Credit fee to the Lenders pro-rata in accordance with their respective Commitment Percentages. Such fees shall be nonrefundable and shall not be further prorated in the event that the Letter of Credit terminates prior to its scheduled expiration date. The Borrower also agrees to reimburse the Agent for all reasonable fees (consistent with the fee schedule of the Agent's trade services division as then in effect), costs, expenses and disbursements of the Agent in issuing, effecting payment under, amending or otherwise administering any Letter of Credit. (d) Promptly after each Unreimbursed Drawing the Agent shall notify the Lenders and the Borrower of the amount thereof. The payment of each Unreimbursed Drawing shall constitute an advance of a Loan which shall bear interest as a Base Rate Loan from the Drawing Date. On the Drawing Date of each Unreimbursed Drawing, each Lender shall pay to the Agent 25 its Commitment Percentage of the amount of such Unreimbursed Drawing. If the Agent receives such payment from any Lender on a date after the Drawing Date, such Lender shall pay to the Agent on demand an amount computed in the same manner as the amount due to the Agent from a Lender which has made available funds for loans after the Borrowing Date thereof pursuant to Section 2.7(b). Each Lender's obligation to pay its Commitment Percentage of each Unreimbursed Drawing shall not be subject to the satisfaction of the conditions set forth in Section 11. Within three (3) Business Days after each Unreimbursed Drawing, the Borrower shall deliver to the Agent a written explanation of the facts and circumstances relating to such drawing and a Compliance Certificate and any other information requested by the Agent for the purpose of allowing the Lenders to determine whether the drawing or related events have resulted in a Default or Event of Default. The Agent shall promptly provide copies of such explanation and information to the Lenders. (e) The Borrower's obligations under this Section 2.9 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Borrower may have or have had against the Agent, any Lender or any beneficiary of a Letter of Credit. The Borrower also agrees that the Agent shall not be responsible for, and the Borrower's reimbursement obligations hereunder shall not be affected by, among other things, (i) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or (ii) any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (iii) any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Agent shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors, omissions, interruptions or delays for which the Agent is liable under the Uniform Customs and Practices for Documentary Credits. The Borrower assumes all risks of the acts or omissions of any trustee, paying agent, tender agent or remarketing agent under the IRB Indebtedness and the Agent shall not be responsible for any use which may be made of the IRB Letters of Credit. The Borrower agrees that any action taken or omitted by the Agent under or in connection with any Letter of Credit or the related drafts or documents, if done in accordance with the standards of care specified in the Uniform Customs and Practices for Documentary Credits as the same may be amended from time to time, shall be binding on the Borrower and shall not result in any liability of the Agent to the Borrower or to any Guarantor. Section 3. REPAYMENT OF THE LOANS. Section 3.1. Maturity. The Borrower unconditionally promises to pay on the Maturity Date, and there shall become absolutely due and payable on the Maturity Date, all of the Loans outstanding on such date, together with any and all accrued and unpaid interest and charges thereon. Section 3.2. Mandatory Repayments of Loan. If at any time the sum of the Outstanding Principal Amount exceeds the Maximum Principal Amount, then the Borrower shall 26 immediately pay the amount of such excess to the Agent for the respective accounts of the Lenders for application to the Loans. Section 3.3. Optional Repayments of Loans. The Borrower shall have the right, at its election, to repay the outstanding amount of the Loans, as a whole or in part, on any Business Day, without penalty or premium; provided that the full or partial prepayment of the outstanding amount of any Eurodollar Rate Loans made pursuant to this Section 3.3 may be made only on the last day of the Interest Period relating thereto, except as set forth below in this Section 3.3. The Borrower shall give the Agent no later than 10:00 a.m., Boston time, at least three (3) Business Days' prior written notice of any prepayment pursuant to this Section 3.3 of any Base Rate Loans and four (4) Eurodollar Business Days, notice of any proposed repayment pursuant to this Section 3.3 of any Eurodollar Rate Loans, specifying the proposed date of payment of Loans and the principal amount to be paid. Each such partial prepayment of the Loans shall be in an integral multiple of $100,000 and shall be accompanied by the payment of all charges outstanding on all Loans and of accrued interest on the principal repaid to the date of payment and shall be applied, in the absence of instruction by the Borrower, first to the principal of Base Rate Loans and then to the principal of Eurodollar Rate Loans. Notwithstanding anything contained herein to the contrary, the Borrower may make a full or partial prepayment of a Eurodollar Rate Loan on a date other than the last day of the Interest Period relating thereto, if all optional prepayments (in whole or in part) on such Loans shall be accompanied by, and the Borrower hereby promises to pay, a prepayment fee in an amount determined by the Agent in the following manner: (i) Fixed Rate Prepayment Fee. Borrower acknowledges that prepayment or acceleration of a Eurodollar Loan during an Interest Period shall result in the Lenders incurring additional costs, expenses and/or liabilities and that it is impractical to ascertain the extent of such costs, expenses and/or liabilities. (For all purposes of this Section, any Loan not being made as a Eurodollar Rate Loan in accordance with the Loan Request therefor, as a result of Borrower's cancellation thereof, shall be treated as if such Eurodollar Rate Loan had been prepaid.) Therefore, on the date a Eurodollar Rate Loan is prepaid or the date all sums payable hereunder become due and payable, by acceleration or otherwise ("Prepayment Date"), Borrower will pay to Agent, for the account of each Lender, (in addition to all other sums then owing), an amount ("Fixed Rate Prepayment Fee") determined by the Agent to be the amount, if any, by which (i) the amount of interest which would have accrued on the prepaid Eurodollar Rate Loan for the remainder of the Interest Period at the rate applicable to such Eurodollar Rate Loan exceeds (ii) the amount of interest that would accrue for the same period on any readily marketable bond or other obligation of the United States of America designated by the Agent in its sole discretion at or about the time of such payment, such bond or other obligation of the United States of America to be in an amount equal (as nearly as may be) to the amount of principal so paid or not borrowed and to have a maturity comparable to the remainder of such Interest Period, and the interest to accrue thereon to take account of amortization of any discount from par or accretion of premium above par at which the same is selling at the time designation. 27 (ii) Upon the written notice to Borrower from Agent, Borrower shall immediately pay to Agent, for the account of the Lenders, the Fixed Rate Prepayment Fee. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the parties hereto. (iii) Borrower understands, agrees and acknowledges the following: (i) no Lender has any obligation to purchase, sell and/or match funds in connection with the use of the Eurodollar Rate as a basis for calculating the rate of interest on a Eurodollar Rate Loan; (ii) the Eurodollar Rate is used merely as a reference in determining such rate; and (iii) Borrower has accepted the Eurodollar Rate as a reasonable and fair basis for calculating such rate and a Fixed Rate Prepayment Fee. Borrower further agrees to pay the Fixed Rate Prepayment Fee, if any, whether or not a Lender elects to purchase, sell and/or match funds. Section 4. CERTAIN GENERAL PROVISIONS. Section 4.1. Revolving Credit Facility Fees and Agent's Fee. The Borrower agrees to pay to the Lead Lenders and the Agent revolving credit facility fees and agency fees in the amounts specified in the Fee Agreement dated October 20, 1997 among the Lead Lenders, the Borrower, the Company and The Prime Group, Inc. The Lead Lenders shall be responsible for any facility fees which they may agree to pay to the other Lenders which become a party to this Agreement. If the Borrower obtains releases of one or more Mortgaged Properties pursuant to Section 5.5, and simultaneously or thereafter provides Additional Properties pursuant to Section 5.3 and Section 5.4 to replace the Collateral Value of the released property, the Borrower shall pay a substitution fee to the Agent for its own account in the amount of $2,500 per Additional Property. Section 4.2. Commitment Fee. The Borrower shall pay to the Agent for the accounts of the Lenders in accordance with their respective Commitment Percentages a commitment fee calculated at the rates set forth below per annum on the daily amount by which the Total Commitment (as it may have been reduced pursuant to Section 2.2) exceeds the Outstanding Principal Amount (the "Unused Amount"):
Unused Amount Fee Rate - ------------- -------- less than 1/3 of Total Commitment 15 basis points at least 1/3 of Total Commitment but less than 2/3 of Total Commitment 20 basis points at least 2/3 of Total Commitment 25 basis points
The commitment fee shall be payable on the basis of the applicable annual rate quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter commencing on the first such date following the date hereof, with a final payment on the Maturity Date or any earlier date on which the Commitments shall terminate. 28 Section 4.3. Funds for Payments. (a) All payments of principal, interest, closing fees, commitment fees and any other amounts due hereunder (other than as provided in Section 4.1, Section 4.5 and Section 4.6) or under any of the other Loan Documents, and all prepayments, shall be made to the Agent, for the respective accounts of the Lenders, at the Agent's Head Office, in each case in Dollars in immediately available funds. (b) All payments by the Borrower hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory liens, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrower is compelled by law to make such deduction or withholding. If any such obligation is imposed upon the Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrower shall pay to the Agent, for the account of the Lenders or (as the case may be) the Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders or the Agent to receive the same net amount which the Lenders or the Agent would have received on such due date had no such obligation been imposed upon the Borrower. The Borrower will deliver promptly to the Agent certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrower hereunder or under such other Loan Document. Section 4.4. Computations. All computations of interest on the Loans and of other fees to the extent applicable shall be based on a 360-day year and paid for the actual number of days elapsed. Except as otherwise provided in the definition of the term "Interest Period" with respect to Eurodollar Rate Loans, whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. The outstanding amount of the Loans as reflected on the Records from time to time shall (absent manifest error) be considered correct and binding on the Borrower unless within thirty (30) Business Days after receipt by the Agent or any of the Lenders from Borrower of any notice by the Borrower of such outstanding amount, the Agent or such Lender shall notify the Borrower to the contrary. Section 4.5. Additional Costs, Etc. If any present or future applicable law which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to any Lender or the 29 Agent by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall: (a) subject any Lender or the Agent to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement, the other Loan Documents, such Lender's Commitment or the Loans (other than taxes based upon or measured by the income or profits of such Lender or the Agent), or (b) materially change the basis of taxation (except for changes in taxes on income or profits) of payments to any Lender of the principal of or the interest on any Loans or any other amounts payable to any Lender under this Agreement or the other Loan Documents, or (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or commitments of an office of any Lender, or (d) impose on any Lender any other conditions or requirements with respect to this Agreement, the other Loan Documents, the Loans, the Commitment, or any class of loans or commitments of which any of the Loans or the Commitment forms a part; and the result of any of the foregoing is (i) to increase the cost to such Lender of making, funding, issuing, renewing, extending or maintaining any of the Loans or such Lender's Commitment, or (ii) to reduce the amount of principal, interest or other amount payable to such Lender or the Agent hereunder on account of the Commitments or any of the Loans, or (iii) to require such Lender or the Agent to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Lender or the Agent from the Borrower hereunder, then, and in each such case, the Borrower will, upon demand made by such Lender or (as the case may be) the Agent at any time and from time to time and as often as the occasion therefor may arise, pay to such Lender or the Agent, to the extent permitted by law, such additional amounts as will be sufficient to compensate such Lender or the Agent for such additional cost, reduction, payment or foregone interest or other sum. 30 Section 4.6. Capital Adequacy. If any present or future law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction affects the amount of capital required or expected to be maintained by banks or bank holding companies and any Lender or the Agent determines that the amount of capital required to be maintained by it is increased by or based upon the existence of the Loans made or deemed to be made pursuant hereto, then such Lender or the Agent may notify the Borrower of such fact, and the Borrower shall pay to such Lender or the Agent from time to time on demand, as an additional fee payable hereunder, such amount as such Lender or the Agent shall determine in good faith and certify in a notice to the Borrower to be an amount that will adequately compensate such Lender or the Agent in light of these circumstances for its increased costs of maintaining such capital. Each Lender and the Agent shall allocate such cost increases among its customers in good faith and on an equitable basis. Section 4.7. Certificate. A certificate setting forth any additional amounts payable pursuant to Sections 4.5 or 4.6 and a brief explanation of such amounts which are due, submitted by any Lender or the Agent to the Borrower, shall be prima facie evidence that such amounts are due and owing. Section 4.8. Indemnity. In addition to the other provisions of this Agreement regarding any such matters, the Borrower agrees to indemnify each Lender and to hold each Lender harmless from and against any loss, cost or reasonable expense (including loss of anticipated profits) that such Lender may sustain or incur as a consequence of (a) a default by the Borrower in payment of the principal amount of or any interest on any Eurodollar Rate Loans as and when due and payable, including any such loss or expense caused by Borrower's breach or other default and arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Eurodollar Rate Loans, (b) a default by the Borrower in making a borrowing or conversion after the Borrower has given (or is deemed to have given) a Loan Request or a Conversion Request, and (c) the making of any payment of a Eurodollar Rate Loan or the making of any conversion of a Eurodollar Rate Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain any such Eurodollar Rate Loan. Section 4.9. Interest on Overdue Amounts. Overdue principal and (to the extent permitted by applicable law) interest on the Loans and all other overdue amounts payable hereunder or under any of the other Loan Documents shall bear interest compounded monthly and payable on demand at a rate per annum equal to four percent (4%) above the Base Rate until such amount shall be paid in full (after as well as before judgment). In addition, the Borrower shall pay to the Agent a late charge equal to three percent (3%) of any amount of principal and/or interest and/or charges on the Loans which is not paid within ten (10) days of the date when due. 31 Section 4.10. Inability to Determine Eurodollar Rate. In the event, prior to the commencement of any Interest Period relating to any Eurodollar Rate Loan, the Agent shall determine that adequate and reasonable methods do not exist for ascertaining the Eurodollar Rate that would otherwise determine the rate of interest to be applicable to any Eurodollar Rate Loan during any Interest Period, the Agent shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrower) to the Borrower. In such event (a) any Loan Request with respect to Eurodollar Rate Loans shall be automatically withdrawn and shall be deemed a request for Base Rate Loans, (b) each Eurodollar Rate Loan will automatically, on the last day of the then current Interest Period thereof, become a Base Rate Loan, and (c) the obligations of the Lenders to make Eurodollar Rate Loans shall be suspended until the Agent determines that the circumstances giving rise to such suspension no longer exist, whereupon the Agent shall so notify the Borrower. Section 4.11. Illegality. Notwithstanding any other provisions herein, if any present or future law, regulation, treaty or directive or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Rate Loans, such Lender shall forthwith give notice of such circumstances to the Borrower and thereupon (a) the Commitment of such Lender to make Eurodollar Rate Loans or convert Loans of another Type to Eurodollar Rate Loans shall forthwith be suspended and (b) the Eurodollar Rate Loans then outstanding shall be converted automatically to Base Rate Loans on the last day of each Interest Period applicable to such Eurodollar Rate Loans or within such earlier period as may be required by law. The Borrower hereby agrees promptly to pay to the Agent for the account of such Lender, upon demand, any additional amounts necessary to compensate such Lender for any reasonable costs incurred by such Lender in making any conversion in accordance with this Section 4.11, including any interest or fees payable by such Lender to lenders of funds obtained by it in order to make or maintain its Eurodollar Rate Loans hereunder. Section 4.12. Replacement of Lenders. If any of the Lenders shall make a notice or demand upon the Borrower pursuant to Section 4.5, Section 4.6, or Section 4.11 based on circumstances or laws which are not generally applicable to the Lenders organized under the laws of the United States or any State thereof, the Borrower shall have the right to replace such Lender with an Eligible Assignee selected by the Borrower and approved by the Agent. In such event the assignment shall take place on a date set by the Agent at which time the assigning Lender and the Eligible Assignee shall enter into an Assignment and Acceptance as contemplated by Section 18.1 (and clause (d) thereof shall not be applicable) and the assigning Lender shall receive from the Eligible Assignee or the Borrower a sum equal to the outstanding principal amount of the Loans owed to the assigning Lender together with accrued interest thereon plus the accrued commitment fee under Section 4.2 allocated to the assigning Lender. Section 4.13. U.S. Tax Certificates. Each Lender that is organized under the laws of any jurisdiction other than the United States of America or any state or other political subdivision thereof shall deliver to the Agent for transmission to the Borrower, on the date it becomes a 32 Lender, and at such other times as may be necessary in the determination of the Borrower or the Agent (each in the reasonable exercise of its discretion), such certificates, documents or other evidence, properly completed and duly executed by such Lender (including Internal Revenue Service Form 1001 or Form 4224 or any other certificate or statement of exemption required by Treasury Regulations Section 1.1441-4(a) or Section 1.1441-6(c) or any successor thereto) to establish that such Lender is not subject to deduction or withholding of United States federal income tax under Section 1441 or 1442 of the Internal Revenue Code or otherwise (or under any comparable provisions of any successor statute) with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents. Section 5. COLLATERAL SECURITY; NO LIMITATION ON RECOURSE. Section 5.1. Collateral Security. The Obligations shall be secured by (i) a perfected first priority lien and security interest to be held by the Agent (subject only to Permitted Liens) in the Mortgaged Properties, pursuant to the terms of the Security Documents, (ii) a perfected first priority lien and security interest to be held by the Agent in the Leases and rents pursuant to the Assignments of Leases and Rents, (iii) a first priority pledge of any pledged bonds purchased with the proceeds of Drawings under any IRB Letter of Credit pursuant to the Pledge Agreements, and (iv) the Guaranties. Section 5.2. No Limitation on Recourse. Notwithstanding the foregoing Collateral, the Obligations are full recourse obligations of the Borrower (with recourse to its partners limited to the extent provided in Section 28) and, to the extent provided in the applicable Guaranty, of the Guarantors, and all of their respective Real Estate Assets and other properties shall be available for the indefeasible payment in full in cash and performance of the Obligations. Section 5.3. Additional Properties. (a) Additional Real Estate Assets owned by the Borrower or by a Guarantor Subsidiary may become Mortgaged Properties with the approval of the Lead Lenders provided that such Real Estate Assets satisfy the conditions set forth in Section 5.4. In the event that the Lead Lenders grant such approval and all of the conditions set forth in Section 5.4 are satisfied, the Agent shall notify the Borrower and within ten (10) days thereafter the Borrower and the Company shall execute and deliver an Indemnity Agreement and the Mortgagor shall execute and deliver to the Agent a Security Deed, an Assignment of Rents and Leases and UCC-1 Financing Statements, which Security Documents shall be in substantially the form of the Security Documents executed and delivered herewith with such changes as the Agent may deem desirable to address the laws of the State where the Additional Property is located or the factual circumstances of the Additional Property. Such Additional Properties shall be deemed to be Mortgaged Properties upon the recording and filing of such Security Documents and the Agent's receipt of satisfactory evidence thereof. 33 (b) The Lead Lenders hereby approve the Real Estate Assets described on Schedule 5.3(b) which Borrower agrees to add as Mortgaged Properties hereunder on or before December 10, 1997. Upon satisfaction of the conditions set forth in Section 5.4, the Agent shall revise Schedule 1.1 to include such Additional Properties. (c) The Agent and the Lead Lenders shall use their best efforts to complete their review of the documents submitted with respect to each Additional Property and notify the Borrower as to whether the conditions in Section 5.4 are satisfied within ten (10) Business Days after receipt of the last of the items required pursuant to Section 5.4. Section 5.4. Conditions to Approval of Additional Properties. Prior to acceptance of any Real Estate Asset to become an Additional Property pursuant to Section 5.3, such property must satisfy the following conditions, which may be modified or waived only by the written agreement of the Requisite Lenders: (a) If the Additional Property is not owned by the Borrower or an existing Guarantor Subsidiary, but is owned by a Related Company which is at least 99% owned by Borrower, such Related Company must become a Guarantor Subsidiary by delivery to the Agent the following, all in form and substance satisfactory to the Agent: (i) a Guaranty in substantially the form of the Guaranty executed and delivered by the Guarantor Subsidiaries prior to the Effective Date and (ii) good standing certificates, general partner certificates, secretary certificates, opinions of counsel and such other documents as may be reasonably requested by the Agent. (b) An Appraisal of the Additional Property ordered by the Agent and paid for by the Borrower shall have been approved by the Lead Lenders. (c) The Agent shall have received all of the items relating to the Additional Property described in Section 10.8, Section 10.9, Section 10.10, Section 10.12, Section 10.13, Section 10.14, Section 10.16 and Section 10.18 and such items shall have been approved by the Agent or the Lead Lenders as required by such Sections. (d) The Agent shall have received a Certificate executed on behalf of the Borrower containing the representations and warranties with respect to the Additional Property as are set forth in Section 6.18 and Section 6.22, to which there shall be attached a current rent roll for the Additional Property which shall be deemed to supplement and become a part of Schedule 6.22(l) hereto. (e) The Borrower shall have requested estoppel certificates in form reasonably satisfactory to the Agent from the tenants under all Leases of the Additional Property, shall have used its best efforts to obtain all such estoppel certificates and shall have received such estoppel certificates as the Lead Lenders may, in their discretion, require, and all estoppel certificates received shall be satisfactory to the Lead Lenders. 34 (f) The Agent shall have received updated certificates and other items relating to the Borrower, the Company and the applicable Guarantor Subsidiary as described in Section 10.2, Section 10.3 and Section 10.4 and a favorable opinion addressed to the Lenders and the Agent, in form and substance satisfactory to the Lenders and the Agent as to the matters described on Exhibit E relating to the Loan Documents executed by Borrower and/or the Mortgagor with respect to the Additional Property and relating to the laws of the state where the Additional Property is located. Section 5.5. Release of Mortgaged Properties. The Borrower may request that the Agent release any Mortgaged Property from the lien of the Security Documents and the Agent shall approve any such request provided that there is then no continuing Default or Event of Default under this Agreement and the requested release will not result in any Default or Event of Default under this Agreement and the Borrower delivers to the Agent a pro-forma Compliance Certificate reasonably satisfactory to the Agent demonstrating that the requested release will not result in a violation of any of the covenants in Section 9. The Borrower may request releases of a portion of a Mortgaged Property consisting of undeveloped land to be developed by Borrower or sold provided that in addition to the requirements set forth above, the Borrower shall also submit such additional information as may be reasonably requested by the Agent including, without limitation, (i) an updated survey and endorsements to the Title Policy; (ii) an updated Appraisal of the remaining portion of the Mortgaged Property and (iii) evidence that the division of the Mortgaged Property pursuant to the requested release will not result in violation of any zoning ordinance or other applicable laws and ordinances. If the Borrower shall request the release of any Mortgaged Property which is adjacent to any other Mortgaged Property which is not to be simultaneously released, the Agent may require the establishment of appropriate easements and maintenance agreements satisfactory to the Agent relating to any shared utilities, drainage facilities, access drives or walks, parking areas or other shared facilities. Section 6. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Agent and each of the Lenders as follows, and to the extent that the following representations and warranties relate to the Company, the Company represents and warrants to the Agent and each of the Lenders as follows: 35 Section 6.1. Authority; Etc. (a) Organization; Good Standing. The Company (i) is a Maryland real estate investment trust duly organized, validly existing and in good standing under the laws of the State of Maryland, (ii) has all requisite power to own its properties and conduct its business as now conducted and as presently contemplated, and (iii) to the extent required by law is in good standing as a foreign entity and is duly authorized to do business in the States in which the Mortgaged Properties are located and in each other jurisdiction where such qualification is necessary except where a failure to be so qualified in such other jurisdiction would not have a Materially Adverse Effect. The Borrower is a Delaware limited partnership, and each Guarantor Subsidiary is a limited partnership or a limited liability company formed under the laws of Illinois, Tennessee or Delaware, and each such entity is duly organized, validly existing and in good standing under the laws of the State of its formation, has all requisite power to own its properties and conduct its business as presently contemplated and is duly authorized to do business in the States in which the Mortgaged Properties owned by it are located and in each other jurisdiction where such qualification is necessary. (b) Authorization. The execution, delivery and performance of this Agreement and the other Loan Documents to which the Borrower is to become a party and the transactions contemplated hereby and thereby (i) are within the authority of the Borrower, (ii) have been duly authorized by all necessary proceedings on the part of the Borrower and the Company, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower or the Company is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower or the Company and (iv) do not conflict with any provision of the Borrower's partnership agreement or Company's declaration of trust, charter documents or bylaws, or any material agreement or other material instrument binding upon, the Borrower or the Company or to which any of their properties are subject. The execution, delivery and performance of the Guaranty and the other Loan Documents to which any Guarantor is to become a party and the transactions contemplated hereby and thereby (i) are within the authority of such Guarantor, (ii) have been duly authorized by all necessary proceedings on the part of such Guarantor, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which such Guarantor is subject or any judgment, order, writ, injunction, license or permit applicable to such Guarantor and (iv) do not conflict with any provision of such Guarantor's charter documents or bylaws, partnership agreement, limited liability company agreement, declaration of trust, or any agreement or other instrument binding upon such Guarantor or to which any of such Guarantor's properties are subject. (c) Enforceability. The execution and delivery of this Agreement and the other Loan Documents to which the Borrower is or is to become a party will result in valid and legally binding obligations of the Borrower enforceable against it in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, 36 insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. The execution and delivery of this Agreement and the Indemnity Agreement will result in valid and legally binding obligations of the Company enforceable against it in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. The execution and delivery of the Guaranty and the other Loan Documents to which any Guarantor is or is to become a party will result in valid and legally binding obligations of such Guarantor enforceable against such Guarantor in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. Section 6.2. Governmental Approvals. The execution, delivery and performance by the Borrower and each Guarantor of this Agreement and the other Loan Documents to which the Borrower or such Guarantor is or is to become a party and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing with, any governmental agency or authority other than those already obtained and the filing of the Security Documents in the appropriate records office with respect thereto. Section 6.3. Title to Properties. (a) Based on the Title Policies, the Borrower or one of the Guarantor Subsidiaries holds good and clear record and marketable fee simple title to the Mortgaged Properties, subject to no Liens or encumbrances except for the Permitted Liens. (b) Except as indicated on Schedule 6.3 hereto, the Borrower or the Related Companies own all of the properties reflected in the Closing Balance Sheet of the Company, subject to no Liens except Permitted Liens. Section 6.4. Financial Statements. The following financial statements have been furnished to each of the Lenders. (a) The Prospectus Financial Statements. Such Prospectus Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles and fairly present the financial condition of the Borrower and the Company as at the close of business on 37 the Effective Date and the results of operations for the applicable period. There are no direct or contingent liabilities of the Borrower or the Company as of such date involving material amounts, known to the officers of the Company not disclosed in the Closing Balance Sheet of the Company contained in the Prospectus Financial Statements and the related notes thereto. There are no material differences between the Closing Balance Sheet and balance sheet of the Borrower and its subsidiaries prepared on a consolidated basis in accordance with Generally Accepted Accounting Principles prepared on the same basis and as of the same date as the Closing Balance Sheet, other than the line item for the minority interests in the Borrower. (b) With respect to each Mortgaged Property, a statement prepared by the Borrower of the rental and other income of the Borrower from the operation of such Mortgaged Property for each of the previous four (4) fiscal quarters, and all operating and other costs and expenses incurred by the Borrower in connection with such Mortgaged Property during such fiscal quarters, certified by a Responsible Officer of the Company as fairly presenting the results of operation with respect to such Mortgaged Property for such fiscal period. Section 6.5. No Material Changes, Etc. The Formation Transactions and all other events which are the basis for the assumptions used in preparation of the Closing Balance Sheet have happened or will happen on the Effective Date. Since the time of preparation of the Closing Balance Sheet, there has occurred no material adverse change in the financial condition or assets or business of the Borrower as shown on or reflected on the Closing Balance Sheet, nor has there been any material increase in the liabilities of the Borrower or the Company in excess of those shown thereon other than changes in the ordinary course of business that have not had any Material Adverse Effect either individually or in the aggregate. Section 6.6. Franchises, Patents, Copyrights, Etc. The Borrower possesses all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of its business substantially as now conducted without known conflict with any rights of others, including all Permits except to the extent the Borrower's failure to possess the same does not have a Material Adverse Effect. Section 6.7. Litigation. Except as listed and described on Schedule 6.7 hereto, there are no actions, suits, proceedings or investigations of any kind pending or, to Borrower's knowledge, threatened against the Borrower, the Company, any Guarantor or any of the Related Companies before any court, tribunal or administrative agency or board that, if adversely determined, are reasonably expected to, either in any case or in the aggregate, have a Material Adverse Effect or materially impair the right of the Borrower, the Company, any Guarantor or any of the Related Companies to carry on business substantially as now conducted by it, or which question the validity of this Agreement or any of the other Loan Documents, any action taken or to be taken pursuant hereto or thereto, or any Lien or security interest created or intended to be created pursuant hereto or thereto, or which will materially adversely affect the ability of the Borrower 38 or any Guarantor to pay and perform the Obligations in the manner contemplated by this Agreement and the other Loan Documents. Section 6.8. No Materially Adverse Contracts, Etc. The Borrower is not subject to any charter, trust or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected in the future, in the judgment of the Company's officers, to have a Material Adverse Effect. The Borrower is not a party to any contract or agreement that has or is expected, in the judgment of the Company's officers, to have any Material Adverse Effect. The Company is not subject to any charter, trust or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected in the future, in the judgment of the Company's officers, to have a Material Adverse Effect. The Company is not a party to any contract or agreement that has or is expected, in the judgment of the Company's officers, to have any Material Adverse Effect. Section 6.9. Compliance With Other Instruments, Laws, Etc. Neither the Borrower nor the Company is in violation of any provision of the Borrower's partnership agreement, the partnership agreement of any of the Guarantor Subsidiaries or of the Company's declaration of trust, by-laws, or any agreement or instrument to which it may be subject or by which the Borrower or any of its properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could result in the imposition of substantial penalties or have a Material Adverse Effect. Section 6.10. Tax Status. Each of the Guarantor Subsidiaries (a) has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, and (b) has paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 6.11. Event of Default. No Default or Event of Default has occurred and is continuing. Section 6.12. Investment Company Act. The Borrower is not an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940.The Company is not an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940. Section 6.13. Absence of Financing Statements, Etc. There is no financing statement, security agreement, chattel mortgage, real estate mortgage, equipment lease, financing lease, option, encumbrance or other document existing, filed or recorded with any filing records, registry, or other public office, that purports to cover, affect or give notice of any present or possible future 39 Lien or encumbrance on, or security interest in, any Collateral, except those in favor of the Agent or Permitted Liens. Section 6.14. Setoff, Etc. The Collateral and the Agent's rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses. Either the Borrower or a Guarantor is the owner of the Collateral free from any lien, security interest, encumbrance and any other claim or demand, except for the Permitted Liens. Section 6.15. Certain Transactions. Except as disclosed in the Equity Prospectus, none of the officers or employees of the Borrower, the Company or any Guarantor are presently a party to any transaction with the Borrower, the Company or any Guarantor (other than for services as employees, officers and trustees), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, trustee or such employee or, to the knowledge of the Borrower and the Company, any corporation, partnership, trust or other entity in which any officer, trustee or any such employee or natural Person related to such officer, trustee or employee or other Person in which such officer, trustee or employee has a direct or indirect beneficial interest has a substantial interest or is an officer or trustee. Section 6.16. Benefit Plans: Multiemployer Plans: Guaranteed Pension Plans. As of the date hereof as to any Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan, neither the Borrower nor any ERISA Affiliate maintains or contributes to any Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan. To the extent that Borrower, the Company or any ERISA Affiliate hereafter maintains or contributes to any Employee Benefit Plan or Guaranteed Pension Plan, it shall at all times do so in compliance with Section 7.18 hereof. Section 6.17. Regulations U and X. No portion of any Loan is to be used for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. Section 6.18. Environmental Compliance. The Borrower has delivered to the Agent the Environmental Reports with respect to the Mortgaged Properties which are listed on Schedule 6.18. Except as may be set forth in the Environmental Reports with respect to the Mortgaged Properties, or as described on Schedule 6.18 or in the Equity Prospectus with respect to the other Real Estate Assets, Borrower makes the following representations and warranties: (a) To the best of Borrower's knowledge, none of the Borrower, any Guarantor, any of the Related Companies or any operator of the Real Estate or any portion thereof, or any operations thereon is in violation, or alleged material violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive 40 Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment, including, without limitation, the environmental statutes, regulations, orders and decrees of the States in which any of the Real Estate may be located (hereinafter collectively referred to as the "Environmental Laws"), which violation either involves the Mortgaged Properties or would have a Material Adverse Effect. (b) None of the Borrower, Prime, the Guarantors or the Related Companies has received written notice from any third party including, without limitation any federal, state or local governmental authority with respect to any of the Mortgaged Properties, or with respect to any other Real Estate if the same would have a Material Adverse Effect, (i) that it has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous waste, as defined by 42 U.S.C. Section 9601(5), any hazardous substances as defined by 42 U.S.C. Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) or any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws ("Hazardous Materials") which it has generated, transported or disposed of have been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that the Borrower, any Guarantor or any of the Related Companies conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Materials. (c) (i) To the best of Borrower's knowledge no portion of the Real Estate has been used for the handling, processing, storage or disposal of Hazardous Materials except in material compliance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Materials is located on any portion of the Real Estate except in material compliance with applicable Environmental Laws; (ii) to the best of Borrower's knowledge, in the course of any activities conducted by the Borrower, any Guarantor, any of the Related Companies or the operators of any Real Estate, any ground or space tenants on any Real Estate, no Hazardous Materials have been generated or are being used on the Real Estate except in material compliance with applicable Environmental Laws, which in the case of Real Estate other than the Mortgaged Properties would have a Material Adverse Effect; (iii) there has been no present, or to the best of Borrower's knowledge past, releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping (a "Release") or threatened Release of Hazardous Materials on, upon, into or from the Mortgaged Properties or the other Real Estate, which Release in the case of Real Estate other 41 than the Mortgaged Properties would have a Material Adverse Effect and; (iv) to the best of Borrower's knowledge, there have been no Releases on, upon, from or into any real property in the vicinity of any of the Real Estate which, through soil or groundwater contamination, may have come to be located on, and which would have a Material Adverse Effect; and (v) notwithstanding that any representation contained herein may be limited to the knowledge of the Borrower, any such limitation shall not affect the covenants specified in Section 7.10 or elsewhere in this Agreement. Section 6.19. Subsidiaries and Affiliates. The Borrower has no Subsidiaries except for the Related Companies listed on Schedule 1.3 and does not have an ownership interest in any entity whose financial statements are not consolidated with the Borrower's except for the Permitted Joint Ventures listed on Schedule 1.3. The Company is not a partner in any partnership other than Borrower and certain of the Related Companies listed on Schedule 1.3 which are limited partnerships in which the Company has a one tenth percent (0.1%) limited partnership interest, has no Investments in any Person other than the Borrower and such limited partnerships and is not a member of any limited liability company. The Company owns no material assets other than its partnership interest in Borrower and the limited partnership interests described in this Section 6.19. Section 6.20. Major Leases. The Borrower has delivered to the Agent complete copies of the Major Leases and of the other Leases requested by the Agent. Section 6.21. Loan Documents. All of the representations and warranties of the Borrower or any Guarantor made in the other Loan Documents or any document or instrument delivered or to be delivered to the Agent or the Lenders pursuant to or in connection with any of such Loan Documents are true and correct in all material respects. Section 6.22. Mortgaged Properties. In this Section 6.22 the phrase "to the Borrower's knowledge" shall mean the actual knowledge of the officers and employees of the Company or of Prime who have had significant responsibility for the operation, management and leasing of the applicable Mortgaged Property. The Borrower makes the following additional representations and warranties concerning the Mortgaged Properties: (a) Off-Site Utilities. All water, sewer, electric, gas, telephone and other utilities are installed to the property lines of the Mortgaged Properties and, except in the case of drainage facilities, are connected to the Buildings located thereon and to the Borrower's knowledge are adequate to service the Buildings in full compliance with applicable law; and to the Borrower's knowledge the Buildings are properly and legally connected directly to public water and sewer systems. No easements over land of others not yet obtained are required for any such utilities, and no drainage of surface or other water across land of others is required except as disclosed in the Surveys. 42 (b) Surveys, Access; Etc. Since the date of the most recent Survey delivered to the Agent with respect to each Mortgaged Property, there has been no construction (except interior renovations and improvements) of additional Buildings or additions to Buildings on such Mortgaged Property, and to the Borrower's knowledge no takings by eminent domain affecting such Mortgaged Property or other changes which may have caused such Survey to be no longer accurate. (c) Independent Building. The Buildings on each Mortgaged Property (except as described in documents referred in the Title Policy for the West Wacker Drive Property with respect to walkways and other common areas shared by such property with other buildings) are fully independent from any other real estate in all respects including, without limitation, in respect of structural integrity, heating, ventilating and air conditioning, plumbing, mechanical and other operating and mechanical systems, and electrical, sanitation and water systems, all of which are connected directly to off-site utilities located in public streets or ways. Each Mortgaged Property consists of one or more lots which are not assessed for purposes of real estate tax assessment and payment jointly with any land which is not a part of such Mortgaged Property. The Buildings, all Building Service Equipment and all paved or landscaped areas related to or used in connection with the Buildings are located wholly within the perimeter lines of the lot or lots on which the Mortgaged Properties are located except as disclosed in the Surveys. (d) Condition of Building; No Asbestos. Except as set forth in the engineering reports provided to the Agent and listed on Schedule 6.22(d), to the Borrower's knowledge there are no material defects in the roof, foundation, structural elements and masonry walls of the Buildings or their heating, ventilating and air conditioning, electrical, sprinkler, plumbing or other mechanical systems or their Building Service Equipment; the Buildings are fully sprinkled; and no friable asbestos is located in or on the Buildings except as may be disclosed in the Environmental Reports. (e) Building Compliance with Law; Permits. The Buildings as presently constructed and used do not, to the Borrower's knowledge, violate any applicable federal or state law or governmental regulation, or any local ordinance, order or regulation, including but not limited to laws, regulations, or ordinances relating to zoning, building use and occupancy, subdivision control, fire protection, health and sanitation. To the Borrower's knowledge, all Permits required for the operation and maintenance of the Mortgaged Properties, including without limitation, building permits, curb-cut permits, water connection permits, sewer extension or connection permits and other permits relating to the use of utilities, and permits required under the Federal Clean Air Act, as amended, the Federal Clean Water Act, as amended (including, without limitation a so-called Section 404 Permit"), and by state law or regulations consistent with the requirements of said Acts, have been validly issued by the appropriate governmental Persons and are now in full force and effect. 43 (f) No Required Real Property Consents, Permits, Etc. The Borrower has received no notices of, nor has any knowledge of, any Permits, utility installations and connections (including, without limitation, drainage facilities, curb cuts and street openings), or private consents required for the maintenance, operation, servicing and use of the Mortgaged Properties for their current use which have not been granted, effected, or performed and completed (as the case may be) or any fees or charges therefor which have not been fully paid provided, however, that certain Permits may require periodic renewals. (g) Suits; Judgments. To the Borrower's knowledge, there are no outstanding notices, suits, orders, decrees or judgments relating to zoning, building use and occupancy, subdivision control, fire protection, health, sanitation, or other violations affecting, against, or with respect to, the Mortgaged Properties or any part thereof, other than suits, orders, decrees or judgments against tenants or former tenants with respect to defaults by such tenants under their Leases or evicting or otherwise obtaining possession of the premises occupied by such tenants. (h) Insurance. None of the Guarantors, the Company or the Borrower has received any written notices from any insurer or its agent requiring performance of any material work with respect to the Mortgaged Properties or canceling or threatening to cancel any policy of insurance. (i) Real Property Taxes; Special Assessments. Based on the Title Policies, there are no unpaid or outstanding real estate or other taxes or assessments on or against the Mortgaged Properties or any part thereof which are payable by Borrower or tenants (except only real estate taxes and assessments not yet due and payable). Except as disclosed on the Title Policies, and to the Borrower's knowledge there are no betterment assessments or other special assessments presently pending with respect to any portion of the Mortgaged Properties, and Borrower has received no notice of any such special assessment being contemplated. (j) Historic Status. To the Borrower's knowledge, the Buildings are not historic structures or landmarks, and the Mortgaged Properties are not within any historic district pursuant to any federal, state or local law or governmental regulation. (k) Domain. To the Borrower's knowledge, there are no pending eminent domain proceedings against the Mortgaged Properties or any part thereof, and no such proceedings are presently threatened or contemplated by any taking authority. (l) Leases. A rent roll with respect to all Leases of any portion of the Mortgaged Properties (current as of the date set forth thereon) is accurate and completely set forth in Schedule 6.22(1) as the same shall be supplemented each fiscal quarter by a certificate signed by an authorized officer of Borrower. The Leases reflected on such rent roll constitute the sole and complete agreements and understandings relating to leasing or licensing of space in the Buildings or otherwise at the Mortgaged Properties. The Borrower has delivered to the Agent a 44 true and complete copy of all Major Leases. There are no occupancies, rights, privileges or licenses in or to the Buildings or any other part of the Mortgaged Properties other than pursuant to the Leases reflected on the rent roll set forth in Schedule 6. 22(1). Except as set forth in Schedule 6.22(1) the Leases reflected on the Schedule 6.22(1) rent roll are in full force and effect, in accordance with their respective terms, without any payment default or any other material default thereunder, nor to the Borrower's knowledge, are there any defenses, counterclaims, offsets, concessions or rebates available to any tenant thereunder, and the Mortgagor has not given or made, or received, any notice of default, or any material claim, which remains uncured or unsatisfied, with respect to any of the Major Leases and, to the best of the Borrower's knowledge there is no basis for any such claim or notice of default by any tenant. The Schedule 6.22(1) rent roll accurately and completely sets forth all rents payable by tenants, no tenant having paid more than one month's rent in advance. All tenant improvements or work to be done, furnished or paid for by the landlord, or credited or allowed to a tenant, for, or in connection with, the Buildings pursuant to any Lease has been completed and paid for, or provided for in a manner satisfactory to the Agent, or will be paid for by the Borrower in the ordinary course of the Borrower's business. No leasing, brokerage or like commissions, fees or payments are due from the Borrower in respect of the Leases, or will be paid for by the Borrower in the ordinary course of the Borrower's business. Except as set forth on the Schedule 6.22(1) rent roll, all tenants under all Leases are in occupancy and operating the premises covered by such Leases within the permitted uses under such Leases. (m) Service Agreements. Except as listed on Schedule 6.22 (m), there are no Service Agreements relating to the operation and maintenance of the Mortgaged Properties or any part thereof except Service Agreements which may be terminated at the owner's option upon not more than 60 days advance notice. To the best of Borrower's knowledge, no default notices have been given by any party to any Service Agreement. (n) Other Material Real Property Agreements; No Options. Except as listed on Schedule 6.22(n), there are no material agreements pertaining to the Mortgaged Properties or the operation or maintenance thereof other than as described in this Agreement (including the Schedules hereto) or otherwise disclosed in writing to the Agent by the Borrower, and no person or entity has any right or option to acquire any of the Mortgaged Properties or any portion thereof or interest therein or lease any portion thereof or additional portion thereof or provide services thereat. Section 7. AFFIRMATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees as follows, and to the extent that the following covenants relate to the Company, the Company covenants and agrees as follows, so long as any Loan, Note or Letter of Credit is outstanding or the Lenders have any obligations to make Loans or issue Letters of Credit: 45 Section 7.1. Punctual Payment. The Borrower will unconditionally duly and punctually pay the principal and interest on the Loans and all other amounts provided for in the Note, this Agreement, and the other Loan Documents all in accordance with the terms of the Note, this Agreement and the other Loan Documents. Section 7.2. Maintenance of Office. Each of the Borrower and the Company will maintain its chief executive office in Chicago, Illinois or at such other place in the United States Of America as the Borrower or the Company shall designate upon written notice to the Agent to be delivered within fifteen (15) days of such change, where notices, presentations and demands to or upon the Borrower or the Company in respect of the Loan Documents may be given or made. Section 7.3. Records and Accounts. Each of the Borrower and the Company will keep true and accurate records and books of account in which full, true and correct entries will be made in accordance with Generally Accepted Accounting Principles. Section 7.4. Financial Statements, Certificates and Information. The Borrower will deliver to each of the Lenders: (a) as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year of the Borrower, the audited balance sheet of the Borrower and of the Company at the end of such year, and the related audited statement of income, statement of changes in shareholders, equity and statement of Funds From Operations and taxable income for such year, each setting forth in comparative form the figures for the previous fiscal year and all such statements to be in reasonable detail, prepared in accordance with Generally Accepted Accounting Principles on a consolidated basis including the Borrower, the Company and the Related Companies, and accompanied by an auditor's report prepared without qualification by Ernst & Young LLP or by another independent certified public accountant reasonably acceptable to the Agent; (b) as soon as practicable, but in any event not later than forty-five (45) days after the end of each fiscal quarter of the Borrower, copies of the unaudited balance sheets of the Borrower as at the end of such quarter, and the related unaudited statement of income, statement of changes in shareholders' equity and statement of Funds From Operations and estimated taxable income for the portion of the Borrower's fiscal year then elapsed, all in reasonable detail and prepared in accordance with Generally Accepted Accounting Principles, together with a certification by the principal financial or accounting officer of the Company that the information contained in such financial statements fairly presents the financial position of the Borrower and of the Company on the date thereof (subject to year-end adjustments), provided, however, that such information with respect to the quarter ended September 30, 1997 shall be delivered by December 29, 1997; 46 (c) as soon as practicable, but in any event not later than forty-five (45) days after the end of each of the fiscal quarters of the Borrower, copies of a statement of the Net Operating Income for such fiscal quarter for each Mortgaged Property, and a consolidating statement of the Net Operating Income for such fiscal quarter for all of the Mortgaged Properties, prepared on a basis consistent with the statements furnished pursuant to Section 6.4 (b), and certified by a Responsible Officer of the Company; (d) as soon as practicable, but in any event no later than forty-five (45) days after the end of each fiscal quarter of the Borrower, the Borrower will provide the Agent with , a rent roll for each of the Mortgaged Properties, and a consolidated rent roll for all of the Mortgaged Properties, each dated as of the end of such fiscal quarter in form reasonably satisfactory to the Agent; (e) simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, a statement in the form of Exhibit C hereto signed by a Responsible Officer of the Company and setting forth in reasonable detail computations evidencing compliance with the covenants contained herein and (if applicable) reconciliations to reflect changes in Generally Accepted Accounting Principles since the Effective Date; (f) as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year of the Company, copies of the Form 10-K statement filed with the Securities and Exchange Commission ("SEC") for such fiscal year, and as soon as practicable, but in any event not later than forty-five (45) days after the end of each fiscal quarter, copies of the Form 10-Q statement filed with the SEC for such fiscal quarter, provided that in either case if the SEC has granted an extension for the filing of such statements (or if a later filing is permitted by rule of the SEC with respect to the fiscal quarter ended September 30. 1997), Borrower shall deliver such statements to the Agent simultaneously with the filing thereof with the SEC; (g) promptly following the filing or mailing thereof, copies of all other material of a financial nature filed with the SEC or sent to the shareholders of the Company or to the limited partners of the Borrower and copies of all press releases (except local press releases relating to specific properties) promptly upon the issuance thereof; (h) from time to time such other financial data and information (including accountants' management letters) as the Agent may reasonably request; Section 7.5. Notices. (a) Defaults. The Borrower will promptly notify the Agent in writing of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting a Default or an Event of Default under this Agreement) under any note, evidence of Indebtedness, indenture or other 47 obligation to which or with respect to which the Borrower, the Company, any Guarantor or any of the Related Companies is a party or obligor, whether as principal or surety, and if the principal amount thereof exceeds $1,000,000, and such default would permit the holder of such note or obligation or other evidence of Indebtedness to accelerate the maturity thereof, the Borrower shall forthwith give written notice thereof to the Agent and each of the Lenders, describing the notice or action and the nature of the claimed default. (b) Environmental Events. The Borrower will promptly notify the Agent in writing of any of the following events: (i) upon Borrower's obtaining knowledge of any violation of any Environmental Law regarding a Mortgaged Property or any Real Estate or Borrower's operations which violation could have a Material Adverse Effect; (ii) upon Borrower's obtaining knowledge of any potential or known Release, or threat of Release, of any Hazardous Materials at, from, or into a Mortgaged Property or any Real Estate which it reports in writing or is reportable by it in writing to any governmental authority and which is material in amount or nature or which could materially affect the value of such Mortgaged Property or which could have a Material Adverse Effect; (iii) upon Borrower's receipt of any notice of violation of any Environmental Laws or of any Release or threatened Release of Hazardous Materials, including a notice or claim of liability or potential responsibility from any third party (including without limitation any federal, state or local governmental officials) and including notice of any formal inquiry, proceeding, demand, investigation or other action with regard to (A) Borrower's or any Person's operation of a Mortgaged Property or any Real Estate if the same would have a Material Adverse Effect, (3) contamination on, from or into a Mortgaged Property or any Real Estate if the same would have a Material Adverse Effect, or (C) investigation or remediation of off-site locations at which Borrower or any of its predecessors are alleged to have directly or indirectly disposed of Hazardous Materials; or (iv) upon Borrower's obtaining knowledge that any expense or loss has been incurred by such governmental authority in connection with the assessment, containment, removal or remediation of any Hazardous Materials with respect to which Borrower, Guarantor or any of the Related Companies may be liable or for which a lien may be imposed on a Mortgaged Property. (c) Notification of Liens or other Material Claims. The Borrower will, immediately upon becoming aware thereof, notify the Agent in writing of any of any Liens (except Permitted Liens) placed upon or attaching to any Mortgaged Properties or of any other setoff, claims (including environmental claims), withholdings or other defenses which could have a Material Adverse Effect. (d) Notice of Litigation and Judgments. The Borrower will give notice to the Agent in writing within fifteen (15) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting any of the Mortgaged Properties or affecting the Borrower, the Company, any Guarantor or any of the Related Companies or to which the Borrower, the Company, any Guarantor or any of the Related Companies is or is to become a party involving an uninsured claim (or as to which the insurer 48 reserves rights) against the Borrower, the Company, any Guarantor or any of the Related Companies that at the time of giving of notice could reasonably be expected to have a Materially Adverse Effect, and stating the nature and status of such litigation or proceedings. The Borrower will give notice to the Agent, in writing, in form and detail satisfactory to the Agent, within ten (10) days of any final judgment not covered by insurance against the Borrower, the Company, any Guarantor or any of the Related Companies in an amount in excess of $500,000. (e) Notice of Default under Major Leases. The Borrower will immediately notify the Agent in writing of the occurrence of any failure of any of the Major Tenants to materially comply with any of the material terms, covenants, conditions or agreements under any of the Major Leases. (f) Notice of Equity Prospectus Amendment. The Company will promptly notify the Lenders of any further amendment to the Equity Prospectus, which notice shall include a copy of any such amendment. (g) Notice of Expected Receipt of Net Offering Proceeds. At least three (3) Business Days prior to the date on which the Company or the Borrower expects to receive Net Offering Proceeds, the Borrower or the Company, as applicable will notify the Agent of the expected amount of Net Offering Proceeds and the expected date of receipt thereof and shall immediately notify the Agent of any changes in the information set forth in such notice. Section 7.6. Existence; Maintenance of REIT Status; Maintenance of Properties. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence as a Maryland trust and its status as a self administered real estate investment trust under the Code, the existence of Borrower as a Delaware limited partnership and the existence of each Guarantor Subsidiary. The Borrower will do or cause to be done all things necessary to preserve and keep in full force all of its rights and franchises which in the judgment of the Borrower may be necessary to properly and advantageously conduct the businesses being conducted by it, the Company or any of the Related Companies. The Borrower (a) will cause all of the properties used or useful in the conduct of the business of Borrower, the Company or any of the Related Companies to be maintained and kept in good condition, repair and working order, subject to ordinary wear and tear, and supplied with all necessary equipment, (b) will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Borrower may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and (c) will continue to engage primarily in the businesses now conducted by it and in related businesses. Section 7.7. Insurance. The Borrower will maintain insurance on the Mortgaged Properties as required by the Security Deeds. With respect to other properties and businesses of Borrower, the Guarantors and the Related Companies, the Borrower will maintain or cause to be maintained insurance with financially sound and reputable insurers against such casualties and contingencies 49 in amounts, containing such terms, in such forms and for such periods as may be reasonable and prudent in the judgment of the Company's officers. Section 7.8. Taxes. The Borrower will pay real estate taxes, other taxes, assessments and other governmental charges against the Mortgaged Properties before the same become delinquent, and will duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon it and its other properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon any of its properties; provided that any such tax, assessment, charge, levy or claim with respect to properties other than the Mortgaged Properties need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if the Borrower shall have set aside on its books adequate reserves with respect thereto; and provided further that the Borrower will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. Promptly after payment of real estate taxes, other taxes, assessments and other governmental charges against the Mortgaged Properties, Borrower will provide evidence of such payments to the Agent, in the form of receipted tax bills or other form reasonably acceptable to the Agent. Notwithstanding anything contained herein to the contrary, with respect to the Mortgaged Properties, Borrower, after receipt of notice from the Agent (which notice may be given by the Agent at any time after the occurrence of an Event of Default) , shall deposit with Agent, on the first day of each month thereafter, a sum determined by Agent to be sufficient to provide, in the aggregate, a fund adequate to pay all real estate taxes, other taxes, assessments and other governmental charges against the Mortgaged Properties at least ten (10) days before the same becomes delinquent; and whenever the Agent determines sums accumulated under such escrow to be insufficient to meet the obligations for which such deposits were made, the Borrower shall pay, on the demand of the Agent, any amount required to cover the deficiency therein. Section 7.9. Inspection of Properties and Books; Confidential Information. The Borrower shall permit the Lenders, through the Agent or any of the Lenders' other designated representatives, to visit and inspect any of the Mortgaged Properties, to examine the books of account of the Borrower, the Company and the Related Companies (and to make copies thereof and extracts therefrom) and to discuss the affairs, finances and accounts of the Borrower with, and to be advised as to the same by, its officers, all at such reasonable times and intervals as the Agent or any Lender may reasonably request. Each Lender understands that in the course of its exercise of its rights set forth herein, the Lender may obtain information relating to Borrower or the Company or a Property which is of a confidential nature (the "Confidential Information"). Each Lender agrees that it will not, at any time, divulge, publish or disclose, or authorize or permit any other person to divulge, publish or disclose, to any Person, any of the Confidential Information, provided, however, that the Confidential Information may be disclosed by any Lender (a) to its officers, attorneys, and accountants, (b) to any regulator or other governmental 50 agency with supervisory authority over the business of such Lender, (c) to any other Person to the extent required by applicable law or regulation, and (d) to the extent that such Confidential Information is otherwise publicly available from sources other than such Lender. Section 7.10. Compliance with Laws, Contracts, Licenses, and Permits. The Borrower will comply in all material respects, the Company will comply in all material respects and the Borrower will cause each Guarantor and all Related Companies to comply in all material respects, with (a) all applicable laws and regulations now or hereafter in effect wherever its business is conducted, including all Environmental Laws, (b) the provisions of all applicable partnership agreements, charter documents and by-laws, (c) all agreements and instruments to which it is a party or by which it or any of its Real Estate Assets may be bound including the Leases, and (d) all applicable decrees, orders, and judgments. Section 7.11. Use of Proceeds. Subject to the provisions of Section 2.5 hereof, the proceeds of the Loans shall be used by the Borrower for Permitted Acquisitions and Permitted Developments, for refinancing other Indebtedness, and for working capital and other purposes consistent with the covenants contained herein. Section 7.12. Appraisals. The Appraised Values of the Mortgaged Properties, including the Appraised Values of Additional Properties determined pursuant to Appraisals approved by the Requisite Lenders pursuant to Section 10.14 and Section 5.4(b), may increase or decrease only upon the approval by the Lead Lenders of a new or updated Appraisal of such Mortgaged Property. The Agent shall order a new or updated Appraisal of a Mortgaged Property (i) promptly following a written request from the Borrower, (ii) in the discretion of the Agent if the occupied percentage of the gross leasable area of the Buildings on such Mortgaged Property for two (2) consecutive fiscal quarters is more than 20 percentage points lower than the occupancy percentage shown on the rent roll for such Mortgaged Property attached as Schedule 6.22(l) hereto, (iii) if, in the Agent's opinion, there has been a substantial adverse change in market conditions; (iv) as may be required by regulatory requirements applicable to any Lender; and (v) following an Event of Default, if requested by any Lender. The Borrower shall provide to the Agent all available information needed to assist in the preparation of an Appraisal and shall pay to the Agent on demand all reasonable costs of all such Appraisals. Section 7.13. Leases; Lease Approvals. The Borrower will not include in any Leases any purchase option or right of first refusal to purchase any Mortgaged Property. The Borrower will at all times exercise or enforce its material rights under the Leases. During the continuance of an Event of Default, the Agent shall have the right, and the Borrower hereby authorizes the Agent, to communicate directly with any of the tenants or guarantors for any purpose contemplated by this Agreement or any of the Security Documents. Any proposed lease which would be a Major Lease shall be submitted to and approved by the Lead Lenders prior to execution, along with the most recent financial statements of such proposed tenant and any guarantor. The Borrower will not materially adversely amend, terminate, or accept a surrender of any Major Lease or release 51 any Major Tenant or waive the material performance of a Major Lease by a Major Tenant, in each case without prior approval of the Lead Lenders. The Lead Lenders shall not unreasonably withhold their approval of any Major Lease or amendment thereof. If the Lead Lenders fail to respond within five (5) Business Days after receipt of any proposed Major Lease or amendment of a Major Lease, the same shall be deemed to be approved. Section 7.14. Further Assurance. The Borrower will cooperate with the Agent and the Lenders and execute such further instruments and documents and perform such further acts as the Agent and the Lenders shall reasonably request to carry out to their satisfaction the transactions contemplated by this Agreement and the other Loan Documents and the granting and perfecting of all liens in the Collateral for the benefit of the Agent as agent for the Lenders. Section 7.15. Environmental Indemnification. Each of the Borrower and the Company, jointly and severally, covenants and agrees that it will indemnify and hold the Agent and each Lender harmless from and against any and all claims, expense, damage, loss or liability incurred by the Agent or any Lender (including all reasonable costs of legal representation incurred by the Agent or any Lender , but excluding, as applicable, for the Agent or a Lender any claim, expense, damage, loss or liability as a result of the gross negligence or willful misconduct of the Agent or such Lender ) relating to (a) any Release or threatened Release of Hazardous Materials on, upon, into or from any Mortgaged Property or any Real Estate; (b) any violation of any Environmental Laws with respect to conditions at any Mortgaged Property or the operations conducted thereon; or (c) the investigation or remediation of off-site locations at which the Borrower or its predecessors are alleged to have directly or indirectly disposed of Hazardous Materials. It is expressly acknowledged by the Borrower that this covenant of indemnification shall survive any foreclosure or any modification, release or discharge of any or all of the Security Documents or the payment of the Loans and shall inure to the benefit of the Agent and the Lenders, and their successors and assigns. Section 7.16. Response Actions. The Borrower covenants and agrees that if any Release or disposal of Hazardous Materials shall occur or shall have occurred on, upon, into or from any Mortgaged Property, or on, upon, into or from any other Real Estate if the same would have a Material Adverse Effect, the Borrower will cause the prompt containment and removal of such Hazardous Materials and remediation of such Mortgaged Property or Real Estate as necessary to comply in all material respects with all applicable Environmental Laws or to preserve the value of such Mortgaged Property. Section 7.17. Environmental Assessments. The Borrower shall diligently and continuously comply with all recommendations set forth in the Environmental Reports, including, without limitation, the completion of the remediation projects described therein. Upon written request, the Borrower shall provide the Agent with periodic reports with respect to the progress of said remediation projects. If the Agent in its good faith judgment, after discussion with the Borrower and the Lead Lenders, has reason to believe that the environmental condition of any 52 Mortgaged Property has deteriorated, after reasonable notice by the Agent, whether or not a Default or an Event of Default shall have occurred, the Agent may, from time to time, for the purpose of assessing and ensuring the value of such Mortgaged Property, obtain one or more environmental assessments or audits of such Mortgaged Property prepared by a hydrogeologist, an independent engineer or other qualified consultant or expert approved by the Agent to evaluate or confirm (i) whether any Hazardous Materials are present in the soil or water at such Mortgaged Property in such quantities as to require remediation or clean-up to prevent or mitigate damage or threats to the public health, safety or welfare or the environment and (ii) whether the use and operation of such Mortgaged Property complies in all material respects with all applicable Environmental Laws. Environmental assessments may include without limitation detailed visual inspections of such Mortgaged Property including, without limitation, any and all storage areas, storage tanks, drains, dry wells and leaching areas, and the taking of soil samples, surface water samples and ground water samples, as well as such other investigations or analyses as the Agent deems appropriate. All such environmental assessments shall be at the sole cost and expense of the Borrower; provided, however, the Agent may not require environmental assessments at the Borrower's expense, with respect to any Mortgaged Property, more frequently than annually except (i) during the continuance of an Event of Default or (ii) upon the occurrence of a Release on, upon, into or from any Mortgaged Property. Section 7.18. Employee Benefit Plans. (a) Representation. The Borrower and its ERISA Affiliates do not currently maintain or contribute to any Employee Benefit Plan, Guaranteed Pension Plan or Multiemployer Plan. (b) Notice. The Borrower will notify the Agent promptly following the establishment of any Employee Benefit Plan or Guaranteed Pension Plan by the Borrower or any ERISA Affiliate. (c) In General. Each Employee Benefit Plan maintained by the Borrower or any ERISA Affiliate will be operated in compliance in all material respects with the provisions of ERISA and, to the extent applicable, the Code, including but not limited to the provisions thereunder respecting prohibited transactions. (d) Terminability of Welfare Plans. With respect to each Employee Benefit Plan maintained by the Borrower or an ERISA Affiliate which is an employee welfare benefit plan within the meaning of Section 3(1) or Section 3(2)(B) of ERISA, the Borrower, or the ERISA Affiliate, as the case may be, has the right to terminate each such plan at any time (or at any time subsequent to the expiration of any applicable bargaining agreement) without liability other than liability to pay claims incurred prior to the date of termination. 53 (e) Multiemployer Plans. Without the consent of the Agent, the Borrower will not enter into, maintain or contribute to, any multiemployer Plan. (f) Unfunded or Underfunded Liabilities. The Borrower will not, at any time, have accruing unfunded or underfunded liabilities with respect to any Employee Benefit Plan, Guaranteed Pension Plan or Multiemployer Plan, or permit any condition to exist under any Multiemployer Plan that would create a withdrawal liability. Section 7.19. Required Interest Rate Contracts. The Borrower shall maintain in effect the Interest Rate Contracts in form and substance reasonably satisfactory to the Lead Lenders with respect to that portion of the Variable Rate Indebtedness which exceeds, excluding the IRB Indebtedness, the principal amount of $125,000,000. Section 7.20. Equity Interests in the Company. The Company will comply in all material respects with all applicable rules and regulations of the Securities Exchange Commission and of relating to its publicly held Common Shares and Preferred Shares. The Company will continue to have its Common Shares listed on the New York Stock Exchange or on one of the other major stock exchanges in the United States, and will comply in all material respects with all applicable rules of the stock exchange where the Common Shares are so listed. Immediately upon the receipt of any Net Offering Proceeds, 100% thereof shall be contributed to the Borrower as an additional capital contribution with respect to the Company's general partnership interest in the Borrower. Section 8. CERTAIN NEGATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees as follows, and to the extent that the following covenants relate to the Company, the Company covenants and agrees as follows, so long as any Loan, Note or Letter of Credit is outstanding or the Lenders have any obligation to make any Loans or issue any Letters of Credit: Section 8.1 Restrictions on Indebtedness. Except with the prior written consent of the Requisite Lenders, the Borrower will not, the Company will not, and the Borrower will not permit any Guarantor, any of the Related Companies or any Permitted Joint Venture to create, incur, assume, guarantee or become or remain liable, contingently or otherwise, or agree not to do any of same with respect to any Indebtedness other than: (a) Indebtedness to the Lenders arising under any of the Loan Documents; (b) current liabilities of the Borrower incurred in the ordinary course of business but not incurred through (i) the borrowing of money, or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services; 54 (c) Indebtedness in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 7.8; (d) Indebtedness in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which the Borrower shall at the time in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution shall have been obtained pending such appeal or review; (e) endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business; (f) Indebtedness of Borrower, the Company or the Related Companies to the extent the same does not create a violation of Section 9.3, Section 9.5 or Section 9.6 provided that the maximum principal amount of Recourse Indebtedness permitted under this paragraph shall not exceed $50,000,000 in the aggregate at any time outstanding. Section 8.2. Restrictions on Liens, Etc. The Borrower will not, and will not permit Guarantor, any of the Related Companies or any Permitted Joint Venture to, (a) create or incur or agree not to create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest of any kind upon any of the Mortgaged Property of any character whether now owned or hereafter acquired, or upon the rents, income or profits therefrom; (b) suffer to exist for a period of more than thirty (30) days after the same shall have been incurred any Indebtedness (not permitted by Section 8.1(c)) or claim or demand against it that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over the Security Documents; or (c) sell, assign, pledge or otherwise transfer any rents, issues, profits, accounts, contract rights or general intangibles relating to any of the Mortgaged Premises; provided that the Borrower may create or incur or suffer to be created or incurred or to exist: (i) liens to secure taxes, assessments and other governmental charges in respect of obligations not overdue, the Indebtedness with respect to which is permitted by Section 8.1(c); (ii) deposits or pledges made in connection with, or to secure payment of, workmen's compensation, unemployment insurance, old age pensions or other social security obligations; (iii) liens in respect of judgments or awards, the Indebtedness with respect to which is permitted by Section 8.1(d); 55 (iv) liens of carriers, warehousemen, mechanics and materialmen, and other like liens on properties other than the Mortgaged Properties in existence less than 120 days from the date of creation thereof in respect of obligations not overdue, the Indebtedness with respect to which is permitted by Section 8.1(c); (v) encumbrances consisting of easements, rights of way, covenants, restrictions on the use of real property and defects and irregularities in the title thereto; and other minor liens or encumbrances none of which in the opinion of the Borrower interferes materially with the use of the property affected in the ordinary conduct of the business of the Borrower, and which matters (x) do not individually or in the aggregate have a materially adverse effect on the value of the Mortgaged Property and (xx) do not make title to such property unmarketable by the conveyancing standards in effect where such property is located; (vi) the Leases referenced on Schedule 6.22(l) and any other Leases permitted by this Agreement or otherwise approved by the Lead Lenders; (vii) presently outstanding liens and other encumbrances on the Mortgaged Properties listed on Schedule B to the Title Policies; and (viii) liens in favor of the Agent and/or any of the Lenders granted pursuant to the Security Documents. (ix) financing statements disclosed by the searches described in Section 10.18, provided that to the extent that the Lead Lenders may agree that the Borrower will have a certain time period after the Effective Date to obtain and file releases or terminations of certain of such financing statements, the same shall be Permitted Liens only during such time period as the Lead Lenders may so agree. Section 8.3. Restrictions on Investments. The Borrower will not, and will not permit any Guarantor, any of the Related Companies or any Permitted Joint Venture to make or permit to exist or to remain outstanding any Investment except Investments in: (a) marketable direct or guaranteed obligations of the United States of America that mature within one (1) year from the date of purchase by the Borrower; (b) demand deposits, certificates of deposit, repurchase agreements, bankers acceptances and time deposits of United States banks having total assets in excess of $1,000,000,000; (c) securities commonly known as "commercial paper" issued by a corporation organized and existing under the laws of the United States of America or any state thereof that at 56 the time of purchase have been rated and the ratings for which are not less than "P 1" if rated by Moody's Investors Services, Inc. , and not less than "A 1" if rated by Standard and Poor's; (d) Investments existing or contemplated on the date hereof and listed on Schedule 8.3(d) hereto; (e) Investments made in the ordinary course of the Borrower's business, in (i) any mortgages the acquisition of which is expressly approved by the Lead Lenders, (ii) mortgages and notes receivable having an aggregate principal amount, exclusive of any investments in mortgages which may have been so expressly approved by the Lead Lenders, of not more than $25,000,000, (iii) Permitted Joint Ventures (to the extent permitted by Section 8.4(a)), or (iv) Interest Rate Contracts; (f) Investments in Permitted Acquisitions; (g) Investments in Permitted Developments which shall not exceed 20% of Total Adjusted Assets; provided that within said limit any single development project with a total cost in excess of $30,000,000 shall only be a Permitted Development after it has been approved by the Requisite Lenders; (h) Investments in undeveloped land which shall not exceed 10% of Total Adjusted Assets. Section 8.4. Merger, Consolidation and Disposition of Properties. (a) The Borrower will not, and will not permit the Company, any of the Related Companies or any Permitted Joint Venture to (i) become a party to any merger or consolidation, or (ii) agree to or effect any property acquisition or stock acquisition (other than Permitted Acquisitions in compliance with the other terms of this Agreement) , or (iii) enter into any joint venture or invest in any Permitted Joint Venture unless prior to such transaction the Borrower has provided the Lead Lenders with a notice describing such transaction, the Borrower shall have obtained the prior consent of the Lead Lenders. (b) Real Estate Assets may be sold or transferred except that to the extent the aggregate sales price of all such dispositions during any fiscal quarter shall exceed $10,000,000, prior to such sale or transfer, the Borrower shall provide a statement in the form of Exhibit C hereto signed by a Responsible Officer of the Company and setting forth in reasonable detail computations evidencing compliance with the financial covenants contained in Section 9 after giving effect to such proposed transfer and all liabilities, fixed or contingent, pursuant thereto. Section 8.5. Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, whereby the Borrower shall sell or transfer any property owned by it in order then 57 or thereafter to lease such property or lease other property that the Borrower intends to use for substantially the same purpose as the property being sold or transferred. The Borrower will not permit the Company, any of the Related Companies or any Permitted Joint Venture to enter into any such arrangement. Section 8.6. Compliance with Environmental Laws. The Borrower will not do, and will not permit the Company, any of the Related Companies or any Permitted Joint Venture to do, any of the following: (a) use any of the Real Estate or any portion thereof as a facility for the handling, processing, storage or disposal of Hazardous Materials except for Hazardous Materials used in the operation of the Real Estate and in material compliance with applicable law, (b) cause or permit to be located on any of the Real Estate any underground tank or other underground storage receptacle for Hazardous Materials except in material compliance with Environmental Laws, (c) generate any Hazardous Materials on any of the Real Estate except in material compliance with Environmental Laws, or (d) conduct any activity at any Real Estate or use any Real Estate in any manner so as to cause a Release requiring remediation, clean up or other response action under applicable Environmental Laws. Section 8.7. Distributions. Borrower shall not permit the total Distributions by it and the Company during any fiscal year to exceed 90% of Funds from Operations for such year and shall not permit there to be more than two consecutive fiscal quarters during which the total Distributions by Borrower and the Company during each fiscal quarter exceed 100% of Funds from Operations for such fiscal quarter except that such limitations may be exceeded to the extent necessary for the Company to maintain its REIT status provided that the Company provides the Agent with a letter from its accountants or attorneys setting forth the basis for computation of the amount of such necessary excess Distributions. No Distribution by the Borrower to the Company shall be made other than simultaneously with and in the same amount as the corresponding Distribution by the Company to the owners of the Common Shares and/or the Preferred Shares. During any period when Event of Default under Section 12.1(a) or Section 12.1(b) has occurred and is continuing total Distributions by the Borrower and the Company will not exceed the minimum amount necessary for the Company to maintain its REIT status. Section 8.8. Leases. The Borrower will not (i) enter into any Major Leases or (ii) materially amend, supplement or otherwise materially modify, or terminate or cancel, or accept the surrender of, or grant any material concessions to or waive the material performance of any of the Major Tenants under the Major Leases, in each case without the prior approval of the Lead Lenders as provided in Section 7.13. Section 8.9. Restrictions on the Company. The Company will not: (a) own any assets, or have any Investments, other than owning its general partnership interest in the Borrower and its limited partnership interests described in Section 6.19. 58 (b) engage in any business other than its activities as managing general partner of the Borrower. (c) directly or indirectly convey, sell, transfer, assign, pledge or encumber any of its partnership interest in the Borrower. (d) create, incur, assume, guarantee or become or remain liable, contingently or otherwise, any Indebtedness, and any recourse against the Company with respect to the Indebtedness of the Borrower shall be limited to the same or greater extent as recourse against the Company with respect to the Obligations as provided in Section 28. Section 9. FINANCIAL COVENANTS OF THE BORROWER. The Borrower covenants and agrees as follows, so long as any Loan or Note is outstanding or any Lender has any obligation to make any Loan: Section 9.1. Collateral Value. The Borrower will not at any time permit the Outstanding Principal Amount to exceed sixty percent (60%) of the total of the Collateral Values of the Mortgaged Properties. Section 9.2. Minimum Debt Service Coverage. The Borrower will not at any time permit the Outstanding Principal Amount to exceed an amount such that: (a) the aggregate of the Net Operating Income for all of the Mortgaged Properties, divided by (b) Pro Forma Debt Service Charges for the Mortgaged Properties would be less than 1.5 for any fiscal quarter of Borrower. For purposes of the foregoing, any Real Estate Asset that became a Mortgaged Property during the applicable fiscal quarter shall be treated as though it were a Mortgaged Property for the entire quarter and any Real Estate Asset which is released by Agent during such fiscal quarter shall be excluded for the entire quarter. Section 9.3. Total Liabilities to Total Adjusted Assets. The Borrower will not at any time permit Total Liabilities at the end of any fiscal quarter to exceed fifty-five percent (55%) of Total Adjusted Assets. Section 9.4. Minimum Tangible Net Worth. The Borrower will not at any time permit the Tangible Net Worth of the Borrower to be less than $350,000,000 plus 75% of Net Offering Proceeds. Section 9.5. Total Operating Cash Flow to Interest Expense. The Borrower will not permit the ratio of its Total Operating Cash Flow to Interest Expense to be less than 2.0 to 1.0 for any fiscal quarter. For the fiscal quarter ending December 31, 1997, such covenant will be computed on a pro forma basis as though the Formation Transactions had closed, and the Effective Date had been, October 1, 1997. 59 Section 9.6. EBITDA to Fixed Charges. The Borrower will not permit the ratio of its EBITDA to Fixed Charges to be less than 1.75 to 1.0 for any fiscal quarter. For the fiscal quarter ending December 31, 1997, such convenant will be computed on a pro forma basis as though the Formation Transactions had closed, and the Effective Date had been, October 1, 1997. Section 10. CONDITIONS TO EFFECTIVENESS. This Agreement shall become effective when each of the following conditions precedent have been satisfied: Section 10.1. Loan Documents. Each of the Loan Documents 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. Each Lender shall have received a fully executed copy of each such document prior to or on the Effective Date. Section 10.2. Certified Copies of Organization Documents; Good Standing Certificates. The Agent shall have received (i) a Certificate of the Company to which there shall be attached complete copies of the Borrower's Limited Partnership Agreement and its Certificate of Limited Partnership, certified as of a recent date by the Secretary of State of Delaware, (ii) Certificates of Good Standing for the Borrower from the State of Delaware and each State in which a Mortgaged Property is located, (iii) a copy of the Company's Declaration of Trust certified by the Maryland Secretary of State, (iv) Certificates of Good Standing for the Company from the State of Maryland and each State in which a Mortgaged Property is located unless the Company's qualification is not required by the laws of such state, and (v) certificates of good standing and certified copies of partnership agreements and certificates of limited partnership with respect to each of the Guarantor Subsidiaries. Section 10.3. By-laws; 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 Agreement and the other Loan Documents to which it is or is to become a party 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 its by-laws and the resolutions adopted by its Board of Directors authorizing the transactions described herein, each certified by its secretary to be true and complete and in effect on the Effective Date. Section 10.4. Incumbency Certificate; Authorized Signers. The Agent shall have received from the Company an incumbency certificate, dated as of the Effective Date, signed by a duly authorized officer of the Company and giving the name and bearing a specimen signature of each individual who shall be authorized: (a) to sign, in the name and on behalf of the Company (in its own capacity and as general partner on behalf of Borrower and on behalf of each Guarantor Subsidiary which is a partnership), each of the Loan Documents to which the Borrower or any Guarantor is or is to become a party; (b) to make Loan Requests and Conversion Requests; and (c) to give notices and to take other action on behalf of the Borrower under the Loan Documents. 60 Section 10.5. 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, in form and substance satisfactory to the Lenders and the Agent from Borrower's counsel, as to: (a) the matters described on Exhibit E and (b) such other opinions with respect to the Formation Transactions as the Agent may reasonably require. Such opinion may rely on opinions from other law firms approved by the Agent as to matters of law applicable in the various states where the Mortgaged Properties are located. Section 10.6. Payment of Fees. The Borrower shall have paid to the Agent and/or the Lead Lenders the fees pursuant to Section 4.1 and Section 2.9(a) and shall have paid all other expenses as provided in Section 15 hereof then outstanding. Section 10.7. Validity of Liens. The Security Documents shall be effective to create in favor of the Agent legal, valid and enforceable first priority, perfected liens and security interests in the Collateral covered thereby, subject only to the Permitted Liens. All filings, recordings, deliveries of instruments and other actions or consents necessary or desirable in the reasonable opinion of the Agent to grant, perfect, protect and preserve such liens and security interests shall have been duly effected. The Agent shall have received evidence thereof in form and substance reasonably satisfactory to the Agent. Section 10.8. Survey. The Agent shall have received Surveys of the Mortgaged Properties, bearing dates reasonably acceptable to the Agent, and in form and substance reasonably acceptable to the Agent. Section 10.9. Title Insurance; Title Exception Documents. The Agent shall have received the Title Policies reasonably satisfactory to the Agent, together with proof of payment of all fees and premiums for such policies. The Agent shall have received true and accurate copies of all documents listed as exceptions under such policies. Section 10.10. Leases. The Agent shall have received true copies of those Leases which the Agent may request after its review of the applicable rent roll. Section 10.11. Estoppel and Attornment Agreements. The Agent shall have received estoppel certificates and attornment agreements in form reasonably satisfactory to the Lead Lenders from the three (3) Tenants who lease and occupy the largest amount gross leasable area of the West Wacker Drive Property and from any other Major Tenants specifically required by the Agent. Section 10.12. Certificates of Insurance. The Agent shall have received (a) a certificate of insurance as to the insurance maintained by Borrower on the Mortgaged Properties (including flood insurance if necessary) from the insurer or an independent insurance broker dated as of the Effective Date, identifying insurers, types of insurance, insurance limits, and policy terms; 61 (b) certified copies of all policies evidencing such insurance (or certificates therefor signed by tile insurer or an agent authorized to bind the insurer); and (c) such further information and certificates from Borrower, its insurers and insurance brokers as the Agent may reasonably request. Section 10.13. Environmental Reports. The Agent shall have received an Environmental Report with respect to each of the Mortgaged Properties, dated as of a recent date, from environmental engineers reasonably acceptable to the Agent which Environmental Reports shall have been approved by the Lead Lenders. Section 10.14. Environmental Indemnity. The Agent shall have received an executed original of the environmental indemnity described in the Equity Prospectus from The Prime Group, Inc. for the benefit of certain of the Guarantor Subsidiaries with respect to environmental liabilities relating to certain of the Mortgaged Properties, together with an agreement from The Prime Group, Inc. that the Lenders shall be a beneficiary thereunder in the event of any foreclosure of the applicable Mortgaged Properties, which indemnity and agreement shall be in form and substance satisfactory to the Agent and the Lead Lenders. Section 10.15. Appraisals. The Agent and each of the Lenders shall have received Appraisals dated as of a recent date in form and substance satisfactory to the Agent and the Lead Lenders (including satisfaction as to determination of Appraised Value). Section 10.16. Inspecting Engineers' Reports. The Agent shall have received reports, addressed to Agent and the Lenders or accompanied by reliance letters in favor of the Agent and the Lenders, from third party inspecting engineers dated as of a date acceptable to the Agent as to the good structural condition of the Buildings located on the Mortgaged Properties, which reports shall be in form and substance satisfactory to the Agent. Section 10.17. Initial Letters of Credit. The Agent shall have received with respect to each of the Initial Letters of Credit (i) a Letter of Credit Request executed by Borrower, and (ii) copies of all legal opinions and certificates delivered in connection with such replacement of letters of credit pursuant to the applicable IRB Documents. Section 10.18. UCC Lien Searches. The Agent shall have received UCC lien searches of the applicable public records disclosing no conditional sales contracts, security agreements, chattel mortgages, leases of personalty, financing statements or other encumbrances which affect any of the Collateral other than those relating to any liens permitted hereby and by the Security Documents. Section 10.19. Formation Transactions Complete. The Lead Lenders shall have received evidence satisfactory to each of them that all of the Formation Transactions have been completed on the Effective Date and that the net proceeds of the sale of the common and preferred shares of 62 beneficial interest in the Company were not less than the amount described in the Equity Prospectus. Section 11. CONDITIONS TO ALL BORROWINGS. The obligations of the Lenders to make any Loan, whether on or after the Effective Date, shall also be subject to the satisfaction of the following conditions precedent: Section 11.1. Representations True; No Event of Default; Compliance Certificate. Each of the representations and warranties of the Borrower and the Company contained in this Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Agreement shall be true in all material respects as of the date as of which they were made and shall also be true in all material respects at and as of the time of the making of such Loan, with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and except to the extent that such representations and warranties relate expressly to an earlier date); the Borrower shall have performed and complied with all terms and conditions herein required to be performed by it or prior to the Borrowing Date of such Loan; and no Default or Event of Default shall have occurred and be continuing on the date of any Loan Request or on the Borrowing Date of such Loan. Each of the Lenders shall have received a Compliance Certificate of the Borrower signed by a Responsible Officer to such effect, which certificate will include, without limitation, computations evidencing compliance with the covenants contained in Section 9 hereof after giving effect to such requested Loan. Section 11.2. No Legal Impediment. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of any Lender would make it illegal for such Lender to make such Loan. Section 11.3. Governmental Regulation. Each Lender shall have received such statements in substance and form reasonably satisfactory to such Lender as such Lender shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System. Section 11.4. Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Agreement, the other Loan Documents and all other documents incident thereto shall be reasonably satisfactory in substance and in form to the Agent, and the Lenders shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. Section 12. EVENTS OF DEFAULT; ACCELERATION; ETC. 63 Section 12.1. Events of Default and Acceleration. If any of the following events ("Events of Default" or, if the giving of notice or the lapse of time or both is required, then, prior to such notice or lapse of time, "Defaults") shall occur: (a) the Borrower shall fail to pay any principal of the Loans when the same shall become due and payable; (b) the Borrower shall fail to pay any interest on the Loans or any other sums due hereunder or under any of the other Loan Documents within five (5) days after the same shall become due and payable or the Borrower shall fail to deposit in the IRB Indebtedness Account sufficient funds as required by Section 2.8; (c) the Borrower or the Company shall fail to comply with any of its covenants contained in Section 7.5, the first sentence of Section 7.6, the first sentence of Section 7.7, Section 7.20, Section 8 or Section 9 hereof; (d) the Borrower, the Company or any Guarantor shall fail to perform any other term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this Section 12) for thirty (30) days after written notice of such failure from Agent to the Borrower, provided, however that if the Borrower fails to give notice of any Default as required by Section 7.5(a), such thirty (30) day cure period shall be deemed to have started on the date such notice should have been given; (e) any representation or warranty of the Borrower or the Company in this Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Agreement, shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated, and shall continue to be false on the date that the Agent or any Lender takes action based on the Default relating to such representation or warranty, provided, however, that with respect to the representations and warranties of the Borrower contained in Section 6.2, Section 6.3, Section 6.13, Section 6.18 and in paragraphs (a), (c), (d), (e) and (f) of Section 6.22, if the condition or event making the representation and warranty false is capable of being cured by the Borrower, no enforcement action has been commenced against the Borrower or the applicable Mortgaged Property on account of such condition or event nor is the applicable Mortgaged Property subject to risk of forfeiture due to such condition or event, and the Borrower promptly commences the cure thereof after the Borrower's first obtaining knowledge of such condition or event, the Borrower shall have a period of thirty (30) days after the date that the Borrower first obtained knowledge of such condition or event during which the Borrower may cure such condition or event (or, if such condition or event is not reasonably capable of being cured within such thirty (30) day period, such additional period of time as may be reasonably required in order to cure such condition or event but in any event such period shall not exceed six (6) months from the date that the Borrower first obtained knowledge of such condition or event), and no Event of Default shall exist hereunder during such thirty (30) day or additional period so long as the Borrower 64 continuously and diligently pursues the cure of such condition or event and the other conditions to such cure period have not changed; (f) the Borrower, the Company, any of the Related Companies or any Permitted Joint Venture shall fail to pay at maturity, or within any applicable period of grace, any Recourse Indebtedness, or shall fail to observe or perform any material term, covenant or agreement contained in any agreement by which it is bound, evidencing or securing Indebtedness for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof, and in any event, such failure shall continue for thirty (30) days, unless the aggregate amount of all such defaulted Recourse Indebtedness plus the amount of any unsatisfied judgments described in paragraph (i) of this Section 12.1 is less than $10,000,000.00; (g) any of the Borrower, the Company or any Guarantor shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of any substantial part of its properties or shall commence any case or other proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against any such Person and such Person shall indicate its approval thereof, consent thereto or acquiescence therein or any of the events described in this paragraph shall occur with respect to any other Related Company or any Permitted Joint Venture and such event shall have a Material Adverse Effect; (h) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating the Borrower, the Company, or any Guarantor bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of the Borrower, the Company, or any Guarantor in an involuntary case under federal bankruptcy laws as now or hereafter constituted or any of the events described in this paragraph shall occur with respect to any other Related Company or any Permitted Joint Venture and such event shall have a Material Adverse Effect; (i) there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty days, whether or not consecutive, any uninsured final judgment against the Borrower that, with other outstanding uninsured final judgments, undischarged, against the Borrower, the Company or any of the Related Companies plus the amount of any defaulted Recourse Indebtedness under paragraph (f) of this Section 12.1, exceeds in the aggregate $10,000,000.00; (j) if any of the Loan Documents or any material provision of any Loan Documents shall be unenforceable, cancelled, terminated, revoked or rescinded otherwise than in 65 accordance with the terms thereof or with the express prior written agreement, consent or approval of the Agent, or any action at law, suit or in equity or other legal proceeding to make unenforceable, cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of the Borrower, the Company or any Guarantor, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; (k) the Borrower, the Company or any Guarantor shall be indicted for a federal crime, a punishment for which could include the forfeiture of any assets of the Borrower; (l) any "Event of Default," as defined in any of the IRB Documents shall occur provided that if such Event of Default is caused by the issuer or other Person other than the Guarantor Subsidiary, the same shall constitute an Event of Default hereunder only if the maturity of the applicable IRB Indebtedness is accelerated based thereon; (m) any "Event of Default", as defined in any of the other Loan Documents shall occur; then, and in any such event, so long as the same may be continuing, the Agent may, and upon the request of the Requisite Lenders shall, by notice in writing to the Borrower declare all amounts owing with respect to this Agreement, the Notes and the other Loan Documents to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; provided that in the event of any Event of Default specified in Sections 12.1(g) or 12.1(h), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Agent or action by the Requisite Lenders. Section 12.2. Termination of Commitments; Drawing of IRB Letters of Credit. If any one or more Events of Default specified in Section 12.1(g) or Section 12.1(h) shall occur, any unused portion of the Commitments hereunder shall forthwith terminate and the Lenders shall be relieved of all obligations to make Loans to the Borrower. If any other Event of Default shall have occurred and be continuing, any Lender may by notice to the Borrower terminate the unused portion of its Commitment hereunder, and upon such notice being given such unused portion of its Commitment hereunder shall terminate immediately and such Lender shall be relieved of all further obligations to make Loans, provided, however, such Lender shall not be relieved of its obligation to pay its Proportionate Share of Unreimbursed Drawings under Section 2.9. No termination of such Lender's Commitment hereunder shall relieve the Borrower of any of the Obligations or any of its existing obligations to such Lender arising under other agreements or instruments. At any time after any Commitments have been terminated pursuant hereto, the Agent may, in its sole discretion, give such notices as may be permitted under the terms of the IRB Letters of Credit or the related IRB Documents to cause the bonds relating to the IRB Indebtedness to be 66 accelerated or to cause a mandatory tender thereof or to cause the IRB Letters of Credit to be drawn by the beneficiary thereof or to cause the applicable IRB Letters of Credit to expire if not drawn within the specified period after the giving of such notice. Section 12.3. Remedies. In case any one or more of the Events of Default shall have occurred, and whether or not the Requisite Lenders shall have accelerated the maturity of the Loans pursuant to Section 12.1, each Lender, if owed any amount with respect to the Loans, may, with the consent of the Requisite Lenders, direct the Agent to proceed to protect and enforce the rights and remedies of the Agent and the Lenders under this Agreement, the Notes, the IRB Documents or any of the other Loan Documents by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement and the other Loan Documents or any instrument pursuant to which the Obligations are evidenced, including to the full extent permitted by applicable law the obtaining of the ex parte appointment of a receiver and, if any amount shall have become due, by declaration or otherwise, to proceed to enforce the payment thereof or any other legal or equitable right of such Lender. No remedy herein conferred upon any Lender or the Agent or the holder of any Note is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. Section 12.4. Distribution of Collateral Proceeds. In the event that, following the occurrence or during the continuance of any Default or Event of Default, the Agent or any Lender as the case may be, receives any monies in connection with the enforcement of any of the Security Documents, or otherwise with respect to the realization upon any of the Collateral, such monies shall be distributed for application as follows: (a) First, to the payment of, or (as the case may be) the reimbursement of the Agent for or in respect of all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Agent in connection with the collection of such monies by the Agent, for the exercise, protection or enforcement by the Agent of all or any of the rights, remedies, powers and privileges of the Agent or the Lenders under this Agreement or any of the other Loan Documents or in respect of the Collateral or in support of any provision of adequate indemnity to the Agent against any taxes or liens which by law shall have, or may have, priority over the rights of the Agent to such monies; (b) Second, to all other Obligations in such order or preference as the Requisite Lenders may determine; provided, however, that distribution in respect of such Obligations shall be made among the Lenders pro rata in accordance with each Lender's respective Commitment Percentage; and provided, further, that the Agent may in its discretion make proper allowance to take into account any Obligations not then due and payable; 67 (c) Third, upon payment and satisfaction in full or other provisions for payment in full satisfactory to the Requisite Lenders and the Agent of all of the obligations, and to the payment of any obligations required to be paid pursuant to Section 9-504(1)(c) of the Uniform Commercial Code of the State of New York; and (d) Fourth, the excess, if any, shall be returned to the Borrower or to such other Persons as are legally entitled thereto. Section 12.5. Addition of Real Estate Assets to Cure Default. As an alternative to the payment of cash to cure a Default under Section 9.1 or Section 9.2 hereof, the Borrower shall have the right to offer to provide additional Collateral to the Agent in the form of Additional Properties pursuant to Section 5.3 and Section 5.4, for the purpose of curing a Default under Section 9.1 or Section 9.2 hereof, if the Borrower designates such Collateral for addition within fifteen (15) days after the occurrence of such Default and the Borrower, the Company or the Mortgagor, as applicable, executes and delivers to the Agent a Security Deed, an Assignment of Leases and Rents, an Indemnity Agreement and UCC-1 Financing Statements relating to the Additional Property together with the Certificates and opinion described in Section 5.4(d) and Section 5.4(e) within thirty (30) days after the occurrence of such Default. The Agent and the Lenders shall accept and approve the addition of such Collateral as a cure for such Default if such Collateral shall cure the Default and satisfies the due diligence requirements of the Agent and the Requisite Lenders, including, without limitation, the conditions set forth in Section 5.4 and those requirements with respect to the Mortgaged Properties specified in Section 10 hereof, within ninety (90) days after the occurrence of the subject Default, and at the time that such due diligence requirements are so satisfied, no other Defaults or Events of Default are continuing. If any such additional Collateral is provided to the Agent in accordance with this Section 12.5, such additional Collateral shall, for all purposes hereof, be deemed to be a "Mortgaged Property." Until the Agent and Requisite Lenders have acknowledged in writing the cure of such Default (which written acknowledgment will be given promptly after such cure has been completed as herein provided), all consequences of such Default hereunder shall be effective (except as provided in Section 8.7) and the Agent may exercise all available remedies except that the maturity of the Loans shall not be accelerated based solely on the Default which Borrower is diligently attempting to cure hereunder, prior to the expiration of said ninety (90) day period. Section 13. SETOFF. Regardless of the adequacy of any Collateral, during the continuance of any Event of Default, any deposits (general or specific, time or demand, provisional or final, regardless of currency, maturity, or the branch of where such deposits are held) or other sums credited by or due from any of the Lenders to the Borrower and any securities or other property of the Borrower in the possession of such Lender may WITH THE PRIOR APPROVAL OF THE AGENT be applied to or set off against the payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of the Borrower to such Lender. Each of the Lenders agrees with each other Lender that (a) if an amount to be set off is to be applied to Indebtedness of the Borrower to such 68 Lender, other than Indebtedness evidenced by the Notes held by such Lender, such amount shall be applied ratably to such other Indebtedness and to the Indebtedness evidenced by all such Notes held by such Lender, and (b) if such Lender shall receive from the Borrower, whether by voluntary payment, exercise of the right of setoff, counterclaim, cross action, enforcement of the claim evidenced by the Notes held by such Lender by proceedings against the Borrower at law or in equity or by proof thereof in bankruptcy, reorganization, liquidation, receivership or similar proceedings, or otherwise, and shall retain and apply to the payment of the Note or Notes held by such Lender any amount in excess of its ratable portion of the payments received by all of the Lenders with respect to the Notes held by all of the Lenders, such Lender will make such disposition and arrangements with the other Lenders with respect to such excess, either by way of distribution, pro tanto assignment of claims, subrogation or otherwise as shall result in each Lender receiving in respect of the Notes held by it its proportionate payment as contemplated by this Agreement; provided that if all or any part of such excess payment is thereafter recovered from such Lender, such disposition and arrangements shall be rescinded and the amount restored to the extent of such recovery, but without interest. Notwithstanding the foregoing, no Lender shall exercise a right of setoff if such exercise would limit or prevent the exercise of any other remedy, right to Collateral or other recourse against the Borrower. Section 14. THE AGENT. Section 14.1. Authorization. The Agent is authorized to take such action on behalf of each of the Lenders and to exercise all such powers as are hereunder and under any of the other Loan Documents and any related documents delegated to the Agent, together with such powers as are reasonably incident thereto, provided that no duties or responsibilities not expressly assumed herein or therein shall be implied to have been assumed by the Agent. The relationship between the Agent and the Lenders is and shall be that of agent and principal only, and nothing contained in this Agreement or any of the other Loan Documents shall be construed to constitute the Agent as a trustee for any Lender. Section 14.2. Employees and Agents. The Agent may exercise its powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Agreement and the other Loan Documents. The Agent may utilize the services of such Persons as the Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Borrower. Section 14.3. No Liability. Neither the Agent nor any of its shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any agent or employee thereof, shall be liable for any waiver, consent or approval given or any action taken, or omitted to be taken, in good faith by it or them hereunder or under any of the other Loan Documents, or in connection herewith or therewith, or be responsible for the consequences of any oversight or 69 error of judgment whatsoever, except that the Agent or such other Person, as the case may be, may be liable for losses due to its willful misconduct or gross negligence. Section 14.4. No Representations. The Agent shall not be responsible for the execution or validity or enforceability of this Agreement, the Notes, any of the other Loan Documents or any instrument at any time constituting, or intended to constitute, collateral security for the Notes, or for the value of any such collateral security or for the validity, enforceability or collectability of any such amounts owing with respect to the Notes, or for any recitals or statements, warranties or representations made herein or in any of the other Loan Documents or in any certificate or instrument hereafter furnished to it by or on behalf of the Borrower, or be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein or in any instrument at any time constituting, or intended to constitute, collateral security for the Notes. The Agent shall not be bound to ascertain whether any notice, consent, waiver or request delivered to it by the Borrower or any holder of any of the Notes shall have been duly authorized or is true, accurate and complete. The Agent has not made nor does it now make any representations or warranties, express or implied, nor does it assume any liability to the Lenders, with respect to the credit worthiness or financial condition of the Borrower. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender , and based upon such information and documents as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender has been independently represented by separate counsel regarding this Agreement. Section 14.5. Payments. (a) A payment by the Borrower to the Agent hereunder or any of the other Loan Documents for the account of any Lender shall constitute a payment to such Lender subject to the pro rata rights to repayment based upon the Commitment Percentage of each Lender. The Agent agrees promptly to distribute to each Lender such Lender's pro rata share of payments received by the Agent for the account of the Lenders except as otherwise expressly provided herein or in any of the other Loan Documents. (b) If in the opinion of the Agent the distribution of any amount received by it in such capacity hereunder, under the Notes or under any of the other Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. (c) Notwithstanding anything to the contrary contained in this Agreement or any of the other Loan Documents, any Lender that fails (i) to make available to the Agent its pro rata 70 share of any Loan or of any Unreimbursed Drawing or (ii) to comply with the provisions of Section 12.4 or Section 13 with respect to making dispositions and arrangements with the other Lenders, where such Lender's share of any payment received, whether by setoff or otherwise, is in excess of its pro rata share of such payments due and payable to all of the Lenders, in each case as, when and to the full extent required by the provisions of this Agreement, or to adjust promptly such Lender's outstanding principal and its pro rata Commitment Percentage as provided in Section 2.1 hereof, shall be deemed delinquent (a "Delinquent Lender ") and shall be deemed a Delinquent Lender until such time as such delinquency is satisfied. A Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Borrower, whether on account of outstanding Loans, interest, fees or otherwise, to the remaining nondelinquent Lenders for application to, and reduction of, their respective pro rata shares of all outstanding Loans. The Delinquent Lender hereby authorizes the Agent to distribute such payments to the nondelinquent Lenders in proportion to their respective pro rata shares of all outstanding Loans. A Delinquent Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans of the nondelinquent Lenders, the Lenders' respective pro rata shares of all outstanding Loans have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. Section 14.6. Holders of Notes. The Agent may deem and treat the payee of any Note as the absolute owner or purchaser thereof for all purposes hereof until it shall have been furnished in writing with a different name by such payee or by a subsequent holder assignee or transferee. Section 14.7. Indemnity. The Lenders ratably agree hereby to indemnify and hold harmless the Agent from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including any expenses for which the Agent has not been reimbursed by the Borrower as required by Section 15), and liabilities of every nature and character arising out of or related to this Agreement, the Notes, or any of the other Loan Documents or the transactions contemplated or evidenced hereby or thereby, or the Agent's actions taken hereunder or thereunder, except to the extent that any of the same shall be directly caused by the Agent's willful misconduct or gross negligence. Section 14.8. Agent as Lender. In its individual capacity, BankBoston shall have the same obligations and the same rights, powers and privileges in respect to its Commitment and the Loans made by it, and as the holder of any of the Notes as it would have were it not also the Agent. By issuing the Letters of Credit in its individual capacity BankBoston is bound to perform its duties and obligations under such Letters of Credit as provided therein. BankBoston's status as Agent hereunder shall not limit or restrict its ability to perform such duties and obligations. Section 14.9. Resignation. The Agent may resign at any time by giving sixty (60) days, prior written notice thereof to the Lenders and the Borrower. Upon any such resignation, the 71 Requisite Lenders shall have the right to appoint a successor Agent. Unless a Default or Event of Default shall have occurred and be continuing, appointment of such successor Agent shall be subject to the reasonable approval of the Borrower. If no successor Agent shall have been so appointed by the Requisite Lenders and shall have accepted such appointment within thirty (30) days after the giving of notice of resignation or removal, or the Borrower has disapproved or failed to approve a successor agent within such period, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a financial institution having a rating of not less than A2/P2 or its equivalent by Standard & Poor's Corporation. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations as Agent hereunder. After any retiring Agent's resignation, the provisions of this Agreement and the other Loan Documents shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. Section 14.10. Notification of Defaults and Events of Default. Each Lender hereby agrees that, upon learning of the existence of a Default or an Event of Default, it shall promptly notify the Agent thereof. The Agent hereby agrees that upon receipt of any notice under this Section 14.10 it shall promptly notify the other Lenders of the existence of such Default or Event of Default. Section 14.11. Duties in the Case of Enforcement. In case one of more Events of Default have occurred and shall be continuing, and whether or not acceleration of the Obligations shall have occurred, the Agent shall, if (a) so requested by the Requisite Lenders and (b) the Lenders have provided to the Agent such additional indemnities and assurances against expenses and liabilities as the Agent may reasonably request, proceed to enforce the provisions of the Security Documents authorizing the sale or other disposition of all or any part of the Collateral and exercise all or any such other legal and equitable and other rights or remedies as it may have in respect of such Collateral. The Requisite Lenders may direct the Agent in writing as to the method and the extent of any such sale or other disposition, the Lenders hereby agreeing to indemnify and hold the Agent harmless from all liabilities incurred in respect of all actions taken or omitted in accordance with such directions, provided that the Agent need not comply with any such direction to the extent that the Agent reasonably believes the Agent's compliance with such direction to be unlawful or commercially unreasonable in any applicable jurisdiction. The Agent may take such steps as it reasonably determines for the taking of possession or title to any Collateral, including the formation of trusts or corporation with each Lender having a beneficial interest equal to its pro rata percentage of the outstanding Loans. Section 14.12. Mandatory Resignation of Agent. In the event that the Agent enters into one or more Assignments pursuant to Section 18 having the effect of reducing the Agent's Commitment to less than $25,000,000 (which number will be reduced in proportion to any reduction in the Total Commitment pursuant to Section 2.2) then the Agent shall promptly so notify the Borrower and the Lenders. Upon the written request of the Borrower or any Lender whose Commitment exceeds 72 that of the Agent, which written request is made within thirty (30) days after the Agent's notice that its Commitment is below such minimum level, the Agent shall be obligated to resign pursuant to Section 14.9. Section 15. EXPENSES. The Borrower agrees to pay (a) the reasonable costs of producing and reproducing this Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) any taxes (including any interest and penalties in respect thereto) payable by the Agent or any of the Lenders (other than taxes based upon the Agent's or any Lender's net income), including any recording, mortgage, documentary or intangibles taxes in connection with the Security Documents and other Loan Documents, or other taxes payable on or with respect to the transactions contemplated by this Agreement, including any such taxes payable by the Agent or any of the Lenders after the Effective Date (the Borrower hereby agreeing to indemnify the Lenders with respect thereto), (c) all title insurance premiums, appraisal fees, engineer's, inspector's and surveyor's fees, recording costs and the reasonable fees, expenses and disbursements of the Agent's counsel or any local counsel to the Agent incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (d) the reasonable fees, costs, expenses and disbursements of the Agent incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein including without limitation, the reasonable costs incurred by the Agent in connection with its inspection of the Mortgaged Properties, and the fees and disbursements of the Agent's counsel and the Borrower's legal counsel in preparing documentation, (e) the reasonable fees, costs, expenses and disbursements of the Agent incurred in connection with the syndication and/or participation of the Loans, (f) all reasonable out-of-pocket expenses (including reasonable attorneys' fees and costs, which attorneys may be employees of any Lender or the Agent and the fees and costs of appraisers, engineers, investment bankers, surveyors or other experts retained by the Agent or any Lender in connection with any such enforcement proceedings) incurred by any Lender or the Agent in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrower or the administration thereof after the occurrence of a Default or Event of Default (including, without limitation, expenses incurred in any restructuring and/or "workout" of the Loans), and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to the Agent's or the Lender's relationship with the Borrower, the Company, any Permitted Joint Venture or any of the Related Companies, (g) all reasonable fees, expenses and disbursements of the Agent incurred in connection with UCC searches, UCC filings or mortgage recordings, (h) all reasonable costs incurred by the Agent in the future in connection with its inspection of the Mortgaged Properties (which inspections shall occur not more frequently than annually prior to an Event of Default), and (i) the reasonable fees, costs, expenses and disbursements of the Agent incurred in connection with the granting of additional Collateral by the Borrower pursuant to Section 12.5 hereof, including, without limitation, the costs incurred by the Agent in connection with its inspection of such additional Collateral, and the fees and disbursements of the Agent's counsel. The covenants 73 of this Section 15 shall survive payment or satisfaction of payment of amounts owing with respect to the Notes. Section 16. INDEMNIFICATION. Each of the Borrower and the Company, jointly and severally, agrees to indemnify and hold harmless the Agent and the Lenders and the shareholders, directors, agents, officers, subsidiaries, and affiliates of the Agent and the Lenders from and against any and all claims, actions or causes of action and suits whether groundless or otherwise, and from and against any and all Liabilities, losses, settlement payments, obligations, damages and expenses of every nature and character arising out of this Agreement or any of the other Loan Documents or the Formation Transactions or any other transactions contemplated hereby or which otherwise arise in connection with the financing including, without limitation unless directly caused by the gross negligence or willful misconduct of a Lender or the Agent (but such limitation on indemnification shall only apply to the Agent or Lender being grossly negligent or committing willful misconduct), (a) any actual or proposed use by the Borrower of the proceeds of any of the Loans or the Drawings of any Letters of Credit, (b) any actual or alleged infringement of any patent, copyright, trademark, service mark or similar right of the Borrower comprised in the Collateral, (c) the Borrower or any Guarantor entering into or performing this Agreement or any of the other Loan Documents or (d) any cost, claim liability, damage or expense in connection with any harm the Borrower may be found to have caused in the role of a broker, in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. In litigation, or the preparation therefor, the Lenders and the Agent shall each be entitled to select their own separate counsel to the extent that their representation by the same counsel would present such counsel with a conflict of interest, or would be inappropriate due to actual or potential differing interests or because there may be defenses available to certain of such persons that are different from or in addition to those available to the other persons to be represented by such counsel and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses of such counsel. In the event that Agent or any Lender is made a party to any litigation against the Company or the Borrower relating to or arising from the Formation Transactions, the Borrower or the Company may, or if requested by the Agent or the Requisite Lenders shall, assume primary responsibility for the defense thereof with counsel reasonably satisfactory to the Requisite Lenders, subject to the right of the Agent and the Lenders to separate counsel to the extent provided in the preceding sentence. If, and to the extent that the obligations of the Borrower or the Company under this Section 16 are unenforceable for any reason, the Borrower and the Company hereby agree to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The provisions of this Section 16 shall survive the repayment of the Loans and the termination of the obligations of the Lenders hereunder and shall continue in full force and effect as to the Lenders so long as the possibility of any such claim, action, cause of action or suit exists. 74 Section 17. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein, in the Notes, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrower or any Guarantor pursuant hereto shall be deemed to have been relied upon by the Lenders and the Agent, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the making by the Lenders of the Loans, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Agreement or the Notes or any of the other Loan Documents remains outstanding or the Lenders have any obligation to make any Loans. The indemnification obligations of the Borrower provided herein and the other Loan Documents shall survive the full repayment of amounts due and the termination of the obligations of the Lenders hereunder and thereunder to the extent provided herein and therein. All statements contained in any certificate or other paper delivered to the Agent or any Lender at any time by or on behalf of the Borrower pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower hereunder. Section 18. ASSIGNMENT; PARTICIPATIONS; ETC. Section 18.1. Conditions to Assignment by Lenders. Except as provided herein, each Lender may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment Percentage and Commitment and the same portion of the Loans at the time owing to it, and the Notes held by it; provided that (a) the Agent shall have given its prior written consent to such assignment except that such consent shall not be needed with respect to an assignment from a Lender to one of its Affiliated Lenders or to another Lender, (b) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (c) each assignment shall be in an amount of not less than $10,000,000 that is a whole multiple of $1,000,000, (d) each Lender either shall assign all of its Commitment and cease to be a Lender hereunder or shall retain, free of any such assignment, an amount of its Commitment of not less than $10,000,000 and (e) the parties to such assignment shall execute and deliver to the Agent, for recording in the Register (as hereinafter defined), an Assignment and Acceptance, substantially in the form of Exhibit F hereto (an "Assignment and Acceptance'), together with any Notes subject to such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (ii) the assigning Lender shall, to the extent provided in such assignment and upon payment to the Agent of the registration fee referred to in Section 18.3, be released from its obligations under this Agreement. Section 18.2. Certain Representations and Warranties; Limitations; Covenants. By executing and delivering an Assignment and Acceptance, the parties to the assignment thereunder confirm to and agree with each other and the other parties hereto as follows: (a) other than the 75 representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto; (b) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Person primarily or secondarily liable in respect of any of the Obligations, or the performance or observance by the Borrower or any other Person primarily or secondarily liable in respect of any of the Obligations of any of their obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto or the validity or enforceability or priority of any lien or any Collateral; (c) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 6.4 and Section 7.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (d) such assignee will, independently and without reliance upon the assigning Lender, the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions and Collateral decisions in taking or not taking action under this Agreement, (e) such assignee represents and warrants that it is an Eligible Assignee; (f) such assignee appoints and authorizes the Agent to take such action as "Agent" on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; (g) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender; and (h) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance. Section 18.3. Register. The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register or similar list (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment Percentages of, and principal amount of the Loans owing to the Lenders from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and the Lenders at any reasonable time and from time to time upon reasonable prior notice. Upon each such recordation, the assigning Lender agrees to pay to the Agent a registration fee in the sum of $2,500.00. The Agent may amend Schedules 1 and 1.2 hereof to reflect the recording of any such assignments. Section 18.4. New Notes. Upon its receipt of an Assignment and Acceptance executed by the parties to such assignment, together with each Note subject to such assignment, the Agent shall 76 (a) record the information contained therein in the Register, and (b) give prompt notice thereof to the Borrower and the Lenders (other than the assigning Lender ). Within five (5) Business Days after receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for each surrendered Note, a new Note to the order of such Eligible Assignee in an amount equal to the amount assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Lender has retained some portion of its Loans hereunder, a new Note to the order of the assigning Lender in an amount equal to the amount retained by it hereunder. Such new Notes shall provide that they are replacements for the surrendered Notes and that they do not constitute a novation, shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the assigned Notes. Within five (5) days of issuance of any new Notes pursuant to this Section 18.4, the Borrower shall deliver an opinion of counsel, addressed to the Lenders and the Agent, relating to the due authorization, execution and delivery of such new Notes and the legality, validity and binding non-preferential effect thereof, and that the Obligations evidenced by the new Notes are secured by the Collateral with the same validity, enforceability and priority as if given on the Effective Date, in form and substance satisfactory to the Lenders. The surrendered Notes shall be cancelled and returned to the Borrower. Section 18.5. Participations. Each Lender may sell participations to one or more banks or other entities in a portion of such Lender's rights and obligations under this Agreement and the other Loan Documents not to exceed forty-nine percent (49%) of its Commitment Percentage; provided that (a) the Agent shall have given its prior written consent to such participation, except that any Lender may sell participations to its Affiliated Lenders without such consent, (b) each such participation shall be in an amount of not less than $10,000,000 that is a whole multiple of $1,000,000, (c) any such sale or participation shall not affect the rights and duties of the selling Lender hereunder to the Borrower and the Lender shall continue to exercise all approvals, disapprovals and other functions of a Lender, (d) the only rights granted to the participant pursuant to such participation arrangements with respect to waivers, amendments or modifications of the Loan Documents shall be the rights to approve the vote of the Lender as to waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the Commitment of such Lender as it relates to such participant, reduce the amount of any fees to which such participant is entitled or extend any regularly scheduled payment date for principal or interest, provided that all approvals affecting a Loan or this Agreement under this clause (d) shall be by a fifty-one percent (51%) vote of such Lender's Commitment Percentage, and (e) no participant shall have the right to grant further participations or assign its rights, obligations or interests under such participation to other Persons without the prior written consent of the Agent. The Agent shall promptly advise the Borrower in writing of any such sale or participation. Section 18.6. Pledge by Lender. Any Lender may at any time pledge all or any portion of its interest and rights under this Agreement (including all or any portion of its Note) to any of the 77 twelve Federal Reserve Lenders organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or the enforcement thereof shall release the pledgor Lender from its obligations hereunder or under any of the other Loan Documents. Section 18.7. No Assignment by Borrower. The Borrower shall not assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written consent of each of the Lenders. Section 18.8. Disclosure. The Borrower agrees that in addition to disclosures made in accordance with standard banking practices any Lender may disclose information obtained by such Lender pursuant to this Agreement to assignees or participants and potential assignees or participants hereunder. Such Lender shall obtain from each party to whom it discloses such information, the agreement by such party to comply with the Lenders' agreements with respect to Confidential Information set forth in Section 7.9. Section 19. NOTICES, ETC. Except as otherwise expressly provided in this Agreement, all notices and other communications made or required to be given pursuant to this Agreement or the Notes shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telegraph, telecopy, telefax or telex and confirmed by delivery via courier or postal service, addressed as follows: (a) if to the Borrower, at 77 West Wacker Drive, Suite 3900, Chicago, IL 60601, Attention: Chief Financial Officer or at such other address for notice as the Borrower shall last have furnished in writing to the Agent; and (b) if to the Agent, at 100 Federal Street, Boston, Massachusetts 02110, Attention: Real Estate Department, and to 115 Perimeter Center Place, N.E., Suite 500, Atlanta, Georgia 30346, Attn: Lori Y. Litow, Vice President, or such other address for notice as the Agent shall last have furnished in writing to the Borrower. (c) if to any Lender, at such Lender's address set forth on Schedule 1, hereto, or such other address for notice as such Lender shall have last furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 78 Section 20. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE. THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SUCH STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT BY IT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND BORROWER CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT FOR ANY SUIT BY AGENT OR ANY LENDER AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN Section 19. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. IN ADDITION TO THE COURTS OF MASSACHUSETTS AND NEW YORK OR ANY FEDERAL COURT SITTING THEREIN, THE AGENT OR ANY LENDER MAY BRING ACTION(S) FOR ENFORCEMENT ON A NONEXCLUSIVE BASIS WHERE ANY COLLATERAL EXISTS AND THE BORROWER CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN Section 19. Section 21. HEADINGS. The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. Section 22. COUNTERPARTS. This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. Section 23. ENTIRE AGREEMENT. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in Section 25. Section 24. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS. THE BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE 79 OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT TO THE EXTENT EXPRESSLY PROHIBITED BY LAW, THE BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE AGENT OR ANY LENDER HAD REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT OR SUCH LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (B) ACKNOWLEDGES THAT THE AGENT AND THE BANKS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH THEY ARE PARTIES BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. Section 25. CONSENTS, AMENDMENTS, WAIVERS, ETC. Any consent or approval required or permitted by this Agreement may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrower of any terms of this Agreement or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Requisite Lenders, and, in the case of amendments, with the written consent of the Borrower other than amendments to schedules made in the ordinary course as contemplated by this Agreement. Notwithstanding the foregoing, (i) the rate of interest on and the term or amount of the Notes, (ii) the amount of the Commitments of the Lenders, (iii) the amount of any fee payable to a Lender hereunder, (iv) any provision herein or in any of the Loan Documents which expressly requires consent of all the Lenders, (v) the funding provisions of Section 2.4 and Section 2.5 hereof, and (vi) the rights, duties and obligations of the Agent specified in Section 14 hereof, may not be amended without the written consent of each Lender affected thereby, nor may the Agent release any obligor from its liability with respect to the Obligations, without first obtaining the written consent of all the Lenders. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Agent or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrower shall entitle the Borrower to other or further notice or demand in similar or other circumstances. Section 26. SEVERABILITY. The provisions of this Agreement are severable, and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 80 Section 27. ACKNOWLEDGMENTS. The Borrower hereby acknowledges that: (i) neither the Agent nor any Lender has any fiduciary relationship with, or fiduciary duty to, the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents; (ii) the relationship in connection herewith between the Agent and the Lenders, on the one hand, and the Borrower, on the other hand, is solely that of debtor and creditor and (iii) no joint venture or partnership among any of the parties hereto is created hereby or by the other Loan Documents, or otherwise exists by virtue of the Facility or the Loans. Section 28. PARTNER LIABILITY. Section 28.1. Limited Recourse to Company. Notwithstanding anything expressed or implied to the contrary contained herein, the Company shall not be liable hereunder or under any Guaranty or under any legal or equitable proceeding or by virtue of any statute, regulation or other applicable law for (i) any payment of principal or interest on, or any other amounts due under, any of the Loans, or (ii) any reimbursement obligation with respect to a Drawing under a Letter of Credit, or (iii) to repay any other indebtedness of Borrower or any Guarantor, provided, however, that nothing herein shall be construed to prevent the Agent or any Lender from recovering from the Company, or limit the Agent's or any Lender's recourse against the Company for any losses, damages or costs (including, without limitation, reasonable legal expenses), incurred by the Agent or any Lender in connection with the Company's breach of the Company's own covenants and agreements herein or in the Indemnity Agreement, or in connection with the Company's fraud, misappropriation of funds (whether due to the Company's failure to contribute Net Offering Proceeds to the Borrower, as required by Section 7.20, or its receipt of Distributions from the Borrower in violation of Section 8.7, or otherwise) or any misrepresentation made by or on behalf of the Company hereunder or in connection with the transactions contemplated hereby. Section 28.2. Limited Recourse to Partners of Borrower other than the Company. With respect to all partners of the Borrower other than the Company, no personal deficiency judgment or any other judgment shall be asserted or enforced against any such partner for payment of any amount hereunder or for observance or performance of any of the obligations of the Borrower contained herein, except as expressly set forth in this agreement or any other agreement or instrument or document as an obligation of such partner in connection herewith, and provided that the foregoing shall not affect the liability which any of such other partners may have for any fraud, misappropriation of funds or intentional misrepresentation made hereunder by or on behalf of the Borrower or in connection with the transactions contemplated hereby. 81 IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as a sealed instrument as of the date first set forth above.
WITNESS: BANKBOSTON, N.A. - ---------------------------------------- By: ---------------------------------------- Lori Y. Litow Its: Vice Presiden ---------------------------------------- PRUDENTIAL SECURITIES CREDIT CORPORATION By: /s/ George D. Morgan - ---------------------------------------- ---------------------------------------- George D. Morgan Its: Vice President ---------------------------------------- PRIME GROUP REALTY TRUST - ---------------------------------------- By: ---------------------------------------- ---------------------------------------- Its: ---------------------------------------- PRIME GROUP REALTY, L.P. By: PRIME GROUP REALTY TRUST, its general partner - ---------------------------------------- By: ---------------------------------------- ---------------------------------------- Its: ----------------------------------------
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as a sealed instrument as of the date first set forth above.
WITNESS: BANKBOSTON, N.A. /s/Nancy Johns - ---------------------------------------- By: /s/ Lori Y. Litow ---------------------------------------- Lori Y. Litow Its: Vice President PRUDENTIAL SECURITIES CREDIT CORPORATION By: - ---------------------------------------- ---------------------------------------- ---------------------------------------- Its: ---------------------------------------- PRIME GROUP REALTY TRUST /s/Illegible - ---------------------------------------- By: /s/ W. Michael Karnes ---------------------------------------- W. Michael Karnes Its: Executive VP PRIME GROUP REALTY, L.P. By: PRIME GROUP REALTY TRUST, its general partner /s/Illegible - ---------------------------------------- By: /s/ W. Michael Karnes ---------------------------------------- W. Michael Karnes Its: Executive VP
Exhibit A FORM OF NOTE No. ___ [Date] [Amount] FOR VALUE RECEIVED, the undersigned, Prime Group Realty, L.P., a Delaware limited partnership (the "Borrower"), promises to pay to the order of [Name of Lender] (hereinafter, together with its successors in title and assigns, called the "Lender") at the head office of BankBoston, N.A., as Agent (the "Agent") at 100 Federal Street, Boston, Massachusetts 02110, the principal sum of [Amount in Words][Amount in Numbers] or, if less, the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to the Credit Agreement dated as of November 17, 1997 among the Lender, the Borrower, Prime Group Realty Trust, the other lending institutions named therein and the Agent, as amended from time to time (the "Credit Agreement"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. Unless otherwise provided herein, the rules of interpretation set forth in Section 1.2 of the Credit Agreement shall be applicable to this Note. The Borrower also promises to pay (a) principal from time to time at the times provided in the Credit Agreement and (b) interest from the date hereof on the principal amount from time to time unpaid at the rates and times set forth in the Credit Agreement and in all cases in accordance with the terms of the Credit Agreement. Late charges and other charges and default rate interest shall be paid by Borrower in accordance with the terms of the Credit Agreement. The entire outstanding principal amount of this Note, together with all accrued but unpaid interest thereon, shall be due and payable in full on the Maturity Date. The Lender may endorse the record relating to this Note with appropriate notations evidencing advances and payments of principal hereunder as contemplated by the Credit Agreement. This Note is issued pursuant to, is entitled to the benefits of, and is subject to the provisions of the Credit Agreement. The principal of this Note is subject to prepayment in whole or in part in the manner and to the extent specified in the Credit Agreement. This Note is secured by the Security Documents. However, the principal of this Note, the interest accrued on this Note and all other Obligations of the Borrower are full recourse obligations of the Borrower, and all of its Real Estate Assets, the Collateral and its other properties shall be available for the payment and performance of this Note, the interest accrued on this Note, and all of such other Obligations. The liability of the partners of the Borrower hereunder is limited as set forth in Section 28 of the Credit Agreement. In case an Event of Default shall occur and be continuing, the entire unpaid principal amount of this Note and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. The Borrower and all endorsers hereby waive presentment, demand, protest and notice of any kind in connection with the delivery, acceptance, performance and enforcement of this Note, and also hereby assent to extensions of time of payment or forbearance or other indulgences without notice. THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED AND DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed in its name as an instrument under seal on the date first above written. WITNESS: PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its managing general partner By: - ----------------------------------- ----------------------------------- Exhibit B LOAN REQUEST Prime Group Realty, L.P. 77 West Wacker Drive, Suite 3900 Chicago, IL 60601 [Date] BankBoston, N.A., as Agent 100 Federal Street Boston, MA 02110 Ladies and Gentlemen: Re: Loan Request under Credit Agreement dated as of November 17, 1997 Pursuant to Section 2.5 of the Credit Agreement dated as of November 17, 1997, among you, certain other Lenders and us (the "Credit Agreement"), we hereby request that you make a Loan as follows: (i) Principal amount requested: $ ----------- (ii) Proposed Borrowing Date: ---------------- (iii) Interest Period: ------------------------- (iv) Type: ----------------------------------- (v) Purpose of Loan: ----------------------------------- This Loan Request is submitted pursuant to, and shall be governed by, and subject to satisfaction of, the terms, conditions and provisions set forth in Section 2.5 of the Credit Agreement. The undersigned hereby further certifies to you that it is in compliance with the covenants specified in Section 9 of the Credit Agreement, and will remain in compliance with such covenants after the making of the requested Loan, as evidenced by a Compliance Certificate in the form of Exhibit C to the Credit Agreement of even date herewith delivered to you simultaneously with this Loan Request. We also understand that if you grant this request this request obligates us to accept the requested Loan on such date. All terms defined in the Credit Agreement and used herein without definition shall have the meanings set forth in Section 1.1 of the Credit Agreement. The undersigned hereby certifies to you, in accordance with the provisions of Section 11.1 of the Credit Agreement, that the representations and warranties contained in the Credit Agreement and in each document and instrument delivered pursuant to or in connection therewith were true as of the date as of which they were made, are also true at and as of the date hereof, and will also be true at and as of the proposed Borrowing Date of the Loan requested hereby, in each case except as otherwise permitted pursuant to the provisions of Section 11.1 of the Credit Agreement, and no Default or Event of Default has occurred and is continuing. Very truly yours, Prime Group Realty, L.P. By: Prime Group Realty Trust, Its managing general partner By: ------------------------------- ------------------------------- Its: -------------------------- Exhibit C Prime Group Realty, L.P. 77 West Wacker Drive, Suite 3900 Chicago, IL 60601 Compliance Certificate under Credit Agreement dated as of November 17, 1997 The undersigned, a Responsible Officer of Prime Group Realty Trust, general partner of Prime Group Realty, L.P. (the "Borrower"), hereby certifies on behalf of the Borrower as of the date hereof the following: 1. No Defaults. I have read a copy of the Credit Agreement dated as of November 17, 1997 (the "Credit Agreement") among the Borrower, BankBoston, N.A., the other lending institutions party thereto, and BankBoston, N.A., as Agent. Terms used herein and not otherwise defined herein shall have the meanings set forth in Section 1.1 of the Credit Agreement. No Default is continuing in the performance or observance of any of the covenants, terms or provisions of the Credit Agreement or any of the other Loan Documents. Without limiting the foregoing, the Borrower has not taken any actions which are prohibited by the negative covenants set forth in Section 8 of the Credit Agreement. Attached hereto as Appendix I are all relevant calculations needed to determine whether the Borrower is in compliance with Section 9 and Section 8.3(g) of the Credit Agreement as of the end of the most recently completed fiscal quarter (except that in the case of Compliance Certificates delivered pursuant to Section 2.5(a), Section 2.9(b) Section 11.1, Section 5.5(a) or Section 8.4(b), the calculations determining compliance with Section 9.1, Section 9.2 and Section 9.3 are based on a Pro Forma Principal Amount (after giving effect to the proposed transaction) and is in compliance with Section 8.7 of the Credit Agreement for the most recently completed fiscal year. 2. No Material Changes, Etc. Except as disclosed on Appendix II hereto, since the [date of most recent financial statements furnished to the Agent and the Lenders], there have occurred no materially adverse changes in the financial condition or business of the Borrower as shown on or reflected in the balance sheet of the Borrower as at such date other than (a) changes in the ordinary course of business that have not had any materially adverse effect either individually or in the aggregate on the business or financial condition of the Borrower and (b) changes resulting from the making of the Loans and the transactions contemplated by the Credit Agreement. 3. No Materially Adverse Contracts, Etc. Neither the Borrower nor the Company is subject to any charter, corporate, trust, partnership or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected, in the reasonable judgment of the Company's officers, in the future to have a Materially Adverse Effect. Neither the Borrower nor the Company is a party to any contract or agreement that has or is expected, in the reasonable judgment of the Company's officers, to have a Materially Adverse Effect. Prime Group Realty, L.P. By: Prime Group Realty Trust, Its managing general partner By: ------------------------------- ------------------------------- Its: -------------------------- Date: Appendix I FINANCIAL COVENANT CALCULATIONS Note: Unless otherwise indicated all calculations are as of or for the fiscal quarter ending on such date (the "Fiscal Quarter").
1. Appraisal Value [Section 9.1] (a) Pro Forma Principal Amount $_____________ (b) Collateral Value of Mortgaged $_____________ Properties (see attached Schedule of Collateral Values) CALCULATIONS: (a)/(b) = ____% which is less than 60% 2. Minimum Debt Service Coverage [Section 9.2] (a) Net Operating Income for all of the Mortgaged Properties: $_____________ (b) Pro Forma Debt Service Charges for Mortgaged Properties based on three monthly payments of mortgage style amortization of the Pro Forma Principal Amount of $_______________ amortized over 25 years at _______% per annum, being the greater of the current average interest rate on the Loans or 1.75% above the current ten year U.S. Treasury bill yield: $_____________ CALCULATIONS: (a)/(b) = _________ which is not less than 1.5
3. Total Liabilities to Total Adjusted Assets [Section 9.3] (a) Total Liabilities: $_____________ (b) Cash and cash equivalents: $_____________ (c) EBITDA last quarter: $_____________ (d) EBITDA previous quarter: $_____________ (e) Annualized EBITDA [(c) + (d) times 2]: $_____________ (f) Line (e) divided by 0.0975: $_____________ (g) Total Adjusted Assets [(b) + (f)]: $_____________ CALCULATIONS: (a)/(g) = which is less than 55% --------- 4. Minimum Tangible Net Worth [Section 9.4] (a) Total Assets (GAAP assets plus depreciation on Real Estate Assets) $_____________ (b) Total Liabilities (same as line 3(a)) $_____________ (c) Intangibles $_____________ (d) Tangible Net Worth [(a)-(b)-(c)] $_____________ (e) Net Offering Proceeds $_____________ (f) $350,000,000 plus .75 times (e) $_____________ COVENANT: Line (d) should exceed line (f) 5. Total Operating Cash Flow to Interest Expense [Section 9.5] (a) EBITDA (same as line 3(c)) $_____________ (b) Gross leasable area of all Real Estate Assets ______________ (c) Reserve Amount ((c) times $0.25 divided by 4) $_____________ (d) Total Operating Cash Flow [(a) - (c)] $_____________ (e) Interest Expense (includes capitalized interest) $_____________ CALCULATIONS: (d)/(e) = _____ which is not less than 2.0 6. EBITDA to Fixed Charges [Section 9.6] (a) EBITDA (same as line 3(c)) $_____________ (b) Interest Expense (same as line 5(e)) $_____________ (c) Principal installments and current maturities $_____________ not refinanced (d) Preferred dividends and distributions $_____________ (e) Fixed Charges (sum of lines (b), (c), and (d)) $_____________ CALCULATIONS: (a)/(e) = ____________which is not less than 1.75
8. Investments in Permitted Developments [Section 8.3(g)] Attached hereto is a Schedule of all Permitted Developments in process as of ________________ (a) Investments in Permitted Developments $_____________ (b) Total Adjusted Assets (same as line 3(g)) $_____________ (c) 20% of Total Adjusted Assets $_____________ COVENANT: Line (a) should not exceed line (c) 9. Distributions [Section 8.7] (a) Total Distributions during most recently ended $_____________ fiscal year (b) Funds From Operations for said fiscal year $_____________ (c) Total Distributions during most recently ended $_____________ fiscal quarter (d) Funds from Operations for fiscal quarter referenced $_____________ in (c) (e) Total Distributions during the fiscal quarter preceding $_____________ the fiscal quarter referenced in (c) (f) Funds from Operations during fiscal quarter referenced $_____________ in (e) (g) Total Distributions during the fiscal quarter preceding $_____________ the fiscal quarter referenced in (e) (h) Funds from Operations during fiscal quarter referenced $_____________ in (g) CALCULATIONS: (a)/(b) = _____% which is less than 90% (c)/(d) = _____% (e)/(f) = _____% (g)/(h) = _____%
At least one of the three percentages immediately above is less than 100% SCHEDULE OF COLLATERAL VALUES
Borrowing Mortgaged NOI NOI Reserve Cap Base Appraised Collateral Property Last Q Previous Q Amount Rate Value Value Value -------- ------ ---------- ------ ---- ----- ----- ----- Totals:
SCHEDULE OF PERMITTED DEVELOPMENTS
Scheduled Project Location Size (sq. ft.) Total Project Cost Start Date Completion Date - ---------------- -------------- ------------------ ---------- ---------------
APPENDIX II MATERIAL CHANGES Exhibit D LETTER OF CREDIT REQUEST Prime Group Realty, L.P. 77 West Wacker Drive, Suite 3900 Chicago, IL 60601 [Date] BankBoston, N.A., as Agent 100 Federal Street Boston, MA 02110 Ladies and Gentlemen: Re: Letter of Credit Request under Credit Agreement dated as of November 17, 1997 Pursuant to Section 2.9 of the Credit Agreement dated as of November 17, 1997, among you, Prime Group Realty Trust, certain other Lenders and us (the "Credit Agreement"), we hereby request that you issue [extend or renew, if applicable] a Letter of Credit as follows: (i) Name and address of beneficiary: (ii) Face amount: $ (iii) Proposed Issuance Date: Proposed Expiration Date: (iv) Other terms and conditions as set forth in the proposed form of Letter of Credit attached hereto. (v) Purpose of Letter of Credit: This Letter of Credit Request is submitted pursuant to, and shall be governed by, and subject to satisfaction of, the terms, conditions and provisions set forth in Section 2.9 of the Credit Agreement. The undersigned hereby further certifies to you that it is in compliance with the covenants specified in Section 9 of the Credit Agreement, and will remain in compliance with such covenants after the Outstanding Principal Amount is adjusted to include the face amount of the requested Letter of Credit, as evidenced by a Compliance Certificate in the form of Exhibit C to the Credit Agreement of even date herewith delivered to you simultaneously with this Letter of Credit Request. We also understand that if you grant this request this request obligates us to accept the requested Letter of Credit [or extension or renewal thereof] and pay the issuance fee [or the renewal fee] and Letter of Credit fee as required by Section 2.9(c). All terms defined in the Credit Agreement and used herein without definition shall have the meanings set forth in Section 1.1 of the Credit Agreement. The undersigned hereby certifies to you, in accordance with the provisions of Section 11.1 of the Credit Agreement, that the representations and warranties contained in the Credit Agreement and in each document and instrument delivered pursuant to or in connection therewith were true as of the date as of which they were made, are also true at and as of the date hereof, and will also be true at and as of the proposed issuance date of the Letter of Credit requested hereby, in each case except as otherwise permitted pursuant to the provisions of Section 11.1 of the Credit Agreement, and no Default or Event of Default has occurred and is continuing. Very truly yours, Prime Group Realty, L.P. By: Prime Group Realty Trust, Its general partner By: ------------------------------- ------------------------------- Its: ------------------------------- EXHIBIT F FORM OF ASSIGNMENT AND ACCEPTANCE Dated Reference is made to the Credit Agreement, dated as of November 17, 1997 (as amended and in effect from time to time, the "Agreement"), among Prime Group Realty, L.P., a Delaware limited partnership (the "Borrower"), BankBoston, N.A., the other Lenders and BankBoston, N.A. as agent (the "Agent") for itself and the other Lenders. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Agreement. (the "Assignor") and - ------------------------------------------------------------ (the "Assignee") agree as follows: - ------------------------------------------- 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, a % interest in and to all the Assignor's rights and obligations under the Agreement as of the Effective Date (as hereinafter defined). 2. The Assignor (i) represents that as of the date hereof, its Commitment (without giving effect to assignments thereof which have not yet become effective) is $__________ and its Commitment Percentage with respect thereto is %, and the outstanding balance of its Loans (unreduced by any assignments thereof which have not yet become effective) is $__________; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Agreement, the other Loan Documents or any other instrument or document furnished pursuant thereto on the status or value of any Collateral, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any of its Subsidiaries or any other person which may be primarily or secondarily liable in respect of any of the Obligations or any of their obligations under the Agreement or the other Loan Documents or any other instrument or document delivered or executed pursuant thereto; and (v) attaches the Note delivered to it under the Agreement and requests that the Borrower exchange such Note for new Notes payable to each of the Assignor and the Assignee as follows: Notes Payable to Amount the Order of: of Note - ----------------- ------- [Name of Assignor] [($ )] [Name of Assignee] [($ )] 3. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Sections 6.4 and 7.4 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon the Assignor, any other Lender or the Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions and review and analysis of the granting and perfecting of any purported liens and the status and value of any Collateral in taking or not taking action under the Agreement; (iv) confirms that it is an Eligible Assignee; (v) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers as are reasonably incidental thereto pursuant to the terms of the Agreement and the other Loan Documents; and (vi) agrees that it will perform all the obligations which by the terms of the Agreement are required to be performed by it as a Lender in accordance with the terms of the Agreement. 4. The effective date for this Assignment and Acceptance shall be (the "Effective Date"). Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording in the Register by the Agent. This Assignment and Acceptance may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Assignment and Acceptance it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 5. Upon such acceptance and recording, from and after the Effective Date, (i) the Assignee shall be a party to the Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder, and (ii) the Assignor shall, with respect to that portion of its interest under the Agreement assigned hereunder relinquish its rights and be released from its obligations under the Agreement. 6. Upon such acceptance and recording, from and after the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, fees and other amounts) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to the Effective Date by the Agent or with respect to the making of this assignment directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT TO BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, intending to be legally bound, each of the undersigned has caused this Assignment and Acceptance to be executed on its behalf by its officer thereunto duly authorized, as of the date first above written. [NAME OF ASSIGNOR] By: ------------------------------- Title: ----------------------------- [NAME OF ASSIGNEE] By: ------------------------------- Title: ---------------------------- SCHEDULE 1 Lenders; Domestic and Eurodollar Lending Offices BankBoston, N.A. 100 Federal Street Boston, MA 02110 (Domestic and Eurodollar) Prudential Securities Credit Corporation One New York Plaza New York, New York 10292 (Domestic and Eurodollar) SCHEDULE 1.1 Mortgaged Properties 1. Donnelley Building, 77 West Wacker Drive, Chicago, IL SCHEDULE 1.2 Commitments
Commitment Lender Commitment Percentage - ------ ---------- ---------- BankBoston, N.A $112,500,000 50% Prudential Securities Credit Corporation $112,500,000 50% Total $225,000,000 100%
SCHEDULE 1.3 Guarantor Subsidiaries, Related Companies and Permitted Joint Ventures Guarantor Subsidiaries - ---------------------- 77 West Wacker Limited Partnership Enterprise Center I, L.P. Enterprise Center II, L.P. Enterprise Center III, L.P. Enterprise Center IV, L.P. Enterprise Center V, L.P. Enterprise Center VI, L.P. Enterprise Center VII, L.P. Enterprise Center VIII, L.P. Enterprise Center IX, L.P. Enterprise Center X, L.P. Arlington Heights I, L.P. Arlington Heights II, L.P. Arlington Heights III, L.P. East Chicago Enterprise Center Limited Partnership Hammond Enterprise Center Limited Partnership Nashville Office Building I, Ltd. Old Kingston Properties, Ltd. Professional Plaza, Ltd. Centre Square II, Ltd. Triad Parking Company, Ltd. Related Companies - ----------------- Prime Group Realty Trust Prime Group Realty, L.P. 1990 Algonquin Road, L.L.C. 2010 Algonquin Road, L.L.C. 555 Huehl Road, L.L.C. 1669 Wodfiled Road, L.L.C. 475 Superior Avenue, L.L.C. Enterprise Drive, L.L.C. Enterprise Drive, L.L.C. 280 Shuman Blvd., L.L.C. 77 West Wacker Limited Partnership Enterprise Center I, L.P. Enterprise Center II, L.P. Enterprise Center III, L.P. Enterprise Center IV, L.P. Enterprise Center V, L.P. Enterprise Center VI, L.P. SCHEDULE 1.3 (continued) Enterprise Center VII, L.P. Enterprise Center VIII, L.P. Enterprise Center IX, L.P. Enterprise Center X, L.P. Arlington Heights I, L.P. Arlington Heights II, L.P. Arlington Heights III, L.P. East Chicago Enterprise Center Limited Partnership Hammond Enterprise Center Limited Partnership Nashville Office Building I, Ltd. Old Kingston Properties, Ltd. Professional Plaza, Ltd. Centre Square II, Ltd. Triad Parking Company, Ltd. 77 Fitness Center Limited Partnership Libertyville Tech Way, L.L.C. 3818 Grandville, L.L.C. 306 Era Drive, L.L.C. 1301 Ridgeview Drive, L.L.C. 515 Heuhl Road, L.L.C. 455 Academy Drive, L.L.C. 801 Technology Way, L.L.C. Prime Columbus Industrial, L.L.C. Kemper/Prime Industrial Partner 1051 N. Kirk Road, L.L.C. 4211 Madison Street, L.L.C. 200 E. Fullerton L.L.C. 350 Randy Road, L.L.C. 4300 Madison Street, L.L.C. 370 Carol Lane, L.L.C. 388 Carol Lane, L.L.C. 941 Weigel Drive, L.L.C. 342 Carol Lane, L.L.C. 343 Carol Lane, L.L.C. 371 N. Gary Avenue, L.L.C. 350 N. Mannheim Road, L.L.C. 1600 167th Street, L.L.C. 1301 E. Tower Road, L.L.C. 4343 Commerce Court, L.L.C. 11039 Gage Avenue, L.L.C. 11045 Gage Avenue, L.L.C. 1401 S. Jefferson, L.L.C. 4100 Madison Street, L.L.C. 4160 Madison Street, L.L.C. 550 Kehoe Blvd., L.L.C. SCHEDULE 1.3 (continued) Permitted Joint Ventures None. SCHEDULE 1.4 Initial Letters of Credit
Beneficiary IRB Project Face Amount - ----------- ----------- ----------- NBD Bank, N. A Enterprise Center I, L.P. $2,939,726 NBD Bank, N. A Enterprise Center II, L.P. $5,068,493 NBD Bank, N. A Enterprise Center III, L.P. $4,561,644 NBD Bank, N. A Enterprise Center IV, L.P. $2,635,616 NBD Bank, N. A Enterprise Center V, L.P. $5,068,493 NBD Bank, N. A Enterprise Center VI, L.P. $4,967,123 Cole Taylor Bank Enterprise Center VII, L.P. $7,298,630 Cole Taylor Bank Enterprise Center VIII, L.P. $7,095,890 Cole Taylor Bank Enterprise Center IX, L.P. $4,815,068 Cole Taylor Bank Enterprise Center X, L.P. $4,358,904 First Tennessee Bank N.A Nashville Office Building I, Ltd. $4,915,069 First Tennessee Bank N.A Old Kingston Properties, Ltd. $3,583,905 First Tennessee Bank N.A Professional Plaza, Ltd. $9,215,754 First Tennessee Bank N.A Centre Square II, Ltd. $9,215,754 Credit Suisse First Boston Tennessee Projects. $27,261,554.88 TOTAL $26,930,482
SCHEDULE 5.3 (b) Required Additional Properties 1. Hilton Parking Garage, Knoxville, TN 2. Chicago Enterprise Ctr., Chicago, IL 3. Arlington Hts. Enterprise Ctr., 425 E. Algonquin Rd., Arlington Heights, IL 4. East Chicago Enterprise Ctr., East Chicago, IN 5. Hammond Enterprise Ctr., Hammond, IN 6. SunTrust Bank Bldg., 201 4th Ave., N., Nashville, TN 7. The Weston, 4823 Kingston Pike, Knoxville, TN 8. Centre Square I, 620 Market St., Knoxville, TN 9. Centre Square II, 625 Gay St., Knoxville, TN SCHEDULE 6.3 Title to Properties R. Dan Culp holds a 0.1% limited partnership interest in Professional Plaza, Ltd. SCHEDULE 6.7 Litigation (a) Karen McIntosh v. The Prime Group, Inc., Pepper Construction Company, 77 West Wacker Limited Partnership, and all unknown owners of 77 West Wacker, Case No. 94 M2 1646, filed on June 9, 1994, in the Circuit Court of Cook County, Illinois, Municipal Department - Second District. Plaintiff, an employee of a tenant in the 77 West Wacker Drive Building (the "77 Project"), alleges that she was struck by a board providing protection to the wood paneling in the elevator cab in the 77 Project and, as a result thereof, sustained injuries. Pepper Construction Company ("Pepper") constructed the protective barrier in the elevator cab. The plaintiff alleges that The Prime Group, Inc. ("PGI") and 77 West Wacker Limited Partnership (the "77 Partnership") were negligent in failing to maintain, inspect and repair the elevator cab in a reasonable manner and, that her injuries were proximately caused by such negligence. This matter has been forwarded to the 77 Partnership's insurance carrier. The 77 Partnership's insurance carrier has tendered the defense of this action to the insurance carrier for Pepper, which has accepted the tender. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership or PGI will be fully covered by insurance. (b) Michael Spiezio v. Schal Associates, Inc., Pepper Construction, The Prime Group, Inc. and Carrera Marble & Mosaics, Case No. 92L15284, filed on December 15, 1992, in the Circuit Court of Cook County, Illinois, County Department, Law Division. Plaintiff alleges that he was an employee of Carrera Marble & Mosaics ("Carrera"), which performed work and/or supplied materials for or in connection with the construction of the 77 Project. The plaintiff alleges that, while working on the 77 Project, the plaintiff sustained injuries, and is seeking damages therefor. The defense of this case is being handled by Carrera's insurance carrier. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership or PGI will be fully covered by insurance. (c) Giuseppe Fricano v. Schal Associate, Inc. and 77 West Wacker Limited Partnership, Case No. 92L14542, filed in the Circuit Court, Cook County, Illinois on November 20, 1992. The plaintiff in this action, alleges that he was an employee of GMI Corporation ("GMI"), a subcontractor retained by Schal to perform work in connection with the construction of the 77 Project, and that he was injured while performing work on the 77 Project. The 77 Partnership has tendered defense of this lawsuit to the 77 Partnership's insurance carrier, which, in turn, tendered defense of the action to Massachusetts Bay Insurance Company ("MBIC"), the insurance carrier of GMI, which has accepted the defense of this lawsuit. The defense of this action is being handled by attorneys retained by MBIC. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (d) Charles O. Dowler v. Schal Associates, Inc., The Prime Group, Inc., Prime Group Realty, Inc. and 77 West Wacker Limited Partnership, Case No. 93L07708, filed on June 25, 1993, in the Circuit Court of Cook County, Illinois, County Department, Law Division. Plaintiff in this action alleges that he was employed by PDM Structural Group ("PDM"), a subcontractor retained by Schal to perform work in connection with the construction of the 77 Project, and that, on or about July 2, 1991, the plaintiff was injured while working on the 77 Project. The defense of PGI, Prime Group Realty, Inc. and the 77 Partnership in this action was tendered to the insurance carrier for Schal, which, in turn, tendered the defense on behalf of Schal, PGI, Prime Group Realty, Inc. and the 77 Partnership to the insurance carrier for PDM. The insurance carrier for PDM has accepted tender of the defense on behalf of all defendants of this action. The defense of this action is being handled by attorneys retained by PDM's insurance carrier. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership, PGI or Prime Group Realty, Inc. will be fully covered by insurance. (e) Robert Ochoa v. 77 West Wacker Limited Partnership, American National Bank as Trustee under Trust Agreement No. 110025-08, The Prime Group, Inc., R.R. Donnelley Building, Schal Construction Company, Pepper Construction, LaSalle Construction, Robert Irsay Company and TOR Construction, Case No. 93L010010, filed on August 17, 1993, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff alleges that he was an employee of Great Lakes Plumbing Heating Company ("Great Lakes"), a subcontractor of Schal, and that, on or about May 2, 1992, plaintiff fell off scaffolding while performing work in connection with the construction of the 77 Project and, as a result thereof, sustained injuries. The 77 Partnership has tendered defense of this action on behalf of the 77 Partnership to the 77 Partnership's insurance carrier, which, in turn, tendered defense of this action to the insurance carrier for Schal. The insurance carrier for Schal, in turn, tendered defense of this action to the insurance carrier for Great Lakes, which has accepted such tender. The defense of this action was being handled by attorneys retained by the insurance carrier for Great Lakes. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (f) Michael Schumacher v. Schal Associates, Inc. and The Prime Group, Inc., Case No. 94L08011, filed on June 29, 1994, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff alleges that he was an employee of Riggio Caulking, Inc., a subcontractor of Schal, and that he was injured on September 16, 1992 while performing work on or with respect to the 77 Project. This matter has been forwarded to the 77 Partnership's insurance carrier, which tendered defense of this action to Schal's insurance carrier. The defense of this action is being handled by attorneys retained by Schal's insurance carrier. The 77 Partnership expects that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (g) Terrance Sullivan v. The Prime Group, Inc., Schal Associates, Inc. n/k/a Schal Bovis, Inc., 77 West Wacker Limited Partnership, Pitt-Des Moines, Inc. and Tribco Construction Co., Case No. 94L09311, filed on July 27, 1994, in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff, alleges that he was an employee of Gateway Steel which, in turn, was a subcontractor of Schal, and that, on August 18, 1990, the plaintiff was injured while performing work in connection with the construction of the 77 Project. This matter has been forwarded to the 77 Partnership's insurance carrier, which tendered defense of this action to Schal's insurance carrier. Schal's insurance carrier subsequently tendered this action to the insurance carrier for Tribco Construction Co. ("Tribco"). The defense of this action is being handled by attorneys retained by Tribco's insurance carrier. It is expected that any and all damages awarded to the plaintiff against the 77 Partnership will be fully covered by insurance. (h) Terrance Sullivan v. The Prime Group, Inc., Schal Associates, Inc. and n/k/a Schal Bovis, Inc., and PDM Structural Group, a division of Pitt-Des Moines, Inc., Case No. 95L00481, filed on January 11, 1995 in the Circuit Court of Cook County, Illinois, County Department, Law Division. The plaintiff alleges that he was an employee of Gateway Erectors, which, in turn, was a subcontractor of Schal, and that, on or about, May 30, 1991, while working at the 77 Project, the plaintiff was injured when the plaintiff was required to lift a metal re-enforcing bar at the 77 Project. Defense of this action on behalf of all defendants is being handled by attorneys retained by the insurance carrier for a subcontractor of Schal. It is expected that any and all damages awarded to plaintiff against the 77 Partnership will be fully covered by insurance. This case is in the discovery stage. (i) Roger P. Ward d/b/a Roger Ward & Company v. Bank of Montreal, Kemper Investors Life Insurance Company, 77 West Wacker Limited Partnership, The Prime Group, Inc., The John Buck Company and Keck, Mahin & Cate, Case No. 96CH02007284, filed on July 11, 1996, in the Circuit Court of Cook County, Illinois, County Department, Chancery Division. The plaintiff in this action alleges that he provided real estate brokerage services in connection with a sublease between Keck, Mahin & Cate, as sublandlord, and Michael, Best & Friedrich, as subtenant, for space in the 77 Project. Plaintiff claims he is entitled to a commission payment of $117,530.00 for such services, plus interest, fees and costs. The plaintiff seeks foreclosure and other available relief. Motions to Dismiss this action, filed by the defendants, have been granted. The defendants are seeking to recover attorneys' fees and costs. The plaintiff has indicated that he intends to appeal the granting of the Motions to Dismiss. The 77 Partnership and PGI are represented in this matter by Kenneth P. Purcell, Esq. of Winston & Strawn. (j) McQuay Services v. The Prime Group, Inc., Case No. 97M1-158877, filed on October 29, 1997, in the Circuit Court of Cook County, Illinois, Municipal Department, First District, Contract. The plaintiff in this action seeks $10,353.01, plus interest, which plaintiff alleges is due for a piece of equipment supplied by plaintiff for the 77 Project. PGI and 77 Partnership claim that the equipment was defective and, therefore, no amount is owed to plaintiff. PGI and 77 Partnership intend to defend this action. (k) Illiana Steel, Inc. Illiana Steel, Inc. ("Illiana"), a tenant in the building owned by Enterprise Center IV, L.P. ("EC4LP"), has not paid all amounts which EC4LP has determined is owed under its lease. Illiana has disputed the calculation of additional rent under the lease and, as a result, has not paid all of the amounts invoiced by EC4LP. In addition, a dispute exists between Illiana and EC4LP over whether EC4LP is responsible for tuckpointing brick on the exterior of the leased premises or for the repairs of certain cranes in the leased premises. The parties currently are negotiating a settlement of the matter. (l) David Van Lul, Kathleen Van Lul and Sean Holloway v. The Prime Group, Inc., Cause No 450049702CT00144, filed on February 19, 1997, in the Superior Court of Lake County, Indiana, Civil Division, Room Four. In August, 1995, a trailer on the property owned by EC1LP was blown over by wind, injuring David Van Lul's left arm, wrist and back, injuring Sean Holloway's spine and extremities and causing damage to the car owned by Mr. Holloway. The plaintiffs allege that Prime was negligent and that such negligence caused the incident. The defense in this action is being handled by EC1LP's insurance carrier. It is expected that any damages awarded against PGI in this action will be fully covered by insurance. (m) John Garcia and Norma Garcia v. Brian Moore, The Prime Group, Inc. and Deeann B. Auto Sales, Inc., Cause No. 45D019605CT 447, filed on May 6, 1996, in the Lake County Superior Court, Room 1, Hammond, Indiana. The plaintiffs in this action allege that, on or about May 16, 1994, John Garcia was involved in an automobile accident with a vehicle driven by Brian Moore, who, at the time, was employed by PGI and worked through PGI's office in Hammond, Indiana. PGI has tendered the defense of this action to its insurance carrier. It is expected that all damages awarded to plaintiffs against PGI in this action will be fully covered by insurance. (n) Carol Riepe, Special Administratrix of the estate of Frank J. Riepe, deceased v. Sterling Steel Services, Ltd., Sterling Steel, Inc., The Prime Group, Inc. and Whiting Corporation, Case No. 96L02402, filed on March 1, 1996, in the Circuit Court of Cook County, Illinois County Department, Law Division. The plaintiff in this action seeks damages allegedly suffered by the plaintiff by reason of the death of Frank J. Riepe. Mr. Riepe was an employee of Whiting Corporation ("Whiting"). Whiting was retained by Enterprise Center X, L.P. ("EC10LP") to perform certain work in the space leased by Sterling. While working in the space leased by Sterling, Mr. Riepe fell off scaffolding and died. It is expected that any damages awarded in this action to plaintiff against PGI or EC10LP will be fully covered by insurance. The defense of this action on behalf of PGI and EC10LP is being handled by attorneys retained by EC10LP's insurance carrier. (o) Wojciech Chryczyk and Boguska Chryczyk v. The Prime Group, Inc., Arlington Heights I, L.P., Arlington Heights II, L.P., Arlington Heights III, L.P., International Components Corporation, Lech Construction Company and Belcore Electric Construction Co., Case No. 96-L-009297, filed on August 13, 1996, in the Circuit Court of Cook County, Illinois, County Department, Law Division. This action was brought by the plaintiffs to recover damages suffered on account of an incident which occurred on or about April 28, 1995, in the facility owned by Arlington Heights I, L.P. ("AH1LP"), Arlington Height II, L.P. ("AH2LP") and Arlington Heights III, L.P. ("AH3LP"; collectively the "AH Partnerships"). On or about such date, Wojciech Chryczyk, an electrician working in the facility owned by the AH Partnerships, was severely burned as a result of an electrical explosion which occurred from an electrical panel in the facility. Mr. Chryczyk sustained burns over more than sixty percent of his body and, thus far, has incurred more than $780,000.00 in medical expenses. Mr. Chryczyk was employed by Sigma Electric Company, a subcontractor of Lech Construction Company, which was retained by International Components Corporation ("ICC"), a tenant in the facility, to perform certain tenant build-out work for ICC. This action is in the discovery stage. PGI and the AH Partnerships are represented in this action by attorneys retained by the insurance carrier for PGI and the AH Partnerships. It is expected that any damages awarded to plaintiffs against Prime and the AH Partnership will by fully covered by insurance. SCHEDULE 6.18 Environmental Reports Phase I Environmental Assessment of Carlson Environmental, Inc. dated August 20, 1997 with respect to 77 West Wacker Drive, Chicago, Illinois Letter from Carlson Environmental, Inc. dated November 11, 1997 to Jennifer Nijman of Winston & Strawn and Juliette Browne of Verrill & Dana concerning potential off-site issues with respect to 77 West Wacker Drive, Chicago, Illinois SCHEDULE 6.22(d) Engineering Reports Engineer Evaluation of 77 West Wacker Drive Chicago, Illinois dated November 10, 1997 by Wiss, Janney, Elstner Associates, Inc. 120 N. LaSalle Street, Suite 2000 Chicago, Illinois 60602 SCHEDULE 6.22(l) Rent Rolls EX-10.27 23 EXHIBIT 10.27 Exhibit 10.27 PRIME GROUP REALTY TRUST 12,380,000 COMMON SHARES(1) OF BENEFICIAL INTEREST UNDERWRITING AGREEMENT November 11, 1997 PRUDENTIAL SECURITIES INCORPORATED FRIEDMAN, BILLINGS, RAMSEY & CO., INC. SMITH BARNEY INC. MORGAN KEEGAN & COMPANY, INC. As Representatives of the several Underwriters c/o Prudential Securities Incorporated One New York Plaza New York, New York 10292 Ladies and Gentlemen: Prime Group Realty Trust, a Maryland real estate investment trust (the "Company"), and Prime Group Realty, L.P., a Delaware limited partnership (the "Operating Partnership"), each hereby confirms its agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom the Company understands you have been duly authorized to act as representatives (in such capacities, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be to the Underwriters. 1. Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the several Underwriters an aggregate of 12,380,000 Common Shares of Beneficial Interest (the "Firm Securities"), par value $.01 per share, of the Company (the "Common Shares"). The Company also proposes to issue and sell to the several Underwriters not more than 1,857,000 additional Common Shares if requested by the Representa- - -------------- (1) Plus an option to purchase from Prime Group Realty Trust up to 1,857,000 additional shares to cover over-allotments. tives as provided in Section 3 of this Agreement. Any and all Common Shares to be purchased by the Underwriters pursuant to such option are referred to herein as the "Option Securities," and the Firm Securities and any Option Securities are collectively referred to herein as the "Securities." At the request of the Company, up to 102,550 of the Common Shares to be purchased by the Underwriters pursuant to this Agreement will be offered for sale to certain individuals, including trustees and employees of the Company and The Prime Group, Inc., and members of their immediate families (the "Reserved Share Program"). 2 Representations and Warranties of the Company and the Operating Partnership. The Company and the Operating Partnership, jointly and severally, represent and warrant to, and agree with, each of the several Underwriters that: (a) A registration statement on Form S-11 (File No. 333-33547) with respect to the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Securities, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 2 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Registration Statement (as hereinafter defined) and any Preliminary Prospectus or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such Registration Statement and any amendment or supplement thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. (b) The Commission has not issued any order preventing or suspending use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the 3 Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective (i) the Company has filed a Rule 462(b) Registration Statement in compliance with, and that is effective upon filing with the Commission pursuant to, Rule 462(b) and has received confirmation of the Commission's receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (d) The Company has been duly organized and is validly existing as a real estate investment trust in good standing under the laws of Maryland and is duly qualified to transact business as a foreign trust and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. Each of the Company's subsidiaries which are corporations have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. Each of the Company's subsidiaries which are partnerships, including the Property Partnerships that are partnerships (as defined in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been duly organized 4 and are validly existing as partnerships in good standing under the laws of their respective jurisdictions of organization and are duly qualified to transact business as foreign partnerships and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. Each of the Company's subsidiaries which are limited liability companies, including the Property Partnerships that are limited liability companies have been duly organized and are validly existing as limited liability companies in good standing under the laws of their respective jurisdictions of organization and are duly qualified to transact business as foreign limited liability companies and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. (e) The Company and each of its subsidiaries have full power (corporate or other) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and each of the Company and the Operating Partnership has full power (corporate or other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. (f) The issued shares of capital stock of each of the Company's subsidiaries (which are corporations) have been duly authorized and validly issued, are fully paid and nonassessable and, except as otherwise set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. The partnership agreements of the Company's subsidiaries (which are partnerships) have been duly authorized, executed and delivered by the general partners thereof and constitute the valid and binding obligation of the general partners thereof. Such partnership agreements, other than the partnership agreement for the Operating Partnership and for Professional Plaza, Ltd., a Tennessee limited partnership, one of the Property Partnerships, reflect the Company and the Operating Partnership, and/or one or more of the Company's subsidiaries as the sole beneficial owners of the partnership interests in such partnerships. (g) The Operating Partnership has been duly organized and is validly existing as a limited partnership in good standing under the laws of its jurisdiction of organization and is duly qualified to transact business as a foreign limited partnership and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the 5 conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. As of the Firm Closing Date, the Company, the NAC General Partner (as defined in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and the limited partners of the Operating Partnership will enter into an Amended and Restated Agreement of Limited Partnership of the Operating Partnership, substantially in the form of Exhibit 3.6 to the Registration Statement, with such other nonmaterial changes and revisions as are acceptable to the Representatives (the "Operating Partnership Agreement"), which agreement will be in full force and effect as of the Firm Closing Date. All of the limited and general partnership interests in the Operating Partnership (the "Common Units") and the Preferred Units (as defined in the Prospectus, or if the Prospectus is not in existence, the most recent Preliminary Prospectus) to be issued in connection with the Formation Transactions (as defined in the Prospectus, or if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been duly authorized for issuance by the Operating Partnership to the holders or prospective holders thereof, and, at the Firm Closing Date, against the payment of consideration therefor in accordance with the Operating Partnership Agreement, will be validly issued, fully paid and owned in the amounts set forth on Schedule 2 hereto, and, in the case of the Common Units and the Preferred Units to be issued to the Company, free and clear of any security interests, liens, encumbrances, equities or claims. Immediately after the Firm Closing Date, 9,064,343 Common Units of limited partner interest, 13,307,100 Common Units of general partner interest and 2,000,000 Preferred Units of the Operating Partnership will be issued and outstanding. The Common Units and Preferred Units conform in all material respects to the description thereof contained in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. The Company is, and immediately after the Firm Closing Date will be, the managing general partner of the Operating Partnership. (h) The authorized capital stock of the Company is as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus under the caption "Description of Shares of Beneficial Interest" and the issued and outstanding shares of beneficial interest of the Company, as of the Firm Closing Date, will be as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, under the caption "Capitalization." All of the issued shares of beneficial interest of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the Firm Closing Date or the related Option Closing Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. No holders of outstanding shares of beneficial interest of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been 6 fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this Agreement. (i) The capitalization of the Company conforms to the description thereof contained in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (j) All of the issued and outstanding Common Shares of the Company have been offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws). Except as described in the Registration Statement and the Prospectus (or, if the Prospectus does not exist, the most recent Preliminary Prospectus), the Company has not issued or sold any Common Shares during the six-month period preceding the initial filing date of the Registration Statement including any sales pursuant to Rule 144A under, or Regulation D or S of, the Act. (k) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (A) securities, equity interests or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any beneficial interests, capital stock or other equity interests (as the case may be) of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such beneficial interests, capital stock or other equity interests or any such convertible or exchangeable securities, equity interests or obligations, or (C) obligations of the Company or any such subsidiary to issue any shares of beneficial interests, capital stock, other equity interests, any such convertible or exchangeable securities, equity interests or obligations, or any such warrants, rights or options. (l) The offer, issuance and exchange of the Common Units in connection with the Formation Transactions were or will be exempt from the registration requirements of the Act and applicable state securities and blue sky laws. The Company and the Operating Partnership reasonably believe that all persons and entities to whom such Common Units have been issued or will be issued on the Firm Closing Date were or will be at the time of issuance "accredited investors" as that term is defined in Rule 501(a) under the Act. (m) The pro forma condensed consolidated balance sheet and the pro forma condensed consolidated statements of operations of the Company (in each case, including the notes thereto) included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial position of the Company at the dates therein specified. The combined financial statements (including the notes thereto) of the Prime Properties (as defined in the notes thereto) included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary 7 Prospectus) fairly present the financial position, the results of operations and cash flows and changes in financial condition of the Prime Properties, at the date and for the periods therein specified. The combined statement of revenues and certain expenses (including the notes thereto) of the Prime Industrial Contribution Properties (as defined in the notes thereto) included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the combined revenues and certain expenses of the Prime Industrial Contribution Properties for the periods therein specified. The combined statement of revenues and certain expenses (including the notes thereto) of the IBD Contribution Properties (as defined in the notes thereto) included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the combined revenues and certain expenses of the IBD Contribution Properties for the periods therein specified. The combined statement of revenues and certain expenses (including the notes thereto) of the NAC Contribution Properties (as defined in the notes thereto) included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the combined revenues and certain expenses of the NAC Contribution Properties for the periods therein specified. The statement of revenues and certain expenses of Citibank Office Plaza included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present revenues and certain expenses of Citibank Office Plaza for the periods therein specified. The statement of revenues and certain expenses of Salt Creek Office Center included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present revenues and certain expenses of Salt Creek Office Center for the periods therein specified. The statement of revenues and certain expenses of 280 Schuman Boulevard included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present revenues and certain expenses of 280 Schuman Boulevard for the periods therein specified. The statement of revenues and certain expenses of 475 Superior Avenue included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present revenues and certain expenses of 475 Superior Avenue for the periods therein specified. All of the foregoing financial statements (including the notes thereto) and schedules have been prepared in accordance with generally accepted accounting principles consistently applied for each of the periods presented. The selected financial data set forth under the caption "Selected Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (n) The pro forma condensed consolidated balance sheet and the pro forma condensed consolidated statements of operations of the Company included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) comply in all material respects with the applicable requirements of Rule 11-02 of 8 Regulation S-X of the Commission and the pro forma adjustments have been properly applied to the historical amounts in the compilation of such information and the assumptions used in the preparation thereof are, in the opinion of the Company, reasonable. Other than the historical and pro forma financial statements (and schedules) included therein, no other historical or pro forma financial statements (or schedules) are required to be included in the Registration Statement or Prospectus. (o) Ernst & Young LLP, who have certified certain financial statements and schedules, and delivered their reports with respect to the audited financial statements and schedules, included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act and the applicable rules and regulations thereunder. (p) The assumptions made by the Company disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), under the caption "Distribution Policy" are reasonable in light of the expected and intended method of operation of the Company and the Operating Partnership. (q) The execution and delivery of this Agreement have been duly authorized by the Company and the Operating Partnership and this Agreement has been duly executed and delivered by the Company and the Operating Partnership, and is the valid and binding agreement of each of the Company and the Operating Partnership, enforceable against the Company and the Operating Partnership in accordance with its terms, subject to the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization and similar laws relating to creditors' rights generally and to the application of equitable principles in any proceeding, whether at law or in equity. (r) No legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and are not described therein, and to the best of the Company's knowledge, no such proceedings have been threatened against the Company or any of its subsidiaries or with respect to any of their respective properties; and no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or filed as required. 9 (s) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company and the Operating Partnership with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, material lease or other material agreement or material instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws or certificate of limited partnership or partnership agreement (as the case may be) of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. (t) Each of the Company and its subsidiaries has full power (corporate or other) to enter into and deliver (as applicable) the agreements set forth on Schedule 4 hereto and all other agreements and other documents related to the Formation Transactions (collectively, the "Transaction Documents") to which each is party and to carry out all the terms and provisions thereof to be carried out by each, respectively. The execution and delivery of each of the Transaction Documents have been duly authorized by the Company and its subsidiaries (as applicable) and the Transaction Documents have been or will be on the Firm Closing Date duly executed and delivered by the Company and its subsidiaries (as applicable), and each is the valid and binding agreement of the Company and its subsidiaries (as applicable), enforceable against the Company and its subsidiaries (as applicable) in accordance with its terms, subject to the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization and similar laws relating to creditors' rights generally and to the application of equitable principles in any proceeding, whether at law or in equity. (u) The execution and delivery of the Transaction Documents, the compliance by the Company and its subsidiaries (as applicable) with their respective obligations under the Transaction Documents and the consummation of the Formation Transactions do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the Registration Statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in 10 a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage (except that (i) in connection with certain mortgages to be assumed concurrently with the Closing as described in the Prospectus, consents from the mortgage holders will be required as a condition of Closing, and (ii) in connection with mortgages to be repaid concurrently with the Closing as described in the Prospectus, an agreement to contribute may be a violation of such mortgages, but such mortgages will be repaid concurrently with the Closing), deed of trust, material lease or other material agreement or material instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws or certificate of limited partnership or partnership agreement (as the case may be) of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. (v) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth, or results of operations of the Company and its subsidiaries, taken as a whole, except in each case as described in or contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (w) The Company has not, directly or indirectly, (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (x) The Company has not distributed and, prior to the later of (i) the Closing Date and (ii) the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or other materials, if any, permitted by the Act. 11 (y) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (1) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any shares of its outstanding beneficial interests, nor declared, paid or otherwise made any dividend or distribution of any kind on its shares of beneficial interests, other than as described in Item 32 of Part II of the Registration Statement; and (3) there has not been any material change in the beneficial interests, capital stock or partnership interests (as the case may be), short-term debt or long-term debt of the Company and its consolidated subsidiaries, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (z) Upon consummation of the Formation Transactions (including, for purposes of this Agreement, the consummation of the issuance and sale of the Firm Securities pursuant to Section 3 hereof), or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the application of the proceeds from such issuance and sale and such borrowings (which application shall occur concurrently with such issuance and sale) as set forth under the caption "Use of Proceeds" in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company or its subsidiaries will have obtained title insurance policies insuring good and marketable title in fee simple to all items of real property comprising part of the Properties, including the Acquisition Properties and the Contribution Properties (as such terms are defined in the Registration Statement and the Prospectus, or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and, based upon UCC searches and representations from the sellers of the Acquisition Properties, marketable title to all personal property comprising part of the Properties, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not interfere in any material respect with the use made or proposed to be made of such property by the Company or such subsidiary, and any real property and buildings comprising part of the Properties held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (aa) No labor dispute with the employees of the Company or any of its subsidiaries exists or is threatened or, to the best of the Company's knowledge, imminent that 12 could result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (bb) Upon consummation of the Formation Transactions, the Company and its subsidiaries will own or possess, or will be able to acquire on reasonable terms, all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed or proposed to be employed by them in connection with the business now operated or proposed to be operated by them as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (cc) Upon consummation of the Formation Transactions, the Company and each of its subsidiaries will own or possess all contract rights that are material to the businesses now operated or proposed to be operated by them taken as a whole as such businesses are described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), including all such contract rights referred to in the Prospectus. The Company has not received any written notices that any of such contracts are not in full force and effect, and neither the Company nor any such subsidiary has received written notice of any material breach by any party under any of such contracts. (dd) As of the Firm Closing Date, the Company and each of its subsidiaries will be insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are or will be engaged as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew such insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). 13 (ee) No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock or partnership interests, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (ff) The Company and its subsidiaries will possess as of the Firm Closing Date all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any written notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of any unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (gg) The Company will conduct its operations in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940, as amended, and the Formation Transactions and other transactions contemplated by this Agreement will not cause the Company to become an investment company subject to registration under such act. (hh) Each of the Company and its subsidiaries has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the Company and its subsidiaries, taken as a whole) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (ii) Neither the Company nor any of its subsidiaries is in violation of any applicable federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company and its subsidiaries have received all permits, licenses or other approvals required of them under 14 applicable federal and state occupational safety and health and environmental laws and regulations to conduct their respective businesses or the businesses proposed to be conducted by them as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the Company and each such subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or the environmental site assessments and engineering inspection reports listed on Schedule 3 hereto. (jj) Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters on the Firm Closing Date or on the Option Closing Date shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (kk) Except for the shares of capital stock of, or partnership interests in (as applicable), each of the subsidiaries owned by the Company and such subsidiaries, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (ll) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (mm) No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease, partnership agreement or other agreement or instrument to which the Company or 15 any of its subsidiaries is a party and will continue to be a party after the Firm Closing Date or by which the Company or any of its subsidiaries or any of their respective properties is bound and will continue to be bound after the Firm Closing Date or may be affected in any material adverse respect with regard to property, business or operations of the Company and its subsidiaries, taken as a whole. (nn) The Securities have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. (oo) Except as otherwise disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), since January 1, 1990 no foreclosures have been instituted and, to the best of the Company's knowledge, none are currently threatened with respect to any property or assets directly or indirectly owned (whether now or in the past) by The Prime Group, Inc. or the Company or any of its subsidiaries. Except for the assets of The Prime Group, Inc. that will not be transferred to the Company in the Formation Transactions that are described under the heading "Business and Properties--Prime Assets Not Acquired by the Company" in the Prospectus, or, if the Prospectus is not in existence, the most recent Preliminary Prospectus (the "Excluded Properties"), neither The Prime Group, Inc. nor any affiliate of The Prime Group, Inc. owns or operates any office or industrial real property other than the real properties comprising part of the Properties. (pp) Except as otherwise described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (i) no proceeding or filing of a petition seeking relief under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, liquidation or similar law has been commenced or instituted (whether voluntary or involuntary) by or with respect to The Prime Group, Inc. or any of its affiliates, (ii) neither The Prime Group, Inc. nor any of its affiliates has applied for or consented to the appointment of a receiver, trustee, custodian, sequestrator or similar official for any such persons or for a substantial part of any such persons' property or assets and (iii) neither The Prime Group, Inc. nor any of its affiliates has made a general assignment for the benefit of its creditors. (qq) No relationship, direct or indirect, exists between or among the Company or the Operating Partnership on the one hand, and the directors, officers, shareholders (in the case of the Company), partners (in the case of the Operating Partnership), tenants, customers or suppliers of the Company or the Operating Partnership on the other hand, which is required to be described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) which is not so described. (rr) The transfer of interests or other assets pursuant to the agreements and instruments set forth on Schedule 5 hereto (the "Transfer Documents") does not violate the articles or certificate of incorporation, by-laws, limited liability company operating agreement, declaration 16 of trust, certificate of limited partnership, partnership agreement or other organizational documents, as the case may be, of The Prime Group, Inc. or any of its affiliates. The Transfer Documents are sufficient to effect the transfer to the Operating Partnership, the Company or its subsidiaries of all direct or indirect interests in the Properties and other assets specified therein upon payment of the specified consideration therefor. Pursuant to the Transfer Documents, the Properties and other assets specified therein will be transferred to the Company or its subsidiaries directly and not by way of a transfer of interests in partnerships or other types of entities which, immediately prior to the transfer, own the Properties and such other assets, except in the case of the Prime Properties and certain other Properties encumbered by tax-exempt bonds and in the case of the Prime Contribution Properties, in which cases the Transfer Documents provide that the interests in the Property Partnerships subject to such encumbrances will be transferred to the Company or its subsidiaries. (ss) Commencing with the Firm Closing Date, after giving effect to the Formation Transactions, the Company will be organized in conformity with the requirements for qualification as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), and will have no earnings and profits accumulated in a non-REIT year within the meaning of Section 857(a)(3)(B) of the Code, and the proposed method of operation of the Company and its subsidiaries will enable the Company to meet the requirements for taxation as a REIT under the Code beginning with its taxable year ending December 31, 1997 and for its subsequent taxable years. All statements in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) regarding the Company's qualification as a REIT are true, complete and correct in all material respects. (tt) Except as disclosed in physical inspection reports, leases, environmental reports and other written materials previously provided by the Company to the Representatives and their counsel, (i) the Company has not received any written notice that any of the Properties is not in compliance with all applicable codes, laws, ordinances and regulations (including, without limitation, building and zoning codes and laws and regulations relating to access to the Properties) and deed restrictions or other covenants, except for such failures to comply that would not materially impair the value of any of the Properties or would not result in a forfeiture or reversion of title; (ii) neither the Company nor any of its subsidiaries has knowledge of any pending or threatened litigation, moratorium, condemnation proceedings, zoning change, or other similar proceeding or action that could in any manner affect the size of, use of, improvements on, construction on, access to or availability of utilities or other necessary services to, the Properties, except such proceedings or actions which are not reasonably expected to, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole; (iii) all liens, charges, encumbrances, claims, or restrictions on or affecting the properties 17 and assets (including the Properties) of the Company or any of its subsidiaries that are required to be disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) are disclosed therein; (iv) to the best of the Company's knowledge, neither the Company, any of its subsidiaries nor any tenant of any portion of any of the Properties is in default under any of the ground leases (as lessor), space leases (as lessor or lessee, as the case may be) or other occupancy or license agreement relating to, or under any of the mortgages which will remain in effect after the Closing or other security documents or other agreements encumbering or otherwise recorded against, the Properties and there is no event which, but for the passage of time or the giving of notice or both, would constitute a default under any of such documents or agreements, except such defaults that would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole; and (v) except as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and except as otherwise provided by law, upon consummation of the Formation Transactions, no tenant under any lease pursuant to which the Company or any of its subsidiaries will lease the Properties will have an option or right of first refusal to purchase the premises leased thereunder or the building of which such premises are a part. (uu) Except as otherwise disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the mortgages and deeds of trust encumbering the properties and assets described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) which will remain in effect after the Closing are not convertible and neither the Company, any of its subsidiaries nor any person affiliated therewith holds a participating interest therein, and such mortgages and deeds of trust are not cross-defaulted or cross-collateralized to any property not owned directly or indirectly by the Company or any of its subsidiaries. (vv) To the best knowledge of the Company, each of the Properties is in substantial compliance with all presently applicable provisions of the Americans with Disabilities Act and no failure of the Company or any of its subsidiaries to comply with all presently applicable provisions of the Americans with Disabilities Act would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole. (ww) Except as otherwise disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or the environmental site assessments and engineering inspection reports listed on Schedule 3 hereto, and except as would not be reasonably likely to result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken 18 as a whole, (i) neither the Company nor any of its subsidiaries nor, to the best knowledge of the Company, any other owners of the Properties at any time or any other party has at any time, handled, stored, treated, transported, manufactured, spilled, leaked, or discharged, dumped, transferred or otherwise disposed of or dealt with, Hazardous Materials (as hereinafter defined) on, to or from the Properties, other than by any such action taken in compliance with all applicable Environmental Statutes; (ii) neither the Company nor any of its subsidiaries intends to use the Properties or any subsequently acquired properties for the purpose of handling, storing, treating, transporting, manufacturing, spilling, leaking, discharging, dumping, transferring or otherwise disposing of or dealing with Hazardous Materials, except as necessary for the conduct of business and in compliance with applicable environmental statutes; (iii) neither the Company nor any of its subsidiaries knows of any seepage, leak, discharge, release, emission, spill, or dumping of Hazardous Materials into waters on or adjacent to the Properties or any other real property owned or occupied by any such party, or onto lands from which Hazardous Materials might seep, flow or drain into such waters; (iv) neither the Company nor any of its subsidiaries has received written notice of, or has any knowledge of any occurrence or circumstance which, with notice or passage of time or both, would give rise to a claim under or pursuant to any federal, state or local environmental statute or regulation or under common law, pertaining to Hazardous Materials on or originating from any of the Properties or any assets described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or any other real property owned or occupied by the Company or its subsidiaries or arising out of the conduct of the Company or its subsidiaries, including without limitation a claim under or pursuant to any Environmental Statute (as hereinafter defined); (v) none of the Properties is included or, to the best of the Company's knowledge, proposed for inclusion on the National Priorities List issued pursuant to CERCLA (as hereinafter defined) by the United States Environmental Protection Agency (the "EPA") or, to the best of the Company's knowledge, proposed for inclusion on any similar list or inventory issued pursuant to any other Environmental Statute or issued by any other Governmental Authority (as hereinafter defined). As used herein, "Hazardous Material" shall include, without limitation, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, toxic substances, asbestos or any hazardous materials as defined by any federal, state or local environmental law, ordinance, rule or regulation in effect as of the date hereof and as of the Firm Closing Date, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601-9675 ("CERCLA"), the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sections 1801-1819, the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Sections 6901-6992K, the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Sections 11001-11050, the Toxic Substances Control Act, 15 U.S.C. Sections 2601-2671, the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136-136y, the Clean Air Act, 42 U.S.C. Sections 7401-7642, the Clean Water Act 19 (Federal Water Pollution Control Act), 33 U.S.C. Sections 1251-1387, the Safe Drinking Water Act, 42 U.S.C. Sections 300f-300j-26, and the Occupational Safety and Health Act, 29 U.S.C. Sections 651-678, and in the regulations promulgated pursuant to each of the foregoing (individually, an "Environmental Statute") or by any federal, state or local governmental authority having or claiming jurisdiction over the properties and assets described in the Prospectus (a "Governmental Authority"). (xx) None of the environmental consultants which prepared environmental and asbestos inspection reports with respect to any of the Properties (including, for purposes of this paragraph, the Excluded Properties), the engineering consultants which prepared engineering inspection reports with respect to any of the Properties or Rosen Consulting Group, real estate advisors, which prepared regional economic overviews and market analysis for The Prime Group, Inc., dated October 10, 1997, were employed for such purpose on a contingent basis or has any substantial interest in the Company or any of its subsidiaries and none of them or any of their directors, officers or employees is connected with the Company or any of its subsidiaries as a promoter, selling agent, voting trustee, director, officer or employee. (yy) Except as set forth in the environmental site assessments and engineering inspection reports prepared with respect to the Properties listed on Schedule 3 hereto, neither the Company nor the Operating Partnership is aware of any environmental or engineering condition at any of the Properties that would result in a material adverse change in the condition (financial or otherwise) or business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole. (zz) Except as disclosed in the Prospectus, no real estate transfer or similar taxes are or will become due and payable by the Company or any of its subsidiaries as a result of the acquisition by the Company or any of its subsidiaries of any direct or indirect interest in any Property in connection with the Formation Transactions, other than customary documentary transfer taxes which will be paid in full on or prior to the Firm Closing Date. (aaa At the firm Closing Date, the Company or its subsidiaries will have obtained title insurance on the Properties which constitute real property (including ground leasehold estates) in an amount (the "Insured Title Amount") at least equal to the sum of (i) the purchase price, in the case of the Acquisition Properties, (ii) $308.5 million and (iii) the costs of the other Properties, in the amount reasonably determined by the Company. (bbb At or prior to the Firm Closing Date, each of the transactions constituting the Formation Transactions will have occurred in the manner described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), 20 including, without limitation, the acquisition of all of the Acquisition Properties and the Contribution Properties and the execution and delivery of the Credit Facility. (ccc All of the representations and warranties of the Company, the Operating Partnership, The Prime Group, Inc. and, to the best of the Company's knowledge, the other limited partners of the Operating Partnership contained in the Transaction Documents are true and correct in all material respects. Each reference in this Section 2 to "the condition (financial or otherwise), management, business prospects, net worth, or results of operations of the Company and its subsidiaries" means the condition (financial or otherwise), management, business prospects, net worth, or results of operations of the Company and its subsidiaries, taken as a whole, upon consummation of the Formation Transactions. 3. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $18.75 per Common Share, the number of Firm Securities set forth opposite the name of such Underwriter in Schedule 1 hereto. One or more certificates in definitive form for the Firm Securities that the several Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Representatives request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company to the Representatives for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the purchase price therefor by wire transfer in same-day funds (the "Wired Funds") to the account of the Company. Such delivery of and payment for the Firm Securities shall be made at the offices of Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois, at 8:30 A.M., Chicago time, on November 17, 1997, or at such other place, time or date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date." The Company will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representatives at the offices in New York, New York of the Company's transfer agent or registrar or of Prudential Securities Incorporated at least 24 hours prior to the Firm Closing Date. (b For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, the Company hereby grants to the several Underwriters an option to purchase, severally and not jointly, the Option Securities. The purchase price to be paid for any Option Securities shall be the same price 21 per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 3, plus, if the purchase and sale of any Option Securities takes place after the Firm Closing Date and after the Firm Securities are trading "ex-dividend", an amount equal to the dividends payable on such Option Securities. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within thirty days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Company shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 3, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Securities and Option Closing Date, respectively. (c The Company hereby acknowledges that the wire transfer by or on behalf of the Underwriters of the purchase price for any Securities does not constitute closing of a purchase and sale of the Securities. Only execution and delivery of a receipt for Securities by the Underwriters indicates completion of the closing of a purchase of the Securities from the Company. Furthermore, in the event that the Underwriters wire the Wired Funds to the Company prior to the completion of the closing of a purchase of Securities, the Company hereby acknowledges that until the Underwriters execute and deliver a receipt for the Securities, by facsimile or otherwise, the Company will not be entitled to the Wired Funds and shall return the 22 Wired Funds to the Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. In the event that the closing of a purchase of Securities is not completed and the Wired Funds are not returned by the Company to the Underwriters on the same day the Wired Funds were received by the Company, the Company agrees to pay to the Underwriters in respect of each day the Wired Funds are not returned by it, in same-day funds, interest on the amount of such Wired Funds in an amount representing the Underwriters' cost of financing as reasonably determined by Prudential Securities Incorporated. (d It is understood that any of you, individually and not as one of the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. 4. Offering by the Underwriters. Upon your authorization of the release of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 5. Covenants of the Company. Each of the Company and the Operating Partnership covenants and agrees with each of the Underwriters that: (a The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the Prospectus, Term Sheet or the amendment referred to in the second sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus, Term Sheet or any amendment to the Registration Statement or any Rule 462(b) Registration Statement of which the Representatives previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representatives shall not have given their consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to 23 the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (b The Company will advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Original Registration Statement or any Rule 462(b) Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c The Company will promptly from time to time take such action as the Representatives may reasonably request to qualify the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may reasonably request and will continue to comply with such laws for as long as may be necessary to complete the distribution of the Securities, provided, however, that in connection therewith the Company shall not be required to take any action that would subject it to income taxation in such jurisdictions, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representatives thereof and, subject to Section 5(a) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the 24 Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. (e The Company will, without charge, provide (i) to the Representatives and to counsel for the Underwriters a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) or any Rule 462(b) Registration Statement, certified by the Secretary or an Assistant Secretary of the Company to be true and complete copies thereof as filed with the Commission by electronic transmission, (ii) to each other Underwriter, a conformed copy of such registration statement or any Rule 462(b) Registration Statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request; without limiting the application of clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New York City time, on the date of determination of the public offering price, if such determination occurred at or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New York City time, on the business day following the date of determination of the public offering price, if such determination occurred after 10:00 A.M., New York City time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. (f The Company, as soon as practicable, will make generally available to its securityholders and to the Representatives a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (h The Company will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any Common Shares or other shares of beneficial interest of the Company or Common Units or other partnership interests of the Operating Partnership, or any securities convertible into, or exchangeable or exercisable for, Common Shares or other shares of beneficial interest of the Company or Common Units or other partnership interests of the Operating Partnership, for a period of 180 days after the date hereof, except (i) pursuant to this 25 Agreement, (ii) pursuant to a dividend reinvestment plan of the Company, (iii) pursuant to the Company's Share Incentive Plan, and (iv) in connection with the acquisition by the Company or the Operating Partnership of real property or interests in entities holding real property, provided that the recipient or transferee of such securities or interests agrees in writing to be subject to the lock-up contained in this Section 5(h) (without giving effect to clauses (i), (ii), (iii) and (iv)) for a period ending on the date that is 180 days after the date hereof. (i The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (j The Company will obtain the lock-up agreements described in Section 7(f) hereof prior to the Firm Closing Date. (k If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (m The Company will cause the Securities to be duly authorized for listing by the New York Stock Exchange prior to the Firm Closing Date, subject to official notice of issuance. (n The Company will use its best efforts to meet the requirements to qualify, commencing with the taxable year ending December 31, 1997, as a REIT under the Code. 26 (o The Company will cause the Operating Partnership to operate as a limited partnership in accordance with the requirements of Delaware law. 6. Expenses. The Company will pay all costs and expenses incident to the performance of its and the Operating Partnership's obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (v) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) any listing of the Securities on the New York Stock Exchange, (viii) any meetings with prospective investors in the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters) and (ix) advertising relating to the offering of the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters). If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because this Agreement is terminated pursuant to Section 11 hereof or because of any failure, refusal or inability on the part of the Company or the Operating Partnership to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all reasonable out-of pocket expenses (including reasonable counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall in no event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 7. Conditions of the Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Firm Securities shall be subject, in the Representatives' sole discretion, to the accuracy of the representations and warranties of the Company and the Operating Partnership contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's 27 officers made pursuant to the provisions hereof, to the performance by the Company and the Operating Partnership of their respective covenants and agreements hereunder and to the following additional conditions: (a If the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or with respect to the Original Registration Statement, or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b The Representatives shall have received an opinion, dated the Firm Closing Date, of Winston & Strawn, counsel for the Company and its subsidiaries, to the effect that: (i the Company has been duly formed and is validly existing as a real estate investment trust in good standing under the laws of the State of Maryland and is duly qualified to transact business as a foreign business trust and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not subject the Company and the Subsidiaries (as defined below), taken as a whole, to a material liability or disability. The Operating Partnership has been duly organized and is validly existing as a limited partnership in good standing under the laws of the State of Delaware and is duly qualified to transact business as a foreign limited partnership and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not subject the Company and 28 the Subsidiaries, taken as a whole, to a material liability or disability. Each of the subsidiaries of the Company, all of which have been identified on an exhibit to such opinion (individually a "Subsidiary" and collectively the "Subsidiaries") has been duly organized and is validly existing as a corporation, partnership or as a limited liability company, as appropriate, in good standing under the laws of its respective jurisdiction of organization and is duly qualified to transact business as a foreign corporation, partnership or limited liability company, as appropriate, and is in good standing (to the extent applicable) under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not subject the Company and the Subsidiaries, taken as a whole, to a material liability or disability. (ii the Company and each of the Subsidiaries have the requisite real estate investment trust, corporate, partnership or limited liability company power (as applicable) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus, and each of the Company and the Operating Partnership has the requisite real estate investment trust or partnership power (as applicable) to enter into this Agreement and to perform its obligations hereunder; (iii the issued and outstanding shares of capital stock or partnership interests, as the case may be, of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and, except as otherwise set forth in the Prospectus, are owned beneficially by the Company free and clear of any perfected security interests or any other security interests, liens, encumbrances, equities or claims known to such counsel; (iv the authorized, issued and outstanding capitalization of the Company is as set forth under the caption "Capitalization" in the Prospectus; all necessary and proper real estate investment trust proceedings have been taken in order to authorize validly the Common Shares referred to therein; all outstanding Common Shares (including the Firm Securities, when issued and paid for by the Underwriters in accordance with the terms of this Agreement) have been (or, in the case of the Firm Securities, will be) duly and validly issued, are fully paid and nonassessable, were not issued in violation of or subject to, under the Company's charter or Maryland law or any agreement to which the Company is a party and which is known to such counsel, any preemptive rights or other rights to subscribe for or purchase any securities, and conform to the description thereof contained in the Prospectus; no holders of outstanding shares of capital stock of the Company are entitled under the Company's charter or Maryland law or any agreement to which the Company is a party and which is known to such counsel, as such, to any 29 preemptive or other rights to subscribe for any of the Firm Securities; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (v the Common Units and Preferred Units to be issued in connection with the Formation Transactions, including, without limitation, the Common Units and Preferred Units issued to the Company, were duly authorized for issuance by the Operating Partnership to the holders thereof; the Common Units and Preferred Units issued to the Company, upon contribution of cash in the amount specified in the Operating Partnership Agreement, will be validly issued; the Common Units issued to the NAC General Partner and the Limited Partners in connection with the Formation Transactions, upon delivery of the consideration specified in the Formation Agreement (identified on Schedule 4 hereto), will be validly issued. Each of the issuances of the Common Units to the NAC General Partner and the Limited Partners at or prior to the Firm Closing Date as contemplated in the Formation Agreement and the issuance of the Convertible Preferred Shares to Security Capital Preferred Growth Incorporated as contemplated in the Prospectus, is or was (as the case may be) exempt from registration under the Act. The terms of the Common Units and Preferred Units conform in all material respects to (x) the description thereof contained in the Prospectus and (y) all statements related thereto contained in the Prospectus. The issuances of securities described in Items 31 and 32 of the Registration Statement were not at the time of issue, and are not as of the Firm Closing Date, required to be registered under the Act; (vi except as disclosed in the Registration Statement and the Prospectus, to the knowledge of such counsel there are no outstanding (A) securities, equity interests or obligations of the Company or any of the Subsidiaries convertible into or exchangeable for any capital stock or equity interests (as the case may be) of the Company or any such Subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company to any such Subsidiary any such capital stock or equity interests or any such convertible or exchangeable securities, equity interests or obligations, or (C) obligations of the Company or any such Subsidiary to issue an shares of capital stock, equity interests, any such convertible or exchangeable securities, equity interests or obligations, or any such warrants, rights or options; (vii the statements in the Prospectus set forth under the headings "Business and Properties-Legal Proceedings," "Description of Shares of Beneficial Interest," "Structure and Formation of the Company," "Certain Relationships and Related Transactions," "Partnership Agreement," "Certain Provisions of Maryland Law and of the Company's Declaration of Trust and Bylaws," "Partnership Agreement," "Shares Eligible 30 for Future Sale," "Certain Federal Income Tax Consequences" and "ERISA Considerations," insofar as such statements describe statutes, rules or regulations, legal conclusions with respect to their application or provisions of the organizational documents of the Company, the Operating Partnership or the Services Company, are accurate in all material respects and fairly present the information required to be disclosed therein; (viii the execution and delivery of this Agreement have been duly authorized by all necessary real estate investment trust or partnership (as applicable) action of the Company and the Operating Partnership, and this Agreement has been duly executed and delivered by the Company and the Operating Partnership; (ix (A) to such counsel's knowledge and other than as set forth in the Prospectus, no legal or governmental proceedings are pending to which the Company or any of the Subsidiaries is a party or to which the property of the Company or any of the Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and to such counsel's knowledge, no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their respective properties and (B) to such counsel's knowledge, no contract or other document of a character required to be disclosed in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not disclosed therein or filed as required; (x the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company and the Operating Partnership with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except the registration under the Act of the Securities and such as have been obtained and such as may be required under state securities or blue sky laws, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, material lease or other material agreement or material instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties are bound (the "Material Agreements"), or the charter documents or by-laws or certificate of limited partnership or partnership agreement or other organizational document (as applicable) of the Company or any of the Subsidiaries, or any provision of any statute, rule or regulation applicable to the Company or the Subsidiaries, or any judgment, decree or order of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company or the Subsidiaries; 31 (xi each of the Company and the Subsidiaries has the requisite real estate investment trust, corporate, partnership or limited liability company power (as applicable) to enter into and deliver (as applicable) the agreements and instruments set forth on Schedule 6 hereto (the "Operative Documents") to which it is party and to perform its obligations thereunder. The execution and delivery of the Operative Documents have been duly authorized by the Company and the Subsidiaries (as applicable) and the Operative Documents have been or will be on the Firm Closing Date duly executed and delivered by the Company and the Subsidiaries (as applicable), and each such Operative Document is the valid and binding agreement of the Company and the Subsidiaries (as applicable), enforceable against the Company and the Subsidiaries (as applicable) in accordance with its terms, subject to the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization and similar laws relating to creditors' rights generally and to the application of equitable principles in any proceeding, whether at law or in equity; (xii the execution and delivery of the Operative Documents, the compliance by the Company and the Subsidiaries (as applicable) with their respective obligations under the Operative Documents and the consummation of the Formation Transactions do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except the registration under the Act of the Securities and such as have been obtained and such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any Material Agreement, or the charter documents or by-laws or certificate of limited partnership or partnership agreement or other organizational document (as applicable) of the Company or any of the Subsidiaries, or any provision of any statute, rule or regulation applicable to the Company or the Subsidiaries, or any judgment, decree or order of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company or the Subsidiaries; (xiii the Company is not, and (assuming the application by the Company of the proceeds of the issue and sale of the Securities as described in the Prospectus under "Use of Proceeds") after giving effect to the Formation Transactions and the other transactions contemplated by this Agreement will not be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; 32 (xiv the transfer of interests or other assets pursuant to the Transfer Documents does not violate the articles or certificate of incorporation, by-laws, limited liability company agreement, declaration of trust, certificate of limited partnership, partnership agreement or other organizational documents, as the case may be, of either of The Prime Group, Inc. or Prime Group Limited Partnership; each of the Transfer Documents has been duly authorized, executed and delivered by The Prime Group, Inc. and Prime Group Limited Partnership and is a valid and binding agreement of The Prime Group, Inc. and Prime Group Limited Partnership, enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization and similar laws relating to creditors' rights generally and to the application of equitable principles in any proceeding, whether at law or in equity; (xv the Registration Statement has become effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required thereby; and to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceeding for that purpose has been instituted or threatened by the Commission; (xvi the Registration Statement originally filed with respect to the Securities and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements and related notes thereto and the other financial, statistical and accounting data included therein or omitted therefrom, as to which such counsel need express no opinion) appeared on their face to be appropriately responsive in all material respects to the applicable requirements of the Act and the rules and regulations of the Commission thereunder; and (xvii upon completion of the Formation Transactions, the Company will be organized in conformity with the requirements for qualification as a real estate investment trust under the Code, and the proposed method of operation of the Company and the Operating Partnership as described in the Registration Statement and the Prospectus and a certificate of a responsible officer of the Company will enable the Company to meet the requirements for taxation as a real estate investment trust under the Code beginning with the year ended December 31, 1997. Such counsel shall also state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of the Underwriters, at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such 33 counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus and has not made any independent check or verification thereof, during the course of such participation (relying as to the factual matters upon the statements of officers and other representatives of the Company and public officials) no facts came to the attention of such counsel that caused such counsel to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date or as of the Firm Closing Date, contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no belief with respect to the financial statements and related notes thereto and the other financial, statistical and accounting data included in the Registration Statement or the Prospectus or omitted therefrom. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company, the Operating Partnership and public officials and, as to matters involving the application of laws of any jurisdiction other than the State of Illinois, the State of New York, the Delaware General Corporation Law and the Delaware Revised Limited Partnership Act or the United States, to the extent satisfactory in form, and scope to counsel for the Underwriters, upon the opinion of Miles and Stockbridge, a Professional Corporation, as to Maryland law. Copies of such local counsel opinions shall be delivered to the Representatives and counsel for the Underwriters. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c The Representatives shall have received an opinion, dated the Firm Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement and the Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (d The Representatives shall have received from Ernst & Young LLP, a letter or letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (i they are independent accountants with respect to the Company and its consolidated subsidiaries and the Prime Properties, the Contribution Properties and the 34 Acquisition Properties within the meaning of the Act and the applicable rules and regulations thereunder; (ii in their opinion, the audited consolidated financial statements and schedules and pro forma financial statements examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii on the basis of a reading of the latest available interim unaudited consolidated condensed financial statements of the Company, the Prime Properties, the Contribution Properties and the Acquisition Properties, carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of trustees and any committees thereof of the Company and inquiries of certain officials of the Company who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: (A0 at a specific date (not more than five business days prior to the date of such letter), there were any increases in debt or accumulated deficit of the Prime Properties or any decreases in total assets of the Prime Properties, in each case as compared with amounts shown in the June 30, 1997 combined balance sheet included in the Registration Statement and the Prospectus, or for the period from July 1, 1997 to September 30, 1997, there were any decreases, as compared with the corresponding period of the previous year, in rental income, total revenues or net income (as applicable) of the Prime Properties, the Acquisition Properties and the Contribution Properties, except in all instances for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; and (B0 at a specific date (not more than five business days prior to the date of such letter), with respect to the Prime Properties, there were any increases in borrowings as compared with amounts shown in the June 30, 1997 balance sheet included in the Registration Statement and the Prospectus, except in all instances for changes or increases which the Registration Statement and the Prospectus disclose have occurred or may occur. (iv they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information identified by 35 the Representatives that are derived from the general accounting records of the Company and its consolidated subsidiaries and are included in the Registration Statement and the Prospectus and have compared such amounts, percentages and financial information with such records of the Company and its consolidated subsidiaries and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation; and (v on the basis of a reading of the unaudited pro forma condensed consolidated financial statements included in the Registration Statement and the Prospectus, carrying out certain specified procedures that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (v), inquiries of certain officials of the Company and its consolidated subsidiaries who have responsibility for financial and accounting matters and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the unaudited pro forma condensed consolidated financial statements, nothing came to their attention that caused them to believe that the unaudited pro forma condensed consolidated financial statements do not comply in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements. In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters under this Agreement that (A) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this paragraph (d) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (e The Representatives shall have received a certificate, dated the Firm Closing Date, of the chief executive officer and the principal financial or accounting officer of the Company to the effect that: (i the representations and warranties of the Company and the Operating Partnership in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does 36 not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each of the Company and the Operating Partnership has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (ii no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Company's or the Operating Partnership's knowledge, are contemplated by the Commission; and (iii subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, except in each case as described in or contemplated by the Registration Statement and the Prospectus (exclusive of any amendment or supplement thereto). (f The Representatives shall have received from (i) each Limited Partner an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other sale or disposition) of any Common Shares or other shares of beneficial interest of the Company or Common Units or other partnership interests of the Operating Partnership, or any securities convertible into, or exchangeable or exercisable for, Common Shares or other shares of beneficial interest of the Company or Common Units or other partnership interests of the Operating Partnership, for a period of (w) two years after the date of this Agreement in the case of The Prime Group, Inc., (x) two years after the date of this Agreement in the case of the Primestone Joint Venture (as defined in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) with respect to the Common Units contributed by The 37 Prime Group, Inc. (except, in the event of a Dividend Reduction (as defined in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), one year), (y) one year after the date of this Agreement in the case of the Primestone Joint Venture with respect to the Common Units purchased by the Primestone Joint Venture and (z) one year after the date of this Agreement in the case of the other Limited Partners and (ii) each of the purchasers of Common Shares from the Underwriters in the Reserved Share Program an agreement to the effect that such person will not, directly or indirectly, offer, sell, offer to sell, contract to sell, transfer, assign, pledge, hypothecate, grant any option to purchase or otherwise sell or dispose of any Common Shares for a period of three months from the date of this Agreement. (g On or before the Firm Closing Date, the Representatives and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (h Prior to the commencement of the offering of the Securities, the Securities shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. (i The Formation Transactions shall have been consummated or shall occur simultaneously with the closing of the purchase and sale of the Firm Securities hereunder. (j On or before the Firm Closing Date, all necessary consents to the Formation Transactions shall have been obtained. (k On or before the Firm Closing Date, the Company and the Operating Partnership shall have delivered to you with respect to each of the Properties copies of: (i an owner policy or polices of title insurance insuring that each of the Property Partnerships owns fee simple title to the real property (other than the land in which the applicable Property Partnership is acquiring a ground leasehold estate) comprising part of the related Property and owns and holds a valid ground leasehold estate in the land comprising part of the related Property in which such Property Partnership is acquiring a ground leasehold estate, in an amount at least equal to the Insured Title Amount, which policies shall be issued by a title insurance company or companies as previously disclosed to you and your counsel (any such person or persons, the "Title Company"), and contain as exceptions to title only those exceptions acceptable to the Representatives; (ii an as-built survey of each of the Properties in form satisfactory to you; 38 (iii all assignments of tenant leases, service contracts and similar rights owned, immediately prior to the Closing, (i) by Prime, in the case of the Prime Properties and the Prime Contribution Properties, (ii) by the NAC Contributors, in the case of the NAC Contribution Properties, (iii) by the IBD Contributors, in the case of the IBD Contribution Properties, and (iv) the respective sellers of the Acquisition Properties, in the case of the Acquisition Properties; (iv all tenant estoppels, third party consents, waivers, licenses, permits, authorizations, agreements, certificates and the like required to be delivered to the Company pursuant to the applicable acquisition, contribution or formation agreements; (v all certificates of occupancy in the Company's possession, zoning compliance letters and evidence of utility availability for each of the Properties, to the extent not included in the title insurance policies and surveys delivered pursuant to clauses (i) and (ii); (vi policies or certificates of insurance (including earthquake insurance) relating to each of the Properties evidencing coverages and in amounts as are prudent and customary in the businesses in which they are or will be engaged; (vii UCC, judgment and tax lien searches confirming that the personal property comprising part of the Properties is subject to no liens, charges, encumbrances, claims or restrictions; (viii) checks payable to the appropriate public officials in payment of all recording costs and transfer taxes (or checks or wire transfers to the Title Company in respect of such amounts) due in respect of the recording of any instruments to be recorded in connection with the Formation Transactions, together with a check or wire transfer for the Title Company in payment of the Title Company's premium, search and examination charges, survey costs and any other amounts due in connection with the issuance of its policy (or commitment); and (ix) if any of the Properties is subject to an existing mortgage which is contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) to be paid and satisfied in full concurrently with the Closing , a current payoff letter from the holder of such existing mortgage indicating the principal amount required to satisfy all amounts then secured by such existing mortgage and the 39 additional amount required for each day after the date of such letter necessary to satisfy all obligations secured thereby. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives and counsel for the Underwriters. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Underwriters shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 8. Indemnification and Contribution. (a) Each of the Company and the Operating Partnership, jointly and severally, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or the Operating Partnership in Section 2 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"), (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amend- 40 ment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials used in connection with the marketing of the Securities, including, without limitation, slides, videos, films and tape recordings, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor the Operating Partnership will be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein; and provided, further, that neither the Company nor the Operating Partnership will be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company or the Operating Partnership with Section 5(d) and (e) of this Agreement. This indemnity agreement will be in addition to any liability which the Company or the Operating Partnership may otherwise have. Neither the Company nor the Operating Partnership will, without the prior written consent of the Underwriter or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Underwriter or any person who controls any such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its trustees (including any person who, with his or her consent, 41 is named in the Registration Statement as about to become a trustee of the Company), each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company or any such trustee, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such trustee, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. No Underwriter will, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Company, any of its trustees or officers who signed the Registration Statement or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company, its trustees and officers who signed the Registration Statement and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from (i) any liability which it may have to any indemnified party under this Section 8 except to the extent that the indemnifying party has been materially prejudiced as a result thereof or (ii) any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party 42 similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits 43 received by the Company and the Operating Partnership on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering of the Securities (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Operating Partnership and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total public offering price of the Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Prudential Securities Incorporated Master Agreement Among Underwriters. For purposes of this paragraph (d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and the Company and the Operating Partnership shall be deemed one party and jointly and severally liable for any obligations to contribute hereunder and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company and the Operating Partnership. 9. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related 44 Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company or the Operating Partnership other than as provided in Section 10 hereof. In the event of any default by one or more Underwriters as described in this Section 9, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 10. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers, the Operating Partnership and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, the Operating Partnership, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Termination. (a) This Agreement may be terminated with respect to the Firm Securities or any Option Securities in the sole discretion of the Representatives by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company or the Operating Partnership shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or such Option Closing Date, respectively, (i) the Company or any of its subsidiaries shall have, in the sole judgment of the Representatives, sustained any material loss or interference with their respective 45 businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company), in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, taken as whole, except in each case as described in or contemplated by the Registration Statement and the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in the Common Stock shall have been suspended by the Commission or the New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or minimum or maximum prices shall have been established on such exchange; (iii) a banking moratorium shall have been declared by New York, Illinois or United States authorities; or (iv) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Sections 6 and 10 hereof. 12. Information Supplied by Underwriters. The statements set forth in the last paragraph on the front cover page and under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to such extent) are correct. 13. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Prudential Securities Incorporated, One New York Plaza, New York, New 46 York 10292, Attention: Equity Transactions Group; and if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at 77 W. Wacker Drive, Suite 3900, Chicago, Illinois 60601, Attention: Chief Executive Officer, with a copy to the Company at 77 W. Wacker Drive, Suite 3900, Chicago, Illinois 60601, Attention: General Counsel (facsimile number: (312) 917-1684). 14. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company, the Operating Partnership and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company and the Operating Partnership contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 15. Applicable Law. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. 16. Consent to Jurisdiction and Service of Process. All judicial proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, each of the Company and the Operating Partnership accepts for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The Company designates and appoints The Corporation Trust Inc. and the Operating Partnership designates and appoints The Corporation Trust Company, and such other persons as may hereafter be selected by each of the Company and the Operating Partnership irrevocably agreeing in writing to so serve, as its agent to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by each of the Company and the Operating Partnership to be effective and 47 binding service in every respect. A copy of any such process so served shall be mailed by registered mail to each of the Company and the Operating Partnership at its address provided in Section 13 hereof; provided, however, that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company or the Operating Partnership refuses to accept service, each of the Company and the Operating Partnership hereby agrees that service of process sufficient for personal jurisdiction in any action against the Company or the Operating Partnership in the State of New York may be made by registered or certified mail, return receipt requested, to the Company or the Operating Partnership at its address provided in Section 13 hereof, and each of the Company and the Operating Partnership hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Underwriter to bring proceedings against each of the Company and the Operating Partnership in the courts of any other jurisdiction. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 48 If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company, the Operating Partnership and each of the several Underwriters. Very truly yours, PRIME GROUP REALTY TRUST By: /s/ Richard S. Curto ------------------------ Name: Richard S. Curto Title: President PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust, its managing general partner By: /s/ Richard S. Curto ------------------------ Name: Richard S. Curto Title: President The foregoing Agreement is hereby confirmed and accepted as of the date first above written. PRUDENTIAL SECURITIES INCORPORATED FRIEDMAN, BILLINGS, RAMSEY & CO., INC. SMITH BARNEY INC. MORGAN KEEGAN & COMPANY, INC. By: PRUDENTIAL SECURITIES INCORPORATED By: /s/ Jean-Claude Canfin - -------------------------- Name: Jean-Claude Canfin Title: Managing Director For itself and on behalf of the Representatives as Representatives of the other several Underwriters named in Schedule I hereto SCHEDULE 1 UNDERWRITERS
Number of Firm Securities Underwriter be Purchased - ----------- ------------ Prudential Securities Incorporated.................. 1,923,125 Friedman, Billlings, Ramsey & Co., Inc.............. 1,923,125 Smith Barney Inc.................................... 1,923,125 Morgan Keegan & Company, Inc........................ 1,923,125 ABN AMRO Chicago Corporation........................ 250,000 Bear, Stearns & Co. Inc............................. 250,000 BT Alex Brown Incorporated.......................... 250,000 LEGG Mason Wood Walker, Incorporated................ 250,000 CIBC Oppenheimer Corp............................... 250,000 Donaldson, Lufkin & Jenrette Securities Corporation. 250,000 A.G. Edwards & Sons, Inc............................ 250,000 Goldman, Sachs & Co................................. 250,000 Merrill, Lynch, Pierce, Fenner & Smith Incorporated. 250,000 JP Morgan Securities Inc............................ 250,000 Morgan Stanley & Co. Incorporated................... 250,000 PaineWebber Incorporated............................ 250,000 Advest, Inc......................................... 125,000 Everen Securities, Inc.............................. 125,000 Furman Selz LLC..................................... 125,000 Janney Montgomery Securities, Inc................... 125,000 Nesbitt Burns Securities Inc........................ 125,000 The Ohio Company.................................... 125,000 Principal Financial Securities, Inc................. 125,000 Raymond James & Associates, Inc..................... 125,000 Sutro & Co. Incorporated............................ 125,000 1-1 Tucker Anthony Incorporated......................... 125,000 Blaylock & Partners, L.P............................ 62,500 Chatsworth Securities LLC........................... 62,500 Home Barnes Investments Inc......................... 62,500 Prime Charter Ltd................................... 62,500 Sanders Morris Mundy Inc............................ 62,500 Sands Brothers & Co., Inc........................... 62,500 The Williams Capital Group, L.P..................... 62,500 ------ Total............................................... 12,380,000 ---------- ----------
1-2 SCHEDULE 2 PARTNERS OF OPERATING PARTNERSHIP
Number of Percentage of Managing General Partner Common Units All Units - ------------------------ ------------ --------- Prime Group Realty Trust 12,380,000 55.3% General Partner The Nardi Group, L.L.C 927,100 4.1 Limited Partners Prime Group Limited Partnership 90,000 0.5 Jeffrey A. Patterson 110,000 0.5 Primestone Investment Partners, L.P. 7,944,893 35.5 IBD Contributors(2) 919,450 4.1 ---------- ----- Total 22,371,443.00 100.0% ------------- ----- ------------- -----
- -------------- (2) The IBD Contributors consist of the following persons or entities: Edward S. Hadesman Trust Dated May 22, 1992, Grandville/Northwestern Management Corporation, Carolyn B. Hadesman Trust Dated May 21, 1992, Lisa Hadesman 1991 Trust, Cynthia Hadesman 1991 Trust, Tucker B. Magid, Frances S. Shubert, Grandville Road Property, Inc. and Sky Harbor Associates. Allocations of Common Units among the IBD Contributors are subject to certain adjustments and will be made at the Firm Closing Date. 2-1 SCHEDULE 3 ENVIRONMENTAL SITE ASSESSMENTS AND ENGINEERING REPORTS ------------------------------------------------------ A. Environmental Site Assessments: 1. Ogden, Level I Site Assessment, Hilton Parking Garage, 500 Clinch Ave., Knoxville, June 5, 1997. 2. Ogden, Level I Site Assessment, One Center Square Office Building, 620 Market Street, Knoxville, June 5, 1997. 3. Ogden, Level I Site Assessment, Two Center Square Office Building, 625 Gay Street, Knoxville, June 5, 1997. 4. Ogden, Level I Site Assessment, Suntrust Bank Building, 201 Fourth Ave, North, Nashville, June 5, 1997. No issues. Also 1993 Ogden Phase I. 5. Ogden, Level I Site Assessment, The Weston, 4823 Old Kingston Pike, Knoxville, June 12, 1997. 6. Foth & Van Dyke, Summary Environmental Report, Chicago Enterprise Center, Nov. 1995. 7. Versar, Phase I, Hammond Enterprise Center, Nov. 1995. 8. Podolsky & Northstar, Underground Tank Removal Report, Citibank Office Plaza, 1699 E. Woodfield Rd., Schaumburg, IL, Aug. 6, 1996. 9. Certified Engineering & Testing Co., Asbestos Audit Report and Transformer Survey, Citicorp Office Building, 1900 Spring Road, Oakbrook, IL, Mar. 17, 1989. 10. Environmental Hazard Control, Closeout Document, Vinyl Asbestos Floor Tile and Mastic Removal, Citibank Office Plaza, 1699 E. Woodfield Rd., Schaumburg, IL, July 26, 1994. 11. Carlson Environmental, Draft Phase I Environmental Assessment, 1699 East Woodfield Rd., Schaumburg, IL., Citicorp Office Plaza, June 22, 1997. 12. Chicago Flameproof, Meta Caulk Fire Stopping Proposal, Mar. 13, 1997. 13. Environmental Remediation and Indemnity Agreement, May 20, 1996. 14. STS, Environmental Reconnaisance and Subsurface Exploration, 77 West Wacker Drive, Dec. 1989. 15. Carlson Environmental, Revised Phase I Environmental Assessment, 77 West Wacker Drive, Chicago, IL, May 20, 1997. 16. Carlson Environmental, Inc., Phase I of 455 Academy Drive, Northbrook, IL, May 28, 1997. 17. Carlson Environmental, Limited Subsurface Soil Investigation Proposal, Gurnee, IL, July 9, 1997. 3-1 18. Pioneer Environmental, Phase I Environmental Site Assessment, 1001 Technology Way, Libertyville, IL, July 11, 1996. 19. Carlson Environmental, Phase I Assessment Update, 1001 Technology Way, Libertyville, IL, May 2, 1997. 20. Green Environmental Group, Phase I of vacant property in McHenry, IL, July 1994. 21. Carlson Environmental, Draft Phase I Environmental Assessment, 1301 Ridgewood Drive, McHenry, IL, May 2, 1997. 22. Heritage, Hammond Enterprise Center Remediation Work Plan, Feb. 28, 1997. 23. Heritage, East Chicago Enterprise Center Remediation Work Plan, Feb. 28, 1997. 24. Burgess & Niple, Phase I Environmental Site Assessments, Columbus Portfolio Properties, April 1997. 25. Burgess & Niple, Phase 2 Environmental Site Assessment of 4411 Marketing Place, Groveport, OH (Wes-Tran), June 1977. 26. Burgess & Niple, Letter regarding soil testing of AutoGlass site, 4849 Grovepoint, Obetz, OH, July 15, 1997. 27. Carlson Environmental, Draft Phase I Environmental Assessment, 370 Carol Lane, Elmhurst, IL, Oct. 13, 1997. 28. Carlson Environmental, Draft Phase I Environmental Assessment, 11039 Gage Ave, Franklin Park, IL, Oct. 13, 1997. 29. Carlson Environmental, Draft Phase I Environmental Assessment, 388 Carol Lane, Elmhurst, IL, Oct. 13, 1997. 30. Carlson Environmental, Draft Phase I Environmental Assessment, 11045 Gage Ave., Franklin Park, IL, Oct. 13, 1997 31. Jamrok, Environmental Assessment of North Western Proviso Center, 5600 Proviso Drive, Berkely, IL, May 31, 1994. 32. Carlson Environmental, Draft Phase I, 5600 Proviso Drive, Berkely, IL, Oct. 16, 1997. 33. Boelter, Phase I Environmental Assessment, 342-346 Carol Lane, Elmhurst, IL, Mar. 25, 1994. 34. Carlson Environmental, Draft Phase I Environmental Report, 342-346 Carol Lane, Elmhurst, IL, Oct. 16, 1997. 35. Boelter, Phase I Environmental Assessment, 343 Carol Lane, Elmhurst, IL, Mar. 25, 1994. 36. Carlson Environmental, Draft Phase I Environmental Assessment, 343 Carol Lane, Elmhurst, IL, Oct. 17, 1997. 3-2 37. Jamrok, Phase I of 1600-1700 167th St. Calumet City, IL, 1992. 38. Carlson, Draft Phase I Environmental Assessment, 1600-1700 167th St., Calumet City, IL, Oct. 16, 1997. 39. Jamrok, Phase I of 200 E. Fullerton, Carol Stream, IL, Nov. 15, 1993. 40. Carlson Environmental, Draft Phase I Environmental Assessment of 200 E. Fullerton, Carol Stream, IL, Oct. 17, 1997. 41. Jamrok, Environmental Inspection of Narco-Elmhurst Center, 961 Weigel Dr., Elmhurst, IL, May 31, 1990. 42. Carlson Environmental, Draft Phase I Environmental Assessment, 961 Weigel Drive., Elmhurst, IL, Oct. 16, 1997. 43. Carlson Environmental, Phase I Environmental Assessment of Vacant Parcel, 300 Craig Place, Hillside, IL. May 21, 1996. 44. Carlson Environmental, Draft Phase I Environmental Site Assessment, 300-320 Craig Place, Hillside, IL, Oct. 17, 1997. 45. Carlson Environmental, Phase I Environmental Assessment of 550 Kehoe Blvd., Carol Stream. IL, July 10, 1996. 46. Carlson Environmental, Draft Phase I Environmental Assessment, 550 Kehoe Blvd., Carol Stream, IL, Oct. 16, 1997. 47. Jamrok, Environmental Assessment of 4100 Madison, Hillside, IL, June 3, 1992. 48. Carlson, Draft Phase I Environmental Assessment, 4100 Madison St., Hillside, IL, Oct. 17, 1997. 49. Carlson, Draft Phase I of Nine Vacant Lots, Carol Stream, IL, Oct. 16, 1997. 50. Jamrok, Environmental Assessment of 4343 Commerce Ct, Lisle, IL, Mar. 29, 1989. 51. Carlson Environmental, Draft Phase I Environmental Assessment, 4343 Commerce Ct., Lisle, IL, Oct. 15, 1997. 52. Jamrok, Environmental Assessment of 4250-4300 Madison, Hillside, IL, Feb. 29, 1992. 53. Carlson Environmental, Draft Phase I Environmental Assessment, 4300 Madison St., Hillside, IL, Oct. 17, 1997. 54. Jamrok, Environmental Assessment of 1051 Kirk Rd, Batavia, IL, Mar. 1, 1990. 55. Carlson, Draft Phase I Environmental Assessment, 1051 Kirk Rd., Batavia, IL, Oct. 17, 1997. 56. Jamrok, Phase I Environmental Audit of 350 Randy Road, Carol Stream, IL. May 31, 1991. 57. Carlson, Draft Phase I Environmental Assessment, 350 Randy Road, Carol Stream, IL, Oct. 17, 1997. 3-3 58. Carlson Environmental, Draft Phase I Environmental Assessment, 130 E. Rawls Rd., Des Plaines, IL, Oct. 15, 1997. 59. Jamrok, Phase I of 1401 S. Jefferson, Chicago, IL, Nov. 26, 1991. 60. Carlson Environmental, Draft Phase I Environmental Assessment of 1401 S. Jefferson, Chicago, IL, Oct. 16, 1997. 61. Carlson Environmental, Draft Phase I Environmental Assessment, 1303 Tower Rd., Schaumburg, Il, Oct. 16, 1997. 62. Carlson, Draft Phase I Environmental Assessment, 2050 Hammond Drive, Schaumburg, IL, Oct. 15, 1997. 63. Carlson Environmental, Draft Phase I Environmental Assessment, 371-385 N. Gary Ave., Carol Stream, IL, Oct. 16, 1997. 64. Carlson Environmental, Draft Phase I Environmental Assessment, 1200 Northwestern Ave./3818 Grandville Ave., Gurnee, IL, May 9, 1997. 65. Carlson Environmental, Draft Phase I Environmental Assessment, 555 Heuhl Rd., Northbrook, IL., 5/8/97; and addendum, June 5, 1997. 66. Carlson Environmental, Draft Phase I Environmental Assessment, 306-310 Era Drive, Northbrook, IL, May 2, 1997, addendum, May 28, 1997. 67. Carlson Environmental, Phase I Environmental Assessment, Salt Creek Office Center, Schaumburg, IL, Aug. 22, 1997. 68. Carlson Environmental, Draft Phase I Environmental Assessment, 4160-4190 Madison, Hillside, IL, Oct. 17, 1997. 69. Carlson Environmental, Draft Phase I Environmental Assessment, 4211 Madison Street, Hillside, IL, Oct. 17, 1997. 70. Carlson Environmental, Draft Phase I Environmental Site Assessment, 350 North Mannheim Rd., Hillside, IL, Oct. 16, 1997. 71. Carlson Environmental, Draft Phase I Environmental Assessment, Two Vacant Lots, Batavia, IL, Oct. 17, 1997. 72. Carlson Environmental, Draft Phase I Environmental Assessment of 280 Shulman Blvd., Naperville, IL, Oct. 21, 1997. 73. Carlson Environmental, Draft Phase I Environmental Assessment of 475 Superior Ave., Munster, IN, Oct. 21, 1997. 74. Carlson Environmental, Phase I Environmental Assessment Update of 425 East Algonquin Road, Arlington Heights, IL Oct. 21, 1997. 3-4 75. Carlson Environmental, Phase I Environmental Assessment, 77 West Wacker Drive, August 20, 1997, plus correspondence dated November 11, 1997. 76. Carlson Environmental, Draft Phase I Environmental Assessment, 2205-2255 Enterprise Drive, Westchester, IL. 77. Carlson Environmental, Removal Site Evaluation and Preliminary Assessment Event and Work Plan (1/97) and Event and Report (4/97), 13535 S. Torrence Ave., Chicago, IL. B. Engineering Reports; 1. Wiss, Janney Engineering Report for the following Properties to be contributed by NAC Contributors: a. 1401 Jefferson St. 1. 4211 Madison 2. 200 E. Fullerton 3. 350 Randy Rd. 4. 4300 Madison 5. 388 Carol Lane 6. 961 Weigel 7. 4100-4190 Madison 8. 4343 Commerce Ct. 9. 5600 Proviso Dr. 10. 11039 Gage Ave. 11. 11045 Gage Ave. 12. 300-320 Craig Pl. 2. Wiss, Janney, Walkthrough Inspection of Eight Industrial Properties of the Brazos Industrial Portfolio, 4/17/97, for the following Properties: 1. 4849 Groveport 2. 2160 McGaw Rd. 3. 2400 McGaw Rd. 4. 2499 McGaw 5. 4411 Marketing 6. 5160 Blazer 7. 341 Enterprise 8. 600 London Rd. 3-5 3. Wiss, Janey, Draft 3 Engineering Walkthrough for Citibank Office Plaza and Salt Creek Office Center, 7/14/97. 4. Wiss, Janey, Draft Engineering Walkthrough for the following IBD Industrial Properties: 1. 515 Heuhl Rd. 2. 555 Heuhl Rd. 3. 455 Academy Dr. 4. 306-310 Era 5. 1200 Northwest 6. 1001 Technology Way 7. 1301 Ridgeview 3-6 SCHEDULE 4 TRANSACTION DOCUMENTS Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. Formation Agreement, to be dated as of November 17, 1997, by and among Prime Group Realty Trust, Prime Group Realty, L.P., Prime Group Realty Services, Inc., The Prime Group, Inc., Prime Group Limited Partnership and Jeffrey A. Patterson. Subscription Agreement dated as of November 11, 1997 by and between Prime Group Realty, L.P. and Primestone Investment Partners, L.P. Series A Preferred Securities Purchase Agreement dated as of November 11, 1997 among Security Capital Preferred Growth Incorporated, Prime Group Realty Trust and Prime Group Realty, L.P. Credit Agreement to be dated as of November 17, 1997 (the "Credit Facility") among Prime Group Realty, L.P., Prime Group Realty Trust, BankBoston, N.A., as agent and the certain financial institutions from time to time parties thereto as lenders (the "Lenders"). Promissory Notes to be dated November 17, 1997 in the amount of $225,000,000 issued by Prime Group Realty, L.P. to the Lenders. Mortgage Security Agreement and Financing Statement to be dated November 17, 1997 by 77 West Wacker Limited Partnership in favor of BankBoston, N.A. as agent for the Lenders. Loan Agreement dated as of November 11, 1997 between Prime Group Realty, L.P. and Prudential Securities Credit Corporation relating to the New Mortgage Notes. Guaranty dated November 17, 1997 from 77 West Wacker Limited Partnership, enterprise Center I, L.P., Enterprise Center II, L.P., Enterprise Center III, L.P., Enterprise Center IV, L.P., Enterprise Center V, L.P., Enterprise Center VI, L.P., Enterprise Center VII, L.P., Enterprise Center VIII, L.P., Enterprise Center IX, L.P., Enterprise Center X, L.P., Arlington Heights I, L.P., Arlington Heights II, L.P., Arlington Heights III, L.P., East Chicago Enterprise Limited Partnership, Hammond Enterprise Center Limited Partnership, Nashville Office Building I, Ltd., Old Kingston Properties, Ltd., Centre Square II, Ltd., Triad Parking Company, Ltd. in favor of BankBoston, N.A., as agent for the Lenders. Indemnification Agreement between Prime Group Realty Trust and each if its trustees. Right of First Offer Agreement to be dated as of November 17, 1997 between Prime Group Realty, L.P., and The Prime Group, Inc. Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Michael W. Reschke. Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Richard S. Curto. 4-1 Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and W. Michael Karnes. Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Robert J. Rudnik. Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Jeffrey A. Patterson. Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Kevork M. Derderian. Employment Agreement by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Edward S. Hadesman. Consulting Agreement by and between Prime Group Realty Trust and Stephen J. Nardi. Option Agreement by and between Prime Group Realty, L.P. and 300 N. LaSalle, L.L.C. to be dated as of November 17, 1997. Registration Rights Agreement to be dated November 17, 1997 among Prime Group Realty Trust, Prime Group Realty, L.P., The Prime Group, Inc., Primestone Investment Partners L.P. and other investors named therein. Registration Rights Agreement to be dated November 17, 1997 between Prime Group Realty Trust and Security Capital Preferred Growth Incorporated. Environmental Remediation and Indemnification Agreement to be dated November 17, 1997 by and between Prime Group Realty, L.P. and The Prime Group, Inc. Non-Competition and Restriction Agreement to be dated November 17, 1997 by and among Prime Group Realty Trust, The Prime Group, Inc. and Michael W. Reschke. Tax Indemnification Agreement to be dated November 17, 1997 by and between Prime Group Realty, L.P. and IBC Contributors. Tax Indemnification Agreement to be dated November 17, 1997 by and between Prime Group Realty, L.P. and certain of the NAC Contributors. Tax Indemnification Agreement to be dated November 17, 1997 by and between The Prime Group, Inc. and Prime Group Realty, L.P. Contribution Agreement dated as of October 20, 1997 by and among The Prime Group, Inc., Prime Group Realty, L.P., Prime Group Realty Trust, Narco River Business Center, Narco Tower Road Associates, Olympian Office Center, Tri-State Industrial Park Joint Venture, Carol Stream Industrial Park Joint Venture, Narco Enterprises, Inc., The Nardi Group Ltd., Narco construction Inc., Nardi & Co., Nardi Asset Management, Inc. and Nardi Architectural, Inc. 4-2 Asset Purchase Agreement by and among Continental Offices, Ltd. Continental Offices Ltd. Realty and Prime Group Realty, L.P. All instruments of transfer and conveyance related to the Formation Transactions, including, without limitation, bills of sale, deeds and assignment agreements. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the Credit Facility. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the New Mortgage Notes. 4-3 SCHEDULE 5 TRANSFER DOCUMENTS Formation Agreement, to be dated as of November 17, 1997, by and among Prime Group Realty Trust, Prime Group Realty, L.P., Prime Group Realty Services, Inc., The Prime Group, Inc., Prime Group Limited Partnership and Jeffrey A. Patterson. Right of First Offer Agreement to be dated as of November 17, 1997 between Prime Group Realty, L.P., and The Prime Group, Inc. Option Agreement by and between Prime Group Realty, L.P. and 300 N. LaSalle, L.L.C. to be dated as of November 17, 1997. Contribution Agreement dated as of October 20, 1997 by and among The Prime Group, Inc., Prime Group Realty, L.P., Prime Group Realty Trust, Narco River Business Center, Narco Tower Road Associates, Olympian Office Center, Tri-State Industrial Park Joint Venture, Carol Stream Industrial Park Joint Venture, Narco Enterprises, Inc., The Nardi Group Ltd., Narco construction Inc., Nardi & Co., Nardi Asset Management, Inc. and Nardi Architectural, Inc. Option to Purchase Partnership Interests dated as of June 17, 1994 by and between KILICO Realty Corporation, and The Prime Group, Inc., as amended by that certain First Amendment to Option Purchase Partnership Interests dated as of January 21, 1997 by and between KILICO Realty Corporation and The Prime Group, Inc., as further amended by that certain Second Amendment to Option to Purchase Partnership Interests dated as of July 15, 1997 by and between KILICO Realty Corporation and The Prime Group, Inc. Contribution Agreement dated as of July 8, 1997, as amended, by and among LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated June 15, 1982 and known as trust No. 10-40113-09, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated September 7, 1994 and known as Trust No. 11-9051, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement March 30, 1984 and known as Trust No. 11-107825, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated August 1, 1986 and known as Trust No. 11-a1358, LaSalle National Trust, N.A., not personally but solely as Trustee under Trust Agreement dated August 1, 1986 and known as Trust No. 11-1357, LaSalle National Trust N.A., not personally, but solely as Trustee under Trust Agreement dated January 17, 1974 and known as Trust No. 286-34, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated October 15, 1995 and known as Trust No. 11-9869, LaSalle National Trust, N.A., not personally, but solely as Trustee under Trust Agreement dated December 1, 1987 and known as Trust No. 11-2868, 310 ERA Limited Partnership, MacArthur Drive Properties, CLE Limited Partnership, 500 Lindeberg Limited Partnership, 515 Huehl Limited Partnership, 555 Huehl Limited Partnership, Sky Harbor Associates, 1001 Technology Way, LLC, The Grandville Road Limited Partnership, Industrial Building and Development Company and The Prime Group, Inc., as amended by the First Amendment to the Contribution Agreement dated as of August 12, 1997, by and between The Prime Group, Inc., an Illinois corporation, and LaSalle National Trust, NA, t/u/t 10-40113-09 dated June 15, 1982, LaSalle National Trust, NA, t/u/t 11-9051 dated September 7, 1994; LaSalle National Trust, NA t/u/t 11-107825 dated March 30, 1984; LaSalle National Trust, NA/t/u/t 11-1358 dated August 1, 1986; LaSalle National Trust, NA, t/u/t 11-1357 dated August 1, 1986; LaSalle National Trust, NA, t/u/t 286-34 dated January 17, 1974; LaSalle National Trust, NA, t/u/t 11-9869 dated October 15, 1995; and LaSalle National Trust, NA, t/u/t 11-2868 dated December 1, 1987. 5-1 Asset Purchase Agreement by and among Continental Offices, Ltd. Continental Offices Ltd. Realty and Prime Group Realty, L.P. Amended and Restated Agreement dated as of July 15, 1997 by and among Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, KILICO Realty Corporation, FKLA Realty Corporation, KR 77 Fitness Center, Inc., 77 West Wacker Limited Partnership, K/77 Investors Limited Partnership, The Prime Group, Inc., Prime Group Limited Partnership and Prime 77 Fitness Center, Inc. Agreement dated as of July 18, 1997 by and among the Prime Group, Inc., KILICO Realty Corporation, KFC Portfolio Corp. and Kemper Investors Life Insurance Company. Agreement to Contribute dated as of August 12, 1997 by and between Tucker B. Magid and The Prime Group, Inc. Agreement to Contribute dated as of August 12, 1997 by and between Frances S. Shubert and The Prime Group, Inc. Option Agreement dated as of August 4, 1997 by and between Lumbermens Mutual Casualty Company and The Prime Group, Inc. Agreement for Purchase or Exchange dated June 13, 1997 by and between Sun Annex Partners and Salt Creek Partners, Ltd. and The Prime Group, Inc. Assignment and Assumption of Real Estate Purchase and Sale Agreement dated November 16, 1997 by and between The Prime Group, Inc. and 1990 Algonquin Road, L.L.C. and 2010 Algonquin Road, L.L.C. Purchase and Sale Agreement dated October, 1997, by and between The Mutual Life Insurance Company of New York, a New York mutual life insurance company, and The Prime Group, Inc. Contract of Sale dated October 13, 1997 between MGI Properties (formerly known as Mortgage Growth Investors), One Winthrop Square, Boston, Massachusetts 02110 (Seller) and The Prime Group, Inc., 77 West Wacker Limited Partnership (Purchaser). Purchase and Sale Agreement and Joint Escrow instructions dated October 1, 1977 by and between Mission Land Company and The Prime Group, Inc. All instruments of transfer and conveyance related to the Formation Transactions, including, without limitation, bills of sale, deeds and assignment agreements. 5-2 SCHEDULE 6 OPERATIVE DOCUMENTS Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. Formation Agreement, to be dated as of November 17, 1997, by and among Prime Group Realty Trust, Prime Group Realty, L.P., Prime Group Realty Services, Inc., The Prime Group, Inc., Prime Group Limited Partnership and Jeffrey A. Patterson. Subscription Agreement dated as of November 11, 1997 by and between Prime Group Realty, L.P. and Primestone Investment Partners, L.P. Series A Preferred Securities Purchase Agreement dated as of November 11, 1997 among Security Capital Preferred Growth Incorporated, Prime Group Realty Trust and Prime Group Realty, L.P. Credit Agreement to be dated as of November 17, 1997 (the "Credit Facility") among Prime Group Realty, L.P., Prime Group Realty Trust, BankBoston, N.A., as agent and the certain financial institutions from time to time parties thereto as lenders (the "Lenders"). Promissory Notes to be dated November 17, 1997 in the amount of $225,000,000 issued by Prime Group Realty, L.P. to the Lenders. Mortgage Security Agreement and Financing Statement to be dated November 17, 1997 by 77 West Wacker Limited Partnership in favor of BankBoston, N.A. as agent for the Lenders. Loan Agreement dated as of November 11, 1997 between Prime Group Realty, L.P. and Prudential Securities Credit Corporation relating to the New Mortgage Notes. Guaranty dated November 17, 1997 from 77 West Wacker Limited Partnership, enterprise Center I, L.P., Enterprise Center II, L.P., Enterprise Center III, L.P., Enterprise Center IV, L.P., Enterprise Center V, L.P., Enterprise Center VI, L.P., Enterprise Center VII, L.P., Enterprise Center VIII, L.P., Enterprise Center IX, L.P., Enterprise Center X, L.P., Arlington Heights I, L.P., Arlington Heights II, L.P., Arlington Heights III, L.P., East Chicago Enterprise Limited Partnership, Hammond Enterprise Center Limited Partnership, Nashville Office Building I, Ltd., Old Kingston Properties, Ltd., Centre Square II, Ltd., Triad Parking Company, Ltd. in favor of BankBoston, N.A., as agent for the Lenders. Right of First Offer Agreement to be dated as of November 17, 1997 between Prime Group Realty, L.P., and The Prime Group, Inc. Option Agreement by and between Prime Group Realty, L.P. and 300 N. LaSalle, L.L.C. to be dated as of November 17, 1997. Registration Rights Agreement to be dated November 17, 1997 among Prime Group Realty Trust, Prime Group Realty, L.P., The Prime Group, Inc., Primestone Investment Partners L.P. and other investors named therein. 6-1 Registration Rights Agreement to be dated November 17, 1997 between Prime Group Realty Trust and Security Capital Preferred Growth Incorporated. Environmental Remediation and Indemnification Agreement to be dated November 17, 1997 by and between Prime Group Realty, L.P. and The Prime Group, Inc. Non-Compete Agreement to be dated November 17, 1997 by and among Prime Group Realty Trust, The Prime Group, Inc. and Michael W. Reschke. Tax Indemnification Agreement to be dated November 17, 1997 by and between Prime Group Realty, L.P. and IBD Contributors. Tax Indemnification Agreement to be dated November 17, 1997 by and between Prime Group Realty, L.P. and certain of the NAC Contributors. Tax Indemnification Agreement to be dated November 17, 1997 by and between The Prime Group, Inc. and Prime Group Realty, L.P. Contribution Agreement dated as of October 20, 1997 by and among The Prime Group, Inc., Prime Group Realty, L.P., Prime Group Realty Trust, Narco River Business Center, Narco Tower Road Associates, Olympian Office Center, Tri-State Industrial Park Joint Venture, Carol Stream Industrial Park Joint Venture, Narco Enterprises, Inc., The Nardi Group Ltd., Narco construction Inc., Nardi & Co., Nardi Asset Management, Inc. and Nardi Architectural, Inc. Option to Purchase Partnership Interests dated as of June 17, 1994 by and between KILICO Realty Corporation, and The Prime Group, Inc., as amended by that certain First Amendment to Option Purchase Partnership Interests dated as of January 21, 1997 by and between KILICO Realty Corporation and The Prime Group, Inc., as further amended by that certain Second Amendment to Option to Purchase Partnership Interests dated as of July 15, 1997 by and between KILICO Realty Corporation and The Prime Group, Inc. 6-2 LaSalle National Trust, NA, t/u/t 11-1357 dated August 1, 1986; LaSalle National Trust, NA, t/u/t 286-34 dated January 17, 1974; LaSalle National Trust, NA, t/u/t 11-9869 dated October 15, 1995; and LaSalle National Trust, NA, t/u/t 11-2868 dated December 1, 1987. Asset Purchase Agreement by and among Continental Offices, Ltd. Continental Offices Ltd. Realty and Prime Group Realty, L.P. Amended and Restated Agreement dated as of July 15, 1997 by and among Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, KILICO Realty Corporation, FKLA Realty Corporation, KR 77 Fitness Center, Inc., 77 West Wacker Limited Partnership, K/77 Investors Limited Partnership, The Prime Group, Inc., Prime Group Limited Partnership and Prime 77 Fitness Center, Inc. Agreement dated as of July 18, 1997 by and among the Prime Group, Inc., KILICO Realty Corporation, KFC Portfolio Corp. and Kemper Investors Life Insurance Company. Agreement to Contribute dated as of August 12, 1997 by and between Tucker B. Magid and The Prime Group, Inc. Agreement to Contribute dated as of August 12, 1997 by and between Frances S. Shubert and The Prime Group, Inc. Option Agreement dated as of August 4, 1997 by and between Lumbermens Mutual Casualty Company and The Prime Group, Inc. Agreement for Purchase or Exchange dated June 13, 1997 by and between Sun Annex Partners and Salt Creek Partners, Ltd. and The Prime Group, Inc. Assignment and Assumption of Real Estate Purchase and Sale Agreement dated November 16, 1997 by and between The Prime Group, Inc. and 1990 Algonquin Road, L.L.C. and 2010 Algonquin Road, L.L.C. Purchase and Sale Agreement dated October 1997, by and between The Mutual Life Insurance Company of New York, a New York mutual life insurance company, and The Prime Group, Inc. Contract of Sale dated October 13, 1997 between MGI Properties (formerly known as Mortgage Growth Investors), One Winthrop Square, Boston, Massachusetts 02110 (Seller) and The Prime Group, Inc., 77 West Wacker Limited Partnership (Purchaser). Purchase and Sale Agreement and Joint Escrow instructions dated October 1, 1977 by and between Mission Land Company and The Prime Group, Inc. All instruments of transfer and conveyance related to the Formation Transactions, including, without limitation, bills of sale, deeds and assignment agreements. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the Credit Facility. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the New Mortgage Notes. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the Primestone Credit Facility. 6-3 Contract of Sale dated October 13, 1997 between MGI Properties (formerly known as Mortgage Growth Investors), One Winthrop Square, Boston, Massachusetts 02110 (Seller) and The Prime Group, Inc., 77 West Wacker Limited Partnership (Purchaser). Purchase and Sale Agreement and Joint Escrow instructions dated October 1, 1977 by and between Mission Land Company and The Prime Group, Inc. All instruments of transfer and conveyance related to the Formation Transactions, including, without limitation, bills of sale, deeds and assignment agreements. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the Credit Facility. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the New Mortgage Notes. The loan agreements, mortgages, security agreements, promissory notes and other documents executed by Prime Group Realty Trust and/or its subsidiaries in connection with the Primestone Credit Facility. 6-4 EX-10.28 24 EX-10.28 Exhibit 10.28 REGISTRATION RIGHTS AGREEMENT Dated as of December 15, 1997 of PRIME GROUP REALTY TRUST for the benefit of CERTAIN HOLDERS OF COMMON UNITS of PRIME GROUP REALTY, L.P. REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT is made as of the 15th day of December, 1997 (this "Agreement"), among PRIME GROUP REALTY TRUST, a Maryland real estate investment trust (the "Company"), PRIME GROUP REALTY, L.P., a Delaware limited partnership (the "Partnership"), and H GROUP LLC, a Delaware limited liability company ("HG"), and the Permitted Transferees (as defined below) of HG and each other Investor (as hereinafter defined) (HG and such other entities or Permitted Transferees are sometimes referred to herein individually as an "Investor" and collectively as the "Investors"). W I T N E S S E T H: WHEREAS, HG will hold the common units of limited partnership interest in the Partnership set forth in Exhibit A hereto (which common units of limited partnership interest, together with common units of limited partnership interest hereafter issued to any other Person that is admitted as a limited partner of the Partnership, are referred to herein collectively as the "Common Units"), which Common Units may be exchanged for common shares of beneficial interest of the Company (the "Common Shares") pursuant to certain exchange rights set forth on Exhibit C to that certain Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P., dated November 17, 1997, as thereafter amended (as so amended and as from time to time hereafter amended, the "Partnership Agreement"); and WHEREAS, the Company has agreed to provide HG and any subsequent Investors with certain registration rights as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: ARTICLE I CERTAIN DEFINITIONS I.1. "Agreement" is defined in the first paragraph of this Agreement. I.2. "Blackout Termination Right" is defined in Section 5.3(b) hereof. I.3. "Business Day" means any day on which the New York Stock Exchange is open for trading. I.4. "Company" is defined in the first paragraph of this Agreement. I.5. "Effectiveness Period" is defined in Section 4.3 hereof. I.6. "Eligible Formation Securities" means the securities defined as "Eligible Securities" in the Formation Registration Rights Agreement. I.7. "Eligible Securities" means all or any portion of the Common Shares acquired by the Investors upon exchange of the Common Units. As to any proposed offer or sale of Eligible Securities, such securities shall cease to be Eligible Securities with respect to such proposed offer or sale when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement or (ii) such securities are permitted to be disposed of pursuant to Rule 144(k) (or any successor provision to such Rule) under the Securities Act as confirmed in a written opinion of counsel to the Company addressed to the Investors, (iii) such securities shall have been otherwise transferred pursuant to Rule 144 (or any successor rule) or pursuant to another applicable exemption under the Securities Act, new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company and such securities shall be freely transferable to the public without registration under the Securities Act or (iv) such securities are no longer outstanding. I.8. "Formation Investors" means the "Investors" and the "Management Investor" as such terms are defined in the Formation Registration Rights Agreement. I.9. "Formation Registration Rights Agreement" means that certain Registration Rights Agreement dated as of November 17, 1997 by and among the Company, the Partnership and the other parties signatory thereto. I.10. "Information Blackout" is defined in Section 5.3(a) hereof. I.11. "Investor Group" means, with respect to an Investor, such Investor and its Permitted Transferees. I.12. "Investor" means HG and each Person that receives Common Units after the date hereof and is admitted as a limited partner of the Partnership, and any of their Permitted Transferees. I.13. "IPO" means, with respect to an Investor, such Investor and its Permitted Transferees and any other beneficial interest of the Company offered simultaneously with the Common Shares. I.14. "IPO Date" means the date of the final prospectus used by the Company in the IPO. 3 I.15. "Lock-Up Agreements" means any Lock-Up Agreement between any other Investor and the Underwriter entered into prior to the end of the 180 day-period following the IPO Date. I.16. "Partnership" is defined in the first paragraph of this Agreement. I.17. "Partnership Agreement" means that certain Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P., dated November 17, 1997, as amended, and as from time to time hereafter amended. I.18. "Participating Investor" is defined in Section 3.3(a) hereof. I.19. "Person" means an individual, a partnership (general or limited), corporation, real estate investment trust, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi-governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity. I.20. "Permitted Transferees" with respect to each Investor means the Persons which qualify as Qualified Transferees under the Partnership Agreement. I.21. "Registration Date" is defined in Section 2.1 hereof. I.22. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with the registration requirements set forth in this Agreement including, without limitation, the following: (i) the fees, disbursements and expenses of the Company's counsel(s) (United States and foreign), accountants and experts in connection with the registration of Eligible Securities to be disposed of under the Securities Act; (ii) all expenses in connection with the 4 preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof to the underwriters and dealers; (iii) the cost of printing or producing any agreement(s) among underwriters, underwriting agreement(s) and blue sky or legal investment memoranda, any selling agreements and any other documents in connection with the offering, sale or delivery of Eligible Securities to be disposed of; (iv) all expenses in connection with the qualification of Eligible Securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such qualification and in connection with any blue sky and legal investment surveys; (v) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Eligible Securities to be disposed of; and (vi) fees and expenses incurred in connection with the listing of Eligible Securities on each securities exchange or quotation system on which the Common Shares are then listed; provided, however, that Registration Expenses with respect to any registration pursuant to this Agreement shall not include underwriting discounts or commissions attributable to Eligible Securities, SEC or blue sky registration fees attributable to Eligible Securities or transfer taxes applicable to Eligible Securities. I.23. "Requesting Investor" means an Investor requesting registration of its Eligible Securities in accordance with the terms hereof. I.24. "Sales Blackout Period" is defined in Section 5.3(a)(iii) hereof. I.25. "SEC" means the United States Securities and Exchange Commission. 5 I.26. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. I.27. "Selling Investor" means the Requesting Investor and each Participating Investor or any Investor who has requested registration pursuant to Section 3.1 or Section 4.1 hereof, as applicable. I.28. "Shelf Registration Statement" is defined in Section 4.3(a) hereof. I.29. "Twelve Month Date" means the date that is twelve months after the date hereof,, and if such date is not a Business Day, the next succeeding date that is a Business Day. I.30. "Underwriter" means Prudential Securities Incorporated. ARTICLE II EFFECTIVENESS OF REGISTRATION RIGHTS SECTION 2.1 Effectiveness of Registration Rights. This Agreement shall become effective on the date hereof, provided, however, that the registration of any Eligible Securities pursuant to Articles III and IV hereof by the Investors prior to the Twelve Month Date (each such dates being hereinafter referred to as a "Registration Date"), shall be subject to the prior receipt of the written consent of the Company and the Underwriter (as applicable) to the waiver of the restrictions on transfer of the Common Shares held by the Investors requesting such consent under the terms of the Partnership Agreement and, as applicable, their respective Lock-Up Agreements. ARTICLE III 6 REGISTRATION REQUEST SECTION 3.1 Request. Upon written request from an Investor requesting that the Company effect the registration under the Securities Act of all or part of the Eligible Securities held by such Investor, which notice may be delivered at any time after 90 days prior to the Registration Date for the applicable Investor Group and which notice shall specify the intended method or methods of disposition of such Eligible Securities, the Company will use all reasonable efforts to effect (at the earliest possible date) the registration, under the Securities Act, of such Eligible Securities for disposition in accordance with the intended method or methods of disposition stated in such request; provided that: (i) if the Company shall have previously effected a registration with respect to Eligible Securities pursuant to Article IV hereof, the Company shall not be required to effect a registration pursuant to this Article III until a period of one hundred twenty (120) days shall have elapsed from the effective date of the most recent such previous registration; (ii) if, upon receipt of a registration request pursuant to this Article III, the Company is advised in writing (with a copy to the Selling Investors) by a nationally recognized independent investment banking firm selected by the Company to act as lead underwriter in connection with a public offering of securities by the Company that, in such firm's opinion, a registration at the time and on the terms requested would materially adversely affect such public offering of securities by the Company (other than an offering in connection with employee benefit and similar plans) (a "Company Offering") that prior to the receipt of the notice by the Requesting Investor had been contemplated by the Company's 7 Board of Trustees to be filed (and which is in fact filed) within sixty (60) days of receipt of the notice by the Requesting Investors, the Company shall not be required to effect a registration pursuant to this Article III until the earliest of (i) three months after the completion of such Company Offering, (ii) the termination of any blackout period, if any, required by the underwriters to be applicable to the Selling Investors in connection with such Company Offering and agreed to in writing by the Selling Investors, (iii) promptly after abandonment of such Company Offering or (iv) four months after the date of written notice requesting registration from the Investor who initially requested registration; (iii) if, while a registration request is pending pursuant to this Article III, the Company determines in the good faith judgment of the Board of Trustees of the Company, with the advice of counsel, that the filing of a registration statement would require the disclosure of non-public material information the disclosure of which would have a material adverse effect on the Company or would otherwise adversely affect a material financing, acquisition, disposition, merger or other comparable transaction, the Company shall deliver a certificate to such effect signed by its Chief Executive Officer, President, or any Executive Vice President to the Selling Investors, and the Company shall not be required to effect a registration pursuant to this Article III until the earlier of (i) the date upon which such material information is disclosed to the public or ceases to be material or (ii) 60 days after the Company makes such good faith determination; and (iv) the Company shall not be required to effect (i) more than two registrations pursuant to this Article III in any calendar year per each Investor Group and (ii) a registration 8 of Eligible Securities, the Fair Market Value of which on the date of the registration request (determined as set forth in the Partnership Agreement) is less than $2,500,000. No registration of Eligible Securities under this Article III shall relieve the Company of its obligation (if any) to effect registrations of Eligible Securities pursuant to Article IV hereof. SECTION 3.2 Registration Expenses. With respect to the registrations requested pursuant to this Article III and any registration arising from an exercise of a Blackout Termination Right (as defined below), the Company shall pay all Registration Expenses. SECTION 3.3 Other Investor Shares. (a) Upon receipt of the written notice from a Requesting Investor, the Company shall give written notice to each other Investor. Subject to Section 3.3(b) hereof, the Company shall be required to cause the registration of securities for sale for the account of any Investor (the "Participating Investor") in any registration of Eligible Securities requested pursuant to this Article III who has delivered written notice to the Company within fifteen (15) Business Days of the date of receipt by such Participating Investor of the above-referenced written notice from the Company (which notice from the Participating Investor to the Company shall specify the number of shares to be disposed of and the intended method of disposition); provided, that the Company shall not be required to cause the registration of all of the securities requested to be registered by Participating Investors if the Requesting Investor is advised in writing (with a copy to the Company) by a nationally recognized independent investment banking firm selected by the Requesting Investor (or as determined by Section 3.3(c)) that, in such firm's opinion, registration of all of such securities would materially adversely affect the offering and sale of Eligible Securities then contemplated by the Requesting Investor. 9 (b) If the Company cannot, pursuant to the terms of this Section 3.3, register all of the shares requested to be registered, the Company shall register the Maximum Amount (as defined below), and such amount shall be allocated between each applicable Investor Group, pro rata according to the number of shares for which registration was initially requested by each Investor Group. The amount allocated to each Investor Group shall be further allocated to each Selling Investor within such Investor Group pro rata according to the number of shares for which registration was initially requested by each Selling Investor within such Investor Group. For purposes of this Section 3.3, "Maximum Amount" shall mean the largest number of shares (if any) that, in the opinion of the nationally recognized underwriter selected by the Requesting Investor (or as determined by Section 3.3(c) hereof), for purposes of Section 3.3(a) hereof, could be offered to the public without materially adversely affecting the offering and sale of Eligible Securities as then contemplated by the Selling Investors. (c) In the event that more than one Investor exercises registration rights on the same day, the Investor who requested a registration of the larger number of shares on such day shall be entitled to select the lead underwriter for such registered offering (if such offering will be underwritten). In all other cases, the first Investor to exercise registration rights with respect to any particular registration demand shall be entitled to select the lead underwriter for such registered offering (if such offering will be underwritten). Notwithstanding this Article III, each Selling Investor may elect, in writing prior to the effective date of the registration statement filed in connection with a registration under this Article III, not to register its Eligible Securities in connection with such registration; provided, 10 that if such Selling Investor is one of the Requesting Investors, such Selling Investor will be deemed to have used one of the two rights each year to request registration of Eligible Securities under this Article III allocated to the Investor Group of which it is a member pursuant to Section 3.1(iv) hereof. ARTICLE IV INCIDENTAL REGISTRATION SECTION 4.1 Notice and Registration. If the Company proposes to register any Common Shares, any equity securities exercisable for, convertible into or exchangeable for Common Shares, or other securities issued by it having terms substantially similar to Eligible Securities ("Other Securities") for public sale under the Securities Act (to the extent to be offered for sale by the Company) on a form and in a manner which would permit registration of Eligible Securities for sale to the public under the Securities Act, it will give prompt written notice to the Investors of its intention to do so, and upon the written request of any Investor delivered to the Company within fifteen (15) Business Days after the giving of any such notice (which request shall specify the number of Eligible Securities intended to be disposed of by such Investor and the intended method of disposition thereof), the Company will use all reasonable efforts to effect, in connection with the registration of the Other Securities, the registration under the Securities Act of all Eligible Securities which the Company has been so requested to register by the Selling Investor(s), to the extent required to permit the disposition (in accordance with the intended method or methods thereof as aforesaid) of Eligible Securities so to be registered (it being understood by the parties hereto that the Company is also obligated under the Formation Registration Rights Agreement to similarly notify the Formation 11 Investors of the Company's intention to register as such Other Securities, and to use all reasonable efforts to effect, in connection with the registration of the Other Securities, the registration under the Securities Act of all Eligible Formation Securities which the Company is so requested to register by the Formation Investors before any Eligible Securities are included in such registration); provided that: (i) if, at any time after giving such written notice of its intention to register any Other Securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register the Other Securities, the Company may, at its election, give written notice of such determination to the Investors and thereupon the Company shall be relieved of its obligation to register such Eligible Securities in connection with the registration of such Other Securities (but not from its obligation to pay Registration Expenses to the extent incurred in connection therewith as provided in Section 4.2 hereof), without prejudice, however, to the rights (if any) of the Investors immediately to request that such registration be effected as a registration under Article III hereof; (ii) The Company will not be required to effect any registration pursuant to this Article IV if the Company shall have been advised in writing (with a copy to the Selling Investors) by a nationally recognized independent investment banking firm selected by the Company to act as lead underwriter in connection with the public offering of securities by the Company that, in such firm's opinion, a registration of Eligible Securities requested to be registered at that time would materially and adversely affect the Company's own scheduled 12 offering of Other Securities together with any Eligible Formation Securities included in such registration; provided, however, that if an offering of some but not all of the Eligible Securities requested to be registered by the Investor(s) would not materially adversely affect the Company's offering of Other Securities together with any Eligible Formation Securities included in such registration, the aggregate number of Eligible Securities requested to be included in such offering by the Investors shall be reduced pro rata according to the total number of Eligible Securities requested to be registered by such Persons; (iii) The Company shall not be required to effect any registration of Eligible Securities under this Article IV incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or share options or other employee benefit plans or in connection with any "demand registration" requested by the Formation Investors under Article III of the Formation Registration Rights Agreement (except that in the case of such a demand registration being made by the Company on behalf of the Formation Investors, the Company will promptly notify the Investors hereunder and the Investors may request (within the time period specified by the Company) that Eligible Securities be included in such registration of Eligible Formation Securities, and, to the extent the Formation Investors expressly consent to the inclusion of some or all of the Eligible Securities so requested to be included in such demand registration of Eligible Formation Securities, the Company will make all reasonable efforts to effect the registration of such of the Eligible Securities so requested to be registered.. 13 (iv) Notwithstanding any request under Section 4.1(a) hereof, a Selling Investor may elect in writing prior to the effective date of a registration under this Article IV, not to register its Eligible Securities in connection with such registration. (v) No registration of Eligible Securities effected under this Article IV shall relieve the Company of its obligation (if any) to effect registrations of Eligible Securities pursuant to Article III hereof. SECTION 4.2 Registration Expenses. The Company shall be responsible for the payment of all Registration Expenses in connection with any registration pursuant to this Article IV. SECTION 4.3 Shelf Registration Statement (a) Shelf Registration Statement. The Company shall as promptly as reasonably practicable subsequent to the Twelve Month Date file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Eligible Securities (the "Shelf Registration Statement"). To the extent possible, the Shelf Registration Statement shall be on the appropriate form permitting registration of such Eligible Securities for resale by Investors in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company will notify each Investor when such Shelf Registration Statement has become effective. The Company shall use its best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act as promptly as practicable after the filing of the Shelf Registration Statement and (subject to compliance with the restrictions on registrations set forth in Articles III and IV hereof which shall be applicable with respect to the Shelf Registration) to keep 14 the Shelf Registration Statement continuously effective under the Securities Act until the date which is five (5) years from the date of its initial effectiveness ("Effectiveness Period"), or such period ending either when all Eligible Securities covered by the Shelf Registration Statement or the Eligible Securities covered by the Shelf Registration Statement first have a Fair Market Value (determined as set forth in the Partnership Agreement) of less than $1,000,000 have been sold in the manner set forth and as contemplated in the Shelf Registration Statement. (b) Withdrawal of Stop Orders. If the Shelf Registration Statement ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder or because the Company's obligation to maintain the Shelf Registration Statement ceases in accordance with Section 4.3 (a) because the Fair Market Value of the Eligible Securities covered by the Registration Statement is then less than $1,000,000), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof. (c) Supplement and Amendments. The Company shall promptly supplement and amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration Statement, if required by the Securities Act. ARTICLE V REGISTRATION PROCEDURES SECTION 5.1 Registration and Qualification. If and whenever the Company is required to use all reasonable efforts to effect the registration of any Eligible Securities under the Securities Act as provided in Articles III or IV hereof, the Company will, as promptly as is practicable: 15 (i) prepare, file and use all reasonable efforts to cause to become effective a registration statement under the Securities Act regarding the Eligible Securities to be offered; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Eligible Securities until the earlier of such time as all of such Eligible Securities have been disposed of in accordance with the intended methods of disposition by the Selling Investors set forth in such registration statement or the expiration of twelve months (or 30 months in the case of the Shelf Registration Statement) after such Registration Statement becomes effective; (iii) furnish to the Selling Investors and to any underwriter of such Eligible Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents as the Selling Investors or such underwriter may reasonably request; (iv) use all reasonable efforts to register or qualify all Eligible Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Selling Investors or any underwriter of such Eligible Securities shall 16 reasonably request, and do any and all other acts and things which may be reasonably requested by the Selling Investors or any underwriter to consummate the disposition in such jurisdictions of the Eligible Securities covered by such registration statement, except the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any jurisdiction where it is not then subject to taxation, or to consent to general service of process in any jurisdiction where it is not then subject to service of process; (v) use all reasonable efforts to list the Eligible Securities on each national securities exchange or quotation system on which the Common Shares are then listed, if the listing of such securities is then permitted under the rules of such exchange; (vi) (x) furnish to the Selling Investors an opinion of counsel for the Company, addressed to them, dated the date of the closing under the underwriting agreement, and (y) upon such Selling Investor's request, use all reasonable efforts to furnish to the Selling Investors a "comfort letter" signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, addressed to them; provided that with respect to such opinion and "comfort letter," the following shall apply: (A) the opinion and "comfort letter" shall cover substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Investors may 17 reasonably request; and (B) the "comfort letter" also shall cover events subsequent to the date of such financial statements; and (vii) notify the Selling Investors immediately upon the happening of any event as a result of which a prospectus included in a registration statement, relating to a registration pursuant to Article III or IV hereof, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and at the request of the Selling Investors prepare and furnish to the Selling Investors as many copies of a supplement to or an amendment of such prospectus as the Selling Investors reasonably request so that, as thereafter delivered to the purchasers of such Eligible Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company may require the Selling Investors to furnish the Company such information regarding the Selling Investors and the distribution of such securities as the Company may from time to time reasonably request in writing and as shall be required by law or by the SEC in connection with any registration. Failure of the Selling Investors to provide such information will relieve the Company of its obligation to register such Selling Investor's Eligible Securities. SECTION 5.2 Underwriting. (a) If requested by the underwriters for any underwritten offering of Eligible Securities pursuant to a registration described in this Agreement, the Company will enter into and perform its obligations under an underwriting agreement with such underwriters 18 for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution to the effect and to the extent provided in Article VII hereof and the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 5.1(i) hereof. The holders of Eligible Securities on whose behalf Eligible Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Eligible Securities. (b) In the event that any registration pursuant to Article IV hereof shall involve, in whole or in part, an underwritten offering, the Company may require Eligible Securities requested to be registered pursuant to Article IV hereof to be included in such underwriting on the same terms and conditions as shall be applicable to the Other Securities being sold through underwriters under such registration. In such case, the holders of Eligible Securities on whose behalf Eligible Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement. Such agreement shall contain such representations and warranties by the Company and the Selling Investors and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution to the effect and to the extent provided in Article VII hereof. The representations and warranties in such underwriting agreement by, and the other agreements on the part of, the Company to and for the 19 benefit of such underwriters shall also be made to and for the benefit of such holders of Eligible Securities. SECTION 5.3 Blackout Periods. (a) At any time when a registration statement effected pursuant to Article III hereof relating to Eligible Securities is effective, upon written notice from the Company to the Selling Investors that the Company determines in the good faith judgment of the Board of Trustees of the Company, with the advice of counsel, that the Selling Investors' sale of Eligible Securities pursuant to the registration statement would require disclosure of non-public material information the disclosure of which would have a material adverse effect on the Company (an "Information Blackout"), the Selling Investors shall suspend sales of Eligible Securities pursuant to such registration statement until the earliest of: (i) the date upon which such material information is disclosed to the public or ceases to be material; (ii) 60 days after the Company makes a good faith determination that such material information ceases to be material; and (iii) such time as the Company notifies the Selling Investors that sales pursuant to such registration statement may be resumed. (The number of days from such suspension of sales by the Selling Investors until the day when such sales may be resumed under clause (i), (ii) or (iii) of this Section 5.3(a) is hereinafter called a "Sales Blackout Period".) (b) Any delivery by the Company of notice of an Information Blackout during the 90 days immediately following effectiveness of any registration statement effected pursuant to Article 20 III hereof shall give the Investors the right, by written notice to the Company within 20 Business Days after the end of such Sales Blackout Period, to cancel such registration and obtain one additional registration right during such calendar year (a "Blackout Termination Right") under Article III hereof. (c) If there is an Information Blackout and if the Investors do not exercise their cancellation right, if any, pursuant to Section 5.3(b) hereof, or, if such cancellation right is not available, the time period set forth in Section 5.1(ii) hereof shall be extended for a number of days equal to the number of days in the Sales Blackout Period. SECTION 5.4 Qualification for Rule 144 Sales. The Company will take all actions reasonably necessary to comply with the filing requirements described in Rule 144(c)(1) so as to enable the Investors to sell Eligible Securities without registration under the Securities Act and, upon the written request of any Investor, the Company will deliver to such Investor a written statement as to whether it has complied with such filing requirements. ARTICLE VI PREPARATION; REASONABLE INVESTIGATION SECTION 6.1 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement registering Eligible Securities under the Securities Act, the Company will give the Selling Investors and the underwriters, if any, and their respective counsel and accountants, drafts of such registration statement for their review and comment prior to filing and such reasonable and customary access to its books and records and such opportunities to discuss the 21 business of the Company with its officers, counsel and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of the Selling Investors and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. ARTICLE VII INDEMNIFICATION AND CONTRIBUTION 22 SECTION 7.1 Indemnification. (a) In the event of any registration of Eligible Securities hereunder, the Company and the Partnership jointly and severally will, and hereby do, indemnify and hold harmless, each Selling Investor, its respective directors, trustees, officers, partners, agents, employees and affiliates and each other person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls each such Selling Investor or any such underwriter within the meaning of the Securities Act, against any and all losses, claims, damages, expenses or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof, to which each such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company and the Partnership will reimburse each such Selling Investor and each such director, trustee, officer, partner, agent, employee or affiliate, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, expense, liability, action, or proceeding; provided, however, that (i) the Company and the Partnership shall not be liable in any such case to the extent that any such loss, claim, damage, expense or liability (or action or proceeding 23 in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Selling Investor or underwriter specifically stating that it is for use in the preparation thereof and (ii) the Company and the Partnership shall not be liable to any person who participates as an underwriter in the offering or sale of Eligible Securities or any other person, if any, who controls or is controlled by such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, expense or liability (or action or proceeding in respect thereof) arises out of such underwriter's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Eligible Securities to such person if such statement or omission was corrected in such final prospectus. (b) Each Selling Investor severally will, and hereby does, indemnify and hold harmless the Company, its trustees, its officers who sign the registration statement, each Person who participates as an underwriter in the offering or sale of such securities, and each Person, if any, who controls the Company or any such underwriter within the meaning of the Securities Act against any and all losses, claims, damages, expenses or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof, to which each such indemnified party may become subject under the Securities Act or otherwise insofar as such losses, claims, damages, 24 expenses or liabilities (or actions or proceedings, whether commenced or threatened in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact in or omission or alleged omission to state a material fact in such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, but only to the extent that such statement or omission was made in reliance upon and in conformity with written information furnished by such Selling Investor to the Company through an instrument duly executed by or on behalf of such Selling Investor specifically stating that it is for use in preparation thereof. (c) Promptly after receipt by any indemnified party hereunder of notice of the commencement of any action or proceeding involving a claim referred to in paragraphs (a) or (b) of this Section 7.1, the indemnified party will notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party under paragraphs (a) or (b) of this Section 7.1. (d) If for any reason the indemnity under this Section 7.1 is unavailable or is insufficient to hold harmless any indemnified party under paragraphs (a) or (b) of this Section 7.1, then the indemnifying parties shall contribute to the amount paid or payable to the indemnified party as a result of any loss, claim, expense, damage or liability (or actions or proceedings, whether commenced or threatened, in respect thereof), and legal or other expenses reasonably incurred by the indemnified party in connection with investigating or defending any such loss, claim, expense, damage, liability, action or proceeding, in such proportion as is appropriate to reflect the relative fault 25 of the indemnifying party on the one hand and the indemnified party on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Investor and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. If, however, the allocation provided in the second preceding sentence is not permitted by applicable law, or if the allocation provided in the second preceding sentence provides a lesser sum to the indemnified party than the amount hereinbefore calculated, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party in such proportion as is appropriate to reflect not only such relative fault but also the relative benefits of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this paragraph (d) of Section 7.1 were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentences of this paragraph (d) of Section 7.1. (e) Indemnification and contribution similar to that specified in this Section 7.1 (with appropriate modifications) shall be given by the Company and the Partnership and the Selling Investors with respect to any required registration or other qualification of securities under any federal, state or blue sky law or regulation of any governmental authority other than the Securities Act. 26 (f) Notwithstanding any other provision of this Section 7.1, to the extent that any director, trustee, officer, partner, agent, employee, affiliate, or other representative (current or former) of any indemnified party is a witness in any action or proceeding, the indemnifying party agrees to pay to the indemnified party all expenses reasonably incurred by, or on the behalf of, the indemnified party and such witness in connection therewith. (g) All legal and other expenses incurred by or on behalf of any Selling Investor in connection with investigating or defending any loss, claim, expense, damage, liability, action or proceeding shall be paid by the Company or the Partnership in advance of the final disposition of such investigation, defense, action or proceeding within twenty days after the receipt by the Company or the Partnership of a statement or statements from the Selling Investor requesting from time to time such payment, advance or advances. The entitlement of each Selling Investor to such payment or advancement of expenses shall include those incurred in connection with any action or proceeding by the Selling Investor seeking an adjudication or award in arbitration pursuant to this Section 7.1. Such statement or statements shall reasonably evidence such expenses incurred by the Selling Investor in connection therewith. (h) The termination of any proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the rights of any indemnified party to indemnification hereunder or create a presumption that any indemnified party violated any federal or state securities laws. (i) (i) In the event that advances are not made pursuant to this Section 7.1 or payment has not otherwise been timely made, each indemnified party shall be entitled to seek a final 27 adjudication in an appropriate court of competent jurisdiction of the entitlement of the indemnified party to indemnification or advances hereunder. (ii) The Company, the Partnership and the Selling Investors agree that they shall be precluded from asserting that the procedures and presumptions of this Section 7.1 are not valid, binding and enforceable. The Company, the Partnership and the Selling Investors further agree to stipulate in any such court that the Company, the Partnership, and the Selling Investors are bound by all the provisions of this Section 7.1 and are precluded from making any assertion to the contrary. (iii) To the extent deemed appropriate by the court, interest shall be paid by the indemnifying party to the indemnified party at a reasonable interest rate for amounts which the indemnifying party has not timely paid as the result of its indemnification and contribution obligations hereunder. (j) In the event that any indemnified party is a party to or intervenes in any proceeding in which the validity or enforceability of this Section 7.1 is at issue or seeks an adjudication to enforce the rights of any indemnified party under, or to recover damages for breach of, this Section 7.1, the indemnified party, if the indemnified party prevails in whole in such action, shall be entitled to recover from the indemnifying party and shall be indemnified by the indemnifying party against, any expenses incurred by the indemnified party. If it is determined that the indemnified party is entitled to indemnification for part (but not all) of the indemnification so requested, expenses incurred in seeking enforcement of such partial indemnification shall be reasonably prorated among 28 the claims, issues or matters for which the indemnified party is entitled to indemnification and for such claims, issues or matters for which the indemnified party is not so entitled. (k) The indemnity agreements contained in this Section 7.1 shall be in addition to any other rights (to indemnification, contribution or otherwise) which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of any Eligible Securities by any Investor. ARTICLE VIII BENEFITS OF REGISTRATION RIGHTS SECTION 8.1 Benefits of Registration Rights. Subject to the limitations of Sections 3.1 and 4.1 hereof, each member of any Investor Group and the Permitted Transferees of Eligible Securities of such Investor Group may severally or jointly exercise the registration rights hereunder in such proportion as they shall agree among themselves. No consent of any Investor shall be required for Permitted Transferees to exercise registration rights under this Agreement or otherwise to be entitled to the benefits of this Agreement as applicable to all Investors. The Company agrees that monetary damages would not compensate the Investors for a breach by the Company hereof and the Investors shall be entitled to specific performance of this Agreement. ARTICLE IX MISCELLANEOUS 29 SECTION 9.1 Captions. The captions or headings in this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope or intent of this Agreement. SECTION 9.2 Severability. If any clause, provision or section of this Agreement shall be invalid or unenforceable, the invalidity or unenforceability of such clause, provision or section shall not affect the enforceability or validity of any of the remaining clauses, provisions or sections hereof to the extent permitted by applicable law. SECTION 9.3 Governing Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Maryland, without reference to its rules as to conflicts or choice of laws. SECTION 9.4 Modification and Amendment. This Agreement may not be changed, modified, discharged or amended, except by an instrument signed by the Company and the holder of a majority in amount of Eligible Securities; provided, that the Company may from time to time and without the consent of any Investor amend Exhibit A hereto to reflect the Common Units of Persons that become Investors subject to this Agreement after the date hereof, and may from time to time and without the consent of any Investor provide written acknowledgments to such other Persons that such Persons are "Investors" hereunder. SECTION 9.5 Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 30 SECTION 9.6 Entire Agreement. This Agreement constitutes the entire agreement and understanding among the parties and supersedes any prior understandings and/or written or oral agreements among them respecting the subject matter herein. SECTION 9.7 Notices. All notices, requests, demands, consents and other communications required or permitted to be given pursuant to this Agreement shall be in writing and delivered by hand, by overnight courier delivery service or by certified mail, return receipt requested, postage prepaid. Notices shall be deemed given when actually received, which shall be deemed to be not later than the next Business Day if sent by overnight courier or after five (5) Business Days if sent by mail. Notice to Investors shall be made to the address listed on the share transfer records of the Company. [signature page follows] 31 IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused this Agreement to be executed as of the day and year first above written. PRIME GROUP REALTY TRUST By:/s/ Jeffrey A. Patterson ------------------------------- Name:Jeffrey A. Patterson Title:Executive VP PRIME GROUP REALTY, L.P. By: Prime Group Realty Trust its general partner By:/s/ Jeffrey A. Patterson ------------------------------- Name:Jeffrey A. Patterson Title:Executive VP H GROUP LLC By:/s/ Eric D. Mayer ------------------------------- Name: Eric D. Mayer Title:President 32 EXHIBIT A H Group LLC Certf. No. 20 251,752Common Units Certif. No. 21 5,000 Common Units EX-10.29 25 EX-10.29 Exhibit 10.29 EXECUTION COPY ENVIRONMENTAL REMEDIATION AND INDEMNIFICATION AGREEMENT by and between PRIME GROUP REALTY, L.P., a Delaware limited partnership and THE PRIME GROUP, INC., an Illinois corporation Dated as of: November 17, 1997 ENVIRONMENTAL REMEDIATION AND INDEMNIFICATION AGREEMENT THIS ENVIRONMENTAL REMEDIATION AND INDEMNIFICATION AGREEMENT (this "Agreement") made and entered into as of the 17th day of November, 1997, by and between The Prime Group, Inc., an Illinois corporation ("Indemnitor"), and Prime Group Realty, L.P., a Delaware limited partnership, in its individual capacity and as general partner of the limited partnerships which own the Properties (as hereinafter defined) (Prime Group Realty, L.P. and each such partnership, collectively, "Indemnitee"); WITNESSETH: WHEREAS, Indemnitor and Indemnitee, together with certain other parties, have heretofore entered into an agreement (the "Formation Agreement") which provides, in part, for the contribution of interests in partnerships which own certain properties, commonly known as (i) the Chicago Enterprise Center, located in Chicago, Illinois ("CEC"), (ii) the East Chicago Enterprise Center, located in East Chicago, Indiana ("ECEC") and (iii) the Hammond Enterprise Center, located in Hammond, Indiana ("HEC," and together with the CEC and the ECEC, collectively known as the "Properties"); WHEREAS, as a condition to its entering into the Formation Agreement, Indemnitee has required that Indemnitor remediate, or cause the remediation of, certain Known Contamination (as defined below) which has been discovered on the Properties, and to indemnify, save, and hold Indemnitee harmless from and against certain obligations and liabilities which may be incurred by Indemnitee (whether as owner, occupier, or operator of the Properties) by reason of such Known Contamination. WHEREAS, this Agreement is entered into to provide the Indemnitee with the indemnity, protections, and assurances it requires and as an inducement to Indemnitee to enter into the Formation Agreement; NOW, THEREFORE, in consideration of the Properties and of the mutual promises and agreements herein contained, the agreements and covenants contained in the Formation Agreement, TEN DOLLARS ($10.00), and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows: 1. Recitals. The recitals set forth above are true and correct and are by this reference incorporated herein. 2. Definitions. As used in this Agreement, the terms "Covenant Not to Sue," "Known Contamination," "Hazardous Materials," "IEPA," "IDEM," "NFR Letter," "Known Contamination," "NFR Letter," "Release," "Environmental Laws" and "Environmental Reports" are defined as follows: (a) "Covenant Not to Sue" means both a Certificate of Completion from the IDEM pursuant to Indiana Code 13-25-5-20(b) and a Covenant Not to Sue from the Governor of the State of Indiana pursuant to Indiana Code 13-25-5-18. (b) "Known Contamination" means the environmental conditions existing on the Properties, as specifically identified in the Environmental Reports and with respect to which Indemnitor is required to remediate (i) at CEC in order to receive a NFR Letter for the environmental contamination listed in the Environmental Reports as being present at CEC, and (ii) at ECEC and HEC in order to receive a Covenant Not to Sue for each of ECEC and HEC for the environmental contamination listed in the Environmental Reports as being present at HEC and ECEC. (c) "Hazardous Materials" means any hazardous or toxic substances, materials or wastes, including, but not limited to, those substances, materials and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 C.F.R. Section 172.101) and amendments thereto or designated by the United States Environmental Protection Agency as hazardous substances (40 C.F.R. Part 302) and such substances, materials and wastes which are or become regulated under Environmental Law including, without limitation, any material, waste or substance which is: (i) petroleum; (ii) asbestos; (iii) polychlorinated biphenyls; (iv) defined or regulated as a "hazardous waste" under Environmental Law; (v) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to section 307 of the Clean Water Act (33 U.S.C. Section 1317); or (vi) defined as a "hazardous substance" pursuant to section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). (d) "IEPA" means the Illinois Environmental Protection Agency. (e) "IDEM" means the Indiana Department of Environmental Management. (f) "NFR Letter" means a No Further Remediation Letter from the IEPA pursuant to the Illinois Environmental Protection Act (415 ILCS 5/58). (g) "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment, including, without limitation, the abandonment or discarding of barrels, containers, and other closed receptacles containing any Hazardous Materials. (h) "Environmental Laws" means all federal, state, local and foreign laws, statutes, ordinances, codes, rules, standards, and regulations, in effect as of the date hereof, and any applicable judicial or administrative interpretation thereof, including any applicable judicial or administrative order, consent decree or judgment, imposing liability or standards of conduct for or relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). -2- (i) "Environmental Reports" means the environmental reports listed on Exhibit A attached hereto. 3. Remediation and Indemnification. Indemnitor agrees to remediate the Known Contamination and agrees to exonerate, indemnify, pay and protect, defend (with counsel reasonably approved by Indemnitee), and save and hold Indemnitee and the directors, officers, shareholders, employees, and agents of Indemnitee harmless from and against any claims (including, without limitation, third party claims for personal injury or real or personal property damage), actions, administrative proceedings (including informal proceedings), judgments, damages, punitive damages, penalties, fines, costs, liabilities (including sums paid in settlement of claims), interest, or losses, including reasonable attorneys' and paralegals' fees and expenses (including, without limitation, any such fees and expenses incurred in enforcing this Indemnification Agreement or collecting any sums due hereunder), investigation and remediation costs, consultants' fees and experts' fees, together with all other costs and expenses of any kind or nature (collectively, the "Costs") that arise directly or indirectly from or in connection with the Known Contamination. The indemnification provided in this Paragraph 3 shall specifically apply to and include claims or actions brought by or on behalf of employees of Indemnitor. In the event Indemnitee shall suffer or incur any such Costs, Indemnitor shall immediately pay to Indemnitee the total of all such Costs suffered or incurred by Indemnitee upon demand by Indemnitee. Without limiting the generality of the foregoing, the indemnification provided in this Paragraph 3 shall specifically cover Costs, including capital, operating, supervision and maintenance costs, incurred in connection with any investigation or monitoring of site conditions, any clean-up, containment, remediation, removal, or restoration work required or performed by any federal, state or local governmental agency or political subdivision or performed by any nongovernmental entity or person because of Known Contamination. 4. Remedial Work. Indemnitor shall perform any investigation or monitoring of site conditions and any clean-up, containment, restoration, removal, treatment, stabilization, or other remedial work relating to the Known Contamination (collectively, the "Remedial Work") required at CEC to obtain the NFR Letter and at the HEC and ECEC to obtain a Covenant Not to Sue. Indemnitor shall perform or cause to be performed the required Remedial Work in compliance with all Environmental Laws. All required Remedial Work shall be performed by one or more contractors, selected by Indemnitor and approved (such approval not to be unreasonably withheld or delayed) in advance in writing by Indemnitee, and under the supervision of a consulting engineer, selected by Indemnitee and approved (such approval not to be unreasonably withheld or delayed) in advance in writing by Indemnitor. All costs and expenses of such required Remedial Work shall be paid by Indemnitor including, without limitation, the charges of such contractor(s) and/or the consulting engineer, and Indemnitee's reasonable consultant, attorney and paralegal fees and costs incurred in connection with monitoring or review of such Remedial Work. In the event Indemnitor shall fail to timely commence, or cause to be commenced, or fail to diligently prosecute to completion, such Remedial Work, Indemnitee may, but shall not be required to, cause such Remedial Work to be performed, and all costs and expenses thereof, or incurred in connection therewith shall be Costs within the meaning of Paragraph 3 above. All such Costs shall be immediately due and payable upon demand by Indemnitee. -3- 5. Limitations of Remedial Work. Notwithstanding anything in this Agreement to the contrary, Indemnitor and Indemnitee agree that Indemnitor shall not be required to remediate Known Contamination under buildings or paved parking areas on the Properties except to the extent required by IEPA or IDEM, as applicable to obtain the NFR Letter or the Covenant Not to Sue, respectively. In addition, Indemnitor and Indemnitee agree that certain of the Known Contamination may, with the approval of IEPA or IDEM, as applicable, be remediated by utilizing appropriate engineered barriers over or around such Known Contamination instead of actually removing it. Indemnitee agrees that the NFR Letter for CEC and the Covenant Not to Sue for ECEC and HEC may contain certain limitations and requirements relating to Known Contamination underneath, or contained by, such buildings, parking areas and engineered barriers (collectively, "Caps") including, but not necessarily limited to, a requirement that restrictions on removing such Caps be recorded against the relevant portions of the applicable Property. The NFR Letter and Covenant Not to Sue may also include a requirement that a restrictive covenant be recorded against the applicable Property limiting the use of such Property to industrial and other approved uses. Indemnitee agrees that in the event that IEPA or IDEM requires that any such restrictive covenants or other limitations (the "Restrictive Covenants") be recorded against any or all of the Properties, Indemnitee shall cause the fee simple title holders of the relevant portions of the applicable Property or Properties to record such Restrictive Covenants against all or any such portions of the applicable Property or Properties as required by IEPA or IDEM. Indemnitor agrees to provide Indemnitee in advance with the form of each NFR Letter, Covenant Not to Sue and Restrictive Covenant requested by IEPA or IDEM (the "EPA Documents") for Indemnitee's approval, and Indemnitee shall have the right to negotiate the form and substance of such EPA Documents with Indemnitor and IEPA or IDEM, as applicable; provided, however, that Indemnitee's approval of such EPA Documents shall not be unreasonably withheld or delayed. 6 Notice of Claims. All notices, approvals, consents, requests, and demands upon the respective parties hereto shall be in writing; sent by personal delivery (including, without limitation, nationally recognized courier services such as Federal Express), or by certified or registered mail, postage prepaid and return receipt requested; and addressed as follows: To Indemnitor: The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: President With a copy to: The Prime Group, Inc. 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: General Counsel To Indemnitee: Prime Group Realty Trust -4- 77 West Wacker Drive Suite 3900 Chicago, Illinois 60601 Attn: President With a copy to: Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attn: Wayne D. Boberg, Esq. or to such other address as may be furnished in writing for such purpose with a copy to one additional person each as Indemnitor or Indemnitee shall specify in writing. 7. Participation in Defense of Claims/Duty to Cooperate Notice of Indemnitor. In the event that any claim, action, administrative proceeding (including informal proceedings), or other demand is made by any governmental agency or other third party against Indemnitee involving Costs, Indemnitor shall cooperate with Indemnitee in any defense or other response to any such claim or other demand. Indemnitor shall have the right to participate in the defense or other response to any such claim or demand provided that Indemnitee shall have the right, but not the obligation, to direct and control the defense or response to any such claim or demand. Indemnitor's right to participate in the defense or response to any such claim or demand shall not be deemed to limit or otherwise modify Indemnitor's obligations under this Agreement. Indemnitee shall give notice to Indemnitor of any claim or demand governed by this Paragraph 6 within a reasonable period after such claim or other demand first becomes known to Indemnitee. 8. Subrogation of Indemnity Rights. If Indemnitor fails to perform its obligations under Paragraph 4 above and Indemnitee performs in its stead, Indemnitee shall be subrogated to any rights Indemnitor may have under any indemnifications from any present, future or former owners, tenants, or other occupants or users of the Properties (or any portion thereof) relating to the matters covered by this Indemnification Agreement. 9. Assignment by Indemnitee. No consent by Indemnitor shall be required for any assignment or reassignment of the rights of Indemnitee hereunder to one or more parties. 10. Litigation Matters. Indemnitee acknowledges that Indemnitor and certain affiliates of Indemnitor are currently engaged in litigation against certain past or present tenants of the Properties, as specified on Exhibit B attached hereto. Indemnitee acknowledges and agrees that any cash or other property received by Indemnitor or such affiliates pursuant to such litigation, for remediation costs previously incurred and for future remediation costs to the extent that the Indemnitor is responsible for such future remediation pursuant to the terms of this Agreement, shall be retained by Indemnitor or such affiliates, even if the value of such cash or property exceeds the amounts due to Indemnitee under this Agreement. Indemnitee also agrees that Indemnitor has the right to receive all cash or securities held in escrow pursuant to any agreement between Indemnitor -5- or Indemnitee or any affiliate of Indemnitor or Indemnitee, on the one hand, and IEPA, IDEM or any other governmental authority, on the other hand, or between Indemnitor or Indemnitee or any affiliate of Indemnitor or Indemnitee, on the one hand, and any lender or provider of credit support, on the other hand, regarding environmental matters relating to the Properties. Indemnitee also agrees to cooperate fully with Indemnitor or any affiliate of Indemnitor, at Indemnitor's expense, in any litigation or other proceedings or actions regarding environmental matters related to the Properties. 11. Merger, Consolidation, or Sale of Assets. In the event of a dissolution of Indemnitor or other disposition involving Indemnitor or all or substantially all of the assets of Indemnitor to one or more persons or other entities, the surviving entity or transferee of such assets, as the case may be, shall deliver to Indemnitee an acknowledged instrument in recordable form assuming all covenants, agreements, responsibilities, liabilities and obligations of Indemnitor under this Agreement. 12. Independent Obligations: Survival. The obligations of Indemnitor under this Agreement shall survive the consummation of the Formation Agreement, and the obligations of Indemnitor under this Agreement are separate and distinct from the obligations of Indemnitor under the Formation Agreement. This Agreement may be enforced by Indemnitee without regard to any other rights and remedies Indemnitee may have against Indemnitor under the Formation Agreement and without regard to any limitations on Indemnitee's recourse as may be provided in the Formation Agreement. 13. Miscellaneous. If any term of this Agreement or any application thereof shall be invalid, illegal, or unenforceable, the remainder of this Agreement and any other application of such term shall not be affected thereby. No delay or omission in exercising any right hereunder shall operate as a waiver of such right or any other right. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by Indemnitor and Indemnitee, and their respective mortgagees, successors and assigns, including, without limitation, any assignee of Indemnitee who acquires all or any portion of the Indemnitee's interest in the Properties, any mortgagee of any portion of the Properties and any person who acquires any portion of the Properties through foreclosure or deed in lieu of the foreclosure. This Agreement shall be governed and construed in accordance with the laws of the State of Illinois. -6- IN WITNESS WHEREOF, Indemnitor and Indemnitee have caused this Agreement to be executed as of the day and year first above written. INDEMNITOR: The Prime Group, Inc., an Illinois corporation By: /s/ Robert J. Rudnik ------------------------------ Its: Executive Vice President ------------------------------ INDEMNITEE: Prime Group Realty, L.P., a Delaware limited partnership By: Prime Group Realty Trust, a Maryland real estate investment trust, its Managing General Partner By: /s/ W. Michael Karnes ------------------------------ Its: Executive Vice President ------------------------------ -7- EXHIBIT A Environmental Reports 1. Removal Site Evaluation and Preliminary Assessment -- Event Two Report, April 1997, by Carlson Environmental, regarding the Chicago Enterprise Center 2. Remediation Work Plan, February 1997, by Heritage Environmental Services, regarding the East Chicago Enterprise Center 3. Remediation Work Plan, February 1997, by Heritage Environmental Services, regarding the Hammond Enterprise Center -8- EXHIBIT B Litigation 1. Enterprise Center VII, L.P., Enterprise Center VIII, L.P., Enterprise Center IX, L.P., Enterprise Center X, L.P. and Kemper/Prime Industrial Partners vs. USX Corporation and Illinois Tool Works, Inc. and Signode Corporation, Case Number 96C 5283, filed on August 22, 1996 in the United States District Court for the Northern District of Illinois, Eastern Division. 2. Kemper/Prime Industrial Partners vs. Montgomery Watson Americas, Inc. (as successor by merger to Warzyn Inc. f/k/a Warzyn Engineering, Inc.), Case Number 97C 4278, filed on June 13, 1997 in the United States District Court for the Northern District of Illinois, Eastern Division. -9- Document Number: 251361.8 3-28-98/10:54AM -10- EX-12.1 26 EXHIBIT 12.1
EXHIBIT 12.1 PRIME GROUP REALTY TRUST STATEMENT REGARDING COMPUTATION OF RATIOS (IN $000'S) PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER 31, -------------------------------------------- 11/17/97 TO 1/1/97 TO 12/31/97 11/16/97 1996 1995 1994 1993 -------------------------------- -------------------------------------------- EARNINGS Income (loss) before preferred share dividend and minority interest per the combined financial statements $ 1,427 $ (29,050) $(31,417) $ (29,576) $ (22,062) $ (20,829) Interest expense 1,680 34,417 37,217 36,234 33,387 29,162 Amortization of debt issuance costs 121 630 594 1,148 714 859 Preferred share dividend 345 - - - - - ------------------------------- ------------------------------------------------ Earnings $ 3,573 $ 5,997 $ 6,394 $ 7,806 $ 12,039 $ 9,192 ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ FIXED CHARGES Interest expense 1,680 34,417 37,217 36,234 33,387 29,162 Capital Interest expense - - - - - - Amortization of debt issuance costs 121 630 594 1,148 714 859 Preferred share dividend 345 - - - - - ------------------------------- ------------------------------------------------ Total fixed charges $ 2,146 $ 35,047 $ 37,811 $ 37,382 $ 34,101 $ 30,021 ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ RATIO OF EARNINGS TO COMBINED FIXED CHARGES (1) 1.66 - - - - - ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ EXCESS(DEFICIT) OF EARNINGS TO COMBINED FIXED CHARGES $ - $ (29,050) $(31,417) $ (29,576) $(22,062) $(20,829) ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDEND (2) 1.66 - - - - - ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ EXCESS(DEFICIT) OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDEND $ - $ (29,050) $(31,417) $ (29,576) $(22,062) $(20,829) ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ Funds From Operations $ 3,964 $ (14,461) $(17,367) $ (12,733) $(12,930) $ (9,345) Interest expense 1,680 34,417 37,217 36,234 33,387 29,162 Amortization of debt issuance costs 121 630 594 1,148 714 859 Preferred share dividend 345 - - - - - ------------------------------- ------------------------------------------------ Adjusted Funds From Operations $ 6,110 $ 20,586 $ 20,444 $ 24,649 $ 21,171 $ 20,676 ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ FIXED CHARGES Interest expense 1,680 34,417 37,217 36,234 33,387 29,162 Capital Interest expense - - - - - - Amortization of debt issuance costs 121 630 594 1,148 714 859 Preferred share dividend 345 - - - - - ------------------------------- ------------------------------------------------ Total fixed charges $ 2,146 $ 35,047 $ 37,811 $ 37,382 $ 34,101 $ 30,021 ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ RATIO OF FUNDS FROM OPERATIONS TO COMBINED FIXED CHARGES (3) 2.85 - - - - - ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ EXCESS(DEFICIT) OF FUNDS FROM OPERATIONS TO COMBINED FIXED CHARGES $ - $ (14,461) $(17,367) $ (12,733) $(12,930) $ (9,345) ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ RATIO OF FUNDS FROM OPERATIONS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDEND (4) 2.85 - - - - - ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------ EXCESS(DEFICIT) OF FUNDS FROM OPERATIONS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS $ - $ (14,461) $(17,367) $ (12,733) $(12,930) $ (9,345) ------------------------------- ------------------------------------------------ ------------------------------- ------------------------------------------------
(1) The Company's earnings were insufficient to cover fixed charges for the period from January 1, 1997 through November 16, 1997 and for the years ended December 31, 1996, 1995, 1994 and 1993 by the amounts indicated. (2) The Company's earnings were insufficient to cover fixed charges including preferred stock dividend requirements for the period from January 1, 1997 through November 16, 1997 and for the years ended December 31, 1996, 1995, 1994 and 1993 by the amounts indicated. (3) The Company's adjusted funds from operations were insufficient to cover fixed charges for the period from January 1, 1997 through November 16, 1997 and for the years ended December 31, 1996, 1995, 1994 and 1993 by the amounts indicated. (4) The Company's adjusted funds from operations were insufficient to cover fixed charges including preferred stock dividend requirements for the period from January 1, 1997 through November 16, 1997 and for the years ended December 31, 1996, 1995, 1994 and 1993 by the amounts indicated. EX-19.1 27 EXHIBIT 19.1 EXHIBIT 19.1 Temporary Certificate -- Exchangeable for Definitive Engraved Certificate When Ready for Delivery Number Shares PG See Restrictive Legend On Reverse of Certificate See Reverse for Certain Definitions Ths Certificate is Transferable In New York, New York and CUSIP 74158J 10 3 Chicago, Illinois Prime Group Realty Trust Organized Under The Laws Of The State of Maryland Common Shares This Certifies That is the owner of Fully Paid and Non-Assessable Common Shares of Beneficial Interest, $0.01 Par Value Per Share, of Prime Group Realty Trust transferable only on the books of the Trust by the holder hereof in person or by duly authorized attorney upon the surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Declaration of Trust of the Trust and any amendments thereto. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness this facsimile seal of the Trust and facsimile signature of its duly authorized officers. Dated: Certificate of Stock /s/ Michael W. Reschke /s/ Robert J. Rudnik CHAIRMAN OF THE BOARD EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY /s/ Richard S. Curto PRESIDENT AND CHIEF COUNTERSIGNED AND REGISTERED LASALLE NATIONAL BANK TRANSFER AGENT AND REGISTRAR BY [SEAL OF PRIME GROUP REALTY TRUST A MARYLAND TRUST] PRIME GROUP REALTY TRUST The Trust is authorized to issue more than one class of stock. The Declaration of Trust on file in the office of the State Department of Assessments and Taxation of the State of Maryland sets forth as full statement of (a) all of the designations, preferences, rights, voting powers, restrictions, limitation as to dividends, qualifications, and terms and conditions of redemptions, and other relative rights of the shares of each class of shares authorized to be issued and (b) the authority of the Board of Trustees to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series of the extent they have been set and the authority of the Board of Trustees to set the relative rights and preferences of subsequent series of preferred shares. The Common Shares represented by this certificate are subject to restrictions on transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as provided in the Trust's Declaration of Trust, no Person may (i) Beneficially or Constructively Own Common Shares in excess of 9.9% (or such other percentage as may be determined by the Board of Trustees) of the number of outstanding Common Shares, (ii) Beneficially Own Common Shares that would result in the Common Shares being Beneficially Owned by fewer than 100 Persons (determined without reference to any rules of attribution), (iii) Beneficially Own Common Shares that would result in the Trust being "closely held" under Section 856(h) of the Core of (iv) Constructively Own Common Shares that would cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B) of the Code. Any Person who attempts to Beneficially or Constructively Own Common Shares in excess of the above limitations must immediately notify the Trust in waiting of such proposed or attempted Transfer. If any restrictions above are violated, the Common Shares represented hereby will be converted automatically into Excess Shares which will be transferred automatically, by operation of law, to a Share Trust to be held for the exclusive benefit of a Beneficiary to be named by the Trust. In addition, upon the occurrence of certain events, attempted Transfer in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Trust's Declaration of Trust, as the same may be further amended from time to time, a copy of which, including the restrictions of Transfer, will be sent without charge to each shareholder who so requests. Such requests must be made to he Secretary of the Trust at its principal office. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with rights of survivors and not as tenants in common UNIT GIFT MIN ACT -- ..........Custodian.......... (Cust) (Minor) Under Uniform Gifts to Minors Act.......................... UNIT TRF MIN ACT -- .....Custodian....(until age ..) (Cust) ...........Under Uniform Transfers (Minor) to Minors Act................... (State) Additional abbreviations may also be used though not in the above list. ASSIGNMENT FOR VALUE RECEIVED,__________________ Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________________________________________________ (Please print or typewrite name and address, including zip code, assignee) _______________________________________________________________________________ _______________________________________________________________________________ represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________________ to transfer the said Common Shares on the books of the within named Trust with full power of substitution in the premises. Date_____________________________ X _______________________________________ X________________________________________ Notice: The Signature(s) to this assignment Must correspond with the name(s) as Written upon the face of the Certificate in every particular, Without alternation or enlargement or any change whatever. Signature(s) Guaranteed By________________________________________ The Signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan association and credit unions with membership in an approved signature guarantee Medallion Program, pursuant to S.E.C. Rule 17Ad-15. _____________________________________________ American Bank Note Company Nov 4, 1997 fm 3504 Atlantic Avenue Suite 12 Long Beach, CA 90807 053384bk (562) 989-2333 (fax) (562) 426-7450 Proof ___ REV 2 ______________________________________________ EX-19.2 28 EXHIBIT 19.2 EXHIBIT 19.2 FORM OF CONVERTIBLE PREFERRED CERTIFICATE PRIME GROUP REALTY TRUST ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND THIS CERTIFIES THAT _________________________________________ IS THE OWNER OF ____________________________________________ fully paid and non-assessable Series A Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share, of Prime Group Realty Trust, transferable only on the books of the Trust by the holder hereof in person or by duly authorized attorney upon the surrender of this Certificate property endorsed. This Certificate and the Series A Cumulative Convertible Preferred Shares of Beneficial Interest evidenced hereby are issued and shall be held subject to all of the provisions of the Declaration of Trust and amendments thereto. The holder hereof has no interest, legal or equitable, in any specific property of the Trust. WITNESS the signatures of its duly authorized officers. Dated: _____________________________ CHAIRMAN OF THE BOARD _____________________________ PRESIDENT _____________________________ EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY [REVERSE OF CERTIFICATE] PRIME GROUP REALTY TRUST THE TRUST IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. THE DECLARATION OF TRUST ON FILE IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND SETS FORTH A FULL STATEMENT OF (A) ALL OF THE DESIGNATIONS, PREFERENCES, RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTIONS, AND OTHER RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF SHARES AUTHORIZED TO BE ISSUED AND (B) THE AUTHORITY OF THE BOARD OF TRUSTEES TO ISSUE ANY PREFERRED OR SPECIAL CLASS IN SERIES, THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES TO THE EXTENT THEY HAVE BEEN SET AND THE AUTHORITY OF THE BOARD OF TRUSTEES TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES OF PREFERRED SHARES. EX-22.1 29 EXHIBIT 22.1 Exhibit 22.1 Subsidiaries of Registrant Prime Group Realty, L.P., a Delaware limited partnership Prime Group Realty Services, Inc., a Maryland corporation PGR Finance I, Inc., a Delaware corporation PGR Finance II, Inc., a Delaware corporation In addition, the Company has direct or indirect interests in 64 entities which hold title or interests in the Company's properties. EX-27.1 30 EXHIBIT 27.1
5 1,000 YEAR DEC-31-1997 NOV-17-1997 DEC-31-1997 11,969 0 103,169 0 39,389 0 589,279 2,338 741,468 189,355 328,044 0 20 130 223,919 741,468 0 9,830 0 0 7,358 0 1,680 792 0 0 0 0 0 792 0.04 0.04 Amount includes net deferred costs ($28,472) and other assets ($10,917). Amount includes accrued interest payable ($1,245), accrued real estate taxes ($17,915), accounts payable and accrued expenses ($13,903), liabilities for leases assumed ($5,758), dividends declared ($2,505), other liabilities ($822) and minority interest of ($147,207). Amount includes property operations ($2,213), real estate taxes ($1,765), depreciation and amortization ($2,478), general and administrative expenses ($267) and minority interest allocation of ($635).
-----END PRIVACY-ENHANCED MESSAGE-----