-----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, TsELA94XKChOOBaGQ4p5SEMuAgMFZXvvv1Mc5jBT3viY8RO1kF42PUGkRhr0Esct sl9yO537xJIETL0NYnPjAw== 0000891554-00-001068.txt : 20000418 0000891554-00-001068.hdr.sgml : 20000418 ACCESSION NUMBER: 0000891554-00-001068 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE REALTY INCOME FUND I L P CENTRAL INDEX KEY: 0000785898 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133311993 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15796 FILM NUMBER: 603227 BUSINESS ADDRESS: STREET 1: 475 FIFTH STREET CITY: NEW YORK STATE: NY ZIP: 10117 BUSINESS PHONE: 2126960701 MAIL ADDRESS: STREET 1: 475 FIFTH STREET CITY: NEW YORK STATE: NY ZIP: 10017 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-15796 CORPORATE REALTY INCOME FUND I, L. P. (Exact Name of Registrant as Specified in Its Charter) Delaware 13-3311993 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 475 Fifth Avenue, New York, NY 10017 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 212-696-0701 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None Not Applicable Securities registered pursuant to Section 12(g) of the Act: Depositary Units of Limited Partnership (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Documents Incorporated by Reference in Part IV of this Form 10-K None. CORPORATE REALTY INCOME FUND I, L. P. Annual Report on Form 10-K December 31, 1999 TABLE OF CONTENTS
PAGE ---- PART I ...................................................................................... 1 Item 1. Business ........................................................................... 1 Item 2. Properties ......................................................................... 6 Item 3. Legal Proceedings .................................................................. 12 Item 4. Submission of Matters to a Vote of Security-Holders ................................ 13 PART II ..................................................................................... 14 Item 5. Market for Registrant's Securities and Related Security-Holder Matters ............. 14 Item 6. Selected Financial Data ............................................................ 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................ 19 Item 8. Financial Statements and Supplementary Data ........................................ 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III .................................................................................... 21 Item 10. Directors and Executive Officers of the Registrant ................................ 21 Item 11. Executive Compensation ............................................................ 22 Item 12. Security Ownership of Certain Beneficial Owners and Management .................... 23 Item 13. Certain Relationships and Related Transactions .................................... 24 ITEM IV ..................................................................................... 26 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................. 26
PART I Item 1. Business. General Corporate Realty Income Fund I, L.P. ("Registrant") is a Delaware limited partnership organized on November 25, 1985 pursuant to the Delaware Revised Uniform Limited Partnership Act. The general partners of Registrant are 1345 Realty Corporation, a Delaware corporation (the "Corporate General Partner"), and Robert F. Gossett, Jr. (the "Individual General Partner") (collectively, the "General Partners"). The limited partners of Registrant are hereinafter collectively referred to as the "Limited Partners." Registrant organized two subsidiaries in March 1999 in connection with the financing of its property at 475 Fifth Avenue, New York, New York. One subsidiary, 475 Fifth Avenue Limited Partnership (the "Subsidiary Partnership"), a Delaware limited partnership, owns 475 Fifth Avenue. The other subsidiary, 475 Fifth-GP, Inc. (the "Subsidiary Corporation"), a Delaware corporation, is the sole general partner of the Subsidiary Partnership. Registrant is the sole limited partner of the Subsidiary Partnership, with a 99% interest in all items of income, gain, loss, and deduction, and the sole shareholder of the Subsidiary Corporation. Registrant's business consists of owning and leasing to others the properties described in Item 2 below. Registrant's properties are leveraged as described below. On March 26, 1986, Registrant commenced an offering (the "Offering") of $80,000,000 of depositary units of limited partnership interest (the "Units"). Registrant terminated the Offering in September 1987, having issued 3,200,000 Units ($80,000,000) and received net proceeds from the Offering (after deduction for organization and offering expenses of $5,948,103) aggregating $74,051,897. Since the Offering, Registrant has invested aggregate funds in excess of $100,000,000 (including $40,000,000 of financing proceeds) in acquiring and improving its properties, which currently number seven. Rental revenue from the following tenants at Registrant's properties each accounted for more than 10% of Registrant's total rental revenue for each of the years ended December 31, 1997, 1998 and 1999: a. For 1997, GTE Directories Corporation ("GTE") as tenant in the Directory Building (16%); and The Austin Company ("Austin") as a tenant in the Austin Place Building (10%). b. For 1998, GTE as tenant in the Directory Building (14%). c. For 1999, GTE as tenant in the Directory Building (16%). 475 Fifth Avenue Loan On August 9, 1999, the Subsidiary Partnership obtained a first mortgage loan (the "475 Loan") from Heller Financial, Inc. ("Heller") in the amount of $32,000,000. On such date, Registrant paid down approximately $23,381,000 of the Fleet Loan (see "Fleet Bank Loan" below) to release the lien of the Fleet Loan from 475 Fifth Avenue and subject the property to the lien of the 475 Loan. The balance of proceeds borrowed by the Subsidiary Partnership from Heller after payment of loan broker fees and costs of approximately $329,000 and other closing costs of approximately $505,000, were used to provide cash to fund capital improvements and leasing costs at 475 Fifth Avenue and to augment working capital. As of March 23, 2000, the outstanding principal balance of the 475 Loan was approximately $31,891,000. 1 The 475 Loan is evidenced by a Consolidated and Restated Promissory Note, a Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing, and a Hazardous Substance Indemnification Agreement (collectively, the "475 Loan Agreements"). The 475 Loan matures on September 1, 2009 and bears interest at a rate of 8.27% per annum. The 475 Loan requires monthly payments of interest plus principal payments based on a 30-year amortization schedule. The monthly payments amount to $240,855. No prepayments are permitted, in whole or in part, prior to the fourth loan year (commencing September 2, 2002). From September 2, 2002, the Subsidiary Partnership may prepay the 475 Loan, in full but not in part, on the first day of any calendar month and upon at least 30 days' prior written notice, upon payment of all accrued and unpaid interest and any fees and costs, together with an additional payment equal to the greater of (i) an amount equal to one percent (1%) of the then outstanding principal amount or (ii) a yield maintenance amount equal to the present value of a series of monthly amounts assumed to be paid from the date of prepayment through the maturity date of the 475 Loan. The yield maintenance amount preserves for Heller a fixed yield tied to a United States Treasury obligation with a term equal to that remaining on the 475 Loan on the date of prepayment. Any payments not received by Heller within 10 days after the due date will incur a late charge equal to five percent (5%) of the amount of such payment. Overdue amounts, whether at maturity, by acceleration, or otherwise will bear interest at a rate equal to five percent (5%) above the otherwise applicable interest rate. The 475 Loan is secured by a first mortgage lien, an assignment of rents, a security agreement, and a fixture filing on 475 Fifth Avenue, including the improvements, machinery, equipment, mechanical systems, personal property, management contracts, permits, certificates, licenses, agreements, trademarks, tradenames, books and records, and any monies on deposit with or for the benefit of Heller relating to this property. This loan also is secured by an assignment of Registrant's management agreement with the Subsidiary Partnership. The 475 Loan established the following four separate reserves: 1. The first, a property tax reserve, requires monthly payments sufficient to enable Heller to pay all real estate taxes against 475 Fifth Avenue before they become due and payable; 2. The second, a replacement reserve, was funded with $200,000 of the proceeds of the 475 Loan. This reserve is to be utilized to fund capital improvements reasonably approved in advance by Heller. The replacement reserve accrues interest for the Subsidiary Partnership's benefit at a "non-personal money market rate." If the balance of this reserve falls below $200,000, the Subsidiary Partnership must make monthly deposits of $4,000 until the balance of the replacement reserve equals $200,000. As of April 13, 2000, the Subsidiary Partnership had not utilized any funds from the replacement reserve and the balance in this account was approximately $202,290; 3. The third, a capital improvements reserve, was funded with $1,967,000 of the proceeds of the 475 Loan. This reserve is to be utilized to fund capital improvements determined in the Subsidiary Partnership's sole discretion. The capital improvements reserve accrues interest for the Subsidiary Partnership's benefit at a "non-personal money market rate." As of April 13, 2000, the Subsidiary Partnership had not funded any capital improvements from the capital improvements reserve and the balance in this account was approximately $1,990,332; and 2 4. The fourth, a tenant improvements and leasing reserve, was funded with $850,000 of the proceeds of the 475 Loan. This reserve is to be utilized to fund specified tenant improvements and leasing commissions at 475 Fifth Avenue. The Subsidiary Partnership has utilized this entire reserve to fund tenant improvements and leasing commissions. The 475 Loan Agreements require Heller's prior written consent to the execution or material modification or amendment of any lease of 15,000 or more rentable square feet at 475 Fifth Avenue. An event of default under the 475 Loan Agreements includes the following: 1. the failure to make any payment within 10 days of the due date thereof; 2. any sale or transfer of 475 Fifth Avenue or any interest therein or any controlling interest therein; 3. the imposition of any lien against 475 Fifth Avenue; and 4. filing of any petition under the United States Bankruptcy Code or any similar law or regulation by or against Registrant, the Subsidiary Partnership, or the Subsidiary Corporation. Upon the occurrence of an event of default under the 475 Loan Agreements, Heller may enforce one or more of its remedies, including the following: 1. the right to declare all principal, interest, and other amounts due under the 475 Loan to be due and payable immediately; 2. the right to require that 475 Fifth Avenue (including all equipment, fixtures, agreements, and other rights and interests relating thereto) be sold at auction to the highest bidder; and 3. to take possession of, manage, and collect the rents from the property. The Subsidiary Partnership and Robert F. Gossett, Jr., the Individual General Partner of Registrant, have agreed to indemnify and hold harmless Heller and its officers, directors, employees, shareholders, agents, and affiliates from and against any and all liabilities, obligations, deficiencies, demands, claims, actions, assessments, losses, costs, expenses, interest, fines, penalties, and damages resulting from or arising out of or by virtue of the presence of hazardous materials on or from 475 Fifth Avenue. Mr. Gossett also has assumed joint and several liability to pay Heller for certain losses, damages, costs, and expenses incurred by Heller in connection with the 475 Loan. Fleet Bank Loan Registrant's properties, other than 475 Fifth Avenue, are subject to the lien of a first mortgage line-of-credit loan (the "Fleet Loan") from Fleet Bank, National Association ("Fleet"). On August 9, 1999, the Fleet Loan was divided into the following two notes: a note in the amount of $22,594,880 and secured by a mortgage on 475 Fifth Avenue, which note was repaid in full to Fleet and which mortgage was consolidated with and into Heller's mortgage on that property; and, a note in the amount of $26,405,120 and secured by Registrant's six other properties. As of March 24, 2000, the outstanding principal balance of the Fleet Loan was approximately $23,433,561. The Fleet Loan is evidenced by a Secured Promissory Note, a Loan Agreement, an Environmental Compliance and Indemnification Agreement, a First Amendment of Loan Agreement and 3 Note, a Second Amendment of Loan Agreement, and a Third Amendment of Loan Agreement and Second Amendment of Note (collectively, the "Fleet Loan Agreements"). The Fleet Loan is secured by a first mortgage lien, an assignment of rents, a security agreement, and a fixture filing on and from each of Registrant's properties, other than 475 Fifth Avenue, including the improvements, equipment, furnishings, proceeds, books and records, and all payments related thereto, which consists of the following six properties: the Monterey Park Building (formerly the American Color Building and the GE Medical Systems Office Building); the Directory Building; the Tumi Building (formerly the Austin Place Building); the Flatiron Building; the Marathon Oil Building; and the Alamo Towers. The Fleet Loan matures on September 24, 2000 and Fleet is not required to fund any further advances. The Fleet Loan requires payment of a front-end fee in an amount equal to one and one-half percent (1.5%) of the amount of the total loan commitment, which amounts have aggregated approximately $711,000 to date, none of which were paid in 1999. In addition, for each six month period ending September 30 and March 31, Registrant must pay an unused loan commitment fee equal to one-half percent (0.5%) of the difference between the average maximum loan commitment for the period and the average outstanding principal balance of the Fleet Loan for such period. In 1999, Registrant paid approximately $12,344 in such fees. The Fleet Loan bears interest on each advance of funds from the date of such advance at Fleet's Peg Rate, plus one-half percent (0.5%) per annum or, if Registrant so chooses, at the LIBOR rate (offered rates for Eurodollar deposits) or other market rate offered to Fleet (any such rate, a "Fixed Rate"), plus two percent (2.0%) per annum. The Peg Rate is the rate announced from time to time by Fleet as a means of pricing some of its loans to customers (not necessarily the lowest rate actually charged to any customer class or category). Registrant may elect to pay interest based on a Fixed Rate on the whole or a portion of the outstanding principal amount, upon notice to Fleet, but only in amounts of at least $1,000,000 and in additional integral multiples of $100,000. As of March 24, 2000, the Peg Rate was 8.75% (interest using this rate would be at 9.25%) and the 180-day Fixed Rate was 5.9125% (interest using this rate would be at 7.9125%). The entire aggregate outstanding balance of the Fleet Loan as of March 24, 2000 bears interest at the rate of 7.9125%. The Fleet Loan requires monthly payments of interest plus principal payments equal to 1/500th of the then outstanding principal balance. The Fleet Loan may be prepaid at any time, on notice, in whole or in part (a minimum of $1,000,000 and additional integral multiples of $100,000). Any such prepayment will be without premium or penalty with respect to funds bearing interest based on the Peg Rate or, if the prepayment is made on the last day of the applicable interest period, with respect to funds bearing interest based on a Fixed Rate; however, a prepayment at any other time of funds bearing interest based on a Fixed Rate will require payment of a breakage fee, which guarantees Fleet a fixed rate yield maintenance tied to United States Treasury obligations for the period from the date of prepayment to the end of the applicable interest period. No breakage fee was required to be paid to Fleet in connection with the August 1999 prepayment of the note secured by 475 Fifth Avenue. Amounts repaid to Fleet may be reborrowed by Registrant provided, however, that amounts repaid in monthly amortization payments may not be reborrowed. Any payments not received by Fleet within 10 days after the due date will incur a late charge equal to four percent (4%) of the amount of such payment. Overdue amounts, whether at maturity, by acceleration, or otherwise will bear interest at a rate equal to four percent (4%) above the otherwise applicable interest rate. The Fleet Loan Agreements contain continuing covenants regarding Registrant's financial condition and the conduct of its operations. Registrant's debt service coverage ratio (the ratio of the sum of cash from operations plus certain fees paid to the General Partners to a constant loan amortization 4 payment) cannot be less than 1.40 to 1.0 and its loan to value ratio (the ratio of the outstanding principal balance of the Fleet Loan to the appraised value of the secured properties) cannot exceed fifty-five percent (55%). In addition, Registrant must maintain a liquid net worth (cash, short-term investments, and marketable securities) of at least $2,000,000. The Fleet Loan Agreements also provide that Registrant may distribute to its partners up to 90% of the sum of its operating net income plus depreciation and amortization, including any step rent adjustments. Compliance with this distribution provision is tested as of the last day of each fiscal quarter for the preceding 12 consecutive calendar months. Registrant must also obtain Fleet's consent, not to be unreasonably withheld or delayed, to any lease of 10,000 or more rentable square feet (5,000 square feet for Alamo Towers). Registrant may not incur unsecured debt owing to the General Partners in amounts in excess of $3,000,000. Registrant has calculated that its cash distributions for the 12 months ended December 31, 1999 exceeded the limit imposed by the Fleet Loan Agreement by approximately $173,000. As a consequence, Registrant has informed Fleet that it will increase to $10,000,000 the amortization payment it will make on the Fleet Loan upon the sale of the Flatiron Building. Registrant has further informed Fleet that if such amortization payment is not made on or before June 30, 2000, Registrant, until it makes this $10,000,000 payment, will (i) limit quarterly distributions to the current level of $.30 per Unit and (ii) increase its liquid net worth requirement by $173,000 to $2,173,000. Although Registrant has solicited offers to purchase the Flatiron Building, Registrant has not entered into any agreement to sell the Flatiron Building and there is no assurance when or if it will sell this building or the terms of any such sale. Fleet's mortgage lien against any of Registrant's secured properties will be released only upon payment of an amount equal to 110% of the loan amount allocated to such property. In addition, such lien will be released only if Registrant's remaining properties satisfy the debt service coverage ratio and loan to value ratio. Upon the occurrence of an event of default under the Fleet Loan Agreements (which includes the failure to make any payment within 10 days of the due date thereof and a failure to comply with its financial covenants which continues for 60 days), Fleet may enforce one or more of its remedies, including the right to (i) declare all principal and interest on the Fleet Loan to be due and payable immediately, (ii) require any or all of Registrant's secured properties (including all equipment, fixtures, agreements, and other rights and interests relating thereto) to be sold at auction to the highest bidder, and (iii) collect any and all rents from the properties. Registrant has also agreed to indemnify and hold harmless Fleet and its officers, directors, employees, agents, representatives, contractors and subcontractors, and their respective successors and assigns from and against any and all claims, liability, costs, and expenses arising out of the presence and/or clean-up of hazardous materials on or affecting Registrant's secured properties. Financing Policies The General Partners expect to approximate Registrant's original intention of a loan to value ratio of 50%. Accordingly, it is expected that Registrant's total borrowings will approximate 50% of the sum of (i) the appraised values of its five remaining original properties plus (ii) the purchase price of additional properties acquired by Registrant. Registrant is not limited by its Partnership Agreement as to borrowing for any individual property; the aggregate borrowings on all properties may not exceed an amount equal to the sum of (x) 60% of the aggregate purchase price of all properties which are not refinanced plus (y) 80% of the aggregate value of all refinanced properties. As of December 31, 1999, Registrant had a loan to value ratio of approximately 53.8%. 5 The Fleet Loan and the 475 Loan have enabled Registrant to acquire and improve properties, but have increased the risk of loss on its properties. Registrant may acquire additional properties, the purchase of which would be funded out of the proceeds of sale of one or more of Registrant's current properties. Registrant has no current agreements to sell any of its existing properties. To be profitable, Registrant's properties must generate cash flow in amounts sufficient to not only cover operating expenses but also to pay all financing costs. Registrant's objectives in making its investments continue to be to (i) preserve and protect Registrant's capital; (ii) provide long term capital appreciation, generating long term capital gains for federal income tax purposes upon sale of the properties; (iii) build up equity through the reduction of mortgage loans encumbering the properties; and (iv) provide cash distributions from operations which may be partially tax-sheltered. There is no assurance that these objectives will be achieved. Competition The Directory Building is fully leased to a single tenant on a net lease or substantially equivalent basis and does not face competition from other properties during the terms of such lease. However, upon termination of this lease, and for any of Registrant's other properties, Registrant does, and will continue to, compete with other properties for tenants. Depending upon market conditions and occupancy rates at the time and place of any vacancies in Registrant's properties, there is currently and there may be, in the future, intense competition in obtaining tenants to fill such vacancies. Furthermore, such competition has resulted and may result, because of reduced rental rates and required concessions to tenants, in decreases in the rental revenue received by Registrant and capital outlays necessary to fund tenant improvements. See Item 2 - "Properties" for a discussion of market conditions in the areas in which Registrant currently competes for tenants. Employees Registrant currently employs 15 persons (3 of which are part-time employees). The business of Registrant is managed by the General Partners. See Item 10 - "Directors and Executive Officers of the Registrant" and Item 13 - "Certain Relationships and Related Transactions." Item 2. Properties. Monterey Park Building (formerly American Color Building and GE Medical Systems Office Building) On July 10, 1986, Registrant acquired the Monterey Park Building, located in Monterey Park, California, for approximately $4,182,000, inclusive of acquisition fees. Registrant owns fee title to the Monterey Park Building and its 90,000 square feet of underlying land, subject to the lien of the Fleet Loan (See Item 1. - "Business-Fleet Bank Loan"). The property was built in 1985 and contains 20,250 net rentable square feet, of which approximately 71% is office space and the remainder is warehouse space. The building contains an unusually high percentage of office space for a mixed use property, but Registrant prefers to avoid reconfiguring the space, both to avoid the construction cost and to obtain the higher rates for office space. As of March 24, 2000, the property is approximately 44.9% leased, with 9,085 square feet leased to the General Services Administration (as discussed below). In March 1999, Registrant executed a lease with the General Services Administration (for the U.S. Census Bureau) for 9,085 square feet (approximately 75% of which is office space). The lease provides for a 17 month term commencing July 1, 1999 and ending November 30, 2000, at a gross rent of 6 $21.15 per square foot (approximately $192,167 in annual gross rent). Registrant expended approximately $79,900 in 1999 in tenant improvements in connection with this lease. In July 1999, American Color Graphics, Inc. ("American Color") terminated its lease for 9,650 square feet in the building, upon payment of a lease cancellation fee of $140,000. This fee represented approximately 50% of American Color's lease obligations for the then remaining lease term of two years. American Color had paid a net rent of $9.00 per square foot, plus reimbursement of its proportionate share of operating expenses. The sole tenant, the General Services Administration, will vacate the building upon expiration of the lease term at the end of November 2000. Registrant prefers to find a single tenant for the entire building and is marketing the space accordingly. Market conditions in the Monterey Park area have improved in recent years. The vacancy rate for commercial properties in such area approximates 4.1% for office buildings and 12.8% for mixed (office and industrial) space. The Monterey Park Building is situated next to a 200,000 square foot Public Storage facility which, like the Monterey Park Building, consists of a front office with warehouse space in the rear. Such facility is currently approximately 91% occupied; rents approximate $6.36 per square foot. Gross rents approximate $21.00 per square foot for office space and $13.00 per square foot for mixed office/warehouse space in this area. The Directory Building (formerly, the IBM Building) On October 27, 1986, Registrant acquired the Directory Building, located in Las Colinas, Texas, for a purchase price of approximately $24,580,000, inclusive of acquisition fees. Registrant owns fee title to the Directory Building and its 6.67 acres of underlying land, subject to the lien of the Fleet Loan. The Directory Building was built in 1982 and contains approximately 152,100 net rentable square feet (reduced from 154,300 square feet during IBM's tenancy). The building is 100% leased to GTE pursuant to a lease dated as of April 20, 1994, as subsequently amended by amendments dated as of July 29, 1994 and as of February 22, 1995. The initial term of the lease expires on September 30, 2000, subject to a five-year renewal option at a rate equal to 95% of the then market rate. Registrant and GTE have engaged in negotiations concerning an extension of the lease for a three year term, but a definitive agreement has yet to be reached. There is no assurance that the GTE lease will be extended or the terms of any such extension. The amended lease requires approximate monthly rent of $173,800 through September 30, 2000. GTE must also pay additional rent equal to excess electric charges and operating expenses over base levels. Registrant incurred approximately $63,350 in capital expenditures at the building during 1999, in connection with replacement of the fire alarm and panel. In connection with the GTE lease, Registrant has expended approximately $2,628,000 for tenant improvements, none of which was in 1999. In the event GTE's lease is extended, Registrant expects to incur capital expenditures, maintenance expenses and leasing commissions aggregating approximately $850,000 in 2000. Improvements would include ADA renovations to the common areas and certain bathrooms, fire alarm and panel replacement, bathroom lighting and other upgrades, and sidewalk and gutter repairs. The Las Colinas office market includes approximately 20,018,000 leasable square feet (approximately 10,988,000 square feet of Class "A" office space), of which approximately 84.1% (83.1% 7 for Class "A" office space) was leased as of December 31, 1999. Weighted average rental rates for new leases at such properties range from approximately $24.65 to $25.53 per square foot. Tumi Building (formerly Austin Place Building) On December 30, 1986, Registrant acquired the Tumi Building, a two-wing office building located in South Plainfield, New Jersey, for a purchase price of approximately $16,473,000, inclusive of acquisition fees. Registrant owns fee title to the Tumi Building and its underlying five acres of land, subject to the lien of the Fleet Loan. The property was built in 1986 and contains approximately 106,600 net rentable square feet for use as a multi-tenant facility (reduced from 108,000 square feet as a single tenant facility). As of March 24, 2000, the property is approximately 60.0% leased, with 45,700 square feet leased to Tumi, Inc. (as discussed below) and the remainder at an average current rent of approximately $14.46 per square foot. Such other leases expire in October 2005 (approximately 10,000 square feet) and March 2014 (approximately 9,600 square feet). On March 9, 1999, Gdynia America Line, Inc., a tenant occupying approximately 21,650 square feet (20.3%) in the Tumi Building filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a Polish corporation owned by the Polish Government, is jointly and severally obligated under this lease. On or about April 30, 1999, the lease, with a term expiring in May 2007 and annual rental payments of approximately $446,000, was rejected in the bankruptcy proceeding. During 1999, Registrant wrote off approximately $718,000 of deferred rent and other receivables attributable to this lease. Registrant has commenced an action in the United States District Court in Newark, New Jersey against Polish Ocean Lines, seeking $4 million in damages. Registrant has succeeded in serving Polish Ocean Lines in this action. Tumi's lease is for 45,700 square feet and expires on January 19, 2009. It requires rent payments equal to $15.00 per square foot until January 2002, $16.00 per square foot from February 2002 to January 2006, and $17.00 per square foot from February 2006 to January 2009. The lease includes two 5-year renewal terms, the first at a base rent of $20.00 per square foot and the second at a then fair market rental. Tumi is also obligated to pay for its electric current consumption and its proportionate share (42.3%) of increases in operating expenses, taxes, and insurance over base year 1999 levels. In 1999, Tumi's lease was amended to increase Registrant's obligation for tenant improvements to $1,045,000 (from $350,000) in return for increasing rent payments to $15 per square foot (from $9.00) until January 2002 and to $16 per square foot (from $15) from February 2002 to January 2006. South Plainfield is included in the Route 287 submarket (approximately 6,850,000 square feet of which 11% is vacant) of Middlesex County (approximately 16,400,000 square feet, of which 11.2% is vacant). Average rents for office space in such area approximate $21.00 per square foot. Registrant has expended approximately $3,000,000 for tenant improvements, of which approximately $1,163,100 was incurred in 1999. Registrant expended approximately $118,000 in tenant improvements in 1999 for tenants other than Tumi. Flatiron Building (formerly, the Cadnetix Building) On January 5, 1988, Registrant acquired the Flatiron Building, located in Flatiron Industrial Park, Boulder, Colorado, for approximately $9,003,000, inclusive of acquisition fees. Registrant owns fee title to the Flatiron Building and its 5 acres of underlying land, subject to the lien of the Fleet Loan. The 8 property contains approximately 96,000 net rentable square feet for use as a multi-tenant facility (reduced from 102,000 square feet as a single tenant facility). As of March 24, 2000, Registrant has rented 100% of the space in the building to various tenants pursuant to leases providing for an average current rent of approximately $15.98 per square foot (exclusive of expenses). Such leases expire in 2000 (approximately 31,822 square feet), in 2001 (approximately 20,421 square feet), in 2002 (approximately 16,237 square feet) and in 2003 (approximately 27,264 square feet). The Flatiron Building is zoned IG (Industrial General), which permits office use by manufacturers and industrial users (including software developers), but does not permit general office use by service providers such as attorneys and accountants. Registrant does not believe that such classification adversely affects its ability to fully lease this building at market rates, and such classification does not affect any existing tenants. Market conditions in the Boulder area remain favorable for owners of commercial buildings. The market for the Boulder area contains approximately 9.3 million square feet of commercial space of which approximately 9.1% is vacant. Average rents for office space in such area approximate $16.49 per square foot, exclusive of expenses. Registrant has expended approximately $717,600, of which approximately $262,200 was spent in 1999, for tenant improvements for the Flatiron Building. Marathon Oil Building (formerly, the Tenneco Building) On March 21, 1988, Registrant acquired the Marathon Oil Building (formerly the Tenneco Building), an office building located in Oklahoma City, Oklahoma, for approximately $10,736,000, inclusive of acquisition fees. Registrant owns fee title to the Marathon Oil Building with its 6.1 acres of underlying land, subject to the lien of the Fleet Loan. The property contains 90,925 net rentable square feet on two floors, plus a 10,016 square foot basement. Marathon and its former affiliate, Koch Midstream Services Company ("Koch"), lease approximately 65,000 square feet (including approximately 4,300 in the basement) and 22,300 square feet (including approximately 550 in the basement), respectively, in the building. Marathon's lease expires in 2001, subject to two five-year renewal options; Koch's lease also expires in 2001, but without any renewal option. Annual rent under such leases is approximately $750,600 ($8.75 per square foot, plus $6.00 per square foot for basement space). Marathon and Koch must also pay additional rent equal to their proportionate share of any increases in operating costs of the building after 1996. Registrant has funded tenant improvements of approximately $350,000 for Marathon and Delhi, none of which was expended in 1999. Registrant has leased approximately an additional 5,800 square feet in the building for a five-year term ending in December 2001 at an annual rent of approximately $65,000 ($11.00 per square foot, plus $6.00 per square foot for basement space). Registrant has funded tenant improvements of approximately $74,000 in connection with this lease, none of which was expended in 1999. The remaining space (approximately 3.2% of the office space, plus approximately 41% of the basement) is vacant and Registrant is seeking a tenant for such space; however, the space is difficult to rent and would require significant tenant improvements. As an alternative, Registrant may demolish and reconfigure this space to improve its marketability. Registrant expended approximately $53,800 on replacing and upgrading lighting fixtures in the building in 1999. 9 Market conditions in the northwest section of Oklahoma City have continued recent improvements from the declines experienced after Registrant acquired the building. Such market contains approximately 4.9 million square feet of commercial space of which approximately 11.0% is vacant. Average rents for commercial space range from $8.50 to $18.75 per square foot, with a weighted average rate of $14.21 per square foot. Although the vacancy rate increased slightly during 1999, rental rates continued the increases of recent years. 475 Fifth Avenue On December 6, 1996, Registrant purchased the land, building and other improvements commonly known as 475 Fifth Avenue, and situated in New York, New York, for approximately $27,440,000 including capitalized costs and related costs. The property contains a multi-tenant office building comprised of approximately 238,000 square feet and is located on the southeast corner of 41st Street and Fifth Avenue in New York City; the Subsidiary Partnership owns fee title to 475 Fifth Avenue, subject to the lien of the 475 Loan. 475 Fifth Avenue is a 23-story office building with approximately 20,000 square feet of retail space on the first floor and basement, 213,000 square feet of office space, and 5,100 square feet of basement storage space. As of March 24, 2000, approximately 94.4% of the rentable square footage in the building was leased (including approximately 96.2% of the office space, 83.7% of the retail space, and 60.0% of the basement space), at an average current rent (base rent plus electric charges and prior year adjustments) of approximately $32.58 per square foot (approximately $31.07 per square foot of office space and $56.02 per square foot of retail space). Following is a schedule of the expirations of such leases. ========================================================================== Approximate Avg. Current Expiration Year Square Feet % of Total Rent/Sq. Ft. - -------------------------------------------------------------------------- 2000 13,430 5.7% $31.05 - -------------------------------------------------------------------------- 2001 19,733 8.3% $36.53 - -------------------------------------------------------------------------- 2002 7,191 3.0% $33.18 - -------------------------------------------------------------------------- 2003 7,558 3.2% $31.67 - -------------------------------------------------------------------------- 2004 19,783 8.3% $43.53 - -------------------------------------------------------------------------- 2005 34,410 14.5% $37.06 - -------------------------------------------------------------------------- 2006 22,630 9.5% $26.90 - -------------------------------------------------------------------------- 2007 6,794 2.9% $27.16 - -------------------------------------------------------------------------- 2008 47,399 20.0% $26.76 - -------------------------------------------------------------------------- 2009 37,625 15.8% $32.27 - -------------------------------------------------------------------------- 2010 7,513 3.2% $36.23 ========================================================================== Registrant's leases generally provide for a base rent, inclusive of an electricity charge, plus additional rent in the form of operating expense and real estate tax escalation factors. In 1997, Registrant 10 commenced a capital improvement program, designed to increase rental rates and the value of the building. In connection with obtaining the 475 Loan, a capital reserve schedule was prepared for 475 Fifth Avenue, detailing improvements aggregating approximately $1,840,000 over a 12-year period. These and other improvements that Registrant intends to make include the following: mechanical, electrical, and plumbing systems, including upgrading objective service and closets (approximately $360,000), consolidating DC service and relocating additional AC service (approximately $90,000), purchasing electrical equipment (approximately $300,000), continue installation of hot water heating system (approximately $315,000), and installation of new riser and drain lines (approximately $350,000); structural repairs, including roofing, facade, and parapet repairs (approximately $415,000) and installation of new windows (approximately $140,000); elevator repairs and refurbishment, including replacement of controls (approximately $345,000); and improvements to comply with building codes and Americans with Disabilities Act requirements, including renovation of restrooms (approximately $240,000) and stair handrail and extensions (approximately $48,000). In 1999, Registrant funded capital improvements aggregating approximately $158,400 and tenant improvements aggregating approximately $1,200,300 at 475 Fifth Avenue. Certain capital improvements can only be made as tenancies expire. Capital improvements and tenant improvements have been, and are expected in the future to be, funded from working capital and loan drawdowns and from anticipated increases in rental income. 475 Fifth Avenue is situated in the Grand Central district of the New York City midtown market. Such district includes approximately 50,385,000 aggregate rentable square feet (vacancy rate of approximately 5.2%), of which approximately 44,485,000 are Class A buildings (5.2% vacancy rate) and 5,900,000 are Class B buildings (5.4% vacancy rate). Asking rents in this district average approximately $49.32 per square foot ($50.23 for Class A buildings and $42.45 for Class B buildings). The entire midtown market includes approximately 236,805,000 aggregate rentable square feet (187,345,000 in Class A buildings and 49,460,000 in Class B buildings), an approximate 3.6% vacancy rate (3.4% for Class A buildings and 4.5% for Class B buildings), and average asking rents of approximately $50.50 per square foot ($53.92 for Class A buildings and $37.55 for Class B buildings). Alamo Towers On March 17, 1997, Registrant purchased the land, building and other improvements commonly known as the Alamo Towers, and situated in San Antonio, Texas for approximately $12,002,000, including capitalized closing and related costs. The Alamo Towers contains a multi-tenant office building comprised of approximately 196,000 square feet. Registrant owns fee title to the Alamo Towers, subject to the lien of the Fleet Loan. The Alamo Towers is an office building consisting of two stand-alone 8-story towers with approximately 186,000 square feet of office space and 8,000 square feet of basement space. As of March 24, 2000, approximately 75.8% of the rentable square footage of office space in the Alamo Towers was leased, at an average current rent (base rent plus escalation adjustments) of approximately $14.40 per square foot. Following is a schedule of expiration of such leases. 11 ============================================================================= Approximate Avg. Current Expiration Year Square Feet % of Total Rent/Sq.Ft. - ----------------------------------------------------------------------------- 2000 29,110 17.0% $14.99 - ----------------------------------------------------------------------------- 2001 46,202 26.9% $13.59 - ----------------------------------------------------------------------------- 2002 27,784 16.2% $14.22 - ----------------------------------------------------------------------------- 2003 6,838 4.0% $14.80 - ----------------------------------------------------------------------------- 2004 18,403 10.7% $15.61 - ----------------------------------------------------------------------------- 2005 1,822 1.1% $15.00 ============================================================================= The Alamo Towers has yet to achieve sustainable increases in occupancy rates, primarily because of the absence of a covered parking garage. Registrant's planned significant capital improvements for this building were delayed in large part because of the capital improvements made at 475 Fifth Avenue. Registrant now intends to fully implement its program at Alamo Towers. In 1999, it completed renovation of the lobby in the East Tower at an approximate cost of $314,800. Renovation of the West Tower lobby is expected to cost approximately $400,000. Registrant also plans to relocate the building's mechanical plant, including replacement of all heating, ventilation, and air conditioning equipment, and upgrade the electrical capacity and distribution, at an approximate cost of $2,250,000. Relocation of this plant will enable Registrant to construct a covered parking garage at an estimated cost of $6,000,000. Construction of the garage is tentatively scheduled for 2001 and is expected to take six to eight months to complete. Registrant also may separate the heating and air conditioning systems to better regulate temperature through the building (estimated to cost $40,000) and recaulk glass walls and windows (approximately $200,000). Registrant may install sprinklers on all floors of the towers, at an estimated cost of $250,000, but any such installation is unlikely to occur in the near future. Registrant intends to finance these capital improvements from the proceeds of loan drawdowns and/or from proceeds from any sales of properties. In 1999, Registrant expended approximately $55,500 in tenant improvements and $532,100 in capital improvements to the Alamo Towers. The San Antonio office market includes approximately 21,190,000 aggregate rentable square feet, of which approximately 13.7% is currently vacant. Asking rents in this market now average $17.14 per square foot. The north-central San Antonio market includes approximately 7,578,000 aggregate rentable square feet, of which approximately 12.9% is vacant and for which asking rents average approximately $17.98 per square foot. Class B buildings, including the Alamo Towers, feature an approximate 11.1% vacancy rate and an average asking rental rate of $16.71 per square foot. Item 3. Legal Proceedings. Except for its action against Polish Ocean Lines, Inc., Registrant does not know of any material legal proceedings, other than ordinary immaterial routine litigation incidental to its business, pending against or involving Registrant or any of its properties. The action against Polish Ocean Lines, Inc. is attributable to the rejection of its subsidiary's lease for space in the Tumi Building. See "Item 2. Properties - Tumi Building." The action was commenced in the United States District Court in Newark, New Jersey on November 22, 1999. 12 Item 4. Submission of Matters to a Vote of Security-Holders. There were no matters submitted to a vote of Limited Partners or Unitholders and none were required to be submitted during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise. 13 PART II Item 5. Market for Registrant's Securities and Related Security-Holder Matters. The Units of Registrant are not traded in any established public trading market. Because of certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as described below, the General Partners have not applied to include the Units for quotation or listing on any national or regional stock exchange or any other established securities market. Registrant has administered a Unit Repurchase Plan since 1995, pursuant to which Registrant, in its discretion, has purchased outstanding Units. Any such purchases are made at prices no higher than the lowest current independent offer quotation. During 1999, Registrant did not repurchase any Units. Registrant is limited by the terms of the Fleet Loan to an aggregate of $3,000,000 in Unit repurchases. In addition, repurchases both divert funds otherwise available for capital improvements and require a monthly reallocation of Unitholders' interests. For these reasons, Registrant limits future repurchases, if any, to the final one or two months of a calendar year. To provide an alternative outlet for Unit sales, the General Partners and their affiliates have, during any periods of suspension in Registrant's Unit Repurchase Plan, purchased Units on the same terms and conditions as under the Unit Repurchase Plan. Provisions found in Section 7704 of the Code have an adverse impact on investors in a "publicly traded partnership" ("PTP"). A PTP is a partnership whose interests are traded on an established securities market or readily tradeable on a secondary market (or the substantial equivalent thereof). If Registrant were classified as a PTP, (i) Registrant may be taxed as a corporation or (ii) income derived from an investment in Registrant would be treated as non-passive income. The IRS has established alternative safe harbors that allow interests in a partnership to be transferred or redeemed in certain circumstances without causing the partnership to be characterized a PTP. Although the Units are not listed or quoted for trading on an established securities market, it is possible that transfers of Units could occur in a secondary market in sufficient amount and frequency to cause Registrant to be treated as a PTP. To the extent that any proposed transfer of Units in secondary market transactions would exceed a safe harbor volume limitation, the proposed transfer will be restricted pursuant to a policy adopted by Registrant. Such a restriction could impair the ability of an investor to liquidate its investment quickly and thus, possibly prevent the reclassification of Registrant as a corporation pursuant to Code Section 7704. It is anticipated that Registrant's policy will remain in effect until such time, if ever, as further clarification of Code Section 7704 permits Registrant to lessen the scope of its policy. The General Partners, if so authorized, will take such steps as are necessary, if any, to prevent the reclassification of Registrant as a PTP. As of April 13, 2000, there were 2,784 Unitholders of record. 14 The following represents per Unit cash distributions to investors for the fiscal years ended December 31, 1999 and 1998. Distribution Quarter Ended Per Unit Payment Date - ------------- ------------- ------------ December 31, 1999 $ 0.30 February 2000 September 30, 1999 $ 0.30 November 1999 June 30, 1999 $ 0.30 August 1999 March 31, 1999 $ 0.30 May 1999 December 31, 1998 $ 0.30 February 1999 September 30, 1998 $ 0.30 November 1998 June 30, 1998 $ 0.30 August 1998 March 31, 1998 $ 0.30 May 1998 There are no material legal restrictions upon Registrant's present or future ability to make distributions in accordance with the provisions of Registrant's Agreement of Limited Partnership, as amended through the date of this report. However, the Fleet Loan Agreements limit distributions to 90% of the sum of cash from operations, depreciation and amortization. See, however, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of economic conditions affecting Registrant's ability to make distributions in the future. Item 6. Selected Financial Data
Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- Operating Revenues $16,695,999 $19,752,206 $14,958,799 $9,142,369 $9,827,431 Net Loss/Income $(2,828,104) $1,930,984 $(420,892) $677,914 $2,008,688 Net Loss/Income Per Unit (1) $(0.94) $0.64 $(0.14) $0.22 $0.62 Total Assets $107,255,707 $105,748,365 $100,946,968 $102,983,279 $74,460,139 Long-Term Obligations $55,539,288 $46,930,800 $41,578,800 $39,955,200 $7,800,000 Distributions Per Unit (1)(2) $1.20 $1.20 $1.20 $1.20 $1.20
15 (1) Per Unit numbers are based on 2,983,531 Units for 1999 and a weighted average number of Units of 2,986,460, 3,022,492, 3,087,170, and 3,184,222, for 1998, 1997, 1996, and 1995, respectively. (2) Each year's distributions include funds distributed after the end of the year which are attributable to that year. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources At December 31, 1999, Registrant had cash and receivables of approximately $3,900,000 as contrasted to accounts payable and accrued expenses of approximately $2,600,000. Registrant measures its liquidity by its ability to generate sufficient cash flow from operations to meet its current operating and debt service requirements on a short-term and long-term basis. Registrant's operations have provided this liquidity and are expected to continue to do so. To the extent additional funds are required, Registrant would need to refinance the Fleet Loan and/or sell assets. In August 1999, Registrant organized 475 Fifth Avenue Limited Partnership and 475 Fifth-GP, Inc. as wholly-owned subsidiaries. The Subsidiary Partnership owns 475 Fifth Avenue and the Subsidiary Corporation is the sole general partner of the Subsidiary Partnership. Registrant is the sole limited partner of the Subsidiary Partnership, with a 99% interest in all items of income, gain, loss, and deduction, and the sole shareholder of the Subsidiary Corporation. In August 1999, the Subsidiary Partnership acquired ownership of 475 Fifth Avenue from Registrant and obtained the 475 Loan. The proceeds of the 475 Loan were used to pay down approximately $23,381,000 of the Fleet Loan, to fund capital improvements and leasing costs at 475 Fifth Avenue, and to augment working capital. Financial statements of Registrant and its subsidiaries are consolidated and intercompany accounts and transactions are eliminated. Registrant has been investing capital in acquiring additional properties and improving its existing and additional properties with a view to increasing its revenues from real estate operations and ultimately realizing appreciation in property values. Capital resources have been employed since the beginning of 1999 to make the following capital improvements: approximately $158,400 in capital improvements and $1,200,300 in tenant improvements at 475 Fifth Avenue; approximately $1,163,100 in tenant improvements at the Tumi Building; approximately $79,900 in tenant improvements and $9,500 in capital improvements at the Monterey Park Building; approximately $63,350 in capital improvements at the Directory Building; approximately $262,200 in tenant improvements and $39,200 in capital improvements at the Flatiron Building; approximately $53,800 in capital improvements at the Marathon Oil Building; and approximately $532,100 in capital improvements and $55,500 in tenant improvements at Alamo Towers. Registrant may also require capital to fund additional tenant improvements as tenancies turn over at its properties as well as further capital improvements at 475 Fifth Avenue (estimated at $1,840,000) and Alamo Towers (estimated at $9,140,000). These additional capital improvements are expected to be made over several years, as tenancies expire. 16 In March 1999, Gdynia America Line, Inc., which leased approximately 20% of the Tumi Building pursuant to a lease expiring in May 2007, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a Polish corporation owned by the Polish Government, is jointly and severally obligated under this lease. On or about April 30, 1999, the lease, which required annual rental payments of approximately $446,000, was rejected in the bankruptcy proceeding. Registrant has instituted suit against Polish Ocean Lines for amounts due over the eight years remaining in the term of the lease. Although this lease's rental payments constituted only approximately three percent of Registrant's aggregate 1998 property revenues, Registrant wrote off approximately $718,000 in deferred rent and other receivables in 1999 as a result of the rejection of this lease. To the extent all or a portion of this space is unproductive for any length of time, and if Registrant is unsuccessful in collecting damages from Polish Ocean Lines, Registrant may face an additional capital demand. During 1999, Registrant received an aggregate of approximately $330,000 in connection with early termination of leases: approximately $140,000 from American Color with respect to the Monterey Park Building; and approximately $190,000 from 2 tenants at 475 Fifth Avenue. To the extent such space remains vacant, as in the Monterey Park Building, Registrant's operations may be affected and its capital demands increased. However, these leases did not represent a significant portion of Registrant's property revenues. To date, Registrant has funded its capital requirements from the 475 Loan, the Fleet Loan and, previously, out of working capital and through reductions in distributions to partners. Registrant's quarterly distribution to partners for each of the four quarters of 1999 was $0.30 per Unit. Registrant intends to maintain this level of distributions through 2000 and, if possible, thereafter. However, to the extent Registrant's sources of capital are inadequate for its requirements, Registrant may need to reduce or suspend distributions to partners, incur additional indebtedness, and/or dispose of one or more of its properties. The 475 Loan and the Fleet Loan have provided Registrant with available capital to acquire properties, fund improvements and leasing commissions, repurchase outstanding Units, and otherwise fund capital requirements. The cost of such financing ultimately must be offset by increased property revenues or Registrant's operations and capital will be compromised. The Fleet Loan matures on September 24, 2000. Registrant anticipates satisfying the Fleet Loan out of the proceeds of a refinancing or a sale of assets. Registrant has used working capital reserves provided from the net proceeds of the Offering, loan proceeds, and any undistributed cash from operations as its primary source of liquidity. Registrant generally intends to distribute its distributable cash from operations to Unitholders. However, such distributions are subject to suspension or reduction to meet capital requirements and are also limited by the Fleet Loan Agreements to 90% of cash from operations plus depreciation and amortization. Results of Operations 1999 versus 1998 Rental revenues decreased by 0.8% from 1998 to 1999, primarily because the rejection of the Gdynia lease in the Tumi Building more than offset increased occupancy and rental rates at the Flatiron Building and, more importantly, 475 Fifth Avenue. In addition, lease cancellation fees decreased by $3,837,623 in 1999 from the significant amounts received in 1998 with respect to the Monterey Park, Tumi, 475 Fifth Avenue, and Alamo Towers buildings. As a result, total revenues decreased by 15.5% from 1998 to 1999. 17 Interest expense in 1999 increased by 12.5% in 1999 from 1998, both because of larger loan balances (only a portion of the proceeds of the 475 Loan was used to pay down the Fleet Loan) and higher interest rates. Depreciation increased by 4.5% in 1999 primarily because of capital improvements made at 475 Fifth Avenue, the Tumi Building, and Alamo Towers during 1997, 1998 and 1999. Amortization increased by 75.8% primarily because of the write-off of leasing commissions on leases that were terminated early and financing costs under the Fleet Loan following partial prepayment of the loan. Property operation expenses increased by 3.9% in 1999 primarily because of increases in cleaning and electricity attributable to increased occupancy at 475 Fifth Avenue, the Tumi Building, and the Flatiron Building and because of higher real estate taxes at 475 Fifth Avenue, the Directory Building, and the Flatiron Building. Management fees decreased by 19.0% in 1999 from 1998 because of property management fees computed as a percentage of Registrant's decreased revenues from rental revenues and lease cancellation fees. Professional fees increased by 12.3%, and general and administrative expenses decreased by 16.9%, from 1998 to 1999 primarily because of the reclassification of transfer agent fees and other expenses as professional fees rather than general and administrative expenses. The 46.7% increase in bad debt expense is primarily attributable to the write-off of unpaid rent and deferred rent receivable from the Gdynia lease in the Tumi Building and from tenants vacating space prior to termination of their leases in 475 Fifth Avenue. Registrant realized a net loss of $2,828,104 in 1999 as compared to income of $1,930,984 in 1998. After adjusting for non-cash items (depreciation, amortization and bad debt expense), operations generated cash flows of approximately $3,574,475 in 1999 and $7,048,258 in 1998 (a 49.3% decrease). The significant decrease in net cash provided by operating activities is largely attributable to the increased interest expense and the reduction in lease cancellation fees from the extraordinary amounts of 1998. The recognition of a net loss is largely due to the non-cash write-off of receivables related to the Gdynia lease at the Tumi Building and several leases at 475 Fifth Avenue. Registrant has focused its capital improvement program at 475 Fifth Avenue, which has increased occupancy and rental rates. Registrant intends to implement its program at Alamo Towers in 2000 and 2001, with a view towards leasing vacant space (approximately 24.2% of office space) and releasing space covered by expiring leases. If successful this will provide additional rental revenues with little additional operating expenses (but necessitating significant capital expenditures). 1998 versus 1997 Rental revenues increased by 4.2% from 1997 to 1998, primarily because of increased occupancy and rental rates at 475 Fifth Avenue. In addition, Registrant received $4,167,685 in lease cancellation fees in 1998 with respect to the Monterey Park, Tumi, and 475 Fifth Avenue buildings. As a result, total revenues increased by 32.0% from 1997 to 1998. Interest expense in 1998 increased by 3.5% in 1998 from 1997, primarily as a result of additional drawdowns under the Fleet Loan aggregating $6,400,000. Depreciation increased by 7.1% in 1998 primarily because of capital improvements made at 475 Fifth Avenue and Alamo Towers during 1997 and 1998. Amortization increased by 17.7% primarily because of additional financing costs related to the Fleet Loan. Management fees increased by 34.7% in 1998 from 1997 primarily due to property management fees computed as a percentage of Registrant's increased rental revenues. Professional fees increased by 50.4% from 1997 to 1998 primarily because of legal fees incurred in connection with amending the Fleet Loan, negotiating lease buyouts, and increased leasing activity. The 93.3% increase in general and administrative expenses in 1998 from 1997 is primarily attributable to the write-off of deferred rent receivable upon early lease terminations of approximately $815,300 in 1998 and $158,900 in 1997. 18 Registrant realized income from real estate operations of $1,930,984 in 1998 as compared to a net loss of $1,333,393 in 1997. After adjusting for non-cash items (principally depreciation and amortization), operations generated cash flows of approximately $5,467,000 in 1998 and $2,708,000 in 1997 (a 101.9% increase). The recognition of net income and significant increase in net cash provided by operating activities is largely due to realization of Registrant's capital improvement program at 475 Fifth Avenue, which has increased occupancy and rental rates. Registrant intends to continue its capital improvement program at 475 Fifth Avenue, and implement its program at Alamo Towers, in 2000. Inflation In the past, inflation has not had a material impact on Registrant's operations or financial condition, as certain leases of Registrant's properties provide for increases in rents based on changes in the consumer price index, and other leases provide lease payments that escalate over time. Registrant's properties with performing leases are protected by arrangements whereby the tenants pay to Registrant an amount equal to all or a portion of the operating costs of the properties, with Registrant's share of expenses, if any, subject to a predetermined limit. These arrangements help to insulate Registrant from the effects of any increases in operating costs. However, to the extent that there is vacant space or nonperforming leases at any of the Registrant's properties, Registrant lacks this protection against inflation, particularly with regards to increased expenses that are not reimbursed. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rates Registrant's primary market risk exposure is to changes in interest rates on its mortgage loan borrowings. Registrant has obtained the 475 Loan, a fixed rate debt instrument, to manage its exposure to fluctuations in market interest rates. Registrant previously obtained the Fleet Loan, a variable rate debt instrument, to enable it to draw down funds as needed for capital improvements, tenant improvements, and leasing commissions on its diverse portfolio of properties. Approximately 42% and 100% of Registrant's outstanding debt was subject to variable rates at December 31, 1999 and 1998, respectively. In addition, the average interest rate on Registrant's debt increased from 7.63% at December 1998 to 8.22% at December 31, 1999. Registrant does not have any other material market-sensitive financial instruments. It is not Registrant's policy to engage in hedging activities for previously outstanding debt instruments or for speculative or trading purposes. The table below provides information about Registrant's debt instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on rates in effect at the reporting date. 19
Expected Maturity Date -------------------------------------------------------------------------------------------- There- Fair 2000 2001 2002 2003 2004 After Total Value ---- ---- ---- ---- ---- ------- ------- ------- (in thousands) Secured Variable $23,593 $ -- $ -- $ -- $ -- $ -- $23,593 $23,593 Average interest rate 7.9125% -- -- -- -- -- 7.9125% Secured Fixed $228 $240 $261 $284 $301 $30,632 $31,946 $30,976 Average interest rate 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27%
Registrant believes that the interest rates given in the table for fixed rate borrowings are below the rates Registrant could currently obtain for instruments of similar terms and maturities. The fair values of such instruments are estimated using discounted cash flow analyses, based on borrowing rates for similar types of borrowing arragements at December 31, 1999 (estimated at 8.75% per annum). A change of 1% in the index rate to which Registrant's variable rate debt is tied would change the annual interest incurred by Registrant by approximately $236,000, based upon the balances outstanding on variable rate instruments at December 31, 1999. Item 8. Financial Statements and Supplementary Data See list of Financial Statements and Financial Statement Schedules at page F-2, filed as part of this report. Corporate Realty Income Fund I, L.P. and Subsidiaries List of Consolidated Financial Statements and Consolidated Financial Statement Schedules The following consolidated financial statements of Corporate Realty Income Fund I, L.P. and Subsidiaries are included in Item 8: Report of Independent Auditors - Ernst & Young LLP ....................................... F-3 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1999 and 1998 ............................. F-4 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 .............................................................................. F-5 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1999, 1998 and 1997 ...................................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-7 Notes to Consolidated Financial Statements ............................................... F-8 Schedule III - Real Estate and Accumulated Depreciation .................................. F-21
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted since (1) the information required is disclosed in the consolidated financial statements and notes thereto; (2) the schedules are not required under the related instructions; or (3) the schedules are inapplicable. F-2 Report of Independent Auditors To the Partners of Corporate Realty Income Fund I, L.P. We have audited the accompanying consolidated balance sheets of Corporate Realty Income Fund I, L.P. (a Delaware limited partnership) and subsidiaries (the "Partnership") as of December 31, 1999 and 1998 and the related statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1999. We also have audited the financial statement schedule listed on the Index at Item 14 (a). These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Realty Income Fund I, L.P. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP --------------------- New York, New York January 28, 2000 F-3 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Balance Sheets
December 31, 1999 1998 ------------------------------ Assets Real estate, at cost: Land $ 19,875,846 $ 19,875,846 Buildings and improvements 98,067,344 95,541,299 Equipment and furniture 242,302 78,029 ------------------------------ 118,185,492 115,495,174 Less accumulated depreciation 24,361,971 21,669,758 ------------------------------ 93,823,521 93,825,416 Cash and cash equivalents at cost, which approximates market value 3,322,319 4,115,435 Accounts receivable 578,480 737,617 Due from general partners -- 95,016 Note receivable, net of unamortized discount of $32,464 in 1999 and $50,024 in 1998 244,643 524,379 Deferred rent receivable 2,479,583 2,638,615 Deferred financing costs, net of accumulated amortization of $1,625,303 in 1999 and $927,224 in 1998 965,492 829,552 Lease commissions, net of accumulated amortization of $1,583,597 in 1999 and $1,637,425 in 1998 2,168,412 2,726,566 Escrow deposits 2,866,682 -- Deposits and other assets 806,575 255,769 ------------------------------ Total assets $ 107,255,707 $ 105,748,365 ============================== Liabilities and partners' capital Accounts payable and accrued expenses $ 2,599,574 $ 2,983,261 Mortgage loans payable 55,539,288 46,930,800 Due to general partners 63,534 -- Other liabilities 1,031,820 1,382,043 ------------------------------ Total liabilities 59,234,216 51,296,104 Commitments and contingencies Partners' capital: General partners: Capital contributions 1,000 1,000 Net income 366,955 395,236 Cash distributions (603,227) (567,200) ------------------------------ (235,272) (170,964) ------------------------------ Limited partners: ($25 per unit; 4,000,000 units authorized, 2,983,531 issued and outstanding in 1999 and 1998) Capital contributions, net of offering costs 71,724,856 71,724,856 Net income 36,328,418 39,128,241 Cash distributions (59,796,511) (56,229,872) ------------------------------ 48,256,763 54,623,225 ------------------------------ Total partners' capital 48,021,491 54,452,261 ------------------------------ Total liabilities and partners' capital $ 107,255,707 $ 105,748,365 ==============================
See accompanying notes. F-4 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Statements of Operations
For the year ended December 31, 1999 1998 1997 -------------------------------------------- Revenue: Rental $ 15,387,502 $ 15,513,474 $ 14,885,474 Lease cancellation 330,062 4,167,685 -- Interest and other income 978,435 71,047 73,325 -------------------------------------------- 16,695,999 19,752,206 14,958,799 -------------------------------------------- Expenses: Interest 3,736,687 3,320,457 3,207,254 Depreciation 3,452,891 3,304,509 3,084,463 Amortization 1,753,623 997,515 847,297 Property operations 7,622,547 7,336,498 7,321,229 Management fees 1,099,706 1,357,671 1,008,252 Professional fees 345,000 307,208 204,301 Bad debt expense 1,196,065 815,250 158,933 General and administrative 317,584 382,114 460,463 -------------------------------------------- 19,524,103 17,821,222 16,292,192 -------------------------------------------- (Loss) income from real estate operations (2,828,104) 1,930,984 (1,333,393) Gain on sale of real estate -- -- 912,501 -------------------------------------------- Net (loss) income $ (2,828,104) $ 1,930,984 $ (420,892) ============================================ Net (loss) income allocated: General partners $ (28,281) $ 19,310 $ (4,209) Limited partners (2,799,823) 1,911,674 (416,683) -------------------------------------------- $ (2,828,104) $ 1,930,984 $ (420,892) ============================================ Net (loss) income per unit of limited partnership interest $ (0.94) $ 0.64 $ (0.14) ============================================
See accompanying notes. F-5 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Statements of Changes in Partners' Capital
General Limited Total Partners Partners -------------------------------------------- Partners' capital (deficit) at December 31, 1996 $ 60,885,576 $ (113,035) $ 60,998,611 Redemption of units (547,120) -- (547,120) Cash distributions to partners (3,677,381) (36,774) (3,640,607) Net loss (420,892) (4,209) (416,683) -------------------------------------------- Partners' capital (deficit) at December 31, 1997 56,240,183 (154,018) 56,394,201 Redemption of units (93,310) -- (93,310) Cash distributions to partners (3,625,596) (36,256) (3,589,340) Net income 1,930,984 19,310 1,911,674 -------------------------------------------- Partners' capital (deficit) at December 31, 1998 54,452,261 (170,964) 54,623,225 Cash distributions to partners (3,602,666) (36,027) (3,566,639) Net loss (2,828,104) (28,281) (2,799,823) -------------------------------------------- Partners' capital (deficit) at December 31, 1999 $ 48,021,491 $ (235,272) $ 48,256,763 ============================================
See accompanying notes. F-6 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Statements of Cash Flows
For the year ended December 31, 1999 1998 1997 -------------------------------------------- Operating activities Net (loss) income $ (2,828,104) $ 1,930,984 $ (420,892) -------------------------------------------- Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 5,206,514 4,302,024 3,931,760 Gain on sale of real estate -- -- (912,501) Decrease (increase) in deferred rent receivable 159,032 316,769 (10,221) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 159,137 (259,237) (46,491) Decrease (increase) in due from general partners 158,550 63,232 (58,451) Decrease (increase) in note receivable 279,736 (521,751) 7,684 (Increase) in escrow deposits - operating (885,658) -- -- Increase in lease commissions (497,390) (1,460,007) (765,788) Increase in deposits and other assets (550,806) (142,613) (2,425) (Decrease) increase in accounts payable and accrued expenses (383,687) 996,988 787,736 (Decrease) increase in other liabilities (350,223) 240,331 197,746 -------------------------------------------- Total adjustments 3,295,205 3,535,736 3,129,049 -------------------------------------------- Net cash provided by operating activities 467,101 5,466,720 2,708,157 -------------------------------------------- Investing activities Increase in escrow deposits - investing (1,981,024) -- -- Proceeds from sale of real estate -- -- 12,475,923 Acquisition of real estate (3,450,996) (3,606,069) (13,753,264) -------------------------------------------- Net cash (used in) investing activities (5,432,020) (3,606,069) (1,277,341) -------------------------------------------- Financing activities Deferred financing costs (834,019) (234,150) -- Proceeds from mortgage loan payable 35,000,000 6,400,000 2,600,000 Repayments of mortgage loan payable (26,391,512) (1,048,000) (976,400) Redemption of units -- (93,310) (547,120) Cash distributions to partners (3,602,666) (3,625,596) (3,677,381) -------------------------------------------- Net cash provided by (used in) financing activities 4,171,803 1,398,944 (2,600,901) -------------------------------------------- Net (decrease) increase in cash and cash equivalents (793,116) 3,259,595 (1,170,085) Cash and cash equivalents at beginning of year 4,115,435 855,840 2,025,925 -------------------------------------------- Cash and cash equivalents at end of year $ 3,322,319 $ 4,115,435 $ 855,840 ============================================
See accompanying notes. F-7 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 1. Organization Corporate Realty Income Fund I, L.P. ("CRIF") was formed as a limited partnership on November 25, 1985 under the laws of the State of Delaware. CRIF was formed for the purpose of acquiring and owning income-producing commercial and industrial real estate properties for lease to others. CRIF will terminate on December 31, 2010 or sooner, in accordance with the Partnership Agreement. During 1999, in connection with refinancing a portion of its debt, CRIF formed a wholly-owned subsidiary to which it transferred ownership of its New York City property. The general partners of CRIF are 1345 Realty Corporation, the corporate general partner, and Robert F. Gossett, Jr., the individual general partner. On November 30, 1994, all of the outstanding capital stock of the corporate general partner of CRIF was acquired by the individual general partner in a transaction which was effective as of July 1, 1994. As a result of this acquisition, the entire interest of the general partners is controlled by the individual general partner. The initial capital was $1,025 representing capital contributions of $1,000 by the general partners and $25 by the original limited partner. The Partnership commenced operations on June 2, 1986 with the acceptance of subscriptions for 1,082,640 Depositary Units of limited partnership interest (the "Units"). The Partnership has authorized the issuance of up to 4,000,000 Units. The Partnership sold 3,200,000 Units, representing $80,000,000, which completed the offering. Upon the first admittance of the additional limited partners and unitholders, the original limited partner withdrew from the Partnership. Offering costs incurred in connection with the initial offering are nonamortizable and have been deducted from limited partners' capital. During 1998, 8,680 units were redeemed from unitholders and canceled. There were no unit redemptions during 1999. F-8 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of CRIF and its wholly-owned subsidiaries (collectively, the "Partnership"). All significant intercompany accounts and transactions have been eliminated. Real Estate and Depreciation Costs directly related to the acquisition and improvement of real estate are capitalized. Ordinary repairs and maintenance are expensed as incurred. Depreciation of buildings, improvements, and equipment and furniture for financial reporting purposes is computed under the straight-line method over the estimated economic useful life of the assets which range from five to forty years. Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the Partnership's assets, which are held for use, are measured by a comparison of the carrying amount of an asset to future net cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. No impairment losses were required on any of the properties owned by the Partnership. Deferred Financing Costs Deferred financing costs are being amortized over the term of the loan agreements. Lease Commissions Leasing commissions are capitalized and amortized over the term of the related leases. F-9 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Deferred Rent Rental income is recognized on the straight-line basis over the entire term of the lease including rent-free periods. Accordingly, rental income for the years ended December 31, 1999, 1998 and 1997, includes approximately $615,300, $498,500 and $169,200, respectively, of the excess of income on the straight-line basis over the actual amount billed. During 1999, the Partnership wrote off deferred rent receivable of approximately $774,400, of which approximately $407,200, $338,200, and $29,000 related to tenants vacating the Tumi Building, 475 Fifth Avenue, and the Monterey Park Building, respectively, prior to the expiration of their lease terms. During 1998, the Partnership wrote-off deferred rent receivable of approximately $815,300, of which approximately $750,300 and $65,000 related to tenants vacating the Tumi Building and 475 Fifth Avenue, respectively, prior to the expiration of their lease terms. During 1997, upon the sale of the James River Building, deferred rent receivable of approximately $158,900 was written-off. Such write-offs are included in bad debt expense in the accompanying statements of operations. Income Taxes No provision for income taxes has been made since all items of income or losses and tax benefits are passed through to the individual partners. Cash Equivalents The Partnership considers all highly liquid financial instruments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents, which consist principally of money market funds, are carried at cost which approximates market value. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines fair value of a financial instrument as the amount at which the instrument could be exchanged F-10 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Fair Value of Financial Instruments (continued) in a current transaction between willing parties. The Partnership's accounts receivable and note receivable, deposits, accounts payable and accrued expenses, interest payable and variable rate mortgage loan payable are carried at cost, which approximates fair value. The fair value of the Partnership's fixed rate long term borrowings are estimated using discounted cash flow analyses, based on current borrowing rates for similar types of borrowing arrangements. The carrying amount and fair value of the Partnership's fixed rate long term debt at December 31, 1999 is approximately $31,946,010 and $30,976,200, respectively. Recently Issued Accounting Standards SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998. The statement requires all derivatives to be recognized on the balance sheet at fair value. SFAS No. 133 is required to be adopted in years beginning after June 15, 2000. Management of the Partnership does not anticipate that the new statement will have a significant effect on the financial statements of the Partnership. Use of Estimates The general partners have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Reclassifications Certain 1998 and 1997 amounts have been reclassified to conform with the current year presentation. F-11 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Partnership Agreement The Partnership Agreement provides that profits, losses and distributions shall be allocated 99% to the limited partners and 1% to the general partners. Sale or refinancing proceeds will generally be distributed 99% to the limited partners and 1% to the general partners until the limited partners have received an amount which, when added to all prior distributions of cash, will equal their original invested capital plus an 8% per annum cumulative noncompounded return. Thereafter, after payment of the subordinated disposition fee, proceeds will be distributed 75% to the limited partners and 25% to the general partners. The Partnership Agreement further provides that net income shall be allocated to each calendar month of the year, and shall be apportioned on a monthly basis to the holders of interests, in the ratio in which the number of interests owned by each limited partner or unitholder on the first day of the month bears to the total number of interests owned by the limited partners and unitholders as of that date. 4. Investments in Real Estate Monterey Park Building On July 10, 1986, the Partnership purchased the Monterey Park Building (formerly the American Color Building), an office building located at 2630 Corporate Place, Monterey Park, California, and the 90,000 square feet of underlying land. The property contains approximately 20,250 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $4,182,000. The building was fully leased to GE through October 21, 1995. In October 1995, GE renewed its lease with respect to 52% of the rentable area of the building for a term which was due to expire in October 2000. During 1998, the Partnership earned a lease cancellation fee of approximately $105,000 as GE terminated its lease prior to the end of its lease term. The remaining 48% of the building was leased to American Color F-12 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) Monterey Park Building (continued) Graphics, Inc. for a term which was due to expire in July 2002. During 1999, American Color Graphics vacated the property and paid a lease cancellation fee of approximately $140,000. At December 31, 1999, the building was approximately 45% leased to one tenant under a lease which expires in November 2000. The Directory Building On October 27, 1986, the Partnership purchased the Directory Building (formerly the IBM building), an office building located in Las Colinas, Texas, and the 6.67 acres of underlying land. The property contains approximately 152,100 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $24,580,000. As of December 31, 1999, the building was 100% leased to GTE Directories Corporation for a term which expires on September 30, 2000. Rent from the tenant represented 16%, 14%, and 16% of the Partnership's total rental revenue in 1999, 1998, and 1997, respectively. Tumi Building On December 30, 1986, the Partnership purchased the Tumi Building (formerly the Austin Place Building), an office building located in South Plainfield, New Jersey, and the five acres of underlying land. The property contains approximately 106,600 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $16,473,000. As of December 31, 1999, the building was approximately 60% leased to various tenants under leases with remaining terms ranging from six to fourteen years. F-13 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) Tumi Building (continued) In March 1999, Gdynia America Line, Inc. ("Gdynia"), a tenant who had occupied approximately 20% of the Tumi Building, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The lease was rejected in bankruptcy proceedings and the Partnership is currently pursuing amounts from Polish Ocean Lines, a Polish corporation owned by the Polish government, who is jointly and severally obligated under Gdynia's lease. During 1999, the Partnership wrote off deferred rent and other receivables from Gdynia of approximately $718,000. During 1998 two tenants, The Austin Company and PNC Mortgage, paid lease cancellation fees of approximately $3,337,000 and $397,000, respectively, to terminate their leases prior to the end of their lease terms. Rent from The Austin Company represented 10% of the Partnership's total rental revenue in 1997. James River Building On October 16, 1987, the Partnership purchased the James River Building (formerly the Crown Zellerbach building) located in Woodland, California (a suburb of Sacramento), and the 21 acres of underlying land. The building contains approximately 570,000 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of $14,551,456. The building was net leased to James River Corporation of Nevada, Inc. for a term which expires in January, 2002. On February 28, 1997, the land and building were sold to an unrelated party for $12,875,000. Flatiron Building On January 5, 1988, the Partnership purchased the Flatiron Building (formerly the Cadnetix Building) located in Boulder, Colorado, and the five acres of underlying land. The building contains approximately 96,000 square feet of net rentable area. F-14 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) Flatiron Building (continued) The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $9,003,000. As of December 31, 1999, the building was 100% leased to various tenants under leases with remaining terms ranging from one to four years. Marathon Oil Building On March 21, 1988, the Partnership purchased the Marathon Oil Building (formerly the Tenneco Oil Building) located in Oklahoma City, Oklahoma, and the 6.1 acres of underlying land. The building contains approximately 90,925 net rentable square feet plus a 10,016 square foot basement. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $10,736,000. As of December 31, 1999, the building was approximately 93% leased to various tenants under leases with original terms of five years. The Marathon Oil Company leases approximately 62,600 square feet of space pursuant to a five-year lease which expires in February, 2001. A former affiliate of Marathon leases approximately 24,700 square feet of space pursuant to a lease which expires in February, 2001. Approximately 5,600 square feet of the remaining space is leased to another tenant for a remaining term of two years. 475 Fifth Avenue On December 6, 1996 the Partnership purchased an office building and the underlying land located at 475 Fifth Avenue, New York, New York (the "New York Building"). The building contains approximately 240,000 net rentable square feet. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $27,440,000. F-15 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) 475 Fifth Avenue (continued) As of December 31, 1999, the building was approximately 96% leased to various tenants under operating leases with remaining terms ranging from one to ten years. During 1999 and 1998, the Partnership earned lease cancellation fees of approximately $190,000 and $197,000, respectively, from tenants who terminated their leases prior to the end of their lease terms. Alamo Towers On March 17, 1997, the Partnership purchased an office building and the underlying land located in San Antonio, Texas, for a purchase price, including capitalized closing and related costs, of approximately $12,002,000. The building contains approximately 196,000 net rentable square feet. As of December 31, 1999, the building was approximately 78% leased to various tenants under operating leases with remaining terms ranging from one to five years. During 1998, the Partnership earned lease cancellation fees aggregating approximately $131,000 from several tenants who terminated leases prior to the end of their respective lease terms. 5. Leases Minimum future rentals from tenants under noncancellable operating leases as of December 31, 1999 are approximately as follows: 2000 $11,491,000 2001 8,296,000 2002 7,367,000 2003 6,891,000 2004 5,998,000 Thereafter 15,900,000 ------------ Total $55,943,000 ============ F-16 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Leases (continued) In addition to the minimum lease amounts, the leases provide for escalation charges to the tenants for operating expenses, electric and real estate taxes. For the years ended December 31, 1999, 1998 and 1997, escalation charges amounting to approximately $2,034,000, $2,152,000 and $2,735,000, respectively, have been included in rental income. 6. Transactions With General Partners and Affiliates The general partners or their affiliates receive a property management fee equal to either 1% for a long-term net lease or 6% for other types of leases on the gross revenue from the property, and a partnership management fee equal to 7% of adjusted cash from operations, as defined, and reimbursement of administrative expenses. The general partners also receive leasing commissions in connection with leasing, re-leasing or leasing related services performed on behalf of the Partnership in connection with the negotiation of tenant leases. Such commissions are computed at a rate equal to 3% of the gross revenues for the first five years of each lease signed where the general partners have performed such leasing services. Following is a summary of the fees earned and reimbursable expenses for the years ended December 31, 1999, 1998 and 1997: 1999 1998 1997 ------------------------------------ Partnership management fees $ 250,908 $ 254,544 $ 257,664 Property management fees 848,798 1,103,127 750,588 Administrative expenses 55,000 55,000 60,372 There were no leasing commissions billed by the general partner in 1999, 1998 and 1997. F-17 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans Payable On September 26, 1996, the Partnership entered into a $24,000,000 senior secured revolving credit facility (the "Mortgage"). The purpose of the Mortgage was to refinance the existing $7,800,000 secured revolving line of credit, to provide working capital for tenant improvements and leasing commissions with respect to the properties owned by the Partnership, and to provide funds for the acquisition of additional properties. On December 6, 1996, the Partnership amended the Mortgage, increasing the principal amount to $44,000,000. On September 25, 1998, the Partnership further amended the Mortgage to increase its existing line of credit by $5,000,000. The terms of the Mortgage, as amended, provide for a term of four years and provided for maximum gross borrowings of $49,000,000. On August 9, 1999, the Partnership divided the Mortgage into two notes. One note, in the amount of $22,594,880, was secured by the New York Building, and the second note in the amount of $26,405,120 is secured by the six other properties owned by the Partnership. The loan secured by the New York Building was repaid in 1999. As a result of the Mortgage borrowing capacity reduction, approximately $251,000 of unamortized loan fees were written off during 1999. Borrowings under the Mortgage bear interest monthly at a rate, selected at the option of the Partnership at the time of the associated borrowing, based on (i) the lender's Peg Rate (as defined in the loan agreement) plus .50% or (ii) the applicable LIBOR rate or other market rate offered to the bank plus 2%. The Mortgage requires monthly amortization of principal in an amount equal to 1/500th of the outstanding principal amount of the Mortgage on the first day of the applicable month with a final payment of the then outstanding balance at maturity. The Mortgage may be prepaid at any time. Upon the sale of any property, the Partnership is required to repay principal on the total indebtedness under the Mortgage in an amount equal to 110% of that portion of outstanding balance of the loan attributable to the sold property, as defined in the Mortgage agreement. The Mortgage requires the Partnership to comply with certain covenants, including but not limited to, maintenance of certain financial ratios. In addition, the Mortgage provides that the Partnership may distribute to its partners up to 90% of the sum of its operating net income plus depreciation and amortization. F-18 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans Payable (continued) The Partnership has calculated that its cash distributions for the twelve months ended December 31, 1999 exceeded the limit imposed by the Mortgage agreement by approximately $173,000. The Partnership has informed the lender that it will increase to $10,000,000 the amortization payment it will make on the Mortgage upon the sale of one of its buildings. The Partnership has further informed the lender that if such amortization payment is not made on or before June 30, 2000, the Partnership, until it makes this $10,000,000 payment, will (i) limit quarterly distributions to the current level of $.30 per Unit and (ii) increase its liquid net worth requirement imposed by the lender by the amount of the excess cash distributed during 1999. At December 31, 1999, $23,593,278 was outstanding under the Mortgage at an interest rate of approximately 8.16% based on (ii) above. In connection with obtaining the Mortgage, the Partnership incurred fees and expenses of $1,756,776, which have been capitalized and are being amortized over the term of the loan agreement. On August 9, 1999, the Partnership obtained a $32,000,000 fixed rate mortgage (the "New York Loan"). The loan is secured by the New York Building, matures on September 1, 2009, and bears interest on the outstanding balance, payable monthly, at a fixed rate of 8.27%. The terms of the note require monthly principal and interest payments of $240,855. Approximately $23,381,000 of the loan proceeds was used to repay the note secured by the New York Building. In connection with the New York Loan, the Partnership incurred fees aggregating approximately $834,000. These fees have been deferred and are being amortized over the term of the New York Loan. As of December 31, 1999, the outstanding balance of the loan was $31,946,010. The New York Loan may not be prepaid prior to September 2, 2002. Thereafter, the New York Loan can be prepaid in full and not in part, subject to a prepayment penalty. Pursuant to the New York Loan agreement, the Partnership had $2,866,682 on deposit at December 31, 1999 in restricted funds for capital improvements, repairs and replacements, and real estate taxes. F-19 7. Loans Payable (continued) Minimum future principal payments pursuant to the Partnership's loan agreements as of December 31, 1999 are as follows: 2000 $23,820,449 2001 240,314 2002 261,256 2003 284,024 2004 301,159 Thereafter 30,632,086 ------------ Total $55,539,288 ============ 8. Supplemental Disclosure of Cash Flow Information
1999 1998 1997 ------------------------------------------ Cash paid during the year for interest $ 3,653,401 $ 3,289,728 $ 3,154,925 ==========================================
9. Employee Savings Plan During 1997, the Partnership established an employee savings plan (the "Plan") in accordance with Section 401(K) of the Internal Revenue Code. The Plan permits eligible employees to make contributions through salary reductions. For the periods ended December 31, 1999, 1998, and 1997, the Partnership had not made any contributions to the Plan. 10. Earnings per Limited Partnership Unit Basic earnings per limited partnership unit amounts were computed based on 2,983,531, 2,986,460 and 3,022,492 weighted average limited partnership units outstanding in 1999, 1998 and 1997, respectively. For the three years ended December 31, 1999, there were no partnership unit equivalents and, in accordance with the provisions of SFAS No. 128, dilutive earnings per limited partnership unit for the three years ended December 31, 1999, were computed based on the weighted average limited partnership units outstanding. F-20 Corporate Realty Income Fund I, L.P. and Subsidiaries Schedule III - Real Estate and Accumulated Depreciation December 31, 1999
Costs Capitalized Subsequent to Gross Amount at Which Initial Cost (B) Acquisition Carried at Close of Period --------------------------------------------------------------------------- Encumbrances Building and Building and Building and Total Description (A) Land Improvements Improvements Land Improvements (C) - ------------------------------------------------------------------------------------------------------------------------------------ Office Building Monterey Park, CA $ 747,080 $ 1,762,126 $ 2,459,141 $ 178,678 $ 1,762,126 $ 2,637,819 $ 4,399,945 Office Building Las Colinas, TX 6,988,816 4,925,745 19,702,979 2,819,061 4,925,745 22,522,040 27,447,785 Office Building So. Plainfield, NJ 4,145,090 3,147,912 13,378,294 3,001,499 3,147,912 16,379,793 19,527,705 Office Building San Antonio, TX 5,783,848 2,408,000 9,636,883 891,328 2,408,000 10,528,211 12,936,211 Office Building Boulder, CO 4,289,687 1,080,369 7,922,716 301,342 1,080,369 8,224,058 9,304,427 Office Building Oklahoma City, OK 1,638,757 1,063,694 9,713,348 440,750 1,063,694 10,154,098 11,217,792 Office Building New York, NY 31,946,010 5,488,000 21,951,998 5,911,629 5,488,000 27,863,627 33,351,627 -------------------------------------------------------------------------------------------------------- $ 55,539,288 $ 19,875,846 $ 84,765,359 $ 13,544,287 $ 19,875,846 $ 98,309,646 $118,185,492 ======================================================================================================== Accumulated Life on Which Depreciation Date of Depreciation Description (D) Construction Date Acquired Is Computed - ----------------------------------------------------------------------------------------------- Office Building Monterey Park, CA $ 889,018 1985 July, 1986 5 to 40 years Office Building Las Colinas, TX 8,809,607 1982 October, 1986 5 to 40 years Office Building So. Plainfield, NJ 5,678,324 1986 December, 1986 5 to 40 years Office Building San Antonio, TX 800,257 1975/1980 March, 1997 5 to 40 years Office Building Boulder, CO 2,435,060 1987 January, 1988 5 to 40 years Office Building Oklahoma City, OK 3,140,210 1986 March, 1988 5 to 40 years Office Building New York, NY 2,609,495 1925 December, 1996 5 to 40 years ------------ $24,361,971 ============
F-21 Corporate Realty Income Fund I, L.P. and Subsidiaries Schedule III - Real Estate and Accumulated Depreciation (continued) December 31, 1999 Notes: (A) Encumbrances represent a loan secured by a deed of trust given with respect to all of the properties of the Partnership. (B) The initial cost to the Partnership represents the original purchase price of the properties net of purchase price adjustments, including amounts incurred subsequent to acquisition which were contemplated. The initial cost includes the purchase price paid by the Partnership and acquisition fees and expenses. There is no difference between costs for financial reporting purposes and costs for federal income tax purposes. (C) Reconciliation Summary of Transactions - Real Estate Owned
Year Ended December 31, 1999 1998 1997 ----------------------------------------------------- Balance at beginning of year $ 115,495,174 $ 112,116,734 $ 112,971,546 Net additions during the year 3,450,996 3,606,069 13,753,264 Cost of real estate sold -- -- (11,563,422) Write off fully depreciated assets (760,678) (227,629) (3,044,654) ----------------------------------------------------- Balance at close of year $ 118,185,492 $ 115,495,174 $ 112,116,734 =====================================================
The aggregate cost of land, buildings and improvements for federal income tax purposes at December 31, 1999 was approximately $119,173,800. (D) Reconciliation Summary of Transactions - Accumulated Depreciation
Year Ended December 31, 1999 1998 1997 ------------------------------------------------------ Balance at beginning of year $21,669,758 $18,592,878 $18,553,069 Depreciation charged to expense 3,452,891 3,304,509 3,084,463 Write-off of fully depreciated assets (760,678) (227,629) (3,044,654) --------------------------------------------------- Balance at close of year $24,361,971 $21,669,758 $18,592,878 ===================================================
F-22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 20 PART III Item 10. Directors and Executive Officers of the Registrant Registrant has no officers or directors. The General Partners manage and control substantially all of Registrant's affairs and have general responsibility and ultimate authority in all matters affecting Registrant's business. The Individual General Partner is Robert F. Gossett, Jr. The Corporate General Partner is 1345 Realty Corporation. All of the outstanding capital stock of 1345 Realty Corporation is owned by the Individual General Partner and his wife. The directors and executive officers of the Corporate General Partner are as follows: Officer/ Director Name Age Position Since ---- --- -------- ----- Robert F. Gossett, Jr. 56 President, Treasurer and Director 1994 Pauline G. Gossett 56 Secretary 1994 Information with respect to the Individual General Partner and with respect to the above officers and directors is set forth below: Robert F. Gossett, Jr., the Individual General Partner since 1985, is Managing Director of Vance Capital Corporation (1981 to present), a real estate management and finance company. Between 1978 and 1981, Mr. Gossett served as Executive Vice President and Director of Loeb Capital Corporation. From 1974 until 1978, he was a Vice President of Oppenheimer Properties, Inc. and, between 1969 and 1974, was associated with the Investment Banking Division of Merrill, Lynch, Pierce, Fenner & Smith, Inc. He received a B.A. degree from the University of Texas, a J.D. degree from Georgetown University, and an M.B.A. degree from the University of Pennsylvania. He is a member of the Texas Bar. Pauline G. Gossett, the Secretary of the Corporate General Partner, is a stockholder and Director of Vance Capital Corporation (1981 to present). Mrs. Gossett received an Associate of Arts degree from Briarcliff College. Mrs. Gossett is the wife of Robert F. Gossett, Jr. Registrant employs the following employees who make significant contributions to the business of Registrant: Employee Name Age Position Since ---- --- -------- ----- James N. Walsh 46 Property Manager 1997 Wallis J. Hoskins 46 Property Manager 1993 Veronica Rios 35 Property Manager 1999 Madeline Matlak 34 Fund Administrator 1994 21 James N. Walsh is the Property Manager for 475 Fifth Avenue. Mr. Walsh has been designated a Real Property Administrator (RPA) by the Building Owners and Managers Association. From 1989 to 1997, he was a building manager, comptroller, and leasing manager for 584 Operating Corp., the owner of an office building in New York, New York which is similarly sized to 475 Fifth Avenue. Prior thereto, Mr. Walsh served for four years as an assistant comptroller and construction accountant for the residential division of Cadillac Fairview. He also acted for four years as a project accountant for residential properties owned by Olympia & York. Mr. Walsh received a B.B.A. degree in accounting from Iona College. Wallis J. Hoskins is the Property Manager for the Austin Place Building. For the 20 years prior thereto he was employed by The Prudential Insurance Company of America, from 1981 to 1992 as a facilities manager for company-owned buildings and from 1973 to 1980 as a claims approver. Veronica Rios is the Property Manager for Alamo Towers. Ms. Rios has been designated a Real Property Administrator (RPA) by the Building Owners and Managers Association. From 1995 to 1999, she was a property manager for three office buildings owned by Mission City Properties in San Antonio. Ms. Rios was a property manager from 1993 to 1995 for several office, office/warehouse, and rental properties owned by the Bonner Group in San Antonio. Prior thereto, from 1989 to 1993, she was employed in various office, accounting, and property management capacities by Commercial Real Estate Associates in San Antonio. Madeline Matlak is the Fund Administrator of the Registrant. Mrs. Matlak was formerly employed as a Fund Administrator in the Direct Investment Department of Smith Barney, Inc. (1989 through 1994). Based solely upon its review of copies of Forms 3, 4, and 5 received by it during 1999, and written representations from reporting persons that no other Forms 5 were required for such persons for 1999, Registrant believes that all filing requirements applicable to its General Partners and the directors and officers of the Corporate General Partner pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, for 1999 and prior years were complied with on a timely basis except as previously reported. Item 11. Executive Compensation Registrant is not required to and did not pay remuneration to the officers and directors of the Corporate General Partner. However, the General Partners and/or their affiliates receive compensation for services performed for Registrant. 22
Summary Compensation Table Share of Adjusted Cash Management Leasing Expense Year From Operations Fees Commissions Reimbursement ---- --------------- ---- ----------- ------------- Corporate General Partner 1999 $28,822 $879,765 $ -0- $44,000 Individual General Partner 1999 $7,205 $219,941 $ -0- $11,000 Corporate General Partner 1998 $29,005 $1,086,137 $ -0- $44,000 Individual General Partner 1998 $7,251 $271,534 $ -0- $11,000 Corporate General Partner 1997 $29,419 $806,602 $ -0- $48,298 Individual General Partner 1997 $7,355 $201,650 $ -0- $12,074
See Item 13 - "Certain Relationships and Related Transactions" for a discussion of the above compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information as of March 28, 2000 as to persons known by Registrant to be the beneficial owner of more than five percent (5%) of the outstanding Units of Registrant. Name and Address Amount and Percent Of Nature of Of Beneficial Owner Beneficial Ownership Class ---------------- -------------------- ----- Vance, Teel & Company, Ltd.(1) 406 E. 85th Street 203,347 6.8% New York, New York 10028 - ---------- (1) Each of Robert F. Gossett, Jr., the Individual General Partner and the President of the Corporate General Partner, and Pauline G. Gossett, the Secretary of the Corporate General Partner, own a 25% proportionate interest in Vance, Teel & Company, Ltd. 23 The following table sets forth information as of March 28, 2000 with respect to the beneficial ownership of Units of Registrant by (i) each of the General Partners, (ii) each of the directors and executive officers of the Corporate General Partner, and (iii) all General Partners and executive officers and directors of the Corporate General Partner, as a group. Amount and Name of Nature of Beneficial Beneficial Percent Owner Ownership of Class ----- --------- -------- 1345 Realty Corporation(1) -0- 0% Robert F. Gossett, Jr.(2) 51,036.75 1.7% Pauline G. Gossett(3) 51,036.75 1.7% All General Partners and Directors and Executive Officers as a group (3 persons) 102,073.50 3.4% Robert F. Gossett, Jr., the Individual General Partner and an officer and director of the Corporate General Partner, and Pauline G. Gossett, an officer of the Corporate General Partner, own all of the outstanding capital stock of the Corporate General Partner. Item 13. Certain Relationships and Related Transactions Registrant has and will continue to have certain relationships with the General Partners and their affiliates as discussed below. The General Partners received $36,027 ($28,822 to the Corporate General Partner and $7,205 to the Individual General Partner) as their allocable share (1%) of adjusted cash from operations with respect to the year ended December 31, 1999. For the year ended December 31, 1999, $28,281 (1%) of Registrant's net loss was allocated to the General Partners ($22,625 to the Corporate General Partner and $5,656 to the Individual General Partner). The General Partners or their affiliates are also entitled to receive: a partnership management fee for managing the affairs of Registrant, equal to 7% of adjusted cash from operations less the asset management fee; an asset management fee for managing Registrant's funds which are not invested in properties, equal to 0.5% per annum of the average amount of outstanding funds during each calendar month which are not otherwise invested in properties; and a property management fee for property - -------- 1 1345 Realty Corporation is the Corporate General Partner. 2 Mr. Gossett is the Individual General Partner and the President of the Corporate General Partner. Consists of Mr. Gossett's 25% proportionate interest in Vance, Teel & Company, Ltd. He disclaims beneficial ownership of the remaining 75% proportionate interest owned by his wife, Pauline Gossett, and his two adult children. 3 Ms. Gossett is the Secretary of the Corporate General Partner. Consists of Ms. Gossett's 25% proportionate interest in Vance, Teel & Company, Ltd. She disclaims beneficial ownership of the remaining 75% proportionate interest owned by her husband, Robert F. Gossett, Jr., and her two adult children. 24 management services for Registrant's properties, equal to the normal and competitive fees customarily charged by unaffiliated parties rendering similar services in the same geographic area, not to exceed 1% of the annual gross revenues for leases with terms of ten years or more or 6% of the annual gross revenues for replacement leases. During the year ended December 31, 1999, the General Partners earned and were paid an aggregate of $1,099,706 of such management fees ($879,765 to the Corporate General Partner and $219,941 to the Individual General Partner). At December 31, 1999, $63,534 of such fees had not been paid. The General Partners are also entitled to receive leasing commissions in connection with leasing, releasing or leasing related services performed on behalf of the Registrant in connection with the negotiation of tenant leases. Such fees are computed at a rate equal to 3% of the gross revenue for the first five years of each lease signed where the General Partners performed such leasing services. During the year ended December 31, 1999, no such fees were paid to the General Partners. During the year ended December 31, 1999, the General Partners were also entitled to reimbursement for expenses incurred in connection with Registrant's operations aggregating $55,000 ($44,000 to the Corporate General Partner and $11,000 to the Individual General Partner). 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1),(2) See page F-2. Sequential Page Number ------ (a)(3) Exhibits: 3. Certificate of Limited Partnership, incorporated by reference to Exhibit 4 to Registration Statement No. 33-2258 (the "Registration Statement"). 4.(a) Amended and Restated Agreement of Limited Partnership dated as of July 24, 1995, incorporated by reference to Exhibit 4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. 10.(a) Property Management Agreement, incorporated by reference to Exhibit 10B to the Registration Statement. (b) Management Agreement dated January 5, 1988 by and between Registrant and Colorado Management Group, incorporated by reference to Exhibit 10(e) to Registrant's Current Report on Form 8-K Dated January 5, 1988. (c) Lease dated as of April 20, 1994 between Registrant and GTE.(1) - ---------- (1) Incorporated by reference to Exhibits 10(y), (z), and (aa) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 26 (d) Amendment No. 1 to Lease dated as of July 29, 1994 between Registrant and GTE.(1) (e) Amendment No. 2 to Lease dated as of February 22, 1995 between Registrant and GTE.(1) (f) Secured Promissory Note dated September 26, 1996, made by Registrant.(2) (g) Loan Agreement dated as of September 26, 1996 between Registrant and Fleet Bank, N.A.(2) (h) Environmental Compliance and Indemnification Agreement dated __________, 1996, made by Registrant.(2) (i) First Amendment of Loan Agreement and Note dated December __, 1996 between Registrant and Fleet Bank, N.A.(2) (j) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the American Color Building.(2) (k) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the American Color Building.(2) (l) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant - ---------- (1) Incorporated by reference to Exhibits 10(y), (z), and (aa) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (2) Incorporated by reference to Exhibits 10(i), (j), (k), (l), (m), (n), (o), (p), (q), (r), (t), (u), (v), (w) and (cc) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 27 with respect to the Flatiron Building.(2) (m) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the Flatiron Building.(2) (n) Mortgage, Assignment of Leases and Rents and Security Agreement dated September 26, 1996, made by Registrant with respect to the Tumi Building.(2) (o) First Amendment to Mortgage dated December __, 1996, made by Registrant with respect to the Tumi Building.(2) (p) Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Marathon Oil Building.(2) (q) First Amendment to Mortgage dated December __, 1996, made by Registrant with respect to the Marathon Oil Building.(2) (r) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Directory Building.(2) (s) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the Directory Building.(2) - ---------- (2) Incorporated by reference to Exhibits 10(i), (j), (k), (l), (m), (n), (o), (p), (q), (r), (t), (u), (v), (w) and (cc) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 28 (t) Second Amendment of Loan Agreement dated March 17, 1997 among Fleet Bank, First American Bank Texas SSB, and Registrant.(2) (u) Third Amendment of Loan Agreement and Second Amendment of Note among Fleet Bank, First American Bank Texas SSB, and Registrant.(3) (v) Splitter Agreement dated as of August 9, 1999 between Fleet Bank and Registrant. (w) Demand Note dated August 9, 1999 made by Registrant. (x) Assignment of Mortgages and Note dated as of August 9, 1999 made by Registrant with respect to 475 Fifth Avenue. (y) Consolidated and Restated Promissory Note dated August 9, 1999 made by 475 Fifth Avenue Limited Partnership. (z) Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing made as of August 9, 1999 by 475 Fifth Avenue Limited Partnership to and for the benefit of Heller Financial, Inc. (3) Incorporated by reference to Exhibits 10(v), to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. 29 (aa) Letter Agreement dated August 9, 1999 made by Robert F. Gossett, Jr. to and for the benefit of Heller. (bb) Manager's Agreement, Subordination and Consent to Assignment dated as of August 9, 1999 made by Registrant to and for the benefit of Heller. (cc) Hazardous Substance Indemnification Agreement dated as of August 9, 1999 made by 475 Fifth Avenue Limited Partnership and Robert F. Gossett, Jr. to and for the benefit of Heller. 27. Financial Data Schedule. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. 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. CORPORATE REALTY INCOME FUND I, L.P. (Registrant) By: 1345 REALTY CORPORATION as Corporate General Partner Dated: April 13, 2000 By: /s/ Robert F. Gossett, Jr. -------------------------------- ROBERT F. GOSSETT, JR., President Dated: April 13, 2000 By: /s/ Robert F. Gossett, Jr. -------------------------------- ROBERT F. GOSSETT, JR. Individual General Partner 30 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities (with respect to the Corporate General Partner) and on the dates indicated. 1345 REALTY CORPORATION Dated: April 13, 2000 By: /s/ Robert F. Gossett, Jr. ---------------------------------- Robert F. Gossett, Jr. President, Director Dated: April 13, 2000 By: /s/ Pauline G. Gossett ---------------------------------- Pauline G. Gossett Secretary
EX-10.(V) 2 SPLITTER AGREEMENT SPLITTER AGREEMENT SPLITTER AGREEMENT (as the same may be amended or otherwise modified from time to time, this "Agreement"), made as of August 9, 1999 between FLEET BANK, NATIONAL ASSOCIATION, as Agent ("Agent"), having its principal office at 1133 Avenue of the Americas, 40th Floor, New York, New York 10036, and CORPORATE REALTY INCOME FUND I, L.P., a Delaware limited partnership ("Borrower"), having an office at 475 Fifth Avenue, 21st Floor, New York, New York 10017. W I T N E S S E T H: - - - - - - - - - - A. Agent, as agent, is the holder of that certain note described on EXHIBIT A annexed hereto and made a part hereof (as the same may be amended or otherwise modified from time to time, the "Note"). Borrower is the maker of the Note. B. The maximum principal amount of the Note was $49,000,000. C. The parties hereto desire to split, divide and sever the Note into (x) that certain $22,594,880 Demand Note (as the same may be amended or otherwise modified from time to time, the "Demand Note") made as of the date hereof by Borrower in favor of Agent, as agent, in the principal amount of $22,594,880 and (y) the remaining $26,405,120 principal indebtedness under the Note, which shall continue to be evidenced by the Note. D. The mortgages (the "NY Mortgages") described on EXHIBIT B annexed hereto heretofore secured the Note. After giving effect to this Agreement, the NY Mortgages shall secure only the Demand Note and no other portion of the Note. E. The transactions described in the preceding recitals shall not result in the cancellation, extinguishment, payment or satisfaction of the Note, the Demand Note or the NY Mortgages. No new or additional indebtedness under the Demand Note is to be secured nor is any readvance made thereunder. NOW, THEREFORE, in consideration of the sum of Ten ($10.00) Dollars paid by each party to the other, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree: 1. The indebtedness evidenced by the Note is hereby split as provided in the recitals hereto. From and after the date hereof, the NY Mortgages shall secure only the Demand Note and no other portion of the Note. 2. Nothing herein shall: (a) be deemed to cancel, extinguish or constitute payment or satisfaction of the Note; (b) constitute a new or additional indebtedness; (c) constitute a readvance to Borrower; or (d) evidence any indebtedness other than the same indebtedness heretofore evidenced by the Note. IN WITNESS WHEREOF, the parties hereto have caused this Splitter Agreement to be executed as of the date first above written. FLEET BANK, NATIONAL ASSOCIATION, as Agent By:/s/ James E. Mirman ------------------------------------------- James E. Mirman Vice President CORPORATE REALTY INCOME FUND I, L.P., a Delaware limited partnership By: /s/ Robert F. Gosset, Jr. -------------------------------------------- Robert F. Gossett, Jr., general partner By: 1345 Realty Corporation, general partner By: /s/ Robert F. Gosset, Jr. ---------------------------------- Robert F. Gossett, Jr., President 2 STATE OF NEW YORK ) : ss.: COUNTY OF ) On the __ day of _________ in the year 1999 before me, the undersigned, personally appeared James E. Mirman, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. - ------------------------------------ Signature and Office of individual taking acknowledgement STATE OF NEW YORK ) : ss.: COUNTY OF ) On the __ day of _________ in the year 1999 before me, the undersigned, personally appeared Robert F. Gossett, Jr., personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. - ------------------------------------ Signature and Office of individual taking acknowledgement 3 EXHIBIT A SECURED PROMISSORY NOTE dated September 26, 1996 in the principal amount of $24,000,000 made by Corporate Realty Income Fund I, L.P., a Delaware limited partnership ("Borrower"), to and in favor of Fleet Bank, National Association ("Agent"); AS MODIFIED by that certain FIRST AMENDMENT OF LOAN AGREEMENT AND NOTE dated as of December 6, 1996 between Borrower and Agent whereby the principal amount of Borrower's indebtedness was increased to $44,000,000; AS FURTHER MODIFIED by that certain INTERCREDITOR AGREEMENT dated as of February 28, 1997 among Lender, First American Bank Texas, SSB and The Travelers Insurance Company and agreed to by Borrower; and AS FURTHER MODIFIED by that certain THIRD AMENDMENT OF LOAN AGREEMENT AND SECOND AMENDMENT OF NOTE dated September 25, 1998, whereby the principal amount of Borrower's indebtedness was increased to $49,000,000. 4 EXHIBIT B (NY Mortgages) The Mortgages 1. Mortgage, Assignment of Leases and Rents and Security Agreement from Corporate Realty Income Fund I, L.P. to Fleet Bank, National Association, in the original principal amount of $20,207,000.00, dated December 6, 1996 and recorded on December 12, 1996 in the Office of the City Register, New York County, December 12, 1996 in Reel 2402, Page 593; which mortgage was assigned by Assignment of Mortgage Without Covenant from Fleet Bank, National Association to Fleet Bank, National Association, as Agent (under that certain Loan Agreement dated September 26, 1996 by and between Fleet Bank, National Association and Corporate Realty Income Fund I, L.P., as amended) dated March 26, 1997 and recorded on June 9, 1997 in Reel 2463, Page 1778. 2. Second Mortgage, Assignment of Leases and Rents and Security Agreement from Corporate Realty Income Fund I, L.P. to Fleet Bank, National Association, as Agent, in the original principal amount of $2,387,880 dated as of September 25, 1998 and recorded on November 10, 1998 in the office of the City Register, New York County at Reel 2748, Page 1075. 5 EX-10.(W) 3 DEMAND NOTE DEMAND NOTE $22,594,880 New York, New York August 9, 1999 Pursuant to that certain Splitter Agreement made as of the date hereof between FLEET BANK, NATIONAL ASSOCIATION, as Agent ("Agent"), having its principal office at 1133 Avenue of the Americas, 40th Floor, New York, New York 10036, and CORPORATE REALTY INCOME FUND I, L.P., a Delaware limited partnership ("Borrower"), having an office at 475 Fifth Avenue, 21st Floor, New York, New York 10017: A. Agent and Borrower split, divided and severed that certain note described on EXHIBIT A annexed hereto and made a part hereof (as the same may be amended or otherwise modified from time to time, the "Note") into (x) this Demand Note (as the same may be amended or otherwise modified from time to time, the "Demand Note") and (y) the remaining principal indebtedness under the Note which shall continue to be evidenced by the Note; and B. The mortgages described on EXHIBIT B annexed hereto (the "NY Mortgages") which heretofore secured the Note, now secure only this Demand Note and no other portion of the Note. NOW, THEREFORE, FOR VALUE RECEIVED, Borrower promises to pay to the order of Agent the principal sum of Twenty-Two Million Five Hundred Ninety Four Thousand and Eight Hundred and Eighty Dollars ($22,594,880) with interest thereon to be computed from the date hereof, at the rate of eight (8%) percent per annum and to be paid ON DEMAND. The provisions of SECTION 6.16 of that certain Loan Agreement between Borrower and Agent dated as of September 26, 1996, amended by that certain First Amendment of Loan Agreement and Note dated as of December 6, 1996, that certain Second Amendment to Loan Agreement dated as of March 17, 1997 and that certain Third Amendment to Loan Agreement and Second Amendment to Note dated as of September 25, 1998 are hereby incorporated herein by reference. This Demand Note may not be changed orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change modification or discharge is sought. CORPORATE REALTY INCOME FUND I , L.P., a Delaware limited partnership By: /s/ Robert F. Gossett, Jr. --------------------------------------- Robert F. Gossett, Jr., general partner By: 1345 Realty Corporation, general partner By: /s/ Robert F. Gosset, Jr. --------------------------------- Robert F. Gossett, Jr., President EXHIBIT A SECURED PROMISSORY NOTE dated September 26, 1996 in the principal amount of $24,000,000 made by Corporate Realty Income Fund I, L.P., a Delaware limited partnership ("Borrower"), to and in favor of Fleet Bank, National Association ("Agent"); AS MODIFIED by that certain FIRST AMENDMENT OF LOAN AGREEMENT AND NOTE dated as of December 6, 1996 between Borrower and Agent whereby the principal amount of Borrower's indebtedness was increased to $44,000,000; AS FURTHER MODIFIED by that certain INTERCREDITOR AGREEMENT dated as of February 28, 1997 among Lender, First American Bank Texas, SSB and The Travelers Insurance Company and agreed to by Borrower; and AS FURTHER MODIFIED by that certain THIRD AMENDMENT OF LOAN AGREEMENT AND SECOND AMENDMENT OF NOTE dated September 25, 1998, whereby the principal amount of Borrower's indebtedness was increased to $49,000,000. 2 EXHIBIT B (NY Mortgages) The Mortgages Mortgage, Assignment of Leases and Rents and Security Agreement from Corporate Realty Income Fund I, L.P. to Fleet Bank, National Association, in the original principal amount of $20,207,000.00, dated December 6, 1996 and recorded on December 12, 1996 in the office of the City Register, New York County, December 12, 1996 in Reel 2402, Page 593; which mortgage was assigned by Assignment of Mortgage Without Covenant from Fleet Bank, National Association to Fleet Bank, National Association, as Agent (under that certain Loan Agreement dated September 26, 1996 by and between Fleet Bank, National Association and Corporate Realty Income Fund I, L.P., as amended) dated March 26, 1997 and recorded on June 9, 1997 in Reel 2463, Page 1778. Second Mortgage, Assignment of Leases and Rents and Security Agreement from Corporate Realty Income Fund I, L.P. to Fleet Bank, National Association as Agent in the original principal amount of $2,387,880 dated as of September 25, 1998 and recorded on November 10, 1998 in the office of the City Register, New York County at Reel 2748, Page 1075. EX-10.(Y) 4 PROMISSORY NOTE CONSOLIDATED AND RESTATED PROMISSORY NOTE LOAN NO. 99_086 August 9, 1999 New York, NY MAKER: 475 Fifth Avenue Limited Partnership, a Delaware limited partnership MAKER'S ADDRESS: 475 Fifth Avenue, 21st Floor New York, New York 10017 PRINCIPAL AMOUNT: THIRTY-TWO MILLION and No/100 Dollars ($32, 000,000.00), together with all other amounts added thereto pursuant to this Note or otherwise payable in accordance with the Loan Documents. PAYEE AND HOLDER: Heller Financial, Inc., a Delaware corporation, and its successors and assigns. PAYMENT ADDRESS: 500 West Monroe Street, 30th Floor Chicago, Illinois 60661 Attention: Heller Express Servicing Department, Re: Loan No. 99-086 or such other address as Holder may hereafter designate in writing to Maker. INITIAL PAYMENT DATE: October 1, 1999. MATURITY DATE: September 1, 2009. AMORTIZATION PERIOD: 30 Years. AMORTIZATION SCHEDULE: The amortization schedule attached hereto as Exhibit A. CONTRACT RATE: A rate of interest equal to eight and 27/100 percent 8.27% per annum. DEFAULT RATE: The Contract Rate plus five percent (5%) per annum. LATE CHARGE: Five percent (5%) of each delinquent payment other than on the principal sum due on the Maturity Date. -1- PROPERTY: 475 Fifth Avenue 475 Fifth Avenue New York, New York County, New York MORTGAGE: The Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing of even date herewith (and any modification, renewal or extension thereof) which consolidates the Existing Mortgages securing repayment of the Loan and encumbering, among other things, the Property. LOAN: The loan from Holder to Maker evidenced by this Note and secured by the other Loan Documents. LOAN DOCUMENTS: This Note, the Mortgage and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension thereof. NOTE: This Consolidated and Restated Promissory Note and any modifications, renewals or extensions hereof and any substitutions therefor. This Note amends and consolidates all of the notes evidencing each of the Existing Mortgages. EXISTING MORTGAGES: Those certain mortgages listed in Exhibit B to the Mortgage. 1. Promise to Pay. FOR VALUE RECEIVED, Maker promises to pay to the order of Holder at the Payment Address the Principal Amount (or so much thereof as may from time to time be outstanding) on or before the Maturity Date, together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. 2. Principal and Interest. So long as no Event of Default exists, interest shall accrue on the Principal Amount from time to time outstanding at the Contract Rate based on the actual number of days elapsed in each given month and a 360 day year. Principal and interest shall be paid to the Holder hereof as follows: (a) On the Initial Payment Date and on the first day of each month thereafter, Maker shall pay to Holder monthly payments of principal and interest due for such period based upon the Amortization Schedule; and (b) the outstanding Principal Amount of this Note, together with all accrued and unpaid interest, shall be due and payable in full on the Maturity Date. Whenever any payment is stated to be due or a computation is to be made on a day which is not a business day, such payment or computation will be made on the next succeeding business day, and such extension of time will be included in the computation of interest. -2- 3. Prepayment. This Note may not be prepaid in whole or in part, prior to the fourth "Loan Year", other than condemnation or casualty proceeds or any other involuntary prepayment contemplated by the Loan Documents, applied to pay a portion of the principal of the Note in Holder's sole discretion. During the fourth Loan Year, and at any time thereafter, this Note may be prepaid in full but not in part at any time, provided that any such prepayment shall be: (i) made on the first of the month; (ii) accompanied by all accrued and unpaid interest and all fees and costs due from Maker to Holder; (iii) made only upon Holder's receipt of at least thirty (30) days' prior written notice of Maker's election to prepay; and (iv) accompanied by the greater of (a) one percent (1.0%) of the outstanding Principal Amount as of the date of prepayment or (b) the "Yield Maintenance Amount". The Loan may be prepaid without payment of a Yield Maintenance Amount or the fee set forth above in clause (iv) of the preceding sentence during the last ninety (90) days of the Loan term (the "Permitted Prepayment Period"). The term "Loan Year" means for Loan Year 1, from the date hereof through September 1, 2000, and for each Loan Year thereafter, each 12-month period after September 1, 2000. "Yield Maintenance Amount" means an amount, never less than zero, equal to the present value of a series of "Monthly Amounts", assumed to be paid at the end of each month remaining from the date of prepayment through the Maturity Date, discounted at the U.S. Securities Rate. "Monthly Amount" shall mean the following: (A) The Contract Rate, MINUS (B) The yield ("U.S. Securities Rate"), as of the date of such prepayment, as published by the Federal Reserve System in its "Statistical Release H.15(519), Selected Interest Rates" under the caption "U.S. Government Securities/Treasury Constant Maturities", for a U.S. Government Security with a term equal to that remaining on this Note on the date of such prepayment (which term may be obtained by interpolating between the yields published for specific whole years), DIVIDED BY TWELVE (12) AND THE QUOTIENT THEREOF THEN MULTIPLIED BY (C) The amount prepaid on the date of such prepayment. All percentages shall be rounded to the nearest one hundred thousandth percent and dollar amounts to the nearest whole dollar. Maker acknowledges and agrees that any prepayment of this Note by virtue of the occurrence of an Event of Default hereunder prior to the Permitted Prepayment Period (but not by virtue of the application of any condemnation or casualty proceeds or any other involuntary prepayment contemplated by the Loan Documents, applied to pay a portion of the principal of the Note in Holder's sole discretion) shall be deemed a voluntary -3- prepayment for purposes of determining the applicability of any prepayment fee or Yield Maintenance Amount pursuant to Paragraph 3 above. 4. Default. 4.1 Events of Default. The following shall constitute an "Event of Default" under this Note: (i) failure to pay any amounts owed pursuant to this Note within ten (10) calendar days after such payment is due; or (ii) the occurrence of any Event of Default under any of the other Loan Documents after the expiration of any applicable notice and cure period contemplated thereby. 4.2 Remedies. So long as an Event of Default remains outstanding: (a) interest shall accrue at the Default Rate and, to the extent not paid when due, shall be added to the Principal Amount; and (b) Holder may, at its option and without further notice (such notice being expressly waived), declare the unpaid Principal Amount immediately due and payable. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, the security described in the other Loan Documents, any guarantor(s) hereof and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the date that the unpaid Principal Amount is due, pursuant to clause (b) above, shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. 5. Late Charge. If payments of principal and/or interest, or any other amounts under the other Loan Documents other than the principal sum due on the Maturity Date are not timely made and remain overdue for a period of ten (10) days, Maker, without further notice or demand by Holder, promptly shall pay the Late Charge computed on such past due amounts. Until paid, the Late Charge shall be added to the Principal Amount. Nothing in this Note shall be construed as an obligation on the part of Holder to accept, at any time, less than the full amount then due hereunder, or as a waiver or limitation of Holder's right to compel prompt performance. -4- 6. Jury Trial Waiver. MAKER AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON, OR ARISING OUT OF THIS NOTE AND THE OTHER LOAN DOCUMENTS. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER REPRESENT AND WARRANT THAT EACH HAS HAD THE OPPORTUNITY TO REVIEW THIS JURY WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. 7. Waiver. Maker, for itself and all endorsers, guarantors and sureties of this Note, and each of them, and their heirs, legal representatives, successors and assigns, respectively hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices (except as otherwise provided herein or in any relevant Loan Document) in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that its liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by the Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and each of them, and their heirs, legal representatives, successors and assigns, respectively hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, or of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers or guarantors or endorsers may become parties hereto without notice to Maker and without affecting the liability of Maker hereunder. 8. Security, Application of Payments. This Note is secured by the liens, encumbrances, and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Each payment on the Loan is to be applied when received first to the payment of any fees, expenses or other costs Maker is obligated to pay hereunder or under the terms of the other Loan Documents, second to the payment of any accrued and unpaid Late Charge, third to the payment of interest on the Principal Amount from time to time remaining unpaid, and the remainder of such payment shall be used to reduce the Principal Amount. -5- 9. Miscellaneous. 9.1 Amendments. This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Holder and Maker. 9.2 Lawful Rate of Interest. In no event whatsoever shall the amount of interest paid or agreed to be paid to Holder pursuant to this Note exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto, then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the Principal Amount (whether or not due and payable, and without any prepayment penalty or fee or Yield Maintenance Amount), and not to the payment of interest, or refunded to Maker if such Principal Amount has been paid in full. 9.3 Captions; Definitions. The captions of the Paragraphs of this Note are for convenience only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. Each of the terms defined before Paragraph 1 hereof shall have the meaning set forth following such term when used throughout this Note. 9.4 Severable Provisions. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 9.5 Notices. Notices shall be given under this Note in conformity with the terms and conditions of the Mortgage. 9.6 Intentionally Omitted. 9.7 Time of Essence. Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein. -6- 9.8 Governing Law. This Note shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of Illinois, without regard to conflicts of law principles. 10. Exculpation. Except as set forth below, neither Maker nor any partner of Maker or any partner, shareholder or member of any such partner of Maker shall be personally liable to pay the Principal Amount or any other amount due under this Note or under any of the Loan Documents, or to perform or observe any obligation under this Note or under any of the Loan Documents, and Holder agrees to look solely to the Property and any other collateral heretofore, now, or hereafter pledged by any party to secure the Loan. Maker, but not any partner of Maker, or any partner, shareholder or member of any such partner of Maker shall, however, be personally liable for all losses, damages, costs and expenses, including attorneys' fees and expenses, incurred by Holder as a result of: (i) the collection and receipt of proceeds and income from the Property and the other assets and obligations securing the Loan by or for the benefit of Maker following an Event of Default which are not paid to Holder or applied to the Property in the ordinary course of business; (ii) fraud by Maker or by any partner or officer of Maker with a management role in Maker or; (iii) material misrepresentation by Maker or any other person or entity which is an officer of Maker or any partner of Maker with a management role in connection with the Loan; (iv) misapplication or misappropriation of funds in which Lender has a security interest which come into the possession of Maker or a partner or officer of Maker with a management role in Maker; (v) intentional or material waste to the Property; (vi) the breach of the obligations set forth in the Hazardous Substance Indemnification Agreement of even date herewith, as hereafter amended, if at all; (vii) the breach of the provisions contained in Paragraph 15 (transfers of the property or beneficial interest in Maker; assumption) of the Mortgage; (viii) the breach of the provisions contained in Paragraph 16 (no additional liens) of the Mortgage; or -7- (ix) the breach of the provisions contained in Paragraph 17 (single asset entity) of the Mortgage. The foregoing shall in no way limit or impair the enforcement against the Property or any other security granted by the Loan Documents of any of the Holder's rights and remedies pursuant to the Loan Documents, or affect the validity or enforceability of any indemnity, guaranty, limited recourse letter or similar instrument made by Maker or any other entity or person in connection with the Mortgage or the Loan Documents. IN WITNESS WHEREOF, Maker does execute this Note as of the date set forth above. MAKER: 475 Fifth Avenue Limited Partnership, a Delaware limited partnership By: 475 Fifth-GP, Inc., a Delaware corporation, its sole general partner By: ______________________________ Name: ____________________________ Its: _____________________________ -8- EXHIBIT A AMORTIZATION SCHEDULE EX-10.(X) 5 ASSIGNMENT OF MORTGAGES AND NOTE ASSIGNMENT OF MORTGAGES AND NOTE 475 Fifth Avenue New York, New York Fleet Bank, National Association, as Agent, having its principal office at 1133 Avenue of the Americas, 40th Floor, New York, New York 10036 (the "Assignor"), the lawful owner and holder, as agent, of those certain mortgages described on EXHIBIT A attached hereto (the "Mortgages"), and of the $22,594,880 Demand Note of even date herewith secured thereby (the "Note"), in consideration of $10.00 and other good and valuable consideration paid to Assignor by Heller Financial, Inc. having an office at 500 West Monroe Street, Chicago, Illinois 60661 (the "Assignee"), hereby assigns unto the Assignee the Mortgages, together with the Note or obligations described in or secured by the Mortgages, and the money due and to become due thereunder. The Mortgages cover premises more particularly described on EXHIBIT B attached hereto. This assignment is made without recourse, representation and/or warranty, express or implied. IN WITNESS WHEREOF, the Assignor has duly executed this assignment as of August 9, 1999. FLEET BANK, NATIONAL ASSOCIATION, as Agent By: /s/ James E. Mirman ------------------------------ James E. Mirman Vice President Record and Return to: Arnold & Porter 399 Park Avenue New York, New York 10022-4690 Attention: Michael J. Canning, Esq. STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the ______ day of __________ in the year 1999 before me, the undersigned, personally appeared James E. Mirman, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. - ------------------------------------ Signature and Office of individual taking acknowledgement 2 EXHIBIT A The Mortgages 1. Mortgage, Assignment of Leases and Rents and Security Agreement from Corporate Realty Income Fund I, L.P. to Fleet Bank, National Association, in the original principal amount of $20,207,000.00, dated December 6, 1996 and recorded on December 12, 1996 in the office of the City Register, New York County, December 12, 1996 in Reel 2402, Page 593; which mortgage was assigned by Assignment of Mortgage Without Covenant from Fleet Bank, National Association to Fleet Bank, National Association, as Agent (under that certain Loan Agreement dated September 26, 1996 by and between Fleet Bank, National Association and Corporate Realty Income Fund I, L.P., as amended) dated March 26, 1997 and recorded on June 9, 1997 in Reel 2463, Page 1778. 2. Second Mortgage, Assignment of Leases and Rents and Security Agreement from Corporate Realty Income Fund I, L.P. to Fleet Bank, National Association as Agent in the original principal amount of $2,387,880 dated as of September 25, 1998 and recorded on November 10, 1998 in the office of the City Register, New York County at Reel 2748, Page 1075. 3 EXHIBIT B Premises located at 475 Fifth Avenue, New York, New York ALL that certain plot, piece or parcel of land, situate, lying and being in the Borough of Manhattan, County, City and State of New York, bounded and described as follows: BEGINNING at the corner formed by the intersection of the easterly side of Fifth Avenue with the southerly side of 41st Street; RUNNING THENCE easterly along the southerly side of 41st Street, 140 feet 1/2 of an inch; THENCE southerly parallel with Fifth Avenue and part of the distance through a party wall, 103 feet 8 inches, more or less, to the lands now or formerly belonging to James McBriar; THENCE westerly or southwesterly along the lands of James McBriar, 41 feet 8 inches, more or less, to a point distant 98 feet 4 1/2 inches easterly from the easterly side of Fifth Avenue and distant 104 feet 11 inches southerly from the southerly side of 41st Street; THENCE westerly parallel with 41st Street, 98 feet 4 1/2 inches to the easterly side of Fifth Avenue; THENCE northerly along the easterly side of Fifth Avenue, 104 feet 11 inches to the point or place of BEGINNING. EX-10.(Z) 6 MORTGAGE CONSOLIDATION This instrument was prepared by and after recording return to: Thomas F. Berner, Esq. Katten Muchin & Zavis 1133 Avenue of the Americas Suite 2820 New York, NY 10036_6772 THE PRINCIPAL AMOUNT SECURED BY THIS MORTGAGE IS $32,000,000. - -------------------------------------------------------------------------------- SPACE ABOVE THIS LINE FOR RECORDER'S USE. Loan No.99-086 MORTGAGE CONSOLIDATION, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS MORTGAGE CONSOLIDATION, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING ("Mortgage") is made as of the ____ day of August, 1999, by 475 Fifth Avenue Limited Partnership, a limited partnership organized and existing under the laws of the State of Delaware, whose address is 475 Fifth Avenue, 21st Floor, New York, New York 10017 ("Borrower"), to and for the benefit of HELLER FINANCIAL, INC., a corporation organized and existing under the laws of Delaware, whose address is 500 West Monroe Street, 30th Floor, Chicago, Illinois 60661, Attention: Heller Express Servicing Department, Re: Loan No. 99_086 (HELLER FINANCIAL, INC. and its successors and assigns are hereinafter referred to as "Lender"). RECITALS A. Borrower has executed and delivered to Lender a Consolidated and Restated Promissory Note dated of even date herewith in the principal amount of THIRTY-TWO MILLION and No/100 Dollars ($32,000,000.00) (which note, together with all notes issued in substitution or replacement therefor and/or as any of the foregoing may be amended, modified or supplemented from time to time, is hereinafter referred to as the "Note"), providing for the payment of monthly installments of principal and interest, with the balance thereof, if not sooner due or paid as set forth in the Note, due and payable on September 1, 2009 (said date, or any earlier date on which the entire unpaid principal amount shall be paid or required to be paid in full, whether by prepayment, acceleration or otherwise, is herein called the "Maturity Date") B. Lender wishes to secure (i) the prompt payment of the Note, together with all interest thereon in accordance with the terms of the Note, as well as the prompt payment of any additional indebtedness accruing to Lender on account of any future payments, advances or expenditures made by Lender pursuant to the Note or this Mortgage or any other agreement, document, or instrument securing the payment of the indebtedness evidenced by the Note (the Note, this Mortgage, and any other documents evidencing or securing the indebtedness evidenced by the Note or executed in connection therewith, and any modifications, renewals, and/or extensions thereof, are hereinafter collectively referred to as the "Loan Documents"), and (ii) the prompt performance of each and every covenant, condition, and agreement now or hereafter arising contained in the Loan Documents of Borrower or any "Principal" (as defined in the Hazardous Substance Indemnification Agreement delivered in connection with this Mortgage ), as the case may be. All payment obligations of Borrower or any Principal, as the case may be, under the Loan Documents are hereinafter sometimes collectively referred to as the "Indebtedness" and all other obligations of Borrower or any Principal, as the case may be, under the Loan Documents are hereinafter sometimes collectively referred to as the "Obligations". C. Borrower is the owner of the fee interest in the real estate described in Exhibit A attached hereto (the "Land"). D. Lender is the holder of (a) those certain mortgages listed on Exhibit B attached hereto (collectively, the "Existing Mortgages"), encumbering Borrower's estate in the Property (as hereinafter defined), and (b) the respective bonds, notes, or obligations secured by the Existing Mortgages (collectively, the "Existing Notes"). E. The terms and provisions of the Existing Notes have been amended and restated in their entirety pursuant to the Note to constitute one joint indebtedness in the original principal amount of the Note. F. Borrower and Lender have mutually agreed to consolidate, coordinate, amend and restate the terms of the Existing Mortgages in their entirety, and have mutually agreed to consolidate and coordinate the liens of the Existing Mortgages so that such liens are made equal and coordinate in the policy. NOW, THEREFORE, TO SECURE TO LENDER the repayment of the Indebtedness and the performance of the Obligations, Borrower has executed this Mortgage and does hereby covenant and agree as follows: To induce Lender to enter into this Mortgage, Borrower represents to Lender that there is now validly due and owing on the Existing Notes and secured by the Existing Mortgages, without defense, offset or counterclaim of any kind, the total sum of $32,000,000.00 (the "Loan Amount"). The Existing Notes are modified to provide for payment of the Loan Amount, together with interest thereon, in the manner set forth in, and subject to the terms of, the Note , and Borrower hereby agrees to repay the Loan Amount, together with interest thereon, in accordance with the terms of the Note. All of the terms and conditions of the Existing Mortgages are hereby modified and superseded by the terms and conditions of this Mortgage, and the Existing Mortgages are hereby combined and consolidated and made equal and coordinate in lien without priority of the one over the other so that together the Existing Mortgages shall hereafter constitute in law but one mortgage, a single first lien on the Property securing the Loan Amount, and, to the extent not already covered thereby, such Existing Mortgages, as so consolidated, are hereby spread to cover, and Borrower does hereby mortgage, convey, assign, warrant, transfer, pledge and grant to Lender a security interest in the following described property and all proceeds thereof to the extent of Borrower's interest therein (which property is hereinafter sometimes collectively referred to as the "Property"): A. The Land; B. All improvements of every nature whatsoever now or hereafter situated on the Land and owned by Borrower (the "Improvements"), and all machinery, equipment, mechanical systems and other personal property now or hereafter owned by Borrower and used in connection with the operation of the Improvements; C. All easements and appurtenances now or hereafter in any way relating to the Land and/or Improvements or any part thereof; D. All agreements affecting the use, enjoyment or occupancy of the Land and/or Improvements now or hereafter entered into (the "Leases"), including any and all guaranties of such Leases, and the immediate and continuing right to collect all rents, income, tax, insurance, and replacement reserve deposits, receipts, royalties, profits, issues, service reimbursements, fees, accounts receivables, revenues and prepayments of any of the same (including termination, cancellation, option and similar payments) from or related to the Land and/or Improvements from time to time accruing under the Leases and/or the operation of the Land and/or Improvements (the "Rents"), reserving to Borrower, however, so long as no "Event of Default" (hereinafter defined) has occurred hereunder, a revocable license to receive and apply the Rents in accordance with the terms and conditions of Paragraph 13 of this Mortgage; E. All claims, demands, judgments, insurance proceeds, awards of damages and settlements hereafter made resulting from the taking of the Land and/or the Improvements or any part thereof under the power of eminent domain, or for any damage (whether caused by such taking, by casualty or otherwise) to the Land and/or the Improvements or any part thereof; F. To the extent assignable, all now or hereafter existing management contracts and all permits, certificates, licenses, agreements, approvals, entitlements and authorizations, however characterized, issued or in any way furnished for the acquisition, construction, operation and use of the Land, Improvements and/or Leases, including building permits, environmental certificates, licenses, certificates of operation, warranties and guaranties; G. All of Borrower's rights in and to all trademarks, tradenames, assumed names, telephone numbers and listing rights and other rights and interests in and to the names and marks used by Borrower in connection with the Land and/or Improvements, including all rights in the name 475 Fifth Avenue, and all books and records and all other general intangibles relating to the operation of the Land and/or Improvements; and H. Any monies on deposit with or for the benefit of Lender, including deposits for the payment of real estate taxes, insurance premiums and any other reserves held by Lender or its agent. TO HAVE AND TO HOLD the Property and all parts thereof, with Power of Sale, together with the rents, issues, profits and proceeds thereof, unto Lender to its own proper use, benefit, and advantage forever, subject, however, to the terms, covenants, and conditions herein. Borrower covenants and agrees with Lender as follows: 1. Payment of Indebtedness; Performance of Obligations. Borrower shall promptly pay when due the Indebtedness and shall promptly perform all Obligations. 2. Taxes and Other Obligations. Subject to Paragraphs 3 and 5 hereafter, as applicable, Borrower shall pay, when due, and before any interest, collection fees or penalties shall accrue, all taxes, assessments, fines, impositions and other charges and obligations, including charges and obligations for any present or future repairs or improvements made on the Property, or for any other goods, services or utilities furnished to the Property, which may become a lien on or charge against the Property prior to this Mortgage, subject, however, to Borrower's right to contest such lien or charge upon the posting of security reasonably satisfactory to Lender so long as such contest stays the enforcement or collection of such lien or charge. Should Borrower fail to make such payments, Lender may, at its option and at Borrower's expense, pay the amounts due for the account of Borrower and all amounts advanced shall be included in the Indebtedness. Upon the request of Lender, Borrower shall immediately furnish to Lender any notices of amounts due and receipts evidencing payment as and when due in each case, which come into Borrower's possession. Borrower shall promptly notify Lender of any lien on all or any part of the Property and shall promptly discharge any unpermitted lien or encumbrance as required by the terms and conditions of this Mortgage.. 3. Reserves for Taxes/Replacement Reserve/Tenant Improvements and Leasing Reserve. (a) Borrower shall pay to Lender, at the time of and in addition to the monthly installments of principal and/or interest due under the Note, a sum equal to 1/12 of the amount reasonably estimated by Lender to be sufficient to enable Lender to pay at least 30 days before they become due and payable, all taxes, assessments and other similar charges levied against the Property as reasonably determined by Lender (the "Property Tax Reserve"). Provided that Lender shall have a copy of the tax bill, and sufficient funds on deposit from Borrower to pay such tax bill, Lender shall apply the sums in the Property Tax Reserve to pay such tax items. These sums may be commingled with funds otherwise held by Lender on account of real estate tax obligations, and no interest shall be payable thereon nor shall these sums be deemed to be held in trust for the benefit of Borrower. If such amount on deposit with Lender is insufficient to fully pay such tax items, Borrower shall, within 10 days following notice at any time from Lender, deposit such additional sum as may be required for the full payment of such tax items. If the sums held in the Property Tax Reserve shall exceed the amounts due for taxes, Lender shall, in its reasonable discretion, return any excess to Borrower or credit such excess against future payments to be made to the Property Tax Reserve. Borrower hereby grants Lender a security interest in such funds and Borrower shall execute any other documents and take any other actions reasonably necessary to provide Lender with a perfected security interest in such funds. Upon the Maturity Date, the moneys then remaining on deposit with Lender or its agent shall, at Lender's option, be applied against the Indebtedness or returned to Borrower upon payment in full of the Indebtedness . (b) At the time of closing of the loan evidenced by the Loan Documents ("Loan"), Lender shall deposit $200,000.00 of the proceeds of the Loan into a replacement reserve ("Replacement Reserve"). The Replacement Reserve shall bear interest for the benefit of Borrower. Interest will be paid on the funds in the Replacement Reserve at the "non-personal money market rate" in effect as of the first business day of each month at The Northern Trust Company or its successors. Interest on the Replacement Reserve shall be calculated using the actual number of days in a month and a 365 day year and will be paid into the Replacement Reserve and compounded on a monthly basis. The funds contained in the Replacement Reserve shall be utilized by Borrower solely for capital improvements reasonably approved in advance by Lender. Lender shall reimburse Borrower, or pay as directed by Borrower from the Replacement Reserve for the actual cost of such approved capital improvements within 10 business days of Borrower's providing Lender with paid receipts or invoices, lien waivers and other documentation deemed reasonably necessary by Lender, which shall occur no more than once per month. Upon the Maturity Date, the moneys then remaining on deposit with Lender or its agent shall, at Lender's option, be applied against the Indebtedness or returned to Borrower upon payment in full of the Indebtedness. Borrower hereby grants Lender a security interest in the Replacement Reserve and Borrower shall execute any other documents and take any other actions reasonably necessary to provide Lender with a perfected security interest in the Replacement Reserve. If the balance of the Replacement Reserve falls below $200,000.00, then at the time of and in addition to the monthly installments of principal and/or interest due under the Note, Borrower shall pay to Lender monthly deposits of $4,000.00 until the balance of the Replacement Reserve equals $200,000.00. (c) At the time of the closing of the Loan, Lender shall deposit $1,967,000 of the proceeds of the Loan into a capital improvements reserve ("Capital Improvements Reserve"). The Capital Improvement Reserve shall bear interest for the benefit of Borrower. Interest will be paid on the funds in the Capital Improvement Reserve at the "non-personal money market rate" in effect as of the first business day of each month at The Northern Trust Company or its successors. Interest on the Capital Improvement Reserve shall be calculated using the actual number of days in a month and a 365 day year and will be paid into the Capital Improvements Reserve and compounded on a monthly basis. The funds contained in the Capital Improvements Reserve shall be utilized by Borrower solely for capital improvements determined in the sole discretion of Borrower. Lender shall reimburse Borrower, or pay as directed by Borrower from the Capital Improvements Reserve for the actual cost of such capital improvements within 10 business days of Borrower's providing Lender with paid receipts or invoices, lien waivers and other documentation deemed reasonably necessary by Lender, which shall occur no more than once per month. Upon the Maturity Date, the moneys then remaining on deposit with Lender or its agent shall, at Lender's option, be applied against the Indebtedness or returned to Borrower upon payment in full of the Indebtedness. Borrower hereby grants Lender a security interest in the Capital Improvements Reserve and Borrower shall execute any other documents and take any other actions reasonably necessary to provide Lender with a perfected security interest in the Capital Improvements Reserve. (d) At the time of the closing of the Loan, Lender shall deposit $850,000.00 of the proceeds of the Loan into a reserve for tenant improvements and leasing commissions relating to the sub-leasing of the space (consisting of approximately 15,667 square feet of space) currently leased to Europe Craft Imports, Inc. (the "Europe Craft Space") ("TI and Leasing Reserve"). The TI and Leasing Reserve shall bear interest for the benefit of Borrower. Interest will be paid on the funds in the TI and Leasing Reserve at the "non_personal money market rate" in effect as of the first business day of each month at The Northern Trust Company or its successors. Interest on the TI and Leasing Reserve shall be calculated using the actual number of days in a month and a 365 day year and will be paid into the TI and Leasing Reserve and compounded on a monthly basis. The funds contained in the TI and Leasing Reserve shall be utilized by Borrower first solely for tenant improvements and leasing commissions for the Europe Craft Space customary in the market place. Once the Europe Craft Space has been completely sub-leased, any funds remaining in the TI and Leasing Reserve will be used for tenant improvements and leasing commissions customary in the marketplace for other space in the Property. Lender shall reimburse Borrower, or pay as directed by Borrower from the TI and Leasing Reserve for the actual cost of such tenant improvements and leasing commissions customary in the market place within 10 business days of Borrower's providing Lender with invoices or paid receipts, lien waivers and other documentation deemed reasonably necessary by Lender, which shall occur no more than once per month. Upon the Maturity Date, the moneys then remaining on deposit with Lender or its agent shall, at Lender's option, be applied against the Indebtedness or returned to Borrower upon payment in full of the Indebtedness. Borrower hereby grants Lender a security interest in the TI and Leasing Reserve and Borrower shall execute any other documents and take any other actions reasonably necessary to provide Lender with a perfected security interest in the TI and Leasing Reserve. (e) With respect to any disbursement pursuant to paragraphs 3(b), 3(c) or 3(d), above, if (i) the time required to complete work to be funded thereunder exceeds one month, (ii) the contractor performing such work requires periodic payments pursuant to the terms of a written contract, and (iii) the total cost of such work exceeds $50,000, a request for reimbursement or payment from the applicable reserve may be made after completion of a portion of the work under such contract, provided (u) such contract requires payment upon completion of such portion of the work, (v) the materials for which the request is made are on site at the Property and are properly secured or have been installed in the Property, (w) all other conditions in this Mortgage for disbursement have been satisfied, (x) funds remaining in the applicable reserve are, in Lender's reasonable judgment, sufficient to complete such work and the other work when required (y) the cost of the portion of the work completed under such contract exceeds $5,000, and (z) each contractor or subcontractor receiving payments under such contract shall provide a waiver of lien with respect to amounts which have been paid to that contractor or subcontractor. Borrower shall not make a request for disbursements more frequently than monthly under this subsection and Lender shall not be obligated to make any disbursements if an Event of Default then exists. 4. Use of Property. Unless required by applicable law, Borrower shall not permit changes in the use of any part of the Property from the use existing at the time this Mortgage was executed, which use Borrower represents and warrants is limited to offices and retail and related uses. Borrower shall not initiate or acquiesce in a change in the zoning classification of the Property or grant easements burdening the Property (other than customary utility easements necessary for the use of the Property) without Lender's prior written consent. 5. Insurance and Condemnation. Borrower shall keep the Improvements insured, and shall maintain general liability coverage and such other coverages requested by Lender, in amounts at all times reasonably satisfactory to Lender provided all such policies of insurance shall be issued by insurers qualified under the laws of the state in which the Land is located, duly authorized and licensed to transact business in such state and reflecting a General Policy Rating of A-(X) or better in Best's Key Rating Guide. Existing insurance carriers (so long as they are rated A-(X)) and amounts approved by Lender as of the date hereof shall be deemed approved hereafter. Unless Borrower provides Lender with evidence of the insurance coverage required by this Mortgage, Lender may purchase insurance at Borrower's expense to protect Lender's interests in the Property and to maintain the insurance required by this Mortgage. This insurance may, but need not, protect Borrower's interests. The coverage purchased by Lender may not pay any claim made by Borrower or any claim that is made against Borrower in connection with the Property or any required insurance policy. Borrower may later cancel any insurance purchased by Lender, but only after providing Lender with evidence that Borrower has obtained insurance as required by this Mortgage. If Lender purchases insurance for the Property or insurance otherwise required by this Mortgage, Borrower will be responsible for the costs of that insurance, including interest and other charges imposed by Lender in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the Indebtedness. The costs of the insurance may be more than the cost of insurance Borrower is able to obtain on its own. In case of loss or damage by fire or other casualty, Borrower shall give immediate written notice thereof to the insurance carrier(s) and to Lender. In the event a casualty loss or damage does not exceed $1,000,000, Borrower may settle and adjust any claim without the consent of Lender and agree with the insurance company or companies on the amount to be paid upon the loss, and Borrower is hereby authorized to collect and receipt for any such insurance proceeds, provided Borrower delivers to Lender a written undertaking to expeditiously commence and satisfactorily complete the restoration of the damage caused by such casualty in compliance with all applicable laws, rules and regulations. In the event a casualty loss or damage does exceed $1,000,000, Lender is authorized and empowered to make or file proofs of loss or damage and to settle and adjust any claim under insurance policies which insure against such risks, or to direct Borrower, in writing, to agree with the insurance carrier(s) on the amount to be paid in regard to such loss and the Net Proceeds (defined below) are hereby assigned to and shall be paid to Lender as further security for the payment of the Indebtedness and performance of the Obligations, subject to the second paragraph hereafter. Borrower shall immediately notify Lender of any action or proceeding relating to any condemnation or other taking, whether direct or indirect, of the Property, or part thereof, and Borrower shall appear in and prosecute any such action or proceeding unless otherwise directed by Lender in writing. Borrower shall diligently prosecute any such proceeding, collect any award or payment for damages and thereafter diligently prosecute any required restoration of the Property in compliance with all applicable laws, rules and regulations. Lender, at Lender's option, may participate with Borrower, to commence, appear in and prosecute any action or proceeding relating to any condemnation or other taking of the Property, whether direct or indirect, and to settle or compromise any claim in connection with such condemnation or other taking, provided such claim is for an amount equal to or greater than $1,000,000.00. The Net Proceeds (defined below) of any award, payment or claim for damages, direct or consequential, in connection with any condemnation or other taking in excess of $1,000,000.00, whether direct or indirect, of the Property, or part thereof, or for conveyances in lieu of condemnation, are hereby assigned to and shall be paid to Lender as further security for the payment of the Indebtedness and performance of the Obligations, subject to the following paragraph. Anything above the contrary notwithstanding, provided no Event of Default then exists hereunder, the net insurance proceeds and/or net proceeds of any condemnation award (in each case after deduction only of Borrower's and Lender's reasonable costs and expenses, if any, in collecting the same, the "Net Proceeds") payable to Lender hereunder shall be made available for the restoration or repair of the Property, either by means of reimbursement to Borrower or payment as directed by Borrower for the actual cost of such restoration or repair of the Property within 10 business days of Borrower's providing Lender with paid receipts or invoices, lien waivers and other documentation deemed reasonably necessary by Lender, if, in Lender's reasonable discretion (a) restoration or repair and the continued operation of the Property is economically feasible, (b) the value of Lender's security after completion of the repairs or restoration is not materially reduced, (c) the loss or condemnation, as applicable, does not occur in the six (6) month period preceding the stated Maturity Date and Lender's independent consultant certifies that the restoration of the Property can be completed at least 90 days prior to the Maturity Date, and (d) Borrower deposits cash with Lender in an amount determined by a contractor reasonably acceptable to the parties, reasonably necessary, in addition to the Net Proceeds, to pay in full the cost of the restoration or repair. Notwithstanding the foregoing, it shall be a condition precedent to any disbursement of Net Proceeds held by Lender hereunder that Lender shall have reasonably approved (x) all plans and specifications for any proposed repair or restoration, (y) the construction schedule and (z) the architect's and general contractor's contract for all restoration that exceeds $1,000,000.00 in the aggregate. With respect to restoration or repair projects in excess of $1,000,000, Lender may establish other conditions it deems reasonably necessary to assure the work is fully completed in a good and workmanlike manner free of all liens or claims by reason thereof. Borrower's deposits made pursuant to this paragraph shall be used before the Net Proceeds held by Lender for such restoration or repair. If the Net Proceeds are made available for restoration or repair, such work shall be completed by Borrower in a diligent fashion, and in compliance with all applicable laws, rules and regulations. At Lender's option, the Net Proceeds shall also be disbursed by Lender pursuant to a construction escrow reasonably acceptable to Lender and Borrower. If following the final payments for the completion of such restoration or repair there are any Net Proceeds remaining, such proceeds shall be paid to Borrower, provided that such restoration and repair is completed substantially in accordance with the previously approved plans, as determined in Lender's reasonable discretion. If an Event of Default then exists, or any of the conditions set forth in subparagraphs (a) through (d) of this Paragraph 5 have not been met or satisfied, the Net Proceeds held by Lender may be applied, without any prepayment penalty or fee or any Yield Maintenance Amount, as defined in the Note, to the Indebtedness, whether or not then due and payable, with any excess paid to Borrower. All covenants hereof shall be construed as affording to Lender rights additional to and not exclusive of the rights conferred under the provisions of Sections 254, 271 and 272 of the New York Real Property Law or any other applicable law of any other state. If there is a conflict between any provisions of this Mortgage and the provisions of Section 254 of the New York Real Property Law, Borrower agrees that the applicable provision of this Mortgage shall control. Until such time as any part or all of the Net Proceeds held by Lender are disbursed as provided hereinabove, such Net Proceeds shall be held by Lender in an interest bearing account for the benefit of Borrower. Interest will be paid on such Net Proceeds at the "non-personal money market rate" in effect as of the first business day of each month at The Northern Trust Company or its successors. Interest on such Net Proceeds shall be calculated using the actual number of days in a month and a 365 day year and will be paid to the account holding such Net Proceeds and compounded on a monthly basis. 6. Preservation and Maintenance of Property. Borrower (a) shall not commit waste or permit impairment or deterioration of the Property; (b) shall not abandon the Property; (c) shall, subject to Paragraphs 3 and 5 above, as applicable, and to the extent Rents, Property revenue and casualty and/or condemnation proceeds are available, keep the Property in good repair and restore or repair promptly, in a good and workmanlike manner, all or any part of the Property to the equivalent of its original condition, ordinary wear and tear excepted, or such other condition as Lender may reasonably approve in writing, and upon any damage or loss thereto in accordance with the terms of Paragraph 5; (d) shall comply with all laws, ordinances, regulations and requirements of any governmental body applicable to the Property; (e) shall provide for management of the Property by Borrower or by a property manager reasonably satisfactory to Lender pursuant to a contract in form and substance reasonably satisfactory to Lender; and (f) shall give notice in writing to Lender of and, unless otherwise directed in writing by Lender if the Lender determines that the Property may be adversely affected by such appearance, appear in and defend any action or proceeding purporting to affect the Property, the security granted by the Loan Documents or the rights or powers of Lender. Neither Borrower nor any tenant or other person shall remove, demolish or alter any Improvement or any fixture, equipment, machinery or appliance in or on the Land and owned or leased by Borrower except when incident to the replacement of fixtures, equipment, machinery and appliances with items of like kind, without the prior written consent of Lender, which consent shall not be unreasonably withheld or delayed. 7. Protection of Lender's Security. If Borrower fails to pay the Indebtedness or perform the Obligations after the expiration of any applicable notice or cure period, or if any action or proceeding is commenced which materially affects the Property or Lender's interest therein and Borrower fails to promptly take appropriate action, as reasonably determined by Lender, then Lender, at Lender's option, may make such appearances, disburse such sums and take such action as Lender deems necessary, in its reasonable discretion, to protect the Property or Lender's interest therein, including lawful entry upon the Property to make repairs and perform environmental tests and studies. Lender shall give Borrower reasonable notice of all such appearances, disbursements and actions, which may be before or after any such appearance, disbursement or action, as appropriate. Any amounts disbursed by Lender pursuant to this Paragraph 7 (including attorneys' costs and expenses), shall bear interest thereon at the "Default Rate" (defined in the Note) from the date of disbursement, shall become additional Indebtedness of Borrower secured by the Loan Documents and shall be due and payable on demand. Nothing contained in this Paragraph 7 shall require Lender to incur any expense or take any action hereunder. With respect to the foregoing, reference is made to Section 291-f of the New York Real Property Law and the benefits of such Section 291-f shall apply hereto. 8. Inspection. Lender and its agents and designees may make or cause to be made reasonable lawful entries upon and inspections of the Property (subject to the rights of tenants), including for performing any environmental inspections and testing of the Property, and inspections of Borrower's books, records, and contracts at all reasonable times upon reasonable advance notice. Borrower shall cooperate with Lender and its agents and designees with respect to all such inspections, including any related to the sale or potential sale of all or any portion of the Loan by Lender and any securitization or potential securitization involving the Loan. 9. Books and Records. Borrower shall keep and maintain at all times at Borrower's address stated above, or such other place as Lender may approve in writing, complete and accurate books of accounts and records adequate to reflect correctly the results of the operation of the Property and copies of all written contracts, Leases and other instruments affecting the Property. 10. Financial Statements. Borrower shall furnish to Lender, within 45 days after the end of each fiscal quarter of the operation of the business of Borrower and at any other time upon five (5) business days of Lender's written request (provided Lender shall not make such request more than two (2) times in any twelve (12) month period), a balance sheet and a statement of income and expenses of the Property, each in reasonable detail, prepared in accordance with sound accounting principles customarily used in the real estate industry and consistently applied and certified as true and complete by Borrower or its general partner or chief financial officer. Borrower shall also furnish to Lender, and shall cause each Principal to furnish to Lender, within 60 days after the end of each fiscal year of Borrower, a balance sheet, a statement of income and expenses and a statement of cash flows, each in reasonable detail, prepared in accordance with sound accounting principles customarily used in the real estate industry and consistently applied and certified as true and complete by Borrower or its general partner or chief financial officer and each Principal, as the case may be. Borrower shall furnish, together with the foregoing quarterly financial statements and at any other time upon five (5) business days of Lender's written request (provided Lender shall not make such request more than two (2) times in any twelve (12) month period), (a) a rent roll for the Property, showing the name of each tenant, and for each tenant, the space occupied, the lease expiration date, the rent payable, the rent paid to date, and the security deposit being held for such tenant, (b) a leasing activity report for the Property during such fiscal quarter, (c) a capital expenditure report indicating the type and amount of each capital expenditure made during such fiscal quarter, and (d) any other information that Lender may reasonably require, all of the foregoing shall be certified as true and complete by Borrower or its general partner or chief financial officer. In addition, Borrower shall cause each Principal to provide to Lender a draft copy of his/her/its financial statements prepared in accordance with sound accounting principles consistently applied, certified by such Principal to be a true and complete copy of such financial statements and in form reasonably satisfactory to Lender, within 60 days of the end of each calendar year with a final version of such Principal's financial statements to be provided within 90 days of the end of such calendar year. All of the information required by Lender in this paragraph must be in form acceptable to Lender in its reasonable discretion. If Borrower fails to timely furnish Lender with any of the financial information and reports set forth in this paragraph within the required time periods, Lender shall have the right, acting in its sole discretion, to hire a certified public accounting firm acceptable to Lender, to prepare such financial information and reports in accordance with generally accepted accounting principles, on an audited basis. The costs and expenses of such accounting firm shall be paid by Borrower on demand and, to the extent advanced by Lender become additional Indebtedness of Borrower secured by the Loan Documents, with interest thereon from the date advanced by Lender at the Default Rate. Additionally, if Borrower fails to timely furnish Lender with any of the financial information and reports set forth in this paragraph within the required time periods, Lender shall be entitled to receive a late charge equal to $500.00 for each financial information and/or report not so furnished to Lender (the "Financial Late Charge"). The Financial Late Charge shall be due and payable by Borrower within five (5) business days after receipt by Borrower of an invoice for same from Lender and until paid, the Financial Late Charge shall bear interest at the Default Rate, and shall be deemed additional Indebtedness of Borrower secured by the Loan Documents. 11. Hazardous Materials. Borrower covenants and agrees that it (a) shall not use, generate, store, or allow to be generated, stored or used, any "Hazardous Materials" (hereinafter defined) on the Property, except in the ordinary course of Borrower's business and in accordance with all "Environmental Laws" (hereinafter defined), (b) shall at all times maintain the Property in full compliance with all applicable Environmental Laws, including timely remediating the Property if and when required, and (c) shall reasonably cause compliance by all tenants and sub-tenants on the Property with Borrower's covenants and agreements contained in this Paragraph 11. Notwithstanding the foregoing, Lender acknowledges that Borrower has informed it in writing of certain currently existing conditions on or about the Property. Upon obtaining knowledge thereof, Borrower shall promptly notify Lender in writing of (i) any investigation, claim or other proceeding by any party caused or threatened in connection with any Hazardous Materials on the Property, or the failure or alleged failure of the Property to comply with any applicable Environmental Laws, or (ii) Borrower's discovery of any condition on or in the vicinity of the Property that could cause the Property to fail to comply with applicable Environmental Laws. The term "Environmental Laws" shall include any federal, state or local laws or regulations relating to health, safety or protection of the environment. The term "Hazardous Materials" shall include Hazardous Substances, as defined by the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.9601 et seq., any petroleum or petroleum products (excluding a small quantity of gasoline and oil used in maintenance equipment on the Property), asbestos or asbestos containing material, or any other hazardous substances, hazardous wastes or hazardous materials as defined by other Environmental Laws. 12. Representations and Covenants. (a) If Borrower is a corporation, it represents that it is a corporation duly organized, existing and in good standing under the laws of its state of incorporation, that it is duly qualified and in good standing under the laws of the state where the Land is located, and that the execution and delivery of the Loan Documents and the performance of the obligations thereunder are within Borrower's corporate powers, have been duly authorized by all necessary action of its board of directors, and do not contravene the terms of its articles of incorporation or by-laws. (b) If Borrower is a general or limited partnership or a limited liability company, it represents that it is duly formed, organized and existing in the state of its formation, that it is qualified to do business under the laws of the state where the Land is located, and that the execution and delivery of the Loan Documents and the performance of the obligations thereunder do not conflict with any provision of Borrower's partnership agreement or operating agreement, as applicable, and all other certificates and agreements governing Borrower, and have been duly authorized by all necessary action of its partners or members. (c) Borrower represents that, to the best of Borrower's knowledge, (i) the execution and delivery of the Loan Documents, the payment of the Indebtedness, and the performance of the Obligations do not violate any law or conflict with any agreement or court order by which Borrower is bound, (ii) no consent or approval of any governmental authority or any third party is required for the execution or delivery of the Loan Documents, the payment of the Indebtedness, and the performance of the Obligations, and (iii) the Loan Documents are valid and binding agreements, enforceable in accordance with their terms. (d) Borrower represents that (i) it is lawfully seized with fee simple title in the estate hereby conveyed; (ii) it has the right to mortgage, convey, assign and grant a first security interest in the Property; (iii) the Property is unencumbered, and Borrower will warrant and defend title to the Property against all claims and demands, subject to encumbrances (including the Existing Mortgages), easements and restrictions listed in a schedule of exceptions to coverage in the title insurance policy accepted by Lender insuring Lender's interest in the Property; and (iv) it has no operations, assets or activities other than the Property. (e) Borrower represents and covenants that to the best of Borrower's knowledge after due investigation (i) all material licenses, permits, approvals, franchises, and certificates, including certificates of completion and occupancy permits, required by law or regulation for the ownership and operation of the Property have been obtained and are and shall remain in full force and effect; and (ii) the use and occupancy of the Property is and shall remain in compliance with all laws. (f) Borrower represents that to the best of Borrower's knowledge all of the improvements on the Land lie wholly within the boundaries of and building line restrictions relating to the Land and no improvements located on adjoining lands encroach upon the Land so as to affect the value or marketability of the Property, except those which are insured against by the title insurance policy accepted by Lender insuring Lender's interest in the Property. (g) None of Borrower, any Principal, or to the best of Borrower's knowledge after due investigation, any other holder of a direct or indirect legal or beneficial interest in Borrower is or will be, held, directly or indirectly, by a "foreign corporation," "foreign partnership," "foreign trust," "foreign estate," "foreign person," "affiliate" of a "foreign person" or a "United States intermediary" of a "foreign person" within the meaning of IRC Sections 897 and 1445, the Foreign Investments in Real Property Tax Act of 1980, the International Foreign Investment Survey Act of 1976, the Agricultural Foreign Investment Disclosure Act of 1978, the regulations promulgated pursuant to such acts or any amendments to such acts. (h) None of Borrower or any Principal is insolvent, and there has been no (i) assignment made for the benefit of the creditors of any of them, (ii) appointment of a receiver for any of them or for the properties of any of them, or (iii) any bankruptcy, reorganization, or liquidation proceeding instituted by or against any of them. (i) There has been no material adverse change in the representations made or information heretofore supplied by or on behalf of Borrower or any Principal in connection with the Loan as to Borrower, any Principal, or the Property. (j) Except as previously disclosed in the title report on the Property delivered to Lender in connection with the Loan, there is no litigation, arbitration, or other proceeding or governmental investigation pending or, to Borrower's knowledge, threatened against or relating to Borrower, any Principal, or the Property. (k) The proceeds evidenced by the Note will be used by Borrower solely and exclusively for proper business purposes and will not be used for the purchase or carrying of registered equity securities within the purview and operation of any regulation issued by the Board of Governors of the Federal Reserve System or for the purpose of releasing or retiring any indebtedness which was originally incurred for any such purpose. (l) Borrower represents and covenants that all Leases of space in the Property existing as of the date hereof are in writing. (m) Borrower covenants that, after closing, Lender shall be allowed to advertise in the various news or financial media that Lender has provided the Loan to Borrower. (n) Borrower represents and covenants that it does not have and will not incur any other indebtedness other than (i) the Indebtedness, (ii) trade payables incurred in the ordinary course of business and (iii) an unsecured lien of working credit, on terms reasonably acceptable to Lender, in an amount not to exceed $1,280,000. (o) Borrower has made an assessment of the microchip and computer-based systems and the software used in its business and based upon such assessment believes that it will be Year 2000 Compliant by January 1, 2000. "Year 2000 Compliant" means that all software, embedded microchips and other processing capabilities utilized by, and material to the business operations or financial condition of, Borrower are able to interpret, store, transmit, receive and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenarios in relation to dates in and after the calendar year 2000. From time to time, at the request of Lender, Borrower shall provide to Lender such updated information as is requested regarding its efforts to become Year 2000 Compliant. 13. Leases of the Property/Absolute Assignment, License to Receive and Apply Rents. The parties intend that this Mortgage grants a present, absolute, and unconditional assignment of the Rents and shall, immediately upon execution, give Lender the right to collect the Rents and to apply them in payment of the principal, interest and all other sums payable under the Loan Documents. Such assignment and grant shall continue in effect until the Indebtedness is paid in full and all Obligations are fully satisfied. Subject to the provisions set forth herein and provided there is no Event of Default, Lender grants to Borrower a revocable license to enforce the Leases and collect the Rents as they become due (excluding, however, any Lease termination, cancellation, option or similar payments, (unless Borrower is simultaneously entering into a lease for the space surrendered with a tenant of equal or greater creditworthiness and upon terms and conditions at least as favorable to the Borrower as the terminated Lease, or unless such Lease is a Minor Lease, as defined below) which Borrower agrees shall be held in trust and turned over to Lender for credit to principal under the Loan, without payment of any prepayment penalty, fee or Yield Maintenance Amount) and Borrower shall hold the same, in trust, to be applied first to the payment of all impositions, levies, taxes, assessments and other charges upon the Property (subject to Paragraph 3 above), second to maintenance of insurance policies upon the Property required hereby, third to the expenses of Property operations, including maintenance and repairs required hereby (subject to Paragraphs 3 and 5 above), fourth to the payment of that portion of the Indebtedness then due and payable, and fifth, the balance, if any, to or as directed by Borrower. Borrower shall deliver such Rents to Lender as are necessary for the payment of principal, interest and other sums payable under the Loan Documents as such sums become due. Borrower shall comply with and observe Borrower's obligations as landlord under all Leases. After the date hereof, Borrower shall not, without Lender's prior written consent, which consent shall not be unreasonably withheld or delayed, execute or materially modify or amend any commercial Lease, other than self storage leases or leases of less than 15,000 rentable square feet (a "Minor Lease"). Other than with respect to Minor Leases, Borrower shall not, without Lender's prior written consent, which consent shall not be unreasonably withheld or delayed, cancel or terminate any Lease or accept a surrender thereof unless Borrower is simultaneously entering into a lease for the space surrendered with a tenant of equal creditworthiness and upon terms and conditions at least as favorable to the Borrower as the Lease terminated. All Leases and amendments thereto shall be on the form of lease previously approved by Lender with such changes as are reasonably required by tenants and approved by Borrower, as landlord, exercising prudent leasing standards. The current form of Lease is acceptable to Lender. All commercial Leases, including self storage leases, executed or renewed after the date hereof shall provide for rental rates comparable to existing local market rates and shall be arm's length transactions. Borrower shall not be authorized to enter into any ground lease of the Property without Lender's prior written approval. If Lender consents to any new Lease or the renewal of any existing Lease, at Lender's written request, Borrower shall cause the tenant thereunder to execute a subordination, non-disturbance and attornment agreement in form and substance reasonably satisfactory to Lender contemporaneously with the execution of such Lease. Borrower, at Lender's written request, shall furnish Lender with executed copies of all Leases. All Leases other than for space in the Property shall be terminable on not less than 90 days' notice, unless approved in writing by Lender prior to Borrower's execution thereof. Any requested consent or approval of Lender hereunder shall be deemed approved if not denied in writing within ten (10) business days after the date on which Lender receives such request and all information reasonably necessary to consider such request, provided that if Lender has not requested such information within ten (10) days after the date on which Lender receives such request, such consent or approval shall be deemed approved. Until Lender takes title to or possession or control of the Property by foreclosure, mortgagee in possession or otherwise, this Mortgage shall not make Lender responsible for the control, care, management, or repair of the Property or any personal property or for the carrying out of any of the terms of the Leases. Until Lender takes title to or possession or control of the Property by foreclosure, mortgagee in possession or otherwise, Borrower hereby acknowledges and agrees: (i) Borrower is and will remain liable under the Leases to the same extent as though this Mortgage had not been made; and (ii) Lender has not by this Mortgage assumed any of the obligations of Borrower under the Leases, except as to such obligations which arise after such time as Lender shall have taken title to or possession or control of the Property by foreclosure, mortgagee in possession or otherwise. Until Lender takes title to or possession or control of the Property by foreclosure, mortgagee in possession or otherwise, Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm, or corporation in or about the Property, except to the extent any such injury or damage is caused by Lender's gross negligence or willful misconduct. Until Lender takes title to or possession or control of the Property by foreclosure, mortgagee in possession or otherwise, this Mortgage shall not be deemed to impose upon Lender any of the obligations or duties of the landlord or Borrower provided in any Lease. 14. Estoppel Certificate. Borrower shall, within 10 days after Lender's written request, furnish Lender with a written statement, duly acknowledged, setting forth the sums secured by the Loan Documents and any right of set-off, counterclaim or other defense which exists against such sums and the Obligations. 15. Transfers of the Property or Beneficial Interest in Borrower; Assumption. (a) Except as permitted in Paragraphs 15(b) and 15(c) below, Borrower agrees that Borrower shall not, without the prior written consent of Lender, sell or transfer the Property or any part thereof or any interest therein; (b) a sale or transfer of the Property within the meaning of this Paragraph 15 shall be deemed to include, (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower's right, title and interest in and to all or substantially all of the Leases or Rents; (iii) if Borrower, or if any general partner or managing member of Borrower is a corporation, the voluntary or involuntary sale, conveyance, transfer or pledge of more than 49% of such corporation's stock (or the stock of any corporation directly or indirectly controlling such corporation by operation of law or otherwise) whether in one transfer or a series of transfers or the creation or issuance of new stock by which an aggregate of more than 49% of such corporation's stock shall be vested in a party or parties who are not now stockholders whether in one transfer or a series of transfers; (iv) if Borrower or any general partner or managing member of Borrower is a limited or general partnership or joint venture, the change, removal or resignation of a general partner or managing partner, or the transfer or pledge of the partnership interest of any general partner or managing partner of such partnership or any profits or proceeds relating to such partnership interest or the transfer of more than 49% in the aggregate of any limited partnership interests in such partnership whether in one transfer or a series of transfers; (v) if Borrower or any general partner or managing member of Borrower is a limited liability company, the change, removal or resignation of the managing member of such company or any profits or proceeds relating to such membership interest or the transfer of more than 49% in the aggregate of any membership interests in such company whether in one transfer or a series of transfers; and (vi) without limitation to the foregoing, except as permitted in (iii) (iv) and (v) above, any voluntary or involuntary sale, transfer, conveyance or pledge by any person or entity which directly or indirectly controls Borrower (by operation of law or otherwise) of its direct or indirect controlling interest in Borrower. (c) Anything herein to the contrary notwithstanding, the following transfers shall be permitted: (i) a Family Member Transfer. The transfer of any direct or indirect interest in any partner of Borrower may without the prior consent of Lender, be made provided that such transfer shall be to an Immediate Family Member or shall be a transfer of any limited partnership interest in a limited partner of Borrower by a limited partner thereof; provided that any such transfer shall not result in a termination of Borrower or a change in the management and control of Borrower. For purposes hereof, "Immediate Family Member" shall mean with respect to any individual, such individual's parents, a current or former spouse, siblings or children or any trust for the benefit of, or other entity wholly owned by, such individual or such individual's parents, current or former spouse, siblings or children; or (ii) a Special Transfer. For purposes hereof, "Special Transfer" shall mean a sale or transfer of the Property to a transferee (a "Permitted Transferee") which shall assume in writing all of the obligations of Borrower under the Loan and provided that: (1) no Event of Default or event which with the giving of notice or the passage of time would constitute an Event of Default shall have occurred and remain uncured; (2) the Permitted Transferee and Principal shall be a reputable entity or person of good character, creditworthy, with sufficient financial worth considering the obligations assumed and undertaken, as reasonably determined by Lender; (3) the Permitted Transferee and its property manager shall have sufficient experience in the ownership and management of properties similar to the Property satisfactory to Lender in its reasonable discretion and Lender shall be provided with reasonable evidence thereof (and reserves the right to approve the Permitted Transferee without approving the substitution of the property manager, if any); (4) Lender shall have received evidence in writing from any applicable rating agencies to the effect that such a sale and assumption of the Loan by such purchaser will not result in a qualification, withdrawal or downgrade of the ratings in effect immediately prior to such sale for any securities issued in connection with any securitization of the Loan which are then outstanding; (5) the Permitted Transferee shall have executed and delivered to Lender an assumption agreement in form and substance reasonably acceptable to Lender, evidencing such Permitted Transferee's agreement to abide and be bound by the terms of the Note, this Mortgage and the other Loan Documents, together with such legal opinions and title insurance endorsements as may be reasonably requested by Lender; (6) Lender shall have received payment of a transferee fee in an amount equal to one percent (1.0%) of the outstanding principal balance of the Indebtedness; and (7) Lender shall have received payment of all costs and expenses incurred by Lender in connection with such assumption (including reasonable attorney's fees and costs), provided further, however, that the right to effectuate a Special Transfer shall only be available in connection with the first three (3) sales or transfers of the Property subsequent to the closing of the Loan; or (iii) an Affiliate Transfer. For purposes hereof, "Affiliate Transfer" shall mean a sale or transfer of the Property to a transferee (an "Affiliate Transferee") which shall assume in writing all of the obligations of Borrower under the Loan with no release of Principals and provided that: (1) no Event of Default or event which with the giving of notice or the passage of time would constitute an Event of Default shall have occurred and remain uncured; (2) the Affiliate Transferee shall be a reputable entity or person of good character, creditworthy, with sufficient financial worth considering the obligations assumed and undertaken, as reasonably determined by Lender; (3) such Affiliate Transferee is either a limited partnership or limited liability company of which Robert F. Gossett, Jr. is the general partner or managing member, respectively, or some other entity directly or indirectly controlled by Robert F. Gossett, Jr.; (4) Lender shall have received evidence in writing from any applicable rating agencies to the effect that such a sale and assumption of the Loan by such purchaser will not result in a qualification, withdrawal or downgrade of the ratings in effect immediately prior to such sale for any securities issued in connection with any securitization of the Loan which are then outstanding; (5) the Affiliate Transferee shall have executed and delivered to Lender an assumption agreement in form and substance reasonably acceptable to Lender, evidencing such Affiliate Transferee's agreement to abide and be bound by the terms of the Note, this Mortgage and the other Loan Documents, together with such legal opinions and title insurance endorsements as may be reasonably requested by Lender; and (6) Lender shall have received payment of all costs and expenses incurred by Lender in connection with such assumption (including reasonable attorney's fees and costs). provided further, however, that the right to effectuate an Affiliate Transfer shall only be available in connection with the first three such transfers subsequent to the closing of the Loan. 16. No Additional Liens. Borrower covenants not to execute any mortgage, security agreement, assignment of leases and rents or other agreement granting a lien (except the liens granted to Lender or permitted by the Loan Documents) or, except as set forth in Paragraph 2 above, take or fail to take any other action which would result in a lien against the Property or the interest of Borrower in the Property without the prior written consent of Lender, provided, however, that in the case of an involuntary lien, Borrower shall have 10 days after prior written notice from Lender to remove, bond over or otherwise satisfy such lien. 17. Single Asset Entity. Borrower shall not hold or acquire, directly or indirectly, any ownership interest (legal or equitable) in any real or personal property other than the Property, or become a shareholder of or member or partner in any entity that acquires or holds any property other than the Property, until such time as the Indebtedness has been fully repaid and all Obligations are satisfied. Borrower's articles of incorporation, partnership agreement or operating agreement, as applicable, limit its purpose to the acquisition, operation and disposition of the Property, and such purposes shall not be amended without the prior written consent of Lender. Borrower covenants: (a) To maintain its assets, accounts, books, records, financial statements, stationery, invoices, and checks separate from and not commingled with any of those of any other person or entity; (b) To conduct its own business in its own name, pay its own liabilities out of its own funds, pay the salaries of its own employees, allocate fairly and reasonably any overhead for shared employees and office space, and to maintain an arm's-length relationship with its affiliates; (c) To hold itself out as a separate entity, correct any known misunderstanding regarding its separate identity, maintain adequate capital in light of its contemplated business operations, and observe all organizational formalities; (d) Not to amend its organizational documents without Lender's approval; (e) Not to guarantee or become obligated for the debts of any other entity or person or hold out its credit as being available to satisfy the obligations of others, including not acquiring obligations or securities of its partners, members or shareholders; and (f) Not to pledge its assets for the benefit of any other entity or person or make any loans or advances to any person or entity. 18. Borrower and Lien Not Released. Without affecting the liability of Borrower or any other person liable for the payment of the Indebtedness, and without affecting the lien or charge of this Mortgage as security for the payment of the Indebtedness, Lender may, from time to time and without notice to any junior lien holder or holder of any right or other interest in and to the Property: (a) release any person so liable, (b) waive or modify any provision of this Mortgage or the other Loan Documents or grant other indulgences, (c) release all or any part of the Property, (d) take additional security for any obligation herein mentioned, (e) subordinate the lien or charge of this Mortgage, (f) consent to the granting of any easement, or (g) consent to any map, plat or plan of the Property. 19. Uniform Commercial Code Security Agreement. This Mortgage shall constitute a security agreement pursuant to the Uniform Commercial Code for any of the items specified herein as part of the Property which, under applicable law, may be subject to a security interest pursuant to the Uniform Commercial Code, and Borrower hereby grants Lender a security interest in said items. Any reproduction of this Mortgage or of any other security agreement or financing statement shall be sufficient as a financing statement. In addition, Borrower agrees to execute and deliver to Lender any financing statements, as well as extensions, renewals and amendments thereof, and reproductions of this Mortgage in such form as Lender may require to perfect a security interest with respect to said items. Borrower shall pay all costs of filing such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all reasonable costs and expenses of any record searches for financing statements Lender may reasonably require. Lender shall have the remedies of a secured party under the Uniform Commercial Code. 20. Events of Default; Acceleration of Indebtedness; Remedies. The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Mortgage: (a) failure of Borrower to pay, within 10 days of the due date, any of the Indebtedness, including any payment due under the Note or any other Loan Documents; or (b) failure of Borrower to strictly comply with Paragraphs 11, 15, 16 and 17 of this Mortgage; or (c) a petition under any Chapter of Title 11 of the United States Code or any similar law or regulation is filed by or against Borrower or any Principal (and in the case of an involuntary petition in bankruptcy, such petition is not discharged within 90 days of its filing), or a custodian, receiver or trustee for any of the Property is appointed, or Borrower or any Principal makes an assignment for the benefit of creditors, or any of them are adjudged insolvent by any state or federal court of competent jurisdiction, or an attachment or execution is levied against any of the Property not discharged within 90 days; or (d) the occurrence of an "Event of Default" under and as defined in any other Loan Document; or (e) Borrower is in default in the payment of any material indebtedness (other than the Indebtedness) and such default is declared and is not cured within the time, if any, specified therefor in any agreement governing the same; or (f) any statement, report or certificate made or delivered to Lender by Borrower or any Principal is not materially true and complete when made; or (g) failure of Borrower, within 30 days after written notice and demand from Lender, to satisfy each and every Obligation, other than those set forth in the subparagraphs above; provided, however, if such failure to satisfy such Obligation cannot by its nature be cured within 30 days, and if Borrower commences to cure such failure promptly after written notice thereof and thereafter diligently pursues the curing thereof (and then in all events cures such failure within 60 days after the original notice thereof unless further extended as reasonably determined by Lender) Borrower shall not be in default hereunder during such period of diligent curing. Upon the occurrence of an Event of Default, the Indebtedness, at the option of the Lender, shall become immediately due and payable without notice to Borrower, and Lender shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever. 21. Entry; Foreclosure; Remedies. Upon the occurrence of an Event of Default, (a) Borrower, upon demand of Lender, shall forthwith surrender to Lender the actual possession, or to the extent permitted by law, Lender itself, or by such officers or agents as it may appoint, may enter and take possession of all or any part of the Property, and may exclude Borrower and its agents and employees wholly therefrom, and may have joint access with Borrower to the books, papers and accounts of Borrower; and (b) if Borrower shall for any reason fail to surrender or deliver the Property or any part thereof after such demand by Lender, Lender may obtain a judgment or decree conferring on Lender the right to immediate possession or requiring the delivery to Lender of the Property, and Borrower specifically consents to the entry of such judgment or decree. Upon every such entering upon or taking of possession, Lender may hold, store, use, operate, manage and control the Property and conduct the business thereof. Lender shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission by it or its representatives which was taken or omitted in good faith. When the Indebtedness or any part thereof shall become due, whether by acceleration or otherwise, Lender may, either with or without entry or taking possession as herein provided or otherwise, proceed by suit or suits at law or in equity or by any other appropriate proceeding or remedy to (a) enforce payment of the Note or the performance of any term, covenant, condition or agreement of Borrower under any of the Loan Documents, (b) foreclose the lien hereof for the Indebtedness or part thereof and sell the Property as an entirety or otherwise, as Lender may determine, and/or (c) pursue any other right or remedy available to it under or by the law and decisions of the State in which the Property is located. The failure to join any tenant or tenants of the Property as a party defendant in any foreclosure action or the failure of any such order or judgment to foreclose their rights shall not be asserted by the Borrower as a defense in any civil action instituted to collect the Indebtedness, or any part thereof, any statute or rule of law at any time existing to the contrary notwithstanding. Upon any foreclosure sale, Lender may bid for and purchase the Property and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price. Upon the occurrence of an Event of Default, then, without further notice to or the consent of Borrower, Lender shall be entitled to exercise all of the rights and remedies contained in this Mortgage or in any other Loan Document or otherwise available at law or in equity including the right to do any one or more of the following: (a) To lawfully enter upon, take possession of and manage the Property for the purpose of collecting the Rents; (b) To require Borrower to hold all Rents collected in trust for the benefit of Lender; (c) Dispossess by the usual summary proceedings any Tenant defaulting in the payment of Rent to Borrower; (d) Lease the Property or any part thereof; (e) Repair, restore, and improve the Property; (f) Apply the Rent after payment of Property expenses as determined by Lender to Borrower's indebtedness under the Loan Documents; and (g) Apply to any court of competent jurisdiction for specific performance of this Mortgage, an injunction against the violation hereof and/or the appointment of a receiver. In any action to foreclose the lien or liens of this Mortgage, including a partial foreclosure, no defense, counterclaim (other than a mandatory or compulsory counterclaim), or setoff shall be available to the Borrower other than one which (i) asserts that all moneys owed have been paid, (ii) denies the existence or sufficiency of the facts upon which the action is grounded or (iii) raises an issue concerning the priority of liens or the statute of limitations or other bar to an action based on the passage of time. If any defense, counterclaim (other than a mandatory or compulsory counterclaim) or setoff, other than one permitted by the preceding sentence, is timely raised in such foreclosure action, such defense, counterclaim, or setoff shall be dismissed; provided, however, that if such defense, counterclaim or setoff is based on a claim which could be tried in an action for money damages, such claim may be brought in a separate action which shall not thereafter be consolidated with such foreclosure action. The bringing of such separate action for money damages shall not be deemed to afford any grounds for staying the foreclosure action. Any assignee of this Mortgage and the Note shall take the same free and clear of all offsets, counterclaims, or defenses which are unrelated to such documents which the Borrower may have against any assignor of this Mortgage and the Note, other than one permitted by the first sentence of this paragraph, and no such unrelated offset, counterclaim, or defense shall be interposed or asserted by the Borrower against any such assignee in any action or proceeding brought by any such assignee upon this Mortgage or the Note and any such right to interpose or assert any such offset, counterclaim, or defense against such assignee in any such action or proceeding is hereby expressly waived by the Borrower. In addition, the Borrower shall not make, nor be entitled to make, any claim for money damages against the Lender based upon any claim or assertion that the Lender has unreasonably withheld or delayed the Lender's consent and/or approval with respect to any provisions contained in the Note, this Mortgage or any other document which provides, in effect, that the Lender's consent and/or approval is required and shall not be unreasonably withheld or delayed, except that nothing herein shall prevent a claim for direct monetary damages in the event Lender or its agents have been grossly negligent or guilty of fraudulent or illegal acts or willful misconduct. The Borrower's sole remedy in such event shall be limited to an action or proceeding to enforce any such provision pursuant to specific performance, injunction, or declaratory judgment (except in the event of such gross negligence or willful misconduct.) Any sale of the Property or any part thereof or any interest therein under or by virtue of this Mortgage, whether pursuant to foreclosure or power of sale or otherwise, shall forever be a perpetual bar against the Borrower's right to reacquire the Property. If the unpaid principal amount of and the premium, if any, and interest on the Note at the time outstanding shall have become due and payable and shall not have been paid when due after any applicable notice and cure period, the Lender may sell, assign, transfer and deliver the whole or, from time to time, any part of the Property, or any interest in any part thereof, at any private sale or at public auction, with or without demand, advertisement or notice, for cash, on credit or for other property, for immediate or future delivery, and for such price or prices and on such terms as the Lender in its sole discretion may determine, or as may be required by law or permitted herein. The Lender is hereby granted a power of sale with respect thereto. 22. Expenditures and Expenses. In any civil action to foreclose the lien hereof or otherwise enforce Lender's rights, there shall be allowed and included as additional Indebtedness in the order or judgment for foreclosure and sale or other order all expenditures and expenses which may be paid or incurred by or on behalf of Lender, including attorneys' fees, costs and expenses, receiver's fees, costs and expenses, appraiser's fees, engineers' fees, outlays for documentary and expert evidence, stenographers' charges, publication costs, and costs (which may be estimates as to items to be expended after entry of said order or judgment) of procuring all such abstracts of title, title searches and examination, title insurance policies, Torrens' Certificates and similar data and assurances with respect to the title as Lender may deem reasonably necessary either to prosecute such civil action or to evidence to bidders at any sale which may be had pursuant to such order or judgment the true condition of the title to, or the value of, the Property (said expenditures and expenses are hereinafter collectively referred to as the "Reimbursable Expenses"). All Reimbursable Expenses, and such costs, expenses and fees as may be incurred by Lender at any time or times hereafter in the protection of the Property, in maintaining required insurance, in enforcing the Obligations, and/or the maintenance of the lien established by any of the Loan Documents, including accountants' and attorneys' fees, costs and expenses in any advice, litigation, or proceeding affecting the Loan Documents or the Property, whether instituted by Lender, Borrower or any other party, or in preparation for the commencement or defense of any action or proceeding or threatened action or proceeding, shall be immediately due and payable to Lender by Borrower, with interest thereon at the Default Rate after the expiration of any applicable notice and cure period as provided herein and as set forth in the Note, and shall be secured by the Loan Documents. In addition, Borrower shall be liable for the payment of all commissions and brokerage fees relating to the Loan. 23. Application of Proceeds of Foreclosure Sale. The proceeds of any foreclosure sale of the Property shall be distributed and applied in the order of priority set forth in the Note with the excess, if any, being applied to any parties entitled thereto as their rights may appear. 24. Appointment of Receiver or Mortgagee in Possession. If an Event of Default is continuing or if Lender shall have accelerated the Indebtedness, Lender, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without further notice, and without regard to the occupancy or value of any security for the Indebtedness or the insolvency of any party bound for its payment, to the appointment of a receiver or the appointment of Lender to take possession of and to operate the Property, and to collect and apply the rents, issues, profits and revenues thereof. 25. Forbearance by Lender Not a Waiver. Any forbearance by Lender in exercising any right or remedy under any of the Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. Lender's acceptance of payment of any sum secured by any of the Loan Documents after the due date of such payment shall not be a waiver of Lender's right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Lender shall not be a waiver of Lender's right to accelerate the maturity of the Indebtedness, nor shall Lender's receipt of any awards, proceeds or damages under Paragraph 5 hereof operate to cure or waive Borrower's default in payment of sums secured by any of the Loan Documents. With respect to all Loan Documents, only waivers made in writing by Lender shall be effective against Lender. 26. Waiver of Statute of Limitations. Borrower hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by any of the Loan Documents. 27. Waiver of Homestead and Redemption. Borrower hereby waives all right of homestead exemption in the Property. Borrower hereby waives all right of redemption on behalf of Borrower and on behalf of all other persons acquiring any interest or title in the Property subsequent to the date of this Mortgage, except decree or judgment creditors of Borrower. 28. Jury Trial Waiver. BORROWER AND LENDER BY ITS ACCEPTANCE OF THIS MORTGAGE HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON, OR ARISING OUT OF THIS MORTGAGE AND THE OTHER LOAN DOCUMENTS. BORROWER AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS RELIED ON THIS WAIVER IN ENTERING INTO THIS MORTGAGE AND THE OTHER LOAN DOCUMENTS AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER AND LENDER REPRESENT AND WARRANT THAT EACH HAS HAD THE OPPORTUNITY TO REVIEW THIS JURY WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. 29. Notice. Except for any notice required under applicable law to be given in another manner, (a) any notice to Borrower provided for in the Loan Documents shall be given by sending such notice by Federal Express or any other overnight carrier addressed to Borrower at Borrower's address stated above or at such other address as Borrower may designate by notice to Lender as provided herein, and (b) any notice to Lender shall be given by Federal Express or any other overnight carrier to Lender's address stated above or to such other address as Lender may designate by notice to Borrower as provided herein. Any notice provided for in the Loan Documents shall be deemed to have been given to Borrower or Lender on the first business day following such sending in the manner designated herein. 30. Successors and Assigns Bound; Joint and Several Liability; Agents; Captions. The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Lender and Borrower, subject to the provisions of Paragraph 15 hereof. In exercising any rights under the Loan Documents or taking any actions provided for therein, Lender may act through its employees, agents or independent contractors as authorized by Lender. The captions and headings of the paragraphs of this Mortgage are for convenience only and are not to be used to interpret or define the provisions hereof. 31. Governing Law; Severability. This Mortgage shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of Illinois without regard to conflicts of law principles, provided, however, that to the extent the mandatory provisions of the laws of another jurisdiction relating to (i) the perfection or the effect of perfection or non-perfection of the security interests in any of the Property, (ii) the lien, encumbrance or other interest in the Property granted or conveyed by this Mortgage, or (iii) the availability of and procedures relating to any remedy hereunder or related to this Mortgage are required to be governed by such other jurisdiction's laws, such other laws shall be deemed to govern and control. The invalidity, illegality or unenforceability of any provision of this Mortgage and the Loan Documents shall not affect or impair the validity, legality or unenforceability of the remainder of this Mortgage and the other Loan Documents, and to this end, the provisions of this Mortgage and the other Loan Documents are declared to be severable. 32. Release. Upon payment of all sums secured by this Mortgage, Lender shall release this Mortgage. Borrower shall pay Lender's reasonable costs incurred in releasing this Mortgage and any financing statements related hereto. 33. Terms. As used in the Loan Documents, (i) "business day" means a day when banks are not required or authorized to be closed in Chicago, Illinois; and (ii) the words "include" and "including" shall mean "including but not limited to" unless specifically set forth to the contrary. All capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to them in the Note and/or the other Loan Documents. 34. Loss of Note. Upon notice from Lender of the loss, theft, or destruction of the Note and upon receipt of indemnity from Lender reasonably satisfactory to Borrower, or in the case of mutilation of the Note, upon surrender of the mutilated Note, Borrower shall make and deliver a new note of like tenor in lieu of the then to be superseded Note. 35. Exculpation. This Mortgage and other Loan Documents and all of Borrower's obligations hereunder and thereunder are subject to the provisions of Paragraph 10 of the Note entitled Exculpation and which are incorporated herein and therein by this reference. 36. Disclosure of Information. Lender shall have the right (but shall be under no obligation) to make available to any necessary and appropriate party for the purpose of granting participations in or selling, transferring, assigning or conveying all or any part of the Loan (including any governmental agency or authority and any prospective bidder at any foreclosure sale of the Property) any and all information which Lender may have with respect to the Property and Borrower, whether provided by Borrower, any Principal or any third party or obtained as a result of any environmental assessments. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering any such information to any third party, and Borrower, on behalf of itself and its successors and assigns, hereby releases and discharges Lender from any and all liability, claims, damages, or causes of action, arising out of, connected with or incidental to the delivery of any such information to any third party. 37. Sale of Loan; Securitization. Lender, at any time and without the consent of Borrower or any Principal, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Mortgage and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. In addition, at any time and without the consent of Borrower or any Principal, Lender may securitize the Loan. Borrower covenants to reasonably cooperate with Lender's efforts in the sale or rating and securitization of the Loan; such cooperation includes Borrower's obligation to (a) make non-material modifications of the Loan Documents (such modifications shall not increase the amount of the Indebtedness), (b) provide additional information regarding Borrower's financial statements, (c) deliver updated information regarding Borrower and the Property, (d) review Lender's securitization offering materials to the extent such materials relate to Borrower, the Property or the Loan and (e) reasonably respond to any inquiries of Lender or other party relating thereto; provided such cooperation does not require Borrower to incur any cost or expense, or Lender has advanced funds to cover such costs and expenses. Borrower agrees to represent and warrant the absence of misstatements and/or omissions in the information relating to Borrower, the Property and the Loan that is contained in the offering materials and which has been furnished to or approved by Borrower. Borrower shall not be liable for Lender's post-closing costs incurred pursuant to any sale or securitization of the Loan by Lender. 38. Exhibits and Riders. The following Exhibits and Riders (which may contain additional representations, warranties, and covenants) are attached to this Mortgage and hereby made a part of this Mortgage: Exhibit A (legal description for Land). 39. Lien Law. Pursuant to Section 13 of the New York Lien Law, Borrower shall receive the advances secured hereby and shall hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of any improvement and shall apply such advances first to the payment of the cost of any such improvement on the Property before using any part of the total of the same for any other purpose. Borrower will indemnify and hold Lender harmless against any loss or liability, cost or expense, including, without limitation, any judgments, attorney's fees, costs of appeal bonds and printing costs, arising out of or relating to any proceeding instituted by any claimant alleging a violation by Borrower of any applicable lien law including, without limitation, any section of Article 3-A of the New York Lien law. 40. Property Improvements. The Property is not principally improved or to be improved by one or more structures containing in the aggregate not more than six residential dwelling units, each dwelling unit having its own separate cooking facilities. 41. Consolidation. This Mortgage is intended to amend and restate in their entirety the provisions of the Existing Mortgages, but the execution and delivery of this Mortgage shall not in any way be deemed to create a new principal indebtedness or impair the liens of the Existing Mortgages. Borrower and Lender certify that (a) this Mortgage secures the principal indebtedness that is secured by the Existing Mortgages and secures no further or other principal indebtedness or obligation and (b) the maximum aggregate principal amount secured hereby at the execution hereof, or which under any contingency may be secured hereby at any time, is $32,000,000. IN WITNESS WHEREOF, Borrower has executed this Mortgage or has caused the same to be executed by its representatives thereunto duly authorized. BORROWER: 475 Fifth Avenue Limited Partnership, a Delaware limited partnership By: 475 Fifth-GP, Inc., a Delaware corporation, its sole general partner By: _________________________________ Name: _______________________________ Its: ________________________________ STATE OF ____________ ) ) SS COUNTY OF __________ ) I, ____________________________, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY, that ___________________, the __________ president of 475 Fifth_GP, Inc., a Delaware corporation ("Corporate G.P.") and the general partner in 475 Fifth Avenue Limited Partnership, a Delaware limited partnership, who is personally known to me to be the same person whose name is subscribed to the foregoing instrument as such officer in such Corporate G.P., appeared before me this day in person and acknowledged that (he/she) signed and delivered the said instrument as (his/her) own free and voluntary act, as the free and voluntary act of Corporate G.P., and as the free and voluntary act of said limited partnership, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this ____ day of _______________, 1999. ------------------------ Notary Public My Commission Expires: - ---------------------- EXHIBIT A LEGAL DESCRIPTION EX-10.(AA) 7 LETTER AGREEMENT August 9, 1999 Heller Financial, Inc. 500 West Monroe Street, 30th Floor Chicago, IL 60661 Attn: Heller Express Servicing Dept. Re: Loan No. 99-086 Re: $32,000,000.00 Loan ("Loan") from Heller Financial, Inc., a Delaware corporation ("Lender") to 475 Fifth Avenue Limited Partnership, a Delaware limited partnership ("Borrower") Ladies & Gentlemen: Reference is hereby made to the above-referenced Loan evidenced by that certain Consolidated and Restated Promissory Note of even date herewith ("Note") and secured by, among other things, that certain Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing of even date herewith ("Mortgage"). All capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to them in the Note and/or the Mortgage. Robert F. Gossett, Jr. (herein referred to as a "Principal") owns indirectly some of the general partnership interests and limited partnership interests in Borrower. It is in the direct financial interest and to the benefit of Principal to execute and deliver this letter agreement ("Agreement") to Lender so as to induce Lender to make the Loan to and for the benefit of Borrower. Accordingly, Principal agrees that Principal shall, together with Borrower, be jointly and severally personally liable to pay the following (collectively the "Retained Liabilities"): (a) all losses, damages, costs and expenses, including attorneys' fees and expenses, incurred by Lender as a result of: (i) the collection and receipt of proceeds and income from the Property and the other assets and obligations securing the Loan by or for the benefit of Borrower or any Principal following an Event of Default which are not paid to Lender or applied to the Property in the ordinary course of business; (ii) fraud by Borrower or by any partner or officer of Borrower with a management role in Borrower; (iii) material misrepresentation by Borrower or any other person or entity which is an officer of Borrower or any partner of Borrower with a management role in connection with the Loan; (iv) misapplication or misappropriation of funds in which Lender has a security interest which come into the possession of Borrower or any Principal; (v) intentional or material waste to the Property; (vi) the breach of the obligations set forth in the Hazardous Substance Indemnification Agreement from Borrower and Principal to Lender of even date herewith, as hereafter amended, if at all; (vii) the breach of the provisions contained in Paragraph 15 (transfers of the property or beneficial interest in Borrower; assumption) of the Mortgage; (viii) the breach of the provisions contained in Paragraph 16 (no additional liens) of the Mortgage; or (ix) the breach of the provisions contained in Paragraph 17 (single asset entity) of the Mortgage; and (b) any claim for any commissions or brokerage fees relating to the Loan. The foregoing shall in no way limit or impair the enforcement against the Property or any other security granted by the Loan Documents of any of the Lender's rights and remedies pursuant to the Loan Documents. Principal agrees that the liability of Principal shall be direct and immediate as a primary and not a secondary obligation or liability, and is not conditional or contingent upon the pursuit of any remedies against Borrower or any other person, or against any collateral or liens held by Lender. Principal waives any rights which it may have to require that (a) Lender first proceed against Borrower, or any other person or entity with respect to the Retained Liabilities, (b) Lender first proceed against any collateral held by Lender or (c) any party be joined in any proceeding to enforce the Retained Liabilities. Principal agrees not to exercise any rights to enforce any remedy which Lender may have against Borrower, any rights to participate in any security for the Loan and any rights of indemnity, reimbursement, contribution or subrogation which Principal may have against Borrower or against any other person or entity with respect to the Retained Liabilities until the Indebtedness of Borrower to Lender under the Note and the Loan Documents has been satisfied in full. Principal consents and agrees that Lender may at any time, and from time to time, without notice to or further consent from Principal and either with or without consideration do any one or more of the following, all without affecting the agreements contained herein or the liability of Principal for the Retained Liabilities: (a) release any person who may hereafter become a Principal hereunder; (b) surrender without substitution any property or other collateral of any kind or nature whatsoever held by Lender, or by any person, firm or corporation on Lender's behalf or for Lender's account, securing the Loan or the Retained Liabilities; (c) modify the terms of any document evidencing, securing or setting forth the terms of the Loan; (d) grant releases, compromises and indulgences with respect to the Loan or the Retained Liabilities or any persons or entities now or hereafter liable thereon; or (e) take or fail to take any action of any type whatsoever with respect to the Loan or the Retained Liabilities. Principal hereby waives and agrees not to assert or take advantage of any defense based upon: (a) the incapacity, lack of authority, death or disability of Borrower, or any other person or entity; (b) the failure of Lender to commence an action against Borrower or any other person or to proceed against or exhaust any security held by Lender at any time or to pursue any other remedy whatsoever at any time; (c) any duty on the part of Lender to disclose to Principal any facts Lender may now or hereafter know regarding Borrower regardless of whether Lender has reason to believe that any such facts materially increase the risk beyond that which Principal intends to assume or has reason to believe that such facts are unknown to Principal, Principal acknowledging that it is fully responsible for being and keeping informed of the financial condition and affairs of Borrower; (d) lack of notice of default, demand of performance or notice of acceleration to Borrower, or any other party with respect to the Loan or the Retained Liabilities; (e) the consideration for this Agreement; (f) any acts or omissions of Lender which vary, increase or decrease the risk on Principal; (g) any statute of limitations affecting the liability of Principal hereunder, the liability of Borrower or any guarantor, if any, under the Loan Documents, or the enforcement hereof, to the extent permitted by law; (h) the application by Borrower of the proceeds of the Loan for purposes other than the purposes represented by Borrower to Lender or intended or understood by Lender or Principal; (i) an election of remedies by Lender, including any election to proceed against any collateral by judicial or nonjudicial foreclosure, whether real property or personal property, or by deed in lieu thereof, and whether or not every aspect of any foreclosure sale is commercially reasonable, and whether or not any such election of remedies destroys or otherwise impairs the subrogation rights of Principal or the rights of Principal to proceed against Borrower or any guarantor for reimbursement, or both; (j) any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other aspects more burdensome than that of a principal; (k) Lender's election, in any proceeding instituted under the Federal Bankruptcy Code, of the application of Section 1111(b)(2) of the Federal Bankruptcy Code or any successor statute; and (l) any borrowing or any grant of a security interest under Section 364 of the Federal Bankruptcy Code. Principal covenants and agrees to provide to Lender a draft copy of his financial statements prepared in accordance with sound accounting principles applied on a consistent basis, certified by such Principal to be a true and complete copy of such financial statements and in form reasonably satisfactory to Lender, within sixty (60) days of the end of each calendar year, with a final version of such final statements to be provided to Lender within ninety (90) days of the end of each calendar year. PRINCIPAL AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON, OR ARISING OUT OF THIS AGREEMENT. PRINCIPAL AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. PRINCIPAL AND LENDER REPRESENT AND WARRANT THAT EACH HAS HAD THE OPPORTUNITY TO REVIEW THIS JURY WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. Principal further agrees that the provisions of this Agreement shall bind each Principal's heirs, personal representatives, successors and assigns, as the case may be. Notwithstanding anything in this Agreement or in the Loan Documents to the contrary, Principal's liability hereunder, including for the Retained Liabilities, shall terminate if (a) Robert F. Gossett Jr. shall no longer be a general partner of Corporate Realty Income Fund I, L.P. and (b) a successor general partner or another individual or entity acceptable to Lender in Lender's reasonable discretion agrees to assume all of Principal's liabilities hereunder. This Agreement shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of Illinois, without regard to conflicts of law principles. Principal acknowledges that Principal's execution and delivery of this Agreement to Lender is a material inducement to Lender's making of the Loan to Borrower. PRINCIPAL: _____________________________ Name: Robert F. Gossett, Jr. EX-10.(BB) 8 MANAGER'S AGREEMENT MANAGER'S AGREEMENT, SUBORDINATION AND CONSENT TO ASSIGNMENT Loan No. 99-086 The undersigned, Corporate Realty Income Fund I, L.P., a Delaware limited partnership ("Manager"), acknowledges and agrees to the following: (A) Manager has entered into that certain Management Agreement dated July 1, 1999 ("Contract") with 475 Fifth Avenue Limited Partnership, a Delaware limited partnership ("Assignor"), pursuant to which the Manager shall manage the real property ("Property") commonly known as 475 Fifth Avenue, 475 Fifth Avenue, New York, New York; (B) Assignor is obtaining a loan ("Loan") from Heller Financial, Inc. (Heller Financial, Inc., its successors and assigns, is herein called the "Assignee") which is secured by, among other things, a Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing of even date herewith ("Mortgage") encumbering the Property, which Mortgage contains an assignment to Assignee of Assignor's rights in the Contract; and (C) Assignor has informed Manager that the execution and delivery of this Manager's Agreement, Subordination and Consent to Assignment ("Agreement") is a condition precedent to the funding of and a material inducement to Assignee to make the Loan. In consideration of the foregoing and to induce Assignee to make the Loan, Manager agrees as follows: 1. Manager consents to the foregoing assignment ("Assignment") of the Contract by Assignor contained in the Mortgage, and to each of the terms thereof notwithstanding anything to the contrary in the Contract. 2. Manager shall not modify the Contract without the prior written approval of Assignee. 3. If Assignee delivers written notice to Manager that Assignee is exercising its rights under the foregoing Assignment, Manager shall continue, at Assignee's written direction, to perform services for Assignee in accordance with the Contract, provided that Assignee pays to Manager (i) prior to the date Assignee takes title to or assumes possession or control of the Property, as mortgagee in possession or otherwise, all costs and expenses arising after the date of such notice including for persons employed on the site performing management services, together with a reasonable fee for accounting and reporting services, except that Assignee shall not be required to pay any contractually required management fee and (ii) from and after the date Assignee takes title to or assumes possession or control of the Property, as mortgagee in possession or otherwise, all fees (including any contractually required management fee), costs and expenses pursuant to the Contract for services rendered to Assignee, notwithstanding Assignor's default under, or breach of, the Contract or any counterclaim, right of set-off, defense or like right against Assignor. However, it is expressly understood that Assignee has no obligation to Manager to exercise Assignee's rights under the foregoing Assignment or to take title to or assume possession or control of the Property, but that the option to exercise such rights rests in the sole discretion of Assignee. 4. Provided that Manager has received any amounts payable to Manager from Assignee to which it is entitled under Paragraph 3 hereof, Manager shall not terminate the Contract or cease to perform its services thereunder for any reason, including, but not limited to, Assignor's failure to make any payments to Manager, without giving written notice to Assignee of such intention to terminate or cease performing its services at least ten (10) business days prior thereto, in order that Assignee may exercise its rights as described in the Assignment and this Agreement. 5. If Assignee exercises its rights under the foregoing Assignment, Manager agrees that Assignee shall have no personal obligations or liabilities under the Contract or the Assignment, except as specifically provided herein, and the sole right and remedy of the Manager as against Assignee under the Contract or under this Agreement shall be enforcement of the Manager's lien rights, if any, against the Property. Whether or not Assignee exercises its rights under the Assignment, Assignee shall have the right to terminate the Contract without the payment of any termination fee or penalty (other than payments agreed to by Assignee pursuant to Paragraph 3 hereof) upon five (5) days' prior written notice to Manager at any time following the occurrence of an "Event of Default" under the Mortgage. 6. Manager shall not accept a management fee in excess of three percent (3%) of the gross income from the Property at any time there exists an "Event of Default" under the Mortgage. Any such excess received by the Manager, or prepayment to Manager made more than thirty (30) days in advance of its due date (whether or not an Event of Default shall have occurred), shall be immediately remitted to Assignee. 7. Until the Loan has been repaid in full and any claim against Assignor or Assignee made by any person with respect to the Property is extinguished, Manager shall, from time to time, at no cost to Assignee, but only after the occurrence of an "Event of Default" under the Mortgage, furnish to Assignee upon written request any material information Manager may have regarding the management and operation of the Property. 8. Additionally, Manager represents that there are no defaults under the Contract, no event has occurred that but for the giving of notice or the passage of time, or both, would constitute a default under the Contract, Manager has no counterclaim, right of set-off, defense or like right against Assignor or Assignee, and Manager has been paid all amounts due for its services as of this date, other than amounts that are not yet due. 9. This agreement shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of Illinois, without regard to conflicts of law principles. -2- IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the ____ day of August, 1999. MANAGER: Corporate Realty Income Fund I, L.P., a Delaware limited partnership By: 1345 Realty Corporation, a ______ corporation, a general partner By: Name: Its: By: ____________________________________ Robert F. Gossett, Jr., an individual, a general partner -3- EX-10.(CC) 9 INDEMNIFICATION AGREEMENT Loan No. 99-086 HAZARDOUS SUBSTANCE INDEMNIFICATION AGREEMENT THIS HAZARDOUS SUBSTANCE INDEMNIFICATION AGREEMENT ("Indemnity") is made as of the ____ day of August 1999, by 475 FIFTH AVENUE LIMITED PARTNERSHIP, a limited partnership, organized and existing under the laws of Delaware, whose address is 475 Fifth Avenue, 21st Floor, New York, New York 10017 ("Borrower"), and ROBERT F. GOSSETT, JR., whose address is 406 East 85th Street, New York, New York 10028 (said individual is hereinafter referred to as a "Principal" and Borrower and Principal are hereinafter together referred to as "Indemnitors" and each individually as an "Indemnitor") to and in favor of HELLER FINANCIAL, INC., a Delaware corporation, with a mailing address at 500 West Monroe Street, 30th Floor, Chicago, Illinois 60661, Attention: Heller Express Servicing Department, Re: Loan No. 99_086 (HELLER FINANCIAL, INC. and its successors and assigns are hereinafter collectively referred to as "Lender"). RECITALS A. Substantially contemporaneously herewith, Lender is entering into a financing transaction ("Loan") with Borrower, which Loan is evidenced by a certain Promissory Note ("Note") in the principal amount of THIRTY_TWO MILLION and No/100 Dollars ($32,000,000.00) of even date herewith executed and delivered by Borrower, as maker, to the order of Lender, as payee, secured by, inter alia, a Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing of even date herewith ("Mortgage") encumbering certain real property located in New York County, New York, and more fully described on Exhibit A to the Mortgage ("Land") (the Note, the Mortgage, this Indemnity, and any other documents evidencing or securing the indebtedness evidenced in connection therewith, and any modification, renewal, or extension thereof are hereinafter collectively referred to as the "Loan Documents"). B. Lender has required this Indemnity as a condition of Lender's making and disbursing the Loan. C. Principal indirectly owns some of the partnership interests in Borrower, and it is in Principal's and Borrower's direct financial interest and benefit to induce Lender to make the Loan by executing and delivering this Indemnity. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Indemnity. Each Indemnitor hereby agrees, jointly and severally, unconditionally, absolutely and irrevocably, to indemnify, defend (with counsel reasonably acceptable to Lender and at Indemnitor's sole cost) and hold harmless Lender and its officers, directors, employees, shareholders, agents and affiliates (individually and collectively the "Indemnified Party"), against and in respect of any and all liabilities, obligations, deficiencies, demands, claims, actions, or causes of action, assessments, losses, costs, expenses (including, without limitation, court costs and reasonable attorneys' fees and expenses), interest, fines, penalties, actual and punitive damages, and all costs and expenses of any and all investigations, remedial measures, proceedings, arbitrations, mediations, judgments, settlements, and compromises whatsoever (collectively the "Liabilities") sustained or incurred by Indemnified Party resulting from or arising out of or by virtue of a claim made by any party resulting from: (a) The presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, disposal (whether arranged or otherwise) or release from, the Land into or upon any land, the atmosphere, or any watercourse, body of water or wetland, of any "Hazardous Materials" (as hereinafter defined). (b) Any failure of the Land or activities thereon to comply with all applicable "Environmental Laws" (as hereinafter defined) relating to the protection of health, safety or the environment. (c) Any personal injury relating to the presence of any Hazardous Materials on or from the Land. Notwithstanding the foregoing, or anything in this Indemnity to the contrary (i) Indemnitors' liability in respect of the Liabilities shall only arise to the extent the Hazardous Materials, the presence of which gives rise to liability to Indemnitors, existed in or about the Land during periods of Borrower's ownership of the Land, (such liability to include any of such Hazardous Materials introduced to the Land prior to such period of ownership); (ii) Indemnitors shall not be responsible for any event described in (a), (b) or (c) above and shall not be liable to any Indemnified Party to the extent any Liabilities are sustained or incurred by any Indemnified Party on account of Hazardous Materials introduced to the Land by anyone other than Indemnitors, or their respective agents and employees, following Lender's taking of title to the Land or assuming possession or control of the Land, as mortgagee in possession or otherwise; and (iii) this Indemnity shall not apply to any Liabilities sustained or incurred by any Indemnified Party to the extent same result from the gross negligence or willful misconduct of any Indemnified Party. The term "Environmental Laws" shall include any federal, state or local laws or regulations relating to health, safety or protection of the environment. The term "Hazardous Materials" shall include Hazardous Substances, as defined by the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.9601 et seq., any petroleum or petroleum products, asbestos or asbestos containing material, or any other hazardous substances, hazardous wastes or hazardous materials as defined by other Environmental Laws. -2- 2. Indemnification Procedure. (a) Notice. Each Indemnitor shall notify Lender promptly (and in any event within 10 business days) upon receipt of any inquiry, notice, claim, charge, cause of action or demand pertaining to the matters indemnified under Paragraph 1, including, without limitation, any notice of inspection, abatement or noncompliance, stating the nature and basis of such inquiry or notification. For identical notices from different Indemnitors, only one such notice needs to be provided to Lender. Each Indemnitor shall immediately deliver to Lender any and all documentation or records in such Indemnitor's possession or control as Lender may reasonably request in connection with such notice or inquiry and shall keep Lender advised of any subsequent developments. If any Indemnified Party asserts a claim for indemnification or receives notice of the assertion of any claim or of the commencement of any action or proceeding against such Indemnified Party, Indemnified Party shall give written notice ( the "Notice of Claim") together with a statement of any available information regarding such claim to Indemnitors within 30 days after learning of such claim or within such shorter time as may be necessary to give Indemnitors a reasonable opportunity to respond to such claim. Indemnitors shall have the right, upon written notice to Indemnified Party (the "Notice to Defend") within 30 days after receipt from Indemnified Party of a Notice of Claim regarding such claim, to conduct at Indemnitors' expense the defense against such claim in Indemnitors' own name, or if necessary in the name of Indemnified Party. (b) Effect of Failure to Give Notice. If Indemnitors shall fail to give the requisite Notice to Defend set forth in Paragraph 2(a) above, Indemnitors shall be deemed to have elected not to conduct the defense of the subject claim, and in such event, Indemnified Party shall have the right to conduct such defense in good faith and to compromise and settle the claim without the prior consent of Indemnitors, and Indemnitors will be liable for all costs, expenses, settlement amounts or other Liabilities paid or incurred in connection therewith. (c) Parties to Cooperate. If Indemnitors elect to conduct the defense of the subject claim, Indemnified Party will cooperate with and make available to Indemnitors such assistance and materials as may be reasonably requested by Indemnitors, all at the expense of Indemnitors, and Indemnified Party shall have the right at Indemnified Party's expense to participate in the defense assisted by counsel of Indemnified Party's own choosing and at Indemnified Party's sole cost and expense, provided that Indemnified Party shall have the right to compromise and settle the claim only with the prior written consent of Indemnitors, which consent shall not be unreasonably withheld or delayed. Without the prior written consent of Indemnified Party, which consent shall not be unreasonably withheld or delayed, Indemnitors will not enter into any settlement of any claim or cease to defend against a claim, if pursuant to or as a result of such settlement or cessation, (i) injunctive or other equitable relief would be imposed against Indemnified Party, or (ii) such settlement or cessation would lead to liability or create any financial or other obligation on the part of the Indemnified Party for which Indemnified Party is not entitled to indemnification hereunder. Indemnitors shall not be entitled to control, and Indemnified Party shall be entitled to have sole control of the defense or settlement of any claim to the -3- extent that claim seeks an order, injunction or other equitable relief against Indemnified Party which, if successful, could materially interfere with the business, operations, assets, condition (financial or otherwise) or prospects of Indemnified Party (and the cost of such defense shall constitute an amount for which Indemnified Party is entitled to indemnification under this Indemnity). If a firm decision is made by Indemnitors to settle a claim, which offer Indemnitors are permitted to settle under this Paragraph 2(c), and Indemnitors desire to accept and agree to such offer, Indemnitors will give written notice to Indemnified Party to that effect. If Indemnified Party fails to consent to such firm offer within ten business days after Indemnified Party's receipt of such notice, Indemnified Party may continue to contest or defend such claim and, in such event, the maximum liability of Indemnitors as to such claim will not exceed the amount of such settlement offer, plus costs and expenses paid or incurred by Indemnified Party through the end of such 10 business day period. (d) Effect of Judgment. Any judgment entered or settlement agreed upon in the manner provided herein shall be binding upon Indemnitors and Indemnified Party, and, to the extent imposing liability on Indemnitors, shall conclusively be deemed to be an obligation with respect to which Indemnified Party is entitled to prompt indemnification hereunder. (e) Failure to Give Timely Notice. A failure by an Indemnified Party to give timely, complete or accurate notice as provided in Paragraph 2(a) will not affect the rights or obligations of any party hereunder except and only to the extent that, as a result of such failure, any party entitled to receive such notice was deprived of its right to recover any payment under its applicable insurance coverage or was otherwise directly and materially damaged as a result of such failure to give timely notice. (f) Reduction of Loss. To the extent any Liabilities of an Indemnified Party are reduced by receipt of payment (i) under insurance policies which are not subject to retroactive adjustment or other reimbursement to the insurer in respect of such payment, or (ii) from third parties not affiliated with the Indemnified Party, such payments (net of the expenses of the recovery thereof) (such net payment being referred to herein as a "Reimbursement") shall be credited against such Liabilities; provided, however, (y) the pendency of such payments shall not delay or reduce the obligation of Indemnitors to make payment to Indemnified Party in respect of such Liabilities, and (z) Indemnified Party shall have no obligation, hereunder or otherwise, to pursue payment under or from any insurer or third party in respect of such Liabilities. If any Reimbursement is obtained subsequent to payment by any Indemnitors in respect to any Liabilities, such Reimbursement shall be promptly paid over to such Indemnitor. (g) Subrogation. Indemnitors shall be subrogated to Indemnified Party's rights of recovery to the extent of any Liabilities satisfied by Indemnitors. Indemnified Party shall execute and deliver such instruments and papers as are necessary to assign such rights and assist in the exercise thereof. (h) Immediate Payment. All expenses of Indemnified Party determined hereunder to be payable by Indemnitors shall be payable within five (5) business days after receipt -4- by Indemnitors of written demand therefor with appropriate documentation thereof, after which interest shall accrue thereon at the Default Rate and such amounts shall be secured by the Loan Documents. 3. Survival. The provisions of and undertakings and indemnification set out in this Indemnity shall continue in full force and effect and shall survive the satisfaction, termination, suspension or cancellation of the indebtedness evidenced by the Note, the release of the Mortgage, the acceptance by Lender of a deed in lieu of foreclosure with respect to the Land, a foreclosure of the Land and/or the exercise by Lender of any of its rights under any Loan Document. Except as otherwise provided herein, this Indemnity shall be continuing, irrevocable and binding on each of the Indemnitors, jointly and severally, and their respective successors and assigns, and shall inure to the benefit of Lender and Indemnitor's obligations hereunder may not be assigned. The dissolution of an Indemnitor shall not affect this Indemnity or any of Indemnitors' obligations hereunder. 4. Controlling Provisions. The provisions of this Indemnity shall govern and control over any inconsistent provision of any other Loan Document, including, without limitation, Paragraph 10 of the Note and any other exculpatory or non-recourse provisions contained in any Loan Document relative to the Indemnitors' liability hereunder. 5. Waivers. Each Indemnitor hereby waives notice of the following events or occurrences: (a) Lender's acceptance of this Indemnity; (b) any Indemnitor's heretofore, now or at any time or times hereafter, granting to Lender of security interests, liens or encumbrances in any of such Indemnitor's assets or Lender's heretofore, now or from time to time hereafter obtaining, amending, substituting for, releasing, waiving or modifying any such security interests, liens or encumbrances; (c) Lender's heretofore, now or at any time or times hereafter, obtaining, releasing, waiving or modifying the Mortgage or any other lien or encumbrance in any other party's assets given to Lender to secure the Note or this Indemnity; (d) Lender's heretofore, now or at any time or times hereafter, amending or modifying any of the Loan Documents other than this Indemnity; and (e) presentment, demand, notices of default, non-payment, partial payment and protest, and all other notices or formalities to which any Indemnitor may be entitled except as otherwise provided herein. Indemnitor agrees that Lender heretofore, now or at any time or times hereafter, may do any or all of the foregoing in such manner, upon such terms and at such times as Lender, in its sole discretion, deems advisable, without in any way, manner or respect impairing, affecting, reducing or releasing Indemnitor from its obligations hereunder and Indemnitor hereby consents to each and all of the foregoing events or occurrences. -5- 6. Notice. Any notice to any Principal provided for herein shall be given by sending such notice by Federal Express or any other overnight carrier addressed to such Principal at such Principal's address stated above or at such other address as such Principal may designate by notice to Lender, Borrower as provided herein. Any notice provided for herein shall be deemed to have been given to Principal on the first business day following such sending in the manner designated herein. Any notice to Borrower or Lender shall be given as set forth in the Mortgage. 7. Governing Law. This Indemnity shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of Illinois, without regard to conflicts of laws principles. 8. Jury Trial Waiver. EACH INDEMNITOR AND LENDER BY ITS ACCEPTANCE OF THIS INDEMNITY, HEREBY WAIVES THEIR RESPECTIVE RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON, OR ARISING OUT OF THIS INDEMNITY AND THE OTHER LOAN DOCUMENTS. EACH INDEMNITOR AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THIS WAIVER IN ENTERING INTO THIS INDEMNITY AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH INDEMNITOR AND LENDER REPRESENT AND WARRANT THAT EACH HAD THE OPPORTUNITY TO REVIEW THIS JURY WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. 9. Severability. The invalidity, illegality or unenforceability of any provision of this Indemnity shall not affect or impair the validity, legality or enforceability of the remainder of this Indemnity and the other Loan Documents, and to this end, the provisions of this Indemnity and the other Loan Documents are declared severable. 10. Binding Effect. This Indemnity shall be binding on the parties hereto, their successors, assigns, heirs and legal representatives and all other persons claiming by, through or under them, but shall not apply for the benefit of any third party purchaser (other than an affiliate of Lender) at a foreclosure sale or any other third party (but Indemnitors shall not be relieved of any of the obligations hereunder by any such assignment or succession). 11. Termination of Principal's Liability. -6- Notwithstanding anything in this Indemnity or in the Loan Documents to the contrary, Principal's liability hereunder, including for any Liabilities to Indemnified Party, shall terminate if (a) Robert F. Gossett, Jr. shall no longer be a general partner of Corporate Realty Income Fund I, L.P. and (b) a successor general partner or another individual or entity acceptable to Lender in Lender's reasonable discretion agrees to assume all of Principal's liabilities hereunder. IN WITNESS WHEREOF, the undersigned have executed this Hazardous Substance Indemnification Agreement as of the date first written above. BORROWER: 475 FIFTH AVENUE LIMITED PARTNERSHIP, a Delaware limited partnership By: 475 Fifth-GP, Inc., a Delaware corporation, its sole general partner By: _____________________________ Name: ___________________________ Its: ____________________________ PRINCIPAL: ________________________________ Name: Robert F. Gossett, Jr. -7- STATE OF ____________ ) ) SS COUNTY OF __________ ) I, ____________________________, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY, that____________, the __________ president of 475 Fifth_GP, Inc., a Delaware corporation ("Corporate G.P.") and the general partner in 475 Fifth Avenue Limited Partnership, a Delaware limited partnership, who is personally known to me to be the same person whose name is subscribed to the foregoing instrument as such officer in such Corporate G.P., appeared before me this day in person and acknowledged that (he/she) signed and delivered the said instrument as (his/her) own free and voluntary act, as the free and voluntary act of Corporate G.P., and as the free and voluntary act of said limited partnership, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this ____ day of _______________, 1999. ------------------------------ Notary Public My Commission Expires: - --------------------- STATE OF __________ ) ) SS COUNTY OF _________ ) On this ____ day of ______________, 1999, before me, a Notary Public in and for the State of ___________, personally appeared Robert F. Gossett, Jr., who executed the within and foregoing instrument, and acknowledged said instrument to be his free and voluntary act and deed for the uses and purposes therein mentioned. IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day and year first above written. NOTARY PUBLIC in and for the State of My commission expires: -8- EX-27 10 FDS
5 This schedule contains summary financial information extracted from registrant's audited financial statements as of and for the year ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,322,319 0 823,123 0 0 4,952,017 118,185,492 24,361,971 107,255,707 3,694,928 55,539,288 0 0 0 48,021,491 107,255,707 15,387,502 16,695,999 0 13,928,767 1,858,649 0 3,736,687 (2,828,104) 0 (2,828,104) 0 0 0 (2,828,104) (0.94) (0.94)
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