-----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, DkArCqiacwT8SiY676gm/YlVW4TUNdLBdw0qfZ1DuQ88fXwh4lHaqhE+ZRcx8yep xLsP4azQq47tM76VLf4xSg== 0001057689-06-000018.txt : 20060510 0001057689-06-000018.hdr.sgml : 20060510 20060510132255 ACCESSION NUMBER: 0001057689-06-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060510 DATE AS OF CHANGE: 20060510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL LEASE FUNDING INC CENTRAL INDEX KEY: 0001057689 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 522414533 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32039 FILM NUMBER: 06824812 BUSINESS ADDRESS: STREET 1: 110 MAIDEN LANE STREET 2: 36TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 2122176300 MAIL ADDRESS: STREET 1: 110 MAIDEN LANE STREET 2: 36TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 10-Q 1 v042344.htm Unassociated Document
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
_______________
 
FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to _____________
 
Commission file number 001-32039
 
 
Capital Lease Funding, Inc.
 
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Maryland
 
52-2414533 
(State or Other Jurisdiction of 
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
 
 
110 Maiden Lane, New York, NY
 
10005
(Address of Principal Executive Offices)
 
(ZIP Code)
 
Registrant’s Telephone Number, Including Area Code:
 
(212) 217-6300 
_______________

 
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 o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o     Accelerated filer x    Non-accelerated filer o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
 
As of May 10, 2006, there were 33,180,930 shares of common stock of Capital Lease Funding, Inc., $0.01 par value per share, outstanding (“Common Stock”).
 


Capital Lease Funding, Inc.
 
Index to Form 10-Q

 
 
Page
   
   
PART I. FINANCIAL INFORMATION
2
   
Item 1.
Financial Statements
2
 
Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
2
 
Consolidated Income Statements (unaudited) for the Three Months Ended March 31, 2006 and 2005
3
 
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2006
4
 
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2006 and 2005
5
 
Notes to Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
Item 4.
Controls and Procedures
35
   
PART II. OTHER INFORMATION
36
   
Item 1.
Legal Proceedings
36
Item 1A.
Risk Factors
36
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 3.
Defaults Upon Senior Securities
38
Item 4.
Submission of Matters to a Vote of Security Holders
38
Item 5.
Other Information
38
Item 6.
Exhibits
38
   
SIGNATURES  39

1
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Capital Lease Funding, Inc. and Subsidiaries
As of March 31, 2006 (unaudited) and December 31, 2005

 
 
   
As Of
  
 As Of
  
   
March 31,
  
 December 31,
  
 (Amounts in thousands, except share and per share amounts)
  
2006
  
 2005
  
 Assets
           
               
 Real estate investments, net
  
$
926,682
  
$
764,930
  
 Mortgage and other real estate loans held for investment
    
270,547
    
297,551
  
 Securities available for sale
    
133,947
    
137,409
  
 Cash and cash equivalents
    
10,468
    
19,316
  
 Assets held for sale
    
2,942
    
2,942
  
 Structuring fees receivable
    
3,714
    
3,862
  
 Other assets
    
68,008
    
60,478
  
 Total Assets
  
$
1,416,308
  
$
1,286,488
  
               
 Liabilities and Stockholders' Equity
              
               
 Accounts payable, accrued expenses and other liabilities
  
$
11,889
  
$
14,890
  
 Repurchase agreement and other short-term financing obligations
    
192,495
    
129,965
  
 Mortgages on real estate investments
    
623,146
    
551,844
  
 Collateralized debt obligations
    
268,164
    
268,156
  
 Other long-term debt
    
30,930
    
30,930
  
 Intangible liabilities on real estate investments
    
16,024
    
14,419
  
 Dividends payable
    
6,347
    
6,253
  
 Total liabilties
    
1,148,995
    
1,016,457
  
               
 Commitments and contingencies
              
 Stockholders' equity:
              
 Preferred stock, $0.01 par value, 100,000,000 shares authorized, Series A cumulative
              
 redeemable preferred, liquidation preference $25.00 per share, 1,400,000 shares
              
 issued and outstanding
    
33,657
    
33,657
  
 Common stock, $0.01 par value, 500,000,000 shares authorized, 28,180,930 and
              
 27,868,480 shares issued and outstanding, respectively
    
282
    
279
  
 Common stock, additional paid in capital
    
234,517
    
237,843
  
 Accumulated other comprehensive loss
    
(1,143
)
  
(1,748
)
 Total Stockholders' Equity
    
267,313
    
270,031
  
 Total Liabilities and Stockholders' Equity
  
$
1,416,308
  
$
1,286,488
  
 
 
See notes to consolidated financial statements.

2

Capital Lease Funding, Inc. and Subsidiaries
Consolidated Income Statements
(Unaudited)


   
For the Three Months
  
   
Ended March 31
  
(Amounts in thousands, except per share amounts)
  
2006
  
 2005
  
Revenues:
  
Unaudited
  
 Unaudited
  
 Rental revenue
  
$
17,022
  
$
4,336
  
 Interest income from mortgage and other real estate loans and securities
    
8,214
    
6,106
  
 Property expense recoveries
    
1,910
    
1,363
  
 Gains on sale of mortgage loans
    
645
    
63
  
 Other revenue
    
557
    
39
  
Total revenues
    
28,348
    
11,907
  
Expenses:
              
 Interest expense
    
14,025
    
3,542
  
 Property expenses
    
3,565
    
1,783
  
 General and administrative expenses
    
2,343
    
2,552
  
 General and administrative expenses-stock based compensation
    
671
    
455
  
 Depreciation and amortization expense on real property
    
5,378
    
1,268
  
 Loan processing expenses
    
67
    
85
  
 (Gain) loss on derivatives
    
(4
)
  
-
  
Total expenses
    
26,045
    
9,685
  
Income from continuing operations
    
2,303
    
2,222
  
Income from discontinued operations
    
49
    
-
  
Net income
    
2,352
    
2,222
  
Dividends allocable to preferred shares
    
(711
)
  
-
  
Net income allocable to common stockholders
  
$
1,641
  
$
2,222
  
Earnings per share:
              
 Net income per common share, basic and diluted
  
$
0.06
  
$
0.08
  
 Weighted average number of common shares outstanding, basic and diluted
    
27,893
    
27,526
  
Dividends declared per common share
  
$
0.20
  
$
0.18
  
Dividends declared per preferred share
  
$
0.50781
  
$
-
  
               
               
See notes to consolidated financial statements.

3


Capital Lease Funding, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
(in thousands)


 
 
 
 
        
Accumulated
              
               
Other 
              
       
Common
  
Additional
  
 Comprehensive
              
   
Preferred
  
Stock
  
Paid-In
  
Income
  
Retained
       Comprehensive   
   
Stock
  
at Par
  
Capital
  
(Loss)
  
Earnings
  
Total
  
Income (Loss) 
  
Balance at December 31, 2005
  
$
33,657
  
$
279
  
$
237,843
  
$
(1,748
)
$
–
  
$
270,031
  
$
2,179
  
Incentive stock plan compensation expense
    
–
   
–
   
671
   
–
   
–
   
671
       
Incentive stock plan grants issued
    
–
   
3
   
(3
)
  
–
   
–
   
–
       
Net income
    
–
   
–
   
–
   
–
   
2,352
   
2,352
   
2,352
 
Dividends declared-preferred
    
–
   
–
   
–
   
–
   
(711
)
  
(711
)
      
Dividends declared-common
    
–
   
–
   
(3,994
)
  
–
   
(1,641
)
  
(5,635
)
      
Unrealized change in value of securities available for sale
    
–
   
–
   
–
   
(3,218
)
  
–
   
(3,218
)
  
(3,218
)
Unrealized change in value of derivatives
    
–
   
–
   
–
   
3,559
   
–
   
3,559
   
3,559
 
Realized gains (losses) on derivatives, net of amortization
    
–
   
–
   
–
   
264
   
–
   
264
   
264
 
Balance at March 31, 2006
  
$
33,657
  
$
282
  
$
234,517
  
$
(1,143
)
$
–
  
$
267,313
  
$
2,957
  
                                             
 
See notes to consolidated financial statements.
 
4


Capital Lease Funding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
   
 For the Three Months
  
   
Ended March 31,
  
   
2006
  
2005
  
Operating activities
          
Net income
  
$
2,352
  
$
2,222
  
Adjustments to reconcile net income to cash used in operating activities:
              
 Depreciation and amortization
    
5,413
    
1,294
  
 Amortization of stock based compensation
    
671
    
455
  
 Amortization of above and below m arket leases
    
(166
)
  
(99
)
 Gains on sale of mortgage loans
    
(645
)
  
(63
)
 (Gain) loss on derivatives
    
(4
)
  
-
  
 Straight-lining of rents
    
(2,971
)
  
(428
)
 Amortization of discounts/premiums, and origination fees/costs
    
(138
)
  
(85
)
 Amortization of debt issuance costs and FMV of debt assumed
    
380
    
106
  
 Changes in operating assets and liabilities:
              
 Structuring fees receivable
    
148
    
137
  
 Other assets
    
(7,595
)
  
(1,694
)
 Accounts payable, accrued expenses and other liabilities
    
(905
)
  
(269
)
 Deposits and escrows
    
(1,683
)
  
(9,146
)
 Amounts due to servicer
    
-
    
(4,360
)
Net cash used in operating activities
    
(5,143
)
  
(11,930
)
Investing activities
              
 Proceeds from sale of mortgage and other real estate loans
    
78,645
    
2,310
  
 Additions to mortgage and other real estate loans
    
(98,020
)
  
(8,566
)
 Principal received from borrowers
    
46,944
    
1,658
  
 Origination costs on lending investments
    
85
    
(56
)
 Purchase of securities available for sale
    
-
    
(31,788
)
 Principal amortization on securities available for sale
    
377
    
797
  
 Purchases of real estate investments
    
(160,609
)
  
(48,130
)
 Real estate improvements, additions and construction in progress
    
(4,750
)
  
(754
)
 Deposits on potential equity investments
    
(4,000
)
  
(2,000
)
 Return of deposit on equity investment
    
4,000
    
2,500
  
 Purchases of furniture, fixtures and equipment
    
(13
)
  
(56
)
Net cash used in investing activities
    
(137,341
)
  
(84,085
)
Financing activities
              
 Borrowing under repurchase agreement and other short-term financing obligations
    
84,893
    
81,389
  
 Repayment of repurchase agreement and other short-term financing obligations
    
(22,363
)
  
(206,869
)
 Borrowings from mortgages on real estate investments
    
71,700
    
36,000
  
 Repayments of mortgages on real estate investments
    
(304
)
  
(264
)
 Borrowings from collateralized debt obligations
    
-
    
268,130
  
 Debt issuance costs
    
(182
)
  
(4,876
)
 Escrows held with mortgage lender
    
6,144
    
(11,500
)
 Funds used in hedging and risk management activities
    
(18
)
  
(9,413
)
 Dividends paid
    
(6,253
)
  
(4,124
)
 Changes in amounts due from affiliates and members
    
19
    
2
  
Net cash provided by financing activities
    
133,636
    
148,475
  
Net (decrease) increase in cash
    
(8,848
)
  
52,460
  
Cash and cash equivalents at beginning of period
    
19,316
    
30,721
  
Cash and cash equivalents at end of period
  
$
10,468
  
$
83,181
  
 
 
 See notes to consolidated financial statements.
 
5

Capital Lease Funding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - continued
(Unaudited)
(in thousands)
 
   
 For the Three Months
  
   
Ended March 31,
  
   
2006
  
2005
  
Supplemental disclosure of cash flow information
          
Cash paid for interest expense (excluding capitalized interest)
  
$
12,556
  
$
2,758
  
Cash paid for capitalized interest
  
$
-
  
$
574
  
Cash paid for income taxes
  
$
-
  
$
-
  
Dividends declared but not paid
  
$
6,347
  
$
5,018
  
Supplemental disclosure of noncash operating, investing and financing information
              
Unrealized gain (loss) on cash flow hedges
  
$
3,559
  
$
7,502
  
Value of in-place leases and above-market leases acquired
  
$
14,000
  
$
-
  
Value of below-market leases acquired   $  1,878   $ -  
Securities reclassified to mortgage loans held for investment
  
$
-
  
$
6,932
  
Real estate investments no longer consolidated under FIN46
  
$
-
  
$
48,000
  
Mortgage on real estate investments no longer consolidated under FIN46
  
$
-
  
$
4,815
  
 
              
 
 
See notes to consolidated financial statements.
 
6

Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)


1. Organization
 
Capital Lease Funding, Inc. (“CLF, Inc.” and collectively with its wholly-owned subsidiaries, the “Company”) invests in equity interests in real estate properties, real estate mortgage loans, real estate securities and other real estate assets. The Company’s investments consist of real estate related assets that are backed by commercial properties typically subject to long-term net leases from investment grade and near investment grade tenants.
 
CLF, Inc. was incorporated in the State of Maryland during October 2003, and was formed for the purpose of continuing the existing business operations and acquiring the assets and liabilities of Caplease, LP (the “Predecessor”). Since 1995, the Predecessor was primarily engaged in the business of underwriting, originating and selling or securitizing mortgage loans made to owners of real properties subject to long term leases to high credit quality tenants. CLF, Inc. completed the acquisition of the Predecessor through a reverse merger and its initial public offering during March 2004.
 
In March 2004, CLF, Inc. sold 23,000,000 shares of its common stock in an initial public offering at a price to the public of $10.50 per share, for net proceeds of approximately $222,000. In October 2005, CLF, Inc. sold 1,400,000 shares of its 8.125% Series A cumulative redeemable preferred stock in a public offering at a price to the public of $25.00 per share, for net proceeds of approximately $33,800. CLF, Inc. had 28,180,930 shares of common stock and 1,400,000 shares of 8.125% Series A cumulative redeemable preferred stock outstanding at March 31, 2006. See Note 20.
 
CLF, Inc. is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. As such, it generally will not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.
 
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared under accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended December 31, 2005 and notes thereto, included in the Company’s Form 10-K filed with the SEC on March 16, 2006.
 
2. Summary of Significant Accounting Policies
 
Basis of Presentation and Principles of Consolidation
 
The accompanying consolidated financial statements include the assets, liabilities, and results of operations of CLF, Inc. and its wholly-owned subsidiaries. Results of operations of properties acquired are included in the Consolidated Income Statements from the date of acquisition. All significant intercompany transactions, balances and accounts have been eliminated in consolidation.
 
Investments in Mortgage Loans
 
Mortgage loans comprise the vast majority of the Company’s loan portfolio. Mortgage loans are secured by an assignment of the long-term real property leases (the majority of whose tenants carry credit ratings of BBB- or better, commonly referred to as investment grade) and mortgages on the underlying real estate. Mortgage loans held for investment are carried at cost (unpaid principal balance adjusted for unearned discount and deferred expenses), and are amortized using the effective interest method over the life of the loan.
 
7

Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

Purchase Accounting for Acquisition of Real Estate
 
The Company’s purchase price of rental real estate acquired is allocated to the following based on fair values:
 
·    the acquired tangible assets, consisting of land, building and improvements; and
 
·    identified intangible assets and liabilities, consisting of above-market and below-market leases, in-place leases and tenant relationships.
 
In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence activities and other market data, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
 
Above-market and below-market lease values for acquired properties are recorded based on the present value of the differences between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease. Fair market lease rates are measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market rate renewal options for below-market leases. In computing present value, the Company uses a discount rate which reflects the risks associated with the leases acquired. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market renewal options of the respective leases.
 
Other intangible assets acquired include in-place leases and tenant relationships which are valued based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors considered by management in its analysis of in-place lease values include an estimate of carrying costs during the hypothetical expected time it would take management to find a tenant to lease the space for the existing lease term (a “lease-up period”) considering current market conditions, and costs to execute similar leases. Management estimates carrying costs, including such factors as real estate taxes, insurance and other operating expenses during the expected lease-up period, considering current market conditions and costs to execute similar leases. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles is amortized to expense over the anticipated life of the relationships. Through March 31, 2006, the Company has assigned no value to tenant relationships on any of its acquisitions.
 
For property acquisitions where the Company assumes existing mortgage debt, the debt is recorded at its fair value, based on management’s estimate of current market yields available for comparable financing. The Company amortizes any discount or premium as part of interest expense on the related debt using the effective interest method.
 
Real estate taxes, insurance and interest expense on properties that are under construction are capitalized in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 34, Capitalization of Interest Cost and SFAS 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects.
 
Depreciation is determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company depreciates buildings and building improvements over periods not exceeding 40 years. Direct costs incurred in acquiring properties are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations which extend the useful life of the properties are capitalized.
 
8

Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

Securities Available for Sale
 
Securities are classified as available-for-sale and are reported at fair value on the Company’s consolidated balance sheets, with unrealized gains and losses included in other comprehensive income, and any other than temporary impairments included in current earnings on the Income Statement, in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has also adopted the disclosure requirements of EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, regarding disclosures to be made when held-to-maturity or available-for-sale investments are impaired at the balance sheet date but for which an “other than temporary” loss has not been recognized. The Company had no losses on securities charged to the Income Statement during the quarters ended March 31, 2006 and March 31, 2005.
 
Deferred Origination Fees and Costs
 
In accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, the Company defers the recognition of fees and expenses associated with the origination of its loans held for investment. These items include lender fee income, rate lock income, direct loan origination costs, certain legal fees, insurance costs, rating agency fees and certain other expenses. Deferred fees and costs are recognized as an adjustment to the effective yield over the life of the related asset.
 
Revenue Recognition
 
Rental revenue on real estate is recognized in accordance with SFAS No. 13, Accounting for Leases. Rental revenue is recognized on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. This includes the effects of rent steps and rent abatements under the leases.
 
Interest income from loans, securities, and structuring fees receivable, is recognized on the accrual basis of accounting. Interest income from securities (including interest-only strips) is recognized over the life of the investment using the effective interest method. The cost basis of interest-only strips is adjusted to reflect any prepayments from underlying assets, using the initial yield-to-maturity at the purchase date.
 
Gains are recognized on the sale of loans and securities in accordance with the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Company may from time to time split its mortgage loan investments into two notes-a real estate note and a corporate credit note. In these instances, the Company will generally sell the real estate note to a third party and retain the corporate credit note in portfolio. The Company computes gain on these sales by comparing the sales proceeds on the note sold to its cost basis. The Company computes its cost basis on the note sold by allocating the entire basis in the loan between the two notes based on the present value of expected cash flows on each note. In computing present values, management estimates a discount rate based on a benchmark rate plus a market spread based on the credit of the underlying tenant. These estimates reflect market rates that management believes are reasonable. However, the use of different estimates could have an impact on the calculation of gain on sale revenue.
 
The Company may periodically receive breakup fees on contracts in connection with its investments in real estate. The Company recognizes revenues from contract breakup fees when the contractual conditions have occurred to trigger the receipt of such a fee, when the amounts of such revenue can be reasonably determined, and when collection is probable.
 
Impairment of Long-Lived Assets
 
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its investment in long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company began acquiring owned real properties in the third quarter of 2004. The Company recognized no impairment losses on long-lived assets during the quarters ended March 31, 2006 and March 31, 2005.
 
9

Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

Income Taxes
 
CLF, Inc. is subject to federal income taxation at corporate rates on its “REIT taxable income.” However, CLF, Inc. is allowed a deduction for the amount of dividends paid to its stockholders, thereby subjecting the distributed net income of CLF, Inc. to taxation at the stockholder level only. CLF, Inc. intends to continue to operate in a manner consistent with and it has elected to be treated as a REIT for tax purposes. From time to time, the Company may conduct a portion of its business through a taxable REIT subsidiary (“TRS”), and the income from the activities of the TRS is subject to federal and state taxation at the applicable corporate rates.
 
Earnings per Share
 
In accordance with the Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”), the Company presents both basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income allocable to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount. The Company has no dilutive securities or other contracts outstanding and, therefore, there is no difference between basic and diluted EPS results for the Company.
 
The following summarizes the Company’s EPS computations for the quarters ended March 31, 2006 and March 31, 2005 (in thousands, except per share amounts):
 
   
For the three months
  
   
ended March 31,
  
   
2006
  
2005
  
Net income allocable to common stockholders
  
$
1,641
  
$
2,222
  
Weighted average number of common shares
              
 outstanding, basic and diluted
    
27,893
    
27,526
  
Earnings per share, basic and diluted
  
$
0.06
  
$
0.08
  
Non-vested shares included in weighted average
              
 number of shares outstanding above
    
581
    
497
  
 
See Note 20 for a discussion of common shares issued after March 31, 2006.
 

Recently Issued Accounting Pronouncements
 
On December 16, 2004, the FASB issued SFAS No. 123R: (Revised 2004) − Share-Based Payment (“SFAS No. 123R”). SFAS 123R replaces SFAS No. 123, which the Company adopted on January 1, 2003. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements and be measured based on the fair value of the equity or liability instruments issued. The Company adopted SFAS No. 123R as of January 1, 2006. The adoption of SFAS No. 123R did not have a material effect on the Company’s consolidated financial statements. See Note 14.
 
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring retrospective application to prior periods’ financial statements of the change in accounting principle, unless it is impracticable to do so. SFAS No. 154 also requires that a change in depreciation or amortization for long−lived, non−financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company’s adoption of SFAS No. 154 on January 1, 2006 did not have a material effect on the Company’s consolidated financial statements.
 
10
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

Reclassification
 
Certain prior year amounts have been reclassified to conform to the current presentation. There was no effect on net income or equity related to these reclassifications.
 
3. Cash and Cash Equivalents
 
The Company defines cash equivalents as highly liquid investments purchased with maturities of three months or less at date of purchase.  From time to time, the Company’s account balance held at financial institutions exceeds Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to the balance on deposit in excess of FDIC insurance coverage. The Company believes that the risk of loss is not significant.
 
4. Mortgage and Other Real Estate Loans Held for Investment
 
Mortgage and other real estate loans held for investment at March 31, 2006 and December 31, 2005, are summarized in the following table. These investments consist predominantly of mortgage loans on properties subject to leases to investment grade tenants. As of March 31, 2006, credit ratings of the underlying tenants ranged from AAA to B+ from Standard & Poor’s. As of March 31, 2006, none of the Company’s loans held for investment were delinquent or in default.

   
Mar 31, 2006
 
 Dec 31, 2005
 
 
 
Unaudited
 
  
  
Principal
  
$
269,555
  
$
296,479
  
Premium
    
1,877
    
1,898
  
Carrying amount of loans
    
271,432
    
298,377
  
Deferred origination fees, net
    
(885
)
  
(826
)
Total
  
$
270,547
  
$
297,551
  
 

From time to time, the Company makes mezzanine loan and other investments. These investments are typically short-term in nature and are often subordinate to other financing on the property. As of March 31, 2006, these investments aggregated $6,737, and included five development loans and a bridge loan. These loans are included in the table above.
 
During March 2006, the Company’s mezzanine investments in the Hercules Incorporated office building in Wilmington, Delaware, were redeemed in connection with a recapitalization of the property. The Company participated in the recapitalization by making a $78,000 first mortgage loan on the property (which the Company sold to Wachovia Bank, N.A. in a gain-on-sale transaction at closing) and a $20,000 corporate credit note investment. As of March 31, 2006, the Company’s aggregate exposure to Hercules was $20,000 and Hercules was rated BB and Ba2 by Standard & Poor’s and Moody’s, respectively.
 
At March 31, 2006, the Company’s mortgage and other real estate loans carried interest rates ranging from 5.28% to 10.00%, and at December 31, 2005, the Company’s mortgage and other real estate loans carried interest rates ranging from 5.28% to 14.29%. At March 31, 2006 and December 31, 2005, the weighted average effective interest rate on the mortgage and other real estate loans, as measured against the Company’s cost basis, was 6.75% and 6.86%, respectively.
 
5. Real Estate Investments
 
Real estate held for investment and related intangible liabilities on real estate investments consisted of the following at March 31, 2006 and December 31, 2005:
 
11
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
   
Mar 31, 2006
  
 Dec 31, 2005
  
   
Unaudited
       
Real estate investments, at cost:
           
 Land
  
$
149,866
  
$
136,566
  
 Building and improvements
    
697,185
    
557,248
  
 Intangible assets under SFAS 141
    
96,862
    
82,862
  
 Less: Accumulated depreciation and amortization
    
(17,231
)
  
(11,746
 ) 
 Real estate investments, net
  
$
926,682
  
$
764,930
  
Intangible liabilities on real estate investments:
              
 Intangible liabilities under SFAS 141
    
17,088
    
15,210
  
 Less: Accumulated amortization
    
(1,064
)
  
(791
 )
Intangible liabilities on real estate investments, net
  
$
16,024
  
$
14,419
  

Acquisition costs capitalized as part of buildings and improvements were $1,116 for the quarter ended March 31, 2006. Interest capitalized as part of buildings and improvements was $0 for the quarter ended March 31, 2006.
 
Amounts for accrued rental income and deferred rental income as of March 31, 2006 and December 31, 2005, were as follows:
 

   
Mar 31, 2006
  
Dec 31, 2005
  
   
Unaudited
      
Accrued Rental Income
  
$
9,563
  
$
6,708
  
Deferred Rental Income
    
505
    
620
  
 
Accrued rental income is included in other assets on the Company’s Consolidated Balance Sheet. Deferred rental income is included in accounts payable, accrued expenses and other liabilities on the Company’s Consolidated Balance Sheet.
 
Amortization of intangible assets and liabilities for the quarters ended March 31, 2006 and March 31, 2005, was as follows:

   
For the three months
  
   
ended March 31,
  
   
2006
  
2005
  
Amortization of in-place leases (included in
          
 depreciation and amortization expense)
  
$
1,743
  
$
306
  
Amortization of above-market leases (included
              
 as a reduction of rental revenue)
    
106
    
-
  
Amortization of below -market leases (included
              
 as a component of rental revenue)
    
273
    
99
  
 
As of March 31, 2006, the Company’s weighted average amortization period on intangible assets was 12.4 years, and the weighted average amortization period on intangible liabilities was 18.0 years.
 
12
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)
 
March 31, 2006 (unaudited)
 
Scheduled amortization on existing intangible assets and liabilities on real estate investments as of March 31, 2006 is as follows:
 
   
Intangible
  
Intangible
  
   
Assets
  
Liabilities
  
9 Months Ending December 31, 2006
  
$
6,267
  
$
867
  
2007
    
8,356
    
1,156
  
2008
    
8,356
    
1,156
  
2009
    
8,356
    
1,156
  
2010
    
8,356
    
1,156
  
Thereafter
    
51,974
    
10,533
  
   
$
91,665
  
$
16,024
  
 
The Company’s analysis of intangible assets and liabilities acquired in connection with the acquisition of real estate properties is preliminary.
 
As of March 31, 2006, all of the Company’s owned properties were pledged as collateral for the related financings of those assets, with the two AMVESCAP PLC properties described below pledged as collateral for the Company’s related borrowings on its short-term real property acquisition facility with Wachovia Bank, N.A. (see Note 9), and all other owned properties pledged as collateral for the related long-term fixed rate financing on those assets (see Note 11). The Company owns and finances each property through a separate single purpose entity, or SPE, with each property and the related lease or leases on the property generally representing the sole assets of the SPE.
 
During the three months ended March 31, 2006, the Company completed the following real estate acquisitions:
 
           
Purchase
      
Net Rentable
  
Month Acquired
  
Tenant or Guarantor
  
Location
  
Price
  
Lease Expires
  
Square Feet
  
March
    
AMVESCAP PLC (1
)
  
Denver, CO
  
$
69,300
    
October 2016
    
263,770
  
March
    
TJX Companies, Inc.
    
Philadelphia, PA
    
90,125
    
June 2021
    
1,015,500
  
 
(1) Includes two adjacent office buildings net leased to Invesco Funds Group, Inc., a wholly-owned subsidiary of AMVESCAP PLC.

6. Discontinued Operations
 
During the fourth quarter of 2005, the Company acquired a portfolio of three office properties from Allstate Insurance Company in a sale/leaseback transaction. The smallest of the three buildings is an approximately 19,500 square foot office building located in Pittsburgh, Pennsylvania. Because of the small size of this property, management concluded, prior to completing the acquisition, to resell the property promptly following its acquisition. The Company expects to resell the property in the second or third quarter of 2006.
 
In accordance with SFAS No. 144, the Company reported the carrying value of the Allstate Pittsburgh property as assets held for sale on the March 31, 2006 and December 31, 2005 Consolidated Balance Sheets, and the revenues from the property as income from discontinued operations on the Consolidated Income Statement for the quarter ended March 31, 2006 and for the year ended December 31, 2005. Revenue and net income for the Allstate Pittsburgh property were $49 and $49, respectively, for the quarter ended March 31, 2006. Based on initial pricing expectations, the Company expects to recognize a gain on the sale of the property and, therefore, no impairment loss on the property has been recognized.
 
7. Securities Available for Sale and Structuring Fees Receivable
 
Securities available for sale at March 31, 2006 and at December 31, 2005, consisted of the following:
 
13
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
     
Mar 31, 2006
    
Dec 31, 2005
  
     
Unaudited
        
BSCMS 1999 CLF1, Class E rated (B+) Face Amount
  
$
3,326
  
$
3,326
  
BSCMS 1999 CLF1, Class F rated (CCC) Face Amount
    
2,494
    
2,494
  
CALFS 1997-CTL1, Class D rated (BB+) Face Amount
    
6,000
    
6,000
  
CMLBC 2001-CMLB-1, Class E rated (BBB+) Face Amount
    
9,526
    
9,526
  
CMLBC 2001-CMLB-1, Class G rated (BB+) Face Amount
    
9,526
    
9,526
  
CMLBC 2001-CMLB-1, Class H rated (B+) Face Amount
    
11,907
    
11,907
  
CMLBC 2001-CMLB-1, Class J rated (D) Face Amount
    
6,383
    
6,383
  
NLFC 1999-LTL-1, Class D rated (BBB) Face Amount
    
5,000
    
5,000
  
NLFC 1999-LTL-1, Class E rated (BB) Face Amount
    
11,081
    
11,081
  
NLFC 1999-LTL-1, Class X (IO) rated (AAA) Carry Value
    
8,162
    
8,434
  
WBCMT 2004-C15 180D rated (B+) Face Amount
    
15,000
    
15,000
  
WBCMT 2004-C15 180E rated (B) Face Amount
    
8,000
    
8,000
  
BACMS 2002-2, Class V-1 (7-Eleven, Inc.) rated (BBB) Face Amount
    
401
    
393
  
BACMS 2002-2, Class V-2 (Sterling Jewelers) rated (BBB-) Face Amount
    
614
    
602
  
CVS Corporation rated (A-) Face Amount
    
19,942
    
20,000
  
Yahoo, Inc. rated (BBB-) Face Amount
    
31,987
    
31,990
  
Unearned Discount
    
(21,832
 )  
(21,901
 ) 
Cost Basis
    
127,517
    
127,761
  
Net unrealized appreciation on securities held for sale
    
6,430
    
9,648
  
Total
  
$
133,947
  
$
137,409
  

 
All ratings in the above table are as of March 31, 2006. On April 25, 2006, Standard & Poor’s lowered the rating of CVS Corporation to BBB+.
 
Unrealized gains and losses on securities available for sale at March 31, 2006 and December 31, 2005, included as a component of other comprehensive income, consisted of the following:

 
   
Mar 31, 2006
 
 Dec 31, 2005
 
 
 
Unaudited
 
  
  
Unrealized gains on securities available for sale
  
$
7,744
  
$
10,002
  
Unrealized losses on securities available for sale
    
(1,314
)
  
(354
)

 
The unrealized losses on the Company’s securities are primarily the result of market factors, rather than credit impairment, and the Company believes the securities’ carrying values are fully recoverable over their expected holding period.
 
The following table summarizes the Company’s securities in an unrealized position as of March 31, 2006.
 
   
 
 
Aggregate
 
 
 
 
 
 Aggregate
 
Unrealized
 
Number of
 
 
 
 Fair Value
 
Loss
 
Securities
  
In unrealized loss position less than 12 months
  
$
46,817
  
$
1,286
    
4
  
In unrealized loss position 12 or more months
    
278
    
28
    
1
  
 
14
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
The security with an unrealized loss in the “12 or more months” category is a zero coupon bond whose value increases over time as maturity approaches. The Company expects the market value of this security to increase to an amount in excess of the Company’s carry value by December 31, 2006.
 
At March 31, 2006 and December 31, 2005, the effective interest rate (yield to maturity on adjusted cost basis) on securities available for sale was approximately 8.2% and 8.2%, respectively. There were no sales of securities during either of the quarters ended March 31, 2006 or March 31, 2005.
 
Structuring fees receivable of $3,714 and $3,862 at March 31, 2006 and December 31, 2005, respectively, were earned by the Company in conjunction with the structuring and subsequent sale of certain net lease loans. Such fees are payable to the Company monthly without interest through March 2020 and, accordingly, have been discounted based on imputed interest rates estimated by management to approximate market. Structuring fees receivable are shown at their amortized cost.
 
8. Other Assets
 
Other assets as of March 31, 2006 and December 31, 2005, consisted of the following:
 
   
Mar 31, 2006 
  
Dec 31, 2005
  
 
  
Unaudited
  
 
  
  Receivables and accrued interest
  
$
5,517
  
$
6,515
  
  Prepaid expenses and deposits
    
2,327
    
2,077
  
  Reserve accounts
    
9,796
    
8,131
  
  Escrow held with mortgage lender
    
3,362
    
9,507
  
  Funds with CDO trustee pending distribution or reinvestment
    
23,030
    
16,638
  
  Amounts held by servicer
    
1,768
    
1,483
  
  Derivative assets
    
4,344
    
1,082
  
  Accrued rental income
    
9,563
    
6,708
  
  Debt issuance costs, net
    
6,977
    
6,975
  
  Other
    
1,324
    
1,362
  
  Total
  
$
68,008
  
$
60,478
  
 
9. Repurchase Agreements and Other Short-Term Financing Arrangements
 
As of March 31, 2006, the Company had a $250,000 repurchase agreement and a $100,000 real property acquisition facility in place for short-term liquidity requirements with Wachovia Bank, N.A. and its affiliate. On March 1, 2005, the Company’s repurchase agreement with Bank of America (“BofA”) expired unused. The Company’s repurchase agreement and real property acquisition facility expire in August 2006. The Company expects to renew these facilities prior to expiration.
 
Amounts related to the Company’s repurchase agreement as of March 31, 2006 and December 31, 2005, are as follows:
 
15
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

 
   
Mar 31, 2006
  
Dec 31, 2005
  
   
Unaudited
      
Collateral carry value
          
Loans
  
$
128,471
  
$
116,881
  
Securities
    
52,265
    
43,785
  
Total
  
$
180,736
  
$
160,666
  
Borrowings
              
Loans
  
$
108,171
  
$
94,341
  
Securities
    
42,744
    
35,624
  
Total
  
$
150,915
  
$
129,965
  


The Company pays interest on amounts borrowed under its repurchase agreement with Wachovia Bank at prevailing short-term rates (30-day LIBOR) plus a pricing spread (determined based upon the class and credit rating of the asset financed). Weighted average interest rates on the Company’s repurchase agreements for the three months ended March 31, 2006 and March 31, 2005, are as follows:
 

   
Mar 31, 2006
  
Mar 31, 2005
  
   
Unaudited
  
Unaudited
  
Wachovia-mortgage loan repurchase agreements
    
5.56
%
  
3.37
%
Wachovia-CMBS repurchase agreements
    
5.25
%
  
3.15
%

As of March 31, 2006 and March 31, 2005, the 30-day LIBOR rate was 4.83% and 2.87%, respectively.
 
During March 2006, the Company made its first draw under the real property acquisition facility in connection with the Company’s acquisition of two office buildings in Denver, Colorado, net leased to Invesco Funds Group, Inc. (lease obligations guaranteed by AMVESCAP PLC). The Company borrowed $41,580 under the facility. As of March 31, 2006, the Company had borrowings of $41,580 on the facility secured by assets with a carry value of $69,354.
 
The Company is required to pay interest on its borrowings on the real property acquisition facility at prevailing short-term rates (30-day LIBOR) plus a pricing spread (ranging from 95 to 225 basis points). As of March 31, 2006, the Company’s interest rate on borrowings on the real property acquisition facility was 5.75%.
 
The Company is required to comply with the following financial covenants under its short-term financing agreements: minimum liquidity, minimum tangible net worth and maximum leverage. As of March 31, 2006, the Company was in compliance with the terms of its short-term financing agreements.
 
10. Risk Management Transactions
 
The Company’s objectives in using derivatives include adding stability to interest expense and managing its exposure to interest rate movements. The Company uses forward starting interest rate swaps to hedge the variability of changes in the interest-related cash outflows on forecasted future borrowings. As of March 31, 2006, the Company was hedging its exposure to such variability through July 2016. In accordance with SFAS 133, the interest rate swaps, to the extent that they have been designated and qualify as part of a hedging relationship, are treated as cash flow hedges for accounting purposes.
 
Interest rate swaps are agreements between two parties to exchange, at particular intervals, payment streams calculated on a specified notional amount. The interest rate swaps that the Company has entered into are single currency interest rate swaps and, as such, do not require the exchange of a notional amount.
 
Amounts related to open positions, as of March 31, 2006 and December 31, 2005, are as follows:
 
16
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 

   
March 31, 2006
 
 December 31, 2005
 
 
 
Unaudited
 
 
      
   
Notional
 
 
 
 Notional
 
 
 
Description
 
Amount
 
Fair value
 
 Amount
 
Fair value
  
Interest rate swaps
  
$
125,881
  
$
4,344
  
$
125,881
  
$
784
  
 
At March 31, 2006 and December 31, 2005, the Company had hedged the following future borrowings:
 
   
Mar 31, 2006
  
Dec 31, 2005
  
   
Unaudited
      
Future borrowings (principal amount)
  
$
125,881
  
$
125,881
  

At March 31, 2006 and December 31, 2005, derivatives with a fair value of $0 and $(298), respectively, were included in accounts payable, accrued expenses and other liabilities on the Company’s Consolidated Balance Sheet. At March 31, 2006 and December 31, 2005, derivatives with a fair value of $4,344 and $1,082, respectively, were included in other assets on the Company’s Consolidated Balance Sheet. For the quarters ended March 31, 2006 and March 31, 2005, the Company had net realized losses of $22 and $9,414, respectively, related to cash flow hedges. The net realized gains and losses are included in Other Comprehensive Income and will be reclassified and amortized as part of interest expense on the Company’s Consolidated Income Statement over the expected term of the Company’s related debt issuances. For the quarters ended March 31, 2006 and March 31, 2005, the Company reclassified $286 and $90, respectively, from accumulated other comprehensive loss into interest expense related to the underlying debt issuances. Within the next twelve months, the Company estimates that $1,189 of net losses currently held within Accumulated Other Comprehensive Income will be reclassified to earnings as additional interest expense.
 
The change in net unrealized gains of $3,559 and $7,502 in the quarters ended March 31, 2006 and March 31, 2005, respectively, for derivatives designated as cash flow hedges is separately disclosed in the Company’s Consolidated Statement of Changes in Stockholders’ Equity.
 
(Gain) loss on derivatives on the Consolidated Income Statement includes $4 and $0 of net income due to hedge ineffectiveness for the quarters ended March 31, 2006 and March 31, 2005, respectively.
 
Consistent with the cash flows of the related financing, the Company classifies the cash flows from derivatives that are accounted for as cash flow hedges as a financing activity on the Consolidated Statements of Cash Flows.
 
11. Long-Term Debt
 
Our long-term debt consists of the following:
 
·    mortgage notes on real estate investments;
 
·    collateralized debt obligations; and
 
·    trust preferred securities.
 
Mortgages Notes on Real Estate Investments
 
The Company has financed most of its owned real properties with third party mortgage debt. The Company’s mortgage notes payable are as follows:
 
17
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 

   
Mar 31, 2006
 
Dec 31, 2005
 
 
 
 
 
    
Property Level Debt - Fixed Rate
  
Face
 
Carry Value
 
Face
 
Carry Value
 
Coupon
 
Effective Rate(1)
 
Maturity
  
   
Unaudited
  
Unaudited
                       
Choice Hotels International, Inc., Silver Spring, MD
  
$
32,062
  
$
32,062
  
$
32,199
  
$
32,199
    
5.30
%
  
5.34
%
  
May-13
  
Omnicom Group, Inc., Irving, TX
    
13,575
    
13,575
    
13,575
    
13,575
    
5.24
%
  
5.30
%
  
May-13
  
Capital One Financial Corporation, Plano, TX
    
20,925
    
20,925
    
20,925
    
20,925
    
5.24
%
  
5.29
%
  
May-13
  
Aon Corporation, Glenview , IL
    
64,800
    
64,800
    
64,800
    
64,800
    
5.23
%
  
5.75
%
  
Nov-14
  
Cadbury Schweppes Holdings (US), Whippany, NJ
    
36,000
    
36,000
    
36,000
    
36,000
    
5.26
%
  
5.34
%
  
Mar-15
  
ITT Industries, Inc., Herndon, VA
    
41,700
    
41,700
    
41,700
    
41,700
    
5.33
%
  
5.48
%
  
Jun-15
  
Lowes Companies, Inc., Aliso Viejo, CA
    
42,125
    
42,125
    
42,125
    
42,125
    
5.10
%
  
5.37
%
  
Jul-15
  
Abbott Laboratories, Waukegan, IL
    
15,244
    
15,244
    
15,244
    
15,244
    
5.11
%
  
5.16
%
  
Aug-15
  
United States Government (NIH), N. Bethesda, MD
    
65,188
    
65,188
    
65,188
    
65,188
    
5.32
%
  
5.56
%
  
Sep-15
  
United States Government (SSA), Austin, TX
    
5,391
    
5,391
    
5,391
    
5,391
    
5.23
%
  
5.46
%
  
Sep-15
  
United States Government (DEA), Birmingham, AL
    
11,280
    
11,280
    
11,280
    
11,280
    
5.23
%
  
5.41
%
  
Sep-15
  
United States Government (FBI), Birmingham, AL
    
18,800
    
18,800
    
18,800
    
18,800
    
5.23
%
  
5.31
%
  
Sep-15
  
Tiffany & Co., Parsippany, NJ
    
58,400
    
58,400
    
58,400
    
58,400
    
5.33
%
  
5.34
%
  
Oct-15
  
Farmers New World Life Insurance Company, Mercer Island, WA
    
30,200
    
30,200
    
30,200
    
30,200
    
5.69
%
  
5.72
%
  
Jan-16
  
Allstate Insurance Company, Charlotte, NC
    
20,209
    
20,209
    
20,209
    
20,209
    
5.68
%
  
5.71
%
  
Jan-16
  
Allstate Insurance Company, Roanoke, VA
    
21,516
    
21,516
    
21,516
    
21,516
    
5.68
%
  
5.71
%
  
Jan-16
  
TJX Companies, Inc., Philadelphia, PA
    
71,700
    
71,700
    
-
    
-
    
5.57
%
  
5.58
%
  
Mar-16
  
United States Government (Department of Veterans Affairs), Ponce, PR
    
7,208
    
7,548
    
7,317
    
7,670
    
7.30
%
  
6.41
%
  
Apr-16
  
Walgreen Co., Pennsauken, NJ
    
2,015
    
2,171
    
2,046
    
2,208
    
7.65
%
  
6.04
%
  
Oct-16
  
Walgreen Co., Portsmouth, VA
    
3,276
    
3,493
    
3,304
    
3,525
    
7.20
%
  
6.18
%
  
Jul-18
  
United States Government (EPA), Kansas City, KS
    
21,395
    
25,095
    
21,395
    
25,151
    
7.57
%
  
5.74
%
  
Oct-22
  
United States Government (OSHA), Sandy, UT
    
14,670
    
15,724
    
14,670
    
15,738
    
6.28
%
  
5.52
%
  
Jan-24
  
Total
  
$
617,679
  
$
623,146
  
$
546,284
  
$
551,844
                    
 
(1)
The effective rate is the Company’s approximate borrowing cost, including the effect of hedge gains or losses and other deferred financing costs associated with the related borrowing.

The mortgage notes are non-recourse (subject to customary exceptions) and are secured by the respective properties and an assignment of the relevant leases on the properties. The Company’s book value before accumulated depreciation and amortization on the mortgaged properties aggregated $943,913 at March 31, 2006.
 
Collateralized Debt Obligations
 
In March 2005, the Company completed its first collateralized debt obligation, or CDO. The CDO was an entirely fixed rate financing. The Company aggregated approximately $300,000 of assets into the pool, and created $285,000 face amount of multi-class notes and $15,000 of preferred equity through the CDO trust. The net amount of the debt the Company issued was $268,130, inclusive of a $370 discount to face, as the Company retained the three most junior note classes aggregating a face amount of $16,500 and the full $15,000 of preferred equity. Each of the five note classes of the CDO was rated investment grade. During the first five years of the CDO term, the Company expects to reinvest principal repayments on the underlying assets into qualifying replacement collateral. The CDO notes have a stated maturity in January 2040, but are expected to mature in January 2015 when they become subject to an auction call procedure. The Company’s effective blended financing rate (inclusive of original issue discount and debt issuance and hedge costs) on its CDO is approximately 5.67%. The CDO debt is non-recourse to the Company but is secured by the assets in the pool. The following table summarizes the assets in the Company’s portfolio posted as CDO collateral as of March 31, 2006.
 

   
Carry Value
  
Long-Term Mortgage Loans
  
$
162,452
  
Corporate Credit Notes
    
12,420
  
CMBS and Other Real Estate Securities
    
67,002
  
Total
  
$
241,874
  

 
The table does not include approximately $37,181 of intercompany corporate credit notes that are eliminated from the Company’s balance sheet in consolidation.
 
18
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
Trust Preferred Securities
 
In December 2005, the Company’s operating partnership, Caplease, LP, issued $30,000 in aggregate principal amount of fixed/floating rate preferred securities through its wholly-owned subsidiary, Caplease Statutory Trust I. The trust simultaneously issued 930 of its common securities to the operating partnership for a purchase price of $930, which constitutes all of the issued and outstanding common securities of the trust. The trust used the proceeds from the sale of the trust preferred securities together with the proceeds from the sale of the common securities to purchase $30,930 in aggregate principal amount of unsecured fixed/floating rate junior subordinated notes due January 30, 2036, issued by the operating partnership. The junior subordinated notes, the common and the trust preferred securities have substantially identical terms, requiring quarterly interest payments calculated at a fixed interest rate equal to 7.68% per annum through January 30, 2016, and subsequently at a variable interest rate equal to London Interbank Offered Rate (“LIBOR”) plus 2.60% per annum. The notes mature on January 30, 2036, and may be redeemed, in whole or in part, at par, at the Company’s option, beginning on January 30, 2011. The preferred and common securities do not have a stated maturity date; however, they are subject to mandatory redemption upon the redemption or maturity of the notes.
 
The principal amount of the junior subordinated notes of $30,930 is reported as other long-term debt on the Company’s Consolidated Balance Sheet. However, because the Company is not deemed to be the primary beneficiary of the trust under FASB Interpretation Number 46, Consolidation of Variable Interest Entities, the Company’s investment in the trust is not eliminated from the Company’s financial statements in consolidation. Instead, the Company records its investment in the trust’s common shares of $930 as part of other assets on the Company’s Consolidated Balance Sheet.
 
The Company incurred issuance costs associated with the offering of $972. These costs are included as a component of other assets on the Company’s Consolidated Balance Sheet, and are being amortized into interest expense using the effective yield method through the date the fixed interest period expires (the expected maturity date of the trust preferred securities). The Company’s effective borrowing rate on the trust preferred securities, inclusive of deferred issuance costs, is approximately 8.30% per annum.
 
Scheduled principal amortization and balloon payments for long-term debt as of March 31, 2006 for the next five years and thereafter are as follows:
 
        
Scheduled
 
Balloon
 
 
 
 
 
  
 
Amortization
 
Payments
 
Total
  
9 Months Ending December 31, 2006
        
$
2,252
  
$
-
  
$
2,252
  
2007
    
 
    
4,610
    
-
    
4,610
  
2008
    
 
    
6,941
    
-
    
6,941
  
2009
    
 
    
8,611
    
-
    
8,611
  
2010
        
33,090
    
-
    
33,090
  
Thereafter
          
150,388
    
716,348
    
866,736
  
         
$
205,892
  
$
716,348
  
$
922,240
  

12. Commitments and Contingencies
 
The Company is involved from time to time in litigation arising in the ordinary course of business. The Company is not currently involved in any matter which management believes will have a material adverse effect on its business, results of operations or financial condition.
 
As an owner of commercial real estate, the Company is subject to potential environmental costs. At March 31, 2006, the Company was not aware of any environmental concerns that would have a material adverse effect on the Company’s financial position or results of operations.
 
During the third quarter of 2005, the Company obtained long-term financing on two of its owned real properties (the United States Government/DEA Property and the United States Government/SSA Property) and simultaneously issued two letters of credit in the aggregate of $16,671 to its mortgage lender to provide additional collateral while the buildings on the property were under construction. Each letter of credit was issued for the full amount the Company borrowed from the lender on the property ($11,280 letter of credit in the case of the DEA Property and $5,391 letter of credit in the case of the SSA Property). Construction of the buildings on each property was substantially completed in the first quarter of 2006, and the letter of credit on the DEA property was cancelled in March 2006, and the letter of credit on the SSA property was cancelled in April 2006.
 
19
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
During May 2005, the Company acquired a real property in Herndon, Virginia net leased to ITT Industries, Inc., and agreed under the tenant’s lease to fund expected improvements to the real property of approximately $9,500. During May 2005, the Company arranged long-term financing on this property and it funded a reserve account with its lender for the full amount of this obligation. The Company expects these funds will be disbursed in full as improvements are completed. As of March 31, 2006, $6,178 of these funds have been disbursed.
 
The Company is obligated under a letter of credit with respect to one of its 1999 securitization transactions (BSCMS 1999-CLF1). The maximum potential amount of future required payments under the letter of credit is $2,850. The letter of credit expires on February 18, 2009. The trustee may draw the letter of credit if there are realized losses on the mortgage loans that would create a shortfall in the interest or principal on any investment grade certificate. The letter of credit may be withdrawn when the ratings of the investment grade certificates are no longer dependent upon the credit support provided by the letter of credit. During February 2005, one of the mortgage loans in the securitization on a property net leased to Winn-Dixie defaulted, in connection with the bankruptcy of Winn-Dixie. However, management does not expect any draw on the letter of credit as a result of this mortgage default, or otherwise. Letter of credit fees included in interest expense were $25 and $26 for the quarters ended March 31, 2006 and 2005, respectively.
 
The Company had outstanding commitments to fund loans of approximately $2,101 related to certain of its development or joint-venture loans as of March 31, 2006. As of March 31, 2006, advances of $1,736 had been made against these commitments.
 
13. Stockholders’ Equity
 
Stock Issuances
 
CLF, Inc.’s authorized capital stock consists of 500,000,000 shares of common stock, $0.01 per share, and 100,000,000 shares of preferred stock, $0.01 per share. As of March 31, 2006, CLF, Inc. had issued and outstanding 28,180,930 shares of common stock, and 1,400,000 shares of 8.125% Series A cumulative redeemable preferred stock. See Note 20.
 
During March 2006, CLF, Inc. issued 312,450 shares of common stock to its executive officers, other employees and directors pursuant to the Company’s stock incentive plan. As of March 31, 2006, the Company had awarded 1,072,996 shares of common stock under the stock plan, all in the form of stock awards to executive officers, other employees and directors of the Company (see Note 14 below).
 
Dividends
 
CLF, Inc. has paid cash dividends to its common stockholders each quarter since the third quarter of 2004, and to its Series A preferred stockholders each quarter since the fourth quarter of 2005.
 
On January 17, 2006, CLF, Inc. paid a dividend of $0.20 per share to its common stockholders. The dividend was declared on December 6, 2005, to common stockholders of record as of December 30, 2005.
 
On January 17, 2006, CLF, Inc. paid a dividend of $0.48524 per share to its Series A preferred stockholders. The dividend was declared on December 6, 2005, to Series A preferred stockholders of record as of December 30, 2005.
 
On April 17, 2006, CLF, Inc. paid a dividend of $0.20 per share to its common stockholders. The dividend was declared on March 14, 2006, to common stockholders of record as of March 31, 2006.
 
20
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
On April 17, 2006, CLF, Inc. paid a dividend of $0.5078125 per share to its Series A preferred stockholders. The dividend was declared on March 14, 2006, to Series A preferred stockholders of record as of March 31, 2006.
 
14. Stock Based Compensation
 
The Company adopted a stock incentive plan for its employees and directors during March 2004 in connection with its initial public offering. 1,073,000 shares of common stock are authorized for issuance under the stock plan. As of March 31, 2006, the Company had awarded 1,072,996 shares of common stock under the stock plan, all in the form of stock awards to executive officers, other employees and directors of the Company. The Company has not awarded any options, stock appreciation rights or other stock based compensation under the stock plan. At its annual stockholder meeting to be held on June 14, 2006, the Company intends to seek stockholder approval to increase by 1,250,000 shares, to 2,323,000 shares, the number of shares available for issuance under the stock incentive plan.
 
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) − Share-Based Payment (“SFAS No. 123R”), using the modified prospective transition method. SFAS No. 123R replaces SFAS No. 123, which the Company adopted on January 1, 2003. Under that transition method, compensation cost recognized on and after January 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.
 
Because the Company has historically valued compensation cost for stock awards at fair value under SFAS No. 123, the adoption of SFAS No. 123R did not have a material effect on the Company.
 
The Company uses the closing stock price on the grant date as its estimate of the fair value of the award.
 
The adoption of SFAS No. 123R had no impact on the Company’s income from continuing operations, net income, earnings per share (basic and diluted), cash flows from operations or cash flows from financing activities.
 
During March 2006, CLF, Inc. issued 312,450 shares of common stock to its executive officers, other employees and directors pursuant to the Company’s stock incentive plan. All of these shares were unvested at issuance. Vesting terms are described in the table below. All unvested shares have voting and dividend rights until forfeited.
 
A summary of the Company’s activity under the stock plan during the quarter ended March 31, 2006, is presented below:
 

   
Number of
    
   
Shares
    
Stock Awards at January 1, 2006
    
760,546
      
Granted During Quarter Ended March 31, 2006
    
312,450
  
(1)
 
Stock Awards at March 31, 2006
    
1,072,996
      

(1)
Shares are scheduled to vest between March 2007 and March 2009, but will generally be forfeited if the recipient either terminates his employment with the Company or ceases to be a member of CLF, Inc.’s Board of Directors at any time prior to the vesting date. Vesting of an aggregate of 133,500 shares is also subject to satisfaction of objective and subjective performance criteria, to be determined by CLF, Inc.’s Compensation Committee.
 
21
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)
 
 
A summary of the status of unvested shares as of and for the quarter ended March 31, 2006, is presented below:

   
 
 
 Weighted
 
 
 
 
 
 
 Average Fair
 
 
 
 
Shares
 
 Value
 
  
Nonvested at January 1, 2006
    
495,654
  
$
10.83
  
(1)
 
Granted
    
312,450
    
11.04
  
(2)
 
Vested
    
(227,260
)
  
10.73
      
Nonvested at March 31, 2006
    
580,844
  
$
11.03
      
 
(1)
Includes weighted average fair value on 435,654 of the 495,654 shares awarded and remaining unvested as of January 1, 2006. Performance criteria on the remaining 60,000 shares have not yet been determined, and therefore, as required under SFAS 123R, the applicable grant date for these shares has not yet occurred and the fair value has not yet been determined.
(2)
Includes weighted average fair value on 223,450 of the 312,450 shares awarded during the quarter. Performance criteria on the remaining 89,000 shares have not yet been determined, and therefore, as required under SFAS 123R, the applicable grant date for these shares has not yet occurred and the fair value has not yet been determined.

As of March 31, 2006, $4,662 of deferred compensation expense was included in the Company’s Consolidated Balance Sheet as a component of additional paid in capital. This amount is expected to be charged to the Company’s Consolidated Income Statement over the remaining vesting period (through March 2009). The amount of deferred compensation expense for awards of 60,000 shares made in 2005 and 89,000 shares made in 2006 has not yet been measured and included as a component of additional paid in capital because the grant date (as defined under SFAS 123R) has not yet occurred.
 
The following summarizes the expense the Company recorded in its Consolidated Income Statement during the quarters ended March 31, 2006 and March 31, 2005, for awards under the stock plan:
 
   
For the three months
  
   
ended March 31,
  
   
2006
  
2005
  
General and administrative expenses- stock based compensation
  
$
671
  
$
455
  
 
15. Other Comprehensive Income
 
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For the Company’s purposes, comprehensive income represents net income, as presented in the Company’s Consolidated Income Statements, adjusted for unrealized gains or losses on securities available for sale, unrealized gains or losses on derivatives designated as cash flow hedges, and realized gains and losses on derivatives designated as cash flow hedges (net of amortization of those realized gains and losses into interest expense). The Company’s comprehensive income is summarized in the last column on the Consolidated Statement of Changes in Stockholders’ Equity.
 
SFAS No. 130, Reporting Comprehensive Income, divides comprehensive income into “net income” and “other comprehensive income.” Other comprehensive income is defined as revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Other comprehensive income is also summarized on the Company’s Consolidated Statement of Changes in Stockholders’ Equity (fourth column). The following table summarizes the Company’s accumulated other comprehensive income (loss) as reported on the Consolidated Statement of Changes in Stockholders’ Equity.
 
22
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

 
   
Mar 31, 2006
  
 Dec 31, 2005
  
   
Unaudited
       
  Net unrealized gains on securities
  
$
6,430
  
$
9,648
  
  Net unrealized gains (losses) on derivatives
    
4,344
    
784
  
  Net realized gains (losses) on derivatives
    
(11,917
)
  
(12,180
)
  Accumulated other comprehensive income (loss)
  
$
(1,143
)
$
(1,748
)
 
16. Rental Income
 
The Company is the lessor to tenants under operating leases with expiration dates ranging from 2007 to 2025 (not including incidental leases). The minimum rental amounts due under the leases are generally subject to scheduled fixed increases. The leases generally also require that the tenants pay for or reimburse the Company for the occupancy and operating costs of the properties, or in certain cases reimburse the Company for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at March 31, 2006, are as follows:
 
9 Months Ending December 31, 2006
 
$
52,002
  
2007
    
70,672
  
2008
    
71,444
  
2009
    
69,765
  
2010
    
67,728
  
Thereafter
  
588,262
  
   
$
919,873
  
 
17. Pro Forma Condensed Consolidated Income Statements
 
The accompanying unaudited Pro Forma Condensed Consolidated Income Statements are presented as if, at January 1, 2005, the Company acquired the TJX Companies, Inc. and AMVESCAP PLC/Invesco Group, Inc. properties described in Note 5-Real Estate Investments (the only properties acquired during the quarter ended March 31, 2006) and all real properties purchased during 2005. Earnings per share are presented using the weighted average shares outstanding during the relevant periods. In management's opinion, all adjustments necessary to reflect the effects of the above transactions have been made.
 
The unaudited Pro Forma Condensed Consolidated Income Statements are not necessarily indicative of what the actual results of operations would have been assuming the acquisition transactions had occurred at the dates indicated above, nor do they purport to represent our future results of operations.
 

   
For the three months
  
   
ended March 31,
  
   
2006
  
2005
  
Total revenues
  
$
30,783
  
$
25,602
  
Income from continuing operations
  
$
2,292
  
$
2,893
  
Income per basic and diluted common share
              
 from continuing operations
  
$
0.08
  
$
0.11
  
 
 
23
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

 
18. Segment Reporting
 
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes the manner in which public businesses report information about operating segments in annual and interim financial reports issued to stockholders.  SFAS No. 131 defines a segment as a component of an enterprise about which separate financial information is available and that is evaluated regularly to allocate resources and assess performance. The Company conducts its business through two segments: operating net lease real estate (including its investments in owned properties) and lending investments (including its loan investments as well as its investments in securities). For segment reporting purposes, the Company does not allocate interest income on short-term investments or general and administrative expenses.
 
Selected results of operations for the three months ended March 31, 2006 and March 31, 2005, are as follows:
 

   
Corporate /
 
 Operating Net Lease
 
Lending
 
 
 
Unallocated
 
 Real Estate
 
Investments
 
 
 
3/31/2006
 
 3/31/2005
 
 3/31/2006
 
3/31/2005
 
3/31/2006
 
3/31/2005
  
  Total revenues
  
$
228
  
$
172
  
$
18,995
  
$
5,749
  
$
9,125
  
$
5,986
  
  Total expenses & minority interest
    
3,637
    
3,009
    
17,583
    
4,530
    
4,824
    
2,146
  
  Income (loss) from continuing operations
    
(3,409
)
  
(2,837
)
  
1,412
    
1,219
    
4,301
    
3,840
  
  Total assets
    
49,118
    
84,154
    
957,212
    
263,561
    
409,979
    
342,975
  
 
19. Variable Interest Entities
 
In January 2003, the FASB issued Interpretation Number 46, Consolidation of Variable Interest Entities. FIN 46 was revised by FIN 46(R) in December 2003 (as revised, “FIN 46”). FIN 46 defines a variable interest entity (“VIE”) as an entity with one or more of the following characteristics:
 
   
  ·  the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties;  
     
·
equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur; or
     
  · equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
 
If an entity is deemed to be a VIE, an enterprise that absorbs a majority of the expected losses of the entity is considered the primary beneficiary and must consolidate the VIE.
 
As part of the Company’s developer loan program, the Company funds loans to an entity that owns an undeveloped property. These loans are used to finance pre-construction costs related to the property, such as due diligence costs and land acquisition contract deposits, rather than costs to build on the property. The Company has funded five such loans as of March 31, 2006, with an aggregate unpaid principal amount of approximately $1,736 as of that date. The Company has determined that its borrowers are VIEs under FIN 46. Each loan is secured, in part, by a personal guarantee by the borrowing entity’s owner. The Company has concluded it is not the primary beneficiary of the VIE (and, therefore, the Company has not consolidated the VIE under FIN 46). The Company’s maximum exposure to loss as a result of its involvement with these VIEs is the amount funded on the loans.
 
As of December 31, 2005, the Company had invested $36,395 in an office building in Wilmington, Delaware, net leased to Hercules Incorporated, including a $27,700 mezzanine loan and a $8,695 preferred equity investment. As of December 31, 2005, the Company determined that its borrower was a VIE under FIN 46, but the Company did not consolidate the borrower because the Company concluded it was not the primary beneficiary of the VIE. During March 2006, the property was recapitalized and the Company’s mezzanine loan and preferred equity investment were retired. The Company participated in the recapitalization by making a first mortgage loan on the property (which was simultaneously resold in a gain on sale transaction) and a corporate credit note investment secured by the property. Upon completion of the recapitalization, the Company’s aggregate investment in the property was $20,000, and the Company concluded its borrower was not a VIE under FIN 46.
 
24
 
Capital Lease Funding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share amounts)

March 31, 2006 (unaudited)

20. Subsequent Events
 
On May 1, 2006, CLF, Inc. issued 5,000,000 shares of common stock in a public offering at a price to the public of $10.55 per share, and raised net proceeds of approximately $49,938, after the underwriting discount and estimated offering expenses. The Company expects to use the proceeds from the offering to repay or reduce its short-term borrowings, make additional net lease investments and for general corporate purposes. CLF, Inc. also granted the underwriters in the offering an option to purchase up to an additional 750,000 shares of common stock to cover over-allotments, if any. The underwriters may exercise the option at any time in whole or in part on or before May 24, 2006.
 
25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the consolidated financial statements and the notes to those financial statements, included elsewhere in this filing. Where appropriate, the following discussion includes analysis of our predecessor entity.
 
General
 
We are a diversified REIT that owns and finances primarily single tenant commercial real estate assets subject to long-term leases to primarily investment grade tenants. We focus on properties that are subject to a net lease, which we define as a lease that requires the tenant (rather than the landlord) to pay for, or pay for and perform, all or substantially all aspects of the property and its operations during the lease term.
 
We invest at all levels of the capital structure of net lease properties, including equity investments in real estate (owned real properties), debt investments (mortgage loans and net lease mortgage backed securities) and mezzanine investments secured by net leased real estate collateral.
 
The principal sources of our revenues are rental income on our owned real properties and interest income from our debt investments. The principal sources of our expenses are interest expense on our assets financed, depreciation expense on our real properties, general and administrative expenses and property expenses (net of expense recoveries). While our focus is on net leased properties, we also have made and expect to continue to make owned property investments where we have exposure to property expenses when we determine we can sufficiently underwrite that exposure and isolate a predictable cash flow.
 
We rely on leverage to allow us to invest in a greater number of assets and enhance our asset returns. We seek to finance our assets on a long-term basis with fixed-rate debt of a like maturity. Through March 31, 2006, our long-term financings have been in the form of traditional third party mortgage financings (on most of our owned real properties) and our first CDO (completed in March 2005). We have short-term floating rate borrowing arrangements in place to facilitate our investment activity while we arrange long-term financing. We employ a hedging strategy to mitigate our exposure to changes in interest rates while our assets are financed under our short-term borrowing arrangements. We expect our leverage to average 70% to 85% of our assets in portfolio.
 
Our primary business objective is to generate stable, long-term and attractive returns based on the spread between the yields generated by our assets and the cost of financing our portfolio.
 
We rely primarily on equity and debt capital to fund our portfolio growth. The following is a summary of our capital raising activities beginning with our initial public offering in March 2004 and through March 31, 2006.
 
Month/Year
Securities Issued
Price
Net Proceeds
March 2004
23.0 million shares of
common stock
$10.50
$221.8 million
October 2005
14.0 million shares of
8.125% Series A cumulative
redeemable preferred stock
$25.00
$33.7 million
December 2005
$30.9 million of junior
subordinated notes
N/A
$29.9 million

Also, on May 1, 2006, we closed our first public offering of common stock since our initial public offering. See “Recent Developments” below.
 
Summary of Investment and Financing Activity in First Quarter 2006
 
The following highlights our investment and financing activity during the first quarter ended March 31, 2006:
 
·
We added assets of $179.4 million to our portfolio, including a $90.1 million acquisition of a TJX Companies, Inc. warehouse and distribution facility in Philadelphia, Pennsylvania, and a $69.3 million acquisition of two adjacent office buildings in Denver, Colorado net leased to Invesco Funds Group, Inc. (lease obligations guaranteed by AMVESCAP PLC). We participated in a recapitalization of the Hercules Incorporated office building in Wilmington, Delaware, by making a $78.0 million first mortgage loan on the property (which we sold to Wachovia Bank, N.A. in a gain-on-sale transaction at closing) and a $20.0 million corporate credit note investment.
 
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·
In March 2006, we financed the acquisition of the TJX Companies, Inc. warehouse and distribution facility with a $71.7 million 10-year mortgage note from Wachovia Bank, N.A. with a coupon rate of 5.57%.
 
Recent Developments
 
On May 1, 2006, we closed our first public offering of common stock since our initial public offering in March 2004. We issued 5,000,000 shares of common stock in a public offering at a price to the public of $10.55 per share, and raised net proceeds of approximately $49.9 million, after the underwriting discount and estimated offering expenses. The shares were issued pursuant to our shelf registration statement. We expect to use the proceeds from the offering to repay or reduce our short-term borrowings, make additional net lease investments and for general corporate purposes. We also granted the underwriters in the offering an option to purchase up to an additional 750,000 shares of common stock to cover over-allotments, if any. The underwriters may exercise the option at any time in whole or in part on or before May 24, 2006.
 
Business Environment
 
The markets have been and remain extremely competitive across each of our business segments. We continue to see significant amounts of investment capital pursuing transactions across the real estate spectrum which has put downward pressure on yields and spreads on both property acquisitions and our origination of loans for our portfolio. Recent increases in long-term interest rates also increase our anticipated financing costs for new investment opportunities, which may compress our anticipated spreads and make it more difficult to bid successfully on new transactions. If these trends continue, we may look to invest in net lease assets with return characteristics at the lower end of our target return criteria, we may re-adjust our target returns, or our asset origination activity may slow while we continue to pursue only those assets at or above the returns being generated by our current portfolio.
 
Application of Critical Accounting Policies
 
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2005 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.  There have been no significant changes to those policies during the first quarter of 2006.
 
Property Acquisitions
 
During the quarter ended March 31, 2006, we completed the following property acquisitions (dollar amounts in thousands):
 
           
Purchase
      
Net Rentable
  
Month Acquired
  
Tenant or Guarantor
  
Location
  
Price
  
Lease Expires
  
Square Feet
  
March
    
AMVESCAP PLC (1
)
  
Denver, CO
  
$
69,300
    
October 2016
    
263,770
  
March
    
TJX Companies, Inc.
    
Philadelphia, PA
    
90,125
    
June 2021
    
1,015,500
  
 
(1) Includes two adjacent office buildings net leased to Invesco Funds Group, Inc., a wholly-owned subsidiary of AMVESCAP PLC.
 
Business Segments
 
We conduct our business through two operating segments:
 
·    operating net lease real estate (including our investments in owned real properties); and
 
·    lending investments (including our loan business as well as our investments in securities).
 
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Selected results of operations for the three months ended March 31, 2006 and March 31, 2005, are as follows (dollar amounts in thousands):

   
Corporate /
  
 Operating Net Lease
  
Lending
  
   
Unallocated
  
 Real Estate
  
Investments
  
   
3/31/2006
  
 3/31/2005
  
 3/31/2006
  
3/31/2005
  
3/31/2006
  
3/31/2005
  
Total revenues
  
$
228
  
$
172
  
$
18,995
  
$
5,749
  
$
9,125
  
$
5,986
  
Total expenses & minority interest
    
3,637
    
3,009
    
17,583
    
4,530
    
4,824
    
2,146
  
Income (loss) from continuing operations
    
(3,409
)
  
(2,837
)
  
1,412
    
1,219
    
4,301
    
3,840
  
Total assets
    
49,118
    
84,154
    
957,212
    
263,561
    
409,979
    
342,975
  

 
Results of Operations
 
During the first quarter of 2006, we continued to execute on our business plan as a long-term holder of equity, debt and mezzanine investments in net lease assets.
 
Comparison of the Quarter Ended March 31, 2006 to the Quarter Ended March 31, 2005
 
The following discussion compares our operating results for the quarter ended March 31, 2006 to the comparable period in 2005.
 
Revenue.
 
Total revenue increased $16.4 million, or 138%, to $28.3 million. The increase was primarily attributable to increases in rental revenue and property expense recoveries and increases in interest income, gain on sale of mortgage loans and other revenue.
 
Rental revenue and property expense recoveries, in the aggregate, increased $13.2 million, or 232%, to $18.9 million. The increase was due to a substantial increase in the underlying property investments from the prior year period.
 
Interest income increased $2.1 million, or 35%, to $8.2 million. The increase was due to larger overall asset investments, including both mortgage loans and CMBS investments.
 
Gain on sale of mortgage loans increased to $0.6 million, from $0.1 million, reflecting a large gain we earned on the origination and sale of a mortgage loan in the 2006 period.
 
Other revenue increased $0.5 million to $0.6 million, primarily reflecting fees we received on two loans that were paid off in the first quarter of 2006.
 
Expenses.
 
Total expenses increased $16.4 million, or 169%, to $26.0 million. The increase in expenses was primarily attributable to higher levels of interest expense, depreciation and amortization expense on real property, property expenses and stock based compensation expense, offset in part by a reduction in general and administrative expenses.
 
Interest expense increased $10.5 million, or 296%, from $3.5 million to $14.0 million. The increase in 2006 primarily consisted of $6.6 million of additional interest expense on property mortgages originated or assumed in 2005 and 2006, $2.9 million of additional interest expense on our collateralized debt obligations issued in March 2005, and $0.6 of interest expense on the trust preferred debt we issued in December 2005. In addition, interest expense on our borrowings under our repurchase agreement and other short-term financing obligations increased $0.4 million, or 27%, from $1.6 million to $2.0 million, primarily as a result of higher borrowing costs in 2006.
 
Property expenses increased $1.8 million, or 100%, to $3.6 million. The net amount of property expenses we incurred (net of expense recoveries) was $1.7 million. The growth in property expenses reflects the growth of our portfolio as well as our purchase of properties with greater overall exposure to property expenses under the lease provisions, primarily with respect to leases with the United States Government. While our investment focus continues to be on net lease properties, we expect to continue to make owned property investments where we have exposure to property expenses when we determine we can sufficiently underwrite that exposure and isolate a predictable cash flow.
 
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General and administrative expense decreased $0.2 million, or 8%, to $2.3 million, due primarily to slightly lower liability insurance and public company compliance costs. General and administrative expense for the 2005 period also included approximately $0.1 million of accrued severance expense.
 
General and administrative expense-stock based compensation increased $0.2 million, or 47%, to $0.7 million. The increase was due to marginally higher expected vesting of outstanding stock grants compared with the prior year period.
 
Depreciation and amortization expense on real property increased $4.1 million, due to the significant increase in property investments compared with the prior year period.
 
Net income.
 
Net income increased from $2.2 million to $2.4 million, as a result of the factors discussed above. Net income allocable to common stockholders was $1.6 million in the first quarter of 2006, reflecting dividends to preferred stockholders of $0.7 million.
 
Funds from Operations
 
Funds from operations, or FFO, is a non-GAAP financial measure. We believe FFO is a useful additional measure of our performance because it facilitates an understanding of our operating performance after adjustment for real estate depreciation, a non-cash expense which assumes that the value of real estate assets diminishes predictably over time. In addition, we believe that FFO provides useful information to the investment community about our financial performance as compared to other REITs, since FFO is generally recognized as an industry standard for measuring the operating performance of an equity REIT. FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income or earnings per share determined in accordance with GAAP as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Since all companies and analysts do not calculate FFO in a similar fashion, our calculation of FFO may not be comparable to similarly titled measures reported by other companies.
 
We calculate FFO consistent with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, or net income (computed in accordance with GAAP) excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
 
The following table reconciles our net income to FFO for the quarters ended March 31, 2006 and March 31, 2005.
 

   
 For the Three Months
  
   
Ended March 31
  
(in thousands, except per share amounts)
  
2006
  
2005
  
Net income allocable to common stockholders
  
$
1,641
  
$
2,222
  
Adjustments:
              
 Add: Depreciation and amortization expense on real property
    
5,378
    
1,268
  
Funds from operations
  
$
7,019
  
$
3,490
  
Weighted average number of common shares oustanding, basic and diluted
    
27,893
    
27,526
  
Funds from operations per share
  
$
0.25
  
$
0.13
  
Gain on sale of mortgage loans
  
$
645
  
$
63
  
 
Liquidity and Capital Resources
 
As of March 31, 2006, we had $10.5 million in available cash and cash equivalents. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annual basis, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the distribution requirements of the Internal Revenue Code and to avoid federal income tax and the nondeductible excise tax. We declared a dividend of $0.20 per share of common stock during the quarter ended March 31, 2006. We also declared a dividend of $0.5078125 per share of 8.125% series A cumulative redeemable preferred stock in the first quarter of 2006.
 
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We believe that our working capital and cash provided by operations are sufficient to fund our operations and pay our distributions necessary to enable us to continue to qualify as a REIT. However, our strategy contemplates additional net lease investments and, therefore, as we approach or reach our targeted leverage level from time to time, we will need to raise additional capital. We expect our leverage to average 70% to 85% of our assets in portfolio. As of May 10, 2006, we had an effective shelf registration statement under which we can offer an aggregate of $212.3 million of common stock, preferred stock and/or senior or subordinated debt securities from time to time.
 
We raised additional equity capital through a public offering of common stock that closed on May 1, 2006. We issued 5,000,000 shares of common stock in a public offering at a price to the public of $10.55 per share, and raised net proceeds of approximately $49.9 million, after the underwriting discount and estimated offering expenses. The shares were issued pursuant to our shelf registration statement. We expect to use the proceeds from the offering to repay or reduce our short-term borrowings, make additional net lease investments and for general corporate purposes. We also granted the underwriters in the offering an option to purchase up to an additional 750,000 shares of common stock to cover over-allotments, if any. The underwriters may exercise the option at any time in whole or in part on or before May 24, 2006.
 
We expect to raise additional capital to enable us to continue to implement our growth strategy, although the precise timing of our next capital raise will be impacted by our pace of investment activity and market conditions. Our ability to raise capital is influenced by market conditions, and we cannot assure you conditions for raising capital will be favorable for us at any time.
 
Short-Term Liquidity and Financing.
 
We expect to meet our short-term liquidity requirements generally through our available cash and cash equivalents, cash provided by operations, as well as through our short-term borrowing arrangements. Our short-term borrowing arrangements are comprised of a repurchase agreement with Wachovia Bank (aggregate borrowing capacity of $250.0 million) and a real property acquisition facility with Wachovia Bank and one of its affiliates (two loan agreements with aggregate borrowing capacity of $100.0 million). These arrangements are uncommitted, meaning the lenders may decline to advance on any asset we seek to finance.
 
We had $150.9 million outstanding as of March 31, 2006 under our Wachovia repurchase agreement, which borrowings were secured by loan investments with an aggregate carry value of $128.5 million, and securities with a carry value of $52.3 million. We also had $41.6 million outstanding as of March 31, 2006 under our real property acquisition facility, which borrowings were secured by owned properties with an aggregate carry value of $69.4 million. Our short-term borrowing arrangements are co-terminus, and they expire in August 2006. We expect to renew these arrangements prior to expiration. We had a repurchase agreement with Bank of America that expired unused on March 1, 2005.
 
Our short-term borrowing arrangements allow us to finance our assets on a short-term basis while we arrange long-term financing. We pay interest at prevailing short-term interest rates plus a spread. These borrowing arrangements are secured by the assets financed and are fully recourse to our other assets. Our lender also has the right to initiate a margin call if our assets financed decline in value (including as a result of a tenant downgrade). We are required to comply with various covenants under these arrangements, including financial covenants of minimum liquidity, minimum consolidated net worth and maximum leverage.
 
As of March 31, 2006, we were in compliance with the terms of our short-term borrowing arrangements. We do not currently anticipate any difficulty in maintaining compliance with these terms in future periods. We believe our relationship with Wachovia Bank is excellent. However, because our short-term borrowing arrangements are uncommitted, we cannot make any assurance that these facilities will continue to be available to us.
 
Long-Term Liquidity and Financing.
 
We expect to meet our long-term liquidity requirements generally through cash provided by operations, long-term fixed-rate financings on our net lease asset investments and issuances of debt and equity capital. As discussed in further detail above, we issued common stock in May 2006.
 
We finance our investments through short-term financing arrangements and, as soon as practicable thereafter, we obtain long-term financing for these investments, generally on a secured, non-recourse basis. Long-term financing can be in the form of traditional mortgage debt, CDOs or other debt mechanisms. As of March 31, 2006, we have financed on a long-term basis an aggregate of approximately $1,069.3 million of assets in portfolio with third party mortgage debt of $623.1 million and collateralized debt obligations of $268.2 million. We expect our leverage to average 70% to 85% of our assets in portfolio.
 
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Long-Term Mortgage Financings.
 
During the quarter ended March 31, 2006, we obtained $71.7 million of long-term third party mortgage financing on one of our real property acquisitions, the TJX Companies, Inc. warehouse and distribution facility in Philadelphia, Pennsylvania. The coupon rate we pay on the related note is 5.57% and the note is scheduled to mature in March 2016. The note includes a six month interest only period, followed by monthly payments of interest and principal through maturity and a $65.5 million balloon payable at maturity.
 
Our mortgage financings are fixed rate financings. The notes typically mature over a long-term period of approximately ten years, and debt service is payable monthly. The notes are generally non-recourse to us but are secured by a mortgage on the property and an assignment of the underlying lease and rents on the property. The notes generally include customary non-recourse exceptions. The notes often include an interest only payment period and usually require a balloon payment at maturity.
 
CDO Financing.
 
In March 2005, we completed our first CDO. Our CDO was an entirely fixed rate financing. We aggregated approximately $300 million of assets into the pool, and we created $285 million face amount of multi-class notes and $15 million of preferred equity through the CDO trust. The net amount of the debt we issued was $268.1 million, inclusive of a $0.4 million discount to face, as we retained the three most junior note classes aggregating a face amount of $16.5 million and the full $15 million of preferred equity. Each of the five note classes of the CDO was rated investment grade. During the first five years of the CDO term, we expect to reinvest principal repayments on the underlying assets into qualifying replacement collateral. The CDO notes are expected to mature in January 2015. Our effective blended financing rate (inclusive of original issue discount and debt issuance and hedge costs) on our CDO is approximately 5.67%. Our CDO debt is non-recourse to us but is secured by the assets in the pool.
 
We are currently aggregating assets for our next CDO financing. We expect our next CDO issuance to occur in the second or third quarter of 2006.
 
Statement of Cash Flows
 
We used $5.1 million of cash in operating activities in the first quarter of 2006, primarily driven by an increase in other assets of $7.6 million, including a $6.4 million increase in funds held by our CDO trustee pending distribution or reinvestments, and decreases of $0.9 million in accounts payable, accrued expenses and other liabilities and cash deposits and escrows of $1.7 million. Our net income as adjusted for straight-lining of rents, various non-cash gains and losses and depreciation and amortization was $5.0 million in the first quarter of 2006. We used $11.9 million of cash in operating activities in the first quarter of 2005, primarily driven by reductions in cash deposits and escrows ($9.1 million) and amounts due to servicers and dealers ($4.4 million), partially offset by net income net of non-cash items of $3.5 million. As part of our CDO issuance in 2005, we transferred a number of loan deposits and other escrows to the CDO trustee.
 
Investing activities used $137.3 million during the period ended March 31, 2006, which primarily resulted from net investments in real estate of $165.4 million and net investments in mortgage loans of $51.1 million, partially offset by sale of mortgage loans of $78.6 million. Investing activities used $84.1 million during the period ended March 31, 2005, which resulted primarily from net investments in real estate of $48.4 million, net investments in securities investments of $31.0 million and net investments in mortgage loans of $6.9 million, partially offset by sale of mortgage loans of $2.3 million.
 
Cash provided by financing activities during the period ended March 31, 2006 was $133.6 million, which primarily resulted from net borrowings under repurchase agreements and other short-term financing obligations of $62.5 million, net borrowings from mortgages on real estate investments of $71.4 million, reductions in escrows held with mortgage lender of $6.1 million, and dividends paid of $6.3 million. Cash provided by financing activities during the period ended March 31, 2005 was $148.5 million, which primarily resulted from borrowings under collateralized debt obligations of $268.1 million, borrowings under mortgages on real estate investments, net of deposits and escrows, of $24.2 million, partially offset by net repayments on repurchase agreements of $125.5 million, funds used in hedging and risk management activities of $9.4 million, debt issuance costs of $4.9 million and dividends paid of $4.1 million.
 
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See our consolidated statements of cash flows included in the historical consolidated financial statements included elsewhere in this filing for a reconciliation of our cash position for the periods described above.
 
Derivative and Other Risk Management Transactions
 
Since our initial public offering, we have entered into derivative and other risk management transactions in order to hedge the value of our future debt obligations from changes in underlying interest rates during the period between closing and obtaining long-term financing of our net lease assets. Our derivative and other risk management activities during this period have consisted primarily of interest rate swaps, and we expect they will continue to consist primarily of interest rate swaps in the future. In accordance with SFAS 133, the interest rate swaps, to the extent that they have been designated and qualify as part of a hedging relationship, are treated as cash flow hedges for accounting purposes. Consistent with SFAS No. 133, open cash flow hedges are marked to fair value at each reporting date, with a corresponding offset to Other Comprehensive Income (a component of Stockholders’ Equity). The cost to carry our open cash flow hedges and any gain or loss we realize upon closing the cash flow hedge is amortized as part of interest expense over the term of the related debt issuance.
 
For the quarters ended March 31, 2006 and 2005, we had net realized losses of $0.0 million and $9.4 million, respectively, related to cash flow hedges. The net realized gains and losses are included in Other Comprehensive Income and will be reclassified and amortized as part of interest expense on our Consolidated Income Statement over the expected term of the related debt issuances. For the quarters ended March 31, 2006 and March 31, 2005, we reclassified $0.3 million and $0.1 million from accumulated other comprehensive loss into interest expense related to the underlying debt issuances. Within the next twelve months, we estimate that $1.2 million of net losses currently held within Accumulated Other Comprehensive Income will be reclassified to earnings as additional interest expense.
 
The change in net unrealized gains of $3.6 million and $7.5 million in the quarters ended March 31, 2006 and March 31, 2005, respectively, for derivatives designated as cash flow hedges is separately disclosed in the statement of changes in stockholders’ equity.
 
We do not use derivative and other risk management transactions for trading or speculative purposes and we only enter into contracts or hedging arrangements with major financial institutions.
 
We settle our derivative and other risk management transactions in cash. Therefore, upon settlement, we will pay or receive cash for the net amount due. These amounts could be material and could have a material impact (positive or negative) on our liquidity. We seek to settle these transactions simultaneous with the closing of our financing transaction for the related hedged asset to mitigate the possible adverse impact on our liquidity.
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

We may from time to time make written or oral forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements contained in our filings with the Securities and Exchange Commission and in our press releases and webcasts. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “strategy,” “will” and other words of similar meaning. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are hereby identifying important factors that could cause actual results and outcomes to differ materially from those contained in any forward-looking statement made by or on our behalf. Such factors include, but are not limited to:
 
·    our ability to make additional investments in a timely manner or on acceptable terms;
 
·    our ability to obtain long-term financing for our asset investments at the spread levels we project when we invest in the asset;
 
32
·    adverse changes in the financial condition of the tenants underlying our net lease investments;
 
·    increases in our financing costs, our general and administrative costs and/or our property expenses;
 
·    changes in our industry, the industries of our tenants, interest rates or the general economy;
 
·    the success of our hedging strategy;
 
·    our ability to raise additional capital;
 
·    impairments in the value of the collateral underlying our investments; and
 
·    the degree and nature of our competition.
 
In addition, we may be required to defer revenue recognition on real properties we acquire if the property is under construction or is not yet ready for occupancy.
 
These risks and uncertainties should be considered in evaluating any forward-looking statement we may make from time to time. Any forward-looking statement speaks only as of its date. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date made.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Market risk refers to the risk of loss from adverse changes in the level of one or more market prices, rate indices or other market factors. We are exposed to market risk primarily from changes in interest rates, credit spreads, tenant credit ratings and equity prices. We attempt to mitigate certain of these risks by entering into hedge and other risk management transactions during the short-term and fixed-rate financings for the long-term. We seek to obtain long-term fixed rate financing as soon as practicable after we make an asset investment. There can be no assurance, however, that such mitigation strategies will be completely or even partially successful. The level of our exposure to market risk is subject to factors beyond our control, including political risk (including terrorism), monetary and tax policy, general economic conditions and a variety of other associated risks.
 
Interest Rate Exposure
 
Substantially all of our assets have exposures to long-term interest rate movements, primarily the yields on long-term U.S. Treasuries. Our hedge and other risk management transactions will also have exposures to movements in interest rates. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-bearing assets and the interest expense incurred in connection with our interest-bearing liabilities. Changes in interest rates can also affect our net income from any investments that we make in net leased real estate, which is the difference between the rental income earned and the interest expense on the liabilities associated with the properties. Changes in the level of interest rates may also affect, among other things, our ability to originate or acquire loans and securities, real estate properties, and the value of our loans and other assets.
 
Credit Spread Curve Exposure
 
Our loans and real estate securities are subject to spread risk. The majority of these assets are fixed-rate assets, which are valued based on a market credit spread over the rate payable on fixed-rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such assets by the market based on their credit relative to U.S. Treasuries. Changes in the general credit markets can lead to changes in the required yield on these assets, which would result in a higher or lower value for our loans and real estate securities. If the required market yields increase as a result of these general credit-market changes, the value of our fixed-rate assets would decline relative to U.S. Treasuries. Conversely, if the required market yields decrease as a result of these general credit-market changes, the value of our fixed-rate assets would increase relative to U.S. Treasuries. These changes in the market value of our fixed-rate asset portfolio may affect the equity on our balance sheet or our results of operations directly through provisions for losses on loans or through unrealized losses on available-for-sale securities. These value changes may also affect our ability to borrow and access capital.
 
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Furthermore, shifts in the U.S. Treasury yield curve, which represents the market’s expectations of future interest rates, would also affect the yield required on our fixed-rate assets. This would have similar effects on the fair value of our fixed-rate assets, our financial position and results of operations, as would a change in general credit spreads.
 
Tenant Credit Rating Exposure
 
Our loans and real estate securities are subject to risks due to credit rating changes of the tenants under the related net lease obligations. The credit quality of a particular net lease asset is highly dependent on the credit rating of the related tenant obligor of the net lease. Deterioration in the tenant’s credit rating can lead to changes in the required yield on the related asset, which would result in a lower value for our net lease assets. This would have similar effects on the fair value of our fixed-rate assets, our financial position and results of operations, as would a change in general credit spreads. In addition, precipitous declines in the credit rating of a particular tenant prior to our obtaining long-term financing may significantly impede or eliminate our ability to finance the asset. We manage this risk by maintaining diversity among our credits and assessing our aggregate exposure to ratings classes, in particular lower rated classes. We also seek to lock or procure long-term financing on our assets as promptly as practicable after we commit to invest.
 
Equity Price Risk Exposure
 
We may seek to raise capital by sale of our common stock. Our ability to do so is dependent upon the market price of our common stock and general market conditions.
 
Fair Value
 
For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated cash flows may be subjective and imprecise. Changes in assumptions or estimation methodologies can have a material affect on these estimated fair values. The fair values indicated below are indicative of the interest rate and credit spread environment as of March 31, 2006, and may not take into consideration the effects of subsequent interest rate, credit spread fluctuations, or changes in the ratings of the tenants under related net leases.
 
The following summarizes certain data regarding our interest rate sensitive instruments:

   
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
Carrying
 
Notional
 
Effective
 
 
 
 
 
   
Amount
  
Amount
  
Interest Rate  
  
Maturity Date
  
Fair Value
  
 
 
(dollars in thousands)
  
Assets:
                      
 Mortgage and other real estate loans held
                      
 for investment (1)
  
$
271,432
  
$
269,555
    
6.75
%
  
Various
  
$
271,627
  
 Securities available for sale - CMBS (2)
    
133,947
    
149,351
    
8.21
%
  
2009-2028
    
133,947
  
 Structuring fees receivable
    
3,714
    
N/A
    
7.98
%
  
2010-2020
    
3,714
  
 Derivative assets (3)
    
4,344
    
125,881
    
N/A
    
N/A
    
4,344
  
Liabilities
                                
 Repurchase agreement and other short-term
                                
 financing obligations (4)
    
192,495
    
192,495
    
5.64
%
  
Short-term
    
192,495
  
 Mortgage notes payable (5)
    
623,146
    
617,679
    
5.52
%
  
2013-2024
    
599,482
  
 Collateralized debt obligations (5)
    
268,164
    
268,500
    
5.67
%
  
2015
    
255,214
  
 Other long-term debt (6)
    
30,930
    
30,930
    
8.30
%
  
2016
    
29,532
  

 
34
_____________
(1)
With the exception of one loan, this portfolio of loans bears interest at fixed rates. We have estimated the fair value of this portfolio of loans based on sales of loans with similar credit and structural characteristics where available, and management’s estimate of fair values where comparable sales information is not available. The maturity dates for the loans range from 2006 through 2033.
(2)
Securities available for sale represent subordinate interests in securitizations (CMBS), as well as pass-through certificates representing our pro rata investments in a pool of mortgage loans. Structuring fees receivable represent cash flows receivable by us from the sale of loans to third-party purchasers. The notional values for the CMBS are shown at their respective face amounts. Fair value for the CMBS is based on third-party quotations, where obtainable, or our estimate of fair value, based on yields of comparably rated securities in the CMBS market. Fair value for the structuring fees receivable is shown at our amortized cost for these items. For the securities available for sale, we receive current monthly interest coupon payments, and contractual principal payments as scheduled.
(3)
These instruments represent hedging and risk management transactions involving interest rate swaps. They have been valued by reference to market quotations.
(4)
Our repurchase agreement and other short-term financing obligations bear interest at floating rates, and we believe that for similar financial instruments with comparable credit risks, the effective rates approximate market value. Accordingly, the carrying amounts outstanding are believed to approximate fair value.
(5)
We estimate the fair value of mortgage notes on real estate investments and collateralized debt obligations using a discounted cash flow analysis, based on our estimates of market interest rates. For mortgages where we have an early payment right, we also consider the prepayment amount to evaluate the fair value. The maturity date of the collateralized debt obligations reflects our expected maturity date in January 2015 and is used to compute the related fair value and weighted average effective interest rate.
(6)
We estimate the fair value of our other long-term debt using a discounted cash flow analysis, based upon management’s estimates of market interest rates. The maturity date of our other long-term debt reflects our expected maturity date in January 2016 and is used to compute the related fair value and weighted average effective interest rate.
 
Scheduled maturities of interest rate sensitive instruments as of March 31, 2006 are as follows:
 

   
 
 
 Expected Maturity Dates
 
 
 
 
 
2006
 
 2007
 
 2008
 
 2009
 
 2010
 
Thereafter
  
   
   (in thousands, notional amounts where appropriate,
  
   
  otherwise carrying amounts)
  
Mortgage and other real estate loans
  
$
12,854
  
$
11,405
  
$
5,842
  
$
8,989
  
$
11,242
  
$
219,223
  
Securities available for sale
    
938
    
1,321
    
1,435
    
24,522
    
1,626
    
119,509
  
Structuring fees receivable
    
461
    
659
    
713
    
772
    
768
    
341
  
Derivative assets
    
4,344
    
-
    
-
    
-
    
-
    
-
  
Mortgages on real estate investments
    
2,278
    
4,647
    
6,979
    
8,652
    
10,298
    
590,292
  
Repurchase agreement and other short-term
                                      
financing obligations
    
192,495
    
-
    
-
    
-
    
-
    
-
  
Collateralized debt obligations
    
(26
)
  
(36
)
  
(38
)
  
(41
)
  
22,792
    
245,513
  
Other long-term debt
    
-
    
-
    
-
    
-
    
-
    
30,930
  
 
Negative amounts shown with respect to our collateralized debt obligations represent amortization of original issue discount.
 
The expected maturity dates shown for loan investments, securities available for sale and structuring fees receivable are based on the contractual terms of the underlying assets. These assets, based on our current operating strategy, are held for investment. Our liabilities with respect to our repurchase agreement and other short-term financing obligations are short-term in nature and, accordingly, are listed in the current period. The material assumptions used to determine fair value are included in footnotes 1 through 6 in the immediately preceding table.
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
35
Pursuant to Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
 
Changes in Internal Controls
 
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.    OTHER INFORMATION
 
Item 1. Legal Proceedings
 
From time to time, we are involved in legal proceedings in the ordinary course of business. We do not believe any matter we are currently involved in will have a material adverse effect on our business, results of operations or financial condition.
 
Item 1A.    Risk Factors
 
The following risk factors amend and restate those risk factors with the same caption headings included in our Form 10-K for the year ended December 31, 2005.
 
We are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to certain tenants.
 
We are subject to the following tenant credit concentrations as of March 31, 2006:
 
·
approximately $195.2 million, or 14.6%, of our assets in portfolio involve properties leased to the United States Government;
 
·
approximately $92.9 million, or 7.0%, of our assets in portfolio involve properties leased to, or leases guaranteed by, TJX Companies, Inc.;
 
·
approximately $88.3 million, or 6.6%, of our assets in portfolio involve properties leased to, or leases guaranteed by, Lowe’s Companies Inc.;
 
·
approximately $83.1 million, or 6.2%, of our assets in portfolio involve properties leased to, or leases guaranteed by, Aon Corporation;
 
·
approximately $76.6 million, or 5.7%, of our assets in portfolio involve properties leased to, or leases guaranteed by, Tiffany & Co.;
 
·
approximately $69.4 million, or 5.2%, of our assets in portfolio involve properties leased to, or leases guaranteed by, AMVESCAP PLC; and
 
·
approximately $66.6 million, or 5.0%, of our assets in portfolio involve properties leased to, or leases guaranteed by, CVS Corporation.
 
Any bankruptcy, insolvency or failure to make rental payments by, or any adverse change in the financial condition of, one or more of these tenants or any other tenant to whom we may have a significant credit concentration in the future, could result in a material reduction of our cash flows or material losses to our company.
 
We are subject to tenant industry concentrations that make us more susceptible to adverse events with respect to certain industries.
 
We are subject to the following industry concentrations as of March 31, 2006:
 
36
 
·
approximately $178.2 million, or 13.3%, of our assets in portfolio involve properties leased to, or leases guaranteed by, companies in the insurance industry (e.g., Aon Corporation, Allstate Insurance Company, Farmers New World Life Insurance Company);
 
·
approximately $140.7 million, or 10.5%, of our assets in portfolio involve properties leased to, or leases guaranteed by, companies in the retail department stores industry (e.g., TJX Companies, Inc. and Kohl’s Corporation); and
 
·
approximately $105.2 million, or 7.9%, of our assets in portfolio involve properties leased to, or leases guaranteed by, companies in the retail home improvements industry (e.g., Lowe’s Companies, Inc. and Home Depot USA, Inc.); and
 
·
approximately $92.1 million, or 6.9%, of our assets in portfolio involve properties leased to, or leases guaranteed by, companies in the retail drug industry (e.g., CVS Corporation, Walgreen Co.).
 
Any downturn in one or more of these industries or in any other industry in which we may have a significant credit concentration in the future could have a material adverse effect on our cash flows and operating results.
 
We are subject to geographic concentrations that make us more susceptible to adverse events in these areas.
 
We are subject to the following geographic concentrations as of March 31, 2006:
 
·
approximately $187.8 million, or 14.1%, of our assets in portfolio are investments in properties located in the Chicago, Illinois metropolitan area;
 
·
approximately $179.5 million, or 13.4%, of our assets in portfolio are investments in properties located in the Washington, D.C. metropolitan area;
 
·
approximately $148.3 million, or 11.1%, of our assets in portfolio are investments in properties located in the New York City and Northern New Jersey area; and
 
·
approximately $111.1 million, or 8.3%, of our assets in portfolio are investments in properties located in the Philadelphia, Pennsylvania metropolitan area; and
 
·
approximately $67.6 million, or 5.0%, of our assets in portfolio are investments in properties located in the Southern California area.
 
An economic downturn or other adverse events or conditions such as terrorist attacks or natural disasters in one or more of these areas, or any other area where we may have a significant credit concentration in the future, could have a material adverse effect on our financial condition and operating results.
 
Our investments in assets backed by below investment grade credits have a greater risk of default.
 
We invest in net lease assets where the underlying tenant’s credit rating is below investment grade (approximately $110.4 million, or 8.3%, of our assets in portfolio as of March 31, 2006). These investments will have a greater risk of default and bankruptcy than investments on properties net leased exclusively to investment grade tenants.
 
Our investments in commercial mortgage-backed securities may be subordinated.
 
As of March 31, 2006, our CMBS investments included $56.9 million of below investment grade bond classes. Generally, these classes represent subordinate classes of the securitization pool, meaning that we hold the “first loss” position or a near “first loss” position in the event of losses on the assets within the pool. We may not be able to recover our investment in these subordinated CMBS classes. In addition, the value of these subordinated investments may be adversely affected by decreases in the value of the underlying collateral, increases in market rates for similar collateral pools or economic downturns, and we may be required under GAAP to record an impairment loss on our investment if any of these developments occur.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
37
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
None.
 
Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
 
a.
Exhibits
 
10.1
Agreement of Sale and Purchase of Partnership Interests, dated January 24, 2006, between Liberty Property Limited Partnership, Liberty Property Philadelphia Trust and Caplease, LP
10.2
Purchase and Sale Agreement, dated January 27, 2006, between Challenger South Monaco, L.L.C. and Caplease, LP
10.3
Promissory Note, dated March 10, 2006, of CLF Red Lion Road Philadelphia Business Trust in favor of Wachovia Bank, National Association
12.1
Computation of ratio of earnings to fixed charges and preferred stock dividends
31.1
Certification of the Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

38

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.
 
   
CAPITAL LEASE FUNDING, INC.
   
Registrant
     
Date: May 10, 2006
  
/s/ Paul H. McDowell
   
Paul H. McDowell
Chief Executive Officer
     
Date: May 10, 2006
  
/s/ Shawn P. Seale
   
Shawn P. Seale
Senior Vice President, Chief Financial Officer
and Treasurer
     

39

 EX-10 2 ex10-1.txt AGREEMENT OF SALE AND PURCHASE OF PARTNERSHIP INTERESTS BETWEEN LIBERTY PROPERTY LIMITED PARTNERSHIP & LIBERTY PROPERTY PHILADELPHIA TRUST (COLLECTIVELY, SELLER) AND CAPLEASE, LP (BUYER) PROPERTY: TJX/MARSHALL'S REGIONAL DISTRIBUTION FACILITY, 2760 RED LION ROAD, PHILADELPHIA, PENNSYLVANIA TABLE OF CONTENTS PAGE 1. AGREEMENT TO SELL AND PURCHASE.......................................2 2. PURCHASE PRICE.......................................................2 3. SETTLEMENT...........................................................3 4. CONDITION OF TITLE...................................................3 5. REPRESENTATIONS, WARRANTIES, COVENANTS AND INDEMNITIES...............4 6. CONDITIONS TO SETTLEMENT.............................................9 7. DUE DILIGENCE PERIOD................................................12 8. APPORTIONMENTS......................................................13 9. PARTNERSHIP TAX MATTERS.............................................14 10. CONDEMNATION........................................................15 11. DEFAULT BY BUYER....................................................15 12. DEFAULT BY SELLER...................................................16 13. RISK OF LOSS........................................................16 14. BROKERAGE...........................................................17 15. OPERATION OF THE PROPERTY PRIOR TO SETTLEMENT.......................17 16. NOTICE..............................................................19 17. NON-DISCLOSURE......................................................20 18. "AS IS" SALE AND RELEASE............................................20 19. LIMITATION OF LIABILITY.............................................21 20. LIKE KIND EXCHANGES.................................................22 21. MISCELLANEOUS.......................................................22 i AGREEMENT OF SALE AND PURCHASE OF PARTNERSHIP INTERESTS THIS AGREEMENT OF SALE AND PURCHASE OF PARTNERSHIP INTERESTS (this "Agreement") is made this __ day of January, 2006, between LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership ("LPLP"), and LIBERTY PROPERTY PHILADELPHIA TRUST, a Pennsylvania business trust ("LPPT"), each having an address at 500 Chesterfield Parkway, Malvern, PA 19355, (LPLP and LPPT are referred to herein collectively as "Seller") and CAPLEASE, LP, a Delaware limited partnership having an address at 110 Maiden Lane, 36th Floor, New York, New York 10005, ("Buyer"). This Agreement is to be effective as of the date this Agreement has been executed and delivered by the last party to sign, as evidenced by the dates next to the respective signatures of Buyer and Seller on the execution page(s) of this Agreement (the "Effective Date"). RECITALS: WHEREAS, Liberty Property Philadelphia Limited Partnership III (the "Partnership") is a Pennsylvania limited partnership governed by that certain Agreement of Limited Partnership dated May 30, 2000 (the "Existing Partnership Agreement"). WHEREAS, LPLP and LPPT are all of the existing partners of the Partnership, with LPPT owning a one percent (1%) general partnership interest, and LPLP owning a ninety-nine percent (99%) limited partnership interest (collectively, the "Partnership Interests"). WHEREAS, The Partnership owns all that certain lot, piece or parcel of land (the "Real Property"), together with the improvements located thereon (the "Improvements"), situated in Philadelphia, Pennsylvania and known as the TJX/Marshalls Regional Distribution Facility, 2760 Red Lion Road, Philadelphia, Pennsylvania 19114, said lot, piece or parcel being more particularly described on Exhibit "A" attached hereto and made a part hereof (the Real Property and the Improvements are collectively referred to as the "Property"). The Property also includes (i) the fixtures, machinery, equipment and systems which are located in the Improvements and owned by the Partnership (the parties acknowledge that the Tenant under the Lease (each defined below) owns the mezzanine portion of the building located on the Real Property as well as substantial trade fixtures, equipment and other personal property which are expressly excluded from this Agreement); (ii) all contracts and agreements relating to the management, operation, servicing and/or maintenance of the Property, if any, and any agreements with municipalities, as are listed on Exhibit "B-1" attached hereto (the "Surviving Agreements"); (iii) the Partnership's interest, as landlord, in that certain Lease Agreement dated June 1, 2000 between the Partnership, as landlord, and NBC Philadelphia Merchants, Inc., as tenant ("Tenant") as more fully described on Exhibit "C" attached hereto (the "Lease"); (iv) all certificates, licenses, permits, authorizations and approvals issued to the Partnership for or with respect to the Property by governmental and quasi-governmental authorities having jurisdiction, to the extent transferable; and (v) all appurtenances, easements and other rights and privileges in any way pertaining or beneficial to the Real Property or the Improvements. WHEREAS, Seller desires to withdraw from the Partnership and to transfer all of its Partnership Interests in the Partnership to Buyer on the terms and conditions hereinafter set forth. WHEREAS, the parties desire that at Settlement the Partnership engage an affiliate of Seller to serve as the facilities manager of the Property. NOW, THEREFORE, in consideration of the covenants and provisions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, subject to the terms and conditions of this Agreement, the Partnership Interests. Buyer shall have the right to designate an Affiliate to accept all or a portion of the Partnership Interests at Settlement. Seller shall assign the Partnership Interests to Buyer and Buyer's designee in the respective percentage interests designated by Buyer. As used herein, "Affiliate" shall mean a person or entity that controls, is controlled by, or is under common control with, Buyer. 2. PURCHASE PRICE. (a)The purchase price for the Property is Ninety Million One Hundred Twenty Five Thousand Dollars ($90,125,000.00) (the "Purchase Price"), payable as follows: (i)One Million Dollars ($1,000,000.00) (together with all interest thereon, the "Initial Deposit") by wire transfer or check payable to Lawyers Title Insurance Corporation, 140 E. 45th Street, New York, New York 10017, Attention: Debra L. Sollitto ("Escrow Agent"), which Buyer shall deliver to Escrow Agent at the time of Buyer's execution of this Agreement; in the event Buyer fails to deliver the Initial Deposit to Escrow Agent in accordance with the foregoing, this Agreement shall be void and of no force or effect. (ii)Two Million Dollars ($2,000,000.00) (together with all interest thereon, the "Additional Deposit") by wire transfer or check payable to Escrow Agent which Buyer shall deliver to Escrow Agent within one (1) business day following expiration of the Due Diligence Period (as defined below) provided Buyer does not elect to terminate this Agreement prior to the expiration of the Due Diligence Period. In the event Buyer fails to deliver the Additional Deposit to Escrow Agent in accordance with the foregoing, such failure shall constitute a default by Buyer hereunder, Seller shall be entitled to retain the Initial Deposit as liquidated damages as set forth below in this Agreement and there shall be no further obligation or liability on either of the parties hereto, except as specifically provided herein. (iii)The balance of the Purchase Price shall be paid to Seller at Settlement (as defined below) in cash by wire transfer of immediately available federal funds. (b)The Initial Deposit and the Additional Deposit, together with all interest earned thereon, shall collectively be referred to as the "Deposit". The Deposit shall be held in an interest bearing, federally insured account, by Escrow Agent in accordance with this Agreement pending consummation of this transaction. At the completion of Settlement, the Deposit shall be paid to Seller on account of the Purchase Price. Buyer's Federal Tax I.D. Number is 134196336; LPLP's Federal Tax I.D. Number is 23-2766549; LPPT's Federal Tax I.D. Number is 23-7949189. 2 (c)If there is a dispute between Seller and Buyer regarding whether the Deposit shall be returned to Buyer or delivered to Seller, Escrow Agent shall have no obligation to either Seller or Buyer except to interplead the proceeds into an appropriate court of competent jurisdiction. Escrow Agent may act upon any instrument or other writing believed by Escrow Agent in good faith to be genuine and to be signed and presented by the proper person. Escrow Agent shall not be liable in connection with the performance by Escrow Agent of its duties hereunder, except for Escrow Agent's own fraudulent misconduct or gross negligence. Seller and Buyer shall jointly and severally indemnify, defend and save harmless Escrow Agent from and against all loss, cost, claim, liability, damage and expense, including reasonable attorneys' fees and disbursements, incurred by Escrow Agent in connection with the performance of the Escrow Agent's duties hereunder, except with respect to actions or omissions taken or suffered by the Escrow Agent in bad faith, in violation of this Agreement, or otherwise involving gross negligence or willful misconduct on the part of Escrow Agent (the "Indemnified Matters") (but, as between Seller and Buyer, the cost of such Indemnified Matters shall be shared equally, except to the extent that such Indemnified Matters are attributable to the breach by Seller or Buyer of this Agreement, in which event the cost shall be borne by whichever of the Seller or Buyer is the breaching party). 3. SETTLEMENT. Settlement of the transaction contemplated hereunder ("Settlement") shall be held at 10:00 a.m. on February 28, 2006, or on such earlier date as Buyer and Seller may mutually agree (collectively, the "Settlement Date"), at the Philadelphia offices of Wolf, Block, Schorr and Solis-Cohen LLP, 1650 Arch Street, Philadelphia, Pennsylvania 19103. 4. CONDITION OF TITLE. (a)Buyer's obligation to close this transaction shall be conditioned upon title to the Property being good and marketable and free and clear of all liens and encumbrances, excepting only matters appearing of public record on the Effective Date, subject to subparagraph 4(b) below. Between the time period commencing on the Effective Date and ending on the earlier of Settlement or termination of this Agreement, Seller agrees that (i) it will take no voluntary action to convey any interest in the Property to anyone other than Buyer, and (ii) it will not enter into any document or agreement of record without Buyer's consent, in Buyer's reasonable discretion, provided, however, after the expiration of the Due Diligence Period, such consent may be withheld in Buyer's sole discretion. At the time of Settlement, Seller will cause the Property to be released or otherwise discharged from any lien, securing the payment of a sum certain, which Seller granted or created voluntarily. Additionally, Seller shall cause the following, to the extent encumbering the Property, to be released or bonded over (at Seller's election in a manner reasonably satisfactory to Buyer) on or before Settlement: (i) any mechanic's lien in favor of any contractor or materialman providing goods or services to the Partnership or Seller at the Property, and (ii) any judgment lien caused by Seller and encumbering the Property. (b)On or prior to the Effective Date, Buyer will order a title search to be performed with regard to the Property, and will cause a title insurance commitment to be issued by Lawyers Title Insurance Corporation (the "Title Company") with regard to the Property, at Buyer's expense. On or before fifteen (15) days after the Effective Date (the "Title Objection Date"), Buyer will give notice to Seller of the existence of any title defect, lien, or encumbrance which Buyer finds unacceptable (such matters being "Defects" and each being a "Defect"), together with a complete copy of the title commitment relating to the Property, including a copy of all plans and documents referred to therein, and a current ALTA land title survey relating to the Property (collectively the "Title Information"). Notwithstanding the foregoing sentence to the contrary, an ALTA land title survey shall not be required to be submitted as part of the Title Information unless Buyer raises one (1) or more Defects which reasonably will require such a survey to define, locate, or remedy such Defects. If, by the Title Objection Date, Buyer does not give notice to Seller of any Defects, at the time of Settlement Buyer agrees to accept title to the Property subject to all matters of public record on the Effective Date. If, by the Title Objection Date, Buyer gives notice to Seller of one or more Defects, Seller shall, within ten (10) days after receiving such notice, give notice to Buyer that Seller will or will not attempt to cure such Defects to Buyer's reasonable satisfaction. If Seller elects not to attempt to cure the Defects, Buyer shall be entitled, by giving notice to Seller within five (5) days after receiving such notice from Seller, to terminate this Agreement and have the Deposit returned to it. If Seller elects to attempt to cure the Defects, but at the time of Settlement the Defects have not been cured, Buyer's sole option shall be either to (i) terminate this Agreement and receive back the Deposit or (ii) complete Settlement and accept title to the Property subject to the uncured Defects, without an abatement of the Purchase Price. Seller may, at Seller's election, cause the "cure" of any Defect by causing the Title Company to provide an endorsement or other affirmative insurance over such Defect, at Seller's sole cost and expense. 3 5. REPRESENTATIONS, WARRANTIES, COVENANTS AND INDEMNITIES. (a)Seller, to induce Buyer to enter into this Agreement and to complete the sale and purchase of the Property hereunder, represents, warrants and covenants to Buyer as follows: (i)Property Matters: (A) To the best of Seller's knowledge, the current zoning classification of the Property is "L2 - Limited Industrial". (B) There are no management, employment, service, equipment, supply, maintenance, water, sewer, or other utility or concession agreements or agreements with municipalities (including improvement or development escrows or bonds) with respect to or affecting the Property except instruments of record, the Surviving Agreements, and those agreements, which relate to properties in addition to the Property and which Seller will terminate or cause to be terminated with respect to the Property as of Settlement, listed on Exhibit "B-2" attached hereto (the "Blanket Agreements"), provided that prior to Settlement Seller shall be entitled to enter into new contracts respecting the ordinary maintenance of the Property on commercially reasonable terms and such new contracts shall be deemed not to violate the representation and warranty set forth in this Section 5(a)(i)(B), as long as the obligations under such contracts are reimbursable by Tenant under the Lease. (C) There are no existing leases, whether oral or written, affecting the Property except the Lease. To the best of Seller's knowledge, the Lease is valid and subsisting and in full force and effect. Neither Seller nor the Partnership has sent, nor has Seller or the Partnership received, any written notice of a default under the Lease that remains uncured. To the best of Seller's knowledge, neither Seller nor Tenant is currently in material default under the Lease. 4 (D) To the best of Seller's knowledge, that certain Guarantee from The TJX Companies, Inc. in favor of Seller, dated June 1, 2000 (the "Guarantee") is valid and subsisting and in full force and effect. The Guarantee has not been amended, modified or terminated. Neither Seller nor the Partnership has sent, nor has Seller or the Partnership received, any written notice of a default under the Guarantee that remains uncured. To the best of Seller's knowledge, neither Seller nor the guarantor under the Guarantee is currently in material default under the Guarantee. (E) With respect to the Lease, Exhibit "C" lists the documents constituting the Lease, the leased square feet, the current minimum monthly rent, the current monthly operating expense reimbursement, the expiration date and any security deposit paid by the Tenant which has not heretofore been returned or applied in accordance with the Lease. (F) No brokerage or leasing commissions or other compensation is or will be due or payable to any person, firm, corporation or other entity with respect to or on account of the current term of the Lease. (G) Seller has received no written notice on behalf of the Partnership of any pending or threatened condemnation or similar proceeding affecting the Property or any portion thereof. (H) Neither Seller nor the Partnership has received any written notices of any special assessments for improvements from any governmental authority relating to the Property. (I) Tenant has a right of first offer to purchase the Property (the "Right of First Offer") pursuant to a letter agreement dated June 1 2000 between Seller and Tenant (listed as item 1.f. on Exhibit "D") (the "Letter Agreement"). To trigger Tenant's Right of First Offer, Seller provided written notice to Tenant of Seller's desire to sell the Property by letter dated October 10, 2005. Seller did not receive a response from Tenant respecting such Right of First Offer within the twenty (20) day period provided under the Letter Agreement. (J) To Seller's actual knowledge: (i) all areas in which sewage sludge was disposed on the Property during the period from 1979 through 1980 were excavated by agents of the City (the "Excavation") in accordance with all applicable legal requirements, including without limitation the Modification to Solid Waste Disposal and/or Processing Permit dated August 2, 2000 ("Modified Permit"); (ii) the City submitted documentation of the completion of the Excavation in accordance with Modified Permit to the Pennsylvania Department of Environmental Protection ("PADEP"); (iii) the City provided certification by a professional engineer of the completion of activities related to construction of a landfill on adjacent property as required by the Modified Permit to the PADEP; and (iv) the Excavation was monitored and completion of the Excavation in accordance with the Modified Permit was confirmed by Roy F. Weston, Inc. on behalf of the City and Powell - Harpstead, Inc. on behalf of the Seller. 5 (K) To Seller's actual knowledge, the depth and areal extent of the Excavation was determined based on the results of analysis of samples of soil taken prior to the Excavation and visual observations. (L) To Seller's actual knowledge, subsequent to the Excavation, no regulated substances, as that term is determined by the Pennsylvania Land Recycling and Environmental Remediation Standards Act, 25 P.S. ss. 6026.103 ("Act 2"), have been identified in soil on the Property at levels which exceed the relevant non-residential Act 2 remediation standard. (M) As of the Settlement, no construction warranties in connection with the construction of the Improvements are in effect other than that certain roof warranty identified as item 6.c. on Exhibit D attached hereto. (ii)LPLP is a duly existing limited partnership organized under the laws of the Commonwealth of Pennsylvania and has the power and authority to enter into this Agreement and to consummate the transactions herein contemplated. (iii)LPPT is a duly existing business trust organized under the laws of the Commonwealth of Pennsylvania and has the power and authority to enter into this Agreement and to consummate the transactions herein contemplated. (iv)Neither the execution and delivery of this Agreement, nor compliance with the terms and conditions of this Agreement by Seller, nor the consummation of the sale, constitutes or will constitute a violation or breach of the Existing Partnership Agreement, or the limited partnership agreement of LPLP, or the declaration of trust of LPPT, or of any agreement or judicial order to which Seller or the Partnership is a party or to which Seller or the Partnership is subject. (v)There are no proceedings pending or, to the best of Seller's knowledge, threatened by or against Seller or the Partnership in bankruptcy, insolvency or reorganization in any state or federal court. (vi)The Existing Partnership Agreement is in full force and effect, has not been modified, supplemented, amended or terminated and constitutes the sole agreement and understanding (written or oral) among the parties thereto with respect to the Partnership. A true and correct copy of the Existing Partnership Agreement has been delivered to Buyer. (vii)LPPT is, and on the date of Settlement will be, the only beneficial and legal owner of a general partnership interest in the Partnership, free and clear of all liens, security interests, pledges, assignments, claims, options, encumbrances, charges, commitments, and equitable interests or rights of others, of any kind whatsoever. (viii)LPLP is, and on the date of Settlement will be, the only beneficial and legal owner of a limited partnership interest in the Partnership, free and clear of all liens, security interests, pledges, assignments, claims, options, encumbrances, charges, commitments, and equitable interests or rights of others, of any kind whatsoever. 6 (ix)The Partnership has no assets other than its interest in the Property, and the Partnership has never owned any real property other than the Property; provided, however, that Buyer acknowledges that the Partnership was the ground subtenant of portions of the Property and certain additional property, pursuant to that certain Ground Sublease between Philadelphia Authority for Industrial Development, as sublandlord, and Seller, as subtenant, dated June 1, 2000, which Ground Sublease was terminated by that certain Termination of Ground Sublease and Memorandum of Termination dated May 17, 2005. (x)Except for the obligations accruing after the date hereof under any instrument of record, the Lease and the Surviving Agreements, to the Seller's actual knowledge, the Partnership has no liabilities, contingent or otherwise, and is not a party to any other contract. (xi)The Partnership has not conducted any business which is unrelated to its ownership of the Property. (xii)The Partnership is not delinquent in filing any tax returns which are required to have been filed by it. The Partnership has no outstanding liability for any Tax (as defined in Section 9), with the exception of taxes for the current tax year which are to be allocated between Seller and Buyer as set forth in Section 9. (xiii)The Partnership has no employees. (b)Seller hereby agrees to indemnify, defend and hold Buyer, its successors and assigns, and the Partnership harmless from and against any and all claims, demands, losses, damages, expenses and costs, including but not limited to reasonable attorney's fees and expenses actually incurred, arising out of: (i)any obligations of the Partnership, whether accruing prior to or after Settlement, under any contract entered into or assumed by the Partnership prior to Settlement, with the exception of any instrument of record, the Lease and the Surviving Agreements; (ii)any obligations of the Partnership accruing prior to Settlement under any instrument of record, the Lease and the Surviving Agreements; (iii)to the extent not fully covered by policies of insurance, any liability for personal injury, property damage or other damages owed to third parties as a result of the act or omission of the Partnership prior to Settlement (Buyer hereby agreeing not to settle or compromise any claim asserting such a liability without Seller's written consent, which consent shall not be unreasonably withheld); (iv)all fees of the Partnership's professionals (including, but not limited to, accountants and attorneys) which were incurred prior to Settlement; 7 (v)any loss, damage, liability, cost or expense (including diminution in value of the assets of the Partnership) resulting from the untruth in any material respect of any of the representations and warranties set forth in Sections 5(a)(ii) through 5(a)(xiii) (inclusive); (vi)any liability of the Partnership for federal, state or local taxes relating to any transaction or activity of the Partnership occurring prior to Settlement or relating to periods prior to Settlement; (c)Buyer, to induce Seller to enter into this Agreement and to complete the sale and purchase of the Property hereunder, represents, warrants and covenants to Seller as follows: (i)Neither the execution and delivery of this Agreement, nor compliance with the terms and conditions of this Agreement by Buyer, nor the consummation of the purchase, constitutes or will constitute a violation or breach of the Partnership Agreement of Buyer, or of any agreement or judicial order to which Buyer is a party or to which Buyer is subject. (ii)There are no proceedings pending or, to the best of Buyer's knowledge, threatened, by or against Buyer in bankruptcy, insolvency or reorganization in any state or federal court. (iii)Buyer is duly formed, validly existing and in good standing under the laws of the State of Delaware. Buyer has duly authorized, executed and delivered this Agreement. (iv)Seller has delivered to Buyer (or Buyer has otherwise received adequate access to) the items listed on Exhibit "D" and Seller agrees to deliver or provide reasonable access to such additional documents and materials respecting the Property as may be specifically requested in writing by Buyer, to the extent within Seller's possession or reasonable control (all of the foregoing are collectively referred to as "Seller's Materials"). Buyer shall keep Seller's Materials and all information obtained by Buyer as part of its due diligence review of the Property ("Buyer's Materials") confidential and, except as may otherwise be required by law, shall not share any of the foregoing with anyone other than Buyer's directors, officers, employees, outside counsel, accounting firm and other professional consultants (all of whom are collectively referred to as the "Related Parties") who, in Buyer's judgment, need to know such information for evaluating a possible purchase of the Property. The Related Parties shall be informed by Buyer of the confidential nature of the Seller's Materials and the Buyer's Materials and shall be directed by Buyer to keep same in the strictest confidence. Buyer shall be responsible for any breach of the obligations set forth in this subparagraph by Buyer or the Related Parties. 8 (d)The representations and warranties set forth in Sections 5(a)(i) and 5(c) shall survive Settlement for a period of six (6) months. The representations and warranties set forth in Sections 5(a)(ii) through 5(a)(xiii) (inclusive) and the indemnities set forth in Sections 5(b)(i), 5(b)(ii), 5(b)(iv) and 5(b)(v) shall survive Settlement for a period of three (3) years. The indemnities set forth in Sections 5(b)(iii) and 5(b)(vi) shall survive Settlement for a period equal to the applicable statute of limitations for such claims. For the purpose of this Agreement, the phrase "to the best of Seller's knowledge" and any phrase or words of similar import shall be deemed to mean the actual knowledge of Michael T. Hagan, Chief Investment Officer of LPPT ("Seller's Knowledge Individual") without having made inquiry or investigation beyond such individual's actual knowledge on the date that Seller executes this Agreement. Similarly, any reference to any written notice, claim, litigation, filing or other correspondence or transmittal to Seller set forth herein shall be limited to refer to only those actually received by or known to the Seller's Knowledge Individual in the limited manner provided above. (e)Buyer hereby expressly agrees that Seller shall have no liability to Buyer for a misrepresentation or breach of warranty hereunder, if: (A) Buyer does not provide to Seller written notice of a claim of misrepresentation or breach of warranty on or prior to the expiration of the respective time period set forth in Section 5(d) above; (B) Buyer had actual knowledge of the misrepresentation or breach of warranty prior to the consummation of Settlement; or (C) the aggregate amount of all claims by Buyer of misrepresentation or breach of warranty (other than such claims arising under Sections 5(a)(ii) through 5(a)(xiii) (inclusive) and the indemnity set forth in Section 5(b), which shall not be subject to any minimum claim amount) is less than $100,000.00; provided, however, that if such claims equal or exceed $100,000.00, in the aggregate, Buyer shall have the right to prosecute such claims in the full amount thereof, and not just in the amount by which such claims exceed $100,000.00. With respect to the representations and warranties set forth in Section 5(a)(i), the maximum aggregate liability of Seller on account of all breaches and defaults under all representations and warranties in Section 5(a)(i) of this Agreement shall not exceed $2,000,000.00. Buyer and Seller hereby agree that in the event that Seller discloses in writing to Buyer, or Buyer otherwise has actual knowledge of, at the time of or prior to Settlement, any fact, information or circumstance that renders any representation or warranty made by Seller in this Agreement untrue, incorrect or misleading in any material respect, Buyer's sole remedy shall be to elect, at or before the Settlement, either to: (i) waive its rights and claims hereunder with respect to such misrepresentation or breach of warranty, and proceed to Settlement in accordance with the terms of this Agreement, without any reduction in the Purchase Price, or (ii) terminate this Agreement, in which event the Deposit (to the extent paid by Buyer to the Escrow Agent) and any interest accrued thereon shall be returned to Buyer, Seller shall reimburse Buyer for all reasonable third-party out of pocket costs and expenses incurred by Buyer in connection with Buyer's due diligence investigations and the negotiation of this Agreement, not to exceed $25,000 in the aggregate (the "Buyer Costs"), and the parties shall have no further obligations hereunder except for the obligations hereunder which by their express terms are to survive the termination of this Agreement. (f) Seller hereby agrees to indemnify, defend and hold Buyer harmless from and against any action, claim, loss, cost or damage resulting from (i) the failure of Durable Surfaces, Inc. to properly undertake and complete the repair work to Column Lines H and N of the Premises (the "Repair Work") as described in the undated Third Amendment to the Lease executed by Seller, as landlord, and Tenant (the "Third Amendment"), or (ii) the failure of Landlord to pay for the cost of the corrective repairs as required under the Third Amendment. The indemnity contained in this Section 5(f) shall survive Settlement through August 31, 2007. 6. CONDITIONS TO SETTLEMENT. 9 (a) The obligation of Buyer under this Agreement to purchase the Property from Seller is subject to the satisfaction at Settlement of each of the following conditions (any one of which may be waived in whole or in part by Buyer at or prior to Settlement): (i) All of the representations and warranties by Seller set forth in this Agreement shall be true and correct at and as of Settlement in all material respects as though such representations and warranties were made at and as of Settlement, except for changes therein consented to by Buyer or deemed consented to by Buyer under the terms of this Agreement. (ii) Seller shall have performed, observed and complied with all material covenants, agreements and conditions required by this Agreement to be performed on its part prior to or as of Settlement. (iii) If Buyer has not terminated this Agreement on or before the expiration of the Due Diligence Period (defined below), Seller shall use reasonable efforts to deliver to Buyer, at or before Settlement, a duly executed original of a certificate from the Tenant under the Lease, substantially in the form attached hereto as Exhibit "E" (the "Tenant Estoppel Certificate"), and a duly executed original of a certificate from The TJX Companies, Inc. ("Guarantor"), the guarantor of the Lease, substantially in the form attached hereto as Exhibit "I" (the "Guarantor Estoppel Certificate" and collectively with the Tenant Estoppel Certificate, the "Estoppel Certificates"), each to be dated no earlier than the Effective Date of this Agreement. If, at or before Settlement, Seller has not delivered to Buyer the Tenant Estoppel Certificate, Buyer may waive such condition and complete Settlement in accordance with this Agreement or terminate this Agreement by delivering notice of such termination to Seller and in such event the Deposit shall be returned to Buyer, this Agreement thereupon shall become void and there shall be no further obligations or liability on either of the parties hereto, except as otherwise specifically provided herein. The parties acknowledge that Delivery of the Guarantor Estoppel is not a condition to Settlement. (iv) At Settlement, Seller shall have delivered to Buyer duly executed originals of the following: (A) A duly executed assignment of the Partnership Interests owned by Seller, substantially in the form of the Assignment and Assumption Agreement attached hereto as Exhibit "F" (the "Assignment and Assumption Agreement"). (B) A letter addressed to the Tenant under the Lease informing it of the new general partner of the Partnership and new rent payment address; (C) To the extent not previously made available to Buyer, originals of the following instruments (or copies if originals are unavailable): 1. the Lease; 2. the Guarantee; 3. the Tenant Estoppel Certificate; 10 4. if and to the extent obtained, the Guarantor Estoppel Certificate; and 5. the Surviving Agreements. (D) All keys and combinations to locks at the Property, to the extent in Seller's possession; (E) A Nonforeign Person Certification in the form attached hereto as Exhibit "G", as required under Section 1445 of the Internal Revenue Code; (F) An owner's affidavit as to mechanics' liens and possession in customary form reasonably acceptable to Seller and Buyer's title insurer; (G) A settlement statement in form and substance acceptable to the parties (the "Settlement Statement"); (H) A Facilities Management Agreement in the form of Exhibit "H" duly executed by Seller (or Seller's affiliate that will serve as manager of the Property) (the "Management Agreement"); and (I) The Amendment to Certificate of Limited Partnership (as defined in Section 21(a) below). (v) At or before Settlement, Seller shall have delivered a certificate from the Philadelphia Department of Licenses and Inspections dated not more than 30 days before the date of Settlement certifying the classification of the Property under the Philadelphia zoning code and identifying any outstanding uncured notices of code violations at the Property (the "L&I Certificate"). Notwithstanding the foregoing, Buyer acknowledges that it may take up to 30 days or more to obtain an L&I Certificate from the Philadelphia Department of Licenses and Inspections. Seller has either already ordered the L&I Certificate or will do so promptly after this Agreement is executed. If Seller delivers an L&I Certificate which, based on the date it was ordered, would comply with the foregoing, but because of any postponement or extension of the date of Settlement, such L&I Certificate becomes dated more than 30 days before Settlement, then Seller shall be deemed to have satisfied the condition set forth in this Section 6(a)(v). (vi) .At Settlement, neither Seller nor Tenant shall be in default under the Lease. If either Seller or Buyer becomes aware of any default under the Lease prior to Settlement, the party obtaining such knowledge shall promptly notify the other party thereof in writing (a "Lease Default Notice"). Notwithstanding the foregoing, if either party delivers a Lease Default Notice to the other party within ten (10) days prior to the scheduled date of Settlement, Seller shall have the right, but not the obligation, to extend the date of Settlement for up to ten (10) business days to attempt to resolve or cure the default in question. Unless all the foregoing conditions contained in this Section 6(a) are satisfied or waived within the time period specified, or if no time period is specified, prior to or at Settlement, Buyer may (i) extend the date of Settlement until such conditions are satisfied (not to exceed thirty [30] days), or (ii) terminate this Agreement and have the Deposit refunded to Buyer, or (iii) complete Settlement, in which event this Agreement shall be read as if such conditions no longer existed. 11 (b) The obligation of Seller under this Agreement to sell the Property to Buyer is subject to the satisfaction at Settlement of each of the following conditions (any one of which may be waived in whole or in part by Seller at or prior to Settlement): (i) All of the representations and warranties by Buyer set forth in this Agreement shall be true and correct at and as of the date of Settlement in all material respects as though such representations and warranties were made at and as of the date of Settlement, except for changes therein consented to by Seller or deemed consented to by Seller under the terms of this Agreement. (ii) Buyer shall have performed, observed and complied with all material covenants, agreements and conditions required by this Agreement to be performed on its part prior to or as of Settlement. (iii) At Settlement, Buyer shall have delivered to Seller duly executed originals of the following: (A) The Assignment and Assumption Agreement; (B) The Management Agreement; (C) The Settlement Statement; and (D) The Amendment to Certificate of Limited Partnership. Unless all the foregoing conditions contained in this Section 6(b) are satisfied or waived within the time period specified, or if no time period is specified, prior to or at Settlement, Seller may (i) extend the date of Settlement until such conditions are satisfied (not to exceed thirty [30] days), or (ii) terminate this Agreement and retain the Deposit as liquidated damages, or (iii) complete Settlement, in which event this Agreement shall be read as if such conditions no longer existed. 7. DUE DILIGENCE PERIOD. (a) Buyer shall have a period from the Effective Date through the date which is twenty (20) business days thereafter (the "Due Diligence Period") to conduct due diligence investigations and analysis of the Property and all information pertaining to the Property. If Buyer determines that it does not desire to acquire the Property and notifies Seller by 5:00 p.m. Eastern Standard Time or Eastern Daylight Time (as then currently applicable) on the last day of the Due Diligence Period of its election to terminate this Agreement, the Deposit shall be returned to Buyer, this Agreement thereupon shall become void and there shall be no further obligation or liability on either of the parties hereto, except as otherwise specifically provided herein, and Buyer promptly shall return to Seller, without retaining any copies thereof, all copies of the Lease, the Surviving Agreements and Seller's Materials (defined below) and shall deliver to Seller copies of all studies and reports relating to the Property obtained by Buyer. Buyer's failure to deliver notice to Seller of its election to terminate this Agreement prior to 5:00 p.m. EST/EDT on the last day of the Due Diligence Period shall obligate Buyer to complete Settlement under this Agreement. Buyer shall not communicate with the Tenant under the Lease with respect to this transaction, except with Seller's prior written consent and, at Seller's election, with Seller being present at the time of such communication. In the event of such consent, Buyer shall not disclose any of the terms and conditions of this transaction to such Tenant. 12 8. APPORTIONMENTS. (a) Minimum and additional rents from the Tenant under the Lease, the Surviving Agreements, operating expenses and other apportionable income and expenses paid or payable by Seller shall be apportioned pro rata on an actual basis as of the date of Settlement. Taxes, and additional rent paid on account thereof (to the extent not paid directly by Tenant to the taxing authority) shall be apportioned based on the fiscal year of the taxing authority. All utilities consumed at the Property are paid by the Tenant directly to the applicable utility provider and will not be apportioned at Settlement. Each party shall separately reconcile with the Tenant the amounts paid or payable on account of operating expenses incurred by such party during its period of ownership in accordance with the terms of the Lease. If the Tenant objects to reconciling separately with Seller for operating expenses for the calendar year in which Settlement occurs with respect to Seller's period of ownership, Buyer and Seller agree to cooperate in a combined year-end reconciliation with such Tenant in a manner reasonably acceptable to Buyer and Seller. Any amounts that may be due Seller as a result of such year-end reconciliations shall be paid by Buyer to Seller promptly after Buyer collects such amounts from the Tenant. Seller hereby agrees to indemnify Buyer for any refund owing to Tenant under the Lease for the period of Seller's ownership as a result of such year-end reconciliation or as a result of Tenant's audit and inspection rights under Section 7(a) of the Lease. If Settlement occurs on a day other than the first of the month, expenses for the month in which Settlement occurs shall be apportioned on a per diem bases. (b) All realty transfer taxes imposed on or in connection with this transaction shall be shared equally by Seller and Buyer, provided that Buyer's share of transfer taxes shall not exceed $883,209.50. (c) Buyer agrees that if at Settlement any rents, charges or other arrearages with respect to any period prior to Settlement are due and owing from the Tenant to the Partnership but are then unpaid (the "Arrearages"), Buyer will cooperate with Seller's efforts to collect such Arrearages. All payments received by Buyer after Settlement from the Tenant shall be applied first on account of current amounts due from Tenant and then to any Arrearages; provided, however, that if the Tenant identifies a payment as pertaining to an Arrearage, such payment shall be applied first on account of the identified Arrearage. Buyer further agrees to remit such collected Arrearages to Seller in a prompt and timely fashion. Any sums received by Seller from the Tenant for periods after Settlement shall be remitted by Seller to Buyer in a prompt and timely fashion. (d) The cost of the buyer's title commitment, title insurance, survey, and all other due diligence conducted by Buyer shall be borne by Buyer. Each party shall be responsible for its own attorney fees incurred in preparing and negotiating this Agreement and preparing for and completing Settlement. 13 (e) All casualty, liability and other insurance currently carried by the Partnership shall be terminated effective as of Settlement, and Buyer shall be responsible for obtaining such insurance for the Partnership as it deems necessary or desirable. (f) The provisions of this Article 8 shall survive Settlement under this Agreement. 9. PARTNERSHIP TAX MATTERS. (a) The parties intend to treat the purchase of the Partnership Interests as an event which causes the termination of the Partnership for federal income tax purposes pursuant to Section 708(b)(1)(B) of the Code and which causes a termination of the Partnership for state and local tax purposes to the extent permitted under applicable law. In connection with such termination, the Partnership will compute items of income, gain, deduction, loss and other relevant partnership items for federal income tax purposes by causing an interim closing of the Partnership's books in the manner described in Treas. Reg. ss. 1.706-1(c)(2)(ii). The Partnership will file (i) a federal income tax return for the short taxable year ending on the date of Settlement, reporting the items through the interim closing of the Partnership's books, and (ii) a federal income tax return for the short taxable year commencing after the date of Settlement and ending on the last day of the taxable year. (b) The interim closing of the Partnership's books and the filing of short taxable year returns will also be utilized, where permitted, for the allocation and reporting of income and the payment of Tax for state and local purposes. To the extent that such reporting methodology is not permitted under state or local law, the income or Tax allocable to Seller and Buyer shall be allocated in an equitable manner as close as possible to the federal income tax methodology, based upon the interim closing of the Partnership's books. (c) Seller shall prepare and timely file any and all federal, state and local tax reports and returns (the "Returns") of any nature whatsoever required to be filed for tax periods ending on or before the date of Settlement with respect to the Partnership. All Returns with respect to the Partnership for periods ending after the date of Settlement shall be prepared and timely filed by Buyer; provided, that when any such Return results in the allocation of income or Tax to Seller, Buyer shall provide Seller with a copy of the Return not less than thirty (30) days before the filing due date (including extensions) to allow Seller to review the Return and object to any part which is inconsistent with the methodology described in Sections 9(a) and 9(b) hereof. Buyer and Seller shall each cooperate with the other in the preparation of Returns. (d) Seller shall be liable to the Buyer for all Tax applicable to periods ending on or before the date of Settlement which are allocable to Buyer under this Section 9. (e) The Buyer shall diligently pursue any available refunds of Tax and pay to the Seller any and all such refunds of Tax received by the Partnership or the Buyer after Settlement, if such refunds are attributable to Tax paid by the Seller, or if paid on or prior to the Settlement, by the Partnership, and such Tax would be allocable to Seller under this Section 9. Such payment shall be made within fifteen (15) days after the receipt of any such refund. 14 (f) If any taxing authority makes a claim for Tax against the Partnership, proposes to change any determination or allocation of any income, gain, deduction, loss or other tax item, or gives notice of intent to audit with respect to any period in any tax year which includes the Settlement or is prior thereto, the party receiving such claim shall promptly notify the other party. The party responsible for filing the Return shall be responsible for handling any such audit and the defense of any claim for additional income or Tax. (g) In the event that Buyer or the Partnership is liable for any Tax hereunder, and makes reasonable requests for any books and records of the Partnership still in the possession of Seller, Seller shall cause such books and records to be made available within a reasonable time after any such request. (h) The cost of defending any claims for additional Tax by any taxing authority shall be prorated between Buyer and Seller based on the portion of Tax claimed, or which may be claimed, for which each party is liable. (i) "Tax" means any federal, state, county, provincial, local or foreign income, gross receipts, sales, use, ad valorem, employment, severance, transfer, gains, profits, excise, franchise, property, capital stock, premium, minimum and alternative minimum or other taxes, fees, levies, duties, assessments or charges of any kind or nature whatsoever imposed by any government, any governmental entity, department, commission, board, agency or instrumentality, and any court, tribunal or judicial body, in each case whether federal, state, county, provincial, local or foreign ("Governmental Authority"), whether such Tax is payable directly or by withholding, together with any interest, penalties (civil or criminal), additions to or additional amounts imposed by, any Governmental Authority with respect thereto. (j) This Article 9 shall survive Settlement. 10. CONDEMNATION. If prior to Settlement any condemnation proceeding or other proceeding in the nature of eminent domain in connection with the Property is commenced or any change is made, or proposed to be made, to the current means of ingress and egress to the Real Property or the Improvements or to the roads or driveways adjoining the Real Property or the Improvements, or to change such ingress or egress or to change the grade thereof, Seller agrees to notify Buyer thereof. Buyer then shall have the right, at Buyer's option, to terminate this Agreement by giving written notice to Seller within five (5) days after receipt of such notice. If Buyer does not so terminate this Agreement within such five (5) day period, Buyer shall proceed to Settlement hereunder as if no such proceeding had commenced and will pay Seller the full Purchase Price in accordance with this Agreement, whereupon Seller shall assign to Buyer all of its right, title and interest in and to any compensation for such condemnation, and Seller shall not negotiate or settle any claims for compensation prior to Settlement without Buyer's participation. 11. DEFAULT BY BUYER. If Buyer, without the right to do so and in default of its obligations hereunder, fails to complete Settlement, the Deposit shall be paid to Seller. Such payment of the Deposit to Seller shall be deemed to be liquidated damages for Buyer's default and the receipt of same shall be Seller's exclusive and sole remedy, and Seller hereby waives any right to recover the balance of the Purchase Price, or any part thereof, and the right to pursue any other remedy permitted at law or in equity against Buyer; provided, however, that the provisions of this Section 11 shall not limit Seller's recourse against Buyer with respect to Buyer's indemnifications of Seller relating to Seller's Materials, Buyer's Materials and Buyer's Access Rights (defined below) set forth in this Agreement and any obligation of Buyer under this Agreement that requires performance after Settlement. Buyer and Seller agree that the amount of Seller's actual damages upon a Buyer default will be difficult to calculate and that the liquidated damages set forth in this Section 11 represents the parties' reasonable estimate of such damages. 15 12. DEFAULT BY SELLER. If Seller, without the right to do so and in default of its obligations hereunder, fails to complete Settlement, Buyer, as its sole and exclusive remedy, may elect to (a) have the Deposit returned to Buyer, in which case Seller shall reimburse Buyer for the Buyer Costs, or (b) exercise the remedy of specific performance to cause Seller to convey the Partnership Interests to Buyer, as long as any action for specific performance is commenced within 30 days of such default. 13. RISK OF LOSS. (a) Seller shall bear the risk of all loss or damage to the Property from all causes until Settlement. Seller represents that it has, and will maintain pending Settlement, a policy of fire and extended coverage insurance in at least the full amount of the replacement cost of all buildings and improvements located on the Property. (b) If, prior to the Settlement Date, all or any portion of the Property is destroyed or damaged by fire or other casualty, Seller shall notify Buyer of such fact promptly after Seller obtains knowledge thereof. (c) If such a casualty at the Property is "Material" (as hereinafter defined), Buyer shall have the option to terminate this Agreement upon notice to Seller given not later than fifteen (15) days after receipt of Seller's notice, provided that if Seller's notice is delivered to Buyer within fifteen (15) days prior to Settlement, the Settlement Date shall be extended such that Buyer has the full fifteen (15) day period described above. If this Agreement is terminated, the Deposit shall be returned to Buyer and thereafter neither Seller nor Buyer shall have any further rights or obligations to the other hereunder except as are expressly stated to survive the termination of this Agreement. For purposes of this Section 13(c), with respect to a casualty, the term "Material" shall mean any casualty such that the cost of repair, as reasonably estimated by Buyer's engineer, is in excess of ten percent (10%) of the Purchase Price. (d) The parties acknowledge that the Tenant has the right to terminate the Lease if Seller, as landlord, notifies the Tenant within thirty (30) days after a casualty that repairs to the Premises are anticipated to take in excess of twelve (12) months to complete (the "Landlord's Notice"). Notwithstanding anything in this Article 13 to the contrary, if after the expiration of the Due Diligence Period any portion of the Property is damaged or destroyed by fire or other casualty and Seller anticipates that repairs to the Premises required by reason of such casualty will take more than twelve (12) months to complete, Seller will promptly notify Buyer of such and, if requested by Buyer in writing within two (2) days thereafter, Seller agrees to postpone delivering the Landlord's Notice to the Tenant until the date that is twenty-five (25) days after the occurrence of the casualty (the "Postponement Date"), and Buyer shall have the opportunity to proceed to Settlement in accordance with this Agreement prior to the Postponement Date. If Buyer does not complete Settlement on or before the Postponement Date, or if Buyer does not request that Seller postpone the delivery of Landlord's Notice within the aforementioned two (2) day period, then Seller may deliver the Landlord's Notice to the Tenant, whereupon the Settlement Date shall be extended until the date that is fifteen (15) days after the delivery of Landlord's Notice to the Tenant. If the Tenant terminates the Lease in response to Landlord's Notice, Buyer shall have the right to terminate this Agreement by delivering written notice to Seller within five (5) days thereafter, whereupon the Deposit shall be returned to Buyer and neither party shall have any further obligations hereunder except for those that expressly survive the termination of this Agreement. 16 (e) If this Agreement is not terminated in accordance with this Article 13, Seller shall not be obligated to repair any damage or destruction but (a) Seller shall assign and turn over to Buyer all of the insurance proceeds net of any costs of repairs and net of reasonable collection costs, in either case to the extent actually incurred or expended by Seller (or, if such have not been awarded, all of its right, title and interest therein) payable with respect to such fire or other casualty including any rent abatement insurance for such casualty and Buyer shall receive a credit at closing for the amount of any deductible under such policies of insurance, and (b) the parties shall proceed to Settlement pursuant to the terms hereof without abatement of the Purchase Price. Seller represents and warrants that Seller shall maintain or cause to be maintained insurance on the Property for the full replacement value of the Improvements thereon and shall, at Buyer's request, reasonably cooperate with Buyer with respect to the collection of such insurance proceeds if Buyer is entitled to receive such proceeds pursuant to this Agreement. 14. BROKERAGE. Buyer represents and warrants to Seller and Seller represents and warrants to Buyer that each dealt with no broker, agent, finder or other intermediary in connection with this sale and purchase other than CB Richard Ellis for whose commissions Seller shall be solely responsible (pursuant to a separate agreement with such broker) if and when Settlement takes place out of the proceeds thereof. Seller agrees to indemnify, defend and hold Buyer harmless from and against any broker's claim arising from any breach by Seller of Seller's representation and warranty in this paragraph. Buyer agrees to indemnify, defend and hold Seller harmless from and against any broker's claim arising from any breach by Buyer of Buyer's representation and warranty in this paragraph. The foregoing indemnification obligations of Seller and Buyer shall survive Settlement. 15. OPERATION OF THE PROPERTY PRIOR TO SETTLEMENT. Prior to Settlement: (a) The Property shall be operated, managed and maintained in its present condition, reasonable wear and tear excepted. (b) At reasonable times following reasonable notice, Buyer, its accountants, architects, attorneys, engineers, contractors and other representatives shall be afforded reasonable access to the Property to inspect, measure, appraise, test and make surveys of the Property (collectively, "Buyer's Access Rights"), provided, however, as follows: (i) Buyer shall be obligated to obtain Seller's prior approval for the performance of any invasive or intrusive environmental testing, such approval not to be unreasonably withheld or delayed if same is recommended by Buyer's environmental engineer and Buyer's written request to Seller therefor is accompanied by a summary of the proposed scope of work. (ii) Buyer shall not interfere unreasonably with the operation of the Property and shall coordinate all of Buyer's activities under this Section 15(b) with Seller to minimize possible interference with the Property or its operation. Buyer's rights under this Section 15(b) shall be subject to the rights of the Tenant under the Lease. (iii) Buyer shall restore any area on the Property disturbed in the course of Buyer's testing to the conditions existing prior to any tests conducted by Buyer. (iv) Buyer agrees to indemnify, defend, and hold Seller harmless from and against any claim made against Seller as a result of any entry upon the Property and any activities conducted thereon by Buyer or on behalf of Buyer. The foregoing indemnification obligation of Buyer shall survive Settlement and shall survive any termination of this Agreement. (c) Seller shall comply with all material obligations of landlord under the Lease and all other agreements and contractual arrangements affecting the Property by which Seller is bound. (d) Seller shall notify Buyer of Seller's receipt of any notice from any party alleging that Seller is in default of its obligations under the Lease or any permit or agreement affecting the Property, or any portion or portions thereof. (e) Except with the prior written consent of Buyer, which consent shall not be unreasonably withheld or delayed (and which shall be deemed granted in the event Buyer fails to approve or disapprove same within three (3) days after receipt of a request therefor), other than contracts for snow removal and landscaping on commercially reasonable terms, no contract for or on behalf of or affecting the Property shall be negotiated or entered into which cannot be terminated by Seller prior to Settlement without charge, cost, penalty or premium. (f) With respect to Lease Modification (defined below): (i) While this Agreement remains in full force and effect and prior to the expiration of the Due Diligence Period, except with the prior written approval of Buyer, in Buyer's reasonable discretion, Seller shall not enter into any new lease for the Property or any amendments, extensions, terminations, or assignments or subleases relating to the Lease (each a "Lease Modification"). If Seller submits a proposed Lease Modification to Buyer for its approval, Buyer shall have three (3) days from the date of its receipt of such proposed Lease Modification to grant or deny its approval by notice to Seller. If Buyer denies approval, Buyer shall state in the notice its grounds for denial. If Buyer does not deliver a notice to Seller within such three (3) day period, Buyer shall be deemed to have denied approval the Lease Modification as submitted. If Buyer denies (or is deemed to have denied) approval of any proposed Lease Modification, and Seller enters into such Lease Modification, Buyer may terminate this Agreement, in which event Buyer shall be entitled to a refund of the Deposit; 17 (ii) At the time of Settlement, with regard to any Lease Modification approved by Buyer, in addition to the Purchase Price, Buyer shall pay to Seller the brokerage commissions and tenant improvement costs incurred by Seller in connection with such approved Lease Modification and shall be responsible for paying any such commissions and costs that are outstanding as of Settlement as long as any such brokerage commissions and tenant improvement costs were disclosed to Buyer in connection with its approval of the Lease Modification. Any commission due as a result of an extension, renewal or expansion commencing after Settlement shall be Buyer's responsibility. (g) Notwithstanding anything herein to the contrary, from and after the expiration of the Due Diligence Period (and prior to Settlement or the earlier termination of this Agreement) Seller shall not enter into any Lease Modification, contract or other agreement respecting the Property without Buyer's prior approval, in Buyer's sole discretion. 16. NOTICE. All notices, requests and other communications under this Agreement shall be in writing and shall be delivered (a) in person, (b) by registered or certified mail, return receipt requested, (c) by recognized overnight delivery service providing positive tracking of items (for example, Federal Express), or (d) by facsimile provided a copy is sent concurrently by one of the methods described in (a), (b) or (c) above, addressed as follows or at such other address of which Seller or Buyer shall have given notice as herein provided: If intended for Seller: c/o Liberty Property Trust 500 Chesterfield Parkway Malvern, Pennsylvania 19355 Attn: Michael T. Hagan Fax No.: 610-644-4129 With a copy to: Liberty Property Trust 500 Chesterfield Parkway Malvern, Pennsylvania 19355 Attn: Anne E. Sheppard, Esquire Fax No.: 610-644-2175 With a copy to: Wolf, Block, Schorr and Solis-Cohen LLP 1650 Arch Street, 22nd Floor Philadelphia, Pennsylvania 19103 Attn: Herman C. Fala, Esquire Fax No.: 215-405-2976 18 If intended for Buyer: Caplease, LP 110 Maiden Lane, 36th Floor New York, New York 10005 Attn: Paul C. Hughes, Esquire Fax: 212-217-6301 with a copy to: Wolf, Block, Schorr and Solis-Cohen LLP 1650 Arch Street, 22nd Floor Philadelphia, Pennsylvania 19103 Attn: Helene S. Jaron, Esquire Fax No.: 215-405-2938 All such notices, requests and other communications shall be deemed to have been sufficiently given for all purposes hereof only upon receipt by the party to whom such notice is sent. Notices by the parties may be given on their behalf by their respective attorneys. 17. NON-DISCLOSURE. Neither party shall make public disclosure with respect to this transaction before the Settlement except: (a) as may be required by law, including without limitation disclosure required under securities laws, or by the Securities and Exchange Commission, or by the rules of any stock exchange, or in connection with any filing or registration made by Buyer or Seller, or their respective affiliates, as the issuer of publicly traded securities; (b) to such, attorneys, accountants, present or prospective sources of financing, partners, directors, officers, employees and representatives of either party or of such party's advisors who need to know such information for the purpose of evaluating and consummating the transaction, including the financing of the transaction; and (c) as may be permitted specifically by the terms of this Agreement. After the completion of Settlement, at the election of either party, the parties shall reasonably cooperate in the issuance of a joint press release for the purpose of publicly announcing the consummation of the transactions contemplated herein. 18. "AS IS" SALE AND RELEASE. (a) Buyer hereby represents and warrants to Seller that, except as otherwise expressly set forth in this Agreement, Buyer has not entered into this Agreement based upon any representation, warranty, statement or expression of opinion by Seller or any person or entity acting or allegedly acting for or on behalf of Seller with respect to Seller, the Property or the "Condition of the Property" (as hereinafter defined). Buyer acknowledges and agrees that, except for the covenants, representations and warranties of Seller expressly contained in this Agreement, the Property owned by the Partnership shall be assumed and accepted by Buyer at Settlement AS IS, WHERE IS, WITH ALL DEFECTS AND WITHOUT ANY WRITTEN OR ORAL REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED OR ARISING BY OPERATION OF LAW. Except as expressly otherwise provided in this Agreement, Seller makes no representation, warranty or covenant, express, implied or statutory, of any kind whatsoever with respect to the Property, including, without limitation, representation, warranty or covenant as to title, survey conditions, use of the Property for Buyer's intended use, the condition of the Property, past or present use, development, investment potential, tax ramifications or consequences, compliance with law, present or future zoning, the presence or absence of hazardous substances, the availability of utilities, access to public road, habitability, merchantability, fitness or suitability for any purpose, or any other matter with respect to the Property (collectively, the "Condition of the Property"), all of which are, except as otherwise expressly provided in this Agreement, hereby expressly disclaimed by Seller. Except as otherwise expressly provided in this Agreement, Buyer acknowledges that Seller has made no representation, warranty or covenant as to the Condition of the Property or compliance of the Property with any federal, state, municipal or local statutes, laws, rules, regulations or ordinances including, without limitation, those pertaining to construction, building and health codes, land use, zoning, hazardous substances or toxic wastes or substances, pollutants, contaminants, or other environmental matters. Buyer shall reconfirm the aforesaid acknowledgments in writing as of the Settlement. 19 (b) Buyer further represents and warrants that Buyer has knowledge and expertise in financial and business matters that enable Buyer to evaluate the merits and risks of the transaction contemplated by this Agreement and that Buyer is not in any disparate bargaining position. Buyer acknowledges and agrees that it has been given or will be given before the end of the Due Diligence Period, full opportunity to inspect and investigate each and every aspect of the Property, either independently or through agents of Buyer's choosing, including, without, limitation the Condition of the Property. (c) Without limiting the above, Buyer on behalf of itself and its successors and assigns waives any rights to recover from, and forever releases and discharges, Seller, Seller's affiliates, partners, the shareholders, directors, officers, employees and agents of Seller the Partnership and Liberty Property Trust (an affiliate of Seller), and their respective heirs, successors, personal representatives and assigns (collectively, the "Seller Related Parties"), from any and all demands, claims, legal or administrative proceedings, losses, liabilities, damages, penalties, fines, liens, judgments, costs or expenses whatsoever (including, without limitation, attorneys' fees and costs), whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Resources Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901, et seq.), the Clean Water Act (33 U.S.C. Section 1251, et seq.), the Safe Drinking Water Act (14 U.S.C. Section 1801, et seq.), and the Toxic Substance Control Act (15 U.S.C. Section 2601, et seq.), and any similar environmental state or local statutes, regulations, rules or requirements. (d) The provisions of this Section 18 shall survive Settlement and the delivery of the Assignment and Assumption Agreement or any expiration or termination of this Agreement without limitation as to time. 19. LIMITATION OF LIABILITY. Neither the holders of beneficial interests nor the trustees, officers, employees or agents of Seller or of any affiliate of Seller, shall be liable under this Agreement and all parties hereto shall look solely to the Seller's assets for the payment of any claim or for the performance of any obligation of the Seller. 20 20. LIKE KIND EXCHANGES. Buyer or Seller may elect to exchange the Property for other real estate of a like kind in accordance with Section 1031 of the Internal Revenue Code of 1986 as amended (the "Code"). To the extent possible, the provisions of this Section 20 shall be interpreted consistently with this intent. To exercise any rights under this Section 20, the party electing to exchange the Property shall provide the other with a written statement stating its intent to enter into an exchange at least five days prior to Settlement. Either party's election to exchange, rather than sell or buy, the Property for other real estate of a like kind shall be at no cost or liability to the other. Should this Agreement become part of a 1031 transaction, the party electing to exchange the Property (the "Exchanger") hereby agrees that the other party may enforce any and all representations, warranties, covenants and other obligations of the Exchanger under this Agreement directly against Exchanger, and the other party agrees that Exchanger may enforce any and all representations, warranties, covenants and other obligations of the other party under this Agreement directly against the other party. 21. MISCELLANEOUS. (a) On the Settlement, Buyer shall cause to be filed with the Secretary of the Commonwealth of Pennsylvania an amendment to the Certificate of Limited Partnership of the Partnership (the "Amendment to Certificate of Limited Partnership") identifying the new general partner of the Partnership and changing the name of the Partnership to a name selected by Buyer, provided such name does not include the words "Liberty Property" or derivations thereof. At no time following Settlement shall Buyer use the words "Liberty Property" or derivations thereof in connection with the Partnership or any certificates, agreements or other materials related thereto. This Section 21(a) shall survive Settlement. (b) Except as otherwise specifically provided in this Agreement, all representations and warranties contained in this Agreement shall terminate at Settlement. (c) All times specified in this Agreement shall be of the essence of this Agreement. If any date herein set forth for the performance of any obligations by Seller or Buyer or for the delivery of any instrument or notice as herein provided should be on a Saturday, Sunday or legal holiday, the compliance with such obligations or delivery shall be deemed acceptable on the next business day following such Saturday, Sunday or legal holiday. As used herein, the term "legal holiday" means any state or federal holiday on which financial institutions or post offices are generally closed in the state in which the Property is located. (d) The captions in this Agreement are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Agreement or any of the provisions hereof. (e) Formal tender at the time of Settlement of an executed Assignment and Assumption Agreement by Seller and the balance of the Purchase Price by Buyer are hereby mutually waived, but nothing herein contained shall be construed as to relieve Seller from the obligation to deliver the Assignment and Assumption Agreement or to relieve Buyer from the concurrent obligation to pay the Purchase Price in accordance with the terms hereof. 21 (f) Other than to an Affiliate (as defined in Section 1), or in accordance with Section 20 above, Buyer shall have no right to assign this Agreement without the prior written consent of Seller. (g) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and, to the extent herein permitted, assigns. (h) This Agreement, including the exhibits attached hereto, contains the whole agreement as to the Property between Seller and Buyer and there are no other terms, obligations, covenants, representations, statements or conditions, oral or otherwise of any kind whatsoever concerning this sale and purchase. This Agreement shall not be altered, amended, changed or modified except in writing executed by the parties hereto. (i) This Agreement shall be construed in accordance with the laws of the Commonwealth of Pennsylvania. (j) This Agreement may not be recorded in the Office for Recording of Deeds or in any other office or place of public record without Seller's prior consent. (k) Both parties to this Agreement having participated fully and equally in the negotiation and preparation hereof, this Agreement shall not be more strictly construed, or any ambiguities within this Agreement resolved, against either party hereto. (l) This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but which together shall constitute one original Agreement. 22 IN WITNESS WHEREOF, intending to be legally bound, the parties have caused this Agreement to be duly executed, under seal, as of the day and year first written above. SELLER: GENERAL PARTNER: --------------- Date: 1/23/06 LIBERTY PROPERTY PHILADELPHIA TRUST By: /s/ Michael T. Hagan ---------------------------------- Name: Michael T. Hagan Title: Chief Investment Officer By: /s/ William P. Hankowsky ---------------------------------- Name: William P. Hankowsy Title: Chief Executive Officer LIMITED PARTNER: --------------- Date: 1/23/06 LIBERTY PROPERTY LIMITED PARTNERSHIP By: Liberty Property Trust, its General Partner By: /s/ Michael T. Hagan ---------------------------------- Name: Michael T. Hagan Title: Chief Investment Officer By: /s/ William P. Hankowsky ---------------------------------- Name: William P. Hankowsky Title: Chief Executive Officer (Signatures continued on next page) 23 BUYER: Date: 1/24/06 CAPLEASE, LP, a Delaware limited partnership By: CLF OP General Partner LLC, a Delaware limited liability company, its general partner By: Capital Lease Funding, Inc, a Maryland corporation, its sole member By: /s/ Robert C. Blanz ------------------------------ Name: Robert Blanz Title: Senior Vice President Attest: /s/ Paul C. Hughes --------------------------------------------- Name: Paul C. Hughes Title: Vice President, General Counsel and Corporate Secretary [Corporate Seal] 24 Escrow Agent hereby joins in the execution of this Agreement for the purposes of acknowledging receipt of the Deposit and agreeing to hold such Deposit in accordance with the terms of this Agreement. LAWYERS TITLE INSURANCE CORPORATION By: /s/ Chris S. Feder ------------------------------- Name: Chris S. Feder Title: Vice President 25 EX-10 3 ex10-2.txt ================================================================================ PURCHASE AND SALE AGREEMENT by and between CHALLENGER SOUTH MONACO, L.L.C., a Delaware limited liability company, as Seller and CAPLEASE, LP, a Delaware limited partnership Invesco Funds Corporate Campus 4340/4350/4346 South Monaco Street Denver, Colorado January 27, 2006 ================================================================================ PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "AGREEMENT") is made and entered into as of January 27, 2006 by and between CHALLENGER SOUTH MONACO, L.L.C., a Delaware limited liability company ("SELLER") and CAPLEASE, LP, a Delaware limited partnership ("PURCHASER"). WHEREAS, Seller is the owner of the real estate and related assets hereinafter described; and WHEREAS, Seller desires to sell, and Purchaser desires to buy, the real estate and related assets hereinafter described, at the price and on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of the recitals, the mutual covenants hereafter set forth, and other good and valuable considerations, the receipt and sufficiency of which are mutually acknowledged, it is agreed by and between the parties as follows: 1. Defined Terms. Capitalized terms used in this Agreement shall have the meanings ascribed to them in the Glossary of Defined Terms attached hereto as Exhibit A. 2. Sale and Conveyance; Survey. (a) Seller agrees to sell and convey the Property to Purchaser, and Purchaser agrees to buy the Property from Seller, at the price and upon the other terms and conditions hereinafter set forth. (b) The Personal Property, if any, shall be conveyed to Purchaser by the Bill of Sale. (c) Pursuant to the Assignment of Lease, the Service Contracts, the IFG Lease and the Intangible Personal Property shall be assigned by Seller to Purchaser, and Purchaser shall assume (i) those obligations of Seller under the Service Contracts (if any) which relate to periods from and after Closing and which Purchaser has elected to assume, and (ii) any of Seller's monetary obligations under the Service Contracts which relate to periods prior to Closing to the extent Purchaser receives a credit therefor at Closing. (d) Seller has heretofore delivered to Purchaser a survey of the Real Property, prepared by Flatirons Surveying, Inc., dated November 26, 2002 (the "SURVEY"). Prior to the Closing Purchaser, at its expense, may obtain an updated version of the Survey. (e) The Property is currently encumbered by that certain loan (the "LOAN") in the original principal amount of $39,000,000 payable to the order of Prudential Mortgage Capital Company, LLC, together with its successors and assigns (collectively, "LENDER") secured by a first lien against the Property. 1 3. Purchase Price; Earnest Money. The purchase price for the Property shall be the Purchase Price, payable by Purchaser to Seller as follows: (a) Concurrently with the execution of this Agreement, Purchaser shall deposit into a strict joint order escrow trust established with the Title Company, as earnest money hereunder, the cash sum of One Million Dollars ($1,000,000.00) (the "INITIAL EARNEST MONEY DEPOSIT"). (b) If Purchaser does not timely exercise its right to terminate this Agreement prior to the expiration of the Inspection Period in accordance with Section 9(f), Purchaser shall, on or before the last day of the Inspection Period, deposit into the escrow trust established with the Title Company as set forth above the additional cash sum of Two Million Dollars ($2,000,000) (the "SECOND EARNEST MONEY DEPOSIT"; the Initial Earnest Money Deposit and the Second Earnest Money Deposit, or so much thereof as has been deposited by Purchaser from time to time, collectively constitute the "EARNEST MONEY"). The Earnest Money shall at all times prior to the Closing be invested in United States treasury obligations or such other interest bearing accounts or securities as are approved by Purchaser and Seller in writing; all interest earned on the Earnest Money shall be deemed to constitute part of the Earnest Money, and shall be administered and paid in the same manner as the Earnest Money. At the Closing, Purchaser shall receive a credit against the Purchase Price for the Earnest Money. Time is of the essence for the delivery of the Earnest Money under this Agreement. (c) Each of Seller and Purchaser agree to direct the Title Company, as escrowee, to administer and pay the Earnest Money in accordance with the terms and provisions of this Agreement. (d) The Purchase Price, less a credit for the Earnest Money, and plus or minus prorations and adjustments as set forth in Section 16 hereof, shall be paid by Purchaser (or caused by Purchaser to be released by the Title Company) to Seller by wire transfer of immediately available federal funds prior to 12:00 p.m. Eastern Time on the Closing Date. (e) Purchaser shall deliver the Purchase Price, as adjusted pursuant to Section 3(d) above, to the Title Company at least one (1) business day prior to the Closing Date, time being of the essence. Purchaser acknowledges that timely delivery of the Purchase Price to the Title Company by Purchaser as set forth herein is required in order to purchase the Defeasance Collateral (as defined in the Debt Documents), and that in the event Purchaser does not timely deliver the sums required hereunder Seller may terminate this Agreement and declare this Agreement to be of no further force or effect (except to the extent that any right, obligation or liability set forth herein expressly survives termination of this Agreement), and in which event the Earnest Money shall promptly be paid to Seller and Seller shall have no liability to Purchaser hereunder by reason thereof. 4. Seller's Representations, Warranties and Covenants. As a material inducement to Purchaser to execute this Agreement and consummate this transaction, Seller hereby represents and warrants to Purchaser, and covenants with Purchaser, as follows: 2 (a) Organization and Authority. Seller has been duly organized and is validly existing as a Delaware limited liability company. Seller has the full right and authority, and has obtained all necessary consents required, to enter into this Agreement, consummate or cause to be consummated the sale of the Property and make or cause to be made the conveyances, transfers and assignments contemplated herein. Seller is duly qualified to do business in the State of Colorado to the extent such qualification is required under Colorado law. The persons signing this Agreement on behalf of Seller are authorized to do so. This Agreement and all of the documents to be delivered by Seller at the Closing have been or will be duly authorized and properly executed and constitute or will constitute the valid and binding obligations of Seller, enforceable against Seller in accordance with their terms. (b) Conflicts. There is no agreement to which Seller is a party or, to Seller's Knowledge, binding on Seller or the Property which is in conflict with this Agreement or which would limit or restrict the timely performance by Seller of its obligations pursuant to this Agreement, other than the DTC ROFO and the Debt Documents. (c) Documents and Records. Seller has provided (or shall provide within three (3) business days following the date hereof) Purchaser with, or has made available to Purchaser, true, correct and complete copies of the items scheduled in Exhibit C attached hereto which are in Seller's possession or control (all of the foregoing collectively the "PROPERTY INFORMATION"); provided, however, that with respect to any operating statements or other financial statements prepared by or for Seller, Seller warrants that the statements delivered to Purchaser are the statements prepared by or for Seller in the ordinary course of business, but does not warrant the accuracy of the contents of any such statements. Notwithstanding the foregoing, Seller shall use commercially reasonable efforts to provide to Purchaser copies of any additional items reasonably requested by Purchaser promptly following such request; provided, that such requests shall relate solely to the Property (as distinguished from Seller's internal or structuring matters), and that in no event shall Seller be required to provide any appraisals or financial projections. (d) Litigation. To Seller's Knowledge, there is no action, suit or proceeding pending which (i) if adversely determined, would materially and adversely affect the Property, or (ii) which challenges or impairs Seller's ability to execute, deliver or perform this Agreement or consummate the transaction contemplated hereby. (e) Lease. Exhibit D sets forth, for the IFG Lease, (i) the name of the tenant thereunder, (ii) the number of rentable square feet demised by such Lease, and (iii) the expiration date of the initial term of such Lease (or if such Lease has previously been renewed or extended, the present renewal or extension term). Except as scheduled in Exhibit D, and except for the MDC Sublease (as hereinafter defined) to which Seller is not a party, (w) there are no leases (written or oral) affecting the Property or any part thereof, (x) Seller has not given IFG a written notice of default which has not been remedied or cured to the satisfaction of Seller, (y) Seller has not received a written notice of default from IFG which has not been remedied or cured to the satisfaction of such tenant, and (z) to Seller's Knowledge as of the date of this Agreement, the IFG Lease is in full force and effect, and no default now exists thereunder. The IFG Lease is with a tenant in possession (or with a right to possession, it being acknowledged by Purchaser that IFG has entered into a sublease with M.D.C. Holdings, Inc. with respect to one of the buildings comprising the Improvements, and Seller has consented to such sublease (the "MDC SUBLEASE")) of the demised premises, and (together with the landlord's consent to sublease set forth on Exhibit D) sets forth the entire agreement between the landlord and tenant under the IFG Lease. 3 (f) Service Contracts; Management Agreement. As set forth on Exhibit E, there are no Service Contracts presently outstanding with respect to the Property entered into by Seller. Seller is not a party to the Management Agreement; Purchaser acknowledges that Property Manager currently manages the Property pursuant to the Management Agreement between IFG and Property Manager, and that Property Manager takes direction from IFG with respect to the management of the Property pursuant to the terms of the Management Agreement, a copy of which has been provided to Purchaser. The terms of the Management Agreement and IFG's direction to Property Manager may conflict with the terms of Section 9 of this Agreement, and Purchaser acknowledges that Property Manager is not bound by the terms of such section or any other provision of this Agreement. (g) Notice of Violations. Seller has received no written notice that either the Property or the use thereof violates any laws, rules and regulations of any federal, state, city or county government or any agency, body, or subdivision thereof having any jurisdiction over the Property that have not been resolved to the satisfaction of the issuer of the notice. To Seller's Knowledge, neither the Property nor the use thereof violates any laws, rules and regulations of any federal, state, city or county government or any agency, body, or subdivision thereof having any jurisdiction over the Property in any material respect. (h) Withholding Obligation. The sole member of Seller is not a "foreign person" within the meaning of Section 1445 of the Internal Revenue Code. (i) Condemnation. To Seller's Knowledge, there are no pending or threatened condemnation or similar proceedings affecting the Property or any part thereof. (j) Leasing Brokerage Agreements/Tenant Improvements. Except as set forth in the IFG Lease or in Exhibit D, Seller has not entered into any leasing brokerage agreements or leasing commission agreements respecting leasing activities at the Property. Seller has paid all tenant improvement and other construction costs required to be paid by the landlord under the IFG Lease. Any potential liability of Seller under the foregoing sentence regarding tenant improvement and construction costs shall be released by Purchaser at Closing to the extent such costs are confirmed by the Tenant Estoppel. 4 (k) Bankruptcy. Seller (i) has not admitted in writing its inability to pay its debts as they mature, and (ii) has not been adjudicated a bankrupt or filed a petition in voluntary bankruptcy or a petition or answer seeking reorganization or an arrangement with creditors under the Federal bankruptcy laws or any similar law or statute of the United States or any state and no such petition has been filed against Seller. (l) Covenants. Seller covenants and agrees that during the Contract Period: (1) Seller will timely pay and perform its obligations under the IFG Lease and the Service Contracts to be assumed by Purchaser pursuant hereto. (2) Seller shall provide Purchaser with prompt notice and copies of all new leases, lease amendments and lease extensions ("NEW LEASES") and lease terminations occurring during the Contract Period. Seller shall solicit input from Purchaser regarding, and keep Purchaser informed of the status of, proposed New Leases, and will provide Purchaser with copies of drafts, proposals, letters of intent and other similar documentation pertaining to such proposed New Leases. Prior to the expiration of the Inspection Period or the earlier termination of this Agreement, Seller shall not enter into any New Leases or lease terminations without obtaining Purchaser's prior written consent, which shall not be unreasonably conditioned, delayed or withheld and shall be deemed given if Purchaser does not reject the same within five (5) business days after notice thereof from Seller. Following the expiration of the Inspection Period and prior to the Closing or the earlier termination of this Agreement, Seller shall not enter into any New Leases or lease terminations without obtaining Purchaser's prior written consent, which consent may be withheld in Purchaser's sole discretion, but which shall be deemed given if Purchaser does not reject the same within five (5) business days after notice thereof from Seller. In no event shall this covenant be construed to limit the ability of IFG under the IFG Lease to enter into any proposed subleases, nor shall it be construed to require that Seller disapprove of any such proposed sublease or otherwise take or omit to take any action in connection with any such proposed sublease, but prior written notice of any of the foregoing shall be given to Purchaser to the extent known to Seller. (3) From and after the date hereof, Seller will not enter into any contract (other than New Leases and lease terminations as provided in the foregoing subsection (2)) that will be an obligation affecting the Property subsequent to the Closing Date except contracts entered into in the ordinary course of business that are terminable without cause and without payment of a penalty on not more than 30-days' notice. 5 (4) Seller will not remove any Personal Property from the Real Property except as may be required for necessary repair or replacement, and in the event of such replacement, the replacement shall be of equal or better quality and quantity as existed as of the time of its removal. (5) Seller will continue to operate and maintain the Property in accordance with past practices and will not make any material alterations or changes thereto; provided, however, that notwithstanding past practices Seller shall not be required to make any capital expenditures in maintaining and operating the Property except as otherwise expressly provided in this Agreement. (6) Seller will maintain (or will use reasonable efforts to cause IFG to maintain) all-risk casualty insurance of a level and type consistent with the insurance maintained by Seller or IFG prior to the execution of this Agreement in force with respect to the Property in an amount equal to the full replacement cost of the Property. (7) Within five (5) business days after the date of this Agreement, Seller will send a Tenant Estoppel to IFG and will use commercially reasonable efforts to obtain and deliver an executed Tenant Estoppel to Purchaser at least five (5) business days prior to Closing from IFG. In the event that the Tenant Estoppel delivered to Purchaser shall contain any statement of fact, information or other matter which is inconsistent with the matters stated in Seller's representations in this Section 4, the Tenant Estoppel shall control and Seller shall have no liability for any claim based upon a breach of representation regarding such statement of fact, information or other matter contained in the Tenant Estoppel. (8)(A) Purchaser may, at its option, prepare and submit to Seller and Seller's counsel for their review and approval a form of guarantor estoppel which Purchaser proposes to be executed by AMVESCAP, PLC, as guarantor under the IFG Lease (the "GUARANTOR ESTOPPEL"). If Seller fails to deliver any comments to such form within three (3) business days following receipt, such form will be deemed approved by Seller and its counsel. Within five (5) business days after the date of the approval, or deemed approval, of the Guarantor Estoppel, Seller shall send such Guarantor Estoppel to IFG and/or AMVESCAP, PLC and will use commercially reasonable efforts to obtain and deliver an executed Guarantor Estoppel to Purchaser at least five (5) business days prior to Closing from AMVESCAP, PLC. Purchaser acknowledges and agrees that execution and delivery of the Guarantor Estoppel by AMVESCAP, PLC, and Purchaser's receipt of same, shall not under any circumstances constitute a condition to Purchaser's obligations under this Agreement, and that the failure to obtain the Guarantor Estoppel shall not constitute a default by Seller under this Agreement. Purchaser further agrees that it will accept any Guarantor Estoppel without regard to any qualifications, deletions or modifications thereto made by AMVESCAP, PLC, and that no such qualifications, deletions or modifications shall entitle Purchaser to terminate this Agreement. 6 (B) Purchaser may, at its option, prepare and submit to Seller and Seller's counsel for their review and approval one or more forms of estoppel certificates which Purchaser proposes to be executed by third parties with respect to any reciprocal easement agreement or like instrument appearing on the Title Report (the "REA ESTOPPELS"). If Seller fails to deliver any comments to such form(s) within three (3) business days following receipt, such form will be deemed approved by Seller and its counsel. Within five (5) business days after the date of the approval, or deemed approval, of the REA Estoppels, Seller shall send such REA Estoppel to the party from which such REA Estoppel is requested and will use commercially reasonable efforts to obtain and deliver an executed REA Estoppel to Purchaser at least five (5) business days prior to Closing. Purchaser acknowledges and agrees that execution and delivery of any REA Estoppels, and Purchaser's receipt of same, shall not under any circumstances constitute a condition to Purchaser's obligations under this Agreement, and that the failure to obtain any requested REA Estoppels shall not constitute a default by Seller under this Agreement. Purchaser further agrees that it will accept any REA Estoppels without regard to any qualifications, deletions or modifications thereto made by the party from which such REA Estoppel is requested, and that no such qualifications, deletions or modifications shall entitle Purchaser to terminate this Agreement. (9) Seller shall not do anything, nor authorize anything to be done, which would materially adversely affect the condition of title as shown on the Title Commitment. (10) Seller shall notify Purchaser promptly upon receiving written notice during the Contract Period of any violation of any law, ordinance or regulation which affects the Property or any portion thereof. Seller shall provide Purchaser with copies of any notice of default given or received by or on behalf of Seller with respect to any Lease to be assumed by Purchaser pursuant to this Agreement. (11) If requested by Purchaser at any time during the Contract Period, Seller will use commercially reasonable efforts, but at Purchaser's sole cost and expense, to cause any roof, HVAC and other warranties held by Seller and given by third parties with respect to the Property to be transferred to Purchaser at Closing. (12) Unless Purchaser delivers a Termination Notice or this Agreement is otherwise terminated prior to the expiration of the Inspection Period, Seller will send a notice to Lender promptly following the expiration of the Inspection Period pursuant to which Seller shall request that Lender grant the Loan Defeasance Approval as soon as possible consistent with the terms of this Agreement. 7 (m) Required Colorado Disclosure. Seller hereby makes the following specific disclosure to Purchaser: SPECIAL TAXING DISTRICTS MAY BE SUBJECT TO GENERAL OBLIGATION INDEBTEDNESS THAT IS PAID BY REVENUES PRODUCED FROM ANNUAL TAX LEVIES ON THE TAXABLE PROPERTY WITHIN SUCH DISTRICTS. PROPERTY SELLERS IN SUCH DISTRICTS MAY BE PLACED AT RISK FOR INCREASED MILL LEVIES AND EXCESSIVE TAX BURDENS TO SUPPORT THE SERVICING OF SUCH DEBT WHERE CIRCUMSTANCES ARISE RESULTING IN THE INABILITY OF SUCH A DISTRICT TO DISCHARGE SUCH INDEBTEDNESS WITHOUT SUCH AN INCREASE IN MILL LEVIES. PURCHASERS SHOULD INVESTIGATE THE DEBT FINANCING REQUIREMENTS OF THE AUTHORIZED GENERAL OBLIGATION INDEBTEDNESS OF SUCH DISTRICTS, EXISTING MILL LEVIES OF SUCH DISTRICT SERVICING SUCH INDEBTEDNESS, AND THE POTENTIAL FOR AN INCREASE IN SUCH MILL LEVIES. (n) Notice of Violations of Environmental Laws. To Seller's Knowledge, Seller has not received any written notice from the United States Environmental Protection Agency or any other federal, state or local governmental authority, any tenant of the Property, any adjacent landowner or any other party alleging that the Property is presently in violation of any applicable laws concerning Hazardous Materials. 5. Purchaser's Representations and Warranties. As a material inducement to Seller to execute this Agreement and consummate this transaction, Purchaser hereby represents and warrants to Seller, and covenants with Seller, as follows: (a) Organization and Authority. Purchaser has been duly organized and is validly existing as a Delaware limited partnership. Purchaser has the full right and authority, and has obtained all necessary consents required, to enter into this Agreement and consummate or cause to be consummated the acquisition of the Property. The persons signing this Agreement on behalf of Purchaser are authorized to do so. This Agreement and all of the documents to be delivered by Purchaser at the Closing have been authorized and properly executed and will constitute the valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms. (b) Conflicts. There is no agreement to which Purchaser is a party or to Purchaser's knowledge binding on Purchaser which is in conflict with this Agreement. (c) ERISA. Purchaser is not acquiring any of the Property with the "plan assets" (as defined in 29 C.F.R. 2510.3-101) of (i) any "employee benefit plan" subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) any "plan" subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the "CODE") or (iii) any other plan or retirement arrangement subject to applicable law that is substantially similar to Section 406 of ERISA or Section 4975 of the Code. 8 (d) Defeasance. Purchaser shall cooperate reasonably with Seller and Lender in connection with obtaining the Loan Defeasance Approval; provided, that Purchaser shall not be required to pay any costs to Seller or Lender in connection with such cooperation. 6. As Is Sale; Release. (a) By closing this transaction, Purchaser acknowledges and agrees that it has been given a full opportunity to inspect and investigate each and every aspect of the Property, either independently or through agents of Purchaser's choosing, including, without limitation: (1) All matters relating to title, together with all governmental and other legal requirements such as taxes, assessments, zoning, use permit requirements and building codes; (2) The physical condition of the Property, including, without limitation, the interior, the exterior, the structure, the paving, the utilities, the floor slabs, and all other physical and functional aspects of the Property. Purchaser's examination of the physical condition of the Property has included such inspection for the presence or absence of Hazardous Materials as Purchaser has deemed necessary or desirable in its sole discretion and expense; (3) Any easements and/or access rights affecting the Property; (4) The IFG Lease and all matters in connection therewith, including, without limitation, the ability of the tenant thereunder to pay the rent; (5) The Service Contracts (if any) and any other documents or agreements of significance affecting the Property and furnished to Purchaser; and (6) The Floor Slab Reports and all matters in connection therewith. 9 (b) WITHOUT LIMITING THE GENERALITY OF SECTION 6(A) ABOVE, PURCHASER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT, SUBJECT TO THE EXPRESS PROVISIONS OF SECTION 4, SELLER IS CONVEYING AND PURCHASER IS ACQUIRING THE PROPERTY ON AN "AS IS, WHERE IS" AND "WITH ALL FAULTS" BASIS AND THAT, EXCEPT AS EXPRESSLY PROVIDED IN SECTION 4, PURCHASER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY OR ANY PART THEREOF, INCLUDING WITHOUT LIMITATION: (I) THE QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF THE PROPERTY, INCLUDING, BUT NOT LIMITED TO THE STRUCTURAL ELEMENTS, FLOOR SLABS, FOUNDATION, ROOF, APPURTENANCES, ACCESS, LANDSCAPING, PARKING FACILITIES AND THE ELECTRICAL, MECHANICAL, HVAC, PLUMBING, SEWAGE, AND UTILITY SYSTEMS, FACILITIES AND APPLIANCES, (II) THE QUALITY, NATURE, ADEQUACY, AND PHYSICAL CONDITION OF SOILS, GEOLOGY AND ANY GROUNDWATER, (III) THE EXISTENCE, QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF UTILITIES SERVING THE PROPERTY, (IV) THE DEVELOPMENT POTENTIAL OF THE PROPERTY, AND THE PROPERTY'S USE, HABITABILITY, MERCHANTABILITY, OR FITNESS, SUITABILITY, VALUE OR ADEQUACY OF THE PROPERTY FOR ANY PARTICULAR PURPOSE, (V) THE ZONING OR OTHER LEGAL STATUS OF THE PROPERTY OR ANY OTHER PUBLIC OR PRIVATE RESTRICTIONS ON USE OF THE PROPERTY, (VI) THE COMPLIANCE OF THE PROPERTY OR ITS OPERATION WITH ANY APPLICABLE CODES, LAWS, REGULATIONS, STATUTES, ORDINANCES, COVENANTS, CONDITIONS AND RESTRICTIONS OF ANY GOVERNMENTAL OR QUASI-GOVERNMENTAL ENTITY OR OF ANY OTHER PERSON OR ENTITY, (VII) THE PRESENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PROPERTY OR THE ADJOINING OR NEIGHBORING PROPERTY, (VIII) THE QUALITY OF ANY LABOR AND MATERIALS USED IN ANY IMPROVEMENTS, (IX) THE CONDITION OF TITLE TO THE PROPERTY, (X) THE IFG LEASE, THE SERVICE CONTRACTS OR OTHER AGREEMENTS AFFECTING THE PROPERTY AND FURNISHED TO PURCHASER, AND (XI) THE ECONOMICS OF THE OPERATIONS OF THE PROPERTY. (c) WITHOUT LIMITING THE ABOVE, PURCHASER ON BEHALF OF ITSELF AND ITS SUCCESSORS AND ASSIGNS WAIVES ITS RIGHT TO RECOVER FROM, AND FOREVER RELEASES AND DISCHARGES THE SELLER RELATED PARTIES, AND EACH OF THEM, FROM ANY AND ALL DEMANDS, CLAIMS, LEGAL OR ADMINISTRATIVE PROCEEDINGS, LOSSES, LIABILITIES, DAMAGES, PENALTIES, FINES, LIENS, JUDGMENTS, COSTS OR EXPENSES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES AND COSTS), WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, THAT MAY ARISE ON ACCOUNT OF OR IN ANY WAY BE CONNECTED WITH THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED (42 U.S.C. SECTION 6901, ET SEQ.), THE RESOURCES CONVERSATION AND RECOVERY ACT OF 1976 (42 U.S.C. SECTION 6901, ET SEQ.), THE CLEAN WATER ACT (33 U.S.C. SECTION 1251, ET SEQ.), THE SAFE DRINKING WATER ACT (14 U.S.C. SECTION 1401, ET SEQ.), THE HAZARDOUS MATERIALS TRANSPORTATION ACT (49 U.S.C. SECTION 1801, ET SEQ.), THE TOXIC SUBSTANCE CONTROL ACT (15 U.S.C. SECTION 2601, ET SEQ.), AND ANY SIMILAR ENVIRONMENTAL STATE OR LOCAL STATUTES, REGULATIONS, RULES OR REQUIREMENTS. THE PROVISIONS OF THIS SECTION SHALL SURVIVE CLOSING; PROVIDED, HOWEVER, THAT NOTHING IN THIS SECTION 6(C) SHALL RELEASE SELLER FROM ANY LIABILITY ARISING OUT OF (X) ANY INACCURACY OR BREACH OF ANY OF THE REPRESENTATIONS AND WARRANTIES MADE BY SELLER IN SECTION 4, OR PRECLUDE PURCHASER FROM THE EXERCISE OF ANY RIGHT OR REMEDY AVAILABLE UNDER THIS AGREEMENT BY REASON OF ANY INACCURACY OR BREACH OF SUCH REPRESENTATIONS AND WARRANTIES, (Y) THE IMPROPER RELEASE OR DISPOSAL OF HAZARDOUS MATERIALS AT THE REAL PROPERTY BY SELLER OR ITS AUTHORIZED AGENTS OR EMPLOYEES, AND (Z) ANY FRAUD OR INTENTIONAL MISREPRESENTATION BY SELLER. 10 7. Representations, Warranties and Covenants Prior to Closing. (a) The continued validity in all material respects of the foregoing representations and warranties shall be a condition precedent to the obligation of the party to whom the representation and warranty is given to close this transaction. (b) If Purchaser acquires knowledge that any of Seller's representations and warranties are or shall not be true and correct in any material respect at any time on or before the Closing Date, and such breach of representation or warranty remains uncured for a period of fifteen (15) days after notice thereof from Purchaser to Seller, then Purchaser may, at Purchaser's option, exercised by written notice to Seller, either (i) proceed with this transaction, accepting the applicable representation and warranty as being modified by such subsequent matters or knowledge and waiving any right relating thereto, if any, or (ii) terminate this Agreement and declare this Agreement to be of no further force and effect and in which event the Earnest Money shall promptly be returned to Purchaser and Seller shall have no liability to Purchaser hereunder by reason thereof; provided, however, that if the breach of any representation or warranty of Seller hereunder results from the willful and intentional act of Seller, Purchaser shall have the rights and remedies available to Purchaser hereunder upon a default hereunder or breach hereof by Seller. (c) Seller shall provide written notice to Purchaser if Seller acquires knowledge that any of Seller's representations and warranties are or shall not be true and correct in any material respect at any time on or before the Closing Date. If any such notice is delivered by Seller to Purchaser prior to the end of the Inspection Period and Purchaser does not terminate this Agreement as set forth herein prior to the end of the Inspection Period, then the applicable representation and warranty shall be deemed to have been modified by such notice and Purchaser shall be deemed to have waived any right relating thereto. 8. Survival of Representations and Warranties After Closing; Limitation of Seller's Liability. (a) All representations and warranties of Seller herein shall survive the Closing for a period of one (1) year (THE "LIMITATION PERIOD"). (b) Purchaser shall provide written notice to Seller of any breach of any of Seller's warranties or representations of which Purchaser acquires knowledge at any time after the Closing Date but prior to the expiration of the Limitation Period, and shall allow Seller thirty (30) days within which to cure such breach, or, if such breach is susceptible of cure but cannot reasonably be cured within thirty (30) days, an additional reasonable time period required to effect such cure so long as such cure has been commenced within such thirty (30) days and diligently pursued to completion within ninety (90) days from the date of receipt of Purchaser's notice of such breach. If Seller fails to cure such breach after written notice and within such cure period (as extended), Purchaser's sole remedy shall be an action at law for damages as a consequence thereof, which must be commenced, if at all, within thirty (30) days after the expiration of the Limitation Period. 11 (c) Notwithstanding anything in this Section 8 to the contrary, (i) Purchaser shall not be entitled to make a claim against Seller for a violation of the representations, warranties, and covenants unless the amount of damages to Purchaser equals or exceeds Fifty Thousand Dollars ($50,000) in any one instance and (ii) the cumulative, maximum amount of liability that Seller shall have to Purchaser for breaches of the representations, warranties and covenants under this Agreement and in any document executed by Seller pursuant to this Agreement shall not exceed Two Million Dollars ($2,000,000). (d) Purchaser agrees that none of the partners, trustees, shareholders, members, directors, officers, employees or agents of Seller or any affiliate of Seller shall have any liability to Purchaser arising under or in connection with this Agreement or the transaction contemplated hereby, all such liability being expressly limited to Seller and its assets. 9. Inspections. (a) During the Inspection Period, Purchaser may review the Property Information and any additional information delivered or made available to Purchaser pursuant to Section 4(c) above, and examine, inspect, and investigate the Property to determine whether, in Purchaser's sole judgment and discretion, Purchaser wishes to proceed to acquire the Property. (b) Purchaser shall have reasonable access to the Property (subject to and consistent with the rights of IFG and its subtenants under the IFG Lease) for the purpose of conducting such surveys, architectural, engineering, geotechnical and environmental inspections and tests, and any other inspections, studies, or tests reasonably required by Purchaser in connection with the transaction contemplated by this Agreement ("Inspections"). Purchaser shall give Seller not less than 24 hours prior written notice before entering onto the Property to perform inspections or tests, and in the case of tests (i) Purchaser shall specify to Seller the precise nature of the test to be performed, (ii) invasive testing shall require the prior advance written consent of Seller, in its sole discretion, and (iii) Purchaser or Purchaser's contractor shall maintain public liability and other appropriate insurance. Any inspections and testing shall be performed in accordance with law and only by appropriately qualified and, where applicable, licensed personnel. Purchaser shall keep the Property free and clear of any liens arising out of its Inspections. If any inspection or test disturbs the Property, Purchaser will restore the Property to substantially the same condition as existed prior to any such inspection or test. (c) Purchaser and its agents, employees, and representatives may, upon not less than 24 hours prior notice to Seller, examine and make copies of the Property Information, and all books and records and other materials delivered or made available to Purchaser pursuant to Section 4(c) above relating to the physical condition of the Property in the possession of Seller or Property Manager at the office of Seller in Boston, Massachusetts or the office of Property Manager in Denver, Colorado where such records are maintained, except to the extent Seller or Property Manager is required by agreement or applicable law to keep such books and records confidential. 12 (d) Notwithstanding anything contained herein to the contrary, Seller shall have the right, in its sole discretion, to have an employee of Seller or any other party designated by Seller (including Seller's property manager) present during any such Inspection and to approve any inquiries (including any written correspondence) Purchaser may make to any tenants, property management employees, parties to Service Contracts, or any governmental officials or representatives. Purchaser shall give Seller not less that two (2) business days' prior written notice of any proposed meeting with any tenant, property management employee, party to a Service Contract, or any governmental officials or representatives with regard to the Property; provided proper notice was given, Purchaser may proceed with any such meeting despite the failure of Seller to have its employee or representative present. (e) Purchaser shall indemnify and defend Seller against and hold Seller harmless from any and all loss, cost, claim, liability and expense (including reasonable attorneys' fees) arising out of Purchaser's activities on the Real Property or relating to Purchaser's Inspections. (f) Purchaser may terminate this Agreement for any reason (or no reason) on or before the end of the Inspection Period by delivering a written notice to Seller (the "TERMINATION NOTICE") to such effect. If Purchaser fails, for any reason, to timely deliver the Termination Notice to Seller on or prior to the end of the Inspection Period, Purchaser's right to terminate this Agreement as set forth in this Section 9(f) shall automatically lapse and be of no further force or effect, and the Earnest Money shall become non-refundable to Purchaser (subject to the provisions of Section 17(b)). (g) The obligations of Purchaser under this Section 9 shall survive the termination of the Agreement. 10. Closing. (a) The Closing shall be accomplished through the escrow referred to in subsection (c), and shall take place on (i) the later of (y) the fifth (5th) day following the expiration of the Inspection Period or (z) the receipt of the Loan Defeasance Approval, or (ii) such earlier date as Seller and Purchaser may mutually select, or (iii) such later date to which Closing is extended in accordance with the provisions of this Agreement, provided that (A) all conditions precedent to the Closing have been fulfilled or have been waived in writing by the respective party entitled to waive same, and (B) such date shall in any case be a Payment Date (as defined in the Debt Documents), and if such scheduled date does not constitute a Payment Date the date of the Closing shall be extended until the next following Payment Date unless the Lender shall waive the requirement set forth in the Debt Documents that the defeasance of the Loan be completed only on a Payment Date. Purchaser and Seller shall use commercially reasonable efforts to cause the Loan Defeasance Approval to be received and the Closing to be completed as soon as practicable. 13 (b) In the event that Seller fails to timely obtain the required Tenant Estoppel pursuant to Section 11(a)(3), Seller may, unless Purchaser waives the need for such Tenant Estoppel, elect to unilaterally extend the Closing for a period not exceeding fifteen (15) days, to permit Seller to attempt to obtain such Tenant Estoppels; provided, that if the extended Closing date determined in accordance with this sentence does not constitute a Payment Date (as defined in the Debt Documents), the extended date of the Closing shall be further extended until the next following Payment Date unless the Lender shall waive the requirement set forth in the Debt Documents that the defeasance of the Loan be completed only on a Payment Date. Any such election shall be made by Seller by notice to Purchaser not later than two (2) business days prior to the date set for Closing hereunder. (c) At least three (3) days prior to the date set for Closing under this Agreement, the parties shall establish a deed and money escrow with Title Company. Counsel for the respective parties are hereby authorized to execute the escrow trust instructions, as well as any amendments thereto. In the event of any conflict between the escrow trust instructions and the provisions of this Agreement, as between the parties hereto the provisions of this Agreement shall control. (d) Any provision of this Section 10 to the contrary notwithstanding, in no event shall the Closing Date occur more than one hundred fifty (150) days following the expiration of the Inspection Period (the "OUTSIDE CLOSING DATE"). In the event that the Closing does not occur on or before the Outside Closing Date, within five (5) days after the Outside Closing Date the Title Company shall, unless it is notified by either of the parties hereto to the contrary, return to the depositor thereof items which have been deposited with the Title Company pursuant to this Agreement and pay the Earnest Money to the party entitled thereto under the terms of this Agreement. No such return or payment of the Earnest Money shall relieve either party hereto of any liability it may have for its breach of this Agreement or its wrongful failure to close the transaction contemplated by this Agreement. 11. Conditions to Purchaser's Obligation to Close. (a) Purchaser shall not be obligated to proceed with the Closing unless and until each of the following conditions has been either fulfilled or waived in writing by Purchaser: (1) This Agreement shall not have been previously terminated pursuant to any other provision hereof. 14 (2) Seller shall be prepared to deliver or cause to be delivered to Purchaser all instruments and documents to be delivered to Purchaser at the Closing pursuant to Section 14 or any other provision of this Agreement. (3) Seller shall have delivered to Purchaser a Tenant Estoppel dated not earlier than the date of this Agreement from IFG. The Tenant Estoppel shall not (A) assert the existence of a material default by the landlord under the IFG Lease, (B) assert the existence of a material agreement between the landlord and IFG not reflected in the IFG Lease, or (C) disclose any other matter which materially and adversely affects the Property, unless in each case, prior to Closing, Seller shall have submitted to Purchaser written evidence reasonably acceptable to Purchaser indicating that any such unpermitted matter has been resolved. The completed form of Tenant Estoppel shall be prepared by Seller and submitted to Purchaser and Purchaser's counsel for their review and approval prior to distribution to IFG. If Purchaser fails to deliver any comments to such form within two (2) business days following receipt, such form will be deemed approved by Purchaser and its counsel. Purchaser agrees that it will accept any Tenant Estoppel which contains language which qualifies the statements set forth therein as being within the "knowledge", "best knowledge", "actual knowledge" or any words of similar import or effect of the party that executes and delivers such Tenant Estoppel. (4) Lender has consented to the defeasance of the Loan and Seller and Lender have negotiated and agreed to, each in their sole absolute discretion, the terms of appropriate instruments evidencing same (such instruments, including without limitation a pledge agreement, a defeasance security agreement, an instruction letter, a comfort letter, and such other certificates, opinions, documents or instruments as are required in connection therewith, are referred to herein collectively as the "LOAN DEFEASANCE DOCUMENTS"). (5) DTC West Land Venture ("DTC") shall have waived in writing, by execution and delivery of a Certificate of Waiver or other instrument reasonably satisfactory to Purchaser, the DTC ROFO. (b) In the event that any of the foregoing conditions shall not have been fulfilled on or before the time for Closing hereunder, then subject to the provisions of Section 17(b) hereof, Purchaser may elect, upon notice to Seller, to terminate this Agreement, in which event the Earnest Money shall be returned to Purchaser, and neither party shall have any further liability or obligation to the other except for the provisions of this Agreement that expressly survive Closing or early termination. 15 12. Conditions to Seller's Obligation to Close. (a) Seller shall not be obligated to proceed with the Closing unless and until each of the following conditions has been fulfilled or waived in writing by Seller: (1) Purchaser shall be prepared to pay to Seller all amounts to be paid to it at or prior to Closing pursuant to the provisions of this Agreement; (2) Purchaser shall be prepared to deliver to Seller all instruments and documents to be delivered to Seller at the Closing pursuant to Section 15 or any other provision of this Agreement; and (3) This Agreement shall not have been previously terminated pursuant to any other provision hereof. (4) Lender has consented to the defeasance of the Loan and Seller and Lender have negotiated and agreed to, each in their sole absolute discretion, the terms of the Loan Defeasance Documents, including without limitation appropriate instruments releasing Seller from any liability in connection with the Loan which may arise from and after the Closing. (5) DTC shall have waived in writing, by execution and delivery of a Certificate of Waiver or other instrument reasonably satisfactory to Seller, the DTC ROFO. (b) In the event that any of the foregoing conditions shall not have been fulfilled on or before the time for Closing hereunder, then subject to the provisions of Section 17(a) hereof, Seller may elect, upon notice to Purchaser, to terminate this Agreement, in which event the Earnest Money shall be returned to Purchaser, and neither party shall have any further liability or obligation to the other except for the provisions of this Agreement that expressly survive Closing or early termination. 13. Title Insurance. (a) Purchaser, at its sole expense, shall cause the Title Report to be delivered to Purchaser within ten (10) days after the date of this Agreement, and shall cause a copy of the Title Report to be delivered to Seller. (b) During the Inspection Period, Purchaser shall review title to the Property as disclosed by the Title Commitment and the Survey (and any updated Survey), and satisfy itself as to the availability from the Title Company of the ALTA extended coverage owner's policy of title insurance (including any required endorsements) required by Purchaser at Closing (the "TITLE POLICY"). (c) Seller shall have no obligation to remove or cure title objections, except for (i) liens of an ascertainable amount created by Seller, which liens Seller shall cause to be released at the Closing or affirmatively insured over by the Title Company, (ii) any exceptions or encumbrances to title which are created by Seller after the date of this Agreement without Purchaser's consent, which exceptions or encumbrances Seller shall cause to be released at the Closing or affirmatively insured over by the Title Company and (iii) any judgment or mechanics' liens or other encumbrances secured by any deeds of trust, mortgages or other loan documents set forth in the Title Report and the removal or curing of which are not otherwise the responsibility of IFG under the IFG Lease, which liens Seller shall cause to be released at the Closing or affirmatively insured over by the Title Company. 16 (d) Purchaser may terminate this Agreement and receive a refund of the Earnest Money if the Title Company revises the Title Commitment after the date of this Agreement to add exceptions created by Seller after the date of this Agreement if such additional exceptions are not acceptable to Purchaser and are not removed or affirmatively insured over by the Title Company by the Closing Date. If Purchaser terminates this Agreement as set forth in this Section 13(c), the Earnest Money shall promptly be returned to Purchaser and Seller shall not have any liability to Purchaser hereunder by reason thereof and neither party hereto shall have any liability to the other except to the extent that any right, obligation or liability set forth herein expressly survives termination of this Agreement. (e) "PERMITTED EXCEPTIONS" shall mean: (i) any exception arising out of an act of Purchaser or its representatives, agents, employees or independent contractors; (ii) zoning ordinances and regulations; (iii) the specific exceptions in the Title Commitment that the Title Company has not agreed to insure over or remove from the Title Commitment as of date hereof and that Seller is not required to remove as provided above; (iv) items shown on the Survey or any updated Survey of the Real Property which have not been removed as of date hereof; (v) real estate Taxes not yet due and payable; (vi) rights of tenants, as tenants only, under the Leases; (vii) liens or claims of lien for work or materials performed or supplied by or on behalf of a tenant; (viii) local, state and federal laws, ordinances or governmental regulations now or hereafter in effect relating to the Property; and (ix) such easements and other agreements reasonably required in connection with the Light Rail Condemnation Proceeding that do not materially and adversely affect the Real Property. 14. Seller's Closing Deposits. At Closing, Seller shall deliver or cause to be delivered to Purchaser each of the following instruments and documents: (a) the Deed, duly executed and acknowledged by Seller; (b) a counterpart Assignment of Lease, duly executed and acknowledged by Seller; (c) the Bill of Sale, duly executed and acknowledged by Seller; 17 (d) the FIRPTA Certificate, duly executed and acknowledged by the sole member of Seller; (e) original copies of any required real estate transfer tax declarations executed by Seller or any other similar documentation required to evidence the payment of any tax imposed by the state, county and city on the transaction contemplated hereby; (f) original copies (or photocopies certified by Seller as true, correct and complete) of the IFG Lease and all Service Contracts in the possession of Seller or its property manager; (g) a Closing Statement for the transaction contemplated hereby, duly executed and acknowledged by Seller; (h) a Seller's ALTA Statement, duly executed and acknowledged by Seller, in such form as is required by the Title Company to issue the Title Policy and obtain extended coverage, provided that Seller shall not be obligated to retain any liabilities or execute any indemnification other than as required by Section 13(c) of this Agreement; (i) a duly executed notice to IFG in the form attached hereto as Exhibit K; (j) a certificate updating Seller's representations and warranties set forth in Section 4; (k) all master keys in Seller's possession to all locks on the Property; (l) the Loan Defeasance Documents; (m) the Floor Slab Holdback Agreement, duly executed by Seller or the Seller Support Party; (n) the DTC ROFO; (o) the original Tenant Estoppel received by Seller from IFG; (p) the original Guarantor Estoppel received by Seller from AMVESCAP, PLC (if any); (q) the original REA Estoppel(s) received by Seller (if any); (r) a GAP indemnity in the standard form required by the Title Company in order to issue the Title Policy and reasonably acceptable to Seller; and (s) such other documents and instruments as may be required by any other provision of this Agreement or as may reasonably be required to carry out the terms and intent of this Agreement. 18 15. Purchaser's Closing Deposits. At Closing, Purchaser shall deliver or cause to be delivered to Seller each of the following instruments, documents and amounts: (a) the balance of the Purchase Price, plus sufficient cash to pay Purchaser's share of all escrow costs, prorations and closing expenses as set forth herein; (b) a counterpart Assignment of Lease, duly executed and acknowledged by Purchaser; (c) original copies of any required real estate transfer tax declarations executed by Purchaser or any other similar documentation required to evidence the payment of any tax imposed by the state, county and city on the transaction contemplated hereby. (d) a Closing Statement for the transaction contemplated hereby, duly executed and acknowledged by Purchaser; (e) a certificate updating Purchaser's representations and warranties set forth in Section 5; (f) the Floor Slab Holdback Agreement, duly executed by Purchaser; and (g) such other documents and instruments as may be required by any other provision of this Agreement or as may reasonably be required to carry out the terms and intent of this Agreement. 16. Prorations and Adjustments. (a) Subject to the provisions of Section 16(h)(2) below, the items in subsections (1) through (4) of this Section 16(a) shall be prorated between Seller and Purchaser as of the close of business on the day immediately preceding the Closing Date, the Closing Date being a day of income and expense to Purchaser: (1) Taxes and Assessments. Real estate taxes assessed against the Real Property ("Taxes") and special assessments against the Real Property ("ASSESSMENTS"). (2) Collected Rent. Purchaser shall receive a credit for any rent and other income (and any applicable state or local tax on rent) under the IFG Lease collected by Seller before Closing that applies to any period after Closing. (3) Utilities. Gas, electricity and other utility charges for which Seller is liable, if any, such charges to be apportioned at Closing on the basis of the most recent meter reading occurring prior to Closing or, if unmetered, on the basis of a current bill for each such utility. 19 (4) Operating Expenses. Any other operating expenses or other items pertaining to the Property which are customarily prorated between a purchaser and a seller in the area in which the Property is located. (b) Intentionally Omitted. (c) Tenant Obligations. Seller shall be responsible for the payment of all Tenant Obligations relating to the current term of IFG under the IFG Lease scheduled on Exhibit M attached hereto, if any. With respect to Tenant Obligations arising under Leases not set forth in Exhibit M, including any New Leases which have been entered into in accordance with Section 4(l)(2) above, such Tenant Obligations shall be amortized on a straight line basis over the initial term of any such Lease and prorated between Seller and Purchaser based on the number of days that each of Seller and Purchaser were the landlord under any such Lease. If, as of the Closing Date, Seller shall have paid any Tenant Obligations for which Purchaser is responsible pursuant to the forgoing provisions, Purchaser shall reimburse Seller therefor at Closing. If, as of the Closing Date, Seller shall not have paid any Tenant Obligations for which Seller is responsible, Purchaser shall be entitled to receive such amounts from Seller at the Closing. (d) Tenant Deposits. All unapplied tenant security deposits (and interest thereon if required by law or contract to be earned thereon) under the IFG Lease, as reflected in the IFG Lease and confirmed in the Tenant Estoppel, shall be transferred to Purchaser at Closing. As of the Closing, Purchaser shall assume Seller's obligations related to tenant security deposits, but only to the extent they are properly transferred to Purchaser. Any letters of credit held as substitutes for security deposits shall be transferred to Purchaser at Closing, if transferable, otherwise Seller shall hold the same on Purchaser's behalf (and draw on the same at Purchaser's direction) pending Purchaser's receipt of a replacement letter of credit payable to Purchaser and approved by Purchaser as to its form. If Purchaser directs Seller to draw on any letter of credit, then Purchaser shall indemnify, protect, defend and hold Seller harmless from and against any loss, cost, damage, liability, claim or expense (including reasonable attorneys' fees and court costs) arising from or relating to Seller's having drawn upon any such letter of credit. The provisions of this Section 16(d) shall survive the Closing of the transactions contemplated by this Agreement. (e) Utility Deposits. Seller shall retain the deposits, if any, with utility companies. If Seller has paid utilities no more than 30 days in advance in the ordinary course of business, then Purchaser shall be charged its portion of such payment at Closing. Purchaser shall be responsible for making any security deposits required by utility companies providing service to the Real Property. (f) Seller Deposits. Seller shall be entitled to the return of all bonds, deposits, letters of credit, set aside letters or other similar items, if any, that are outstanding with respect to the Real Property that have been provided by Seller or any of its affiliates to any governmental agency, public utility, or similar entity (collectively, "SELLER DEPOSITS"). Purchaser shall replace such Seller Deposits and obtain the release of Seller (or its affiliates) from any obligations under such Seller Deposits. To the extent that any funds are released as a result of the termination of any Seller Deposits for which Seller did not get a credit, such funds shall be delivered to Seller immediately upon their receipt. 20 (g) Indemnity. Purchaser hereby agrees to indemnify, protect, defend and hold Seller harmless from and against each obligation of Seller for which, and to the extent that, credit has been given to Purchaser at the time of Closing. Seller hereby agrees to indemnify, protect, defend and hold Purchaser harmless from and against each obligation of Purchaser for which, and to the extent that, credit has been given to Seller at the time of Closing. The provisions of this Section 16(g) shall survive the Closing and shall remain in effect until the expiration of the Limitation Period. (h) Notwithstanding anything contained in the foregoing provisions: (1) Any Taxes paid at or prior to Closing shall be prorated based upon the amount actually paid. If Taxes and Assessments for the current year have not been paid at or prior to Closing, Seller shall be charged at Closing an amount equal to that portion of such Taxes and Assessments which relates to the period before Closing and Purchaser shall pay the Taxes and Assessments prior to their becoming delinquent. Any such apportionment made with respect to a tax year for which the tax rate or assessed valuation, or both, have not yet been fixed shall be based upon the tax rate and/or assessed valuation last fixed. (2) Charges referred to in Section 16(a) above which are payable by tenants to a third party pursuant to Leases shall not be apportioned hereunder, and Purchaser shall accept title subject to any of such charges unpaid and Purchaser shall look solely to tenants therefor for the payment of the same. If Seller shall have paid any of such charges on behalf of a tenant, and shall not have been reimbursed therefor by the time of Closing, Purchaser shall pay same to Seller at Closing on account of such charges so paid by Seller. (3) Seller shall receive the entire advantage of any discounts for the prepayment by it of any Taxes, Assessments, water rates or sewer rents. (4) As to gas, electricity and other utility charges referred to in Section 16(a) above, Seller may on written notice to Purchaser elect to pay at or prior to Closing one or more of all of said items accrued to the date hereinabove fixed for apportionment directly to the person or entity entitled thereto, and to the extent Seller so elects, such item shall not be apportioned hereunder. 21 (5) Unpaid and delinquent rent collected by Seller or Purchaser after the date of Closing shall be delivered as follows: (a) if Seller collects any unpaid or delinquent rent for the Property, Seller shall, within five (5) business days after the receipt thereof, deliver to Purchaser any such rent which Purchaser is entitled to hereunder relating to the date of Closing and any period thereafter, and (b) if Purchaser collects any unpaid or delinquent rent from the Property, Purchaser shall, within five (5) business days after the receipt thereof, deliver to Seller any such rent which Seller is entitled to hereunder relating to the period prior to the date of Closing. Seller and Purchaser agree that all rent received by Seller or Purchaser after the Closing shall be applied first to current rentals and then to delinquent rentals, if any, in inverse order of maturity, remitting to Seller, after deducting collection costs, any rent properly allocable to Seller's period of ownership. Purchaser will make a reasonable good faith effort after Closing to collect all delinquent rents in the usual course of Purchaser's operation of the Property, but Purchaser will not be obligated to declare a lease default, engage a collection agency or take legal action or other collection procedures to collect delinquent rents. In the event that there shall be any rents or other charges under the Lease which, although relating to a period prior to Closing, do not become due and payable until after Closing or are paid prior to Closing but are subject to adjustment after Closing (such as year end common area expense reimbursements and the like), then any rents or charges of such type received by Purchaser or its agents or Seller or its agents subsequent to Closing shall be prorated between Seller and Purchaser as of Closing and Seller's portion thereof shall be remitted promptly to Seller by Purchaser and Purchaser's portion thereof shall be credited to Purchaser; provided, that such rents or charges shall be reapportioned as soon as practicable after the date of Closing. Upon any such re-apportionment, a settlement in cash shall be made by the party whose date of Closing tentative apportionment exceeded the amount to which it is entitled on the basis of the final apportionment to the other party. (6) The portion of rents consisting of escalation rents, real estate taxes and assessments, insurance, utilities and other operating costs and expenses which are shared by tenants of the Property on a pro rata basis, which are payable or which have been accrued with respect to a period prior to the date of Closing (but which are not susceptible of calculation and verification until subsequent to the date of Closing) shall be prorated for the month of Closing to the extent collected. Such items shall be reapportioned, as soon as practicable after the date of Closing, on the same fiscal basis as such rents are calculated under the Lease, so that the amount thereof under the Lease to which Seller shall be entitled, as finally determined, shall be the entire amount thereof with respect to any fiscal period ending prior to the date of Closing, and, for the then current fiscal period, an amount which bears the same ratio to the total escalation rents and real estate taxes and assessments and all other amounts paid thereunder for the current fiscal period as the number of days in said current fiscal period which shall have elapsed prior to the date of Closing bears to the total number of days in said current fiscal period. Upon any such re-apportionment, a settlement in cash shall be made by the party whose date of Closing apportionment exceeded the amount to which it is entitled on the basis of the final apportionment to the other party. 22 (i) Floor Slab Repair Credit. During the course of its Inspections and its examination of the floor slabs of the Property, Purchaser has caused to be prepared that certain Independent Structural Evaluation by JR Engineering dated January 18, 2006 (the "INDEPENDENT FLOOR SLAB EVALUATION"). The section of the Independent Floor Slab Evaluation entitled "Potential Repair Costs" notes certain existing damage to the Property observed during a site visit on January 12, 2006 (the "CURRENT FLOOR SLAB REPAIR ITEMS"), the estimated cost of repairing which Current Floor Slab Repair Items as set forth in the Independent Floor Slab Evaluation is Fifty One Thousand Dollars ($51,000). At the Closing, Purchaser shall receive a credit against the Purchase Price in the amount of Fifty One Thousand Dollars ($51,000), less the estimated cost of any of the Current Floor Slab Repair Items repaired by Seller prior to the Closing. Without limiting the generality of the provisions of Section 6 above or Section 21 below, Purchaser or anyone claiming by, through or under Purchaser hereby fully waives its right to recover from, and forever releases and discharges, the Seller Related Parties, and each of them, from any and all demands, claims, legal or administrative proceedings, losses, liabilities, damages, penalties, fines, liens, judgments, costs or expenses whatsoever (including, without limitation, reasonable attorneys' fees and costs), whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with the Current Floor Slab Repair Items, and Purchaser hereby expressly assumes all risks, liabilities, claims, damages and costs (and agrees that Seller shall not be liable for any special, direct, indirect, consequential, or other damages) resulting or arising from or related to the Current Floor Slab Repair Items. The provisions of this Section 16(i) shall survive Closing. 17. Default; Termination. (a) If Purchaser defaults hereunder, then provided Seller is not in default, Seller's sole and exclusive remedy shall be to terminate this Agreement by giving written notice thereof to Purchaser, whereupon the Earnest Money shall be retained by Seller as liquidated damages as Seller's sole and exclusive remedy, and neither party shall have any further liability or obligation to the other except for those liabilities and obligations that expressly survive Closing or early termination of this Agreement. The parties acknowledge and agree that Seller's actual damages in the event of Purchaser's default are uncertain in amount and difficult to ascertain and that said amount of liquidated damages was reasonably determined. (b) If Seller defaults hereunder prior to Closing, then provided Purchaser is not in default, Purchaser may, at its sole election, either: 23 (1) Terminate this Agreement, whereupon the Earnest Money shall be promptly returned to Purchaser and neither party shall have any further liability or obligation to the other except for those liabilities or obligations that expressly survive Closing or early termination of this Agreement; provided, that Seller shall reimburse Purchaser for its out-of-pocket expenses incurred to third parties in connection with the transaction contemplated by this Agreement up to a maximum reimbursement obligation of Fifty Thousand Dollars ($50,000.00), to be reimbursed following delivery to Seller of paid receipts for same certified by Purchaser to Seller to be true, correct and complete. (2) Assert and seek judgment against Seller for specific performance; provided, however, if the remedy of specific performance is not legally available to Purchaser by reason of Seller's transfer of the Property to a third party, Purchaser shall be entitled to the prompt return of the Earnest Money, and to pursue the actual damages sustained by Purchaser as a result of such breach; provided that (x) the foregoing shall be Purchaser's sole and exclusive remedies, and the exercise of one of such remedies by Purchaser shall be deemed an election of remedies, and shall preclude Purchaser from the exercise of the other such remedy, and (y) subject to Section 8 hereof, nothing in this subsection be shall limit any right or remedy available to Purchaser after Closing in connection with any inaccuracy or breach of any of Seller's warranties and representations set forth in Section 4. 18. Expenses. (a) Seller and Purchaser shall each pay one-half of the escrow fee charged by Title Company. (b) Purchaser shall pay (i) the cost of the premium charges for the Title Policy and any lender's title policy(ies) and for any endorsements requested by Purchaser to the Title Policy or to any lender's title policy, (ii) all state, county and municipal real estate transfer taxes due on the transfer of the Property from Seller to Purchaser; (iii) all recording costs for this transaction; and (iv) the cost of the updated Survey, if any. (c) Seller shall pay (i) any costs and expenses charged by Lender in connection with the purchase of the Defeasance Collateral and the release of the Debt Documents (including, if applicable, any fees that may be assessed by Lender and the cost of any attorney's fees incurred by Lender), and (ii) all monetary obligations under the Service Contracts which have accrued prior to the Closing Date. (d) Other closing costs shall be allocated among Seller and Purchaser as expressly provided in this Agreement, or in the absence of such provision, as is customary in connection with commercial real estate transactions in Denver, Colorado. Each party shall pay its own attorneys' costs, expenses and fees. 19. Intermediaries. (a) Seller represents to Purchaser, and Purchaser represents to Seller, that, other than Broker, there is no broker, finder, or intermediary of any kind with whom such party has dealt in connection with this transaction. 24 (b) Seller agrees to indemnify and hold harmless Purchaser against and from all claims, demands, causes of action, judgments, and liabilities which may be asserted or recovered for fees, commissions, or other compensation claimed to be due to any party with whom Seller may have dealt in connection with this transaction, including costs and reasonable attorneys' fees incident thereto. (c) Purchaser agrees to indemnify and hold harmless Seller against and from all claims, demands, causes of action, judgments, and liabilities which may be asserted or recovered for fees, commissions, or other compensation claimed to be due to any party with Purchaser may have dealt in connection with this transaction, including costs and reasonable attorneys' fees incident thereto, except for any brokerage fees due from Seller to Broker pursuant to a separate written agreement between Seller and Broker. 20. Destruction of Improvements. (a) If prior to Closing Material Damage shall occur with respect to the Improvements, or a condemnation proceeding is commenced or threatened in writing by a governmental or quasi-governmental agency with the power of eminent domain ("CONDEMNATION"), then: (1) Purchaser may elect, within fourteen (14) days from and after the date Purchaser receives notice of said damage or destruction, or notice of such Condemnation, by written notice to Seller, to terminate this Agreement, in which event the Earnest Money shall be returned to Purchaser and, except for the provisions of this Agreement that expressly survive Closing or earlier termination of this Agreement, this Agreement shall be void and of no further force and effect, and neither party shall have any liability to the other by reason hereof; or (2) In the event Purchaser does not timely elect to terminate pursuant to subsection (1), the transaction contemplated hereby shall be closed without a reduction in the Purchase Price, and Seller shall assign to Purchaser Seller's rights in any insurance proceeds or Condemnation award to be paid to Seller in connection with such Material Damage or Condemnation, and, in the case of Material Damage, Seller shall pay to Purchaser an amount equal to the deductible under Seller's policy of casualty insurance and Seller shall execute and deliver to Purchaser all required proofs of loss, assignments of claims and other similar items. In such event, any title exception arising by reason of said damage, destruction or Condemnation shall be deemed a Permitted Exception. (b) If, prior to Closing, any of the Improvements are damaged or destroyed and such damage is not Material Damage, Purchaser shall remain obligated to close hereunder with no abatement in the Purchase Price. At Closing Seller shall assign to Purchaser Seller's rights in any insurance proceeds to be paid to Seller in connection with such damage or destruction, and at Closing Purchaser shall receive a credit against the Purchase Price in an amount equal to the deductible amount under Seller's casualty insurance policy. 25 21. Floor Slab. (a) Without limiting the provisions of Section 6 above, Purchaser acknowledges that it has reviewed the Floor Slab Reports and all matters in connection therewith, including without limitation the potential costs of correcting any known or unknown defects or movement in, or caused by the movement of, the floor slabs of the Property, any expansive soil problems and any moisture movement (the "FLOOR SLAB DEFECTS"), and that Seller has agreed to make available the maximum sum of Five Hundred Thousand Dollars ($500,000) to Purchaser as set forth herein to reimburse Purchaser for reasonable costs incurred by Purchaser during the Holdback Limitation Period to correct the Floor Slab Defects. (b) At the Closing, Escrow Agent, Purchaser and Seller or an affiliate of Seller (the "SELLER SUPPORT PARTY") shall enter into a Holdback Escrow Agreement (the "FLOOR SLAB HOLDBACK AGREEMENT") in the form attached hereto as EXHIBIT N, which Floor Slab Holdback Agreement shall establish an escrow account (the "FLOOR SLAB HOLDBACK ESCROW") to be maintained with the Escrow Agent and into which Seller or the Seller Support Party shall deposit the sum of Five Hundred Thousand Dollars ($500,000). The Floor Slab Holdback Agreement shall provide, among other things, that any funds remaining in the Floor Slab Holdback Escrow at the expiration of the Holdback Limitation Period shall then be refunded to Seller or the Seller Support Party, as applicable; provided that, if there exists as of the expiration of the Holdback Limitation Period a good faith dispute between Purchaser and Seller or the Seller Support Party with respect to an earlier withdrawal requested by Purchaser, the amount in dispute shall remain in the Floor Slab Holdback Escrow pending the resolution of the dispute consensually or by judicial proceeding. (c) Purchaser agrees that any and all liability of Seller and the Seller Support Party under this Section 21 or otherwise with respect to the Floor Slab Defects shall be limited exclusively to the funds available from time to time in the Floor Slab Holdback Escrow. (d) Any provision of this Agreement to the contrary notwithstanding, in the event that the Seller Support Party enters into the Floor Slab Holdback Agreement to be delivered at Closing and deposits into the Floor Slab Holdback Escrow the funds required to be deposited therein, Purchaser agrees that the entry into such agreement and the deposit of such funds by such affiliate shall automatically serve as a novation of Seller hereunder. Accordingly, subject to Seller Support Party's compliance with the terms of this Section 21 and the Floor Slab Holdback Agreement, in such event Purchaser agrees that any and all liabilities and obligations of Seller under this Section 21 and the Floor Slab Holdback Agreement (to the extent that such liabilities and obligations survive the Closing) shall instead be liabilities and obligations of such Seller Support Party, and Seller shall not have any liability hereunder, all such liability being waived and released by Purchaser and its successors and assigns to the full extent allowed by law. 26 (e) Without limiting the generality of the provisions of Section 6 above, upon execution by Seller or the Seller Support Party of the Floor Slab Holdback Agreement and the deposit of the Security Amount (as defined in the Floor Slab Holdback Agreement) Purchaser and anyone claiming by, through or under Purchaser hereby fully waives its right to recover from, and forever releases and discharges, the Seller Related Parties, and each of them, from any and all demands, claims, legal or administrative proceedings, losses, liabilities, damages, penalties, fines, liens, judgments, costs or expenses whatsoever (including, without limitation, reasonable attorneys' fees and costs), whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with the floor slabs or floor levels of the Property, and Purchaser hereby expressly assumes all risks, liabilities, claims, damages and costs (and agrees that Seller shall not be liable for any special, direct, indirect, consequential, or other damages) resulting or arising from or related to the condition of the floor slabs or the floor levels of the Property. The provisions of this Section 21 shall survive Closing. 22. General Provisions. (a) This written Agreement, including all Exhibits attached hereto and documents to be delivered pursuant hereto, shall constitute the entire agreement and understanding of the parties, and there are no other prior or contemporaneous written or oral agreements, undertakings, promises, warranties, or covenants not contained herein. (b) This Agreement may be amended only by a written memorandum subsequently executed by all of the parties hereto. (c) No waiver of any provision or condition of this Agreement by any party shall be valid unless in writing signed by such party. No such waiver shall be taken as a waiver of any other or similar provision or of any future event, act, or default. (d) Time is of the essence of this Agreement. In the computation of any period of time provided for in this Agreement or by law, any date falling on a Saturday, Sunday or legal holiday shall be deemed to refer to the next day which is not a Saturday, Sunday, or legal holiday. (e) In the event that any provision of this Agreement shall be unenforceable in whole or in part, such provision shall be limited to the extent necessary to render the same valid, or shall be excised from this Agreement, as circumstances require, and this Agreement shall be construed as if said provision had been incorporated herein as so limited, or as if said provision has not been included herein, as the case may be. (f) Headings of sections are for convenience of reference only, and shall not be construed as a part of this Agreement. (g) This Agreement shall be binding upon and shall inure to the benefits of the parties hereto, and their respective heirs, executors, personal representatives, successors, and assigns, provided, however, that (x) this Agreement may not be assigned by Purchaser without the prior express written consent of Seller, (y) Purchaser may, without the prior express written consent of Seller, designate an Affiliate of Purchaser to take title to the Property by written notice to Seller at least five (5) Business Days prior to Closing, and (z) Purchaser may, without the prior express written consent of Seller, assign the rights of Purchaser under this Agreement to an Affiliate of Purchaser by written notice to Seller at least five (5) Business Days prior to Closing, provided that no such designation or assignment shall release or discharge Purchaser from any liability arising pursuant to this Agreement. 27 (h) All notices and other communications required or permitted hereunder shall be in writing and shall be mailed, hand delivered, or sent by Federal Express, UPS or other recognized overnight courier service, to the parties as follows: In the case of notices directed to Seller: Jeff Miller and Jim Patterson Challenger America, Inc. c/o Barrington Capital Partners, LLC 101 Arch Street, 15th Floor Boston, Massachusetts 02110 with a copy to: Leonard X Rosenberg Mayer, Brown, Rowe & Maw LLP 71 South Wacker Drive Chicago, Illinois 60606 and in the case of notices directed to Purchaser: Caplease, LP 110 Maiden Lane, 36th Floor New York, New York 10005 Attention: Douglas W. Chase with a copy to: Wolf, Block, Schorr and Solis-Cohen LLP 1650 Arch Street, 22nd Floor Philadelphia, Pennsylvania 19103 Attention: Helene S. Jaron, Esq. or to such additional or other persons, at such other address or addresses as may be designated by notice from Purchaser or Seller, as the case may be, to the other. Notices by mail shall be sent by United States certified or registered mail, return receipt requested, postage prepaid, and shall be deemed given and effective two (2) business days following posting in the United States mails. Notices by hand delivery shall be deemed given and effective upon the delivery thereof. Notices by overnight courier shall be deemed given and effective on the first business day following the delivery thereof to Federal Express, UPS or another recognized overnight courier service. 28 (i) This Agreement shall be governed in all respects by the internal laws of the State of Colorado. (j) This Agreement may be executed in any number of identical counterparts, any or all of which may contain the signatures of less than all of the parties, and all of which shall be construed together as but a single instrument. (k) In the event of any action or proceeding brought by either party against the other under this Agreement, the prevailing party shall be entitled to recover, and the non-prevailing party shall pay, all costs and expenses including its attorneys' fees in such action or proceeding in such amount as the court may adjudge reasonable. The prevailing party shall be determined by the court based upon an assessment of which party's major arguments made or positions taken in the proceedings could fairly be said to have prevailed over the other party's major arguments or positions on major disputed issues in the court's decision. If the party which shall have commenced or instituted the action, suit or proceeding shall dismiss or discontinue it without the concurrence of the other party, such other party shall be deemed the prevailing party. (l) This Agreement shall not be construed more strictly against Seller merely by virtue of the fact that the same has been prepared by Seller or its counsel, it being recognized both of the parties hereto have contributed substantially and materially to the preparation of this Agreement. All words herein which are expressed in the neuter gender shall be deemed to include the masculine, feminine and neuter genders and any word herein which is expressed in the singular or plural shall be deemed, whenever appropriate in the context, to include the plural and the singular. (m) Seller and Purchaser hereby designate the Title Company to act as and perform the duties and obligations of the "reporting person" with respect to the transaction contemplated by this Agreement for purposes of 26 C.F.R. Section 1.6045-4(e)(5) relating to the requirements for information reporting on real estate transaction closed on or after January 1, 1991. Seller, Purchaser and Title Company shall execute at Closing a Designation Agreement designating the Title Company as the reporting person with respect to the transaction contemplated by this Agreement. (n) Neither this Agreement nor any memorandum or evidence hereof shall be recorded in any public records by Purchaser; provided, however, that the foregoing shall not preclude the recording of a lis pendens notice upon the filing of an action by Purchaser for specific performance of this Agreement. If this Agreement or a memorandum hereof is recorded by Purchaser in violation of this Section 22(n), this Agreement shall be deemed ipso facto canceled and terminated, the Earnest Money shall thereupon be forfeited to Seller, and Purchaser shall have no further interest in the Property, pursuant to this Agreement or otherwise. 29 (o) Until the Closing, Purchaser and its representatives shall hold in strictest confidence all data and information obtained with respect to the operation and management of the Property, whether obtained before or after the execution and delivery hereof, and shall not use such data or information for purposes unrelated to this Agreement or disclose the same to others except as expressly permitted hereunder. The preceding sentence shall not be construed to prevent Purchaser from disclosing to its beneficiaries, prospective lenders or investors, or to its officers, directors, attorneys, accountants, architects, engineers and consultants to perform their designated tasks in connection with Purchaser's inspection of the Property, provided Purchaser advises any such party of the confidential nature of the information disclosed. However, neither party shall have this obligation concerning information which: (a) is published or becomes publicly available through no fault of either the Purchaser or Seller; (b) is rightfully received from a third party; or (c) is required to be disclosed by law. In the event this Agreement is terminated or Purchaser fails to perform hereunder, Purchaser shall promptly return to Seller any statements, documents, schedules, exhibits or other written information obtained from Seller in connection with this Agreement or the transactions contemplated hereby. In the event of a breach or threatened breach by Purchaser or its agents, consultants and/or lenders of this paragraph, Seller shall be entitled to an injunction restraining Purchaser from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Seller from pursuing any other available remedy at law or in equity for such breach or threatened breach. (p) Prior to Closing neither Seller nor Purchaser shall make any public announcement or disclosure of any information related to this Agreement to outside brokers or third parties without the prior written specific consent of the other; provided, however, that Seller and Purchaser may make disclosure of this Agreement to its lenders, creditors, officers, managers, members, employees and agents as necessary to perform its obligations hereunder and to others as required by law or by any regulatory body having jurisdiction over Seller or Purchaser or their respective Affiliates. After Closing, either party may announce or disclose the fact that the transaction contemplated by this Agreement was closed. In the event of a breach or threatened breach by Seller, Purchaser or their agents, consultants and/or lenders of this Section, then in addition to any other remedy available hereunder the nonbreaching party shall be entitled to an injunction restraining the breaching party from disclosing, in whole or in part, such confidential information. Notwithstanding the foregoing, either party may, following the end of the Inspection Period and prior to Closing and without the prior written consent of the other party, announce or disclose the transaction contemplated by this Agreement; provided, that such announcements or disclosures shall be limited to the location of the Property, the identity of the tenant, and the Purchase Price. [Signature page follows] 30 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. SELLER: CHALLENGER SOUTH MONACO, L.L.C., a Delaware limited liability company By: CHALLENGER REIT NUMBER 1 LIMITED, a Maryland corporation, its sole member By: /s/ Jeffrey J. Miller ----------------------------------------- Name: Jeffrey J. Miller --------------------------------------- Title: Authorized Signatory -------------------------------------- PURCHASER: CAPLEASE, LP, a Delaware limited partnership By: CLF OP General Partner, LLC, a Delaware limited iability company, its general partner By: Capital Lease Funding, Inc., a Maryland corporation, its sole member By: /s/ Robert C. Blanz ------------------------------------------- Name: Robert Blanz Title: Senior Vice President EXHIBIT A GLOSSARY OF DEFINED TERMS AFFILIATE means, with respect to any entity, (a) an entity that directly or indirectly controls, is controlled by or is under common control with the entity in question or (b) an entity whose economic interest is owned and controlled by such entity. For purposes of the foregoing definition, "controls" (and its correlative terms "controlled by" and "under common control with") means possession by the applicable entity of the power to direct or cause the direction of the management and policies thereof, whether through the ownership of voting securities, by contract, or otherwise. ASSESSMENTS has the meaning set forth in Section 16 hereof. ASSIGNMENT OF LEASE means an assignment by Seller and assumption by Purchaser of Seller's interest in the IFG Lease, the Service Contracts, applicable warranties and guaranties and other intangible property affecting or related to the Property as of the Closing Date in the form attached to this Agreement as Exhibit G and incorporated herein by this reference. BILL OF SALE means a bill of sale in the form attached to this Agreement as Exhibit H and incorporated herein by this reference. BROKER means CB Richard Ellis. CLOSING means the close of escrow hereunder on the Closing Date. CLOSING DATE means the date upon which the Closing occurs. CLOSING STATEMENT means a closing statement of adjustments and prorations prepared by Title Company and approved by Purchaser and Seller at or prior to the Closing. CONDEMNATION has the meaning set forth in Section 20 hereof. CONTRACT PERIOD means the period from the date of this Agreement through and including the Closing Date. DEBT DOCUMENTS means the instruments evidencing, securing and pertaining to the Loan, which instruments are described on Exhibit F attached hereto and incorporated by this reference. DEED means a Special Warranty Deed of the Real Property, subject to the Permitted Exceptions, in the form attached to this Agreement as Exhibit I and incorporated herein by this reference. DOLLARS OR $ means the legal currency of the United States of America. DTC has the meaning set forth in Section 11 hereof. DTC ROFO means DTC's right to purchase the Property pursuant to the right of first offer set forth in that certain Special Warranty Deed from DTC to USAA Real estate Company dated June 30, 2000 and recorded in the office of the Denver County Clerk and Recorder on July 5, 2000 as Document Number 20000-93979. EARNEST MONEY has the meaning set forth in Section 3 hereof. FIRPTA CERTIFICATE means a certificate, in the form attached to this Agreement as Exhibit J and incorporated herein by this reference, certifying the information required by 1445 of the Internal Revenue Code and the regulations issued thereunder to establish, for the purposes of avoiding Purchaser's tax withholding obligations, that the sole member of Seller is not a "foreign person" as defined in Internal Revenue Code 1445(f)(3). FLOOR SLAB DEFECTS has the meaning set forth in Section 21. hereof. FLOOR SLAB HOLDBACK AGREEMENT has the meaning set forth in Section 21. hereof. FLOOR SLAB HOLDBACK ESCROW has the meaning set forth in Section 21 hereof. FLOOR SLAB REPORTS means, collectively, that certain letter report prepared by Structural Consultants Incorporated dated April 21, 2004 (identified as SCI #03-380); that certain letter report from CTL/Thompson Incorporated dated April 30, 2004 (identified as CTL Job No. 38,143); that certain letter report prepared by Structural Consultants Incorporated dated July 20, 2004 (identified as SCI #03-380); that certain draft status letter report prepared by Structural Consultants Incorporated dated March 8, 2005 (identified as SCI #03-380 01); that certain building movement summary prepared by Structural Consultants Incorporated dated June 28, 2005; that certain field report prepared by Structural Consultants Incorporated dated September 19, 2005 (identified as SCI #03-380); that certain field report prepared by Structural Consultants Incorporated dated November 1, 2005 (identified as SCI #03-380); that certain letter report from CTL/Thompson Incorporated dated January 13, 2006 (identified as CTL Project No. DN38,143-145); and the Independent Floor Slab Evaluation, and each of the other drawings, reports, observations, surveys, documents, investigations and analyses referenced or contained in any of the foregoing. HAZARDOUS MATERIALS means and includes any hazardous, toxic or dangerous waste substance or material defined as a "hazardous waste", "hazardous material", "hazardous substance", "extremely hazardous waste", "restricted hazardous waste" or similar in or for purposes of (i) any provision of Colorado law; (ii) the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Sec. 6903 et seq.); (iii) the Clean Water Act (33 U.S.C. 1251 et seq.); (iv) any so-called "Superfund" or "Superlien" law; or (v) any other federal, state or local statute, law, ordinance, code, rule, regulation, order, decree or other requirement of any governmental authority regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect. HOLDBACK LIMITATION PERIOD has the meaning set forth in the Floor Slab Holdback Agreement attached hereto as Exhibit N. IFG means Invesco Funds Group, Inc. IFG LEASE means that certain Master Lease Agreement dated as of June 30, 2000 by and between Seller (as successor to USAA Real Estate Company), as landlord, IFG, as tenant and AMVESCAP, PLC, as guarantor. IMPROVEMENTS has the meaning set forth in the definition of Real Property below. INDEPENDENT FLOOR SLAB EVALUATION has the meaning set forth in Section 16(i) hereof. INSPECTIONS has the meaning set forth in Section 9 hereof. INSPECTION PERIOD means the period commencing on December 23, 2005 and ending at 5:00 p.m. Eastern Time on February 3, 2006 or such earlier date as Purchaser may select by written notice to Seller. INTANGIBLE PROPERTY means all of Seller's rights and interests in and to all non-proprietary and non-confidential, as reasonably determined by Seller, assignable intangible property related to the Real Property and the Improvements, including, without limitation: (a) any governmental licenses, permits and approvals held by Seller relating to the occupancy or use of the Real Property, (b) any existing warranties held by Seller and given by third parties with respect to the Real Property, (c) trade names and trade marks associated with the Real Property and the Improvements, but specifically excluding any right or interest in the name "Challenger" or any variant or derivative thereof; (d) the plans and specifications and other architectural and engineering drawings for the Improvements; (e) non-governmentally issued licenses, telephone exchanges and other identifying material relating to the Property, including street addresses, telephone numbers and goodwill associated with the Property; and (f) all other records relating to the Property. LEASES means all leases and/or rental agreements for occupancy of any portion of the Real Property, as amended and modified from time to time. LENDER has the meaning set forth in Section 2(e) hereof. LIGHT RAIL CONDEMNATION PROCEEDING means that certain condemnation proceeding which includes a portion of the Property and which is captioned case No. 01 CV 3689 in the Denver County, Colorado, District Court (Department of Transportation, State of Colorado v. USAA Real Estate Company, et al. The Light Rail Condemnation Proceeding has been concluded by the entry of that certain Rule and Order dated September 29, 2005 in the Denver County, Colorado, District Court. LIMITATION PERIOD has the meaning set forth in Section 8 hereof. LOAN has the meaning set forth in Section 2(e) hereof. LOAN DEFEASANCE APPROVAL means Lender's approval of Seller's defeasance of the Loan and the approval of the Loan Defeasance Documents by Seller and Lender. LOAN DEFEASANCE DOCUMENTS has the meaning set forth in Section 11(a)(4). MANAGEMENT AGREEMENT means the Property Management Services Agreement dated as of June 30, 2000 between Invesco Funds Group, Inc. and USAA Real Estate Management Company d/b/a USAA Realty Company of Colorado relating to the Property. MATERIAL DAMAGE means damage (a) which is reasonably estimated to exceed One Million Dollars ($1,000,000) to repair, or (b) that would permit IFG to terminate its Lease. NEW LEASES has the meaning set forth in Section 4 hereof. PERMITTED EXCEPTIONS has the meaning set forth in Section 13 hereof. PERSONAL PROPERTY means Seller's interest, if any, in the furniture, fixtures, machinery, appliances, equipment, tenant improvements, supplies, and other personal property of every nature and description, and all replacements thereof, located on the Real Property, excluding the interest of Seller and its affiliates in any furniture, fixtures, machinery, appliances, equipment, tenant improvements, supplies. PROPERTY means the Real Property, the Leases (excluding Seller's rights otherwise expressly retained hereunder, such as to rents and liabilities accruing prior to closing), Service Contracts (but only to the extent Seller's obligations thereunder are expressly assumed by Purchaser pursuant to this Agreement), Personal Property and the Intangible Property. PROPERTY INFORMATION has the meaning set forth in Section 4(c) hereof. PROPERTY MANAGER means USAA Real estate Management Company, d/b/a/ USAA Real estate Company of Colorado. PURCHASE PRICE means Sixty Nine Million Three Hundred Thousand and No/100 Dollars ($69,300,000.00). REAL PROPERTY means that certain real property described on Exhibit B attached to this Agreement and incorporated herein by this reference (as the same may be revised to reflect an updated survey and any grants, easements or similar agreements entered into by Seller in connection with the Light Rail Condemnation Proceeding that do not materially and adversely affect such real property), together with (a) all of the buildings, structures, fixtures and other improvements located on such real property not owned by any of the tenants under the Leases ("IMPROVEMENTS"), including, without limitation, any and all plumbing, air conditioning, heating, ventilating, mechanical, electrical and other utility systems, (b) all right, title and interest of Seller in and to the rights, benefits, privileges, easements, tenements, hereditaments, and appurtenances thereon or anywise appertaining to such real property, and (c) all right, title, and interest of Seller in and to all strips and gores and any land lying in the bed of any street, road or alley, open or proposed, adjoining such real property or anywise appertaining to such real property, all of which is commonly known as 4340/4350/4346 South Monaco Street, Denver, Colorado. SELLER DEPOSITS has the meaning set forth in Section 16 hereof. SELLER'S KNOWLEDGE means the actual knowledge of Jeff Miller or James Patterson, and shall not be construed, by imputation or otherwise, to refer to the knowledge of any other officer, director, agent, manager, member, representative, employee or advisor of Seller, or impose upon Seller any duty to inquire into or investigate the matter to which such actual knowledge, or absence thereof, pertains. SELLER RELATED PARTIES means Seller, Seller's Affiliates, Barrington Capital Partners, LLC, and the partners, trustees, shareholders, members, directors, officers, employees and agents of each of them. SELLER SUPPORT PARTY has the meaning set forth in Section 21 hereof. SERVICE CONTRACTS means any and all service contracts to which Seller is a party or by which Seller is bound pertaining to the construction, operation and ownership of the Real Property, as amended and modified from time to time. Service Contracts expressly exclude the Management Agreement and any other leasing or management agreement affecting the Real Property. SURVEY has the meaning set forth in Section 2 hereof. TAXES has the meaning set forth in Section 16 hereof. TENANT ESTOPPEL means an estoppel certificate substantially in the form attached to this Agreement as Exhibit L and incorporated herein by this reference (or such other form as may be attached to or required in IFG's Lease) from IFG. TENANT OBLIGATIONS means tenant improvement expenses (including all hard and soft construction costs, whether payable to the contractor or the tenant), tenant allowances, rent abatement, moving expenses, leasing commissions and other out-of-pocket costs, that are the obligation of the landlord under the Leases, net of fees payable therefrom to Seller or its Affiliates. TITLE COMMITMENT means a Commitment for Title Insurance with respect to the Property issued by Title Company, in the full amount of the Purchase Price, with Purchaser named as the proposed insured thereunder. TITLE COMPANY means First American Title Insurance Company of NY, 633 Third Avenue, New York, New York 10033. TITLE POLICY has the meaning set forth in Section 13 hereof. TITLE REPORT means the Title Commitment and all documents, instruments and agreements listed therein. EX-12 4 ex12-1.txt CAPITAL LEASE FUNDING, INC. AND SUBSIDIARIES RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(dollars in thousands) Three Months Ended March 31, 2006 - ------------------------------------------------------------------------------------------------------- Earnings: Net income $ 2,352 Interest expense 14,025 Less: Interest capitalized during the period Note (A) -- Portion of rental expense representing interest 4 ---------------- Total earnings $ 16,381 ================ Combined Fixed Charges and Preference Dividends: Interest expense $ 14,025 Interest capitalized during the period -- Portion of rental expense representing interest 4 Preferred Stock Dividends 711 ---------------- Total $ 14,739 ================ Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 1.11
Note (A) Interest capitalized during the period is deducted because fixed charges includes all interest, whether capitalized or expensed. Only fixed charges that were deducted from income should be added back in the earnings computation. EX-31 5 ex31-1.txt EXHIBIT 31.1 Certification of Chief Executive Officer I, Paul H. McDowell, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the year ended March 31, 2006 of Capital Lease Funding, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13 a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2006 By: /s/ PAUL H. MCDOWELL ------------------------ Paul H. McDowell Chief Executive Officer EX-31 6 ex31-2.txt EXHIBIT 31.2 Certification of the Chief Financial Officer I, Shawn P. Seale, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the year ended March 31, 2006 of Capital Lease Funding, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2006 By: /s/ SHAWN P. SEALE Shawn P. Seale Senior Vice President, Chief Financial Officer and Treasurer EX-32 7 ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Capital Lease Funding, Inc. (the "Company") for the quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul H. McDowell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, aS adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PAUL H. McDOWELL Paul H. McDowell Chief Executive Officer May 10, 2006 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Capital Lease Funding, Inc. and will be retained by Capital Lease Funding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Capital Lease Funding, Inc. (the "Company") for the year ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shawn P. Seale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ SHAWN P. SEALE Shawn P. Seale Senior Vice President, Chief Financial Officer and Treasurer May 10, 2006 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Capital Lease Funding, Inc. and will be retained by Capital Lease Funding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-10 9 ex10-3.txt LOAN NO.: 50-2853944 TJX DISTRIBUTION CENTER PROMISSORY NOTE (HYPER-AM) (NOTE A) $71,700,000.00 March 10, 2006 FOR VALUE RECEIVED, the undersigned, CLF RED LION ROAD PHILADELPHIA BUSINESS TRUST, a Virginia business trust ("MAKER"), having an address c/o Caplease, LP, 110 Maiden Lane, 36th Floor, New York, New York 10005, promises to pay to the order of WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association ("PAYEE"), at the office of Payee at Commercial Real Estate Services, 8739 Research Drive URP - 4, NC 1075, Charlotte, North Carolina 28262, or at such other place as Payee may designate to Maker in writing from time to time, the principal sum of Seventy-One Million Seven Hundred Thousand and No/100 Dollars ($71,700,000.00), together with interest on so much thereof as is from time to time outstanding and unpaid, from the date of the advance of the principal evidenced hereby, at the Note Rate (as hereinafter defined), together with all other amounts due hereunder or under the other Loan Documents (as defined herein), in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of all debts and dues, public and private. This promissory note shall be hereinafter referred to as the "A Note" and the loan evidenced by this A Note shall be hereinafter referred to as the "A Loan". Concurrently with the execution of this A Note, Maker has executed and delivered to Caplease, LP that certain promissory note dated the date hereof in the original principal amount of Nine Million Six Hundred Forty-Seven Thousand Two Hundred Seventy-Five and 68/100 Dollars ($9,647,275.68), which note shall be hereinafter referred to as the "B Note" and the loan evidenced by the B Note shall be hereinafter referred to as the "B Loan". The indebtedness evidenced by the B Note and the obligations created thereby are also secured by the Security Instrument (as hereinafter defined), the Assignment (as defined in the hereinafter defined Loan Documents) and the other Loan Documents (as hereinafter defined) securing the A Loan. Payee has been engaged as collateral agent by Payee and the holder of the B Note to administer the documents and collateral securing this A Note and the B Note, including, without limitation, the Security Property (as hereinafter defined). Maker shall make separate monthly payments of principal and interest under the A Note and the B Note, as directed by the holder of this A Note and the holder of the B Note. The A Loan and the B Loan shall be hereinafter referred to collectively as the "Loan". ARTICLE I. - TERMS AND CONDITIONS 1.1. Note Rate. The term "NOTE RATE" as used in this Note shall mean (a) from the date of this Note through but not including the Optional Prepayment Date (as hereinafter defined), a rate per annum equal to five and fifty-seven one hundredths percent (5.57%) (the "INITIAL INTEREST RATE"), and (b) from the Optional Prepayment Date through and including the date this Note is paid in full, a rate per annum equal to the greater of (i) the Initial Interest Rate plus two and one-half percent (2.5%) or (ii) the Treasury Constant Maturity Yield Index (as hereinafter defined) plus two and one-half percent (2.5%) ((i) or (ii), as applicable, the "REVISED INTEREST RATE"). For purposes of this Section 1.1, the term "TREASURY CONSTANT MATURITY YIELD INDEX" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Statistical Release H.15 (519) published during the second full week preceding the Optional Prepayment Date, for instruments having a maturity coterminous with the remaining term of this Note. If there is no Treasury Constant Maturity Yield Index for instruments having a maturity coterminous with the remaining term of this Note, then the index shall be equal to the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). If such Release is not available or no longer published, Payee may refer to another recognized source of financial market information. 1.2. Computation of Interest. Interest shall be computed hereunder based on a 360-day year and based on the actual number of days elapsed for any period in which interest is being calculated including, without limitation, the Interest Only Period (hereinafter defined), as more particularly set forth on Annex 1 attached hereto and incorporated by this reference. Interest shall accrue from the date on which funds are advanced hereunder (regardless of the time of day) through and including the day on which funds are credited pursuant to Section 1.3 hereof. 1.3. Payment of Principal and Interest. Payments in federal funds immediately available at the place designated for payment received by Payee prior to 2:00 p.m. local time on a day on which Payee is open for business at said place of payment shall be credited prior to close of business, while other payments, at the option of Payee, may not be credited until immediately available to Payee in federal funds at the place designated for payment prior to 2:00 p.m. local time on the next day on which Payee is open for business. Interest only shall be payable in six (6) consecutive monthly installments in the amount set forth on Annex 1, beginning on April 11, 2006 (the "FIRST PAYMENT DATE"), and continuing on the eleventh (11th) day of each and every calendar month thereafter through and including September 11, 2006 (the "INTEREST ONLY PERIOD") and, thereafter, principal and interest shall be payable in one hundred fourteen (114) consecutive monthly installments in the amount set forth on Annex 1, beginning on October 11, 2006 and continuing on the eleventh (11th) day of each and every calendar month thereafter through and including February 11, 2016 (each, a "PAYMENT DATE"). On March 11, 2016 (the "MATURITY DATE" or the "OPTIONAL PREPAYMENT DATE"), the entire outstanding principal balance hereof, together with all accrued but unpaid interest thereon, shall be due and payable in full; provided, however, that in the event that such amounts are not paid on such date, Payee may, at Payee's sole option, extend the Maturity Date to June 11, 2021 (the "EXTENDED MATURITY DATE"). Maker hereby authorizes Payee to use its automated loan payment service pursuant to which on each Payment Date Maker shall have its monthly payments of principal and interest payments together with any other sums then due to Payee automatically drawn by Payee or its servicer in accordance with that certain Auto-Draft Request Form by and between Maker and Payee executed in connection with the Loan. 2 In the event that, on any Payment Date, there are insufficient funds in such account for sums due to Payee, then Payee shall be permitted to withdraw sums from such account on any day thereafter until such time as all payments due to Payee have been drawn from such account; provided, however, the foregoing shall in no event limit or otherwise modify Maker's obligations to make payments of principal and interest and other sums due hereunder or under any other Loan Document. 1.4. Application of Payments. So long as no Event of Default (as hereinafter defined) exists hereunder or under any other Loan Document, each such monthly installment shall be applied, prior to the Optional Prepayment Date, first, to any amounts hereafter advanced by Payee hereunder or under any other Loan Document, second, to any late fees and other amounts payable to Payee, third, to the payment of accrued interest and last to reduction of principal, and from and after the Optional Prepayment Date, as provided in Section 2.2 of this Note. 1.5. Payment of "Short Interest". Maker shall pay to Payee contemporaneously with the execution hereof interest at the Note Rate for a period from the date hereof through March 10, 2006. 1.6. Prepayment; Defeasance. (a) This A Note may not be prepaid, in whole or in part (except as otherwise specifically provided herein), at any time prior to the Optional Prepayment Determination Date. In the event that Maker wishes to have the Security Property (as hereinafter defined) released from the lien of the Security Instrument (as hereinafter defined) prior to the Optional Prepayment Determination Date, Maker's sole option shall be a Defeasance (as hereinafter defined) upon satisfaction of the terms and conditions set forth in Section 1.6(d) hereof, provided, however, that any Defeasance under this A Note must occur simultaneously with the Defeasance of the B Note. This A Note may be prepaid in whole but not in part without premium or penalty on any Payment Date occurring on or after the Optional Prepayment Determination Date provided (i) written notice of such prepayment is received by Payee not more than ninety (90) days and not less than thirty (30) days prior to the date of such prepayment, and (ii) such prepayment is accompanied by all interest accrued hereunder through and including the date of such prepayment and all other sums due hereunder or under the other Loan Documents. If, upon any such permitted prepayment on any Payment Date occurring on or after the Optional Prepayment Determination Date, the aforesaid prior written notice has not been timely received by Payee, there shall be due a prepayment fee equal to, an amount equal to the lesser of (i) thirty (30) days' interest computed at the Note Rate on the outstanding principal balance of this A Note so prepaid and (ii) interest computed at the Note Rate on the outstanding principal balance of this A Note so prepaid that would have been payable for the period from, and including, the date of prepayment through the Maturity Date, or the Extended Maturity Date, as the case may be, of this A Note as though such prepayment had not occurred. 3 (b) If, prior to the fourth (4th) anniversary of the First Payment Date (the "LOCKOUT EXPIRATION DATE"), the indebtedness evidenced by this A Note shall have been declared due and payable by Payee pursuant to Article III hereof or the provisions of any other Loan Document due to a default by Maker, then, in addition to the indebtedness evidenced by this A Note being immediately due and payable, there shall also then be immediately due and payable a sum equal to the interest which would have accrued on the principal balance of this Note at the Note Rate from the date of such acceleration to the Lockout Expiration Date, together with a prepayment fee in an amount equal to the Yield Maintenance Premium (as hereinafter defined) based on the entire indebtedness on the date of such acceleration. If such acceleration is on or following the Lockout Expiration Date, the Yield Maintenance Premium shall also then be immediately due and payable as though Maker were prepaying the entire indebtedness on the date of such acceleration. In addition to the amounts described in the two preceding sentences, in the event of any such acceleration or tender of payment of such indebtedness occurs or is made on or prior to the first (1st) anniversary of the date of this Note, there shall also then be immediately due and payable an additional prepayment fee of three percent (3%) of the principal balance of this A Note. The term "YIELD MAINTENANCE PREMIUM" shall mean an amount equal to the greater of (A) two percent (2.0%) of the principal amount being prepaid, and (B) the present value of a series of payments each equal to the Payment Differential (as hereinafter defined) and payable on each Payment Date over the remaining original term of this A Note and on the Maturity Date, discounted at the Reinvestment Yield (as hereinafter defined) for the number of months remaining as of the date of such prepayment to each such Payment Date and the Maturity Date. The term "PAYMENT DIFFERENTIAL" shall mean an amount equal to (i) the Note Rate less the Reinvestment Yield, divided by (ii) twelve (12) and multiplied by (iii) the principal sum outstanding under this A Note after application of the constant monthly payment due under this A Note on the date of such prepayment, provided that the Payment Differential shall in no event be less than zero. The term "REINVESTMENT YIELD" shall mean an amount equal to the lesser of (i) the yield on the U.S. Treasury issue (primary issue) with a maturity date closest to the Maturity Date, or (ii) the yield on the U.S. Treasury issue (primary issue) with a term equal to the remaining average life of the indebtedness evidenced by this A Note, with each such yield being based on the bid price for such issue as published in the Wall Street Journal on the date that is fourteen (14) days prior to the date of such prepayment (or, if such bid price is not published on that date, the next preceding date on which such bid price is so published) and converted to a monthly compounded nominal yield. In the event that any prepayment fee is due hereunder, Payee shall deliver to Maker a statement setting forth the amount and determination of the prepayment fee, and, provided that Payee shall have in good faith applied the formula described above, Maker shall not have the right to challenge the calculation or the method of calculation set forth in any such statement in the absence of manifest error, which calculation may be made by Payee on any day during the fifteen (15) day period preceding the date of such prepayment. Payee shall not be obligated or required to have actually reinvested the prepaid principal balance at the Reinvestment Yield or otherwise as a condition to receiving the prepayment fee. 4 (c) Partial or full prepayments of this A Note shall not be permitted, except for partial or full prepayments resulting from Payee's election to apply insurance or condemnation proceeds to reduce the outstanding principal balance of this A Note as provided in the Security Instrument, in which event no prepayment fee or premium shall be due unless, at the time of either Payee's receipt of such proceeds or the application of such proceeds to the outstanding principal balance of this A Note, an Event of Default, or an event which, with notice or the passage of time, or both, would constitute an Event of Default, shall have occurred, which default or Event of Default is unrelated to the applicable casualty or condemnation, in which event the applicable prepayment fee or premium shall be due and payable based upon the amount of the prepayment. No notice of prepayment shall be required under the circumstances specified in the preceding sentence. No principal amount repaid may be reborrowed. Any such partial prepayments of principal shall be applied to the unpaid principal balance evidenced hereby but such application shall not reduce the amount of the fixed monthly installments required to be paid pursuant to Section 1.3 above. Except as otherwise expressly provided in this Section, the prepayment fees provided above shall be due, to the extent permitted by applicable law, under any and all circumstances where all or any portion of this A Note is paid prior to the Maturity Date, whether such prepayment is voluntary or involuntary, including, without limitation, if such prepayment results from Payee's exercise of its rights upon Maker's default and acceleration of the Maturity Date of this A Note (irrespective of whether foreclosure proceedings have been commenced), and shall be in addition to any other sums due hereunder or under any of the other Loan Documents. No tender of a prepayment of this A Note with respect to which a prepayment fee is due shall be effective unless such prepayment is accompanied by the applicable prepayment fee. Any voluntary prepayment or defeasance of the A Loan or the B Loan must occur concurrently with the voluntary prepayment or defeasance of the other Loan. Unless there is a continuing Event of Default, there shall be no prepayment penalty or premium for prepayment resulting from application of title insurance, casualty insurance or condemnation proceeds or awards. (d) (i) On any Payment Date on or after the earlier to occur of (x) the Lockout Expiration Date, and (y) the later to occur of (A) the day immediately following the date which is two (2) years after the "startup day," within the meaning of Section 860G(a) (9) of the Internal Revenue Code of 1986, as amended from time to time or any successor statute (the "CODE"), of a "real estate mortgage investment conduit," within the meaning of Section 860D of the Code (a "REMIC TRUST"), that holds this A Note and (B) the day immediately following the date which is two (2) years after the "startup day", within the meaning of Section 860G(a)(9) of the Code, of a "real estate mortgage investment conduit," within the meaning of Section 860D of the Code, that holds the B Note, and provided no Event of Default has occurred hereunder or under any of the other Loan Documents, at Maker's option, Payee shall cause the release of the Security Property from the lien of the Security Instrument and the other Loan Documents (a "DEFEASANCE") upon the satisfaction of the following conditions: (A) Maker shall give not more than ninety (90) days' or less than sixty (60) days' prior written notice to Payee specifying the date Maker intends for the Defeasance to be consummated (the "RELEASE DATE"), which date shall be a Payment Date. (B) All accrued and unpaid interest and all other sums due under this A Note and under the other Loan Documents up to and including the Release Date shall be paid in full on or prior to the Release Date. (C) Maker shall deliver to Payee on or prior to the Release Date: 5 (1) a sum of money in immediately available funds (the "DEFEASANCE DEPOSIT") equal to the outstanding principal balance of this A Note plus an amount, if any, which together with the outstanding principal balance of this A Note, shall be sufficient to enable Payee to purchase, through means and sources customarily employed and available to Payee, for the account of Maker, (x) direct, non-callable, fixed rate obligations of the United States of America or (y) non-callable, fixed rate obligations, other than U.S. Treasury Obligations, that are "government securities" within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended, that provide for payments prior, but as close as possible, to all successive monthly Payment Dates occurring after the Release Date and to the Optional Prepayment Determination Date, with each such payment being equal to or greater than the amount of the corresponding installment of principal and/or interest required to be paid under this A Note (including, but not limited to, all amounts due on the Maturity Date) for the balance of the term hereof (the "DEFEASANCE Collateral"), each of which shall be duly endorsed by the holder thereof as directed by Payee or accompanied by a written instrument of transfer in form and substance satisfactory to Payee in its sole discretion (including, without limitation, such instruments as may be required by the depository institution holding such securities or the issuer thereof, as the case may be, to effectuate book-entry transfers and pledges through the book-entry facilities of such institution) in order to perfect upon the delivery of the Defeasance Security Agreement (as hereinafter defined) the first priority security interest in the Defeasance Collateral in favor of Payee in conformity with all applicable state and federal laws governing granting of such security interests; (2) a pledge and security agreement, in form and substance satisfactory to Payee, creating a first priority security interest in favor of Payee in the Defeasance Collateral (the "DEFEASANCE SECURITY AGREEMENT"); (3) a certificate of Maker certifying that all of the requirements set forth in this subsection 1.6(d)(i) have been satisfied; (4) one or more opinions of counsel for Maker in form and substance and delivered by counsel which would be satisfactory to Payee stating, among other things, that (i) Payee has a perfected first priority security interest in the Defeasance Collateral and that the Defeasance Security Agreement is enforceable against Maker in accordance with its terms, (ii) in the event of a bankruptcy proceeding or similar occurrence with respect to Maker, none of the Defeasance Collateral nor any proceeds thereof will be property of Maker's estate under Section 541 of the U.S. Bankruptcy Code, as amended, or any similar statute and the grant of security interest therein to Payee shall not constitute an avoidable preference under Section 547 of the U.S. Bankruptcy Code, as amended, or applicable state law, (iii) the release of the lien of the Security Instrument and the pledge of Defeasance Collateral will not directly or indirectly result in or cause any REMIC Trust that then holds this A Note to fail to maintain its status as a REMIC Trust and (iv) the defeasance will not cause any REMIC Trust to be an "investment company" under the Investment Company Act of 1940; 6 (5) evidence in writing from any applicable Rating Agency (as defined in the Security Instrument) to the effect that the Defeasance will not result in a downgrading, withdrawal or qualification of the respective ratings in effect immediately prior to such Defeasance for any Securities (as hereinafter defined) issued in connection with the securitization which are then outstanding; provided, however, no evidence from a Rating Agency shall be required if this A Note does not meet the then-current review requirements of such Rating Agency; (6) a certificate in form and scope acceptable to Payee in its sole discretion from an acceptable independent accountant certifying that the Defeasance Collateral will generate amounts sufficient to make all payments of principal and interest due under this A Note (including the scheduled outstanding principal balance of the A Loan due on the Maturity Date); (7) Maker and any guarantor or indemnitor of Maker's obligations under the Loan Documents for which Maker has personal liability executes and delivers to Payee such documents and agreements as Payee shall reasonably require to evidence and effectuate the ratification of such personal liability and guaranty or indemnity, respectively; (8) such other certificates, documents or instruments as Payee may reasonably require; (9) payment of all fees, costs, expenses and charges incurred by Payee in connection with the Defeasance of the Security Property and the purchase of the Defeasance Collateral, including, without limitation, all reasonable legal fees and costs and expenses incurred by Payee or its agents in connection with release of the Security Property, review of the proposed Defeasance Collateral and preparation of the Defeasance Security Agreement and related documentation, any revenue, documentary, stamp, intangible or other taxes, charges or fees due in connection with transfer of the A Note, assumption of the A Note, or substitution of collateral for the Security Property shall be paid on or before the Release Date. Without limiting Maker's obligations with respect thereto, Payee shall be entitled to deduct all such fees, costs, expenses and charges from the Defeasance Deposit to the extent of any portion of the Defeasance Deposit which exceeds the amount necessary to purchase the Defeasance Collateral; and 7 (10) the Defeasance of the A Loan must occur with the simultaneous Defeasance of the B Loan subject to and in accordance with the terms of each such Loan. (D) In connection with the Defeasance Deposit, Maker hereby authorizes and directs Payee using the means and sources customarily employed and available to Payee to use the Defeasance Deposit to purchase for the account of Maker the Defeasance Collateral. Furthermore, the Defeasance Collateral shall be arranged such that payments received from such Defeasance Collateral shall be paid directly to Payee to be applied on account of the indebtedness of this A Note. Any part of the Defeasance Deposit in excess of the amount necessary to purchase the Defeasance Collateral and to pay the other and related costs Maker is obligated to pay under this Section 1.6 shall be refunded to Maker. (ii) Upon compliance with the requirements of subsection 1.6(d)(i), the Security Property shall be released from the lien of the Security Instrument and the other Loan Documents, and the Defeasance Collateral shall constitute collateral which shall secure this A Note and all other obligations under the Loan Documents. Payee will, at Maker's expense, execute and deliver any agreements reasonably requested by Maker to release the lien of the Security Instrument from the Security Property. (iii) Upon the release of the Security Property in accordance with this Section 1.6(d), Maker shall assign all its obligations and rights under this A Note, together with the pledged Defeasance Collateral, to a newly created successor entity which complies with the terms of Section 2.29 of the Security Instrument designated by Maker and approved by Payee in its sole discretion. Such successor entity shall execute an assumption agreement in form and substance satisfactory to Payee in its sole discretion pursuant to which it shall assume Maker's obligations under this A Note and the Defeasance Security Agreement. As conditions to such assignment and assumption, Maker shall (x) deliver to Payee an opinion of counsel in form and substance satisfactory to a prudent lender and delivered by counsel satisfactory to a prudent lender stating, among other things, that such assumption agreement is enforceable against Maker and such successor entity in accordance with its terms and that this A Note and the Defeasance Security Agreement as so assumed, are enforceable against such successor entity in accordance with their respective terms, and (y) pay all costs and expenses (including, but not limited to, legal fees) incurred by Payee or its agents in connection with such assignment and assumption (including, without limitation, the review of the proposed transferee and the preparation of the assumption agreement and related documentation). Upon such assumption, Maker shall be relieved of its obligations hereunder, under the other Loan Documents other than as specified in Section 1.6(d)(i)(C)(7) above and under the Defeasance Security Agreement (or other Defeasance document). 8 1.7. Security. The indebtedness evidenced by this A Note and the obligations created hereby are secured by, among other things, that certain Open-End Mortgage, Security Agreement and Fixture Filing (the "SECURITY INSTRUMENT") from Maker to Payee, dated of even date herewith, covering the Security Property. The Security Instrument, together with this A Note and all other documents to or of which Payee is a party or beneficiary now or hereafter evidencing, securing, guarantying, modifying or otherwise relating to the indebtedness evidenced hereby, are herein referred to collectively as the "LOAN DOCUMENTS". All of the terms and provisions of the Loan Documents are incorporated herein by reference. Some of the Loan Documents are to be filed for record on or about the date hereof in the appropriate public records. ARTICLE II. - OPTIONAL PREPAYMENT DATE/TRIGGER EVENT PROVISIONS 2.1. Optional Prepayment Date; Trigger Event. The following subsections shall apply from and after January 11, 2016 (the "OPTIONAL PREPAYMENT DETERMINATION DATE") and, to the extent set forth in that certain Lock-Box Account and Security Agreement of even date herewith between Maker and Payee (the "LOCK-BOX AGREEMENT"), after the occurrence of a Trigger Event (as defined in the Lock-Box Agreement): (a) Except as hereinafter set forth in subsection (e) of this Section 2.1, Maker shall be obligated to pay, and Payee shall collect from the Lock-Box Account (as defined in the Lock-Box Agreement) to the extent of funds on deposit in such account, on each Payment Date following the Optional Prepayment Determination Date the following payments in the listed order of priority: (i) First, the payment of the amount set forth in Section 1.3 of this A Note (the "MONTHLY DEBT SERVICE PAYMENT AMOUNT") to be applied first to the payment of interest computed at the Initial Interest Rate with the remainder applied to the reduction of the outstanding principal balance of this A Note; (ii) Second, payments to the Reserves (as defined in the Security Instrument) in accordance with the terms and conditions of the Security Instrument; (iii) Third, payments to the deposit bank selected by Payee to maintain the Lock-Box Account (the "DEPOSIT BANK") for any customary fees charged in accordance with the Lock-Box Agreement; (iv) Fourth, payments for monthly Cash Expenses (as hereinafter defined), less management fees payable to affiliates of Maker, pursuant to the terms and conditions of the related Approved Annual Budget (as hereinafter defined); (v) Fifth, payment for Extraordinary Expenses (as hereinafter defined) approved by Payee, if any; (vi) Sixth, payments of any other amounts due under the Loan Documents; and (vii) Lastly, any excess amounts shall remain on deposit in the Lock-Box Account. 9 (b) For the calendar year in which the Optional Prepayment Determination Date or any Trigger Event occurs and for each calendar year thereafter, Maker shall submit to Payee for Payee's written approval an annual budget (an "Annual Budget") not later than (i) the Optional Prepayment Determination Date or the first Payment Date after the date on which any Trigger Event occurs for the calendar year in which the Optional Prepayment Determination Date or any Trigger Event occurs and (ii) sixty (60) days prior to the commencement of each calendar year thereafter, in form satisfactory to Payee setting forth in reasonable detail budgeted monthly operating income and monthly operating capital and other expenses for the Security Property. Each Annual Budget shall contain, among other things, limitations on management fees, third party service fees and other expenses as Maker may reasonably determine. Payee shall have the right to approve such Annual Budget and in the event that Payee objects to the proposed Annual Budget submitted by Maker, Payee shall advise Maker of such objections within fifteen (15) days after receipt thereof (and deliver to Maker a reasonably detailed description of such objections) and Maker shall, within three (3) days after receipt of notice of any such objections, revise such Annual Budget and resubmit the same to Payee. Payee shall advise Maker of any objections to such revised Annual Budget within ten (10) days after receipt thereof (and deliver to Maker a reasonably detailed description of such objections) and Maker shall revise the same in accordance with the process described in this subsection until Payee approves an Annual Budget, provided, however, that if Payee shall not advise Maker of its objections to any proposed Annual Budget within the applicable time period set forth in this subsection, then such proposed Annual Budget shall be deemed approved by Payee. Each such Annual Budget approved by Payee in accordance with terms hereof shall hereinafter be referred to as an "Approved Annual Budget." Until such time that Payee approves a proposed Annual Budget, the most recently Approved Annual Budget shall apply; provided, that such Approved Annual Budget shall be adjusted to reflect actual increases in real estate taxes, insurance premiums and utilities expenses. (c) In the event that Maker must incur an extraordinary operating expense or capital expense not set forth in the Approved Annual Budget (as defined in the Security Instrument) or allotted for in any Reserve (each, an "EXTRAORDINARY EXPENSE"), then Maker shall promptly deliver to Payee a reasonably detailed explanation of such proposed Extraordinary Expense for Payee's approval. (d) For the purposes of this A Note, "CASH EXPENSES" shall mean, for any period, the operating expenses for the operation and maintenance of the Security Property as set forth in an Approved Annual Budget to the extent that such expenses are actually incurred by Maker excluding payments into the any Reserve, or which shall be paid for out of, any Reserve. 10 (e) Notwithstanding the other provisions of this Section 2.1, in the event that, prior to the Optional Prepayment Determination Date, Maker delivers to Payee either (i) a written commitment (the "COMMITMENT")for the refinancing of the loan evidenced by this A Note from a Qualified Institutional Lender (as hereinafter defined), which reasonably provides for the consummation of such refinance prior to the Optional Prepayment Date or (ii) other evidence in form and substance satisfactory to Payee in its sole determination of Maker's ability to refinance the loan evidenced by this A Note prior to the Optional Prepayment Date, then, solely in either such event, and provided no Trigger Event has occurred, the terms of Section 2.1(a), (b), (c) and (d) of this A Note shall be inoperative; provided, however, that upon (x) the failure of such refinance to be consummated in accordance with the terms of the Commitment or such other evidence, as applicable, (y) the termination of the Commitment for any reason or (z) any adverse change in circumstances with respect to Maker or any principals of Maker, the Security Property, the proposed lender or otherwise, as determined by Payee in its sole determination, which, in Payee's reasonable judgment, significantly decreases the likelihood of such refinance being consummated prior to the Optional Prepayment Date, the terms of Section 2.1(a), (b), (c) and (d) of this A Note shall immediately become operative and Maker shall immediately comply with any of the terms thereof which, except for the operation of this subsection (e), Maker would theretofore have been obligated to comply. "QUALIFIED INSTITUTIONAL LENDER" shall mean a financial institution or other lender with a long term credit rating which is not less than investment grade. The determination of whether the conditions set forth in clause (i) or (ii) above, shall be made and notice of such determination shall be delivered to Maker, within ten (10) business days following Payee's receipt of the items set forth in such clauses. 2.2. Failure to Pay Prior to Optional Prepayment Date. In the event that Maker does not prepay the entire principal balance of this A Note and any other amounts outstanding under this A Note or any of the other Loan Documents on or prior to the Optional Prepayment Date, the provisions of Section 2.1(b), (c) and (d) as set forth above shall remain in full force and effect, and the following subsections also shall apply: (a) From and after the Optional Prepayment Date, interest shall accrue on the unpaid principal balance from time to time outstanding under this A Note at the Revised Interest Rate. Interest accrued at the Revised Interest Rate and not paid pursuant to this Section 2.2 shall be deferred and added to the principal balance of this A Note and shall earn interest at the Revised Interest Rate to the extent permitted by applicable law (such accrued interest is hereinafter referred to as "ACCRUED INTEREST"). All of the unpaid principal balance of this A Note, including, without limitation, any Accrued Interest, shall be due and payable on the Extended Maturity Date. (b) Maker shall be obligated to pay, and Payee shall collect from the Lock-Box Account to the extent of funds on deposit in such account, on the Optional Prepayment Date and on the eleventh (11th) day of each calendar month thereafter to and including the Extended Maturity Date the following payments from the funds on deposit in the Lock-Box Account received on or before such day in the listed order of priority: (i) First, the payment of the Monthly Debt Service Payment Amount to be applied first to the payment of interest computed at the Initial Interest Rate with the remainder applied to the reduction of the outstanding principal balance of this A Note; (ii) Second, payments to the Reserves in accordance with the terms and conditions of the Security Instrument; (iii) Third, payments to the Deposit Bank any customary fees charged in accordance with the Lock-Box Agreement; 11 (iv) Fourth, payments for monthly Cash Expenses, less management fees payable to affiliates of Maker, pursuant to the terms and conditions of the related Approved Annual Budget; (v) Fifth, payment for Extraordinary Expenses approved by Payee, if any; (vi) Sixth, payments to Payee of the balance of the funds then on deposit in the Lock-Box Account to be applied to (x) any other amounts due under the Loan Documents, (y) Accrued Interest and (z) the reduction of the outstanding principal balance of this A Note until such principal balance is paid in full in whatever proportion and priority as Payee may determine. (c) Nothing in this Article II shall limit, reduce or otherwise affect Maker's obligations to make payments of the Monthly Debt Service Payment Amount, payments to the Reserves and payments of other amounts due hereunder and under the other Loan Documents, whether or not Rents and Profits (as defined in the Security Instrument) are available to make such payments. 2.3. Trigger Event. In the event that any Trigger Event occurs, the provisions of Section 2.1(b), (c) and (d) as set forth above and the following subsections shall apply: (a) Maker shall be obligated to pay, and Payee shall collect from the Lock-Box Account to the extent of funds on deposit in such account, on the eleventh (11th) day of each calendar month thereafter until all amounts owed under the Loan Documents are paid in full, the following payments from the funds on deposit in the Lock-Box Account received on or before such day in the listed order of priority: (i) First, the payment of the Monthly Debt Service Payment Amount to be applied first to the payment of interest computed at the Initial Interest Rate with the remainder applied to the reduction of the outstanding principal balance of this A Note; (ii) Second, payments to the Reserves in accordance with the terms and conditions of the Security Instrument; (iii) Third, payments to the Deposit Bank any customary fees charged in accordance with the Lock-Box Agreement; (iv) Fourth, payments for monthly Cash Expenses, less management fees payable to affiliates of Maker, pursuant to the terms and conditions of the related Approved Annual Budget; (v) Fifth, payment for Extraordinary Expenses approved by Payee, if any. Any balance in the Lock-Box Account after payment of the foregoing shall be retained by Payee as additional collateral for the loan evidenced by this Note until released in accordance with Section 3(b) of the Lock-Box Agreement. 12 (b) Nothing in this Section 2.3 shall limit, reduce or otherwise affect Maker's obligations to make payments of the Monthly Debt Service Payment Amount, payments to the Reserves and payments of other amounts due hereunder and under the other Loan Documents, whether or not Rents (as defined in the Security Instrument) are available to make such payments. ARTICLE III. - DEFAULT 3.1. Events of Default; Cross Default. (a) It is hereby expressly agreed that should any default occur in the payment of principal or interest as stipulated above and such payment is not made on the date such payment is due, or should any other default not be cured within any applicable grace or notice period occur under any other Loan Document, then an event of default (an "EVENT OF DEFAULT") shall exist hereunder, and in such event the indebtedness evidenced hereby, including all sums advanced or accrued hereunder or under any other Loan Document, and all unpaid interest accrued thereon, shall, at the option of Payee and without notice to Maker, at once become due and payable and may be collected forthwith, whether or not there has been a prior demand for payment and regardless of the stipulated date of maturity. (b) A default or Event of Default under any of the Loan Documents delivered in connection with either the A Loan or the B Loan (as the term "Event of Default" is defined in the Security Instrument) shall constitute an Event of Default under the other Loan Documents delivered in connection with the A Loan and/or the B Loan. 3.2. Late Charges. In the event that any payment is not received by Payee on the date when due (subject to any applicable grace period), then, in addition to any default interest payments due hereunder, Maker shall also pay to Payee a late charge in an amount equal to five percent (5%) of the amount of such overdue payment. 3.3. Default Interest Rate. So long as any Event of Default exists hereunder, regardless of whether or not there has been an acceleration of the indebtedness evidenced hereby, and at all times after maturity of the indebtedness evidenced hereby (whether by acceleration or otherwise), interest shall accrue on the outstanding principal balance of this A Note, from the date due until the date credited, at a rate per annum equal to four percent (4%) in excess of the Note Rate, or, if such increased rate of interest may not be collected under applicable law, then at the maximum rate of interest, if any, which may be collected from Maker under applicable law (the "DEFAULT INTEREST RATE"), and such default interest shall be immediately due and payable. 3.4. Maker's Agreements. Maker acknowledges that it would be extremely difficult or impracticable to determine Payee's actual damages resulting from any late payment or default, and such late charges and default interest are reasonable estimates of those damages and do not constitute a penalty. The remedies of Payee in this A Note or in the Loan Documents, or at law or in equity, shall be cumulative and concurrent, and may be pursued singly, successively or together, in Payee's discretion. 3.5. Maker to Pay Costs. In the event that this A Note, or any part hereof, is collected by or through an attorney-at-law, Maker agrees to pay all costs of collection, including, but not limited to, reasonable attorneys' fees. 13 3.6. Exculpation. Notwithstanding anything in this A Note or the Loan Documents to the contrary, but subject to the qualifications hereinbelow set forth, Payee agrees that: (a) Maker shall be liable upon the indebtedness evidenced hereby and for the other obligations arising under the Loan Documents to the full extent (but only to the extent) of the security therefor, the same being all properties (whether real or personal), rights, estates and interests now or at any time hereafter securing the payment of this A Note and/or the other obligations of Maker under the Loan Documents (collectively, the "SECURITY PROPERTY"); (b) if a default occurs in the timely and proper payment of all or any part of such indebtedness evidenced hereby or in the timely and proper performance of the other obligations of Maker under the Loan Documents, any judicial proceedings brought by Payee against Maker shall be limited to the preservation, enforcement and foreclosure, or any thereof, of the liens, security titles, estates, assignments, rights and security interests now or at any time hereafter securing the payment of this A Note and/or the other obligations of Maker under the Loan Documents, and no attachment, execution or other writ of process shall be sought, issued or levied upon any assets, properties or funds of Maker other than the Security Property, except with respect to the liability described below in this section; and 14 (c) in the event of a foreclosure of such liens, security titles, estates, assignments, rights or security interests securing the payment of this A Note and/or the other obligations of Maker under the Loan Documents, no judgment for any deficiency upon the indebtedness evidenced hereby shall be sought or obtained by Payee against Maker, except with respect to the liability described below in this section; provided, however, that, notwithstanding the foregoing provisions of this section, Maker shall be fully and personally liable and subject to legal action (i) for proceeds paid under any insurance policies (or paid as a result of any other claim or cause of action against any person or entity) by reason of damage, loss or destruction to all or any portion of the Security Property, to the full extent of such proceeds not previously delivered to Payee, but which, under the terms of the Loan Documents, should have been delivered to Payee, (ii) for proceeds or awards resulting from the condemnation or other taking in lieu of condemnation of all or any portion of the Security Property, to the full extent of such proceeds or awards not previously delivered to Payee, but which, under the terms of the Loan Documents, should have been delivered to Payee, (iii) for all tenant security deposits or other refundable deposits paid to or held by Maker or any other person or entity in connection with leases of all or any portion of the Security Property which are not applied in accordance with the terms of the applicable lease or other agreement, (iv) for rent and other payments received from tenants under leases of all or any portion of the Security Property paid more than one (1) month in advance, (v) for rents, issues, profits and revenues of all or any portion of the Security Property received or applicable to a period after the occurrence of any Event of Default or any event which, with notice or the passage of time, or both, would constitute an Event of Default, hereunder or under the Loan Documents which are not either applied to the ordinary and necessary expenses of owning and operating the Security Property or paid to Payee, (vi) for waste committed on the Security Property by Maker or any of its principals, officers, general partners or members, any guarantor, any indemnitor, or any agent or employee of any such person, damage to the Security Property as a result of the intentional misconduct or gross negligence of Maker or any of its principals, officers, general partners or members, any guarantor, any indemnitor, or any agent or employee of any such person, or any removal of all or any portion of the Security Property by Maker in violation of the terms of the Loan Documents, to the full extent of the losses or damages incurred by Payee on account of such occurrence, (vii) for failure to pay any valid taxes, assessments, mechanic's liens, materialmen's liens or other liens which could create liens on any portion of the Security Property which would be superior to the lien or security title of the Security Instrument or the other Loan Documents, to the full extent of the amount claimed by any such lien claimant except, with respect to any such taxes or assessments, to the extent that funds have been deposited with Payee pursuant to the terms of the Security Instrument specifically for the applicable taxes or assessments and not applied by Payee to pay such taxes and assessments, (viii) for all obligations and indemnities of Maker under the Loan Documents relating to Hazardous Substances (as defined in the Security Instrument) or radon or compliance with environmental laws and regulations to the full extent of any losses or damages (including those resulting from diminution in value of any Security Property) incurred by Payee as a result of the existence of such hazardous or toxic substances or radon or failure to comply with environmental laws or regulations, and (ix) for fraud, material misrepresentation or failure to disclose a material fact by Maker or any of its principals, officers, general partners or members, any guarantor, any indemnitor or any agent, employee or other person authorized or apparently authorized to make statements, representations or disclosures on behalf of Maker, any principal, officer, general partner or member of Maker, any guarantor or any indemnitor, to the full extent of any losses, damages and expenses of Payee on account thereof. References herein to particular sections of the Loan Documents shall be deemed references to such sections as affected by other provisions of the Loan Documents relating thereto. Nothing contained in this section shall (1) be deemed to be a release or impairment of the indebtedness evidenced by this A Note or the other obligations of Maker under the Loan Documents or the lien of the Loan Documents upon the Security Property, or (2) preclude Payee from foreclosing the Loan Documents in case of any default or from enforcing any of the other rights of Payee except as stated in this section, or (3) limit or impair in any way whatsoever (A) the Indemnity and Guaranty Agreement (the "INDEMNITY AGREEMENT") or (B) the Environmental Indemnity Agreement (the "ENVIRONMENTAL INDEMNITY AGREEMENT"), each of even date herewith executed and delivered in connection with the indebtedness evidenced by this A Note or release, relieve, reduce, waive or impair in any way whatsoever, any obligation of any party to the Indemnity Agreement or the Environmental Indemnity Agreement. 15 Notwithstanding the foregoing, the agreement of Payee not to pursue recourse liability as set forth in this Section 3.6 SHALL BECOME NULL AND VOID and shall be of no further force and effect in the event of a material default by Maker, Indemnitor (as defined in the Security Instrument) or any general partner, manager or managing member of Maker which is a Single-Purpose Entity (as defined in the Security Instrument) (if any) of any of the covenants set forth in Section 2.9 or Section 2.29 of the Security Instrument (excluding, however, the covenants set forth in Sections 2.29 (o) and (u)). Notwithstanding anything to the contrary in this A Note, the Security Instrument or any of the other Loan Documents, Payee shall not be deemed to have waived any right which Payee may have under Section 506(a), 506(b), 1111(b) or any other provisions of the U.S. Bankruptcy Code to file a claim for the full amount of the indebtedness evidenced hereby or secured by the Security Instrument or any of the other Loan Documents or to require that all collateral shall continue to secure all of the indebtedness owing to Payee in accordance with this A Note, the Security Instrument and the other Loan Documents. All rights, powers or remedies of enforcement available to Payee by the terms of the Loan Documents may be exercised by Collateral Agent. ARTICLE IV. - GENERAL CONDITIONS 4.1. No Waiver; Amendment. No failure to accelerate the indebtedness evidenced hereby by reason of default hereunder, acceptance of a partial or past due payment, or indulgences granted from time to time shall be construed (i) as a novation of this A Note or as a reinstatement of the indebtedness evidenced hereby or as a waiver of such right of acceleration or of the right of Payee thereafter to insist upon strict compliance with the terms of this A Note, or (ii) to prevent the exercise of such right of acceleration or any other right granted hereunder or by any applicable laws; and Maker hereby expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing. No extension of the time for the payment of this A Note or any installment due hereunder made by agreement with any person now or hereafter liable for the payment of this A Note shall operate to release, discharge, modify, change or affect the original liability of Maker under this A Note, either in whole or in part, unless Payee agrees otherwise in writing. This A Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 4.2. Waivers. Presentment for payment, demand, protest and notice of demand, protest and nonpayment and all other notices are hereby waived by Maker. Maker hereby further waives and renounces, to the fullest extent permitted by law, all rights to the benefits of any moratorium, reinstatement, marshaling, forbearance, valuation, stay, extension, redemption, appraisement, exemption and homestead now or hereafter provided by the Constitution and laws of the United States of America and of each state thereof, both as to itself and in and to all of its property, real and personal, against the enforcement and collection of the obligations evidenced by this A Note or the other Loan Documents. 16 4.3. Limit of Validity. The provisions of this A Note and of all agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, including, but not limited to, the Loan Documents, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity of this A Note or otherwise, shall the amount contracted for, charged, taken, reserved, paid or agreed to be paid ("INTEREST") to Payee for the use, forbearance or detention of the money loaned under this A Note exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between Maker and Payee shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law or otherwise transcend the limit of validity prescribed by applicable law, then, ipso facto, the obligation to be performed or fulfilled shall be reduced to such limit, and if, from any circumstance whatsoever, Payee shall ever receive anything of value deemed Interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive Interest shall be applied to the reduction of the principal balance owing under this A Note in the inverse order of its maturity (whether or not then due) or, at the option of Payee, be paid over to Maker, and not to the payment of Interest. All Interest (including any amounts or payments judicially or otherwise under the law deemed to be Interest) contracted for, charged, taken, reserved, paid or agreed to be paid to Payee shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this A Note, including any extensions and renewals hereof until payment in full of the principal balance of this A Note so that the Interest thereon for such full term will not exceed at any time the maximum amount permitted by applicable law. To the extent United States federal law permits a greater amount of interest than is permitted under the law of the State in which the Security Property is located, Payee will rely on United States federal law for the purpose of determining the maximum amount permitted by applicable law. Additionally, to the extent permitted by applicable law now or hereafter in effect, Payee may, at its option and from time to time, implement any other method of computing the maximum lawful rate under the law of the State in which the Security Property is located or under other applicable law by giving notice, if required, to Maker as provided by applicable law now or hereafter in effect. This Section 4.3 will control all agreements between Maker and Payee. 4.4. Use of Funds. Maker hereby warrants, represents and covenants that no funds disbursed hereunder shall be used for personal, family or household purposes. 4.5. Unconditional Payment. Maker is and shall be obligated to pay principal, interest and any and all other amounts which become payable hereunder or under the other Loan Documents absolutely and unconditionally and without any abatement, postponement, diminution or deduction and without any reduction for counterclaim or setoff. In the event that at any time any payment received by Payee hereunder shall be deemed by a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under any bankruptcy, insolvency or other debtor relief law, then the obligation to make such payment shall survive any cancellation or satisfaction of this A Note or return thereof to Maker and shall not be discharged or satisfied with any prior payment thereof or cancellation of this A Note, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof, and such payment shall be immediately due and payable upon demand. 4.6. Governing Law. THIS A NOTE SHALL BE INTERPRETED, CONSTRUED AND ENFORCED ACCORDING TO THE LAWS OF THE STATE IN WHICH THE SECURITY PROPERTY IS LOCATED. 4.7. Waiver of Jury Trial. MAKER, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THE DEBT EVIDENCED BY THIS A NOTE OR ANY CONDUCT, ACT OR OMISSION OF PAYEE OR MAKER, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, PARTNERS, MEMBERS, EMPLOYEES, AGENTS OR ATTORNEYS, OR ANY OTHER PERSONS AFFILIATED WITH PAYEE OR MAKER, IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. 4.8. Secondary Market. Payee may sell, transfer and deliver the Loan Documents to one or more investors in the secondary mortgage market. In connection with such sale, Payee may retain or assign responsibility for servicing the loan evidenced by this A Note or may delegate some or all of such responsibility and/or obligations to a servicer, including, but not limited to, any subservicer or master servicer, on behalf of the investors. All references to Payee herein shall refer to and include, without limitation, any such servicer, to the extent applicable. 17 4.9. Dissemination of Information. If Payee determines at any time to sell, transfer or assign this A Note, the Security Instrument and the other Loan Documents, and any or all servicing rights with respect thereto, or to grant participations therein (the "PARTICIPATIONS") or issue mortgage pass-through certificates or other securities evidencing a beneficial interest in a rated or unrated public offering or private placement (the "SECURITIES"), Payee may forward to each purchaser, transferee, assignee, servicer, participant, investor, or their respective successors in such Participations and/or Securities (collectively, the "INVESTOR") or any Rating Agency rating such Securities, each prospective Investor and each of the foregoing's respective counsel, all documents and information which Payee now has or may hereafter acquire relating to the debt evidenced by this A Note and to Maker, any guarantor, any indemnitor and the Security Property, which shall have been furnished by Maker, any guarantor or any indemnitor as Payee determines necessary or desirable. 4.10. Splitting the Loan. Payee shall have the right at no cost to Maker from time to time to sever this A Note and the other Loan Documents into one or more separate notes, mortgages, deeds of trust and other security documents (the "SEVERED LOAN DOCUMENTS") in such denominations and priorities as Payee shall determine in its sole discretion, provided, however, that the terms, provisions and clauses of the Severed Loan Documents shall be no more adverse to Maker than those contained in this A Note, the Security Instrument and the other Loan Documents. Maker shall execute and deliver to Payee from time to time, promptly after the request of Payee, a severance agreement and such other documents as Payee shall reasonably request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Payee. Maker hereby absolutely and irrevocably appoints Payee as its true and lawful attorney, coupled with an interest, in its name and stead to make and execute all documents necessary or desirable to effect the aforesaid severance, Maker ratifying all that its said attorney shall do by virtue thereof; provided, however, that Payee shall not make or execute any such documents under such power until three (3) days after notice has been given to Maker by Payee of Payee's intent to exercise its rights under such power. ARTICLE V. - MISCELLANEOUS PROVISIONS 5.1. Miscellaneous. The terms and provisions hereof shall be binding upon and inure to the benefit of Maker and Payee and their respective heirs, executors, legal representatives, successors, successors-in-title and assigns, whether by voluntary action of the parties or by operation of law. As used herein, the terms "Maker" and "Payee" shall be deemed to include their respective heirs, executors, legal representatives, successors, successors-in-title and assigns, whether by voluntary action of the parties or by operation of law. If Maker consists of more than one person or entity, each shall be jointly and severally liable to perform the obligations of Maker under this A Note. All personal pronouns used herein, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of articles and sections are for convenience only and in no way define, limit, amplify or describe the scope or intent of any provisions hereof. Time is of the essence with respect to all provisions of this A Note. This A Note and the other Loan Documents contain the entire agreements between the parties hereto relating to the subject matter hereof and thereof and all prior agreements relative hereto and thereto which are not contained herein or therein are terminated. 18 5.2. Taxpayer Identification. Maker's Tax Identification Number is 13-4196336. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 19 IN WITNESS WHEREOF, Maker has executed this A Note as of the date first written above. MAKER: CLF RED LION ROAD PHILADELPHIA BUSINESS TRUST, a Virginia business trust By: /s/ Michael J. Heneghan ------------------------------------------ Name: Michael J. Heneghan Title: Senior Vice President ANNEX 1 TO $71,700,000.00 PROMISSORY NOTE BY CLF RED LION ROAD PHILADELPHIA BUSINESS TRUST TO WACHOVIA BANK, NATIONAL ASSOCIATION [SEE ATTACHED] [GRAPHIC OMITTED] TJX COMPANIES, PHILADELPHIA, PA A Note Amount 71,700,000.00 B Note Amount 9,647,275.68 TOTAL LOAN AMOUNT 81,347,275.68 Coupon 5.57% Note Date 10-Mar-06 Square Feet 1,015,500
A NOTE TOTAL AVAILABLE DEBT FOR A NOTE SERVICE DEBT PAYMENT (A PERIOD DATE RENT SERVICE BEG BALANCE INTEREST PRINCIPAL NOTE) DSCR END BALANCE ------ ---- ----- -------- ------------- --------- ---------- ------ ------ ------------- 0 3/11/2006 - 71,700,000.00 1 4/11/2006 475,592.50 352,760.90 71,700,000.00 343,901.08 - 343,901.08 1.35 71,700,000.00 2 5/11/2006 475,592.50 352,760.90 71,700,000.00 332,807.50 - 332,807.50 1.35 71,700,000.00 3 6/11/2006 475,592.50 352,760.90 71,700,000.00 343,901.08 - 343,901.08 1.35 71,700,000.00 4 7/11/2006 487,440.00 361,548.54 71,700,000.00 332,807.50 - 332,807.50 1.35 71,700,000.00 5 8/11/2006 487,440.00 361,548.54 71,700,000.00 343,901.08 - 343,901.08 1.35 71,700,000.00 6 9/11/2006 487,440.00 361,548.54 71,700,000.00 343,901.08 - 343,901.08 1.35 71,700,000.00 7 10/11/2006 487,440.00 361,548.54 71,700,000.00 332,807.50 28,741.04 361,548.54 1.35 71,671,258.96 8 11/11/2006 487,440.00 361,548.54 71,671,258.96 343,763.23 17,785.31 361,548.54 1.35 71,653,473.65 9 12/11/2006 487,440.00 361,548.54 71,653,473.65 332,591.54 28,957.00 361,548.54 1.35 71,624,516.65 10 1/11/2007 487,440.00 361,548.54 71,624,516.65 343,539.04 18,009.50 361,548.54 1.35 71,606,507.15 11 2/11/2007 487,440.00 361,548.54 71,606,507.15 343,452.66 18,095.88 361,548.54 1.35 71,588,411.27 12 3/11/2007 487,440.00 361,548.54 71,588,411.27 310,136.91 51,411.63 361,548.54 1.35 71,536,999.64 13 4/11/2007 487,440.00 361,548.54 71,536,999.64 343,119.27 18,429.27 361,548.54 1.35 71,518,570.37 14 5/11/2007 487,440.00 361,548.54 71,518,570.37 331,965.36 29,583.18 361,548.54 1.35 71,488,987.19 15 6/11/2007 487,440.00 361,548.54 71,488,987.19 342,888.98 18,659.56 361,548.54 1.35 71,470,327.63 16 7/11/2007 498,441.25 369,708.48 71,470,327.63 331,741.44 37,967.04 369,708.48 1.35 71,432,360.59 17 8/11/2007 498,441.25 369,708.48 71,432,360.59 342,617.38 27,091.10 369,708.48 1.35 71,405,269.49 18 9/11/2007 498,441.25 369,708.48 71,405,269.49 342,487.44 27,221.04 369,708.48 1.35 71,378,048.45 19 10/11/2007 498,441.25 369,708.48 71,378,048.45 331,313.11 38,395.37 369,708.48 1.35 71,339,653.08 20 11/11/2007 498,441.25 369,708.48 71,339,653.08 342,172.72 27,535.76 369,708.48 1.35 71,312,117.32 21 12/11/2007 498,441.25 369,708.48 71,312,117.32 331,007.08 38,701.40 369,708.48 1.35 71,273,415.92 22 1/11/2008 498,441.25 369,708.48 71,273,415.92 341,855.02 27,853.46 369,708.48 1.35 71,245,562.46 23 2/11/2008 498,441.25 369,708.48 71,245,562.46 341,721.42 27,987.06 369,708.48 1.35 71,217,575.40 24 3/11/2008 498,441.25 369,708.48 71,217,575.40 319,549.30 50,159.18 369,708.48 1.35 71,167,416.22 25 4/11/2008 498,441.25 369,708.48 71,167,416.22 341,346.60 28,361.88 369,708.48 1.35 71,139,054.34 26 5/11/2008 498,441.25 369,708.48 71,139,054.34 330,203.78 39,504.70 369,708.48 1.35 71,099,549.64 27 6/11/2008 498,441.25 369,708.48 71,099,549.64 341,021.09 28,687.39 369,708.48 1.35 71,070,862.25 28 7/11/2008 511,135.00 379,123.81 71,070,862.25 329,887.25 49,236.56 379,123.81 1.35 71,021,625.69 29 8/11/2008 511,135.00 379,123.81 71,021,625.69 340,647.34 38,476.47 379,123.81 1.35 70,983,149.22 30 9/11/2008 511,135.00 379,123.81 70,983,149.22 340,462.79 38,661.02 379,123.81 1.35 70,944,488.20 31 10/11/2008 511,135.00 379,123.81 70,944,488.20 329,300.67 49,823.14 379,123.81 1.35 70,894,665.06 32 11/11/2008 511,135.00 379,123.81 70,894,665.06 340,038.38 39,085.43 379,123.81 1.35 70,855,579.63 33 12/11/2008 511,135.00 379,123.81 70,855,579.63 328,887.98 50,235.83 379,123.81 1.35 70,805,343.80 34 1/11/2009 511,135.00 379,123.81 70,805,343.80 339,609.96 39,513.85 379,123.81 1.35 70,765,829.95 35 2/11/2009 511,135.00 379,123.81 70,765,829.95 339,420.44 39,703.37 379,123.81 1.35 70,726,126.58 36 3/11/2009 511,135.00 379,123.81 70,726,126.58 306,401.30 72,722.51 379,123.81 1.35 70,653,404.07 37 4/11/2009 511,135.00 379,123.81 70,653,404.07 338,881.20 40,242.61 379,123.81 1.35 70,613,161.46 38 5/11/2009 511,135.00 379,123.81 70,613,161.46 327,762.76 51,361.05 379,123.81 1.35 70,561,800.41 39 6/11/2009 511,135.00 379,123.81 70,561,800.41 338,441.84 40,681.97 379,123.81 1.35 70,521,118.44 40 7/11/2009 517,905.00 384,145.32 70,521,118.44 327,335.52 56,809.80 384,145.32 1.35 70,464,308.64 41 8/11/2009 517,905.00 384,145.32 70,464,308.64 337,974.23 46,171.09 384,145.32 1.35 70,418,137.55 42 9/11/2009 517,905.00 384,145.32 70,418,137.55 337,752.77 46,392.55 384,145.32 1.35 70,371,745.00 43 10/11/2009 517,905.00 384,145.32 70,371,745.00 326,642.18 57,503.14 384,145.32 1.35 70,314,241.86 44 11/11/2009 517,905.00 384,145.32 70,314,241.86 337,254.45 46,890.87 384,145.32 1.35 70,267,350.99 45 12/11/2009 517,905.00 384,145.32 70,267,350.99 326,157.62 57,987.70 384,145.32 1.35 70,209,363.29 46 1/11/2010 517,905.00 384,145.32 70,209,363.29 336,751.41 47,393.91 384,145.32 1.35 70,161,969.38 47 2/11/2010 517,905.00 384,145.32 70,161,969.38 336,524.09 47,621.23 384,145.32 1.35 70,114,348.15 48 3/11/2010 517,905.00 384,145.32 70,114,348.15 303,750.94 80,394.38 384,145.32 1.35 70,033,953.77 49 4/11/2010 517,905.00 384,145.32 70,033,953.77 335,910.08 48,235.24 384,145.32 1.35 69,985,718.53 50 5/11/2010 517,905.00 384,145.32 69,985,718.53 324,850.38 59,294.94 384,145.32 1.35 69,926,423.59 51 6/11/2010 517,905.00 384,145.32 69,926,423.59 335,394.32 48,751.00 384,145.32 1.35 69,877,672.59 52 7/11/2010 517,905.00 384,145.32 69,877,672.59 324,348.86 59,796.46 384,145.32 1.35 69,817,876.13 53 8/11/2010 517,905.00 384,145.32 69,817,876.13 334,873.69 49,271.63 384,145.32 1.35 69,768,604.50 54 9/11/2010 517,905.00 384,145.32 69,768,604.50 334,637.36 49,507.96 384,145.32 1.35 69,719,096.54 55 10/11/2010 517,905.00 384,145.32 69,719,096.54 323,612.81 60,532.51 384,145.32 1.35 69,658,564.03 56 11/11/2010 517,905.00 384,145.32 69,658,564.03 334,109.56 50,035.76 384,145.32 1.35 69,608,528.27 57 12/11/2010 517,905.00 384,145.32 69,608,528.27 323,099.59 61,045.73 384,145.32 1.35 69,547,482.54 58 1/11/2011 517,905.00 384,145.32 69,547,482.54 333,576.77 50,568.55 384,145.32 1.35 69,496,913.99 59 2/11/2011 517,905.00 384,145.32 69,496,913.99 333,334.23 50,811.09 384,145.32 1.35 69,446,102.90 60 3/11/2011 517,905.00 384,145.32 69,446,102.90 300,855.95 83,289.37 384,145.32 1.35 69,362,813.53 61 4/11/2011 517,905.00 384,145.32 69,362,813.53 332,691.03 51,454.29 384,145.32 1.35 69,311,359.24 62 5/11/2011 517,905.00 384,145.32 69,311,359.24 321,720.23 62,425.09 384,145.32 1.35 69,248,934.15 63 6/11/2011 517,905.00 384,145.32 69,248,934.15 332,144.82 52,000.50 384,145.32 1.35 69,196,933.65 64 7/11/2011 517,905.00 384,145.32 69,196,933.65 321,189.10 62,956.22 384,145.32 1.35 69,133,977.43 65 8/11/2011 517,905.00 384,145.32 69,133,977.43 331,593.44 52,551.88 384,145.32 1.35 69,081,425.55 66 9/11/2011 517,905.00 384,145.32 69,081,425.55 331,341.38 52,803.94 384,145.32 1.35 69,028,621.61 67 10/11/2011 517,905.00 384,145.32 69,028,621.61 320,407.85 63,737.47 384,145.32 1.35 68,964,884.14 68 11/11/2011 517,905.00 384,145.32 68,964,884.14 330,782.40 53,362.92 384,145.32 1.35 68,911,521.22 69 12/11/2011 517,905.00 384,145.32 68,911,521.22 319,864.31 64,281.01 384,145.32 1.35 68,847,240.21 70 1/11/2012 517,905.00 384,145.32 68,847,240.21 330,218.14 53,927.18 384,145.32 1.35 68,793,313.03 71 2/11/2012 517,905.00 384,145.32 68,793,313.03 329,959.48 54,185.84 384,145.32 1.35 68,739,127.19 72 3/11/2012 517,905.00 384,145.32 68,739,127.19 308,428.64 75,716.68 384,145.32 1.35 68,663,410.51 73 4/11/2012 517,905.00 384,145.32 68,663,410.51 329,336.42 54,808.90 384,145.32 1.35 68,608,601.61 74 5/11/2012 517,905.00 384,145.32 68,608,601.61 318,458.26 65,687.06 384,145.32 1.35 68,542,914.55 75 6/11/2012 517,905.00 384,145.32 68,542,914.55 328,758.47 55,386.85 384,145.32 1.35 68,487,527.70 76 7/11/2012 517,905.00 384,145.32 68,487,527.70 317,896.27 66,249.05 384,145.32 1.35 68,421,278.65 77 8/11/2012 517,905.00 384,145.32 68,421,278.65 328,175.06 55,970.26 384,145.32 1.35 68,365,308.39 78 9/11/2012 517,905.00 384,145.32 68,365,308.39 327,906.61 56,238.71 384,145.32 1.35 68,309,069.68 79 10/11/2012 517,905.00 384,145.32 68,309,069.68 317,067.93 67,077.39 384,145.32 1.35 68,241,992.29 80 11/11/2012 517,905.00 384,145.32 68,241,992.29 327,315.13 56,830.19 384,145.32 1.35 68,185,162.10 81 12/11/2012 517,905.00 384,145.32 68,185,162.10 316,492.79 67,652.53 384,145.32 1.35 68,117,509.57 82 1/11/2013 517,905.00 384,145.32 68,117,509.57 326,718.07 57,427.25 384,145.32 1.35 68,060,082.32 83 2/11/2013 517,905.00 384,145.32 68,060,082.32 326,442.62 57,702.70 384,145.32 1.35 68,002,379.62 84 3/11/2013 517,905.00 384,145.32 68,002,379.62 294,601.42 89,543.90 384,145.32 1.35 67,912,835.72 85 4/11/2013 517,905.00 384,145.32 67,912,835.72 325,736.37 58,408.95 384,145.32 1.35 67,854,426.77 86 5/11/2013 517,905.00 384,145.32 67,854,426.77 314,957.63 69,187.69 384,145.32 1.35 67,785,239.08 87 6/11/2013 517,905.00 384,145.32 67,785,239.08 325,124.37 59,020.95 384,145.32 1.35 67,726,218.13 88 7/11/2013 517,905.00 384,145.32 67,726,218.13 314,362.53 69,782.79 384,145.32 1.35 67,656,435.34 89 8/11/2013 517,905.00 384,145.32 67,656,435.34 324,506.57 59,638.75 384,145.32 1.35 67,596,796.59 90 9/11/2013 517,905.00 384,145.32 67,596,796.59 324,220.52 59,924.80 384,145.32 1.35 67,536,871.79 91 10/11/2013 517,905.00 384,145.32 67,536,871.79 313,483.65 70,661.67 384,145.32 1.35 67,466,210.12 92 11/11/2013 517,905.00 384,145.32 67,466,210.12 323,594.18 60,551.14 384,145.32 1.35 67,405,658.98 93 12/11/2013 517,905.00 384,145.32 67,405,658.98 312,874.60 71,270.72 384,145.32 1.35 67,334,388.26 94 1/11/2014 517,905.00 384,145.32 67,334,388.26 322,961.91 61,183.41 384,145.32 1.35 67,273,204.85 95 2/11/2014 517,905.00 384,145.32 67,273,204.85 322,668.45 61,476.87 384,145.32 1.35 67,211,727.98 96 3/11/2014 517,905.00 384,145.32 67,211,727.98 291,176.14 92,969.18 384,145.32 1.35 67,118,758.80 97 4/11/2014 517,905.00 384,145.32 67,118,758.80 321,927.67 62,217.65 384,145.32 1.35 67,056,541.15 98 5/11/2014 517,905.00 384,145.32 67,056,541.15 311,254.11 72,891.21 384,145.32 1.35 66,983,649.94 99 6/11/2014 517,905.00 384,145.32 66,983,649.94 321,279.63 62,865.69 384,145.32 1.35 66,920,784.25 100 7/11/2014 517,905.00 384,145.32 66,920,784.25 310,623.97 73,521.35 384,145.32 1.35 66,847,262.90 101 8/11/2014 517,905.00 384,145.32 66,847,262.90 320,625.47 63,519.85 384,145.32 1.35 66,783,743.05 102 9/11/2014 517,905.00 384,145.32 66,783,743.05 320,320.80 63,824.52 384,145.32 1.35 66,719,918.53 103 10/11/2014 517,905.00 384,145.32 66,719,918.53 309,691.62 74,453.70 384,145.32 1.35 66,645,464.83 104 11/11/2014 517,905.00 384,145.32 66,645,464.83 319,657.57 64,487.75 384,145.32 1.35 66,580,977.08 105 12/11/2014 517,905.00 384,145.32 66,580,977.08 309,046.70 75,098.62 384,145.32 1.35 66,505,878.46 106 1/11/2015 517,905.00 384,145.32 66,505,878.46 318,988.06 65,157.26 384,145.32 1.35 66,440,721.20 107 2/11/2015 517,905.00 384,145.32 66,440,721.20 318,675.54 65,469.78 384,145.32 1.35 66,375,251.42 108 3/11/2015 517,905.00 384,145.32 66,375,251.42 287,552.34 96,592.98 384,145.32 1.35 66,278,658.44 109 4/11/2015 517,905.00 384,145.32 66,278,658.44 317,898.22 66,247.10 384,145.32 1.35 66,212,411.34 110 5/11/2015 517,905.00 384,145.32 66,212,411.34 307,335.94 76,809.38 384,145.32 1.35 66,135,601.96 111 6/11/2015 517,905.00 384,145.32 66,135,601.96 317,212.07 66,933.25 384,145.32 1.35 66,068,668.71 112 7/11/2015 517,905.00 384,145.32 66,068,668.71 306,668.74 77,476.58 384,145.32 1.35 65,991,192.13 113 8/11/2015 517,905.00 384,145.32 65,991,192.13 316,519.42 67,625.90 384,145.32 1.35 65,923,566.23 114 9/11/2015 517,905.00 384,145.32 65,923,566.23 316,195.06 67,950.26 384,145.32 1.35 65,855,615.97 115 10/11/2015 517,905.00 384,145.32 65,855,615.97 305,679.82 78,465.50 384,145.32 1.35 65,777,150.47 116 11/11/2015 517,905.00 384,145.32 65,777,150.47 315,492.79 68,652.53 384,145.32 1.35 65,708,497.94 117 12/11/2015 517,905.00 384,145.32 65,708,497.94 304,996.94 79,148.38 384,145.32 1.35 65,629,349.56 118 1/11/2016 517,905.00 384,145.32 65,629,349.56 314,783.88 69,361.44 384,145.32 1.35 65,559,988.12 119 2/11/2016 517,905.00 384,145.32 65,559,988.12 314,451.20 69,694.12 384,145.32 1.35 65,490,294.00 120 3/11/2016 517,905.00 384,145.32 65,490,294.00 293,851.31 90,294.01 384,145.32 1.35 65,399,999.99
CASH FLOW AFTER A CASH FLOW NOTE DEBT REPLACEMENT TO PERIOD DATE SERVICE RESERVE BORROWER ------ ---- -------- ------- -------- 0 3/11/2006 1 4/11/2006 131,691.42 4,231.25 127,460.17 2 5/11/2006 142,785.00 4,231.25 138,553.75 3 6/11/2006 131,691.42 4,231.25 127,460.17 4 7/11/2006 154,632.50 4,231.25 150,401.25 5 8/11/2006 143,538.92 4,231.25 139,307.67 6 9/11/2006 143,538.92 4,231.25 139,307.67 7 10/11/2006 125,891.46 4,231.25 121,660.21 8 11/11/2006 125,891.46 4,231.25 121,660.21 9 12/11/2006 125,891.46 4,231.25 121,660.21 10 1/11/2007 125,891.46 4,231.25 121,660.21 11 2/11/2007 125,891.46 4,231.25 121,660.21 12 3/11/2007 125,891.46 4,231.25 121,660.21 13 4/11/2007 125,891.46 4,231.25 121,660.21 14 5/11/2007 125,891.46 4,231.25 121,660.21 15 6/11/2007 125,891.46 4,231.25 121,660.21 16 7/11/2007 128,732.77 4,231.25 124,501.52 17 8/11/2007 128,732.77 4,231.25 124,501.52 18 9/11/2007 128,732.77 4,231.25 124,501.52 19 10/11/2007 128,732.77 4,231.25 124,501.52 20 11/11/2007 128,732.77 4,231.25 124,501.52 21 12/11/2007 128,732.77 4,231.25 124,501.52 22 1/11/2008 128,732.77 4,231.25 124,501.52 23 2/11/2008 128,732.77 4,231.25 124,501.52 24 3/11/2008 128,732.77 4,231.25 124,501.52 25 4/11/2008 128,732.77 4,231.25 124,501.52 26 5/11/2008 128,732.77 4,231.25 124,501.52 27 6/11/2008 128,732.77 4,231.25 124,501.52 28 7/11/2008 132,011.19 4,231.25 127,779.94 29 8/11/2008 132,011.19 4,231.25 127,779.94 30 9/11/2008 132,011.19 4,231.25 127,779.94 31 10/11/2008 132,011.19 4,231.25 127,779.94 32 11/11/2008 132,011.19 4,231.25 127,779.94 33 12/11/2008 132,011.19 4,231.25 127,779.94 34 1/11/2009 132,011.19 4,231.25 127,779.94 35 2/11/2009 132,011.19 4,231.25 127,779.94 36 3/11/2009 132,011.19 4,231.25 127,779.94 37 4/11/2009 132,011.19 4,231.25 127,779.94 38 5/11/2009 132,011.19 4,231.25 127,779.94 39 6/11/2009 132,011.19 4,231.25 127,779.94 40 7/11/2009 133,759.68 4,231.25 129,528.43 41 8/11/2009 133,759.68 4,231.25 129,528.43 42 9/11/2009 133,759.68 4,231.25 129,528.43 43 10/11/2009 133,759.68 4,231.25 129,528.43 44 11/11/2009 133,759.68 4,231.25 129,528.43 45 12/11/2009 133,759.68 4,231.25 129,528.43 46 1/11/2010 133,759.68 4,231.25 129,528.43 47 2/11/2010 133,759.68 4,231.25 129,528.43 48 3/11/2010 133,759.68 4,231.25 129,528.43 49 4/11/2010 133,759.68 4,231.25 129,528.43 50 5/11/2010 133,759.68 4,231.25 129,528.43 51 6/11/2010 133,759.68 4,231.25 129,528.43 52 7/11/2010 133,759.68 4,231.25 129,528.43 53 8/11/2010 133,759.68 4,231.25 129,528.43 54 9/11/2010 133,759.68 4,231.25 129,528.43 55 10/11/2010 133,759.68 4,231.25 129,528.43 56 11/11/2010 133,759.68 4,231.25 129,528.43 57 12/11/2010 133,759.68 4,231.25 129,528.43 58 1/11/2011 133,759.68 4,231.25 129,528.43 59 2/11/2011 133,759.68 4,231.25 129,528.43 60 3/11/2011 133,759.68 4,231.25 129,528.43 61 4/11/2011 133,759.68 4,231.25 129,528.43 62 5/11/2011 133,759.68 4,231.25 129,528.43 63 6/11/2011 133,759.68 4,231.25 129,528.43 64 7/11/2011 133,759.68 4,231.25 129,528.43 65 8/11/2011 133,759.68 4,231.25 129,528.43 66 9/11/2011 133,759.68 4,231.25 129,528.43 67 10/11/2011 133,759.68 4,231.25 129,528.43 68 11/11/2011 133,759.68 4,231.25 129,528.43 69 12/11/2011 133,759.68 4,231.25 129,528.43 70 1/11/2012 133,759.68 4,231.25 129,528.43 71 2/11/2012 133,759.68 4,231.25 129,528.43 72 3/11/2012 133,759.68 4,231.25 129,528.43 73 4/11/2012 133,759.68 4,231.25 129,528.43 74 5/11/2012 133,759.68 4,231.25 129,528.43 75 6/11/2012 133,759.68 4,231.25 129,528.43 76 7/11/2012 133,759.68 4,231.25 129,528.43 77 8/11/2012 133,759.68 4,231.25 129,528.43 78 9/11/2012 133,759.68 4,231.25 129,528.43 79 10/11/2012 133,759.68 4,231.25 129,528.43 80 11/11/2012 133,759.68 4,231.25 129,528.43 81 12/11/2012 133,759.68 4,231.25 129,528.43 82 1/11/2013 133,759.68 4,231.25 129,528.43 83 2/11/2013 133,759.68 4,231.25 129,528.43 84 3/11/2013 133,759.68 4,231.25 129,528.43 85 4/11/2013 133,759.68 4,231.25 129,528.43 86 5/11/2013 133,759.68 4,231.25 129,528.43 87 6/11/2013 133,759.68 4,231.25 129,528.43 88 7/11/2013 133,759.68 4,231.25 129,528.43 89 8/11/2013 133,759.68 4,231.25 129,528.43 90 9/11/2013 133,759.68 4,231.25 129,528.43 91 10/11/2013 133,759.68 4,231.25 129,528.43 92 11/11/2013 133,759.68 4,231.25 129,528.43 93 12/11/2013 133,759.68 4,231.25 129,528.43 94 1/11/2014 133,759.68 4,231.25 129,528.43 95 2/11/2014 133,759.68 4,231.25 129,528.43 96 3/11/2014 133,759.68 4,231.25 129,528.43 97 4/11/2014 133,759.68 4,231.25 129,528.43 98 5/11/2014 133,759.68 4,231.25 129,528.43 99 6/11/2014 133,759.68 4,231.25 129,528.43 100 7/11/2014 133,759.68 4,231.25 129,528.43 101 8/11/2014 133,759.68 4,231.25 129,528.43 102 9/11/2014 133,759.68 4,231.25 129,528.43 103 10/11/2014 133,759.68 4,231.25 129,528.43 104 11/11/2014 133,759.68 4,231.25 129,528.43 105 12/11/2014 133,759.68 4,231.25 129,528.43 106 1/11/2015 133,759.68 4,231.25 129,528.43 107 2/11/2015 133,759.68 4,231.25 129,528.43 108 3/11/2015 133,759.68 4,231.25 129,528.43 109 4/11/2015 133,759.68 4,231.25 129,528.43 110 5/11/2015 133,759.68 4,231.25 129,528.43 111 6/11/2015 133,759.68 4,231.25 129,528.43 112 7/11/2015 133,759.68 4,231.25 129,528.43 113 8/11/2015 133,759.68 4,231.25 129,528.43 114 9/11/2015 133,759.68 4,231.25 129,528.43 115 10/11/2015 133,759.68 4,231.25 129,528.43 116 11/11/2015 133,759.68 4,231.25 129,528.43 117 12/11/2015 133,759.68 4,231.25 129,528.43 118 1/11/2016 133,759.68 4,231.25 129,528.43 119 2/11/2016 133,759.68 4,231.25 129,528.43 120 3/11/2016 133,759.68 4,231.25 129,528.43 ----------- -------------- ------------
-----END PRIVACY-ENHANCED MESSAGE-----