-----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, NVSvQ6O4SosWtIwSLhSbcTDh/FDBVUDCDd0W3t0HV9KFJD3H0Ia6AtBxLm00UTSK myM4aBSnoTV5yOI/sxd0SA== 0000892569-97-000704.txt : 19970319 0000892569-97-000704.hdr.sgml : 19970319 ACCESSION NUMBER: 0000892569-97-000704 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC GULF PROPERTIES INC CENTRAL INDEX KEY: 0000912597 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330577520 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12768 FILM NUMBER: 97558641 BUSINESS ADDRESS: STREET 1: 363 SAN MIGUEL DR STREET 2: STE 100 CITY: NEWPORT BEACH STATE: CA ZIP: 92660-7805 BUSINESS PHONE: 7147212700 MAIL ADDRESS: STREET 1: 363 SAN MIGUEL DRIVE STREET 2: SUITE 100 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ (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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-12546 PACIFIC GULF PROPERTIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ MARYLAND 33-0577520 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 92660 363 SAN MIGUEL DRIVE, NEWPORT BEACH, CALIFORNIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 721-2700 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF SECURITY ON WHICH REGISTERED - -------------------------------------------- -------------------------------------------- Common Stock, $0.01 par value 8.375% New York Stock Exchange Convertible Subordinated Debentures due American Stock Exchange 2001
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of Common Stock held by non-affiliates of the registrant as of March 3, 1997 was approximately $268,276,888. On March 3, 1997, the registrant had 12,058,273 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................................. 2 Item 2. Properties................................................................ 12 Item 3 Legal Proceedings......................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders....................... 12 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters.... 13 Item 6. Selected Financial and Operating Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 16 Item 8. Financial Statements and Supplementary Data............................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................. 21 PART III Item 10. Directors and Management.................................................. 22 Item 11. Executive Compensation.................................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 29 Item 13. Certain Relationships and Related Transactions............................ 31 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on form 8-K........... 31
1 3 PART I ITEM 1. BUSINESS Pacific Gulf Properties Inc. (together with its consolidated operating partnership, PGP Inland Communities, L.P., collectively the "Company") was incorporated in August 1993 in the State of Maryland and completed its initial public offerings on February 18, 1994 (the "Offerings"). Prior to February 18, 1994, the Company was a wholly-owned subsidiary of Santa Anita Realty Enterprises, Inc. ("Realty"). Its executive offices are located at 363 San Miguel Drive, Newport Beach, California 92660-7805. The Company operates as a self-administered and self-managed equity real estate investment trust (a "REIT") which owns, operates, leases, acquires, rehabilitates and develops industrial and multifamily properties located in California and the Pacific Northwest. At December 31, 1996, the Company's portfolio consisted of 21 industrial properties, containing an aggregate of 4,573,000 leasable square feet (the "Industrial Properties") and 22 multifamily properties containing 4,110 apartment units (the "Multifamily Properties", and collectively with the Industrial Properties, the "Properties"). In addition, during 1996 the Company began extensive rehabilitation of an industrial property consisting of approximately 327,000 square feet and development of an active senior apartment community consisting of 166 units. The following table presents information on the composition of the Company's operating properties based on the net book value at December 31, 1996:
PERCENTAGE OF NUMBER OF REAL ESTATE PROPERTY TYPE PROPERTIES ASSETS ---------------------------------------------------- ------------ -------------- Industrial.......................................... 21 49% Multifamily......................................... 22 51% -- --- Total..................................... 43 100% == ===
GEOGRAPHIC LOCATION ---------------------------------------------------- California.......................................... 32 74% Pacific Northwest................................... 11 26% -- --- Total..................................... 43 100% == ===
2 4 SUMMARY FINANCIAL INFORMATION The following table and footnotes set forth summary financial information with respect to the Company from February 18, 1994, the date of the Offerings, and for the combined historical operations of the multifamily and industrial operations acquired from Realty (the "Predecessor Multifamily and Industrial Operations") prior to that date:
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1996 1995 1994(a) 1993 1992 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Rental income: Multifamily properties.............. $ 29,104 $ 24,898 $ 18,937 $ 15,150 $ 10,768 Industrial properties............... 20,783 12,193 7,207 1,002 885 -------- -------- -------- -------- -------- $ 49,887 $ 37,091 $ 26,144 $ 16,152 $ 11,653 -------- -------- -------- -------- -------- Expenses: Rental property expenses: Multifamily properties.............. 11,554 10,215 8,835 7,261 4,639 Industrial properties............... 5,308 2,567 1,541 245 206 -------- -------- -------- -------- -------- 16,862 12,782 10,376 7,506 4,845 -------- -------- -------- -------- -------- Income (loss) before gain on sale of properties and extraordinary item... $ (192)(c) $ 1,739 $ 2,158 $(12,036) $ (1,620) Net income (loss)..................... $ (118)(c) $ 8,403 $ (832) $(12,036) $ (1,620) ======== ======== ======== ======== ======== Funds From Operations(b): New Definition...................... $ 11,640 $ 7,820 $ 5,879 $ 1,572 $ 662 ======== ======== ======== ======== ======== Cash flow information: Operating activities................ $ 8,523 $ 7,138 $ 3,950 $ 1,307 $ (348) ======== ======== ======== ======== ======== Investing activities................ (81,918) (84,480) (99,504) (15,323) (27,660) ======== ======== ======== ======== ======== Financing activities................ 72,071 76,674 98,649 13,798 28,318 ======== ======== ======== ======== ========
- --------------- (a) Includes the combined historical operations of the Predecessor Multifamily and Industrial Operations for the period January 1, 1994 to February 17, 1994 (see Item 14(a)1- Financial Statements). (b) Funds From Operations ("FFO") is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to mean net income, computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures ("Old Definition"). Management generally considers FFO to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income or as an indicator of the Company's operating performance and is not indicative of cash available to fund all cash flow needs. FFO does not measure whether cash flow is sufficient to fund all of the Company's cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. On March 3, 1995, NAREIT modified the calculation of FFO to, among other things, eliminate amortization of deferred financing costs and depreciation of non-real estate assets as items added back to net income ("New Definition") when computing FFO. See Item 6. "Selected Financial and Operating Data." (c) Includes the effect of $3,596,000 non-recurring loss on the exchange of convertible subordinated debentures for common stock (see Item 14(a) 1-Financial Statements). 3 5 1996 DEVELOPMENTS ACQUISITIONS AND DISPOSITION In March 1996, the Company acquired an industrial property located in Garden Grove, California with approximately 189,000 leasable square feet, for an aggregate purchase price of approximately $6.9 million. The Company financed the purchase with the proceeds from a 10-year, 7.3% fixed interest rate loan secured by an existing property located in Kent, Washington. In June and July 1996, the Company acquired nine industrial properties located in California containing an aggregate of approximately 1.4 million leasable square feet, for an aggregate purchase price of approximately $54.0 million, including budgeted capital expenditures of approximately $1.8 million. The Company financed the acquisition of such properties primarily with the proceeds of the 1996 Public Common Stock Offering. See "Equity Financing Activities" below. In August 1996, the Company acquired an industrial property located in the City of Industry, California with approximately 327,000 leasable square feet for approximately $8.8 million. The Company intends to expend approximately $1.4 million to redevelop this property. Also in August 1996, the Company acquired approximately 4.6 acres of land in Rancho Santa Margarita, California for approximately $1.6 million, on which the Company is developing a 166-unit active senior housing apartment community with estimated total capitalized costs of approximately $8.6 million. See "Development Activity" below. In August 1996, the Company sold approximately 14.3 acres of land and an approximately 56,000 leasable square foot industrial building located in Baldwin Park, California to an existing tenant for aggregate consideration of approximately $7.7 million under the terms of an option to purchase contained in the original leases. In October 1996, the Company acquired the Miramar Business Park in San Diego, California, a multi-tenant industrial/warehouse consisting of approximately 186,000 leasable square feet, for a purchase price of approximately $7.3 million. The Miramar Business Park is subject to a ground lease expiring in July 2035. In November 1996, the Company acquired the Raintree Apartments, a 165-unit apartment community located in Ontario, California, for a purchase price of approximately $6.3 million which was financed by the seller for a five year term. REDUCTION IN PUBLIC INDEBTEDNESS In December 1996, the Company initiated an exchange offer (the "Exchange Offer"), pursuant to which it offered to exchange 58 shares of its common stock for each $1,000 in principal amount of its convertible subordinated debentures. On December 26, 1996, the Company completed the Exchange Offer by issuing an aggregate of 2,440,002 shares of common stock in exchange for approximately $42.1 million in aggregate principal amount of convertible subordinated debentures. Approximately $14.4 million in principal amount of convertible subordinated debentures remains outstanding after the consummation of the Exchange Offer. The debentures are traded on the American Stock Exchange. DEVELOPMENT ACTIVITY The Company has begun redevelopment of its newly-acquired industrial property located in the City of Industry, California. See "Acquisitions and Disposition." The redevelopment, which the Company expects to cost approximately $1.4 million, will include the installation of additional loading facilities, sprinkler upgrades, mezzanine level upgrades, parking lot upgrades, and cosmetic rehabilitation of the property. In December 1996, the Company began construction on a 166-unit active senior apartment community in the master planned area of Rancho Santa Margarita, California. The Company estimates the total capitalized cost of this project will be approximately $8.6 million. The community is being developed as a community for residents 55 years and older and will be the first apartment community in Rancho Santa Margarita specifically designed to meet the needs of active seniors. The project is being financed with a 24-month construction loan. 4 6 Subject to completing construction and the property achieving certain lease-up and operating requirements, the Company anticipates that it will refinance the construction loan with tax-exempt credit-enhanced bonds. See "Debt Financing Activities." EQUITY FINANCING ACTIVITIES In mid-1996, the Company received net proceeds of approximately $36.6 million from the issuance of 2,435,581 shares of Common Stock (including proceeds from the issuance of 420,000 shares of common stock sold pursuant to the exercise of the underwriters' over-allotment option) at a price of $16.375 per share (the "1996 Public Common Stock Offering"). The shares of common stock were issued under the Company's shelf registration statement on Form S-3 covering a maximum aggregate offering price of approximately $112 million (the "Shelf Registration Statement"). The Company used the proceeds of the 1996 Public Common Stock Offering to fund the acquisition of certain properties, to repay debt and for general corporate purposes. In December 1996, the company filed a registration statement on Form S-3 pursuant to Rule 462(b) under the Securities Act, increasing the maximum aggregate offering amount under the Shelf Registration Statement by approximately $14.5 million. On December 31, 1996, the Company entered into an agreement to issue 1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Shares") to Five Arrows Realty Securities L.L.C. ("Five Arrows") at a price of $18.50 per share. The Company is obligated to issue the Class A Preferred Shares over the course of 1997 in a maximum of three separate issuances, the timing of which may be specified by the Company, provided that the Company will be charged with certain availability fees if all of the Class A Preferred Shares are not issued before July 1, 1997. The Class A Preferred Shares will be issued under the Shelf Registration Statement. The holders of the Class A Preferred Shares and the holders of the Common Stock vote together as a single class. Each Class A Preferred Share is convertible into one share of Common Stock, subject to adjustment upon certain events. The annual dividend per share on the Class A Preferred Shares is (i) $1.70 from the date of issuance until December 31, 1997, and (ii) the greater of $1.70 or 104% of the then-current dividend on the Common Stock thereafter. The liquidation preference of the Class A Preferred Shares is $18.50 per share, plus an amount equal to any accumulated, accrued and unpaid dividends. The Company may redeem the Class A Preferred Shares beginning on December 31, 2001 for cash in an amount equal to $18.50 per Class A Preferred Share plus accrued and unpaid dividends and plus a premium initially equal to 6.0% of $18.50. This premium decreases to zero after December 31, 2009. The Company has granted to Five Arrows, for as long as Five Arrows maintains its ownership of either all of the Class A Preferred Shares or an amount of voting securities that, if converted into Common Stock, would exceed 10% of the outstanding Common Stock, a seat on the Company's Board of Directors. In addition, upon the occurrence of the failure of the Company to pay a quarterly dividend on the Common Stock in an amount of at least $.40 per share, the failure of the Company to meet certain earnings before interest, depreciation and amortization budgets for three consecutive quarters or the failure of the Company to pay accrued dividends on the Class A Preferred Shares, Five Arrows would be granted one additional seat on the Board. Five Arrows is prohibited from transferring any Class A Preferred Shares, or any shares of Common Stock into which such Class A Preferred Shares have been converted, until December 31, 1997. At that time, Five Arrows will have the right, subject to certain conditions, to demand the Company effect the registration under the Securities Act of 1933, as amended, of the Class A Preferred Shares or the shares of Common Stock into which such Class A Preferred Shares have been converted. DEBT FINANCING ACTIVITIES Tax-Exempt Projects. In December 1996, the Company entered into a refunding agreement to refinance all of its existing tax-exempt mortgage debt totaling $24.9 million. As part of the refinancing, the Company established a pool agreement with the Federal National Mortgage Association ("FNMA") to provide 30-year credit enhancement on the tax-exempt projects. The effective interest rate on the currently outstanding bonds 5 7 that are part of such pool agreement (other than the bonds related to Rancho Santa Margarita project), after giving effect to credit enhancement and other costs, has been fixed at 6.3% for 10 years. In addition to refinancing its tax-exempt projects, the Company also received from FNMA a forward commitment, expiring December 1, 1998, to provide credit enhancement for the senior residential community located in Rancho Santa Margarita, California, that the Company is currently developing. The commitment is subject to the completion of the project and the property achieving certain lease-up and operating requirements. The effective interest rate on the currently outstanding bonds in this commitment, after giving effect to credit enhancement and other costs, has been fixed at 6.4% for ten years. Property Refinancings. In 1996, the Company incurred indebtedness on two separate occasions in order to reduce the outstanding balance on the Company's revolving line of credit. First, in October 1996, the Company borrowed an aggregate of approximately $16.9 million pursuant to three separate 14-year term loans that bear interest at a rate of 8% for the first seven years and thereafter at a fixed rate based upon the then-prevailing market rate. Such loans are secured by the following industrial projects: Golden West, Vista and Garden Grove Industrial Park. Second, in December 1996, the Company borrowed an additional $24.5 million pursuant to a 15-year term loan that bears interest at a rate of 7.75% for the first five years and thereafter at a fixed rate based upon the then-prevailing market rate. This loan is secured by six of the properties acquired with the proceeds of the 1996 Public Common Stock Offering, namely Riverview Industrial Park, Pacific Park, North County Business Park, Bell Ranch Industrial Park, Escondido Business Center and Bay San Marcos Industrial Park. Each of these financings provides the Company with the ability to prepay, without penalty, the balance of outstanding loans at the time the interest rates are reset. The above property financing reduced the Company's revolving line of credit obligation by approximately $39.4 million to $13.7 million at December 31, 1996, thereby reducing the Company's exposure to interest rate fluctuations. The information in the following sections is forward looking and involves risks and uncertainties that could significantly impact the Company's Funds From Operations in the short and long term. Higher than expected acquisition, rental and/or rehabilitation of properties, a downturn in the local economies and/or the lack of growth of such economies could reduce the Company's Funds From Operations. INDUSTRIAL PROPERTIES The Company focuses on multi-tenant business parks and mid-size warehouse/distribution facilities. Whenever possible, the Company seeks a significant market share in its principal sub-markets so that it can accommodate its tenants as their needs change and have an influence on trends in market rents. The Company also seeks properties that are well-located and offer convenient access to major distribution points, such as shipping ports, major airports and major freeways. Management believes that the Southern California industrial property market is poised for recovery based upon an increasing level of leasing interest and a limited supply of new product. As evidence of this, the Company already has observed recent increases in the prices for industrial properties and tenant requests for longer term leases. With 72% of its industrial leases expiring during the next three years, the Company believes it is in a good position to capitalize on anticipated rental rate increases. The Company's industrial properties are currently occupied by over 700 tenants, and no one tenant accounts for more than 2.5% of the Company's total rental revenues. The Company generally offers industrial leases in the one- to five-year range. Lease terms include, in most cases, annual adjustments based on changes in the consumer price index and, in some cases, up to three months' free rent. The standard lease also includes some refurbishing and tenant improvement allowance with the amount varying depending upon the length of the lease, the size of the space leased and the use. The Company seeks tenants primarily involved in warehouse, distribution, assembly and light manufacturing activities. 6 8 The following table presents information concerning the Industrial Properties, including the actual average rent per square foot and percentage of the leasable square footage occupied by tenants as of December 31, 1996:
AVERAGE DATE GROSS LEASABLE MONTHLY BASE INDUSTRIAL PROPERTY(1) LOCATION COMPLETED SQUARE FOOTAGE RENT PER SQ. FT. OCCUPANCY - ------------------------------- --------------------- --------- --------------- ---------------- --------- Seattle I Seattle, WA 1968 42,240 $ 0.42 100% Seattle II Seattle, WA 1981 64,077 0.55 100 Seattle III Seattle, WA 1981 78,720 0.55 100 Pacific Gulf Business Park Tukwila, WA 1975-79 475,629 0.51 93 Etiwanda Ontario, CA 1991 576,327 0.30 100 Golden West Rancho Cucamonga, CA 1990 296,821 0.37 99 Vista Vista, CA 1990 356,800 0.38 100 Baldwin Industrial Park Baldwin Park, CA 1986 567,605 0.36 100 Pacific Gulf Business Park Garden Grove, CA 1986 189,526 0.60 90 Garden Grove Industrial Park Garden Grove, CA 1979 251,927 0.39 100 Crescent Business Center Rancho Cucamonga, CA 1981 136,066 0.38 100 Eden Landing Commerce Park Hayward, CA 1972-74 193,358 0.65 90 San Marcos Commerce Center San Marcos, CA 1985 72,050 0.41 93 Bay San Marcos Industrial Center San Marcos, CA 1988 121,768 0.42 100 Escondido Business Center Escondido, CA 1988-92 251,464 0.49 100 Bell Ranch Industrial Park Santa Fe Springs, CA 1981 128,640 0.27 100 La Mirada Business Center La Mirada, CA 1975 82,010 0.56 88 Pacific Park Aliso Viejo, CA 1988 99,622 0.91 91 Riverview Industrial Park San Bernardino, CA 1980 297,180 0.26 100 North County Business Park Yorba Linda, CA 1987-89 105,516 0.55 89 Mira Mar Industrial Park Mira Mesa, CA 1981 186,022 0.68 99 --------- ------ --- Sub-Total or Weighted Average for Industrial Properties 4,573,368 0.43 98 ========= ====== === INDUSTRIAL PROPERTY UNDER DEVELOPMENT City of Industry Distribution Center City of Industry, CA 1973-77 326,596 N/A N/A
The following table shows scheduled lease expirations for all leases for the Industrial Properties (excluding properties under development) as of December 31, 1996.
PERCENTAGE NUMBER OF GROSS LEASABLE AREA ANNUAL BASE RENT PERCENTAGE OF GROSS ANNUAL BASE YEAR LEASES EXPIRING OF EXPIRING LEASES OF EXPIRING LEASES LEASABLE AREA EXPIRING RENT EXPIRING - --------------------- --------------- ------------------- ------------------ ---------------------- ------------- 1997................. 339 1,022,000 5,869,000 24.7% 27.5% 1998................. 224 1,229,000 6,410,000 29.7 30.1 1999................. 122 726,000 3,544,000 17.6 16.6 2000................. 39 357,000 1,602,000 8.6 7.5 2001................. 38 268,000 1,436,000 6.5 6.7 2002................. 5 325,000 1,220,000 7.9 5.7 2003................. 7 107,000 716,000 2.6 3.4 2004................. 1 90,000 469,000 2.2 2.2 2005 and thereafter......... 1 12,000 58,000 0.3 0.3 --- --------- ---------- ----- ----- TOTALS..... 776 4,136,000(1) 21,324,000 100.0% 100.0% === ========= ========== ===== =====
- --------------- (1) As of December 31, 1996, 325,000 square feet of tenants were on month-to-month leases (which are not included above) and 112,000 square feet were unoccupied. 7 9 MULTIFAMILY PROPERTIES The Company invests primarily in two types of multifamily apartment communities: communities oriented to family-style living and communities for active seniors ages 55 and older. The Company focuses on family-style apartment communities with greater concentrations of two- and three-bedroom units with rents affordable by middle income families. The Company believes that there is a strong demand among middle income families for affordable rental housing such as that offered by the Company. The Company also focuses on active senior housing for individual ages 55 and older, where seniors can be involved in activities, social gatherings and other types of entertainment with residents of their own age group. The Company offers no assisted living or related services; the Company's properties are oriented to those seniors interested in renting versus owning and who are able to care for themselves. The company believes that the senior population will continue to grow and that the market for rental housing for active seniors will be strong. In addition, management believes that active senior housing typically has lower operating and management costs due to lower tenant turnover. Each of the Multifamily Properties provides tenants with attractive amenities, including a swimming pool (except Inn at Laguna Hills) and clubhouse, and many include jacuzzis, tennis courts, sports courts and saunas. Many offer additional features such as vaulted ceilings, fireplaces, washers and dryers, cable television and limited access gates. None of the Multifamily Properties currently are subject to rent control or rent stabilization regulations. However, certain of these properties are subject to restrictions based upon tax- exempt loan requirements, such as providing a percentage of units to low income tenants. There can be no assurances that rent control or rent stabilization regulations will not be imposed in the future. 8 10 The following table presents information concerning the Multifamily Properties, including average gross scheduled rents per unit and percentage of units occupied as of December 31, 1996:
YEAR AVERAGE AVERAGE MULTIFAMILY PROPERTIES LOCATION COMPLETED UNITS UNIT SIZE (SQ FT) RENT PER UNIT OCCUPANCY - ---------------------- --------------------------- --------- ----- ------------------ ------------- --------- Applewood Santa Ana, CA 1972 406 801 $ 706 93% Park Place Santa Ana, CA 1990 196 799 650 95 Inn at Laguna Hills(1) Laguna Hills, CA 1994 140 500 605 99 Daisy 5(2)(3) Covina, CA 1977 38 897 721 97 Daisy 7(2)(3) Diamond Bar, CA 1978 204 950 792 93 Daisy 12(2)(3) San Dimas, CA 1979 102 952 702 89 Daisy 16(2)(3) West Covina, CA 1981 250 986 725 89 Daisy 17(2)(3) San Dimas, CA 1981 156 962 711 87 Lariat(2)(3) San Dimas, CA 1981 30 970 769 97 Daisy 19(2)(3) Ontario, CA 1983 125 1,019 727 91 Daisy 20(2)(3) Ontario, CA 1982 155 1,000 666 87 Sunnyside I(1)(2)(3) San Dimas, CA 1984 164 495 521 93 Sunnyside II(1)(2)(3) Ontario, CA 1983 60 493 503 93 Sunnyside III(1)(2)(3) Ontario, CA 1985 84 504 515 88 Raintree(2) Ontario, CA 1984 165 846 578 88 Fulton's Landing Everett, WA 1988 248 745 523 97 Fulton's Crossing Everett, WA 1986 256 803 544 98 Lora Lakes Burien, WA 1987 234 907 626 96 Holly Ridge Burien, WA 1987 146 946 645 97 Hampton Bay Kent, WA 1987 304 884 635 96 Heatherwood(2) Federal Way, WA 1985 368 741 543 96 Waterhouse Beaverton, OR 1990 279 937 670 89 ----- --- Sub-Total or Weighted Average For Multifamily Properties 4,110 93% ===== === MULTIFAMILY PROPERTIES UNDER DEVELOPMENT Rancho Santa Margarita Senior Community Rancho Santa Margarita, CA N/A 166 600 N/A N/A
- --------------- (1) Properties serving active senior tenants (individuals 55 and older). (2) Under rehabilitation. (3) Owned by PGP Inland Communities, L.P., a limited partnership in which the Company has a minimum 78% equity interest, full management and control, and the right to 100% of cash flow until certain net operating income levels are achieved. 9 11 INDEBTEDNESS The following table presents information on indebtedness encumbering the Industrial and Multifamily Properties, excluding borrowings outstanding under the Company's revolving line of credit, as of December 31, 1996:
PRINCIPAL (IN PROPERTY $000S) MATURITY DATE INTEREST RATE ------------------------------------- --------- -------------- ------------- INDUSTRIAL Baldwin Park Industrial Park......... $ 11,819 October 2005 8.150% Etiwanda............................. 6,838 May 2000 8.740% Seattle I, II, III................... 4,648 November 1997 8.000% Pacific Gulf Business Park........... 11,604 December 2002 Libor + 1.5%(d) Vista................................ 7,800 October 2010 8.000% Golden West.......................... 3,800 October 2010 8.000% Garden Grove Industrial Park......... 5,300 October 2010 8.000% Bell Ranch Industrial Park........... 2,475 December 2011 7.750% Pacific Park......................... 4,425 December 2011 7.750% North County......................... 4,125 December 2011 7.750% Bay San Marcos....................... 2,700 December 2011 7.750% Escondido............................ 6,300 December 2011 7.750% Riverview............................ 4,475 December 2011 7.750% -------- Total Industrial................ 76,309 MULTIFAMILY Inn at Laguna Hills.................. 4,735 August 2024 7.250% Applewood/Park Place(a).............. 11,823 March 1999 8.490% Daisy V.............................. 1,298 September 2025 7.479%(c) Daisy VII............................ 8,786 August 1998 8.000% Daisy XII............................ 3,698 September 2025 7.479%(c) Daisy XVI............................ 9,088 August 1998 8.000% Daisy XVII........................... 5,845 August 1998 8.000% Lariat............................... 1,196 September 2025 7.479%(c) Daisy XIX(b)......................... 6,700 December 2026 6.300% Daisy XX(b).......................... 7,690 December 2026 6.300% Sunnyside I(b)....................... 5,670 December 2026 6.300% Sunnyside II(b)...................... 1,830 December 2026 6.300% Sunnyside III(b)..................... 2,960 December 2026 6.300% Lora Lakes, Fulton's Landing and Fulton's Crossing(a)............... 14,776 March 1998 8.420% Hampton Bay.......................... 7,904 April 2006 7.300% Waterhouse........................... 7,174 June 1997 8.250% Raintree............................. 6,200 October 2006 6.400% Fountains(e)......................... 33 November 1998 Prime -------- Total Multifamily............... 107,406 Total........................... 183,715 ========
- --------------- (a) Applewood and Park Place jointly collateralize the $11,823,000 note payable; and Lora Lakes, Fulton's Landing and Fulton's Crossing jointly collateralize the $14,776,000 note payable. (b) These tax-exempt mortgage loans were refinanced in January 1997 in connection with new tax-exempt bond financing supported by credit enhancement from The Federal National Mortgage Association. The collateral properties are subject to restrictions requiring that a specified percentage of the apartment units in such properties be made available to persons with lower and moderate income. In addition, state and local authorities in some cases impose certain restrictions on the amount of rent that can be charged. (c) Interest rate is subject to periodic adjustments beginning March 10, 1996 based on the monthly weighted average 11th District Cost of Funds plus 2.8%. (d) The Company entered into an interest rate swap agreement that fixed the interest rate on $11,500,000 of the principal balance at 7.35% for five years commencing July 1, 1996. (e) Construction loan relating to development and construction of the Fountains Active Senior housing multifamily community. The maximum loan amount under the agreement is $6,400,000. 10 12 CORPORATE OFFICES The Corporate offices are located in Newport Beach, California in a building, which is owned by the Company, that contains approximately 7,000 square feet, fully occupied by the Company. PROPERTY MANAGEMENT Industrial Properties. The Company manages all of its existing Industrial Properties in California and Pacific Northwest except for its Hayward, California property where it has retained a local property management firm. Commencing in March of 1997, the Company began direct management of its Hayward, California property. The Company offers industrial leases in the one- to five-year range. Lease terms include, in most cases, annual adjustments based on changes in the consumer price index and from one to three months' free rent. The standard lease also includes some refurbishing and tenant improvement allowance with the amount varying depending upon the length of the lease, the size of the space leased and the use. The Company will seek tenants primarily involved in warehouse, distribution, assembly and light manufacturing activities. Standard lease terms include a stipulated due date for rent payment, late charges (typically with no grace period), no offset or withholding provisions, security deposit clause, as well as many other provisions considered favorable to the landlord. Multifamily Properties. The Company currently manages all of its Multifamily Properties in each of its regions. Each of the regions is managed by a Regional Manager who reports directly to the Vice President of Operations -- Apartments. Within each region, each of the Multifamily Properties is operated by a staff of approximately six to seven individuals, including a manager, assistant manager and/or leasing agents, and a maintenance and apartment preparation staff. The Company locates prospective tenants for its Multifamily Properties primarily by advertising in magazines listing available rentals and by using firms that assist tenants in locating apartments. The Company also does magazine and direct mail advertising. Policies and procedures utilized at the property sites, including procedures concerning lease contracts, on-site marketing, credit collection standards and eviction standards, follow established federal and state laws. Individual property lease programs are structured to respond to local market conditions. The Company attempts to balance rent increases with high occupancy and low turnover. None of the Multifamily Properties are currently subject to rent control or rent stabilization regulations. However, certain of these properties are subject to restrictions based on tax-exempt loan requirements. Standard lease terms stipulate due dates for rent payments, late charges, no offset or withholding provisions, security deposits and damage reimbursement clauses, as well as many other provisions considered favorable to the property owner. Nonpayment of rent is generally handled at the properties within 15 days from the beginning of the month, with either commencement of collection or eviction proceedings occurring within that time period. EMPLOYEES At December 31, 1996, the Company employed approximately 140 persons, of which 118 were onsite or property related and 22 were executive office employees. COMPETITIVE AND OTHER CONDITIONS Competition. Within its geographic areas of operation, the Company is subject to competition from a variety of investors, including insurance companies, pension funds, corporate and individual real estate developers and investors and other REITs with investment objectives similar to those of the Company. Some of these competitors have more substantial financial resources and longer operating histories than the Company. As an owner of industrial and apartment real estate properties, the Company competes with other owners of similar properties in connection with their financing, sale, lease or other disposition and use. 11 13 Many regions of the United States, including regions in which the Company owns properties, have in the past experienced economic recessions. Factors which have contributed to economic downturns in the Company's markets include downturns in the national economy and reductions and downsizing in the aerospace and defense industries. Adverse changes in general or local economic conditions could result in the inability of some existing tenants to the Company to meet their lease obligations and could adversely affect the Company's ability to attract or retain tenants. Insurance. The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to its Industrial Properties and Multifamily Properties, with policy specifications, insured limits and deductibles customarily carried for similar properties which the Company believes are adequate and appropriate under the circumstances. These are certain types of losses, such as those arising from acts of war, that are not generally insured because they are either uninsurable or not economically insurable. Presently the Company carries earthquake disaster insurance on its California properties which comprise 74% of the Company's total portfolio (as a percentage of real estate assets); however, such insurance may not be available in the future or may only be available at rates that, in the opinion of the Company, are prohibitive. In the event that an uninsured disaster or a loss in excess of insured limits should occur, the Company could suffer a substantial loss, including loss of anticipated future revenues, while remaining obligated on related mortgage indebtedness. The Company believes its properties were constructed in compliance with applicable construction standards in effect at the time of construction. The Company obtained customary title insurance insuring fee title to its properties upon their acquisition. ITEM 2. PROPERTIES Information concerning properties owned by the Company is included under "Item 1. Business." ITEM 3. LEGAL PROCEEDINGS The Company is not presently subject to any litigation nor is any litigation threatened against the Company, other than routine litigation arising in the ordinary course of business. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 14 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company has traded on the New York Stock Exchange ("NYSE") since October 29, 1996 under the symbol "PAG". Prior to that date and since its formation, the Company traded on the American Stock Exchange ("ASE"). The following table sets forth the high and low closing prices for the common stock on the respective exchange.
CASH RECORD DATE HIGH LOW DISTRIBUTION DATE PAID ---- --- ------------ ----------------- ------------------ 1994 1st Quarter............... $18-1/2 $17-1/4 .18(1) April 15, 1994 May 13, 1994 2nd Quarter............... 17-7/8 16-1/8 .39(1) July 15, 1994 August 15, 1994 3rd Quarter............... 17-1/2 15-1/2 .39(1) October 7, 1994 November 15, 1994 4th Quarter............... 16-7/8 12-3/4 .39(2) January 16, 1995 February 15, 1995 1995 1st Quarter............... 16-1/4 14-5/8 .39(2) April 14, 1995 May 12, 1995 2nd Quarter............... 16-1/4 14-1/2 .39(2) July 14, 1995 August 15, 1995 3rd Quarter............... 16-5/8 14-5/8 .39(2) October 16, 1995 November 14, 1995 4th Quarter............... 16-3/4 13 .40(3) January 2, 1996 January 10, 1996 1996 1st Quarter............... 18-3/4 16-1/8 .40(3) April 2, 1996 April 12, 1996 2nd Quarter............... 18-3/8 16-1/8 .40(3) July 1, 1996 July 12, 1996 3rd Quarter............... 18-3/4 16-1/8 .40(3) October 2, 1996 October 11, 1996 4th Quarter............... 20 18-1/8 .41 January 2, 1997 January 10, 1997
- --------------- (1) 35% of the distributions paid to beneficial owners in 1994 represented a return of capital ($.47 per share). (2) 68% of the distributions paid to beneficial owners in 1995 represented a return of capital ($1.06 per share). (3) 45% of the distributions paid to beneficial owners in 1996 represented a return of capital ($.72 per share). The minimum distribution requirement to maintain REIT status was approximately $2,300,000 for 1995 and $4,758,000 for 1996. A regular quarterly distribution of $.41 per share was paid January 10, 1997. The closing price of the common stock on the New York Stock Exchange on March 3, 1997 was $22.625 per share. As of March 3, 1997, there were approximately 3,800 beneficial owners of common stock. Future distributions by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds From Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. Although the Company intends to continue to make quarterly distributions to its stockholders, no assurances can be given as to the amount of distributions, if any, made in the future. The statement on the face of this Annual Report on Form 10-K regarding the aggregate market value of voting stock of the Company held by non-affiliates of the Company is based on the assumption that all directors and officers of the Company were, for purposes of this calculation only (and not for any other purpose), affiliates of the Company. 13 15 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following table and footnotes set forth selected historical financial information for the Company and for the Predecessor Multifamily and Industrial Operations (See Part I -- "Summary Financial Information") prior to the Company's Offerings. The historical information for the Company reflects the actual operations of the Company from February 18, 1994, the date of the Company's initial public offerings, and the combined historical operating data of the Predecessor Multifamily and Industrial Operations prior to that date.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ COMPANY PREDECESSOR ---------------------------------------- --------------------- 1996 1995 1994(A) 1993 1992 ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) OPERATING DATA Rental income: Multifamily properties.............................. $ 29,104 $ 24,898 $ 18,937 $ 15,150 $ 10,768 Industrial properties............................... 20,783 12,193 7,207 1,002 885 -------- -------- -------- -------- -------- 49,887 37,091 26,144 16,152 11,653 -------- -------- -------- -------- -------- Expenses: Rental property expenses: Multifamily properties.............................. 11,554 10,215 8,835 7,261 4,639 Industrial properties............................... 5,308 2,567 1,541 245 206 -------- -------- -------- -------- -------- 16,862 12,782 10,376 7,506 4,845 Depreciation.......................................... 8,236 6,081 3,721 2,634 2,282 Interest (including amortization of debenture discount and financing costs)................................ 18,411 14,066 8,164 6,028 5,398 General and administrative............................ 2,974 2,423 1,725 1,538 1,394 Nonrecurring loss on exchange of debentures for common stock............................................... 3,596 -- -- -- -- Minority interest in losses of combined partnerships........................................ -- -- -- (492) (646) Reduction in carrying value of Predecessor properties.......................................... -- -- -- 10,974 -- -------- -------- -------- -------- -------- 50,079 35,352 23,986 28,188 13,273 -------- -------- -------- -------- -------- Income (loss) before gain on sale of properties and extraordinary item.................................. (192) 1,739 2,158 (12,036) (1,620) Gain on sale of real estate......................... 74 6,664 -- -- -- Extraordinary item.................................. -- -- (2,990) -- -- -------- -------- -------- -------- -------- Net income (loss)..................................... $ (118) $ 8,403 $ (832) $(12,036) $ (1,620) ======== ======== ======== ======== ======== Net income (loss) per common share.................... $ (.02) $ 1.74 $ (.07)(b) -- -- Weighted average common shares outstanding............ 6,340,748 4,830,723 4,273,337(b) -- -- BALANCE SHEET DATA Real estate, net of accumulated depreciation: Multifamily properties.............................. $ 182,138 $ 175,879 $ 113,706 $ 90,375 $ 88,519 Industrial properties............................... 170,729 102,813 79,751 7,323 7,395 -------- -------- -------- -------- -------- Total real estate..................................... 352,867 278,692 193,457 97,698 95,914 Total assets.......................................... 364,640 288,591 202,519 99,984 100,186 Senior debt........................................... 197,401 149,847 69,480 88,740 78,613 Convertible subordinated debentures................... 14,227(d) 55,659 55,526 -- -- Total equity.......................................... 139,822 71,980 70,860 9,501 23,200 PROPERTY DATA (end of period) Total industrial properties........................... 21 10 9 3 3 Industrial leasable area (sq. ft.).................... 4,573 2,902 2,426 185 185 Industrial leasable area leased....................... 98% 96% 97% 95% 97% Total multifamily properties.......................... 22 21 13 10 9 Total apartment units................................. 4,110 3,945 3,292 2,654 2,398 Apartment units occupied.............................. 93% 92% 93% 92% 93% SUPPLEMENTAL DATA Funds From Operations (c) -- New Definition........... $ 11,640 $ 7,820 $ 5,879 $ 1,572 $ 662 Cash Flow Information: Operating activities................................ 8,523 7,138 3,950 1,307 (348) Investing activities................................ (81,918) (84,480) (99,504) (15,323) (27,660) Financing activities................................ 72,071 76,674 98,649 13,798 28,318
14 16 - --------------- (a) Includes the combined historical operations of the Company (from February 18 through December 31, 1994) and the Predecessor's Multifamily and Industrial Operations (prior to February 18, 1994). See Part IV -- Financial Statements. (b) Per share data for 1994 was based on the weighted average common shares outstanding for the period February 18, 1994 (the closing date of the Company's initial public offering) through December 31, 1994 and the Company's net loss for that period. (c) Funds From Operations ("FFO") is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to mean net income, computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures (the "Old Definition"). Management generally considers FFO to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as an indicator of the Company's operating performance and is not indicative of cash available to fund all cash flow needs. FFO does not measure whether cash flow is sufficient to fund all of the Company's cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. On March 3, 1995, NAREIT modified the calculation of FFO to, among other things, eliminate amortization of deferred financing costs and depreciation of non-real estate assets as items added back to net income (the "New Definition") when computing FFO. (d) Reduction in principal balance resulting from the exchange of convertible debentures for common stock pursuant to the Company's Exchange Offer (see Item 14(a) 1 -- Financial Statements). Below is the calculation of FFO consistent with the methodology historically used by the Company reconciled to the revised calculation adopted by NAREIT which the Company adopted as of January 1, 1996:
YEARS ENDED DECEMBER 31, ------------------------------------------------------- COMPANY PREDECESSOR ------------------- -------------------- 1996 1995 1994(1) 1993 1992 ------- ------- ------ -------- ------- (DOLLARS IN THOUSANDS) Net income (loss)........................ $ (118) $ 8,403 $ (832) (12,036) (1,620) Depreciation and amortization............ 9,447 7,090 4,344 2,719 2,325 Gain on sale of properties............... (74) (6,664) -- -- -- Nonrecurring loss on exchange of debentures for common stock............ 3,596 -- -- -- -- Reduction in carrying value of Predecessor's properties............... -- -- -- 10,974 -- Extraordinary item....................... -- -- 2,990 -- -- ------- ------- ------ -------- ------- Funds From Operations -- Old Definition............................. 12,851 8,829 6,502 1,657 705 Amortization Debenture discount and costs........... (570) (552) (464) -- -- Costs related to financing assumed from Predecessor and line of credit costs............................... (379) (302) (159) (85) (43) Long-term financing costs.............. (262) (155) ------- ------- ------ -------- ------- Funds From Operations -- New Definition............................. $11,640 $ 7,820 $5,879 $ 1,572 $ 662 ======= ======= ====== ======== =======
15 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with "Selected Financial Data" and the financial statements and notes thereto of the Company and the Predecessor Multifamily and Industrial Operations appearing elsewhere in this report. Such financial statements and information have been prepared to reflect the Company's financial condition as of December 31, 1996 and 1995 together with the results of operations and its cash flows for the years ended December 31, 1996 and 1995 and the Company's initial period of operations and the combined historical financial statements of the Predecessor Multifamily and Industrial Operations prior to the consummation of the Offerings. The combined historical financial statements are comprised of the Company and the operations, assets and liabilities of certain properties which prior to the Offerings were owned and operated by Realty. These properties were acquired by the Company in February 1994 in connection with consummation of the Offerings and related formation transactions. The comparability of the financial information discussed below is impacted by the following: the acquisition of twelve industrial properties containing approximately 2,054,000 leasable square feet, the acquisition of one multifamily property containing 165 units, and the disposition of 14 acres of land and a 55,656 square foot industrial building located in the Baldwin Industrial Park project during 1996; and the acquisition of twelve multifamily properties containing 1,736 apartment units, the acquisition of one industrial property containing approximately 476,000 square feet, and the disposition of four multifamily properties consisting of 1,085 apartment units during 1995; the Offerings and other acquisition transactions during 1994, including the acquisition of three multifamily properties containing 638 apartment units and three industrial properties containing 2,241,000 square feet. RESULTS OF OPERATIONS For comparison purposes, the Company's operating results for the period February 18, 1994 through December 31, 1994 have been added to the operating results of the Predecessor Multifamily and Industrial Operations for the period January 1, 1994 through February 17, 1994 to present the results of operations for the year ended December 31, 1994 used in the following comparisons. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995. Multifamily rental income increased by $4,206,000 or 17%, from $24,898,000 in 1995 to $29,104,000 in 1996. This increase was primarily attributable to the acquisition of a 165 unit apartment project in 1996 and the acquisition of twelve multifamily properties containing 1,736 apartment units in 1995 offset by the disposition of four multifamily properties containing 1,085 apartment units during the last quarter of 1995. Industrial rental income increased by $8,590,000 or 70%, from $12,193,000 in 1995 to $20,783,000 in 1996. This increase was primarily attributable to the acquisition of twelve industrial parks during 1996 containing approximately 2,054,000 square feet of space. As a result of these changes total revenues increased by $12,796,000 or 32%, from $37,091,000 in 1995 to $49,887,000 in 1996. Multifamily rental income for the year ended December 31, 1996 totaled $29,104,000 and included $10,558,000 related to the 13 multifamily properties acquired during 1995 and 1996. Industrial rental income for the year ended December 31, 1996 totaled $20,783,000 and included $5,647,000 related to twelve industrial properties acquired during 1996. Multifamily rental property expenses increased by $1,339,000, or 13%, from $10,215,000 in 1995 to $11,554,000 in 1996. Industrial rental property expenses increased by $2,741,000, or 107%, from $2,567,000 in 1995 to $5,308,000 in 1996. These increases were primarily attributable to the acquisitions described above in rental income. 16 18 Multifamily rental property expenses for the year ended December 31, 1996 totaled $11,554,000 and included $4,422,000 related to the 13 multifamily properties acquired during 1996 and 1995. Industrial rental property expenses for the year ended December 31, 1996 totaled $5,308,000 and included $1,630,000 related to the twelve industrial properties acquired during 1996. Depreciation increased by $2,155,000, or 35%, from $6,081,000 in 1995 to $8,236,000 in 1996. The increase relates primarily to the acquisition of the thirteen multifamily properties in 1996 and 1995, the twelve industrial properties acquired in 1996, and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) increased by $4,355,000, or 31%, from $14,066,000 in 1995 to $18,421,000 in 1996. This increase was attributable to increased borrowings outstanding during 1996, as compared to 1995, pursuant to new borrowings of $55,517,000 relating to the acquisition of multifamily properties and one industrial park during mid-1996 and the last half of 1996. Interest resulting from the amortization of financing costs increased by $212,000 or 21% from $1,009,000 in 1995 to $1,221,000 in 1996. This increase is attributable primarily to amortization of loan fees associated with borrowings used to finance acquisitions completed during late 1995 and 1996. General and administrative expenses increased by $551,000, or 23%, from $2,423,000 in 1995 to $2,974,000 in 1996. This increase was primarily attributable to personnel increases related to the 1995 and 1996 acquisitions. For the year ended December 31, 1996, the Company incurred a net loss of $118,000 compared with net income of $8,403,000 in 1995. The results in each year were impacted by non-recurring items. In 1996, a $3,596,000 non-recurring loss on the exchange of Debentures was incurred (see Part I, Item 1) while in 1995 a $6,664,000 gain on sale of real estate occurred from the sale of the Texas apartment portfolio. In December of 1996, the Company exchanged approximately $42,100,000 in aggregate principal amount of its Debentures for 2,440,002 shares of the Company's Common Stock. As a result of this exchange, interest expense of approximately $3,523,000 which was incurred on the debentures in 1996 will not be incurred in 1997 and the average outstanding shares in 1997 will be increased by 2,440,002 shares. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31, 1994. Multifamily rental income increased by $5,961,000 or 31%, from $18,937,000 in 1994 to $24,898,000 in 1995. This increase was primarily attributable to the acquisition of twelve multifamily properties containing 1,736 apartment units in 1995 offset by the disposition of four multifamily properties containing 1,085 apartment units during the last quarter of 1995. Industrial rental income increased by $4,986,000 or 69%, from $7,207,000 in 1994 to $12,193,000 in 1995. This increase was primarily attributable to the acquisition of three industrial parks during the last half of 1994 containing approximately 1,011,000 square feet of space. As a result of these changes, total revenues increased by $10,947,000, or 42% from $26,144,000 in 1994 to $37,091,000 in 1995. Multifamily rental income for the year ended December 31, 1995 totaled $24,898,000 and included $3,990,000 related to 12 multifamily properties acquired during 1995 and $5,987,000 related to four multifamily properties sold during the last quarter of 1995. Industrial rental income for the year ended December 31, 1995 totaled $12,193,000 and included $192,000 related to industrial properties acquired during 1995. Multifamily rental property expenses increased by $1,380,000, or 16%, from $8,835,000 in 1994 to $10,215,000 in 1995. This increase was primarily attributable to the acquisition of twelve multifamily properties containing 1,736 apartment units in 1995. Industrial rental property expenses increased by $1,026,000, or 67%, from $1,541,000 in 1994 to $2,567,000 in 1995. This increase was primarily attributable to the acquisition of three industrial parks during the last half of 1994. 17 19 Multifamily rental property expenses for the year ended December 31, 1995 totaled $10,215,000 and included $1,779,000 related to 12 multifamily properties acquired during 1995 and $2,403,000 related to the four multifamily properties sold during the last quarter of 1995. Industrial rental property expenses for the year ended December 31, 1995 totaled $2,567,000 and included $25,000 related to the industrial properties acquired during 1995. Depreciation increased by $2,360,000, or 63%, from $3,721,000 in 1994 to $6,081,000 in 1995 as a result of the acquisition of the twelve multifamily properties in 1995, the three industrial properties acquired in late 1994, and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) increased by $5,902,000, or 72%, from $8,164,000 in 1994 to $14,066,000 in 1995. This increase was attributable to increased borrowings outstanding during 1995, as compared to 1994, pursuant to new borrowings of $55,517,000 relating to the acquisition of twelve multifamily properties and one industrial park during the last half of 1995 and $24,850,000 of tax-exempt mortgage indebtedness assumed with the Company's recent acquisitions. Interest resulting from the amortization of financing costs increased by $386,000 or 62% from $623,000 in 1994 to $1,009,000 in 1995. This increase is attributable primarily to the additional amortization relating to the convertible subordinated debentures issued on February 18, 1994 and accordingly being outstanding for the entire year in 1995 and amortization of loan fees associated with borrowings used to finance acquisitions completed during late 1994 and 1995. General and administrative expenses increased by $698,000, or 40%, from $1,725,000 in 1994 to $2,423,000 in 1995. This increase was primarily attributable to personnel increases related to the 1994 and 1995 acquisitions made during the second half of each year, respectively. For the year ended December 31, 1995, the Company incurred net income of $8,403,000 compared with a net loss of $832,000 in 1994. These improved results are attributable to the foregoing, and are offset partially by a $6,664,000 net gain from the sale of the Texas apartment portfolio (see Part I, Item 1) in 1995 and a $2,990,000 loss from the extinguishment of debt in 1994 relating to the acquisition of certain of the properties from Realty. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER 31, 1993. Multifamily rental income increased by $3,787,000, or 25%, from $15,150,000 in 1993 to $18,937,000 in 1994. The increase was primarily attributable to the acquisition of three multifamily properties containing 638 apartment units in 1994. Industrial rental income increased by $6,205,000, or 619%, from $1,002,000 in 1993 to $7,207,000 in 1994. This increase was primarily attributable to the acquisition of six industrial parks containing approximately 2,241,000 square feet of space. As a result of these changes, total revenues increased by $9,992,000, or 62% from $16,152,000 in 1993 to $26,144,000 in 1994. Multifamily rental income for the year ended December 31, 1994 totaled $18,937,000 and included $2,389,000 related to three multifamily properties acquired during 1994. Industrial rental income for the year ended December 31, 1994 totaled $7,207,000 and included $4,912,000 related to six industrial properties acquired during 1994. Multifamily rental property expenses increased by $1,574,000, or 22%, from $7,261,000 in 1993 to $8,835,000 in 1994. This increase was primarily attributable to the acquisition of three multifamily properties in 1994. Industrial rental expenses increased by $1,296,000, or 529%, from $245,000 in 1993 to $1,541,000 in 1994. This increase was primarily attributable to the acquisition of six industrial parks. Multifamily rental property expenses for the year ended December 31, 1994 totaled $8,835,000 and included $1,250,000 related to the multifamily properties acquired during 1994. Industrial rental property expenses for the year ended December 31, 1994 totaled $1,541,000 and included $909,000 related to the industrial properties acquired during 1994. 18 20 Depreciation increased by $1,087,000, or 41%, from $2,634,000 in 1993 to $3,721,000 in 1994 as a result of the acquisition of three multifamily properties and six industrial properties in 1994, and capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs increased by $2,136,000, or 35%, from $6,028,000 in 1993 to $8,164,000 in 1994. This increase was attributable to increased borrowings outstanding during 1994, as compared to 1993, resulting from significant changes in the predecessor Multifamily and Industrial Operations and the Company's debt structure. Such changes in 1994 included the issuance of $56.5 million principal amount of convertible subordinated debentures (net of debenture discount), borrowings of $39,100,000 under the Company's new variable rate revolving credit facility, new mortgage notes of $15,200,000 relating to the acquisition of one multifamily property and two industrial parks during 1994, offset by the repayment of $73,300,000 of the Predecessor's indebtedness using proceeds from the Offerings. In addition, the increase in interest expense was attributable to a higher borrowing rate in the Company's variable rate credit facility during 1994 as compared to 1993, which resulted from overall increases in the prime rate and LIBOR rates. Interest resulting from the amortization of financing costs increased by $538,000, or 632%, from $885,000 in 1993 to $623,000 related primarily to the amortization of debenture discount and costs, in 1994 associated with the debentures issued upon Company's initial public offering in February 1994. General and administrative expenses increased by $187,000, or 12%, from $1,538,000 in 1993 to $1,725,000 in 1994. This was primarily attributable to the growth related to the 1994 acquisitions. For the year ended December 31, 1994, the Company incurred a net loss of $832,000, compared with a net loss of $12,036,000 in 1993. These improved results are attributable to the foregoing, the nonrecurring loss of $10,974,000 recognized in 1993 by Realty as a result of the formation transactions which reduced the carrying value of the Predecessor's properties, and are partially offset by a $2,990,000 extraordinary loss from the extinguishment of debt in 1994. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company had $1,523,000 of cash to meet its immediate short-term liquidity requirements. Future short-term liquidity requirements are anticipated to be met through the net cash flow from operations, existing working capital and, if necessary, funding from the Company's revolving line of credit. The Company has a secured revolving line of credit for a maximum amount of $65,000,000 which expires in July, 1998. As of December 31, 1996, the Company had borrowed $13,686,000 under the revolving line of credit. During 1996, the Company invested $89,613,000 in real estate assets. Proceeds for these investments were generated primarily by: a public offering in May of 1996 which generated net proceeds, including exercise of the over-allotment option, of approximately $36,600,000; net proceeds from new long-term secured real estate financing of approximately $55,600,000; and proceeds from the sale of a land parcel and an industrial building for $7,695,000. On December 26, 1996, the Company exchanged 2,440,002 shares of its Common Stock for approximately $42,100,000 in aggregate principal amount of its Convertible Subordinated Debentures. $14,400,000 in principal amount of the Debentures remains outstanding at December 31, 1996. On December 31, 1996, the Company entered into an agreement to issue 1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Shares") to Five Arrows Realty Securities L.L.C. at a price of $18.50 per share. The Company is obligated to issue the Class A Preferred Shares over the course of 1997 in a maximum of three separate issuances, the timing of which may be specified by the Company, provided that the Company will be charged with certain availability fees if all of the Class A Preferred Shares are not issued before July 1, 1997. In December 1996, the Company entered into a refunding agreement to refinance all of its existing tax-exempt mortgage debt totaling $24.9 million. As part of the refinancing, the Company established a pool agreement with the Federal National Mortgage Association ("FNMA") to provide 30-year credit enhancement on the tax-exempt projects. The effective interest rate on the currently outstanding bonds that are part of 19 21 such pool agreement (other than the bonds related to Rancho Santa Margarita project), after giving effect to credit enhancement and other costs, has been fixed at 6.3% for 10 years. The Company intends to acquire additional properties and may seek to fund these acquisitions through proceeds received from a combination of its secured line of credit, Class A Preferred Shares, equity offerings or debt financings. The Company anticipates that adequate cash will be available to fund its operating and administrative expenses, continuing debt service obligations and the payment of dividends in accordance with REIT requirements in the foreseeable future. Cash provided by operating activities increased from $3,950,000 for the year ended December 31, 1994 to $7,138,000 for the year ended December 31, 1995 and $8,523,000 for the year ended December 31, 1996. The primary reason for these increases related to the additional rental income contributed by properties acquired during 1994, 1995 and 1996. Cash used in investing activities decreased from $99,504,000 for the year ended December 31, 1994 to $84,480,000 for the year ended December 31, 1995 and then decreased to $81,918,000 for the year ended December 31, 1996 primarily as a result of acquisitions which increased from $99,504,000 in 1994 to $113,663,000 in 1995, and then decreased to $89,613,000 in 1996 net of $29,183,000 of proceeds from the sale of the Texas apartment portfolio in 1995 and $7,695,000 from the sale of land and an industrial building to an existing tenant in 1996. Cash provided by financing activities decreased from $98,649,000 for the year ended December 31, 1994 to $76,674,000 for the year ended December 31, 1995 and then decreased to $72,071,000 for the year ended December 31, 1996 primarily as a result of reduced borrowing activity associated with acquisitions in 1996 compared to 1995 and 1994, and the issuance of common stock in 1996. In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its shareholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to shareholders and for payment of other expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. SUBSEQUENT EVENTS Subsequent to December 31, 1996, the Company completed a public offering of 2,000,000 shares of Common Stock (2,300,000 shares including the exercise of the over-allotment option) which raised net proceeds to the Company of approximately $44,400,000. The proceeds of this offering were utilized to acquire four separate industrial properties totaling approximately 1,094,000 leasable square feet and to repay a portion of the Company's revolving line of credit. CAPITAL EXPENDITURES The Company capitalizes the direct and indirect cost of expenditures for the acquisition or rehabilitation of its multifamily and industrial properties. The Company also capitalizes the direct cost of capital expenditures which are considered revenue producing ("Revenue Producing") and other expenditures which increase the service life of the Company's properties ("Restorations"). Revenue Producing expenditures are improvements which significantly increase the revenue-producing capability of the asset including tenant improvements at industrial properties, installation of washers and dryers at multifamily properties, and other value-added additions. Rehabilitation expenditures are costs the Company determines are necessary during the due diligence phase immediately preceding the acquisition of a property. At newly acquired properties, the Company often finds it necessary to upgrade the physical appearance of such properties and to complete the maintenance and repair work which had been deferred by prior owners. 20 22 Restorations are nonrevenue-producing capital expenditures which recur on a regular basis, and have estimated useful lives of more than one year. Make ready costs incurred after a property's rehabilitation, such as carpet and appliance replacement, interior painting and window coverings are expensed. The following table summarizes capital expenditures incurred by the Company (excluding costs incurred related to the Texas multifamily portfolio sold in 1995) for the years ended December 31, 1996 and 1995 (all amounts are in thousands):
1996 1995 ------- -------- Multifamily Acquisitions.................................. $ 7,915 $ 85,726 Development................................... 469 -- Revenue-Producing............................. 71 272 Rehabilitation................................ 1,895 1,514 Restorations.................................. 33 58 ------- -------- $10,383 $ 87,570 ======= ======== Industrial Acquisitions.................................. $75,336 $ 24,591 Development................................... 538 -- Revenue-Producing............................. 1,818 865 Rehabilitation................................ 1,538 162 Restorations.................................. -- 99 ------- -------- 79,230 25,717 ------- -------- $89,613 $113,287 ======= ========
The Company anticipates incurring similar capital expenditures in 1997. The Company expects such expenditures will be funded from available cash balances, revolving lines of credit, equity offerings, issuance of Class A Preferred Shares, and proceeds from refinancing. ECONOMIC CONDITIONS All of the Company's leases on its Multifamily Properties are for a period of one year or less. Substantially all of the Company's leases on its Industrial Properties, which have terms generally ranging from one to five years, contain provisions providing for rental increases based either on fixed increases or on increases in the Consumer Price Index. Management believes the nature of its multifamily leases and the provisions contained in its industrial leases that provide for increases in the tenants' base rent tend to mitigate the adverse impact of inflation. Many regions of the United States, including regions in which the Company owns properties, have in the past experienced an economic recession. Adverse changes in general or local economic conditions could result in the inability of some existing tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements for a listing of the financial statements and supplementary data filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 21 23 PART III ITEM 10. DIRECTORS AND MANAGEMENT. The directors, executive officers and key employees of the Company are:
NAME AGE POSITION - ------------------------ --- ------------------------------------------ Glenn L. Carpenter 54 Chairman of the Board, President, Chief Executive Officer and Director Donald G. Herrman 40 Executive Vice President, Chief Financial Officer and Secretary Lonnie P. Nadal 41 Senior Vice President of Acquisitions Robert A. Dewey 37 Vice President of Industrial Operations Kimberly G. Brown 41 Vice President of Apartment Operations Angela M. Wixted 42 Treasurer/Controller Stewart W. Bowie 72 Director Peter L. Eppinga 55 Director John F. Kooken 65 Director Royce B. McKinley 76 Director Robert E. Morgan 77 Director Keith W. Renken 61 Director James E. Quigley, 3rd 40 Director
The following is a biographical summary of experience for the executive officers, directors and key employees of the Company: STEWART W. BOWIE has served as a Director of the Company since 1994. Mr. Bowie is retired, having previously served as Chief Executive Officer of SDC, Inc., a real estate development firm, and was Chairman of the California Business Properties Association. Mr. Bowie currently serves on the Board of Oak Grove Oil Company. PETER L. EPPINGA has served as a Director of the Company since 1994. Mr. Eppinga is a business consultant and practicing attorney specializing in corporate securities and real estate. He previously served as President of Laguna Hills Properties, a company established by Sears Savings Bank to deal with certain non-performing loans and as Senior Vice President of Sears Savings Bank and as Chairman of Sears Savings Bank's Problem Loan Committee. Mr. Eppinga serves on the board of the Alzheimer's Association, San Francisco. JOHN F. KOOKEN has served as a Director of the Company since 1994. Mr. Kooken is retired, having previously served as Vice Chairman from 1987 to 1992 and as Chief Financial Officer from 1984 until 1992 of Security Pacific Corporation. Mr. Kooken currently serves on the Boards of Directors of US Facilities Corp., Glendale Federal Bank, Southern California Healthcare Systems and Huntington Memorial Hospital. ROYCE B. MCKINLEY has served as a Director of the Company since 1994. Mr. McKinley is retired, having previously served as Chairman and Chief Executive Officer of Realty from 1989 to 1991, as President and Chief Executive Officer of Realty from 1979 to 1989 and as director of Realty and Santa Anita Operating Company from 1979 to 1993. Mr. McKinley is a past president of NAREIT. ROBERT E. MORGAN has served as a Director of the Company since 1994. Mr. Morgan is retired, having previously served as President and Chief Executive Officer of Coldwell Banker First Newport Corporation, a real estate investment trust, and as President of Coldwell Banker Real Estate Finance Services. Mr. Morgan currently serves on the Boards of Directors of Meridian Point Realty Trust 83 and Bixby Ranch Company. JAMES E. QUIGLEY, III began serving as a Director of the Company on January 22, 1997. Mr. Quigley has been with Rothschild Realty Inc. since 1988 and a Senior Vice President and Treasurer of Rothschild Realty Inc. since 1990. Mr. Quigley has been serving on the Board of Directors of Charter Oak, a subsidiary 22 24 of Rothschild Realty Inc. which owns and operates a portfolio of factory outlet centers, since 1989. Mr. Quigley is a licensed Certified Public Accountant in the state of New York. KEITH W. RENKEN has served as a Director of the Company since 1994. Mr. Renken is the retired Managing Partner of the Los Angeles office of Deloitte & Touche and was with the firm from 1959 through 1992. He is currently teaching at the University of Southern California's School of Accounting in the "Executive in Residence" program. Mr. Renken serves on the Board of Directors of Coast Federal Bank and several other privately-owned companies. GLENN L. CARPENTER has been Chairman of the Board since 1996 and President, Chief Executive Officer and a director of the Company since its formation in 1993. Mr. Carpenter served as Chief Executive Officer of Santa Anita Realty Enterprises, Inc. ("Realty") from January 1992 until February 1994, and as President of Realty from December 1989 until February 1994. He was Chief Operating Officer of Realty from 1989 until 1991, and was Executive Vice President of Realty from 1988 until 1989. From 1986 until 1988, Mr. Carpenter served as Senior Vice President-Operations of Realty, and has held a number of other positions with Realty since 1979. Mr. Carpenter has been a member of the National Association of Real Estate Investment Trusts ("NAREIT") since 1980 and served on NAREIT's board of governors. DONALD G. HERRMAN has been Executive Vice President since May 1995, Senior Vice President, Secretary, and Chief Financial Officer of the Company since its formation in 1993, and served as Treasurer from February 1994 to October 1994. Mr. Herrman served as Vice President-Finance and Secretary of Realty from January 1992 until February 1994, and as Realty's Treasurer from 1989 until February 1994. From 1985 until 1990, Mr. Herrman served as Controller of Realty. Mr. Herrman is a certified public accountant in California. LONNIE P. NADAL has been Senor Vice President of Acquisitions since 1996 and Vice President of Acquisitions since the Company's formation in 1993. Mr. Nadal served as Vice President-Acquisitions of Realty from January 1992 to February 1994, and as a Director of Operations from August 1991 until February 1994. From 1983 until 1991, Mr. Nadal was a partner of Lincoln Property Company, a development and property management company. ROBERT A. DEWEY has served as Vice President of Industrial Operations since January 1995, and Vice President of Operations of the Company since its formation in 1993. Mr. Dewey served as Director of Asset Management for Realty from 1992 until February 1994. From 1991 to 1992, he was oversight manager of the Newport Beach office of the Resolution Trust Corporation. From 1988 to 1990, Mr. Dewey was a Commercial Manager for a development company. KIMBERLY G. BROWN has served as Vice President of Apartment Operations since January 1996. Ms. Brown served as Director of Apartment Operations and Regional Manager for the Pacific Northwest apartment communities owned by the Company from August 1993 to December 1995. From 1991 to August of 1993, Ms. Brown served as a district manager for Lexford Properties, Irving Texas. ANGELA M. WIXTED has served as Treasurer and Controller since October 1994. Ms. Wixted served as a financial consultant for various clients from 1993 to 1994. From 1992 to 1993, Ms. Wixted was Controller for O'Donnell Property Services. From 1986 to 1992, Ms. Wixted served as CFO/Controller of SDC Investments, Inc. Ms. Wixted is a certified public accountant in California. The Board of Directors has created and delegated certain authority to its Executive Committee, Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee as follows: Executive Committee. The Executive Committee consists of Messrs. McKinley, Eppinga, Bowie, Quigley and Kooken. The Executive Committee has the authority to perform all functions of the full Board, subject to certain limitations prescribed by the Board and by Maryland law, including approval of all real estate investments. The Executive Committee held six meetings during the year ended December 31, 1996. Audit Committee. The Audit Committee consists of Messrs. Renken, Kooken and Morgan. The Audit Committee performs numerous functions, including review of the annual financial statements with both management and the independent auditors. The Audit Committee also recommends the engagement of the 23 25 independent accounting firm and meets with the independent accountants regarding the scope and conduct of the annual audit. In addition, the Committee may inquire about and discuss policies and procedures with respect to principles of business conduct, financial and accounting controls, compliance with the Foreign Corrupt Practices Act of 1977, areas of special concern and other related matters. The Audit Committee met three times during the year ended December 31, 1996. Compensation Committee. The Compensation Committee consists of Messrs. Morgan, McKinley and Renken. The Compensation Committee reviews the performance and effectiveness of the Chief Executive Officer and recommends an annual compensation level for the Chief Executive Officer to the Board of Directors. The Committee also sets the compensation level of all other officers, approves all grants of stock options and restricted stock and administers the Company's stock option and other employee benefit programs and plans. The Compensation Committee met two times during the year ended December 31, 1996. Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee consists of Messrs. Bowie, Eppinga, Quigley and Morgan. The Nominating and Corporate Governance Committee reviews governance issues and makes recommendations to the Board for committee assignments and chairmanships of the committees. The Nominating Committee also considers candidates for appointment to the Board and other such duties delegated to it. The Nominating Committee met two times during the year ended December 31, 1996. During the year ended December 31, 1996, all directors attended at least 75%, in the aggregate, of the meetings of the Board and Committees of which they were members during the periods they were members. During the past year, the Board of Directors met eight times. COMPENSATION OF DIRECTORS The Company pays its directors who are not officers of the Company fees for their services as directors. Directors receive annual compensation of $12,000 plus a fee of $750 ($1,000 for the Chairman of each meeting) for attendance (in person or by telephone) at each meeting of the Board of Directors and committee meetings. Officers of The Company who are directors are not paid director fees. Each director of the Company who is not otherwise an employee of the Company or any of its subsidiaries or affiliates, on each December 31, commencing December 31, 1995, automatically receives an annual grant of options to purchase 500 shares of common stock at an exercise price equal to 100% of the fair market value of the Common Shares on the date of grant of such option. Non-employee directors received at the closing of the Company's initial public offering options to purchase 2,500 common shares at an exercise price equal to the fair market value of the common shares on the date of grant. Mr. Stewart Bowie, upon joining the Board of Directors in June 1994, received an initial grant of options to purchase 2,500 common shares at an exercise price equal to 100% of the fair market value of the common shares as of the date he joined the Board. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and officers, and persons who own more than ten percent (10%) of a registered class of its equity securities, to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Such officers, directors and beneficial owners are also required by Securities and Exchange Commission rules and regulations to furnish the Company with copies of all Section 16(a) forms they file. The Company is aware that the following directors tendered late reports required by Section 16(a): Mr. Stewart Bowie filed three delinquent Form 4 reports regarding three transactions; Mr. Peter Eppinga filed one delinquent Form 4 report regarding two transactions; Mr. Royce McKinley filed one delinquent Form 4 report regarding two transactions; Mr. Robert Morgan filed one delinquent Form 4 report regarding one transaction; and Mr. Keith Renken filed two delinquent Form 4 reports regarding two transactions. All delinquencies were subsequently reported on a Form 5 report, submitted for the year ended December 31, 1996. 24 26 ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION The following table sets forth the annualized base salary the Company paid for 1996 to its Chief Executive Officer and to each of the four most highly compensated officers and key employees of the Company (whose cash compensation exceeded $100,000 on an annualized basis during the year ending December 31, 1996). Prior to February 18, 1994, the Company did not pay any compeNsation to its officers.
LONG-TERM COMPENSATION ------------------------------------- ANNUALIZED COMPENSATION(1) AWARDS/ RESTRICTED ALL -------------------------- OPTIONS STOCK OTHER NAME CAPACITIES YEAR SALARY BONUS GRANTED GRANTED COMPENSATION - ------------------- --------------------------------- ---- -------- -------- ------- ---------- ------------ Glenn L. Carpenter Chairman of the Board, Chief 1996 $300,000 $120,000 3,000 (2) $117,000(3) $6,930(4) Executive Officer and 1995 300,000 86,250 10,000 (2) 613,000 5,085(4) President 1994 280,000 49,000 65,000 (5) 6,750(4) Donald G. Hermann Executive Vice President, 1996 156,000 46,800 2,500 (2) 84,000(3) 4,350(4) Chief Financial Officer and 1995 150,000 37,250 5,000 (2) 215,000 5,085(4) Secretary 1994 145,000 18,125 45,000 (5) 6,308(4) Lonnie P. Nadal Senior Vice President of 1996 135,200 42,000 2,000 (2) 67,000(3) 4,056(4) Acquisitions 1995 130,000 29,750 5,000 (2) 93,000 4,407(4) 1994 125,000 14,100 30,000 (5) 5,505(4) Robert A. Dewey Vice President of Industrial 1996 114,400 33,000 1,000 (2) 33,000(3) 3,432(4) Operations 1995 110,000 17,250 5,000 (2) 59,000 3,729(4) 1994 95,000 11,875 10,000 (5) 4,314(4) Kimberly G. Brown Vice President Apartment 1996 95,000 28,000 1,000 (2) 17,000(3) 2,850(4) Operations 1995 76,275 19,750 7,500 (2) -- -- 1994 50,000 12,500 1,750 (2) -- --
- --------------- (1) The Company provides automobiles and club memberships to certain key employees, including certain officers listed above, the value of which is not included in the table above and which in any case did not exceed the lesser of $50,000 or 10% of the annual salary and bonus of any individual for the year. (2) The amount shown represents the number of shares purchasable upon exercise of an option granted under the Company's 1993 Share Option Plan. The options granted in 1996 were granted effective July 1, 1996 with an exercise price of $16.75 with vesting occurring in equal installments on each of the first five anniversaries of the date of grant. The options granted in 1995 were granted effective December 5, 1995 with an exercise price of $15.00 with vesting occurring in equal installments on each of the first five anniversaries of the date of grant. (3) Restricted Common Stock. The following table sets forth information regarding the restricted common stock issued during 1996 to each of the named officers and key employees (all of which grants were made under the Share Option Plan). RESTRICTED COMMON STOCK GRANTS IN LAST FISCAL YEAR
DATE NUMBER OF NAME SHARES GRANTED SHARES GRANTED VESTING PERIOD -------------------- -------------- -------------- ---------------------------- Glenn L. Carpenter 6/96 7,000 Equally over 7 year period Donald G. Herrman 6/96 5,000 Equally over 7 year period Lonnie P. Nadal 6/96 4,000 Equally over 7 year period Robert A. Dewey 6/96 2,000 Equally over 7 year period Kimberly G. Brown 6/96 1,000 Equally over 7 year period
The shares granted in June of 1996 were issued as performance-based compensation. Distributions will be paid on the shares of restricted common stock issued. (4) The amounts shown are those expensed for financial reporting purposes under the Company's Thrift Plan. See "Thrift Plan" below for a description of such Plan. (5) The amount shown represents the number of shares purchasable upon exercise of an option granted in 1994 under the Company's 1993 Share Option Plan. The options were granted effective immediately prior to the effectiveness of the Company's registration under the Securities Exchange Act of 1934 with an exercise price equal to the initial public offering price of $18.25, with vesting occurring, in the case of Messrs. Carpenter and Herrman, on the date of grant, and in the case of Messrs. Nadal and Dewey, in equal installments on each of the first five anniversaries of the date of grant. 25 27 SHARE OPTION PLAN The Company adopted the 1993 Share Option Plan (the "Share Option Plan") to provide incentives to attract and retain officers and employees (the "Amendment"). On May 8, 1996, the stockholders of the Company approved the amendment of the Share Option Plan to increase the number of shares for which options may be granted from 350,000 shares to 700,000 shares. The Share Option Plan provides for grants of options to purchase a specified number of shares of common stock, awards of restricted common stock, and grants of stock appreciation rights. Under the Share Option Plan the total number of shares available to be granted is 700,000 Common Shares, 45,000 of which have been reserved for awards to non-employee directors. Participants in the Share Option Plan who are officers or any other employees of the Company are selected by the Compensation Committee. Directors of the Company are also eligible to participate, but, in the case of directors who are not also employees, only pursuant to automatic grants under a specified formula set forth in the Share Option Plan. No employee may receive a grant of options for more than 100,000 shares of Common Stock in any calendar year. STOCK OPTIONS. The following table sets forth (i) all individual grants of stock options made by the Company during 1996 to each of the named officers and key employees (all of which grants were made under the Share Option Plan), (ii) the ratio that the number of options granted to each individual bears to the total number of options granted to all employees of the Company, (iii) the exercise price and expiration date of these options, and (iv) the estimated potential realizable values assuming either a 5% or 10% annualized rate of appreciation from the relevant date of grant.
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF # OF TOTAL ANNUAL RATES OF COMMON OPTIONS STOCK PRICE SHARES GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES IN OPTION TERM(1) OPTIONS FISCAL EXERCISE EXPIRATION ------------------- NAME GRANTED(2) YEAR PRICE ($/SH) DATE 5% 10% - ---------------------- ------------ ------------ ------------- ---------- ------- ------- Glenn L. Carpenter.... 3,000 29% $ 16.75 7/1/06 $31,700 $79,900 Donald G. Herrman..... 2,500 24 16.75 7/1/06 26,400 66,600 Lonnie P. Nadal....... 2,000 20 16.75 7/1/06 21,100 53,300 Robert A. Dewey....... 1,000 9 16.75 7/1/06 10,550 26,600 Kimberly G. Brown..... 1,000 9 16.75 7/1/06 10,550 26,600
- --------------- (1) The amounts shown in these columns are based upon assumed rates of appreciation over the option term which are prescribed by applicable SEC regulations. Actual gains, if any, on stock option exercises are dependent on the future performance of the Company's common stock, overall market conditions and the option holder's continued employment through the applicable vesting periods. (2) In each case, the amounts shown relate to option grants made July 1, 1996. 26 28 AGGREGATED OPTIONS EXERCISED IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES The following table sets forth the total number of all outstanding unexercised options held by the named officers and key employees as of the end of 1996. None of the named officers exercised any options during 1996. On December 31, 1996, the fair market value per share of common stock was $19.50.
NUMBER OF COMMON SHARES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(a) ------------------------------- ------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------- ------------ -------------- ------------ -------------- Glenn L. Carpenter....................... 67,000 11,000 $ 90,300 $ 44,300 Donald G. Herrman........................ 46,000 6,500 60,800 24,900 Lonnie P. Nadal.......................... 13,000 24,000 19,500 46,000 Robert A. Dewey.......................... 5,000 11,000 9,500 28,300 Kimberly G. Brown........................ 2,200 8,050 7,600 31,100
- --------------- (a) Market value of underlying securities at December 31, 1996, minus the exercise price of "in-the-money" options. DEFERRED COMPENSATION PLAN Mr. Carpenter received credit under the Deferred Compensation Plan for years of service with Realty. The Company assumed the obligations of Realty and Mr. Carpenter is fully vested. Annualized examples of the benefits, commencing at age 65, are set forth below. The examples assume retirement as of December 31, 1996 after assumed years of service.
YEARS OF SERVICE ------------------------------------------------------------------- SALARY 5 10 15 20 25 30 - -------- ------- ------- ------- ------- ------- ------- $100,000 $20,448 $15,896 $11,345 $ 6,793 $ 2,241 $ 2,241 125,000 25,448 19,646 13,845 8,043 2,241 2,241 150,000 30,448 23,396 16,345 9,293 2,241 2,241 175,000 36,698 29,646 22,595 15,543 8,491 9,741 200,000 42,948 35,896 28,845 21,793 14,741 17,241 225,000 49,198 42,146 35,095 28,043 20,991 24,741 250,000 55,448 48,396 41,345 34,293 27,241 32,241 275,000 61,698 54,646 47,595 40,543 33,491 39,741 300,000 67,948 60,896 53,845 46,793 39,741 47,241 325,000 74,198 67,146 60,095 53,043 45,991 54,741 350,000 80,448 73,396 66,345 59,293 52,241 62,241
RETIREMENT INCOME PLAN The Company has established a defined benefit retirement income plan (the "Retirement Income Plan") that is noncontributory. Benefits are determined regardless of position under a formula applied uniformly to all employees of the Company (except as otherwise required under the Code's "top-heavy" rules relating to "key" employees), and depend upon the employee's length of service, and the employee's highest consecutive five year average earnings up to $150,000 less certain social security benefits. Employees are eligible to participate in the plan after attaining age 21 and completing one year of service. The plan currently provides for 100% vesting of an employee's interest after five years of service, except to the extent faster vesting is required under the Code's "top-heavy" rules. The following table illustrates the estimated annual retirement benefit payable under the Retirement Income Plan at age 65, after reduction for certain social security benefits, for participants with compensation and credited years of service shown. The benefits shown assume retirement at age 65 as of December 31, 1996, 27 29 subject to the maximum annual benefit of $120,000 shown below. This maximum annual amount is actuarially increased to participants who retire after age 65.
YEARS OF SERVICE ------------------------------------------------------------------- SALARY 5 10 15 20 25 30 - -------- ------- ------- ------- ------- ------- ------- $100,000 $ 9,104 $18,208 $27,311 $36,415 $45,519 $55,519 125,000 11,604 23,208 34,811 46,415 58,019 70,519 150,000 14,104 28,208 42,311 56,415 70,519 85,519 175,000 14,104 28,208 42,311 56,415 70,519 85,519 200,000 14,104 28,208 42,311 56,415 70,519 85,519 225,000 14,104 28,208 42,311 56,415 70,519 85,519 250,000 14,104 28,208 42,311 56,415 70,519 85,519 275,000 14,104 28,208 42,311 56,415 70,519 85,519 300,000 14,104 28,208 42,311 56,415 70,519 85,519 325,000 14,104 28,208 42,311 56,415 70,519 85,519 350,000 14,104 28,208 42,311 56,415 70,519 85,519
Participants will receive credit under the Retirement Income Plan for employment by Realty. The officers and their salaries covered under these plans and their years of service for purposes of these plans are as follows:
DEFERRED ANNUAL YEARS OF RETIREMENT COMPENSATION NAME SALARY SERVICE(1) INCOME PLAN AGREEMENT ---------------------------- -------- ----------- ----------- ------------ Mr. Carpenter............... $300,000 25 Yes Yes Mr. Herrman................. 156,000 12 Yes No Mr. Nadal................... 135,200 6 Yes No
- --------------- (1) Includes years of service at Realty. THRIFT PLAN The Company has established a thrift plan under which employees may elect to contribute up to 21% of their annual compensation on a combination before-and-after tax basis, excluding bonuses. Contributions by the employee are matched by the Company at a 75% rate with total matching contributions not exceeding a maximum of 4 1/2% of the contributing employee's annual compensation. Matching contributions are in the form of cash, which is used by the trustee to purchase common shares of the Company. Employee contributions are invested in a fixed income fund, various growth funds, or a combination thereof, according to the employee's choice. The Plan provides for 20% vesting of contributions by the Company for each full year of service, increasing to 100% vesting after five years of service. (See "Compensation" above for the amounts contributed by the Company during 1995 for the benefit of its officers.) EMPLOYMENT CONTRACTS Each of Messrs. Carpenter, Herrman, Nadal and Dewey has an employment contract with the Company for a term of two years (four years in the case of Mr. Carpenter) commencing in February 1995. The contracts provide for annual base compensation, subject to any increases in base compensation recommended by the Compensation Committee and approved by the Board of Directors. Messrs. Carpenter, Herrman, Nadal and Dewey, and the other officers of the Company will also receive incentive compensation in accordance with criteria to be established by the Compensation Committee and approved by the Board of Directors, which the Company expects will be determined primarily on the basis of Funds from Operations growth per common share and in some cases on the basis of division or other performance goals. Each of the employment contracts provides for certain severance payments in the event of death or disability or upon termination by the Company without good cause and provides for certain payments (twice the sum of current annual salary plus 28 30 prior year bonus in the case of Mr. Carpenter and one time the sum of current annual salary plus prior year bonus in all other cases) in the event that employment is terminated following a change in control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information regarding the beneficial ownership of the Common Shares of the Company as of December 31, 1996 by each person known by the Company to be the beneficial owner of more than five percent (5%) of the Company's outstanding common shares, each director of the Company, the officers of the Company, and by all directors and officers as a group. To the Company's knowledge, each person named in the table has sole voting and investment power with respect to all shares shown as beneficially owned by such person, and the address of each person named is the same as the Company's unless otherwise indicated in the accompanying notes.
COMMON SHARES BENEFICIALLY OWNED ----------------------------- BENEFICIAL OWNER AMOUNT PERCENT OF(1) -------------------------------------------------- ------- ------------- Morgan Stanley & Co............................... 635,900(2) 6.5% Investment Counselors of Maryland................. 409,900(3) 4.2 Capital Growth Management, L.P.................... 401,800(4) 4.1 FMR Corporation................................... 380,100(5) 3.8 Glenn L. Carpenter................................ 130,177(6) 1.3 Donald G. Herrman................................. 73,376(7) Lonnie P. Nadal................................... 48,016(8) * Robert A. Dewey................................... 22,198(9) * Angela M. Wixted.................................. 13,740(10) * Kimberly G. Brown................................. 11,424(11) * Royce B. McKinley................................. 17,000(12) * Robert E. Morgan.................................. 30,654(12) * Stewart W. Bowie.................................. 44,800(12)(13) * Peter L. Eppinga.................................. 15,296(12) * John F. Kooken.................................... 12,300(12) * Keith W. Renken................................... 7,500(12) * All officers and directors as a group (12 persons)........................................ 426,481 4.3
- --------------- * Less than 1%. (1) Except as otherwise stated in the notes below, all percentages shown are without assuming conversion of any of the Company's Convertible Subordinated Debentures into Common Shares. (2) Morgan Stanley & Company Incorporated's ("Morgan Stanley") address is 1221 Avenue of the Americas, New York, New York 10020. Information regarding ownership of common shares by Morgan Stanley is included herein in reliance upon information set forth in an Amended Schedule 13G filed on February 14, 1997 by Morgan Stanley. Morgan Stanley has indicated in the Schedule 13G that all shares are owned by various investment advising clients of Morgan Stanley and that Morgan Stanley is deemed to be the beneficial owner pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. (3) Investment Counselors of Maryland, Inc.'s ("ICM") address is 803 Cathedral Street, Baltimore, Maryland 21201. Information regarding ownership of common shares by ICM is included herein in reliance upon information set forth in an Amended Schedule 13G filed on February 14, 1997 by ICM. ICM has indicated in the Schedule 13G that all shares are owned by various investment advising clients of ICM and that ICM is deemed to be the beneficial owner pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. 29 31 (4) Capital Growth Management Limited Partnership's ("CGM") address is One International Place, Boston, Massachusetts 02110. Information regarding ownership of common shares by CGM is included herein in reliance upon information set forth in an Amended Schedule 13G filed on February 11, 1997 by CGM. CGM has indicated in the Schedule 13G that all shares are owned by various investment advising clients of CGM and that CGM is deemed to be the beneficial owner pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. (5) FMR Corporation's ("FMR") address is 82 Devonshire Street, Boston, Massachusetts 02109. Information regarding ownership of common shares by FMR is included herein in reliance upon information set forth in an Amended Schedule 13G filed on February 14, 1997 by FMR. FMR has indicated in the Schedule 13G that all shares are owned by various investment advising clients of FMR and that FMR is deemed to be the beneficial owner pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. (6) Includes 78,000 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan, 46,363 shares of restricted stock granted under the Company's 1993 Share Option Plan, and 3,537 shares allocated to Mr. Carpenter in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan" and "Thrift Plan.") (7) Includes 52,500 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan, 18,818 shares of restricted stock granted under the Company's 1993 Share Option Plan, and 2,058 shares allocated to Mr. Herrman in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan" and "Thrift Plan.") (8) Includes 37,000 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan, 10,025 shares of restricted stock granted under the Company's 1993 Share Option Plan, and 491 shares allocated to Mr. Nadal in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan" and "Thrift Plan.") (9) Includes 16,000 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan, 5,863 shares of restricted stock granted under the Company's 1993 Share Option Plan, and 335 shares allocated to Mr. Dewey in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan" and "Thrift Plan.") (10) Includes 11,000 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan and 2,527 shares of restricted stock granted under the Company's 1993 Share Option Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan.") (11) Includes 10,250 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan and 1,000 shares of restricted stock granted under the Company's 1993 Share Option Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan.") (12) Includes 3,500 shares purchasable upon exercise of options granted under the Company's 1993 Share Option Plan. (See "EXECUTIVE COMPENSATION -- Share Option Plan.") (13) Excludes 2,000 shares of common stock owned by Mr. Bowie's adult step-daughter; Mr. Bowie disclaims beneficial ownership of such. Also excludes 2,000 shares of common stock owned by Mr. Bowie's adult step-son; Mr. Bowie disclaims beneficial ownership of such shares. 30 32 ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report 1. Financial Statements. See Index to Financial Statements. 2. Financial Statement Schedules. See Index to Financial Statements. 3. Exhibits. See Exhibit Index on pages 33 and 34. (b) Reports on Form 8-K. The Company filed a report on Form 8-K filed November 7, 1996, under item 5 reporting the results of operations for the period ended September 30, 1996. 31 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PACIFIC GULF PROPERTIES INC. By: /s/ GLENN L. CARPENTER ------------------------------------ Glenn L. Carpenter Chairman of the Board of Directors President and Chief Executive Officer By: /s/ DONALD G. HERRMAN ------------------------------------ Donald G. Herrman Executive Vice President, Secretary, and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 18, 1997 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 Company and in the capacities and on the date indicated.
NAME TITLE - --------------------------------------------- -------------------------------------------- /s/ GLENN L. CARPENTER Chairman of the Board of Directors - --------------------------------------------- President, Chief Executive Officer Glenn L. Carpenter (Principal Executive Officer) /s/ ROYCE B. MCKINLEY Director - --------------------------------------------- Royce B. McKinley /s/ STEWART W. BOWIE Director - --------------------------------------------- Stewart W. Bowie /s/ KEITH W. RENKEN Director - --------------------------------------------- Keith W. Renken /s/ ROBERT E. MORGAN Director - --------------------------------------------- Robert E. Morgan /s/ PETER L. EPPINGA Director - --------------------------------------------- Peter L. Eppinga /s/ JOHN F. KOOKEN Director - --------------------------------------------- John F. Kooken /s/ JAMES E. QUIGLEY, III Director - --------------------------------------------- James E. Quigley, III
32 34 EXHIBIT INDEX 3.1 Amended and Restated Articles of Incorporation* 3.2 Bylaws* 4.1 Indenture between the Company and Harris Trust Company of California, as trustee.* 10.1 Purchase and Sale Agreement between Santa Anita Realty Enterprises, Inc. and the Company* 10.2 Amended and Restated Employment Agreement between the Company and Glenn L. Carpenter+ 10.3 Amended and Restated Employment Agreement between the Company and Donald G. Herrman+ 10.4 Amended and Restated Employment Agreement between the Company and Lonnie P. Nadal+ 10.5 Employment Agreement between the Company and Robert A. Dewey+ 10.6 1993 Share Option Plan* 10.7 Park Place Acquisition Agreement* 10.8 Management Agreement between Santa Anita Realty Enterprises, Inc. and the Company* 10.9 Purchase and Sale Agreement and Joint Escrow Instructions among Golden West Equity Properties, Inc., Golden West Ontario Associates, Golden West Vista Associates and Pacific Gulf Properties Inc.* 10.10 Registration Rights Agreement between Santa Anita Realty Enterprises, Inc. and the Company* 10.11 Amendment Nos. 1 and 2 to the Purchase and Sale Agreement and Joint Escrow Instructions among Golden West Equity Properties, Inc., Gold West Ontario Associates, Golden West Vista Associates and Pacific Gulf Properties Inc.* 10.13 Master Agreement, dated September 30, 1994, between Pacific Gulf Properties, Inc., PGP Baldwin, Inc., Santa Anita Realty Enterprises, Inc., Baldwin Associates, Ltd. and Wm. P. Willman & Associates regarding Baldwin Park Acquisition** 10.14 Closing Agreement, dated October 1, 1994, between Pacific Gulf Properties Inc. and Santa Anita Realty Enterprises, Inc. regarding Baldwin Park Acquisition** 10.15 Settlement Agreement and Mutual General Release, effective as of January 30, 1995, between Pacific Gulf Properties Inc., PGP Baldwin, Inc., Baldwin Industrial Properties, Ltd., Baldwin Associates, Ltd., W.T. Grant, et al. regarding Baldwin Park Acquisition** 10.16 Award of Arbitration dated March 15, 1995 regarding Baldwin Park Acquisition** 10.17 Stipulation and Order Confirming Arbitration Award dated March 22, 1995 regarding Baldwin Park Acquisition** 10.18 Term Loan Agreement, dated March 3, 1995, between Pacific Gulf Properties Inc. and Bank of America National Trust and Savings Association** 10.19 Term Loan Agreement, dated March 3, 1995, between Pacific Gulf Properties Inc. and Bank of America National Trust and Savings Association** 10.20 Term Loan Agreement, dated March 3, 1995, between Pacific Gulf Properties Inc. and Bank of America National Trust and Savings Association** 10.21 Association** Exchange Agreement, dated April 15, 1995, between the Company and Glenn L. Carpenter, regarding Deferred Compensation Agreement+ 10.22 Exchange Agreement, dated April 15, 1995, between the Company and Donald G. Herrman, regarding Deferred Compensation Agreement+ 10.23 Exchange Agreement, dated April 15, 1995, between the Company and Lonnie P. Nadal, regarding Deferred Compensation Agreement+
33 35 10.24 Exchange Agreement, dated April 15, 1995, between the Company and Robert A. Dewey, regarding Deferred Compensation Agreement+ 10.25 Amended and Restated Agreement of Limited Partnership of PGP Inland Communities, L.P., dated as of August 15, 1995+ 10.26 Master Contribution Agreement, dated as of August 15, 1995, regarding formation of PGP Inland Communities, L.P.+ 10.27 Purchase Agreement and Escrow Instructions, dated September 15, 1995, by and between Capitol Investment Associates Corp. and Pacific Gulf Properties Trust, regarding sale of Texas apartment portfolio+ 10.29 Dividend Reinvestment Plan of the Company dated May 9, 1995*** 10.30 Investment Agreement, dated December 31, 1996, between the Company and Five Arrows Realty Securities L.L.C.++ 10.31 Articles Supplementary, dated January 1997, classifying 1,351,351 Shares of Preferred Stock as Class A Senior Cumulative Convertible Preferred Stock of the Company.++ 10.32 Operating Agreement, dated January 1997, between the Company and Five Arrows Realty Securities L.L.C.++ 10.33 Amendment to 1993 Share Option Plan+++ 10.34 Syndicated Credit Agreement, dated as of August 30, 1996 by and among the Company, Bank of America National Trust and Savings Association, as Agent for the other Banks party thereto and as a Bank, and the other Banks party thereto. 21.01 Subsidiaries** 23.01 Consent of Ernst & Young LLP 27.00 Financial Data Schedule
- --------------- * Incorporated by reference from the Company's registration statement on Form S-11 (33- 69382) declared effective by the Securities and Exchange Commission on February 10, 1994. ** Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1994. *** Incorporated by reference from the Company's registration statement on Form S-3 (33- 92082) filed on May 9, 1995. + Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995. ++ Incorporated by reference from the Company's Current Report on Form 8-K filed on January 14, 1997. +++ Incorporated by reference from the Company's Proxy Statement filed on or about April 5, 1996. 34 36 PACIFIC GULF PROPERTIES INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE ----- FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT Report of Independent Auditors..................................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995....................... F-3 Consolidated and Combined Statements of Operations for the years ended December 31, 1996, 1995 and 1994............................................................. F-4 Consolidated and Combined Statements of Equity for the years ended December 31, 1996, 1995 and 1994............................................................. F-5 Consolidated and Combined Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............................................................. F-6 Notes to Consolidated and Combined Financial Statements............................ F-7 SCHEDULE FILED AS PART OF THIS REPORT Schedule III -- Real Estate and Accumulated Depreciation........................... F-21
F-1 37 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors Pacific Gulf Properties Inc. We have audited the accompanying consolidated balance sheets of Pacific Gulf Properties Inc. (the "Company") as of December 31, 1996 and 1995, and the related consolidated and combined statements of operations, equity, and cash flows of the Company and the multifamily and industrial operations acquired from Santa Anita Realty Enterprises, Inc. (the "Predecessor Multifamily and Industrial Operations") for the years ended December 31, 1996 and 1995, and for the periods February 18, 1994 through December 31, 1994 and January 1, 1994 through February 17, 1994. Our audits also included the financial statement schedule listed in the Index on page F-1. These financial statements and schedule are the responsibility of the Company's and Predecessor's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1996 and 1995, and the consolidated and combined results of operations and cash flows of the Company and the Predecessor Multifamily and Industrial Operations for the years ended December 31, 1996 and 1995, and for the periods February 18, 1994 through December 31, 1994 and January 1, 1994 through February 17, 1994, in conformity with generally accepted accounting principles. 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. ERNST & YOUNG LLP Newport Beach, California February 13, 1997 F-2 38 PACIFIC GULF PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, --------------------- 1996 1995 -------- -------- Real estate assets (Notes 2 and 3) Land................................................................. $111,253 $ 75,011 Buildings............................................................ 270,458 225,142 -------- -------- 381,711 300,153 Accumulated depreciation............................................. (28,844) (21,461) -------- -------- 352,867 278,692 Cash and cash equivalents.............................................. 1,523 2,847 Accounts receivable.................................................... 2,125 959 Other assets (Notes 3 and 4)........................................... 8,125 6,093 -------- -------- $364,640 $288,591 ======== ======== LIABILITIES AND EQUITY Loans payable (Notes 2 and 3).......................................... $197,401 $149,847 Accounts payable and accrued liabilities (Note 5)...................... 5,671 5,644 Dividends payable...................................................... 4,001 1,943 Convertible subordinated debentures (Note 4)........................... 14,227 55,659 -------- -------- 221,300 213,093 Minority interests in consolidated partnership (Note 6)................ 3,518 3,518 Commitments and contingencies (Note 7) Shareholders' equity (Notes 4, 5 and 9) Preferred shares, $.01 par value; 5,000,000 shares authorized; no shares outstanding................................................ -- -- Common shares, $.01 par value; 25,000,000 shares authorized; shares issued and outstanding 9,757,917 (1996) and 4,856,937 (1995)...... 98 49 Excess shares, $.01 par value; 30,000,000 shares authorized; no shares outstanding................................................ -- -- Outstanding restricted stock......................................... (877) (669) Additional paid-in capital........................................... 157,895 77,979 Distributions in excess of earnings.................................. (17,294) (5,379) -------- -------- 139,822 71,980 -------- -------- $364,640 $288,591 ======== ========
See accompanying notes to financial statements. F-3 39 PACIFIC GULF PROPERTIES INC. CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR MULTIFAMILY AND INDUSTRIAL COMPANY OPERATIONS ---------------------------------------- ------------ FEBRUARY 18 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 17, 1996 1995 1994 1994 ---------- ---------- ---------- ------------ REVENUES Rental income Multifamily properties.................. $ 29,104 $ 24,898 $ 16,783 $ 2,154 Industrial properties................... 20,783 12,193 7,074 133 ---------- ---------- ---------- ------ 49,887 37,091 23,857 2,287 ---------- ---------- ---------- ------ EXPENSES Rental property expenses Multifamily properties.................. 11,554 10,215 7,524 1,311 Industrial properties................... 5,308 2,567 1,475 66 ---------- ---------- ---------- ------ 16,862 12,782 8,999 1,377 Depreciation.............................. 8,236 6,081 3,331 390 Interest (including amortization of debenture discount and financing costs of $1,211, $1,009, $606 and $17, respectively)........................... 18,411 14,066 7,332 832 General and administrative (Note 9)....... 2,974 2,423 1,522 203 Minority interests (Note 6)............... -- -- -- -- Nonrecurring loss on exchange of debentures for common stock (Note 4).... 3,596 -- -- -- ---------- ---------- ---------- ------ 50,079 35,352 21,184 2,802 ---------- ---------- ---------- ------ INCOME (LOSS) BEFORE GAIN ON SALE OF PROPERTIES AND EXTRAORDINARY ITEM....... (192) 1,739 2,673 (515) Gain on sale of properties (Note 8)....... 74 6,664 -- -- ---------- ---------- ---------- ------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... (118) 8,403 2,673 (515) Extraordinary item Loss from extinguishment of debt........ -- -- 2,990 -- ---------- ---------- ---------- ------ NET INCOME (LOSS)......................... $ (118) $ 8,403 $ (317) $ (515) ========== ========== ========== ====== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................. 6,340,748 4,830,723 4,273,337 ========== ========== ========== PER COMMON SHARE DATA (Note 1) Income before extraordinary item........ $ (.02) $ 1.74 $ .63 Extraordinary item...................... -- -- (.70) ---------- ---------- ---------- Net income (loss)....................... $ (.02) $ 1.74 $ (.07) ========== ========== ========== DISTRIBUTIONS DECLARED PER COMMON SHARE... $ 1.61 $ 1.57 $ 1.35 ========== ========== ==========
See accompanying notes to financial statements. F-4 40 PACIFIC GULF PROPERTIES INC. CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY (IN THOUSANDS) EQUITY, December 31, 1993......................................................... $ 9,501 Net distributions to Predecessor.................................................. (626) Net loss.......................................................................... (515) -------- EQUITY, February 18, 1994(a)...................................................... 8,360 -------- Common shares issued (Note 9)..................................................... 68,678 Distributions declared............................................................ (5,861) Net loss.......................................................................... (317) -------- EQUITY, December 31, 1994......................................................... 70,860 -------- Common shares issued.............................................................. 988 Outstanding restricted stock (Note 5)............................................. (669) Distributions declared............................................................ (7,602) Net income........................................................................ 8,403 -------- EQUITY, December 31, 1995......................................................... 71,980 -------- Common shares issued (Notes 4 and 9).............................................. 79,966 Outstanding restricted stock (Note 5)............................................. (208) Distributions declared............................................................ (11,798) Net loss.......................................................................... (118) -------- EQUITY, December 31, 1996......................................................... $139,822 ========
- --------------- (a) Amounts presented prior to February 18, 1994 represent the combined equity of the Predecessor Multifamily and Industrial Operations. See accompanying notes to financial statements. F-5 41 PACIFIC GULF PROPERTIES INC. CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR MULTIFAMILY AND INDUSTRIAL COMPANY OPERATIONS ------------------------------------------ ------------ FEBRUARY 18 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 17, 1996 1995 1994 1994 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).............................. $ (118) $ 8,403 $ (317) $ (515) Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation................................. 8,236 6,081 3,331 390 Amortization of financing costs.............. 641 457 142 17 Amortization of debenture discount and costs..................................... 570 552 464 -- Compensation recognized relating to restricted stock.......................... 208 83 -- -- Nonrecurring loss on exchange of debentures for common stock.......................... 3,596 -- -- -- Gain on sale of real estate properties....... (74) (6,664) -- -- Loss from extinguishment of debt............. -- 2,990 -- (Increase) decrease in accounts receivable... (1,166) (258) -- -- (Increase) decrease in certain other assets.................................... (3,397) (2,295) (1,762) 594 Increase (decrease) in certain liabilities... 27 779 (1,130) (254) -------- --------- -------- ----- Net cash provided by operating activities...... 8,523 7,138 3,718 232 -------- --------- -------- ----- CASH FLOWS FROM INVESTING ACTIVITIES Additions to real estate assets................ (89,613) (113,663) (99,504) -- Proceeds from sale of real estate properties... 7,695 29,183 -- -- -------- --------- -------- ----- Net cash used in investing activities.......... (81,918) (84,480) (99,504) -- -------- --------- -------- ----- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgage notes payable........... 63,600 112,070 15,189 -- Proceeds from revolving line of credit......... 28,075 4,300 39,147 -- Repayment of mortgage notes payable............ (14,659) (8,725) (29,146) (25) Repayment of revolving line of credit.......... (29,462) (27,278) (44,425) -- Proceeds from issuance of convertible subordinated debentures...................... -- -- 55,420 -- Increase in deferred debenture costs........... -- -- (3,006) -- Debentures converted to common stock........... (42,114) -- -- -- Issuance of common stock....................... 76,370 317 68,678 -- Increase in liabilities associated with issuance of common shares and convertible debentures................................... -- -- 4,425 -- Payment of costs associated with extinguishment of debt...................................... -- -- (2,990) -- Minority interest contributions................ -- 3,518 -- -- Distributions paid............................. (9,739) (7,528) (3,992) -- Net distributions to Predecessor............... -- -- -- (626) -------- --------- -------- ----- Net cash provided by (used in) financing activities................................... 72,071 76,674 99,300 (651) -------- --------- -------- ----- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. (1,324) (668) 3,514 (419) CASH AND CASH EQUIVALENTS -- beginning of period....................................... 2,847 3,515 1 420 -------- --------- -------- ----- CASH AND CASH EQUIVALENTS -- end of period..... $ 1,523 $ 2,847 $ 3,515 $ 1 ======== ========= ======== =====
See accompanying notes to financial statements. F-6 42 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Pacific Gulf Properties Inc. is incorporated in Maryland and operates as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. Pacific Gulf Properties Inc. commenced operations on February 18, 1994 upon receipt of the proceeds from its initial public offerings and consummation of certain formation transactions (Note 9). Basis of Presentation The consolidated and combined financial statements include the accounts of Pacific Gulf Properties Inc., and all subsidiaries and partnerships over which it has control (the "Company") in addition to the multifamily and industrial operations acquired from Santa Anita Realty Enterprises, Inc. ("Realty" or the "predecessor") on a combined historical cost basis (the "Predecessor Multifamily and Industrial Operations"). The combined financial statements of the Predecessor Multifamily and Industrial Operations for the period prior to February 18, 1994, are not intended to present the results of operations or cash flows of either the Company or its predecessor. All intercompany accounts and transactions have been eliminated in consolidation. Real Estate Assets Real estate assets are held for investment and stated at cost less accumulated depreciation. The properties acquired at formation were recorded at the Predecessor's historical cost basis. Cost includes the cost of land, development and construction in progress, and completed buildings and related improvements. Costs related to the development and construction of properties are capitalized as incurred. Interest and property taxes are capitalized to properties under active development. Expenditures which increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 40 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss reflected in operations. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the assets' carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. At December 31, 1996 and 1995, no indicators of impairment existed. In 1995, the Company adopted Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. There was no impact to the 1995 financial statements resulting from the Company's adoption of Statement 121. Cash and Cash Equivalents Certificates of deposit and short-term investments with remaining maturities of three months or less when acquired are considered cash equivalents. Financing Costs Financing costs are included in other assets and consist of loan fees, other loan costs and deferred debenture costs. Loan fees and other loan costs are amortized over the term of the respective loan. Costs relating to the convertible subordinated debentures offering are amortized over the term of the debentures using a method which approximates the effective interest method. Amortization of financing costs is included in interest expense. F-7 43 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Financial instruments which potentially subject the Company to a concentration of credit risk are primarily cash investments and accounts receivable. Cash is generally invested in investment-grade short-term instruments and the amount of credit exposure to any one commercial issuer is limited. Concentration of credit risk with respect to accounts receivable is limited due to the number of multifamily and industrial tenants. Fair Value of Financial Instruments The carrying amounts of the Company's short-term investments and loans payable approximate their fair values as of December 31, 1996. The fair value as of December 31, 1996 of the Company's convertible subordinated debentures, based on the closing price of the debentures on the last trading day in 1996 on the American Stock Exchange, was $14,762,000. Dividend Reinvestment Plan During the years ended December 31, 1996 and 1995, the Company issued 1,900 and 422 shares, respectively, under the Company's Dividend Reinvestment Plan. Rental Income Rental income from residential leases is recognized when due from tenants. Apartment units are rented under lease agreements with terms of one year or less. Rental income from industrial leases is recognized on a straight-line basis over the related lease term. As a result, deferred rent is created when rental income is recognized during free rent periods of a lease. The deferred rent is included in other assets, evaluated for collectibility and amortized over the lease term. Interest Interest expense incurred for the years ended December 31, 1996, 1995 and 1994 totaled $17,427,000, $13,057,000 and $7,541,000, respectively. Interest expense for 1996, 1995 and 1994 includes $4,720,000, $4,736,000 and $4,052,000 related to the Company's convertible subordinated debentures (Note 4). For the year ended December 31, 1996, the Company capitalized $215,000 related to real estate projects undergoing development and construction activities (Note 2). Interest paid for the years ended December 31, 1996, 1995 and 1994 totaled $18,803,000, $11,785,000 and $4,764,000, respectively. In December 1996, the Company exchanged $42,069,000 in principal amount of convertible subordinated debentures in connection with the Company's tender offer (filed on December 11, 1996 with the Securities and Exchange Commission) to induce early conversion of its convertible subordinated debentures (Note 4). As a result, $1,282,000 of interest was paid to the bond holders upon conversion; had the conversion not occurred, interest would have been paid to bond holders in 1997. Gain on Sale of Properties Gains on sales of properties are recognized by the Company when title to the real estate passes to the buyer, an adequate down payment is received, the collectibility of notes received from buyers is reasonably assured, and other conditions necessary for gain recognition have been satisfied. F-8 44 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) Income Taxes The Company has elected to be taxed as a REIT. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 95% of its REIT taxable income, as defined by the Internal Revenue Code, to its shareholders, and also to satisfy certain other requirements. The Company has estimated that approximately 45% (unaudited) of the dividends paid to shareholders in 1996 represented a return of capital for income tax purposes. Per Share Data Per share amounts are calculated based upon weighted average common shares outstanding and common share equivalents for the years ended December 31, 1996 and 1995 and for the period February 18, 1994 (date of initial public offering) through December 31, 1994. Common stock equivalents include stock options which are considered dilutive for purposes of computing primary earnings per share. The conversion of the Company's convertible subordinated debentures into shares of common stock (Note 4), for purposes of computing fully diluted earnings (loss) per share would be anti-dilutive. Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1996 and 1995 and revenues and expenses for each of the three years in the period ended December 31, 1996. Accordingly, actual results could differ from those estimates in the near term. Reclassifications Certain financial statement amounts have been reclassified to conform to the current year presentation. F-9 45 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. REAL ESTATE ASSETS The Company's multifamily and industrial portfolio at December 31, 1996 and 1995 consists of the following:
1996 1995 ------------ ------------ Multifamily properties Land.......................................... $ 49,175,000 $ 45,785,000 Buildings..................................... 148,993,000 141,997,000 ------------ ------------ 198,168,000 187,782,000 Accumulated depreciation........................ (16,032,000) (11,903,000) ------------ ------------ 182,136,000 175,879,000 ------------ ------------ Industrial properties Land.......................................... 62,078,000 29,226,000 Buildings..................................... 121,465,000 83,145,000 ------------ ------------ 183,543,000 112,371,000 Accumulated depreciation........................ (12,812,000) (9,558,000) ------------ ------------ 170,731,000 102,813,000 ------------ ------------ Total Land.......................................... $111,253,000 $ 75,011,000 Buildings..................................... 270,458,000 225,142,000 ------------ ------------ 381,711,000 300,153,000 Accumulated depreciation........................ (28,844,000) (21,461,000) ------------ ------------ $352,867,000 $278,692,000 ============ ============
Multifamily Properties At December 31, 1996, the Company owns and operates 22 multifamily properties containing 4,110 apartment units located in Southern California and the Pacific Northwest. During 1996, the Company purchased a multifamily property containing 165 apartment units located in Ontario, California. In 1996, the Company commenced development of a 166 unit multifamily property for active seniors located in the masterplanned community of Rancho Santa Margarita, California. Land acquisition and development costs incurred through December 31, 1996 totaled $2,111,000 (including land cost of $1,642,000). Interest capitalized related to the property's development activities during 1996 totaled $46,000. Industrial Properties At December 31, 1996, the Company owns and operates 21 industrial properties containing an aggregate of 4,573,000 leasable square feet located in the states of California and Washington. During 1996, the Company purchased 13 industrial properties located primarily in Southern California containing an aggregate of 2,054,000 leasable square feet, and sold an industrial building and the underlying land to an existing tenant (Note 8). In 1996, the Company commenced redevelopment of a newly acquired single-tenant industrial property containing approximately 327,000 leasable square feet located in the City of Industry, California. Interest capitalized related to the property's development activities during 1996 totaled $169,000. F-10 46 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) The Company's industrial properties are leased to tenants under operating leases with terms ranging from 1 to 5 years. The minimum future lease payments to be received from noncancelable industrial leases for each of the next five years ending December 31 and thereafter, are as follows: 1997............................................................ $20,133,000 1998............................................................ 14,392,000 1999............................................................ 9,136,000 2000............................................................ 6,693,000 2001............................................................ 4,708,000 Thereafter...................................................... 20,758,000 ----------- $75,820,000 ===========
3. LOANS PAYABLE The Company's loans payable at December 31, 1996 and 1995 consist of the following:
1996 1995 ------------ ------------ Mortgage notes payable.......................... $183,682,000 $133,678,000 Construction loan............................... 33,000 -- Revolving line of credit........................ 13,686,000 16,169,000 ------------ ------------ $197,401,000 $149,847,000 ============ ============
Mortgage Notes Mortgage notes payable at December 31, 1996 consist of conventional mortgage debt and tax-exempt mortgage debt totaling $158,865,000 and $24,850,000, respectively. At December 31, 1996, the Company's conventional mortgage debt consist of 23 notes which are secured by multifamily and industrial properties, due in monthly installments and maturing at various dates through September 2025. Approximately $152,640,000 or 20 conventional mortgage notes bear fixed rates of interest ranging from 6.4% to 8.74% per annum. The remaining three conventional mortgage notes totaling $6,192,000 bear a variable rate of interest based on the Federal Home Loan Bank 11th District Rate plus 2.8%. The weighted average interest rate of the Company's conventional mortgage debt at December 31, 1996 was 7.9%. During the year ended December 31, 1996, the Federal Home Loan Bank 11th District Rate ranged from 4.8% to 5.0% and was 4.8% at December 31, 1996. At December 31, 1996, the Company's tax-exempt mortgage debt consists of five notes totaling $24,850,000 which are secured by five multifamily properties and bank letters of credit totaling $1,280,000. The existing tax-exempt mortgage debt was refinanced in January 1997 as more fully described in the following paragraph. Prior to the refinancing, the existing tax-exempt mortgage debt provided for floating interest rates, which adjusted weekly or monthly based on the applicable indices. These floating interest rates, which ranged from 2.15% and 8% during the year ended December 31, 1996, were based on indices such as the Kenny Rate and the Federal Home Loan Bank 11th District Rate. At December 31, 1996, these indices were 3.05% and 4.8%, respectively. The weighted average interest rate of the Company's existing tax-exempt mortgage debt at December 31, 1996 was 6.3%. During December 1996, the Company entered into a refunding agreement for all of its outstanding tax-exempt mortgage debt which closed in January 1997. As a result of a new 30-year refunding agreement, which is backed by credit and liquidity support from guaranteed mortgage pass-through certificates issued by the Federal National Mortgage Association ("Fannie Mae"), the Company obtained three new loans from F-11 47 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) municipalities, the proceeds of which were funded from new tax-exempt mortgage bond financings of $24,850,000 maturing in January 2007. Standard & Poor's Rating Group assigned a rating of AAA to the bonds based on the collateral agreement with Fannie Mae. Monthly principal and interest payments will be made on the loans to a trustee, which in turn will pay the bondholders when interest is due. The bonds will be remarketed periodically and will bear interest at fixed rates scheduled to increase from 3.75% to 5.20% through 2007. Principal payments will be amortized based on scheduled amounts over a 30-year period. The Company's new tax-exempt mortgage debt, after giving effect to credit enhancement and other costs associated with the refunding agreement, has an average fixed rate of interest of 6.3%. As part of the refunding agreement, the Company will be required to deposit impounds for property taxes, property and liability insurance and reserves for capital replacements on a semiannual basis with the trustee. Prepaid finance costs, fees and other impound deposits related to the refinancing total $1,554,000 at December 31, 1996 and are included in other assets. Construction Loan The Company's construction loan, which is payable to a bank, is secured by a multifamily project for active seniors currently undergoing development (Note 2), bears interest at the bank's prime rate payable monthly and matures in November 1998. Undisbursed funds on the construction loan at December 31, 1996 total $6,367,000. Upon completion of the project, the Company has the option to convert the interest rate on the loan into a fixed rate of interest upon meeting certain conditions. At December 31, 1996, the prime rate was 8.25%. Revolving Line of Credit The revolving line of credit as of December 31, 1996, which is payable to a bank, is secured by certain of the Company's real estate properties and matures in 1998. Under the terms of this revolving bank line of credit, the Company may borrow funds up to $65,000,000 at the London Interbank Offered Rate (LIBOR) plus 1.75%. For the year ended December 31, 1996, the weighted average interest rate of the revolving line of credit was 7.43%. At December 31, 1996, the LIBOR was 5 17/32%. The Company's revolving line of credit agreement, as amended in May 1996, contains certain debt covenants. The most significant covenants, as defined in the agreement, require the Company to maintain a minimum tangible net worth, an interest coverage ratio in excess of 1.50 (measured as a four quarter trailing average) and a fixed charge coverage ratio of not less than 1.35. In addition, the revolving line of credit agreement contains a provision restricting the payment of dividends not to exceed Funds Available for Distribution (defined as the National Association of Real Estate Investment Trusts' Funds from Operations -- Old Definition less an agreed-upon amount of imputed capital expenditures) measured based on four consecutive quarters. As of December 31, 1996, the Company was in compliance with all debt covenants. Principal payments due on loans payable as of December 31, are as follows: 1997......................................................... $ 11,824,000 1998......................................................... 14,809,000 1999......................................................... 25,509,000 2000......................................................... 30,556,000 2001......................................................... -- Thereafter................................................... 114,703,000 ------------ $197,401,000 ============
F-12 48 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. CONVERTIBLE SUBORDINATED DEBENTURES Concurrent with its initial public offerings in February 1994, the Company issued $56,551,000 aggregate principal amount of convertible subordinated debentures (Note 9). At December 31, 1996 and 1995, outstanding convertible subordinated debentures totaled $14,227,000 and $55,659,000, net of unamortized discount of $210,000 and $892,000, respectively. The Company's debentures bear interest at 8.375% annually (payable in semiannual installments due in February and August of each year), mature in February 2001 and are convertible into common shares at any time prior to maturity at the original conversion rate of 53.6986 common shares per $1,000 of debenture principal subject to certain restrictions (including ownership limits and other adjustments more fully described in the debentures' indenture agreement). In addition, the debentures are subordinate to all senior indebtedness of the Company and are redeemable by the Company, at their outstanding principal amount, at any time after February 15, 1999. During 1996, $42,114,000 in aggregate principal amount of debentures were converted into shares of common stock, including $42,069,000 exchanged on December 26, 1996 in connection with the Company's tender offer (filed on December 11, 1996 with the Securities and Exchange Commission) to induce early conversion of its convertible subordinated debentures. Pursuant to the Company's offer, the debentures tendered were exchanged at the rate of 58 shares of common stock for each $1,000 debenture principal or 4.3014 shares (the "excess common shares") in excess of the original conversion rate. As part of the exchange, the Company issued a total of 2,440,002 common shares, and recognized a nonrecurring loss of $3,596,000 for the year ended December 31, 1996 directly associated with the issuance of the 180,956 excess common shares at a price of $19.875 per share, the market price of the shares on the date of the exchange. Debenture discount is amortized into expense producing an effective interest rate of 8.76%. Costs incurred by the Company to issue the debentures were capitalized and included in other assets. Deferred debenture costs upon issuance totaled $3,005,000 of which $1,211,000 has been amortized to expense and $1,336,000 has been charged to additional paid in capital related to the debenture for common stock exchange referred to in the preceding paragraph. At December 31, 1996, unamortized deferred debenture costs included in other assets totaled $458,000. At December 31, 1996, the Company was in compliance with the debentures covenants which impose certain restrictions on the payment of dividends by the Company in the event of certain defaults, except when the Company is required to pay such dividends in order to maintain its REIT status. 5. BENEFIT PLANS 1993 Share Option Plan The Company has a share option plan to provide incentives to attract and retain officers and employees (the "1993 Share Option Plan"). The 1993 Share Option Plan provides for grants of stock options to purchase a specified number of shares of Common Stock, awards of restricted common shares and grants of stock appreciation rights. The total number of shares available for the 1993 Share Option Plan for such purposes is 615,404 common shares (45,000 of which have been reserved for awards to non-employee directors). Stock Options Options for 13,500 shares of common stock in 1996 and 40,500 shares in 1995 were granted to officers, directors and employees with exercise prices of $16.75 and $15.00 per share, respectively. Options for a total of 190,050 shares of common stock were granted to officers and employees effective upon the consummation of the initial public offerings. The options are exercisable at the initial stock offering price of $18.25 per share and are subject to varying vesting periods of up to ten years. No stock options were exercised during 1996, 1995 or 1994. F-13 49 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) Pursuant to Statement 123, Accounting and Disclosure of Stock-Based Compensation, issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB Opinion 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the 1993 Share Option Plan. As required by Statement 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The Company estimated the fair value of the stock options at date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.28%; a dividend yield of 8.5%; a volatility factor for the market price of the Company's common stock of 0.161; and a weighted average expected life of eight years for the stock options. Restricted Stock Awards The Company awards restricted stock to its employees for compensation purposes. Compensation expense related to restricted stock awards is measured based on the market price of the stock on the date of the grant, and is expensed ratably over the vesting period of each award with the unamortized portion reflected as outstanding restricted stock in the shareholders' equity section in the accompanying balance sheets. During 1996 and 1995, the Company issued 21,000 and 7,296 shares, respectively, of restricted stock to employees, as performance-based compensation. At the time the shares were granted, the market price of the stock was $16.75 (1996) and $13.75 (1995) per share. The 1996 restricted stock award vests over seven years and the 1995 restricted stock award vests over three years. In June 1995, the Company issued 56,300 shares of restricted stock to certain employees to replace substantially all of its liability to those employees accrued under the existing deferred compensation agreements. The 56,300 shares of Common Stock issued vest over five to twelve years and the Company's original obligation to the employees will be satisfied through dividends and targeted appreciation in the value of the shares. At the time the shares were granted, the market price of the stock was $15.75 per share. At December 31, 1996, the unamortized amount of outstanding restricted stock issued to employees which will be charged to compensation expense in future periods totaled $877,000. Thrift Plan The Company has a thrift plan under which employees may elect to contribute up to 21% of their annual compensation on a combination before-and-after tax basis, excluding bonuses. Contributions by the employee are matched by the Company at a 75% rate with total matching contributions not exceeding 4 1/2% of the contributing employee's annual compensation up to a maximum of 6% of compensation. Matching contributions are in the form of cash, which is used by the trustee to purchase shares of the Company's common stock. Employee contributions are invested in a fixed income fund, various growth funds, or a combination thereof, according to the employee's choice. The thrift plan provides for 20% vesting of contributions by the Company for each full year of service, increasing to 100% vesting after five years of service. Contributions made by the Company to the thrift plan for the years ended December 31, 1996 and 1995 totaled $58,000 and $50,000, respectively. Retirement Income Plan The Company has a defined benefit retirement plan for full time employees who are at least 21 years of age with one or more years of service. Plan assets consist of investments in a life insurance group annuity contract. Plan benefits are based primarily on years of service and qualifying compensation during the final F-14 50 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) years of employment. Funding requirements comply with federal requirements that are imposed by law. The Company assumed, in conjunction with the establishment of its Retirement Income Plan, the retirement plan obligations attributable to employees associated with the Predecessor Multifamily and Industrial Operations who were previously employed by Realty. The information set forth below relates to the Company's retirement income plan. The Company's net periodic pension cost includes amortization of past service cost over a remaining period of 27 years. Based upon actuarial valuation dates as of December 31, 1996 and 1995, the present values of accumulated plan benefits were $570,000 and $459,000 (calculated using a discount rate of 7.5 percent), respectively, and the plan's net assets available for benefits were $531,000 in 1996 and $490,000 in 1995. The Company's net periodic pension cost for the years ended December 31, 1996 and 1995 and for the period February 18, 1994 through December 31, 1994 included the following components:
1996 1995 1994 -------- -------- -------- Service cost............................... $101,000 $ 64,000 $ 33,000 Interest cost on projected benefit obligation............................... 53,000 41,000 35,000 Expected return on plan assets............. (42,000) (34,000) (23,000) Amortization of unrecognized prior service costs and unrecognized net obligation.... 6,000 8,000 6,000 -------- -------- -------- Net periodic pension cost $118,000 $ 79,000 $ 51,000 ======== ======== ========
The following table sets forth the funded status of the Company's retirement income plan and the related amounts recognized in the December 31, 1996 and 1995 consolidated balance sheets: Actuarial present value of accumulated benefit obligations as of December 31:
1996 1995 --------- --------- Vested............................................... $ 499,000 $ 417,000 Nonvested............................................ 71,000 42,000 --------- --------- 570,000 459,000 Additional amounts related to projected future compensation levels................................ 296,000 199,000 --------- --------- Total actuarial projected benefit obligations for service rendered................................... 866,000 658,000 Plan assets as fair value as of December 31 531,000 490,000 --------- --------- Projected benefit obligations in excess of plan assets............................................. (335,000) (168,000) Unrecognized net actuarial (gain) loss from difference in actual experience from that assumed............................................ 37,000 (18,000) Unrecognized transition obligation being recognized over 27 years...................................... 175,000 181,000 --------- --------- $(123,000) $ (5,000) ========= =========
Assumptions used in determining the status of the Company's retirement income plan are as follows: Weighted average discount rate................................. 7.5% Weighted average rate of increase in compensation levels....... 5.0% Expected long-term rate of return on plan assets............... 8.5%
F-15 51 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) Deferred Compensation Agreements Prior to 1995, the Company had defined benefit deferred compensation agreements which provided selected management employees with a fixed benefit at retirement. The plan benefits were based primarily on years of service and qualifying compensation during the final years of employment. In conjunction with its initial public offerings, the Company assumed the deferred compensation obligations attributable to employees who were previously employed by Realty. During 1995, the deferred compensation agreements were substantially replaced with restricted stock. (See "Restricted Stock Awards.") 6. CONSOLIDATED REAL ESTATE PARTNERSHIP In August 1995, the Company formed PGP Inland Communities, L.P., a Delaware limited partnership (the "Partnership") for the purpose of acquiring and operating 11 multifamily properties consisting of 1,368 apartment units located in Southern California (the "Properties") which were contributed by unrelated parties. In exchange for contributing the Properties to the Partnership, the unrelated parties received limited partnership units representing an ownership interest of approximately 22%. The Company is the sole general partner in the Partnership and holds an ownership interest of approximately 78%. The terms of the Partnership agreement provide that all net income (and cash flow) from the Properties are to be allocated (distributed) to the Company until the Properties have achieved a threshold net operating income of $6,200,000 for any given year, and cumulatively for all prior years. The Partnership's results of operations in 1996 and 1995 have been fully allocated to the Company. Condensed financial information for the Partnership as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and the period August 16, 1995 (inception) through December 31, 1995 follows:
1996 1995 ----------- ----------- Real estate assets (multifamily properties) Land............................................ $19,827,000 $19,827,000 Buildings....................................... 52,471,000 52,149,000 ----------- ----------- 72,298,000 71,976,000 Accumulated depreciation........................ (1,791,000) (442,000) ----------- ----------- 70,507,000 71,534,000 Cash and other assets............................. 458,000 658,000 ----------- ----------- $70,965,000 $72,192,000 =========== =========== Liabilities (primarily tax-exempt mortgage debt and mortgage notes)............................. $55,748,000 $56,305,000 Partners' equity Company......................................... 11,699,000 12,369,000 Minority interests.............................. 3,518,000 3,518,000 ----------- ----------- 15,217,000 15,887,000 ----------- ----------- $70,965,000 $72,192,000 =========== ===========
F-16 52 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 16, 1995 YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1996 1995 ------------ --------------- Revenues......................................... $ 10,415,000 $ 3,722,000 Expenses (including depreciation and amortization of financing costs totaling $1,485,000 in 1996 and $472,000 in 1995........................... 9,691,000 3,537,000 ----------- ---------- Net income....................................... $ 724,000 $ 185,000 =========== ========== Company's share of net income.................... $ 724,000 $ 185,000 Minority interests............................... -- -- ----------- ---------- $ 724,000 $ 185,000 =========== ==========
7. COMMITMENTS AND CONTINGENCIES The Company's commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters will not have a material adverse effect on the Company's consolidated financial statements. One of the Company's industrial properties acquired in October 1996 is subject to a 57-year ground lease which expires in July 2035 and is accounted for as an operating lease. Monthly ground lease payments total $20,000 and are subject to increases based on the Consumer Price Index each September, with the next adjustment in September 1997. Ground lease payments during 1996 totaled $53,000. 8. GAIN ON SALE OF PROPERTIES In August 1996, the Company sold an undeveloped ten-acre parcel and a 55,656 square foot industrial building to an existing tenant pursuant to purchase options contained in the existing lease agreements. In connection with the sale, the Company received consideration totaling $7,695,000 and recognized a gain of $74,000. The rental income received under the existing lease agreements in 1996 totaled approximately $691,000. In November 1995, the Company sold its Texas apartment portfolio to four entities controlled by the same buyer. The Texas multifamily portfolio consisted of four properties containing 1,085 apartment units in San Antonio, Austin and Houston, and represented the Company's entire holdings in the state of Texas. The Company received consideration totaling $31,125,000: $30,125,000 in cash and four notes receivable totaling $1,000,000. The notes receivable mature in seven years, bear interest at 9%, require monthly interest-only payments and are secured by limited partnership interests in the purchasing entities. Proceeds from the sale were used to repay the mortgage notes payable secured by the Texas apartment portfolio which totaled $14,438,000 and $2,000,000 of the Company's revolving line of credit. The Company recognized a gain utilizing the cost recovery method on the sale of the Texas apartment portfolio totaling $6,664,000 (net of $1,000,000 deferred gain). The deferred gain is presented as a reduction of the notes included in accounts receivable in the accompanying balance sheets. 9. CAPITAL STOCK Initial Public Offerings and Formation Transactions On February 18, 1994, the Company completed its initial public offerings of 3,900,000 shares of Common Stock (4,008,500 shares after exercise of overallotment option) at $18.25 per share and $50,000,000 aggregate principal amount of 8.375% Convertible Subordinated Debentures ($56,551,000 after exercise of overallotment option). Prior to that date, the Company was a wholly owned subsidiary of Realty. Proceeds raised by F-17 53 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) the Company totaled $64,214,000 (net of fees and costs) from the stock offering and $55,420,000 (net of discount) from the debenture offering. (Note 4) On February 18, 1994, the Company acquired the Predecessor Multifamily and Industrial Operations from Realty pursuant to a Purchase and Sale Agreement between Realty and the Company dated November 15, 1993. The Predecessor Multifamily and Industrial Operations consisted of 10 multifamily properties containing 2,654 apartments and three industrial properties containing an aggregate of 185,000 leasable square feet and certain other assets and liabilities of Realty, including the Company's headquarters. In connection with the acquisitions from Realty, the Company paid $44,425,000 in cash (representing the repayment of indebtedness outstanding on Realty's lines of credit related to the Predecessor Multifamily and Industrial Operations), assumed $44,290,000 in debt and other obligations (of which $29,025,000 was repaid with proceeds from the initial public offerings) and issued 149,900 shares of common stock. In October 1994, the Company acquired Realty's interest in the partnership that owned Baldwin Industrial Park, which contains 623,000 leasable square feet of industrial space, for 559,748 shares of common stock and issued 74,671 shares of common stock to Realty as payment for the Company's corporate offices and certain other assets. (The Company also acquired the interest of the other partners in Baldwin Industrial Park for $9,760,000 of which $6,362,000 was paid in 1994.) As a result of these transactions, Realty's ownership interest in the Company was reduced to 16%. In connection with the extinguishment of $29,500,000 of mortgage indebtedness referred to above, the Company incurred nonrecurring debt repayment costs totaling $2,990,000 which have been reflected as an extraordinary item in the consolidated and combined statement of operations for the period February 18, 1994 through December 31, 1994. The Company also entered into a one-year management agreement with Realty, as part of the formation transactions, under which the Company managed certain properties owned by Realty that were not transferred to the Company. During 1994, the Company received $61,000 from Realty as payment for services performed thereunder, which is shown in the consolidated financial statements as a reduction of general and administrative expense. The Company terminated the agreement in November 1994. 1996 Shelf Registration During 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $112 million covering the proposed issuance of debt, preferred or common stock securities of the Company (the "Shelf Registration Statement"). On May 23, 1996, the shelf registration statement, as amended, was declared effective by the Securities and Exchange Commission. 1996 Common Stock Offerings In May 1996, the Company completed a public offering of 2,015,581 shares of common stock (2,435,581 shares after exercise of overallotment option) under the Shelf Registration at a price of $16.375 per share. Proceeds from the offering totaled approximately $36,600,000 (net of fees and costs) and were primarily used to purchase nine industrial properties (Note 2). Concurrent with the public offering, all of the Company's common stock held by Realty was sold to the public. Subsequent to December 31, 1996, the Company completed another public offering of 2,000,000 shares of common stock (2,300,000 shares after exercise of overallotment option) under the Shelf Registration Statement at a price of $20.50 per share. Proceeds from the offering totaled approximately $44.4 million (net of fees and costs) and were used to acquire two industrial properties subject to definitive purchase agreements at December 31, 1996 (Note 2) and to reduce outstanding indebtedness on the Company's revolving line of credit. F-18 54 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) Exchange of Debentures for Common Stock In December 1996, the Company issued 2,440,002 shares of common stock in exchange for the debentures tendered pursuant to the Company's offer to induce early conversion of its convertible subordinated debentures (Note 4). Preferred Stock The Company is authorized to issue up to 5,000,000 shares of preferred stock. In December 1996, the Company entered into an agreement to issue 1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Shares") to an investor at a price of $18.50 per share. The Class A Preferred Shares will be issued under the Shelf Registration Statement. At December 31, 1996, no shares of preferred stock have been issued. The Company is obligated to issue the Class A Preferred Shares on or before December 31, 1997 in a maximum of three separate issuances, the timing of which may be specified by the Company, however, certain availability fees will be charged to the Company if all of the Class A Preferred Shares are not issued prior to July 1997. The Class A Preferred Shares are convertible into common stock, on a one-for-one basis, subject to adjustment upon certain events. The annual dividend per share on the Class A Preferred Shares is $1.70 from the date of issuance until December 31, 1997 and thereafter, the greater of $1.70 per share or 104% of the then current dividend on the Company's common stock. At its option, the Company may redeem the Class A Preferred Shares beginning December 31, 2001 for cash at a premium of 6% over the initial $18.50 per share liquidation value decreasing to zero by December 31, 2009. The Class A Preferred Shares, or any shares of common stock into which such Class A Preferred Shares could be converted, are nontransferable until December 31, 1997. F-19 55 PACIFIC GULF PROPERTIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. SELECTED QUARTERLY DATA (UNAUDITED) The following tables set forth the quarterly results of operations of the Company for the years ended December 31, 1996 and 1995 and for the period February 18, 1994 (the date the Company commenced operations upon completion of its initial public offerings) through December 31, 1994:
1996 ----------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- Revenues.................................... $10,835,000 $11,865,000 $13,443,000 $13,744,000 Nonrecurring loss on exchange of debentures for common stock.......................... -- -- -- $(3,596,000) Income (loss) before gain on sale of properties................................ $ 293,000 $ 652,000 $ 1,289,000 $(2,426,000) Gain on sale of properties.................. -- -- $ 74,000 -- Net income (loss)........................... $ 293,000 $ 652,000 $ 1,363,000 $(2,426,000) Per common share data: Income before gain on sale of properties............................. $ .06 $ .12 $ .18 $ (.32) Net income................................ $ .06 $ .12 $ .19 $ (.32)
1995 ----------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- Revenues.................................... $ 8,428,000 $ 8,409,000 $ 9,544,000 $10,710,000 Income before gain on sale of properties.... $ 544,000 $ 529,000 $ 366,000 $ 300,000 Gain on sale of properties................ -- -- -- $ 6,664,000 Net income.................................. $ 544,000 $ 529,000 $ 366,000 $ 6,964,000 Per common share data: Income before gain on sale of properties............................. $ .11 $ .11 $ .08 $ .05 Net income................................ $ .11 $ .11 $ .08 $ 1.44
1994 ----------------------------------------------------- FEBRUARY 18 THROUGH MARCH 31, SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- Revenues.................................... $ 2,733,000 $ 6,072,000 $ 6,838,000 $ 8,214,000 Income before extraordinary item............ $ 458,000 $ 854,000 $ 794,000 $ 567,000 Extraordinary item -- extinguishment of debt...................................... $(2,990,000) -- -- -- Net income (loss)........................... $(2,532,000) $ 854,000 $ 794,000 $ 567,000 Per common share data: Income before extraordinary item.......... $ .11 $ .21 $ .19 $ .12 Net income (loss)......................... $ (.61) $ .21 $ .19 $ .12
F-20 56 SCHEDULE III PAGE 1 OF 2 PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (IN $000S)
GROSS AMOUNTS AT WHICH COSTS CARRIED AT CLOSE OF INITIAL COST TO COMPANY CAPITALIZED PERIOD ------------------------ SUBSEQUENT TO ------------------------ BUILDINGS ACQUISITION BUILDINGS AND LAND AND BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS - --------------------------------------- ------------ -------- ------------ ----------------- -------- ------------ Multifamily Properties California Laguna Hills........................ $ 4,735 $ 1,798 $ 5,981 $ 420 $ 1,795 $ 6,404 Santa Ana(c)........................ 11,823 6,985 18,581 1,418 6,985 19,999 Santa Ana(c)........................ -- 1,488 5,764 831 1,488 6,595 Covina.............................. 1,298 558 1,466 57 569 1,512 Diamond Bar......................... 8,786 3,958 8,048 237 4,034 8,209 San Dimas........................... 3,698 1,695 3,520 99 1,727 3,587 West Covina......................... 9,088 3,856 9,848 259 3,930 10,033 San Dimas........................... 5,845 2,390 6,123 176 2,436 6,253 San Dimas........................... 1,196 432 1,312 38 440 1,342 Ontario............................. 6,700 2,273 5,626 142 2,316 5,725 Ontario............................. 7,690 2,654 5,671 151 2,705 5,771 San Dimas........................... 5,670 1,306 5,448 96 1,331 5,519 Ontario............................. 1,830 322 2,232 45 326 2,273 Ontario............................. 2,960 385 3,223 55 391 3,272 Ontario............................. 6,200 1,749 4,525 6 1,749 4,531 Rancho Santa Margarita(d)........... 33 1,642 -- 469 1,642 469 Washington Burien(e)........................... 14,776 1,419 7,176 33 1,419 7,209 Burien.............................. -- 956 4,836 23 956 4,859 Everett(e).......................... -- 3,254 7,171 52 3,254 7,223 Everett(e).......................... -- 3,181 6,994 26 3,181 7,020 Kent................................ 7,904 2,635 10,709 367 2,635 11,076 Federal Way......................... -- 2,876 9,646 608 2,896 10,234 Oregon Beaverton 7,174 970 9,180 698 970 9,878 -------- -------- -------- ------- -------- -------- Total Multifamily 107,406 48,782 143,080 6,306 49,175 148,993 -------- -------- -------- ------- -------- -------- Industrial Properties California Baldwin Park........................ 11,819 999 27,878 (284) 8,155 20,438 Garden Grove........................ 5,300 4,230 4,564 294 4,230 4,858 Ontario............................. 6,838 5,310 10,801 232 5,310 11,033 Rancho Cucamonga.................... 3,800 1,610 8,196 431 1,610 8,627 Rancho Cucamonga.................... -- 1,666 3,367 349 1,666 3,716 Vista............................... 7,800 3,465 7,896 468 3,465 8,364 Garden Grove(f)..................... -- 3,905 3,016 301 3,905 3,317 Santa Fe Springs(g)................. 24,500 1,725 2,041 0 1,725 2,041 La Mirada(f)........................ -- 1,541 2,057 146 1,541 2,203 Aliso Viejo(g)...................... -- 2,760 4,142 27 2,760 4,169 Yorba Linda(g)...................... -- 2,713 3,625 5 2,713 3,630 San Marcos(g)....................... -- 1,827 2,907 65 1,827 2,972 Escondido(g)........................ -- 3,782 6,614 87 3,782 6,701 Hayward(f).......................... -- 2,239 5,107 373 2,239 5,480 San Marcos(f)....................... -- 825 1,838 91 825 1,929 San Bernardino(g)................... -- 1,147 5,320 82 1,147 5,402 City of Industry(d)(f).............. -- 6,686 2,155 401 6,686 2,556 San Diego(f)........................ -- -- 7,287 48 -- 7,335 Washington Seattle............................. 4,648 1,808 4,637 588 1,808 5,225 Tukwila 11,604 6,684 10,677 792 6,684 11,469 -------- -------- -------- ------- -------- -------- Total Industrial 76,309 54,922 124,125 4,496 62,078 121,465 -------- -------- -------- ------- -------- -------- Total Portfolio........................ $183,715 $103,704 $267,205 $10,802 $111,253 $270,458 ======== ======== ======== ======= ======== ======== MAXIMUM LIFE ON WHICH DEPRECIATION IN LATEST INCOME ACCUMULATED DATE OF DATE STATEMENT IS DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED - --------------------------------------- -------- ----------- ------------- -------- ---------------- Multifamily Properties California Laguna Hills........................ $ 8,199 $ 397 1987 1994 40 Years Santa Ana(c)........................ 26,984 5,632 1972 1994 33 Years Santa Ana(c)........................ 8,083 469 1990 1994 40 Years Covina.............................. 2,081 52 1978-79 1995 40 Years Diamond Bar......................... 12,243 280 1979 1995 40 Years San Dimas........................... 5,314 123 1981 1995 40 Years West Covina......................... 13,963 339 1981 1995 40 Years San Dimas........................... 8,689 214 1981 1995 40 Years San Dimas........................... 1,782 47 1981 1995 40 Years Ontario............................. 8,041 192 1983 1995 40 Years Ontario............................. 8,476 196 1982 1995 40 Years San Dimas........................... 6,850 187 1984 1995 40 Years Ontario............................. 2,599 75 1983 1995 40 Years Ontario............................. 3,663 118 1985 1995 40 Years Ontario............................. 6,280 19 1984 1996 40 Years Rancho Santa Margarita(d)........... 2,111 -- n/a 1996 n/a Washington Burien(e)........................... 8,628 1,226 1987 1994 37 Years Burien.............................. 5,815 825 1987 1994 37 Years Everett(e).......................... 10,477 1,726 1986 1994 29 Years Everett(e).......................... 10,201 1,670 1988 1994 29 Years Kent................................ 13,711 742 1987 1994 40 Years Federal Way......................... 13,130 322 1985, 1986 1995 40 Years Oregon Beaverton 10,848 1,181 1990 1994 38 Years -------- ------- Total Multifamily 198,168 16,032 -------- ------- Industrial Properties California Baldwin Park........................ 28,593 7,266 1983, 1985 1994 30 Years Garden Grove........................ 9,088 361 1979 1994 40 Years Ontario............................. 16,343 814 1991 1994 40 Years Rancho Cucamonga.................... 10,237 792 1987, 1990 1994 40 Years Rancho Cucamonga.................... 5,382 218 1981 1994 40 Years Vista............................... 11,829 785 1990 1994 40 Years Garden Grove(f)..................... 7,222 87 1986 1996 40 Years Santa Fe Springs(g)................. 3,766 30 1981 1996 40 Years La Mirada(f)........................ 3,744 47 1975 1996 30 Years Aliso Viejo(g)...................... 6,929 62 1988 1996 40 Years Yorba Linda(g)...................... 6,343 53 1987-89 1996 40 Years San Marcos(g)....................... 4,799 50 1988 1996 40 Years Escondido(g)........................ 10,483 106 1988-92 1996 40 Years Hayward(f).......................... 7,719 114 1972-74 1996 30 Years San Marcos(f)....................... 2,754 28 1985 1996 30 Years San Bernardino(g)................... 6,549 74 1980 1996 30 Years City of Industry(d)(f).............. 9,242 25 n/a 1996 n/a San Diego(f)........................ 7,335 61 1981 1996 30 Years Washington Seattle............................. 7,033 1,470 1968, 1981 1994 24 Years Tukwila 18,153 369 1975-1979 1995 40 Years -------- ------- Total Industrial 183,543 12,812 -------- ------- Total Portfolio........................ $381,711(a) $28,844(b) ======== =======
F-21 57 SCHEDULE III PAGE 2 OF 2 PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) (a) The changes in total real estate for the years ended December 31, 1995, 1994 and 1993 are as follows:
1996 1995 1994 -------- -------- -------- Balance at beginning of period...................... $300,153 $210,596 $106,601 Acquisition of Baldwin Park......................... -- 7,228 28,877 Acquisition of PGP Inland portfolio................. -- 73,718 -- Sale of Land and Bldg to existing tenant............ (8,055) -- -- Sale of Texas multifamily portfolio................. -- (24,106) -- Other acquisitions and improvements................. 89,613 32,717 75,500 Other............................................... -- -- (382) -------- -------- -------- Balance at end of period............................ $381,711 $300,153 $210,596 ======== ======== ========
(b) The changes in accumulated depreciation for the years ended December 31, 1995, 1994 and 1993 are as follows: Balance at beginning of period...................... $ 21,461 $ 17,139 $ 8,903 Additions -- depreciation expense................... 8,236 5,908 3,745 Accumulated depreciation Baldwin Park at date of acquisition...................................... -- -- 4,873 Retirements -- Texas multifamily portfolio.......... -- (1,586) -- Sale to existing tenant............................. (603) -- -- Other............................................... (250) -- (382) -------- -------- -------- Balance at end of period............................ $ 28,844 $ 21,461 $ 17,139 ======== ======== ========
(c) These properties collateralize borrowings under the same mortgage note payable totaling $11,823,000. (d) Property currently under development. (e) These properties collateralize borrowings under the same mortgage note payable totaling $14,776,000. (f) These properties collateralize borrowings under the Company's revolving bank line of credit which has an outstanding balance of $13,686,000 as of December 31, 1996. (g) These properties collateralize borrowings under the same mortgage note payable totaling $24,500,000. F-22 EX-10.34 2 SYNDICATED CREDIT AGREEMENT 1 EXHIBIT 10.34 SYNDICATED REVOLVING CREDIT AGREEMENT (Secured Facility) This Syndicated Revolving Credit Agreement (Secured Facility) is entered into as of August 30, 1996 by and among PACIFIC GULF PROPERTIES INC., a Maryland corporation, as the borrower (the "BORROWER"), the lenders from time to time party to this Agreement (the "BANKS"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as one of the Banks (in such capacity and in its individual capacity, "BOFA"), as Agent (in such capacity, the "Agent") and as Issuing Bank (as defined below), with reference to the following facts: A. Pursuant to that certain Amended and Restated Revolving Credit Agreement (Secured Facility), dated as of May 30, 1996, by and between the Borrower and BofA (the "AMENDED AND RESTATED CREDIT AGREEMENT"), BofA has made available to the Borrower a revolving credit facility in the amount of up to Sixty-Five Million Dollars ($65,000,000) (the "SECURED FACILITY"). B. The Borrower, BofA and the Banks desire to replace and supersede the Amended and Restated Credit Agreement with this Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants set forth below, the parties agree to replace and supersede the Amended and Restated Credit Agreement with this Agreement as follows: ARTICLE I. DEFINITIONS; INTERPRETATION 1.1 Definitions. The following terms are used in this Agreement with the following meanings: "ADJUSTED LIBO RATE" means the quotient, expressed as a percentage, obtained by dividing the LIBO Base Rate by one (1) minus the Reserve Rate. "ADVANCE" means each advance of the proceeds of the Loans made by the Banks pursuant to this Agreement. "AFFILIATE" means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with that Person; and for purposes of the foregoing "control" (including "controlled by" and "under common control with") with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. 1 2 "AGENT" means Bank of America National Trust and Savings Association, a national banking association, in its capacity as Agent, and any successor Agent. "AGENT'S PAYMENT OFFICE" means the address for payments set forth in Section 8.1 for the Agent, or such other address as the Agent may specify. "AGREEMENT" means this Syndicated Revolving Credit Agreement (Secured Facility). "AMENDED AND RESTATED CREDIT AGREEMENT" has the meaning specified in the Recital A. "APARTMENT PROPERTY CAP RATE" means, as of the Effective Date, nine and one-half percent (9.5%); provided, however, that such rate shall be revised upon each anniversary of June 6, 1996 to be the rate reported in the most recently published CB Commercial National Investor Survey as the average going-in cap rate based upon current investment criteria for class B apartment properties, or if such publication is no longer available, then a comparable cap rate in such other publication as may be reasonably designated by the Agent. "APPLICABLE INDUSTRIAL LEASE" has the meaning specified in Section 5.24. "APPLICABLE LAW" means any law, rule, regulation, ordinance, order, code, interpretation, judgment, decree, directive, guideline, policy or similar form of decision of any Governmental Authority or any order or award in any binding non-governmental arbitration. "BANK" means each of the lenders party this Agreement from time to time, and includes BofA, in its capacity as a Bank. "BANKING DAY" means any day other than Saturday, Sunday or any other day on which banks are required or permitted to close in the State of California and, with respect to the rate of interest based upon the Adjusted LIBO Rate, a day on which dealings in U.S. dollar deposits in London, England may be carried on by the Agent. "BOFA" means Bank of America National Trust and Savings Association, a national banking association, in its individual capacity and as a Bank. "BORROWER" means Pacific Gulf Properties Inc., a Maryland corporation. "BORROWING BASE" means the aggregate of all amounts, determined separately for each real estate project accepted by the Required Banks as Collateral pursuant to Section 2.20 hereof, equal to the lesser of (a) fifty-five percent (55%) of the Collateral Value of such real estate project, or (b) the amount of principal that the Net Operating Income (as reasonably determined by Agent) from such real estate project could service at a Debt Coverage Ratio of at least 1.35 to 1. For purposes of calculating 2 3 the Debt Coverage Ratio for any real estate project, Net Operating Income from such project shall be determined as follows: (x) if, at the time the Debt Coverage Ratio is calculated, the Borrower has owned such project for four (4) or more consecutive fiscal quarters, Net Operating Income shall be the actual Net Operating Income for the four (4) fiscal quarters ended most recently immediately prior to the calculation of the Debt Coverage Ratio; (y) if, at the time the Debt Coverage Ratio is calculated, the Borrower has owned such project for more than one (1) fiscal quarter but less than four (4) consecutive fiscal quarters, Net Operating Income shall be determined by annualizing the Net Operating Income for the period of the Borrower's actual ownership of such project (including adjustments for real estate taxes paid or estimated); and (z) if, at the time the Debt Coverage Ratio is calculated, the Borrower has owned such Project for less than one (1) full fiscal quarter or such project is being added to the Borrowing Base, Net Operating Income shall be the appraised Net Operating Income as shown in the appraisal commissioned by the Agent. As of the Effective Date, the Borrowing Base shall equal the amount calculated in accordance with Exhibit "B". Such amount shall be recalculated quarterly in accordance the Borrower's certificate attached hereto as Exhibit "J", which is to be delivered pursuant to Section 5.1(g) hereof, and also upon any reappraisal pursuant to Section 2.21 hereof. "BUSINESS PARK PROPERTY CAP RATE" means, as of the Effective Date, ten and one-half percent (10.5%); provided, however, that such rate shall be revised upon each anniversary of June 6, 1996 to be the rate reported in the most recently published CB Commercial National Investor Survey as the average going-in cap rate based upon current investment criteria for class B business park properties, or if such publication is no longer available, then a comparable cap rate in such other publication as may be reasonably designated by the Agent. "CAPITAL ADEQUACY REQUIREMENT" has the meaning specified in Section 2.18. "CAPITAL LEASE" means, with respect to the Borrower, any lease of any property (whether real, personal or mixed) by the Borrower as lessee that, in conformity with GAAP, should be accounted for as a capital lease on the balance sheet of the Borrower. "CARRYING COSTS" means with respect to any asset or liability the amount at which such asset or liability has been recorded or, in accordance with GAAP, should have been recorded, in the books of account of the Borrower, as reduced by any reserves or write-downs which have been announced, set aside or taken or, in accordance with GAAP, should have been set aside or taken, with respect thereto. "CASH COLLATERAL ACCOUNT" has the meaning specified in Section 2.4(a). "CASH EQUIVALENTS" means (a) securities issued or directly and fully guaranteed or insured by the United States and any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) 3 4 having maturities of not more than a Specified Period (as defined below) from the date of acquisition, (b) time deposits and certificates of deposit of any commercial bank incorporated in the United States having capital and surplus in excess of Five Hundred Million Dollars ($500,000,000) with maturities of not more than one (1) year from the date of acquisition, (c) repurchase obligations with a term of not more than seven (7) days for securities of the types described in clause (a) above, entered into with any bank meeting the qualifications specified in clause (b) above, (d) commercial paper issued by the parent corporation of any commercial bank (provided that the parent corporation and the bank are both incorporated in the United States) having capital and surplus in excess of $500,000,000, in each case maturing not more than forty-five (45) days after the date of acquisition, and (e) commercial paper issued by any other Person incorporated in the United States, which commercial paper is rated at least A-1 or the equivalent thereof by Standard & Poor's Corporation or at least P-1 or the equivalent thereof by Moody's Investors Services, Inc., in each case maturing not more than forty-five (45) days after the date of acquisition. "CODE" means the Internal Revenue Code of 1986, as amended. "CO-LENDER AGREEMENT" has the meaning specified in Section 7.4. "COLLATERAL" means each of the real estate projects on or in which the Agent has a lien or security interest on behalf of the Banks pursuant hereto or pursuant to any Deed of Trust or other Security Documents, and which have been accepted by the Required Banks pursuant to Section 2.20, or any portion thereof. "COLLATERAL VALUE" means, as to any real estate project accepted as Collateral hereunder, the appraised as-is fair market value thereof (or, in the event that such Collateral is reappraised by the Banks pursuant to Section 2.21, the reappraised value thereof) as determined by appraisals commissioned by the Agent, with such adjustments to the appraised value as the Agent may make in its sole discretion, including deductions for the maximum amount of any assessments, taxes and/or any other obligations secured by a Lien prior to the Lien of the applicable Deed of Trust encumbering the Collateral. The value of any personal property shall not be included in Collateral Value for purposes of calculating the Borrowing Base. The Agent shall be entitled to adjust the value of any such obligations secured by a prior Lien to account for above market interest rates and charges and/or to account for any unusual circumstances which could materially decrease the equity of a junior lienholder. Any adjustment by the Agent shall be based on the underwriting criteria then generally used by the Agent in determining the value of real property comparable to the Collateral in question. The foregoing shall in no event be construed as indicating that the Banks shall allow any prior Liens against any Collateral which it accepts for inclusion within the Borrowing Base. "COMMITMENT AMOUNT" means the amount of Sixty-Five Million Dollars ($65,000,000). 4 5 "DEBENTURES" means the 8.375% Convertible Subordinated Debentures due 2001 issued by the Borrower pursuant to the Indenture in the original face amount of $56,551,000. "DEBT COVERAGE RATIO" means, with respect to any real estate project comprising Collateral included within the Borrowing Base for any period of determination, the ratio which the Net Operating Income from such real estate project during such period bears to the debt service which would accrue during such period assuming a twenty-five year (25-year) amortization period of equal annual payments of principal and interest and a fixed interest rate equal to the greater of (a) the prevailing yield for ten year (10-year) U.S. Treasury bonds plus two and one-half (2.50%) per annum or (b) nine percent (9%) per annum. "DEED OF TRUST" means, as to any Collateral, a Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, executed by Borrower in favor of the Agent for the benefit of the Banks, in form and containing such terms as are acceptable to the Agent, as originally executed or as it may from time to time be supplemented, modified or amended and subject only to exceptions reasonably approved by the Agent. "DEFAULT" means any condition or event which with notice, lapse of time or both would, unless cured or waived, constitute an Event of Default. "DEFERRED OBLIGATION" means, as to any Person and at any date, any obligation of such Person to pay the deferred purchase price of property or services for a period in excess of six (6) months, including accounts payable, trade payables and accruals arising in the ordinary course of business, but excluding payments withheld in good faith to assure performance by other parties or payments withheld while being contested in good faith and by appropriate proceedings. "DESIGNATED REPRESENTATIVE" means a Person authorized by the Borrower, on an appointment of designated representative form submitted to the Agent, to deliver Requests for Advances or Letters of Credit, Requests for Borrowing Base Increases, certificates and other documents and materials to the Agent pursuant to this Agreement, the Note and the other Loan Documents. "DISPOSITION" means, with respect to any asset, the sale, exchange, refinancing, destruction, condemnation, lease (other than a Lease) or other transfer of any interest in that asset. "DOLLARS" or "$" means lawful currency of the United States. "EBITDA" means for any period and with respect to the Borrower (including consolidated entities), determined in accordance with GAAP, the sum of (a) Net Income (adjusted to eliminate the effect of extraordinary gains or losses) plus (b) all amounts treated as expenses for depreciation, Interest Expense and the 5 6 amortization of intangibles of any kind (including, without limitation, financing costs) to the extent included in the determination of such Net Income, plus (c) all accrued taxes on or measured by income to the extent included in the determination of such Net Income. "EFFECTIVE DATE" means the date on which this Agreement has been executed and delivered by the Borrower, the Banks and the Agent. "ELIGIBLE ASSIGNEE" means (i) a commercial bank organized under the laws of the United States or any state thereof which (A) has assets of not less than Ten Billion Dollars ($10,000,000,000), (B) has not been involved in material litigation with the Agent regarding an assigned, participated or syndicated loan, and (C) is approved by the Borrower and the Agent in their reasonable discretion; or (ii) a Person that is primarily engaged in the business of commercial banking and is an Affiliate of a Bank. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EVENT OF DEFAULT" has the meaning specified in Section 6.1. "EXISTING COLLATERAL" means the real properties so designated on Exhibit "B" hereto. "EXTENSION FEE" has the meaning specified in Section 2.5(b). "FIXED CHARGE COVERAGE RATIO" means, with respect to the Borrower and its Subsidiaries for any period of determination, the ratio computed as follows: EBITDA Fixed Charge Coverage Ratio = ------------------------------------------ Interest Incurred + Scheduled Amortization "FUNDS AVAILABLE FOR DISTRIBUTION" means, with respect to the Borrower and its Subsidiaries for any period of determination, Funds From Operations minus Imputed Capital Expenditures. "FUNDS FROM OPERATIONS" means, with respect to the Borrower and its Subsidiaries for any period of determination, the Net Income of the Borrower and its Subsidiaries determined on a consolidated basis in conformity with GAAP (excluding gains (or losses) from debt restructurings and sales of property, plus depreciation and amortization), and after appropriate adjustments for income or losses attributable to unconsolidated partnerships and joint ventures. Any such adjustments for unconsolidated partnerships and joint ventures shall be calculated to reflect the Funds From Operations of those partnerships and joint ventures on the same basis. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the 6 7 Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination. "GOVERNMENTAL ACTION" means any authorization, approval, consent, waiver, exception, license, filing, registration, permit, notarization, special lease or other requirement of any Governmental Authority. "GOVERNMENTAL AUTHORITY" means any national, state or local government, any political subdivision or any governmental, quasi-governmental, judicial, public or Statutory instrumentality, authority, body or entity, including the Federal Deposit Insurance Corporation, any central bank or any comparable authority. "GUARANTEE" means, as to any Person and at any time, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing any Indebtedness of any other Person or the payment of dividends or other distributions in respect of the stock of any corporation or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such stock or Indebtedness against loss (whether by virtue of partnership or joint venture arrangements, by agreement to purchase assets, goods, securities or services to keep well or to take or pay or otherwise); provided, however, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb shall have a correlative meaning. "GROSS ASSET VALUE" means, with respect to the Borrower, the sum of: (a) the Net Operating Income for the most recent fiscal quarter (or such other period not less than one month as proposed by the Borrower and approved by the Agent in its sole discretion) from the real property assets of the Borrower and its Subsidiaries, annualized and then capitalized at either (i) the Industrial Property Cap Rate, for such real property assets consisting of warehouse and distribution center properties, (ii) the Business Park Property Cap Rate, for such real property assets consisting of business park properties, or (iii) the Apartment Property Cap Rate, for such real property assets consisting of apartment properties, plus (b) all cash and the fair market value of all Cash Equivalents held by the Borrower as of the last day of such quarter, plus (c) the undepreciated Carrying Cost of the Borrower's investment in its office premises located at 363 San Miguel, Newport Beach, California and any other non-income producing real properties acquired by Borrower in compliance with this Agreement (including, without limitation, Sections 5.9 and 5.15). In the event that the Borrower and the Agent are unable to agree upon whether a real property asset of the Borrower should be classified as a "warehouse and distribution center property" or a "business park property" for purposes of determining Gross Asset Value, (x) such property shall be deemed a warehouse and distribution center property subject to the Industrial Property Cap Rate if the occupied 7 8 leaseable square feet of such property divided by the number of tenants of such property is equal to or greater than 5,000 square feet, or (y) such property shall be deemed to be a business park property subject to the Business Park Property Cap Rate if the occupied leaseable square feet of such property divided by the number of tenants of such property is less than 5,000 square feet. "HAZARDOUS SUBSTANCE" has the meaning set forth in the Unsecured Environmental Indemnity. "IMPROVEMENTS" means all now or hereafter existing improvements to the Collateral, including grading, site improvements, buildings, other structures, hardscape and landscape. "IMPUTED CAPITAL EXPENDITURES" means, for any four (4) consecutive quarters, an amount equal to the sum of (a) the average number of apartment units owned by the Borrower during such period multiplied by Two Hundred and Fifty Dollars ($250.00), plus (b) the average number of leaseable square feet of industrial space owned by the Borrower during such period multiplied by twenty cents ($0.20) per gross leaseable square foot. "INDEBTEDNESS" means, as to any Person and at any time, without duplication, (a) any obligation of such Person for borrowed money, (b) any obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) any Deferred Obligation of such Person, (d) any obligation of such Person as lessee under Capital Leases, (e) any obligation of others secured by a Lien on any asset of such Person, whether or not such debt is assumed by such Person, (f) any contingent obligation, including any liability in respect of any guarantee, letter of credit or similar instrument, (g) any recourse obligations, directly or indirectly, of such Person with respect to any debts or obligations of any unconsolidated partnership or joint venture in which such Person holds any interest and (h) any Guarantee made by such Person in respect of any matter set forth in clauses (a) through (f) above. "INDENTURE" shall mean that certain Indenture, dated as of February 15, 1994, between the Borrower and Harris Trust Company of California, a California corporation, regarding the issuance of the Debentures. "INDUSTRIAL PROPERTY CAP RATE" means, as of the Effective Date, nine and nine-tenths percent (9.9%); provided, however, that such rate shall be revised upon each anniversary of June 6, 1996 to be the rate reported in the most recently published CB Commercial National Investor Survey as the average going-in cap rate based upon current investment criteria for class B warehouse and distribution properties, or if such publication is no longer available, then a comparable cap rate in such other publication as may be reasonably designated by the Agent. 8 9 "INTEREST COVERAGE RATIO" means, with respect to the Borrower and its Subsidiaries for any period of determination, the ratio computed as follows: Interest Coverage Ratio = EBITDA ----------------- Interest Incurred "INTEREST EXPENSE" means, with respect to the Borrower and its Subsidiaries for any period of determination, the total interest expense of the Borrower and its Subsidiaries, determined on a consolidated basis in conformity with GAAP, including, without limitation, all breakage costs and fees, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptance financing. "INTEREST INCURRED" means, with respect to the Borrower and its Subsidiaries for any period of determination, the total Interest Expense plus capitalized interest and interest attributable to Capital Leases of the Borrower and its Subsidiaries, determined on a consolidated basis in conformity with GAAP. "INTEREST PAYMENT DATE" means the first Banking Day of each calendar month following the Effective Date. "INTEREST PERIOD" means any calendar period of one (1) month, two (2) months, three (3) months or six (6) months. In determining an Interest Period, a month means a period that starts on one day in a month and ends on and includes the day preceding the numerically corresponding day in the next month. For any month in which there is no such numerically corresponding day, then as to that month, such day shall be deemed to be the last calendar day of that month. Any Interest Period which would otherwise end on a non-Banking Day shall end on the next succeeding Banking Day unless that is the first day of a month, in which event the Interest Period shall end on the day before the next preceding Banking Day. "IRREVOCABLE REQUEST" has the meaning specified in Section 2.10(a)(i). "ISSUING BANK" means BofA, in its capacity as the issuer of Letters of Credit. "LEASE" has the meaning specified in Section 5.23. "LETTER OF CREDIT" means any standby letter of credit issued by the Issuing Bank pursuant to Section 2.4. "LETTER OF CREDIT APPLICATION AND AGREEMENT" means, collectively, the Issuing Bank's standard form application for, and agreement regarding, letters of credit in the form attached as Exhibit "C" and any related documents (consistent with such standard form and the terms of this Agreement) required by the Issuing Bank in connection with the Issuing Bank's issuance of any Letter of Credit. 9 10 "LETTER OF CREDIT OBLIGATION" means, as to any Letter of Credit, the sum of (i) the undrawn amount thereof which the Issuing Bank may become obligated to pay, plus (ii) the total amount drawn thereon which has not been repaid to the Issuing Bank (whether by virtue of a payment by the Borrower or an Advance from the Banks in accordance with Section 2.4(a)(iv)). "LIBO BASE RATE" means the per annum rate of interest, rounded upward, if necessary, to the nearest 1/16th of one percent (0.0625%), at which the Reference Bank's London branch, London, England, would offer U.S. dollar deposits in amounts and for periods comparable to those of the applicable Interest Period and the amount of the applicable LIBO Rate Loan to major banks in the London U.S. dollar inter-bank market at approximately 11:00 a.m., London time, the first Banking Day after Borrower's rate election. "LIBO RATE LOAN" means any Loan bearing interest at the rate based upon the Adjusted LIBO Rate. "LIEN" means (a) any lien, charge, mortgage, security interest, pledge, assignment of revenues or rights or encumbrance of any kind, (b) the interest of a vendor or lessor under a conditional sale agreement, Capital Lease or other title retention agreement or (c) any agreement to give, or any notice reflecting, any of the foregoing. The term "Lien" does not include any lease in which the Borrower acts as lessor. "LOAN" means any Reference Rate Loan and any LIBO Rate Loan made hereunder. "LOAN AVAILABILITY" means the ability of the Borrower to obtain Advances from the Effective Date up to but not including the Revolving Maturity Date and to request the issuance of Letters of Credit through the date which is three (3) calendar days prior to the Revolving Maturity Date, at any one time not to exceed in the aggregate the lesser of (a) the Revolving Commitment Availability or (b) the Borrowing Base. "LOAN DOCUMENTS" means this Agreement, the Note, the Deeds of Trust and other Security Documents, the Unsecured Indemnity Agreement and each other agreement or document executed and delivered in connection herewith (including, without limitation, each Letter of Credit Application and Agreement), as now existing and as the same may be amended from time to time in accordance with Section 8.4. "MAJORITY BANKS" means (a) if there is only one Bank hereunder, that Bank, and (b) if there are two (2) or more Banks hereunder, then two (2) or more Banks, including the Agent, which hold in the aggregate not less than sixty percent (60%) of the then unpaid principal amount of the Loans (or, if no principal amount is then outstanding, holding not less than sixty percent (60%) of the Commitment Amount). 10 11 "NET CASH PROCEEDS" means, in the case of any Disposition of any assets of any Person or any sale of securities of any Person, all payments (including all payments received by way of deferred payment pursuant to, or monetization of, a note receivable or otherwise, but only as and when so received) realized by such Person in cash or Cash Equivalents from such Disposition of assets or sale of securities, net of the following costs, to the extent applicable: (i) the income taxes, if any, reasonably estimated to be actually payable as a result of the Disposition or other event within two (2) years of the date thereof, (ii) the payment of the outstanding principal amount of, and all interest on, any Indebtedness other than the Loans secured by Liens on such property and (iii) reasonable finder's, broker's or investment banker's fees and commissions and other reasonable costs and expenses related to the Disposition payable to any Person other than an Affiliate of the Borrower and incurred in connection with the sale or other event. "NET INCOME" means, with respect to the Borrower and its Subsidiaries for any period of determination, the net income (or loss) of the Borrower and its Subsidiaries for that period determined on a consolidated basis in conformity with GAAP. "NET OPERATING INCOME" means for any real estate project and for any period (a) the total amount of all rental and other ordinary income received by or on behalf of the Borrower and its Subsidiaries with respect to the leasing of such real estate project during such period, less (b) any and all operating expenses incurred in connection with the ownership, management, operating, cleaning, leasing, marketing, maintenance and repair of such real estate project during such period (excluding depreciation and amortization), properly chargeable against the income according to generally accepted accounting practice, including all taxes and assessments imposed upon such real estate project paid or reserved against during such period and all amounts paid on account of insurance premiums for insurance carried in connection with such real estate project. "NET WORTH" means, with respect to the Borrower and its Subsidiaries at any date of determination, the sum of the capital stock, unamortized amount of outstanding treasury stock, additional paid-in-capital and retained earnings (or minus the accumulated deficit) of the Borrower and its Subsidiaries on that date less any of such capital stock which is redeemable (whether by maturity, mandatory redemption, pursuant to sinking fund obligations or otherwise), determined on a consolidated basis in conformity with GAAP. "NOTE" means the Revolving Note of even date herewith, executed by the Borrower to the order of the Agent for the ratable benefit of the Banks, substantially in the form of Exhibit "A" attached hereto, evidencing the maximum aggregate indebtedness of the Borrower to the Banks resulting from the Loans made by the Banks hereunder. 11 12 "OBLIGATION" means each loan, advance, debt, liability and obligation, howsoever arising, owed by the Borrower to the Banks of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising pursuant to the terms of this Agreement, the Note, or any other Loan Document. "OVERDUE AMOUNT" means any amount which is not paid when due hereunder, whether such amount represents the payment of principal, interest, Overdue Interest, draws under Letters of Credit which are not immediately repaid by an Advance hereunder in accordance with Section 2.4 or otherwise, indemnification payments or the fees, expenses or charges of the Banks. "OVERDUE INTEREST" means interest which accrues on Overdue Amounts at a rate equal to three percent (3%) in excess of the Reference Rate. "PAYMENT OFFICE" means, as to any Bank, the office specified as its address for notices in Section 8.1 or as such Bank may designate to the Borrower and the Agent. "PAYMENT TAX" means any tax, levy or other like governmental charge which is charged or levied against any Bank, with respect to this Agreement, the Loan Availability, the Revolving Commitment Availability, the Note or any other Loan Document, excluding, however, any tax imposed on or measured by gross or net income and excluding any franchise tax imposed by the jurisdiction of such Bank's organization or any political subdivision thereof. "PBGC" means the Pension Benefit Guaranty Corporation. "PERSON" means an individual, a corporation, a partnership, a trust, a joint venture, a Governmental Authority or any other entity or organization. "PLAN" means an employee pension benefit plan maintained by the Borrower which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code or Part 3 of Subtitle B of Title I of ERISA. "PRO RATA SHARE" means as to each Bank at any time the percentage equivalent (expressed as a decimal rounded to the sixth (6th) decimal place) at such time of such Bank's share of the Commitment Amount. Each Bank's Pro Rata Share as of the date hereof is specified in Schedule 1.5. "REALTY" means Santa Anita Realty Enterprises, Inc., a Delaware corporation. "REFERENCE BANK" means Bank of America National Trust and Savings Association, a national banking association. 12 13 "REFERENCE RATE" means the annual rate of interest publicly announced from time to time by the Reference Bank in San Francisco, California, as its "reference rate." The "reference rate" is set by the Reference Bank based on various factors, including the Reference Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Reference Bank may price loans to its customers at, above, or below the "reference rate." Any change in the "reference rate" shall take effect at the opening of business on the day specified in the public announcement of such change. "REFERENCE RATE LOAN" means any Loan bearing interest at a rate based upon the Reference Rate. "REGISTRATION STATEMENT" means that certain Registration Statement No. 33-69382 on Form S-11 of the Borrower, originally filed on September 24, 1993, with the Securities and Exchange Commission, as amended and supplemented from time to time, regarding the public offering of 3,900,000 common shares of the Borrower (exclusive of the underwriter's over-allotment option) and $50,000,000 of Debentures (exclusive of the underwriter's over-allotment option as described therein), along with all Forms 10Q and 10K heretofore filed by the Borrower with the Securities and Exchange Commission. "REGULATION D" means Regulation D as promulgated by the Board of Governors of the Federal Reserve System. "REPORTABLE EVENT" means a "reportable event" as defined in Section 4043 of ERISA, excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation. "REQUEST FOR ADVANCE, LETTER OF CREDIT OR CONVERSION/CONTINUATION OF LOAN" means a written request, substantially in the form of Exhibit "D", signed by a Designated Representative on behalf of the Borrower and delivered to the Agent or the Issuing Bank (with a copy to the Agent, if different), as the case may be, requesting an Advance or Letter of Credit or conversion or continuation of a Reference Rate Loan or a LIBO Rate Loan. "REQUEST FOR BORROWING BASE INCREASE" means a written request, in the form attached as Exhibit "E", properly completed to provide all required information, signed by a Designated Representative on behalf of the Borrower and delivered to the Agent, requesting that real property owned or to be acquired by the Borrower be accepted by the Required Banks as Collateral and included in the Borrowing Base. "REQUIRED BANKS" means at any time all of the Banks then holding any portion of the unpaid principal amount of the Loans (or, if no principal amount is then outstanding, holding any portion of the Commitment Amount). 13 14 "REVOLVING COMMITMENT AVAILABILITY" means the Commitment Amount (as such amount may be reduced pursuant hereto) less, for so long as the Unsecured Credit Agreement remains in effect, Thirty Million Dollars ($30,000,000). "REVOLVING MATURITY DATE" means July 1, 1998 or, if this Agreement is extended in accordance with Section 2.5(b), July 1, 1999. "RESERVE RATE" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D. The Reserve Rate shall be expressed in decimal form and rounded upward, if necessary, to the nearest 1/100th of one percent (0.01%), and shall include marginal, emergency, supplemental, special and other reserve percentages. "SCHEDULED AMORTIZATION" means, with respect to the Borrower and its Subsidiaries, the sum of (a) all Indebtedness of the Borrower and its Subsidiaries on a consolidated basis described in clauses (a), (b) and (d) of the definition of Indebtedness, the maturity of which is less than or equal to twelve (12) months from the date of determination (excluding balloon payments on any secured loan which Borrower intends to refinance and which is secured by collateral with no physical, operating, financial performance or valuation characteristic which could impair in any respect the ability of the Borrower to refinance such loan in full on or prior to the maturity thereof at customary market terms, conditions and underwriting criteria), and (b) the current portion (i.e., such portion as is scheduled to be paid by the Borrower and its Subsidiaries within twelve (12) months from the date of determination) of all Indebtedness of the Borrower and its Subsidiaries on a consolidated basis described in clauses (a), (b) and (d) of the definition of Indebtedness, the maturity of which is more than twelve (12) months from the date of determination. "SECOND PUBLIC OFFERING" means the public offering by the Borrower of 2,015,581 common shares of the Borrower (exclusive of the underwriter's over-allotment option) which occurred on or about May 24, 1996. "SECURED FACILITY" has the meaning set forth in Recital A. "SECURITY DOCUMENTS" means, collectively, the Deeds of Trust, financing statements, pledge agreements, assignments, and any and all other security documents or instruments now or hereafter given to the Banks or the Agent for the benefit of the Banks to secure any Obligations. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, association or other business entity of which (a) if a corporation, more than fifty percent (50%) of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors or managers thereof is at the time owned or controlled, directly or indirectly, by such Person or one or 14 15 more of the other Subsidiaries of such Person or a combination thereof; (b) if a trust, fifty percent (50%) or more of the beneficial ownership thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more Subsidiaries of such Person or a combination thereof; or (c) if a partnership, association or other business entity, more than fifty percent (50%) of the partnership or other similar interests thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more Subsidiaries of such Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons shall be allocated a majority of partnership, association or other business entity gains or losses. "SUPPLEMENTAL REGISTRATION STATEMENT" means that certain Registration Statement No. 333-02798 on Form S-3, originally filed by the Borrower on March 28, 1996 with the Securities and Exchange Commission, as amended and supplemented, regarding the public offering of 2,015,581 common shares of the Borrower (exclusive of the underwriter's over-allotment option and the associated offering of 784,419 common shares of the Borrower by Realty). "TANGIBLE NET WORTH" means, with respect to the Borrower and its Subsidiaries at any date of determination, the Net Worth of the Borrower and its Subsidiaries on that date minus (a) all intangible assets (including, without limitation, franchises, patents, copyrights, patent applications, trademarks, service marks, brand names, goodwill, research and development expenses and all costs incurred by the Borrower and its Subsidiaries in connection with the offering and issuance of the Debentures) appearing on the consolidated balance sheet of the Borrower and its Subsidiaries on that date, (b) the outstanding principal amount of all advances and/or loans made by the Borrower and its Subsidiaries to officers or directors of the Borrower and its Subsidiaries other than as provided in any stock option plan of the Borrower and/or its Subsidiaries, and (c) without duplication, all amounts due from Affiliates of the Borrower and its Subsidiaries determined on a consolidated basis in conformity with GAAP. "TERM-OUT COMMENCEMENT DATE" means, if the Borrower has exercised the Term-out Option as provided in Section 2.5(c) hereof, the Revolving Maturity Date. "TERM-OUT MATURITY DATE" has the meaning specified in Section 2.5.(c)(v). "TERM-OUT OPTION" has the meaning specified in Section 2.5(c) of this Agreement. "TERM-OUT OPTION PERIOD" has the meaning specified in Section 2.5(c) of this Agreement. "TITLE COMPANY" means collectively Chicago Title Company, or such other title company as the Agent may hereafter approve in its sole discretion. 15 16 "TOTAL INDEBTEDNESS" means, with respect to the Borrower and its Subsidiaries at any date of determination, the aggregate Indebtedness of the Borrower and its Subsidiaries determined on a consolidated basis in conformity with GAAP. Total Indebtedness shall include any recourse obligations, directly or indirectly, of the Borrower or its Subsidiaries with respect to any Indebtedness of any unconsolidated partnership or joint venture in which the Borrower or any of its Subsidiaries holds any interest. Total Indebtedness shall exclude the share of the Borrower and its Subsidiaries of any Indebtedness attributable to any corporation, partnership or other entity in which the Borrower and/or its Subsidiaries holds a minority interest to the extent such Indebtedness is non-recourse to the Borrower and/or its Subsidiaries. The foregoing shall not be construed as permitting any investments in partnerships or joint ventures in violation of this Agreement. "UNSECURED CREDIT AGREEMENT" means that certain Credit Agreement (Unsecured), dated as of May 30, 1996, by and between the Borrower and BofA, which provides inter alia that BofA will make available to the Borrower an unsecured credit facility in the amount of up to Thirty-Three Million Dollars ($33,000,000.00). "UNSECURED ENVIRONMENTAL INDEMNITY" means that certain Unsecured Indemnity Agreement dated as of June 10, 1994 executed by the Borrower in favor of BofA and the other "Indemnified Parties" described therein, as the same has been amended and reaffirmed from time to time by the Borrower and BofA and as the same may be amended and reaffirmed from time to time by the Borrower and the Banks. "UNSECURED LOANS" means any Reference Rate Loan and any LIBO Rate Loan (as such terms are defined in the Unsecured Credit Agreement) made by BofA pursuant to the Unsecured Credit Agreement. "UNUSED COMMITMENT FEE" has the meaning specified in Section 2.10. 1.2 Accounting Terms. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all accounting determinations under this Agreement shall be made and all financial statements required to be delivered by the Borrower pursuant to this Agreement shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited financial statements of the Borrower delivered to the Agent; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant contained in Article V to eliminate the effect of any change after the date hereof in GAAP (which, for purposes of this proviso shall include the generally accepted application or interpretation thereof) on the operation of such covenant (or if the Agent notifies the Borrower [which notice the Borrower may reasonably rely upon without the need for independent verification from any other Bank] that the Required Banks wish to amend any such covenant for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the 16 17 relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Banks in accordance with Section 8.4. 1.3 Interpretation. In this Agreement the singular includes the plural and the plural the singular; words importing any gender include the other genders; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; references to sections (or any subdivision of a section), articles, schedules, annexes and exhibits are to those of this Agreement unless otherwise indicated; the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications to such instruments but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement; and references to Persons include their respective permitted successors and assigns and, in the case of Governmental Authority, Persons succeeding to their respective functions and capacities. The term "ratably" means in accordance with the Pro Rata Share of each of the respective Banks. 1.4 References to "the Borrower and its Subsidiaries". Any reference herein to "the Borrower and its Subsidiaries" or the like shall refer solely to the Borrower during such times, if any, as the Borrower shall have no Subsidiaries. 1.5 Existing Advances and Acquisition of Pro Rata Shares. (a) Existing Advances. All outstanding Advances and Letter of Credit Obligations made or issued by BofA under the Amended and Restated Credit Agreement shall be deemed to have been made under this Agreement and shall be subject to the terms and conditions hereof. All such Advances and Letters of Credit shall be evidenced by the Note and shall be secured by the Deeds of Trust and other Security Documents and shall bear interest at the rates and for the Interest Periods established under the Amended and Restated Credit Agreement. (b) Priority of Pro Rata Shares. The respective interests of each Bank in the Loan Documents and the other rights and claims with respect to the Secured Facility shall be of equal priority with one another, except as otherwise expressly provided. (c) Existing Obligations. The Borrower and each Bank acknowledge that as of the date of this Agreement, the Commitment Amount, the principal balance of all outstanding Advances, total accrued and unpaid interest on said Advances, the outstanding Letter of Credit Obligations and each Bank's Pro Rata Share of the Secured Facility, are as set forth on Schedule 1.5. 17 18 ARTICLE II. THE LOANS 2.1 Commitment to Make the Loans. Subject to the terms and conditions of this Agreement and the other Loan Documents, each Bank shall severally make Advances to the Borrower prior to the Revolving Maturity Date in proportion to their respective Pro Rata Shares and the Issuing Bank shall issue Letters of Credit in accordance with Section 2.4, all in such amounts as the Borrower may request that do not exceed in the aggregate at any one time outstanding the Loan Availability; provided, that no more than Five Million Dollars ($5,000,000) in Letter of Credit Obligations may be outstanding at any time. Each Advance shall be in a principal amount of at least One Million Dollars ($1,000,000) (except that any such Advance may be in an amount equal to the unused aggregate Loan Availability), and shall be made in increments in excess thereof of no less than One Hundred Thousand Dollars ($100,000); provided, however, that the foregoing clause shall not apply to Advances made pursuant to Section 2.4(d) hereof. Notwithstanding anything contained in this Agreement to the contrary, at no time may the aggregate outstanding Advances under this Agreement plus the aggregate outstanding amount of all Letter of Credit Obligations at such time exceed the Loan Availability at such time. Within the limits and subject to the terms and conditions of this Agreement and the other Loan Documents, the Borrower may borrow, repay and reborrow amounts under this Agreement; provided, however, that the Borrower shall not be permitted to borrow or reborrow any additional amounts following the Term-out Commencement Date. Except as provided in Section 2.21, in the event that at any time and for any reason, the outstanding principal balance of Advances together with the amount of outstanding Letter of Credit Obligations exceeds the Loan Availability, Borrower shall immediately and without demand pay to the Agent for the benefit of the Banks ratably the amount of such difference; provided, that if the aggregate outstanding principal balance of the Advances together with the amount of outstanding Letter of Credit Obligations exceeds the Loan Availability by reason of reappraisal and determination of new Collateral Values pursuant to Section 2.21, such obligation to pay shall be subject to the provisions of Section 2.21. 2.2 Procedure for Borrowing (a) Request for Advance. Prior to the Term-out Commencement Date, the Borrower may request an Advance under the Loan Availability from time to time on any Banking Day prior to the Revolving Maturity Date by giving irrevocable notice to the Agent in the form of the Request for Advance, Letter of Credit or Conversion/Continuation of a Loan specifying: (i) whether the requested Advance is to be a Reference Rate Loan or a LIBO Rate Loan; (ii) the principal amount of the requested Advance; 18 19 (iii) the date the requested Advance is to be made, which shall be a Banking Day; and (iv) if the requested Advance is to be a LIBO Rate Loan, the initial Interest Period selected by the Borrower for such LIBO Rate Loan, provided that no Interest Period shall be selected if it would extend past the Revolving Maturity Date. (b) Timing of Request. The Borrower shall give such notice to the Agent no later than 9:00 a.m., San Francisco time, on the first Banking Day before the date of the requested Advance in the case of a Reference Rate Loan, and no later than 9:00 a.m., San Francisco time, on the third Banking Day before the date of the requested Advance in the case of a LIBO Rate Loan. Each such notice shall be made by a Designated Representative and given by telephone or facsimile transmission to the Agent and, if given by telephone, shall thereafter be immediately confirmed by the Borrower by delivery to the Agent of a Request for Advance, Letter of Credit or Conversion/Continuation of a Loan. (c) Notice to Banks. Upon receipt of a Request for Advance, Letter of Credit or Conversion/Continuation conforming to the requirements of this Section 2.2, the Agent shall promptly notify each Bank thereof and of the amount of its Pro Rata Share of the Advance described therein. (d) Making of Advances by Banks. Each Bank will make the amount of its Pro Rata Share of any Advance available to the Agent for the account of the Borrower at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the borrowing date requested by the Borrower in accordance with this Agreement in funds immediately available to the Agent. The proceeds of all such Advances will then be made available to the Borrower by the Agent by wire transfer in accordance with written instructions provided to the Agent by the Borrower. The failure of any Bank to make any Advance on any borrowing date shall not relieve any other Bank of any obligation hereunder to make an Advance on such borrowing date, but no Bank shall be responsible for the failure of any other Bank to make its Advance on the borrowing date. 2.3 Conversion and Continuation of Loans (a) The Borrower may elect from time to time to convert any Reference Rate Loan into a LIBO Rate Loan, or any LIBO Rate Loan into a Reference Rate Loan; provided, however, that (i) no Reference Rate Loan may be converted into a LIBO Rate Loan if at such time a Default or an Event of Default has occurred and is continuing and (ii) any conversion of a LIBO Rate Loan into a Reference Rate Loan shall be made on, and only on, the last day of the Interest Period for such LIBO Rate Loan. The Borrower shall request the Agent to effect such conversion by giving irrevocable notice to the Agent in the form of the Request for Advance, Letter of Credit or Conversion/Continuation of a Loan specifying: 19 20 (i) the Loan to be so converted; (ii) the date of the requested conversion, which shall be a Banking Day; and (iii) if such Loan is to be converted into a LIBO Rate Loan, the initial Interest Period selected by the Borrower for such LIBO Rate Loan, provided that no Interest Period shall be selected if it would extend past the Revolving Maturity Date or, if Borrower has elected the Term-out Option, the Term-out Maturity Date. (b) The Borrower shall give such notice of conversion to the Agent no later than 9:00 a.m., San Francisco time, on the first Banking Day before the date of the requested conversion of a Loan into a Reference Rate Loan, and no later than 9:00 a.m., San Francisco time, on the third Banking Day before the date of the requested conversion of a Loan into a LIBO Rate Loan. Each such notice shall be made by a Designated Representative and given by telephone or facsimile transmission to the Agent and, if given by telephone, shall thereafter be immediately confirmed by the Borrower by delivery to the Agent of a Request for Advance, Letter of Credit or Conversion/Continuation of a Loan. (c) Any LIBO Rate Loan may be continued as such upon the expiration of its pending Interest Period by the Borrower's giving the Agent irrevocable notice of continuation thereof no later than 9:00 a.m., San Francisco time, on the third Banking Day before the date of the requested continuation, which notice shall be given by delivery to the Agent of a Request for Advance, Letter of Credit or Conversion/Continuation of a Loan; provided, however, that no LIBO Rate Loan may be continued as such if a Default or an Event of Default has then occurred and is continuing, but instead, such LIBO Rate Loan shall be automatically converted to a Reference Rate Loan on the last day of the Interest Period for which that Adjusted LIBO Rate was determined. (d) In the event that a timely notice of conversion or continuation with regard to a LIBO Rate Loan is not given in accordance with this Section 2.3, then, unless the Agent shall have received timely notice in accordance with Section 2.12 that the Borrower elects to prepay such LIBO Rate Loan on the last day of such Interest Period, the Borrower shall be deemed irrevocably to have requested that such LIBO Rate Loan be converted into a Reference Rate Loan on the last day of such Interest Period. (e) The Borrower may not request, continue or convert to, a LIBO Rate Loan during the Term-out Option Period in an amount and for an Interest Period that would result in all or a portion of such LIBO Rate Loan being paid in whole or in part prior to the end of its applicable Interest Period by reason of the required principal amortization payments during the Term-out Option Period (as required under Section 2.5(c) hereof). 20 21 (f) Unless the Agent otherwise consents, the Borrower shall not have more than six (6) LIBO Rate Loans outstanding at any one time; provided, however, that the Borrower may have up to twelve (12) LIBO Rate Loans outstanding if the Borrower pays to the Agent an additional fee of Two Hundred Fifty Dollars ($250) for each LIBO Rate Loan requested in excess of six (6) LIBO Rate Loans. If upon the Effective Date the Borrower has more than six (6) LIBO Rate Loans outstanding, then the Borrower shall not be entitled to continue any outstanding LIBO Rate Loan as a LIBO Rate Loan upon the expiration of its pending Interest Period, or request the conversion of any Reference Rate Loan into a LIBO Rate Loan, or elect to designate a new Advance as a LIBO Rate Loan, unless (i) such continuation, conversion or designation shall not result in the Borrower having more than six (6) LIBO Rate Loans outstanding or (ii) the Borrower pays the additional fee set forth in the preceding sentence. (g) Upon receipt of a Request for Advance, Letter of Credit or Conversion/Continuation conforming to the requirements of this Section 2.3, or an automatic conversion or continuation pursuant to this Section 2.3, the Agent shall promptly notify each Bank thereof. All interest rate conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans converted or continued. 2.4 Letters of Credit (a) Availability. Subject to the terms and conditions of this Agreement, the Issuing Bank shall, at the request of the Borrower to the Issuing Bank with a copy to the Agent, if different (which request shall be in the form of the Request for Advance, Letter of Credit or Conversion/Continuation of a Loan), issue one or more Letter(s) of Credit under the Loan Availability; provided, however, that the aggregate outstanding Letter of Credit Obligations shall not at any time exceed $5,000,000. The issuance of any such Letters of Credit shall be subject to the following conditions (in addition to the conditions set forth in Article III of this Agreement): (i) Each such Letter of Credit shall be in form and substance satisfactory to the Issuing Bank in its sole discretion (except that the conditions requested by the Borrower upon which drafts or other demands will be honored must be acceptable to the Issuing Bank in its reasonable discretion and must comply with all Applicable Laws), and shall be subject to the terms of a Letter of Credit Application and Agreement which the Borrower shall execute and deliver to the Issuing Bank with a copy to the Agent, if different. No Letter of Credit shall contain an automatic renewal clause. (ii) Each Letter of Credit shall be issued solely for purposes directly relating to the ordinary course of the Borrower's business as now conducted, including, without limitation, the purposes of acquiring, refinancing, maintaining and disposing of real estate projects; provided, however, that notwithstanding the foregoing clause, no such Letter of Credit shall be used to facilitate the payment or financing of any dividends declared by the Borrower, nor shall any such 21 22 Letter of Credit be used for purposes of credit enhancement of the Borrower's other Indebtedness for borrowed money. (iii) Letters of Credit may be issued from time to time through the date which is three (3) calendar days before the Revolving Maturity Date. No Letter of Credit shall have an expiration date extending past the Revolving Maturity Date; provided, however, that in the event that the Term-out Option has been exercised by the Borrower as specified in Section 2.5(c) below, the Required Banks, in their sole discretion may permit a Letter of Credit to have an expiration date extending until the end of the Term-out Option Period, which permission shall be communicated to the Borrower by the Agent and which communication the Borrower may reasonably rely upon without the need for independent verification from any other Bank. In the event that Required Banks have consented to allow a Letter of Credit to have an expiration date extending beyond the Revolving Maturity Date, then on the Revolving Maturity Date, with respect to such Letter of Credit that remains outstanding, the Borrower shall deposit cash in an amount equal to the face amount of such outstanding Letter of Credit into an interest bearing deposit account (the "CASH COLLATERAL ACCOUNT") established with and pledged to the Agent pursuant to documentation in form and substance satisfactory to the Agent. Such Cash Collateral Account shall secure the reimbursement obligations of the Borrower to the Issuing Bank arising in the event of a draw under such Letter of Credit, and the Borrower hereby grants a perfected first priority security interest in favor of the Agent in such Cash Collateral Account, together with all rights of a secured party with respect thereto (even if no further documentation is requested by the Agent or executed by the Borrower with respect thereto). The Borrower shall execute such additional documents as the Agent in its discretion may require and shall provide all other documents requested by the Agent to evidence or perfect the Agent's first priority security interest in such Cash Collateral Account. In the event of a draw under such outstanding Letter of Credit, the Agent shall have the right to immediately withdraw from the Cash Collateral Account an amount of cash equal to the amount of the draw made under such Letter of Credit to reimburse the Issuing Bank for the amount of the draw. If the Issuing Bank is reimbursed by the Borrower from a source other than the Cash Collateral Account, or if the amount of the drawing is less then the amount contained in the Cash Collateral Account for that Letter of Credit, the Agent shall immediately pay to the Borrower an amount equal to the difference between the amount held in the Cash Collateral Account for that Letter of Credit and the amount required to reimburse the Issuing Bank. Upon the expiration, surrender or termination of such outstanding Letter of Credit (and any other Letters of Credit secured by such Cash Collateral Account), the Agent shall promptly remit to the Borrower all cash then contained in the Cash Collateral Account and the Cash Collateral Account shall be closed. Except as specified above, Borrower shall not be allowed to withdraw any sums from the Cash Collateral Account. (iv) In the event of any request for drawing under any Letter of Credit by the beneficiary thereof, the Issuing Bank shall notify the Agent and the Borrower that the Issuing Bank shall honor the drawing, and, with or without such notice, the Borrower shall reimburse the Issuing Bank on the day on which the drawing is 22 23 honored in an amount in same day funds equal to the amount of the drawing; however, (i) the Borrower shall be deemed to have given a Request for Advance to the Agent requesting the Banks to make a Reference Rate Loan (or, if the Borrower shall have made a timely request therefor, a LIBO Rate Loan) on the date on which the drawing is honored in an amount equal to the amount of the drawing; and (ii) subject to the satisfaction of the applicable conditions precedent to Loans hereunder specified in this Agreement, then the Banks shall, on the date of the drawing, make a Reference Rate Loan (or, if the Borrower shall have made a timely request therefor, a LIBO Rate Loan) in the amount of the drawing, the proceeds of which shall be paid to the Issuing Bank and applied directly by the Issuing Bank to reimburse the Issuing Bank for the amount of the drawing. (b) Obligation to Reimburse. The Borrower's obligation to reimburse the Issuing Bank for any and all amounts drawn under any Letter of Credit and all interest thereon shall be secured by the Collateral. The Borrower's obligations to repay any and all drawings under any Letter of Credit hereunder shall be absolute, irrevocable and unconditional under any and all circumstances whatsoever and irrespective of any set-off, counterclaim or defense to payment which the Borrower may have or have had against Issuing Bank, Agent or any other Bank (except such as may arise out of Issuing Bank's, Agent's or any other Bank's gross negligence or willful misconduct hereunder) or any other Person, including, without limitation, any setoff, counterclaim or defense based upon or arising out of: (i) The existence of any claim, setoff, defense or other right which the Borrower may have at any time against, any beneficiary or any transferee of such Letter of Credit; (ii) Any demand, statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect whatsoever or any variations in punctuation, capitalization, spelling or format of the drafts or any statements presented in connection with any drawing under such Letter of Credit; and (iii) The failure, for any reason, of any Bank to fund advances to the Borrower hereunder for purposes of reimbursement of any drawing under a Letter of Credit. (c) Participations in Letter of Credit Obligations Purchased by Banks. (i) On the date of the issuance of each Letter of Credit (or, in the case of any Letter of Credit outstanding hereunder as of the Effective Date, on the Effective Date), the Issuing Bank shall be deemed irrevocably and unconditionally to have sold and transferred to each Bank (other than the Issuing Bank) and each Bank shall be deemed to have irrevocably and unconditionally purchased and received from the 23 24 Issuing Bank, an undivided interest and participation, to the extent of such Bank's Pro Rata Share in effect from time to time, in such Letter of Credit and all Letter of Credit Obligations with respect thereto. The Pro Rata Share of each Bank hereunder shall include that Bank's share of the Letter of Credit Obligations. For the avoidance of doubt, notwithstanding the sale to and purchase by each Bank of its Pro Rata Share of a Letter of Credit Obligation as provided in this Section 2.4(c)(i), the Borrower shall continue to deal with the Issuing Bank and the Agent as provided herein with respect to all Letters of Credit. (ii) In the event that any reimbursement obligation under this Agreement is not paid when due to the Issuing Bank with respect to any Letter of Credit, the Issuing Bank shall promptly notify the Agent to that effect, and the Agent shall promptly notify each Bank (other than the Issuing Bank) of the amount of such reimbursement obligation and each Bank other than the Issuing Bank shall immediately pay to the Agent for distribution to the Issuing Bank, in lawful money of the United States and in same day funds, an amount equal to such Bank's Pro Rata Share then in effect of the amount of such unpaid reimbursement obligation. (iii) The obligation of each Bank other than the Issuing Bank to make payments under Section 2.4(c)(ii) above shall be unconditional and irrevocable and shall be made under all circumstances, including, without limitation, following the occurrence of any Default or any Event of Default or any of the circumstances referred to in Section 2.4(b). (iv) Prior to the occurrence of any Event of Default, Agent shall promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of all amounts received on account of the obligations of the Borrower to repay amounts drawn under any Letter of Credit (in like funds as received). Following the occurrence of an Event of Default, all amounts received by the Agent on account of such obligations shall be disbursed by the Agent as follows: (A) First, to the payment of expenses incurred by the Agent in the performance of its duties and enforcement of its rights under the Loan Documents, including, without limitation, all costs and expenses of collection, attorneys' fees, court costs and foreclosure expenses; (B) Then, to the Banks, pro rata in accordance with their respective Pro Rata Shares until all outstanding reimbursement obligations for drawings on such Letter of Credit and interest accrued thereon have been paid in full; and (C) Then, and if but only if there remains any available amount which has not been drawn under such Letter of Credit, to the Agent to hold as cash collateral for the obligation of the Borrower to reimburse any future drawings on such Letter of Credit, the Borrower hereby granting to the Agent, for the pro rata, pari passu benefit of the Banks, a first perfected security interest therein and hereby 24 25 irrevocably agreeing that amounts so held may be applied from time to time in reimbursement of drawings on such Letter of Credit as the same may occur, until the expiration of such Letter of Credit and payment in full of all amounts due with respect to any drawing thereon. (v) If any payment received from the Borrower on account of any reimbursement obligation with respect to any Letter of Credit and distributed to a Bank hereunder is thereafter recovered from the Issuing Bank, each Bank which received such distribution shall, upon demand by the Agent, repay to the Issuing Bank such Bank's ratable share of the amount so recovered together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such Bank's required repayment to (ii) the total amount so recovered) of any interest of other amount paid or payable by the Issuing Bank in respect of the total amount so recovered. 2.5 Maturity. (a) Scheduled Maturity. Subject to the rights of the Borrower under clause (c) of this Section 2.5 to elect the Term-out Option and also subject to the mandatory prepayment provisions of Section 2.12 and the provisions of Article VI regarding the occurrence of an Event of Default, the outstanding principal amount of the Loans (together with all accrued but unpaid interest, fees, costs, charges and expenses of the Banks) shall be due and payable to the Agent for the benefit of the Banks ratably on the Revolving Maturity Date. (b) Extended Maturity. The Borrower may request that the Banks extend the Revolving Maturity Date hereunder for one (1) year from July 1, 1998 to July 1, 1999, by giving the Agent written notice of such request no sooner than sixty (60) days prior to June 6, 1997 and no later than June 6, 1997. Within thirty (30) days following receipt of such written notice, the Agent shall notify Borrower in writing (which writing the Borrower may reasonably rely upon without the need for independent verification from any other Bank) whether or not the Required Banks elect (which election may be made in the Required Banks' sole discretion) to extend the Revolving Maturity Date hereunder for one (1) year from July 1, 1998 to July 1, 1999. The Agent's failure to notify the Borrower in writing within such thirty-day (30-day) period shall be deemed to be an election not to so extend the Revolving Maturity Date hereunder. If the Required Banks elect to extend the Revolving Maturity Date hereunder, then the parties shall enter into such extension agreements with respect to the Loan Documents as are satisfactory in form and substance to the Required Banks in their sole discretion; provided, however, that the payment terms of the Note shall remain unchanged (e.g., the interest rate shall remain the same and, except as otherwise specified herein, there shall be no required principal amortization prior to July 1, 1999). If this Agreement is extended as provided herein, the Borrower shall pay to the Agent for the account of each Bank ratably a loan extension fee (the "EXTENSION FEE") equal to one-tenth of one percent (0.10%) of Commitment Amount, which fee shall become due and payable within 25 26 ten (10) days after receipt by the Borrower from the Agent of the Required Banks' notice of extension. (c) Term-Out Option. Provided that (a) no Default or Event of Default has occurred and is continuing at the time of such election and (b) in the Required Banks' reasonable opinion there have been no material adverse changes in the business, operations, conditions or prospects, whether financial or otherwise, of the Borrower, then the Borrower may in its sole discretion, by written notice to the Agent no sooner than one hundred and twenty (120) days prior to the Revolving Maturity Date and no later than sixty (60) days prior to the Revolving Maturity Date, elect to exercise the "TERM-OUT OPTION". Upon Borrower's written notification to Agent that it has exercised the Term-out Option the following terms shall apply: (i) The Banks' obligations to make Advances and the Issuing Bank's obligation to issue Letters of Credit shall terminate as of the Term-out Commencement Date, and Borrower shall have no right to request any further Advances or additional Letters of Credit not then outstanding (provided that Letters of Credit which are already outstanding prior to the Term-out Commencement Date and which the Required Banks (in their sole discretion) have permitted to have a term extending beyond the Revolving Maturity Date may remain outstanding during the Term-out Option Period for the specified term thereof, not to exceed the Term-out Maturity Date); (ii) From the Term-out Commencement Date through the date which is twenty-four (24) months following the Term-out Commencement Date (the "TERM-OUT OPTION PERIOD"), in addition to interest and all other sums required to be paid under the Loan Documents, the Borrower shall make quarterly principal amortization payments in an amount equal to one-eightieth (1/80th) of the aggregate amount of Advances outstanding as of the Term-out Commencement Date; such payments shall be payable quarterly on the last Banking Day of each calendar quarter (beginning on the last Banking Day of the calendar quarter during which the Term-out Commencement Date occurs); (iii) As a condition precedent to the effectiveness of Borrower's exercise of the Term-out Option as provided herein, the Majority Banks in their sole discretion may request the Agent to commission new appraisals for any Collateral property for which the "as is" date of value for the most recent appraisal commissioned by the Agent predates the Term-out Commencement Date by more than one (1) year. The Majority Banks in their sole discretion may reestablish Collateral Values for each such reappraised Collateral property for the purpose of recalculating the Borrowing Base. The Borrower shall pay all fees, costs and expenses incurred in connection with all such reappraisals and the limitation on appraisal fees, costs and expenses set forth in Section 2.21 shall not apply to any reappraisals prepared pursuant to this Section 2.5(c)(iii); 26 27 (iv) The applicable interest rates shall increase by one-quarter of one percent (0.25%) during the Term-out Option Period, as more fully specified below in Section 2.6; (v) All remaining unpaid Advances and other Obligations shall be due and payable in full on the expiration of the Term-out Option Period, which shall expire two (2) years from the Revolving Maturity Date (the "Term-out Maturity Date"); (vi) Except as specified above, all other terms and provisions of the Loan Documents shall remain unmodified and in full force and effect during the Term-out Option Period; and (vii) The Borrower shall have paid to the Agent for the account of the Banks ratably on or before the Term-out Commencement Date a term-out fee equal to three hundred and seventy-five one-thousandths of one percent (0.375%) of the aggregate amount of all Advances outstanding on the Term-out Commencement Date. 2.6 Interest; Interest Payment Dates (a) During the initial term of this Agreement, but not during the Term-out Option Period, each Reference Rate Loan shall bear interest on the unpaid principal amount thereof at a rate per annum equal to the Reference Rate plus one-quarter of one percent (0.25%), such rate to change from time to time concurrently with any change in the Reference Rate. During the Term-out Option Period, the applicable interest rate on each Reference Rate Loan shall increase by one-quarter of one percent (0.25%) to a rate equal to the Reference Rate plus one-half of one percent (0.5%) per annum. (b) During the initial term of this Agreement, but not during the Term-out Option Period, each LIBO Rate Loan shall bear interest on the unpaid principal amount thereof during each Interest Period at a rate per annum equal to the Adjusted LIBO Rate for such Interest Period, plus one and three-quarters percent (1.75%). During the Term out Option Period, the applicable interest rate on each LIBO Rate Loan shall increase by one-quarter of one percent (0.25%) to a rate equal to the Adjusted LIBO Rate for the applicable Interest Period plus two percent (2.0%) per annum. (c) Interest on each Loan accrued through the end of each calendar month shall be payable in arrears on the next Interest Payment Date; provided, however, that Overdue Interest and any other amount payable in connection with any Loan not paid when due (whether at stated maturity, by acceleration or otherwise) shall be payable from time to time upon demand of the Banks. (d) All computations of interest shall be based on a year of three hundred and sixty (360) days and actual days elapsed. 27 28 2.7 Overdue Amounts. All Overdue Amounts shall bear interest at a rate of three percent (3.0%) in excess of the Reference Rate, effective on the day following the date of nonpayment and continuing until such amounts are paid in full. 2.8 Note. The Borrower's obligation to repay the principal amount of all Loans and all accrued interest thereon shall be evidenced by the Note, all of the terms and provisions of which are incorporated herein by this reference. The Agent shall enter the date, amount and interest rate with respect to each Loan (and, in the case of each LIBO Rate Loan, the Interest Period applicable thereto), and any payments or prepayments thereof, in its books and records or on the back of the Note, and such entries shall be prima facie evidence of the matters noted, absent manifest error. The failure of the Agent to make any notation in its books and records or on the back of its Note shall not discharge the Borrower of its obligation to repay in full with interest all amounts borrowed hereunder. 2.9 Purpose of the Loans. The proceeds of the Loans shall be used only for purposes directly related to the conduct of the Borrower's business as a real estate investment trust, including, without limitation, general corporate purposes, working capital purposes and the purposes of acquiring, refinancing, maintaining and disposing of real estate projects; provided, however, that no more than Five Million Dollars ($5,000,000) may be available hereunder for the issuance of Letters of Credit or the repayment of Letter of Credit Obligations; and provided, further, that no amounts may be borrowed hereunder for the purpose of paying or financing the payment of dividends declared by the Borrower. 2.10 Other Fees. (a) In addition to the other fees provided for herein, the Borrower shall pay to the Agent for the account of the Banks ratably from the Borrower's own funds (and not from Loan proceeds): (i) An unused facility fee (the "UNUSED COMMITMENT FEE") in an amount equal to the average daily unused amount of the Commitment Amount from June 6, 1996 until the Revolving Maturity Date, multiplied by the rate of one-quarter of one percent (0.25%) per annum based upon a three hundred and sixty-day (360-day) year and the actual number of day elapsed. Installments of the Unused Commitment Fee shall be payable quarterly in arrears on the last Banking Day of each calendar quarter during which there is outstanding any unused Commitment Amount and on the Revolving Maturity Date or the last day of the Term-out Option Period. No Unused Commitment Fee shall be payable during the Term-out Option Period. For purposes of computing the Unused Commitment Fee, the amount of the Advance requested by the Borrower pursuant to that certain Irrevocable Request and Authorization to Disburse, dated as of February 14, 1996 (the "IRREVOCABLE REQUEST"), delivered by the Borrower to BofA, shall be considered part of the unused portion of the Commitment Amount until such time as the letter of credit referenced in the Irrevocable Request is 28 29 returned to BofA or such funds become the subject of a "Funding Notice", as such term is used in the Irrevocable Request; and (ii) For each Letter of Credit, a fee equal to one and one-half percent (1.50%) per annum (based upon a three hundred and sixty-day (360-day) year and the actual number of day elapsed) of the face amount of such Letter of Credit (as the same may be increased by any amendment thereto). The first monthly installment of such fee shall be payable upon issuance of such Letter of Credit and thereafter monthly installments shall be payable in advance for the term of such Letter of Credit (as such term may be extended). The Borrower shall also pay to the Issuing Bank all costs and expenses incurred by the Issuing Bank related to the issuance of such Letter of Credit or any amendment thereto, which costs and expenses shall be payable prior to the issuance of such Letter of Credit or any such amendment. (b) The Borrower shall pay an agency fee to the Agent for the Agent's own account, as set forth in that certain letter agreement, dated May 20, 1996, by and between BofA and the Borrower. 2.11 Payments by Borrower. (a) Except as provided in Section 2.4 with respect to Letters of Credit, all payments by the Borrower shall be made to the Agent for the account of the Banks ratably at the Agent's Payment Office, and shall be made in U.S. dollars and in immediately available funds, in accordance with the Loan Documents. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as may be agreed by a Bank) of such payment in like funds as received to each Bank's Payment Office. Whenever any payment hereunder shall be stated to be due on a day other than a Banking Day, such payment shall be made on the next succeeding Banking Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. Any payment received by the Agent later than 10:00 a.m. (San Francisco time) on any Banking Day or any payment received on a day other than a Banking Day shall be deemed to have been received on the following Banking Day and any applicable interest or fee shall continue to accrue. (b) Agent shall have the exclusive right to collect from Borrower or any guarantors, third parties, on account of the Loan, including principal, interest, fees, protective advances, prepayment premiums (if any), whether such sums are received directly from Borrower, any guarantors, or any other persons, or obtained by right of offset by Agent of any kind, by sale of any Collateral, or by enforcement of the Loan Documents. No Bank shall independently initiate any judicial action or equivalent action or other proceeding against the Borrower with respect to the Secured Facility. (c) The Borrower shall reimburse the Banks for any and all Payment Taxes the Banks shall incur with respect to this Agreement, the Note or any other Loan Document. All payments by the Borrower under this Agreement shall be made without set-off or counterclaim and in such amounts as may be necessary in order 29 30 that all such payments (after deduction or withholding for or on account of any Payment Taxes) shall not be less than the amounts otherwise required to be paid under this Agreement. A certificate as to any additional amounts payable to the Banks under this Section 2.11 submitted to the Borrower by the Agent shall show in reasonable detail the amount payable, the calculations used to determine such amount and the basis of such claim and shall be conclusive absent manifest error. Any amounts payable by the Borrower under this Section 2.11 with respect to past payments shall be due within ten (10) days following receipt by the Borrower of such certificate from the Agent; any such amounts payable with respect to future payments shall be due concurrently with such future payments. With respect to each deduction or withholding for or on account of Payment Taxes, the Borrower shall promptly furnish to the Agent such certificates, receipts and other documents as may be required (in the reasonable judgment of the Agent) to establish any tax credit to which the Banks may be entitled. 2.12 Prepayments. (a) Subject to the terms of this Agreement and the Note, upon at least one Banking Day's notice to the Agent, the Borrower may, at its option, prepay the Loans (together with all other fees, costs, charges and expenses of the Banks accrued but unpaid through the date of prepayment) in whole at any time or in part from time to time, without penalty or premium; provided, however, that LIBO Rate Loans (i) may only be prepaid on a day other than the last day of the applicable Interest Period upon payment of the prepayment fee specified in subsection (b) below, (ii) any partial prepayment shall be made in an amount at least equal to Five Hundred Thousand Dollars ($500,000) or any higher amount that is an integral multiple of One Hundred Thousand Dollars ($100,000). If any such notice is given, the principal amount to be paid shall be irrevocably due and payable on the date specified in the notice, together with all other fees, costs, charges and expenses of the Banks accrued but unpaid through the date of prepayment. Accrued and unpaid interest on the amount of any prepayment shall be due and payable on the next Interest Payment Date following such prepayment. (b) The prepayment fee payable in accordance with subsection (a)(i) above shall be payable to Agent for the account of the Banks ratably and shall be equal to the sum of: (i) Two Hundred and Fifty Dollars ($250); and (ii) the amount, if any, by which X exceeds Y, where (A) X equals the additional interest that would have accrued on the principal amount prepaid at the Adjusted LIBO Rate without any spread, if that amount had remained outstanding until the last day of the applicable Interest Period, and (B) Y equals the interest that Banks could recover by placing the prepaid funds on deposit in the London U.S. dollar inter-bank 30 31 market for a period beginning on the day of the prepayment and ending on the last day of the applicable Interest Period, or for a comparable period for which an appropriate rate quote may be obtained; and (iii) an amount equal to all costs and expenses which Banks reasonably expect to incur in liquidation and reinvestment of the prepaid funds. In no event shall the Banks be obligated to make any payment or refund to the Borrower, nor shall the Borrower be entitled to any setoff or other claim against the Banks, should the return which the Banks could obtain under the prepayment formula exceed the interest that the Banks would have received if no prepayment had occurred. The foregoing prepayment fee shall also be payable if prepayment occurs as the result of the acceleration of the Obligations by the Agent because of the occurrence of an Event of Default, and in that event the Banks shall, automatically and without notice or demand, be entitled to receive, concurrently with any such prepayment, the prepayment fee set forth above and the obligation to pay such prepayment fee shall be added to the principal hereof. THE BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT THE BANKS WOULD NOT MAKE TO THE BORROWER THE LIBO RATE LOANS WITHOUT THE BORROWER'S AGREEMENT, AS SET FORTH ABOVE IN THIS SECTION, TO PAY THE BANKS A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY PORTION OF THE PRINCIPAL BEARING INTEREST BASED UPON THE ADJUSTED LIBO RATE FOLLOWING THE ACCELERATION OF THE REVOLVING MATURITY DATE (OR THE TERM-OUT MATURITY DATE IF THE BORROWER ELECTS THE TERM-OUT OPTION IN ACCORDANCE WITH SECTION 2.5(b)) HEREOF BY REASON OF A DEFAULT HEREUNDER. THE BORROWER HAS CAUSED THOSE PERSONS SIGNING THIS AGREEMENT ON THE BORROWER'S BEHALF TO SEPARATELY INITIAL THE AGREEMENT CONTAINED IN THIS SECTION BY PLACING THEIR INITIALS BELOW: INITIALS: _______________ (c) The outstanding Obligations shall be prepaid immediately to the extent of all Net Cash Proceeds derived from the sale of securities by the Borrower (excluding sales of the Borrower's common stock in the Second Public Offering or any stock option or dividend reinvestment plan of the Borrower). (d) The outstanding Obligations shall be prepaid immediately to the extent of all insurance proceeds received under any insurance policy maintained pursuant to any Loan Document which are required by that Loan Document to be applied to the Obligations. 31 32 (e) The outstanding obligations shall be prepaid immediately to the extent of the release price to be paid to the Agent for the account of the Banks ratably under Section 2.22(a)(iii) hereof when proceeds are received by reason of the sale or refinancing of any Collateral. (f) In the event the Borrower elects to prepay the Secured Facility in whole or in part in accordance with and subject to the requirements, terms and conditions set forth in Section 2.19, the Agent will promptly notify each Bank of the Agent's receipt of the Borrower's notice with respect thereto and of each Bank's Pro Rata Share of such prepayment. Any reduction or termination of the Secured Facility, including any voluntary reduction in the Commitment Amount by the Borrower pursuant to the Agreement, shall be applied to each Bank according to its Pro Rata Share. 2.13 Agent's Right to Charge Account. The Borrower authorizes the Agent at any time and from time to time (irrevocably until the Obligations are paid in full and the Loan Availability hereunder is terminated) to charge any Obligations then due against any deposit account maintained by the Borrower with the Agent; provided that the Agent shall not have any obligation to charge any such Obligations against any such deposit account. The Borrower hereby grants a perfected first priority security interest in favor of the Agent in all such deposit accounts as security for the Obligations of the Borrower, together will all rights of a secured party with respect thereto. The Borrower shall execute such additional documents as the Agent in its discretion may require and shall provide all other documents requested by the Agent to evidence or perfect its first priority security interest in such deposit accounts. 2.14 Set-Off. Subject to Section 2.11(c), in addition to any rights and remedies of the Banks provided by law, upon the occurrence of an Event of Default, the Banks shall have the right, without prior notice to the Borrower (any such notice being expressly waived by the Borrower) to the extent permitted by Applicable Law, to set-off and apply against any Indebtedness, whether mature or unmatured and whether fixed or contingent, of the Borrower to the Banks under this Agreement, any amount then or thereafter owing from the Banks to the Borrower. 2.15 Inability to Determine Interest Rates. Notwithstanding any other provision of this Agreement, if the Agent determines (which determination, in the absence of manifest error, shall be conclusive and binding upon the Borrower) that by reason of circumstances affecting the London interbank eurocurrency market, adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for any Interest Period with respect to (a) proposed Loans that the Borrower has requested be made as LIBO Rate Loans, (b) a LIBO Rate Loan that will result from the requested conversion of any Reference Rate Loan into a LIBO Rate Loan or (c) the continuation of a LIBO Rate Loan as such for an additional Interest Period (any such Loan described in clauses (a), (b) or (c) of this Section being herein called an "Affected Loan"), the Agent shall forthwith give telephonic or facsimile notice of its determination, confirmed in writing, to the Borrower at least two (2) Banking Days prior to, as the case may be, the 32 33 funding date for such Affected Loan, the conversion date for such Affected Loan or the last day of the Interest Period applicable to such Affected Loan. Unless the Borrower notifies the Agent promptly upon receipt of such telephonic or facsimile notice that it wishes to rescind or modify its request regarding the Affected Loan, then any requested LIBO Rate Loan shall be made as, continued as, or converted into a Reference Rate Loan, as the case may be. Until any such notice has been withdrawn by the Agent, no further Affected Loan shall be made. 2.16 Illegality. Notwithstanding any other provision of this Agreement, if any change of law, rule, regulation, treaty or directive or any change in the interpretation or application thereof shall make it unlawful for any Bank to make or maintain a LIBO Rate Loan as contemplated by this Agreement or to accept deposits in order to make or maintain a LIBO Rate Loan, (a) such Bank acting through the Agent shall promptly notify the Borrower thereof, (b) the agreement of such Bank hereunder to make or convert into LIBO Rate Loans shall be suspended forthwith and (c) any and all outstanding LIBO Rate Loans made by such Bank and then outstanding shall automatically become Reference Rate Loans for the duration of the respective Interest Periods applicable thereto (or, if permitted by Applicable Law, at the end of such Interest Periods). The Borrower shall promptly pay to the Agent for the account of such Bank, any additional amounts necessary to compensate such Bank for any costs incurred by such Bank as a consequence of the Borrower making any conversion in accordance with this Section, including, without limitation, any interest or fees payable by such Bank to lenders of funds obtained by such Bank in order to make or maintain its LIBO Rate Loans. A certificate as to any such costs payable pursuant to this Section 2.16 submitted by an officer of such Bank to the Borrower (with a copy to the Agent) shall be conclusive, in the absence of manifest error. 2.17 Increased Costs. If, after the date of this Agreement, the adoption of or any change in law, rule, regulation, treaty or directive or any change in the interpretation or application thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) issued after the date hereof by any central bank or other Governmental Authority: (a) Shall subject such Bank to any tax, duty or other charge with respect to a Letter of Credit or a Loan or its obligation to issue any such Letter of Credit or make any such Loan, or shall change the basis of taxation of payments by the Borrower to such Bank on or in respect of such Loan (except for changes in the rate of taxation on the overall net income of such Bank); (b) Shall impose, modify or hold applicable any reserve, special deposit or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by such Bank for any Letter of Credit or any Loan (except for any reserve, special deposit or other requirement included in the determination of the Adjusted LIBO Rate, as applicable); or 33 34 (c) Shall impose on such Bank any other condition directly related to any Letter of Credit or any Loan; and (d) The result of any of the foregoing is to increase the cost to such Bank of issuing, making, renewing or maintaining such Letter of Credit or Loan beyond any adjustment made by such Bank in determining the applicable fee or interest rate for such Letter of Credit or Loan, or to reduce any amount receivable by it in respect of such Letter of Credit or Loan; then, in any such case, the Borrower shall promptly, upon demand by such Bank, pay to the Agent for the account of such Bank any additional amounts necessary to compensate such Bank for such additional cost or reduced amount receivable as reasonably determined by such Bank with respect to this Agreement, the Note or any other Loan Document; provided that the Borrower shall not be required to pay any such compensation with respect to any period prior to the thirtieth (30th) day before the date of any such demand. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by an officer of such Bank to the Borrower (with a copy to the Agent) shall be conclusive, in the absence of manifest error. 2.18 Capital Adequacy. (a) For purposes of this Section 2.18, the term "Bank" includes each Bank and any company controlling a Bank. The term "CAPITAL ADEQUACY REQUIREMENT" means any applicable existing or future law, rule, regulation or guideline, or any change in any of the foregoing, that relates to the manner in which a Bank allocates capital resources to its loans and commitments, or to a class of such loans and commitments which includes the Loans, or to any letters of credit such as the Letters of Credit. (b) This Section 2.18 shall apply whenever a Bank in its reasonable judgment determines: (i) That the amount of capital required or expected to be maintained by such Bank is or would be affected by any Capital Adequacy Requirement, or by the manner in which any Capital Adequacy Requirement may now or in the future be interpreted or administered by any governmental authority, central bank or comparable agency charged with such interpretation or administration, or by such Bank's compliance with any request or directive, whether or not having the force of law, of any such governmental authority, central bank or comparable agency; and (ii) That as a result, the rate of return on such Bank's capital has been or will be reduced because of such Bank's obligations under the Loan Documents, taking into account such Bank's policies with respect to capital adequacy and such Bank's desired return on capital. 34 35 If the conditions described above have been met, Borrower shall pay the Agent for the account of such Bank, upon written notice and demand made as specified below, such amounts as such Bank may reasonably determine would compensate such Bank for Borrower's allocable share of such Bank's reduced rate of return; provided that the Borrower shall not be required to pay any such amount with respect to any period prior to the thirtieth (30th) day before the date of any such demand. (c) Such Bank shall give the Borrower (with a copy to the Agent) at least thirty (30) days' written notice before such Bank's initial demand for compensation under this Section 2.18, and before any subsequent demand for such compensation at a level higher than that previously requested. The notice shall describe in reasonable detail the method of calculating such compensation. (d) All compensation under this Section 2.18 shall be payable quarterly in arrears. Any demand by a Bank for such compensation shall include a certificate setting forth in reasonable detail the basis for determining the amounts payable, and any such certificate shall be conclusive and binding in the absence of manifest error. 2.19 Termination of Unused Commitment. The Borrower may, at any time, at its option and upon five (5) business days' written notice to the Agent, elect to terminate, in multiples of Five Hundred Thousand Dollars ($500,000), any amount in excess of One Million Dollars ($1,000,000) of the unused portion of the Commitment Amount; once so terminated, such portion of the Commitment Amount shall not be reinstated. 2.20 Collateral. As of the Effective Date, the Collateral hereunder shall be the Existing Collateral and the Banks acknowledge that all conditions specified in this Section 2.20(c) have been satisfied with respect to each property constituting part of the Existing Collateral. Additional Collateral may be offered by the Borrower and shall be included in the Borrowing Base only in accordance with the following and any additional terms and conditions contained in this Agreement: (a) Request for Borrowing Base Increase. The Borrower from time to time may request that real property owned or to be acquired by the Borrower be accepted as Collateral and included in the Borrowing Base by delivering to the Agent a Request for Borrowing Base Increase as to such Collateral. (b) Acceptance of Collateral. The Required Banks shall have the right, in their sole discretion, and after performing such due diligence as the Required Banks desire in their sole discretion, to accept or reject any real property offered as Collateral. The Borrower shall at its expense provide the Required Banks with all requested due diligence materials and information, including, without limitation, title reports, environmental reports, soils reports, flood plain information, entitlement documents and plans and specifications, occupancy permits, operating statements and rent rolls, with respect to any offered real property. 35 36 (c) Conditions to Inclusion of Collateral in Borrowing Base. Each of the following conditions must be satisfied (or waived in writing by the Required Banks in their sole discretion) prior to the Required Banks' acceptance of any real property as Collateral and its inclusion in the Borrowing Base: (i) Acceptances. The Required Banks shall have accepted the real property as Collateral for inclusion into the Borrowing Base in the Required Banks' sole discretion in accordance with Section 2.20(b) above, and the Agent shall have so notified the Borrower in writing, which writing the Borrower may reasonably rely upon without the need for independent verification from any other Bank. (ii) Security Documents. The Borrower shall execute and deliver to the Agent such Security Documents as the Agent may require in its sole discretion, including a Deed of Trust, UCC-1 financing statement, fixture filing, unsecured environmental indemnity, and any other certificates or documents; and such Security Documents shall have been recorded and filed, as appropriate, so as to grant the Agent for the benefit of the Banks a perfected first priority lien on the intended real property collateral and all leases, rents and personal property relating thereto. (iii) Title Assurances. The Agent shall receive an American Land Title Association lender's policy of title insurance issued by Title Company, with such endorsements as the Agent may reasonably require (including mechanics lien coverage), with a liability limit of the Commitment Amount (aggregated with the liability limits of all other title policies issued hereunder), and insuring the Agent as the holder for the pari passu benefit of the Banks of a first lien priority Deed of Trust encumbering the applicable Collateral, subject only to such exceptions as the Agent may approve in its sole discretion. The Agent shall also receive such reinsurance in such amounts and from such title insurers other than the Title Company as the Agent may elect in its sole discretion. The Agent may, at its option, also require a certification from the applicable state authority that no financing statements have been filed affecting the applicable collateral that would have priority over the Agent's security interest covering the same personal property Collateral. (iv) Use and Entitlements. The Collateral shall consist of apartment properties or industrial properties with completed Improvements, and shall be properly zoned and in compliance in all material respects with all applicable laws for its intended use. (v) No Restrictions. The Agent shall be reasonably satisfied, based upon such information as the Agent deems relevant, that the Collateral is not subject to any moratorium, law, government restriction, or other requirement, covenant, condition, or restriction that might materially adversely affect the marketability or refinanceability thereof. 36 37 (vi) Collateral Value. The Agent shall have designated a Collateral Value for the Collateral, and shall have notified the Borrower in writing of the amount thereof. (vii) Insurance. The Borrower shall have provided the Agent with evidence satisfactory to the Agent that all insurance required by the Agent with respect to the Collateral has been obtained (including appropriate lender's loss payable endorsements). (viii) State. The collateral shall be located in California, Oregon and/or Washington. (ix) Tenant Estoppels. In the event the Collateral is industrial property, the Agent shall have received a Tenant Estoppel Certificate, substantially in the form of Exhibit "F" attached hereto, executed by each tenant leasing fifty thousand (50,000) square feet or more of the leaseable space of such Collateral. (d) Adjustment of Borrowing Base. In addition to adjustments resulting from the sale or refinancing of the Collateral (and therefore its removal from the Borrowing Base), the Agent may adjust the Borrowing Base as follows: (i) The Agent may at any time exclude from the Borrowing Base calculation the Collateral Value of any Collateral if Hazardous Substances (other than those disclosed in environmental reports delivered to the Agent prior to the time Collateral becomes part of the Borrowing Base, so long as the potential remediation cost or potential liability has not materially increased, as reasonably determined by the Agent) are present on such Collateral and the remediation of such Hazardous Substances will impose costs upon the Borrower (or such owner of the Collateral as there may be) which, in the good faith determination of the Agent, are material in relation to the value of such Collateral; (ii) The Collateral Value of any property included within the Borrowing Base shall no longer be included in the calculation of the Borrowing Base if the applicable Deed of Trust encumbering such property for any reason ceases or fails to constitute a valid, perfected and subsisting first priority lien (subject only to Liens existing at the time the property became part of the Borrowing Base and those Liens permitted by the Agent) on the property purported to be covered thereby; and (iii) The Agent may reduce the applicable Collateral Value for any Collateral within the Borrowing Base, and thereby reduce the Borrowing Base, by an amount which the Agent reasonably determines, should any such Collateral be subject, in whole or in part, to any condemnation, casualty or other material injury; provided that if the insurance proceeds or condemnation awards are paid to the Agent, and the conditions specified in Section 5.5(d) of the applicable Deed of Trust to allowing the Borrower the use of the proceeds or awards to repair or restore the Collateral have 37 38 been satisfied, the Agent shall not reduce the applicable Collateral Value for such Collateral which has been the subject of such condemnation, casualty or other injury (or shall only reduce the Collateral Value to the value which the Agent reasonably determines the Collateral will have once the repair or restoration is complete, at the Agent's option), so long as the repair or restoration is proceeding diligently and in accordance with the plans and specifications and other requirements as specified in section 5.5(d) of the applicable Deed of Trust. (e) Security for Obligations. All of the Obligations (except for the Unsecured Environmental Indemnity and any other obligations that are specifically stated to be unsecured by the terms of the applicable Loan Documents) shall be secured by the Collateral in accordance with the terms of the Security Documents. 2.21 Rebalancing. At any time following the Effective Date, the Majority Banks may request that the Agent commission reappraisals of each of the properties constituting part of the Collateral within the Borrowing Base and establish new Collateral Values for each of such properties for purposes of the calculation under clause (a) of the definition of Borrowing Base set forth in Section 1.1 of this Agreement. Upon demand by the Agent, the Borrower shall pay all fees, costs and expenses incurred in connection with the reappraisal of such properties in an amount not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate for all such appraisals. Except as otherwise specified in Sections 2.05(c), 2.20(d) or other applicable provisions of the Loan Documents, the Majority Banks may redesignate new Collateral Values for each such property (following the initial designation at the time such property was originally included within the Borrowing Base) only once during any two-year (2-year) period; provided, however, that notwithstanding the foregoing, the redesignation by the Majority Banks of a new Collateral Value for any such property following the Effective Date based upon an appraisal and revaluation process initiated but not completed prior to June 6, 1996 shall not preclude the Majority Banks from once again redesignating a new Collateral Value for such property during the two-year (2-year) period following June 6, 1996. The Agent shall notify the Borrower in writing of the new Borrowing Base, if any, resulting from any reappraisal and redesignation of new Collateral Values made pursuant to this Section 2.21, which notification the Borrower may reasonably rely upon without the need for independent verification from any other Bank, and thereafter such new Borrowing Base shall be the Borrowing Base under this Agreement for all purposes. If any payment to the Banks is required to be made by the Borrower pursuant to Section 2.1 hereof as a result of the recalculation of the Borrowing Base under this Section 2.21, the Borrower shall either: (a) within thirty (30) days and without demand from the Agent pay such amount to the Agent as is required to reduce the aggregate outstanding Advances and Letter of Credit Obligations to an amount not greater than the Loan Availability; or (b) elect, by two (2) days' written notice to the Agent, to amend clause (a) of the definition of Borrowing Base in Section 1.1 by replacing the words "fifty-five percent (55%)" with the words "sixty percent (60%)", whereupon the definition of Borrowing Base set forth in Section 1.1 shall be deemed to have been amended to read "sixty percent (60%)" (but the remainder of the definition of Borrowing Base shall otherwise remain 38 39 unmodified) and the Borrower shall pay within thirty (30) days and without demand such amounts as are required to reduce the aggregate outstanding Advances and Letter of Credit Obligations to an amount not greater than the Loan Availability based upon such amended definition of Borrowing Base. 2.22 Release of Collateral. Provided that no Default or Event of Default has occurred and is continuing, and subject to any other conditions contained in this Agreement: (a) Upon Sale or Refinancing. The Banks irrevocably authorize the Agent to release the entirety of its interest in any Collateral from the lien of the Deed of Trust at the request of Borrower upon the sale or refinancing of the entirety of such Collateral, provided that: (i) The sale or refinancing is not prohibited by any provision of this Agreement or any Security Document; (ii) The release of the Collateral does not result in a violation of any provision of this Agreement or any Security Document, and the Borrower shall first have made such payment to the Agent for the benefit of the Banks ratably as is required to cause the outstanding Advances and Letter of Credit Obligations not to exceed the Loan Availability immediately after giving effect to such release; (iii) Prior to such release, any rebalancing payment required to be made by Borrower pursuant to Section 2.21 with respect to the Collateral remaining as part of the Borrowing Base following such release shall have been made; (iv) The sale or refinancing relates to all of the Borrower's interest in the real estate project comprising the Collateral; and (v) No such release shall affect any of the Borrower's obligations under the Unsecured Indemnity Agreement or Sections 5.22 or 8.5 hereof with respect to such released Collateral. (b) Final Release. The Banks irrevocably authorize the Agent to release all of the Collateral upon payment in full of all Obligations and the full discharge and release of all Letter of Credit Obligations. (c) Costs. As a condition to the Agent's obligation to release any Collateral, the Borrower shall pay to the Agent an amount equal to the Agent's costs incurred in connection with the release, including the Agent's reconveyance fee, recording fees, escrow fees and the cost of any title policy endorsements reasonably requested by the Agent. 2.23 Reaffirmation. The Borrower, the Agent and the Banks acknowledge and agree that the Irrevocable Request remains in full force and effect and is 39 40 unchanged by the terms hereof. The Borrower hereby reaffirms its covenants and obligations under the Irrevocable Request, and, without limiting the generality of the foregoing, the Borrower acknowledges the continuing effectiveness and priority of the Agent's security interest in the "Collateral", as such term is used in the Irrevocable Request. For the avoidance of doubt, the Borrower and the Banks acknowledge and agree that until such time as the letter of credit referenced in the Irrevocable Request is returned to BofA, the Loan Availability hereunder shall be reduced by Two Million Dollars ($2,000,000). ARTICLE III. CONDITIONS PRECEDENT 3.1 Closing Conditions; Agreements, Documents and Certificates. As conditions precedent to the effectiveness of this Agreement (any of which the Banks may waive in writing in their sole discretion): (a) The Agent shall have received originals (along with sufficient copies of for each of the Banks) of the following agreements, documents, opinions and certificates, such opinions and certificates to be dated or confirmed in writing as of the Effective Date and satisfactory in form and substance to the Agent and its counsel in their sole discretion: (i) This Agreement duly executed on behalf of all of the parties hereto; (ii) An opinion of Cox, Castle & Nicholson, counsel to the Borrower, substantially in the form of Exhibit "G"; (iii) Copies of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Agreement, the Note, the Security Documents and all other documents required by the Banks to be delivered hereunder, certified by the Secretary or an Assistant Secretary of the Borrower (which certificate shall state that such resolutions are in full force and effect on the Effective Date); (iv) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement, the Note and the other documents to be delivered by the Borrower under this Agreement; (v) A certification from the Borrower that the Articles of Organization and the Articles of Amendment and Restatement of the Borrower remain in full force and effect and have not been revoked, amended, supplemented or modified since August 4, 1993 and February 15, 1994, respectively; 40 41 (vi) A certification from the Borrower that the Amended and Restated Bylaws of the Borrower dated October 27, 1993 remain in full force and effect and have not been revoked, amended, supplemented or modified; (vii) A good standing certificate, or its equivalent, for the Borrower from the Secretaries of State of the state of the Borrower's organization and the states where the Existing Collateral is located; (viii) A certificate in the form of Exhibit "H" hereto signed by an officer of the Borrower and stating that: (A) the representations and warranties of the Borrower contained in Article IV hereof and in the Loan Documents are true and correct on and as of the Effective Date, as though made on and as of such date; (B) no Default or Event of Default exists; and (C) all conditions precedent set forth in this Section 3.01 have been satisfied (other than those based solely on the approval of the Banks or the Borrower), including detailed calculations of the Borrower's compliance with Sections 5.9, 5.17 and 5.21 hereof and the initial Borrowing Base hereunder; (ix) The duly executed Note; (x) Duly executed modifications of the Deeds of Trust relating to the Existing Collateral; (xi) Duly executed UCC-2's modifying each of the UCC Financing Statements previously executed by the Borrower such that the references to "Secured Party" therein shall mean the Banks; (xii) A duly executed modification and reaffirmation of the Unsecured Indemnity Agreement; (xiii) Such title insurance policies or endorsements to the BofA's existing title insurance policies with respect to the Existing Collateral as the Agent may require, including, without limitation, new title insurance policies or endorsements insuring that the Deeds of Trust constitute first priority liens on the Existing Collateral with a liability amount not less than the Commitment Amount; and (xiv) Such other documents, instruments, approvals or opinions as the Agent may reasonably request; (b) The Borrower shall have paid to the Agent for the account of the Banks all fees, costs and expenses (including all legal fees and expenses) to the extent due and payable hereunder as of the Effective Date, all title insurance, recording and escrow charges incurred in connection with this Agreement, and all legal fees and 41 42 expenses of the Agent's counsel (including, without limitation, allocated costs for services of the Agent's in-house counsel) incurred in connection with the preparation, negotiation and execution of this Agreement and all documents related hereto. 3.2 Each Advance or Letter of Credit. In the case of each new Advance made or Letter of Credit issued under this Agreement, the following conditions precedent shall have been fulfilled to the satisfaction of the Agent or the Issuing Bank, as the case may be, as of the date that Advance is made or that Letter of Credit is issued: (a) The Agent or the Issuing Bank, as the case may be, shall have received the requisite Request for Advance, Letter of Credit or Conversion/Continuation of a Loan; (b) On the date that Advance is made or that Letter of Credit is issued, the representations and warranties of the Borrower set forth in Article IV shall be true and correct in all material respects, after giving effect to that Advance or Letter of Credit with the same effect as though such representations and warranties had been made on and as of that date (except to the extent that such representations and warranties expressly relate solely to an earlier date); (c) On the date that Advance is made or that Letter of Credit is issued and after giving effect to that Advance or Letter of Credit, the Borrower shall be in compliance in all material respects with all covenants set forth in Article V on its part to be observed or performed, and no Default or Event of Default shall have occurred and be continuing or would result from that Advance or Letter of Credit; and (d) For each Letter of Credit requested, the Borrower shall have executed and delivered a Letter of Credit Application and Agreement in favor of the Issuing Bank. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE BORROWER As of the Effective Date and as of the date each Advance is made or each Letter of Credit is issued, the Borrower represents and warrants to the Agent and each Bank as follows: 4.1 Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and all material Governmental Actions required to carry on its business as now being or proposed to be conducted and is in good standing and duly licensed or qualified to transact business in each other jurisdiction where the failure so to do would have a material adverse effect on its business, financial condition or operations. 42 43 4.2 Corporate and Governmental Action; No Contravention. The execution, delivery and performance by the Borrower of this Agreement, the Note, the Security Documents and the other Loan Documents are within the Borrower's corporate power and authority, have been duly authorized by all necessary corporate action on its part, do not and will not require any Governmental Actions other than any that have already been obtained and do not contravene, or constitute a default under, any provision of any Applicable Laws or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Lien on any assets of the Borrower. 4.3 Binding Effect. This Agreement constitutes, and the Note and Security Documents (when executed and delivered as contemplated by this Agreement), will constitute, the valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except in each case as enforcement may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and by general principles of equity. 4.4 Financial Information. (a) All financial information delivered to BofA by the Borrower pursuant to the Amended and Restated Credit Agreement (including, without limitation, the annual financial statement for the fiscal year ended December 31, 1995 and the quarterly financial statement for the fiscal quarter ended June 30, 1996) has been delivered as of the Effective Date and such information accurately presents the financial position of the Borrower as of the dates thereof and the results of its operations during the periods covered thereby. (b) Since June 30, 1996, there has been no material adverse change in the ownership, management, business operations or financial condition prospects, liabilities or capitalization of the Borrower or any of its Subsidiaries. (c) As of the Effective Date, neither the Borrower nor any of its Subsidiaries has any material liabilities or commitments, fixed, contingent or otherwise, that were not reflected on the annual financial statement for the fiscal year ended December 31, 1995 or the quarterly statement for the fiscal quarter ended June 30, 1996 delivered to BofA by the Borrower. (d) The management prepared pro forma balance sheet and proforma statements or operations and cash flows for the Borrower set forth in the Supplemental Registration Statement fairly present the financial position of the Borrower as of the Effective Date. 4.5 Litigation. There is no action, suit or proceeding pending, or to the knowledge of the Borrower threatened, against or affecting the Borrower or any of its Subsidiaries before any Governmental Authority which if decided adversely to the 43 44 Borrower or such Subsidiaries would materially and adversely affect the ownership, management, business, operations or condition (financial or otherwise) of the Borrower or any of its Subsidiaries or which in any manner questions the validity of this Agreement or the Note. 4.6 Compliance with ERISA. To the best of the Borrower's knowledge, the Borrower and its Subsidiaries have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan, are in compliance in all material respects with the currently applicable provisions of ERISA and the Code relating to each Plan, have not incurred any material liability (excluding liability for PBGC premiums) to the PBGC or a Plan under Title IV of ERISA and have taken no actions which would result in the occurrence of an Event of Default under Section 6.1(h). 4.7 Taxes. The Borrower and its Subsidiaries have filed all United States federal income tax returns and all other tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by them, except for those which are being contested in good faith and by appropriate proceedings. The charges, accruals and reserves on the books of the Borrower and its subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. 4.8 Title. The Borrower and its Subsidiaries have good and (in the case of real property) marketable title to, or valid leasehold interests in, all of the properties and assets reflected in any financial statement delivered to the Agent (including the annual financial statement for the fiscal year ended December 31, 1995 and the quarterly financial statement for the fiscal quarter ended March 31, 1996) except for covenants, restrictions, rights, easements and exceptions in title which (a) in the case of any Collateral, have been approved by the Agent, and (b) in the case of properties other than Collateral do not (i) interfere with the occupation, use and employment of the Borrower or its Subsidiaries of such properties and assets in the normal course of its business as currently conducted or (ii) impair the value of such business, properties or assets; and such titles or interests are free and clear of Liens except, in the case of properties other than Collateral, for any Liens permitted under Section 5.11 after the date of this Agreement. 4.9 No Default. No Default or Event of Default has occurred or would result from the execution, delivery and performance by the Borrower of this Agreement, the Note, the Security Documents or any of the other Loan Documents. Neither the Borrower nor any of its Subsidiaries are in default in any material respect under any Governmental Action binding upon or affecting any of them or any of their properties and assets, and no such Governmental Action materially and adversely affects the ability of the Borrower or any of its Subsidiaries to carry on its business as currently conducted or its ability to perform its obligations under this Agreement, the Note or the Security Documents or to pay the principal of or the interest on the Loans or any other Obligations. 44 45 4.10 Certain Regulations. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Investment Company Act of 1940, the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or any other similar Applicable Law limiting or restricting the incurrence of Indebtedness. 4.11 No Margin Stock. No part of the proceeds of the Loans will be used for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U or X promulgated by the Board of Governors of the Federal Reserve System. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending, or arranging for the extension of, credit for the purpose of purchasing or carrying any such "margin stock" or any "margin securities" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System. 4.12 Status as a REIT. The Borrower is qualified as a real estate investment trust under the Code and is in compliance with all Applicable Laws applicable to it as a real estate investment trust, except where such noncompliance is or would be immaterial and, if required, has been authorized by appropriate Governmental Action. 4.13 Environmental Matters. To the best of the Borrower's knowledge and except as disclosed in the Registration Statement, the Borrower and its Subsidiaries are in compliance in all material respects with all Applicable Laws with respect to all of their presently or previously owned real property and such real property is free from, and does not contain any, Hazardous Substances the presence of which would have a material adverse effect on the business, operations, financial condition or prospects of the Borrower and its Subsidiaries taken as a whole. To the best of the Borrower's knowledge, neither the Borrower, its Subsidiaries nor any of their agents or contractors have deposited, discharged, disposed of, stored or placed any Hazardous Substances on or in any real property presently or previously owned by the Borrower or any of its Subsidiaries in a manner which would have a material adverse effect on the business, operations, financial condition or prospects of the Borrower and its Subsidiaries, taken as a whole. Nothing contained in this Section 4.13 shall in any way limit or impair any representations, warranties, agreements or indemnities of the Borrower set forth in the Unsecured Environmental Indemnity. 4.14 Registration Statement. The Registration Statement and the Supplemental Registration Statement do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.15 Full Disclosure. There is no fact which the Borrower has not disclosed in writing to the Agent and the Banks which has, or so far as the Borrower can now reasonably foresee will have, a material adverse effect on the ability of the Borrower 45 46 to perform its obligations under this Agreement or to pay the principal of or the interest on the Loans or any other Obligations. ARTICLE V. COVENANTS So long as this Agreement is in effect or the Note is outstanding and until all amounts payable under this Agreement and the Note have been paid in full, unless compliance shall have been expressly waived in writing by the Majority Banks or the Required Banks, as required hereunder (which waiver shall be communicated to the Borrower by the Agent and which communication the Borrower may reasonably rely upon without the need for independent verification from any other Bank), the Borrower shall, and shall cause each of its Subsidiaries to, comply with and perform each of the following covenants: 5.1 Information. The Borrower shall deliver to the Agent: (a) As soon as practicable and in any event within one hundred (100) days after the end of each of the fiscal years of the Borrower and its Subsidiaries ending after the Effective Date, the audited consolidated balance sheet of the Borrower and its Subsidiaries as of the end of that fiscal year, the related consolidated audited statements of income and cash flows of the Borrower and its Subsidiaries for that fiscal year, and the corresponding figures as of the end of, and for, the preceding fiscal year, in each case accompanied by an opinion of such independent certified public accountants of recognized standing as shall be retained by the Borrower and satisfactory to the Agent, which report and opinion shall be prepared in accordance with GAAP relating to reporting, and which report and opinion shall contain no material exceptions or qualifications except for qualifications relating to accounting changes (with which such independent certified public accountants concur) in response to Financial Accounting Standards Board releases or other authoritative pronouncements. (b) As soon as practical and in any event within thirty (30) days after the Effective Date, all financial information required to have been delivered under the Amended and Restated Credit Agreement for periods prior to the Effective Date, to the extent such information has not already been delivered to the Agent. (c) Within fifty (50) days after the close of each fiscal quarter ending after the Effective Date, except for the last fiscal quarter of each fiscal year, an unaudited consolidated balance sheet of the Borrower and its Subsidiaries as of the end of that fiscal quarter and the related statements of income and cash flows for that fiscal quarter, and for the period from the beginning of the then current fiscal year of the Borrower and its Subsidiaries to the end of that fiscal quarter, prepared in accordance with GAAP and certified as correct to the best knowledge of its chief financial officer. 46 47 (d) Annually, each January 31, a statement of the consolidated projected cash flow of the Borrower and its Subsidiaries for the twelve-month (12-month) period ending on the preceding December 31 showing sufficient detail to show the projected operating performance of the individual properties. (e) Within fifty (50) days after the close of each fiscal quarter ending after the Effective Date, a statement comparing the consolidated actual cash flow of the Borrower and its Subsidiaries to consolidated projected cash flow of the Borrower and its Subsidiaries for the preceding quarter, together with a written explanation of any material variance between consolidated actual cash flow and consolidated projected cash flow for such period. (f) Within sixty (60) days after the close of each fiscal quarter, a report summarizing occupancy and turnover for each apartment project of the Borrower and its Subsidiaries. (g) Simultaneously with the delivery of each set of documents referred to in (a) and (c) above, a certificate of an officer of the Borrower (being the Treasurer, Chief Financial Officer or any other officer with a position at least equivalent to that of a Vice President), in the form of Exhibit "J" attached hereto which certificate (i) states whether there exists on the date of such certificate any Default or Event of Default and, if any Default or Event of Default then exists, sets forth the details of that Default or Event of Default and the action which the Borrower is taking or proposes to take with respect to that Default or Event of Default, (ii) includes a detailed calculation establishing the Borrower's compliance with the covenants set forth in Sections 5.9, 5.17 and 5.21, and (iii) includes a detailed calculation of the Borrowing Base. (h) Promptly upon the occurrence of any Default or Event of Default, a certificate of an officer of the Borrower (being the treasurer, chief financial officer or any other officer with a position at least equivalent to that of a vice president) setting forth the details of that Default or Event of Default and the action which the Borrower is taking or proposes to take with respect to that Default or Event of Default. (i) Promptly following the publication thereof, a business plan of the Borrower and its Subsidiaries and any subsequently revised financial forecasts. (j) Promptly upon their being mailed to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed. (k) Promptly upon their being filed with the Securities and Exchange Commission, copies of all of the Borrower's Forms 10-K, 10-Q and 8-K. (l) Notice of the loss by the Borrower of its status as a real estate investment trust, immediately upon the occurrence of such loss. 47 48 (m) If and when the Borrower or any of its Subsidiaries gives or is required to give notice to the PBGC of any Reportable Event with respect to any Plan which might constitute grounds for a termination of that Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of that Reportable Event given or required to be given to the PBGC. (n) Promptly after the occurrence of any such event, notice of: (i) any litigation, investigation or proceeding pending or threatened against the Borrower or any of its Subsidiaries by or before any Governmental Authority which (A) seeks declaratory or injunctive relief from or against the Borrower or any of its Subsidiaries and would have a material adverse effect on the ownership, management, business, operations or, condition (financial or otherwise) of the Borrower or any of its Subsidiaries or (B) involves a total amount claimed, individually or in the aggregate equal to $1,000,000 or more; (ii) any dispute between the Borrower and/or any of its Subsidiaries with any Governmental Authority which would have a material adverse effect on the ownership, management, business, operations or condition (financial or otherwise) of the Borrower or any of its Subsidiaries; (iii) any labor controversy resulting in or with the potential for resulting in a strike against the Borrower or any of its Subsidiaries which would have a material adverse effect on the operations of the Borrower or any of its Subsidiaries; (iv) any proposal by any Governmental Authority to acquire substantially all of the properties, assets or business of the Borrower or any of its Subsidiaries; and (v) any other matter that the chief executive officer, chief operating officer or chief financial officer of the Borrower has concluded has resulted or will result in a material adverse change in the ownership, management, business, operations or condition (financial or otherwise) of the Borrower or any of its Subsidiaries or in a violation under Sections 5.10 or 5.11. (o) From time to time, such additional information regarding the financial position or business of the Borrower and/or its Subsidiaries as the Agent may reasonably request. 5.2 Consolidations, Mergers, Sales of Assets. The Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries, to consolidate with or merge into any other Person. 48 49 5.3 Maintenance of Property; Insurance. The Borrower shall, and shall cause each of its Subsidiaries to, keep all property useful and necessary in its business in good working order and condition and maintain with financially bound and reputable insurance companies, insurance on all its property in at least such amounts (satisfactory to the Agent) and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business, including (a) fire and extended coverage insurance (including use and occupancy); (b) business-interruption insurance; (c) comprehensive general accident and public liability; (d) general liability insurance; (e) during any period of construction, builders' risk insurance on a replacement cost basis and (f) fidelity bonds and other insurance on all corporate officers and employees who collect or have custody of, or access to, revenues, receipts or income of the Borrower and its Subsidiaries. The Borrower shall maintain its existing or similar earthquake insurance coverage for the Collateral so long as such insurance coverage is economically feasible as determined by the Borrower. Without limiting the foregoing, the Borrower's obligations hereunder shall include, without limitation, the obligations set forth in that certain letter, dated June 10, 1994, from the Borrower to BofA, a copy of which is attached hereto as Exhibit "I". The Borrower shall at the request of the Agent, but in no event more frequently than annually, deliver to the Agent a certificate of all insurance required hereunder then in force. 5.4 Conduct of Business and Maintenance of Existence. The Borrower shall, and shall cause each of its Subsidiaries to, preserve, renew and keep in full force and effect its corporate existence and the rights, privileges and franchises necessary or desirable in the normal conduct of business. The Borrower shall, and shall cause each of its Subsidiaries to, continue to operate in such a manner so as to preserve the Borrower's status as a qualified real estate investment trust under the rules and regulations of the Code. 5.5 Compliance with Laws and Union Contracts. The Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with all Applicable Laws and union contracts, non-compliance with which would have a material adverse effect on its business, operations or condition (financial or otherwise), except where the necessity of compliance is contested in good faith by appropriate proceedings. 5.6 Inspection of Property, Books and Records. The Borrower shall, and shall cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Upon reasonable advance notice (oral or written) from any Bank (twenty-four (24) hours notice shall be deemed reasonable) and during normal business hours, the Borrower shall, and shall cause each of its Subsidiaries to, permit representatives of such Bank to visit and inspect any of its properties and to examine and make copies of any of its books and records and to discuss its affairs, finances and accounts with its officers and employees all at such reasonable times and as often as may reasonably be desired. 49 50 5.7 Payment of Obligations. The Borrower shall, and shall cause each of its Subsidiaries to, pay and discharge, when due, all its material obligations and liabilities, including tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. 5.8 Use of Proceeds. The Borrower shall use the proceeds of the Loans solely for the purposes described in Section 2.9, provided that any such purpose would not cause a violation of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. 5.9 Limitations on Activities. The Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries to, engage in any business activities or operations substantially different from or unrelated to the Borrower's business as a real estate investment trust. Without limiting the generality of the foregoing, the Borrower or its Subsidiaries may undertake or engage in construction and/or development activities, so long as (a) the Carrying Costs of completing such activities does not exceed in any given fiscal year ten percent (10%) of the total tangible assets of the Borrower as determined in accordance with GAAP and (b) the Carrying Costs associated with the Borrower's holdings of unimproved land (regardless of the degree such land is entitled for development) shall not exceed ten percent (10%) of Tangible Net Worth. Without derogating the requirements of clauses (a) and (b) in the immediately foregoing sentence, the Borrower shall not acquire any unimproved land unless (x) such land is acquired for the purpose of constructing income-producing industrial or apartment properties and (y) such land is zoned for the intended use. 5.10 Limitations on Indebtedness. The Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness, or to become a guarantor or surety, or to pledge or lien its credit in any manner, other than (a) Advances to the Borrower and outstanding Letter of Credit Obligations hereunder, (b) Indebtedness existing as of the Effective Date and set forth in Schedule 5.10 hereto, (c) Indebtedness (not to exceed a sixty-five percent (65%) loan to value ratio at the time such Indebtedness is incurred) secured by deeds of trust against real properties which are not subject to a Lien in favor of the Agent for the benefit of the Banks and have not otherwise been pledged to the Agent for the benefit of the Banks, and (d) trade debt incurred in the ordinary course of business. 5.11 Limitation on Liens. The Borrower shall not, nor shall it cause suffer or permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien securing Indebtedness for borrowed money, or any judgment Lien that does not constitute an Event of Default or any Lien for delinquent taxes or assessments, on or with respect to any of its property, whether real, personal or mixed, and whether now owned or hereafter acquired, or upon the income or profits therefrom, other than (a) the Deeds of Trust, (b) liens existing as of the Effective Date and set forth on Schedule 5.11 hereto, (c) deeds of trust against real properties owned by Borrower which are not subject to a Lien in 50 51 favor of Agent for the benefit of the Banks and have not otherwise been pledged to the Agent for the benefit of the Banks, and (d) Liens which the Borrower is contesting diligently and in good faith by appropriate legal proceedings so long as the Borrower has posted a bond or other adequate security (as determined by the Agent in its reasonable discretion), and the property covered by such Lien is not in danger of being lost or forfeited by reason of foreclosure or otherwise. The foregoing provisions of this Section 5.11 shall not be construed to limit or impair (x) any more stringent requirements as to the Collateral to be included in the Borrowing base under the Section 2.20 above and the permissible Liens thereon, (y) any covenants or requirements contained in the Security Documents to be performed or observed by the Borrower regarding Liens, including those prohibiting further encumbrances of the Collateral, or (z) any financial covenants set forth in Section 5.21 hereof. 5.12 ERISA. The Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with the applicable provisions of ERISA and shall not, nor shall it cause, suffer or permit any of its Subsidiaries to, (a) take any action or permit any condition which would result in a termination of any single employer Plan, so as to result in any material liability to PBGC or to any trustee under Section 4042 or Section 4049 of ERISA, (b) engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan which would subject the Borrower or any of its Subsidiaries to any material tax, penalty or other liability or (c) incur or suffer to exist any material "accumulated funding deficiency" (as defined in Section 412 of the Code), whether or not waived, involving any single employer Plan. 5.13 Capital Expenditures. The Borrower shall submit to the Agent each year, within fifty (50) days of the end of the calendar year, a report in form and detail satisfactory to the Agent setting forth all capital expenditures with respect to each property and project owned by the Borrower on a property-by-property basis. 5.14 Loans, Advances and Guaranties. Other than loans in the ordinary course of business between the Borrower and any Subsidiary, or between Subsidiaries, the Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries to make any loans or advances, or extend credit to any other Person; provided, however that the Borrower may make loans to its employees, not in excess of Two Million Dollars ($2,000,000) in principal amount at any one time outstanding, to allow those employees to purchase stock of the Borrower pursuant to its employee stock option plan. The Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries to, purchase the debt or equity of another Person except for savings accounts and certificates of deposit of the Banks, direct U.S. Government obligations and commercial paper issued by corporations within the top rating categories of Moody's Investors Service, Inc. or Standard & Poor's Corporation, provided that all such permitted investments shall mature within one (1) year of purchase. 51 52 5.15 Investments. The Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries to make any investment in or acquire any interest in (a) any joint venture or partnership except for the Borrower's interest (as of June 6, 1996) in Pacific Gulf Inland Properties, L.P., a California limited partnership, whether by means of purchase or other acquisition of partnership or joint venture interests of such partnership or joint venture or by means of a loan, advance, capital contribution, guaranty or other debt or equity participation or interest, (b) any non-industrial real property, any non-apartment property, or any unimproved real property, other than the property located at 363 San Miguel Drive, Newport Beach, California or as may be permitted under Section 5.9, (c) investments prohibited pursuant to Section 5.14, or (d) any securities or bonds, mortgages, notes or other debt instruments (other than Cash Equivalents). 5.16 Payments to Realty. The Borrower shall not, nor shall it cause, suffer or permit any of its Subsidiaries to, declare, pay or set apart any funds for the payment of any amounts to Realty, other than for the payment of dividends by the Borrower in compliance with Section 5.17. 5.17 Dividends. The Borrower shall not (a) pay or set apart any funds for the payment of dividends during any four (4) consecutive fiscal quarters in excess of one hundred percent (100%) of the Funds Available for Distribution derived by the Borrower during such period, nor (b) repurchase or redeem any of its outstanding securities or Debentures, in each case other than to maintain the Borrower's REIT status or to avoid the imposition of federal income tax or excise tax on the Borrower or its Subsidiaries. The Borrower shall not declare, pay or set apart any funds for the payment of dividends so long as an Event of Default has occurred and is continuing other than as is necessary to maintain the Borrower's REIT status. 5.18 Listing of Securities. The Borrower's common stock and Debentures shall remain listed on the New York Stock Exchange or the American Stock Exchange. 5.19 Management. Without the Required Banks' written consent, which consent shall be communicated to the Borrower by the Agent and which communication the Borrower may reasonably rely upon without the need for independent verification from any other Bank, the Borrower shall not cause, suffer or permit Glenn L. Carpenter to cease serving as its Chief Executive Officer. 5.20 Changes to Indenture. Without the Required Banks' written consent, which consent shall be communicated to the Borrower by the Agent and which communication the Borrower may reasonably rely upon without the need for independent verification from any other Bank, the Borrower shall not cause, suffer or permit any modifications to any of the terms or provisions of the Indenture or the Debentures. 52 53 5.21 Financial Covenants. (a) The Borrower shall not permit the ratio of Total Indebtedness to Gross Asset Value to exceed seventy-five percent (75.0%) at any time prior to December 31, 1997 or seventy percent (70.0%) at any time thereafter. (b) The Borrower shall not permit the Interest Coverage Ratio computed for any preceding twelve-month (12-month) period to be less than 1.50:l. (c) The Borrower shall not permit the Fixed Charge Coverage Ratio computed for any preceding twelve (12) month period to be less than 1.35:1.0. (d) The Borrower shall not at any time permit Tangible Net Worth to be less than (i) $65,000,000 plus (ii) ninety percent (90%) of all Net Cash Proceeds derived from any offerings of equity securities of the Borrower and its Subsidiaries (including the Second Public Offering) occurring on or after June 6, 1996 and minus (iii) the amount by which cumulative dividends declared by the Borrower in all fiscal quarters ending after June 6, 1996 exceed cumulative Net Income during all fiscal quarters ending after June 6, 1996. 5.22 Covenant to Indemnify Regarding Construction and Other Risks. The Borrower hereby indemnities, defends and holds the Agent, the Banks and their respective Affiliates, assignees, successors, officers, directors, employees and agents (collectively, the "Indemnified Parties") harmless from and against any and all Indemnified Costs (defined below) directly or indirectly arising out of or resulting from construction of any improvements on the Collateral, including any defective workmanship or materials; or any failure to satisfy any requirements of any laws, regulations, ordinances, governmental policies or standards, reports, subdivision maps or development agreements that apply or pertain to the Collateral; or breach of any representation or warranty made or given by the Borrower to any of the Indemnified Parties or to any prospective or actual buyer of all or any portion of the Collateral; or any claim or cause of action of any kind by any party that any Indemnified Party is liable for any act or omission of Indemnitor or any other person or entity in connection with the ownership, sale, operation or development of the Collateral. Upon demand by any Indemnified Party, the Borrower shall defend any investigation, action or proceeding involving any Indemnified Costs which is brought or commenced against any Indemnified Party, whether alone or together with the Borrower or any other person, all at the Borrower's own cost and by counsel to be approved by the Indemnified Party in the exercise of its reasonable judgment. In the alternative, any Indemnified Party may elect to conduct its own defense at the expense of the Borrower. As used in this Section, "Indemnified Costs" means all actual or threatened liabilities, claims, actions, causes of action, judgments, orders, damages (including foreseeable and unforeseeable consequential damages), costs, expenses, fines, penalties and losses (including sums paid in settlement of claims and all consultant, expert and legal fees and expenses of the Agent's and the Banks' respective counsel), including those incurred in connection with 53 54 any repair or restoration work (whether of the Collateral or any other property), or any resulting damages, harm or injuries to the person or property of any third parties or to any natural resources. The foregoing indemnity shall not cover any Indemnified Costs which arise as the result of the gross negligence or willful misconduct of any Indemnified Party. Any Indemnified Parties who are not parties to this Agreement are also intended beneficiaries of this Section, as well as the Banks. 5.23 Leasing. Except as otherwise approved by the Agent in writing, all leases of space in the Collateral (each, a "LEASE") shall be entered into with bona fide third party tenants that the Borrower reasonably determines following due investigation are financially capable of performing their obligations under such Lease, and shall reflect arms-length transactions at the then current market rate for comparable space. Borrower shall perform all obligations required to be performed by it as landlord under each Lease. Borrower shall not accept payment of more than one (1) month's rent in advance from any tenant, except for deposits in the nature of security deposits, cleaning deposits and first and last month's rental payments. (a) Special Covenants Applicable to Apartment Properties. With respect to Collateral constituting apartment projects, the Borrower shall not, without the prior written consent of the Agent (i) lease any apartment unit for other than residential purposes, or enter into Leases for any portion of the property other than Leases of apartment units or incidental retail space, or (ii) enter into Leases of apartment units for a term (including any right of extension or renewal) exceeding twelve (12) months. (b) Delivery of Leasing Information and Documents. Borrower shall promptly deliver to the Agent such rent rolls, leasing schedules and reports, operating statements and other leasing information as the Agent from time to time may request. Borrower shall use commercially reasonable efforts to promptly obtain and deliver to Agent such subordination and attornment agreements from tenants as the Agent from time to time may require. In no event shall any approval by the Agent of a Lease be a representation of any kind with regard to the Lease or its enforceability, of the financial capacity of any tenant or Lease guarantor. 5.24 Tenant Estoppels. Within five (5) business days of execution of any Applicable Industrial Lease (as defined below), the Borrower shall obtain and deliver to the Agent a Tenant Estoppel Certificate, substantially in the form of Exhibit "F" attached hereto, executed by each tenant under such Applicable Industrial Lease. As used herein, "APPLICABLE INDUSTRIAL LEASE" means any lease created or renewed, after April 18, 1995, which is for fifty thousand (50,000) square feet or more of the leaseable space of any of the Collateral which is industrial property. 5.25 Asbestos Operations and Maintenance. Upon request of the Agent, within ninety (90) days after a real estate project has been accepted as Collateral hereunder, the Borrower shall, at its sole cost and expense, prepare and deliver to the 54 55 Agent for its approval an operation and maintenance program for the management and containment of asbestos-containing materials located at such project. Borrower shall operate the Collateral in accordance with said operation and maintenance program. ARTICLE VI. DEFAULTS 6.1 Events of Default. If any of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing for any reason whatsoever: (a) The Borrower shall fail to pay when due any amount payable under this Agreement, the Note, any Security Documents or any Letter of Credit Application and Agreement and, in the case of any amount other than principal, such failure shall continue for five (5) Banking Days after the due date; (b) The Borrower shall fail to observe or perform any of the covenants contained in Sections 5.8, 5.9, 5.10, 5.11, 5.16, 5.17, 5.18, 5.19, 5.20 and 5.21; (c) The Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clauses (a) or (b) above) or any other Loan Document, and that failure shall remain unremedied for thirty (30) days after the written notice of such failure has been given to the Borrower by the Agent, unless such failure is of such a nature that it cannot be cured within such thirty (30) day period and the Borrower commences action to cure such failure within such thirty (30) day period and thereafter diligently and continuously prosecutes such action to completion within ninety (90) days after written notice of such failure has been given to the Borrower by the Agent; (d) Any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made or deemed made; (e) (i) The Borrower or any of its Subsidiaries shall default in the payment of principal or interest on (A) the Debentures or (B) any other Indebtedness the then outstanding principal balance of which exceeds One Million Dollars ($1,000,000) beyond the period of cure provided for by the terms of that Indebtedness, or (ii) any Indebtedness of the Borrower or any of its Subsidiaries is accelerated or not paid on the scheduled maturity date thereof; provided that this clause (ii) shall not apply to any acceleration resulting from the exercise of a "due on sale" clause by any such holder (or a trustee or representative on behalf of any such holder) so long as the Borrower or the appropriate Subsidiary pays the accelerated Indebtedness owing to holder immediately following the sale or transfer causing such acceleration; 55 56 (f) A judgment or order for the payment of money of $1,000,000 or more in excess of applicable insurance coverage (such coverage being undisputed) shall be rendered against the Borrower or any of its Subsidiaries, and that judgment or order shall continue unsatisfied and unstayed for a period of thirty (30) days; (g) Any final action (including condemnation of property) of any Governmental Authority shall have been taken which, in the opinion of the Majority Banks, will have a material adverse effect on the ownership, management, business, operations or condition (financial or otherwise) of the Borrower or any of its Subsidiaries; provided that any such final action will not constitute an "Event of Default" hereunder if, within three (3) Banking Days of the earlier of (i) the date on which written notice of that final action is given by the Agent to the Borrower or (ii) the date on which the chief financial officer, chief executive officer or chief operating officer of the Borrower first obtained actual knowledge of that final action, the Borrower has paid to the Agent for the benefit of the Banks ratably the outstanding principal balance of, and all accrued interest owing on, the Note and has paid all other Obligations;. (h) (A) The Borrower or any of its Subsidiaries shall fail to pay when due an amount or amounts aggregating in excess of One Million Dollars ($1,000,000) which it shall have become liable to pay to the PBGC, to any trustee under Section 4042 or 4049 of ERISA, or to a Plan under Title IV of ERISA; (B) notice shall be given by any plan administrator to Affected Parties (as defined in Section 4001(A)(21) of ERISA of intent to terminate a Plan where such termination would constitute a "distress termination" under Title IV of ERISA; or (C) (i) the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Borrower or any of its subsidiaries to enforce Section 515 of ERISA, (ii) such proceeding shall not have been dismissed within thirty (30) days, and (iii) such proceedings are expected to result in a liability of the Company or its subsidiaries in excess of $1,000,000; (i) Any certificate, financial statement, report or other document furnished by or on behalf of the Borrower or any of its Subsidiaries in connection with this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which furnished; (j) The Borrower or any of its Subsidiaries (i) shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or in the future in effect or seeking the appointment of a trustee (other than the trustee under the Borrower's pension or profit sharing plan), receiver, liquidator, custodian or other similar official of it or any substantial part of its property, (ii) shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, (iii) shall make a general assignment for the benefit of creditors, (iv) shall fail generally to pay its debts 56 57 as they become due or (v) shall take any corporate action to authorize any of the foregoing; (k) An involuntary case or other proceeding shall be commenced against the Borrower or any of its Subsidiaries seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or in the future in effect or seeking the appointment of trustee, receiver, liquidator, custodian or other similar official of its or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of ninety (90) days; or an order for relief shall be entered against the Borrower or any of its Subsidiaries under the federal bankruptcy laws as now or in the future in effect; or (l) An Event of Default occurs under the Unsecured Credit Agreement; Then, and in every such event, (1) in the case of any of the Events of Default specified in Section 6.1(j) or (k) above, the Loan Availability shall automatically be terminated and the Note and the principal of and accrued interest on the Loans and all other Obligations shall automatically become due and payable and (2) in the case of any other Event of Default specified in this Section 6.1, the Majority Banks may by notice in writing delivered by Agent to the Borrower, terminate the Loan Availability, and it shall upon such notice be terminated, and the Majority Banks may by notice in writing delivered by the Agent to the Borrower, declare the Note and the principal of and accrued interest on the Loans and all other Obligations to be, and the same shall upon such notice forthwith become, due and payable; and the Agent shall at the request of, or may with the consent of, the Majority Banks exercise all of the Bank's rights and remedies under the Loan Documents and applicable law. In addition to all of its other rights and remedies under the Loan Documents, the Majority Banks acting through the Agent may, upon the occurrence of any Event of Default, require that the Borrower shall deposit cash in the Cash Collateral Account in an amount equal to the face amount of all outstanding Letters of Credit as of the date of the occurrence of the Event of Default, in the same fashion as set forth in Section 2.4(a)(iii) hereof, in which the Agent shall have and is hereby granted a security interest to secure all reimbursement obligations of the Borrower to the Issuing Bank arising in the event of a draw under any such outstanding Letters of Credit and to otherwise secure all Obligations owing to the Banks. The Borrower shall deposit the required amounts of cash into the Cash Collateral Account within two (2) Banking Days after demand by the Agent. Without limiting the foregoing, in the event that the Banks elect to declare the Note and the principal and accrued interest on the Loans and all other Obligations immediately due and payable in accordance with this Section 6.1, then the Borrower shall immediately, without demand, deposit cash in the Cash Collateral Account in an amount equal to the face amount of all outstanding Letters of Credit as of the date of such declaration. 57 58 ARTICLE VII. THE AGENT 7.1 Appointment and Authorization. Each Bank hereby irrevocably appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding anything to the contrary herein, the Issuing Bank shall act on behalf of the Banks with respect to the Letters of Credit (and all conditions precedent applicable to the issuance or extension thereof), until such time and except for so long as the Agent may elect by written notice to the Borrower and the Banks to act for the Issuing Bank with respect thereto; provided, however, that the Issuing Bank shall have all of the benefits and immunities (i) for acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit as fully as if the term "Agent", as used in this Article VII, included the Issuing Bank with respect to such acts or omissions, and (ii) as additionally provided in this Agreement with respect to the Issuing Bank. 7.2 Agent's Powers. Subject to the limitations set forth in this Agreement, the Agent's powers include but are not limited to the power: (i) to administer, manage and service the Secured Facility; (ii) to enforce the Loan Documents; (iii) to make all decisions under the Loan Documents in connection with the day-to-day administration of the Secured Facility, any appraisals or inspections required by the Loan Documents, and other routine administration and servicing matters; (iv) to collect and receive from the Borrower or any third persons all payments of amounts due under the terms of the Loan Documents and to distribute the amounts thereof to the Banks; (v) to collect and distribute or disburse all other amounts due under the Loan Documents; (vi) to grant or withhold consents, approvals or waivers, and make any other determinations in connection with the Loan Documents; and (vii) to exercise all such powers as are incidental to any of the foregoing matters. The Agent shall hold the Collateral in its name alone, as agent for the Banks. The Agent shall hold a complete set of the Loan Documents. The Agent shall furnish to the Banks copies of material documents, including confidential ones, received from the Borrower regarding the Secured Facility, the Loan Documents and the transactions contemplated thereby. The Agent shall have no responsibility with respect to the authenticity, validity, accuracy or completeness of the information provided. 7.3 No Fiduciary Duty or Implied Obligations. Notwithstanding any provision to the contrary contained in any Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth in the Loan Documents or, in the case of duties and responsibilities vis-a-vis the Banks, the Loan Documents and the Co-Lender Agreement, nor shall the Agent have any fiduciary relationship with any Bank, and no implied covenants, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document against the Agent. 58 59 7.4 Co-Lender Agreement. The Borrower acknowledges that the Banks have executed a Co-Lender Agreement of even date herewith (the "Co-Lender Agreement") to supplement the Loan Documents with respect to the relationship of the Banks and the Agent among themselves in connection with the Secured Facility. The Co-Lender Agreement is not a Loan Document and the Borrower is not bound by the terms thereof. 7.5 Resignation of Agent. (a) The Agent may, and at the request of the Majority Banks shall, resign as the Agent upon thirty (30) days' notice to the Borrower and the Banks. If the Agent resigns under this Agreement, the Majority Banks shall appoint from among the Banks a successor agent, which successor shall be subject to approval by the Borrower (such approval not to be unreasonably withheld, conditioned or delayed). If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Borrower and the Banks, a successor agent which would qualify as an Eligible Assignee. Upon the acceptance of appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent, and the retiring Agent's appointment, powers and duties as the Agent shall terminate. The appointment of the successor agent shall become effective only upon the Borrower's receipt of written notice of the Majority Banks' appointment of the successor agent and the successor agent's acceptance of such appointment. After any retiring Agent's resignation hereunder as the Agent, the provisions regarding payment of costs and expenses and indemnification of the Agent shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement. If no successor agent has accepted appointment as the Agent by the date which is thirty (30) days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective, and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Banks appoint a successor agent. (b) Upon replacement of the Agent as provided in this Agreement, the former Agent shall promptly deliver to the new Agent an assignment of all beneficial interest in any Deeds of Trust and any other Security Documents (if before acquisition of the Collateral), or a quitclaim deed to and assignment of any Collateral (if after acquisition of the Collateral) and copies of any books, records, and documents related to the Secured Facility and the Collateral then in the former Agent's possession to which the Banks are entitled. 7.6 No Interest in Agent's Other Property. A Bank which is not the Agent shall have no interest in any (i) property taken as security for any other loan or financial accommodation made or furnished to the Borrower by the Agent (in which such Bank has not acquired an interest); (ii) property now or hereafter in the Agent's possession or under the Agent's control other than by reason of the Loan Documents; or 59 60 (iii) deposits which may be or might become security for the Obligations by reason of the general description contained in any instrument not a Loan Document held by the Agent or by reason of any right of setoff, counterclaim, banker's lien or otherwise. If, however, such property shall actually be applied to the payment of amounts owing by the Borrower in connection with the Secured Facility, then each Bank shall be entitled to its Pro Rata Share, if any, of such application to the Secured Facility. ARTICLE VIII. MISCELLANEOUS 8.1 Notices. All notices, requests, demands, directions and other communications provided for herein or in any other Loan Document must be in writing and must be personally delivered, mailed, telecopied or delivered by telex to the appropriate party at the address set forth below (or at such other address as may be designated by it in a written notice sent in accordance with this Section 8.1): The Borrower: Pacific Gulf Properties Inc. 363 San Miguel Drive, Suite 100 Newport Beach, California 92660 Attention: Glenn L. Carpenter Telephone: (714) 721-2700 Telecopier: (714) 721-2713 with copy to: Cox, Castle & Nicholson 2049 Century Park East, Suite 2800 Los Angeles, California 90067 Attention: John H. Kuhl, Esq. Telephone: (310) 277-4222 Telecopier: (310) 277-7889 BofA as the Agent, the Issuing Bank Bank of America, NT & SA and a Bank: 5 Park Plaza, Suite 500 Irvine, California 92714-8524 Attention: Ms. Michelle C. Johnson Telephone: (714) 260-5696 Telecopier: (714) 260-5639 with copy to: Morrison & Foerster LLP 555 West Fifth Street, Suite 3500 Los Angeles, California 90013-1024 Attention: Thomas R. Fileti, Esq. Telephone: (213) 892-5200 Telecopier: (213) 892-5454 60 61 Banks: NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attention: Terrence R. O'Neil Telephone: (313) 225-3703 Telecopier: (313) 225-3939 Dresdner Bank AG Los Angeles Agency 333 South Grand Avenue, 17th Floor Los Angeles, California 90071 Attention: Sidney S. Jordan Telephone: (213) 473-5400 Telecopier: (213) 627-3819 with a copy to: Stanley Farrar, Esq. Sullivan & Cromwell 444 S. Flower Street, 12th Floor Los Angeles, California 90071 Telephone: (213) 955-8023 Telecopier: (213) 683-0459 Any notice, request, demand, direction or other communication given by telecopier or telex must be confirmed within forty-eight (48) hours by letter mailed or delivered to the appropriate party at its address. Except as otherwise expressly provided in any Loan Document, if any notice, request, demand, direction or other communication is given by mail it will be effective on the earlier of actual receipt or the third Banking Day after the day on which mailed; if given by telex or telecopier, when sent; or if given by personal delivery, when delivered. Each party shall notify all other parties in writing within ten (10) days after a change in any of the addresses to which or the Persons to whom such notices are to be delivered. If any day on which any notice is given by any party is not a Banking Day, such notice shall be deemed to have been given on the next succeeding Banking Day. 8.2 Copies of Notices. Whenever any party to this Agreement is required to give any notice, it shall do so in such number of copies as the Person entitled to the same shall reasonably request. 8.3 No Waivers; Remedies Cumulative. No failure or delay by the Agent, the Banks or the Borrower in exercising any remedy, right, power or privilege under this Agreement, the Note, the Security Documents or any other Loan Document shall operate as a waiver of such remedy, right, power or privilege nor shall any single or partial exercise of such remedy, right, power or privilege preclude any other or further exercise of such remedy, right, power or privilege or the exercise of any other remedy, right, power or privilege. No remedy, right, power or privilege conferred upon or 61 62 reserved to the Agent, the Banks or the Borrower by this Agreement, the Note or any Security Documents is intended to be exclusive of any other remedy, right, power or privilege provided or permitted by this Agreement, by such Note, the Security Documents, or by law, but each shall be cumulative and in addition to every other remedy, right, power or privilege so provided or permitted and each may be exercised concurrently or independently from time to time and as often as may be deemed expedient by any such Person. 8.4 Amendments and Waivers. (a) Except as otherwise provided in Article V, no amendment or waiver of any provision of this Agreement or any Loan Document, and no consent with respect to any departure by the Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Majority Banks (or by the Agent alone at the written request of the Majority Banks) and the Borrower, and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. However, no such waiver, amendment, or consent shall do any of the following unless it is in writing and signed by all the Banks and the Borrower, and acknowledged by the Agent: (i) Increase the Commitment Amount or the Pro Rata Share of any Bank; (ii) Postpone or delay any date fixed by this Agreement or any Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any one of them) hereunder or under any Loan Document; (iii) Reduce the rate of interest or (subject to subsection (b) below) any fees or other amounts payable in connection with the Loan; (iv) Change the voting percentage of the Commitment Amount or of the aggregate unpaid principal amount of the Loan which is required for the Banks, or any of them, to take any action hereunder; (v) Amend this or any provision requiring consent of all Banks for action by Agent; or (vi) Discharge any Guarantor, or release all or substantially all of the Collateral except as otherwise may be provided in the Loan Documents or except where only the consent of the Majority Banks is expressly required. No amendment, waiver or consent shall affect the rights or duties of the Agent under this Agreement or any Loan Document unless it is in writing and signed by the Agent in addition to the required number of Banks. Any amendment, supplement, modification, novation, waiver or consent shall be for such period and 62 63 subject to such conditions as shall be specified in the written instrument effecting the same. (b) Any waiver or consent and any amendment, supplement, modification or novation entered into, executed and delivered in accordance with the provisions of Section 8.4(a) shall be binding upon each of the parties to this Agreement and the holder of the Note. (c) Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. 8.5 Certain Taxes; Expenses (a) The Borrower shall pay or reimburse and shall indemnify and hold each Bank harmless from and against any present or future claim or liability for any registration, stamp, documentary or other similar taxes or charges and any penalties or interest with respect to such taxes or charges which might be imposed by any jurisdiction in which this Agreement, the Note or any other Loan Document is enforced or sought to be enforced on or in connection with the execution, delivery, performance, filing, registration or enforcement (or attempted the enforcement) of, or any transaction in connection with, this Agreement the Note and the other Loan Documents. (b) The Borrower shall pay for or reimburse and shall indemnify and hold each Bank harmless from and against any and all costs and expenses (including reasonable attorneys' fees and expenses) of enforcing or preserving any rights created by this Agreement, the Note and the other Loan Documents. (c) The Borrower shall pay for or reimburse and shall indemnify and hold the Bank and each of its officers, directors, shareholders, employees, agents, attorneys-in-fact and Affiliates harmless from and against any and all losses, liabilities, penalties, actions, suits, judgments, demands, damages, costs and expenses (including reasonable attorneys' fees and expenses and the allocated costs for services of in-house counsel) of any nature arising from or relating to the transactions contemplated by, and the use of funds pursuant to, this Agreement, the Note and the other Loan Documents, except for any losses, liabilities, penalties, actions, suits, judgments, demands, damages, costs and expenses resulting from the gross negligence or willful misconduct of such indemnified persons. (d) Whether or not the transactions contemplated herein shall be consummated, the Borrower shall promptly pay (i) all the actual costs and expenses incurred by the Agent in connection with the preparation of this Agreement, the Note and the other Loan Documents, all the actual costs of furnishing all opinions by counsel for the Borrower (including without limitation any opinions requested by the Bank as to any legal matters) and all the actual costs of the Borrower's performance of and compliance with all agreements and conditions contained herein or therein on its part to be performed or complied with; (ii) all the actual fees, expenses and disbursements of counsel to the 63 64 Agent (including allocated costs of internal counsel) in connection with the negotiation, preparation, execution and administration of this Agreement, the Note and the other Loan Documents; (iii) all other actual out-of-pocket expenses incurred by the Agent in connection with the negotiation, preparation, execution and administration of this Agreement, the Note and the other Loan Documents; and (iv) after the occurrence of an Event of Default, all the actual costs and expenses (including attorneys' fees of outside counsel, allocated costs of internal counsel and costs of settlement) incurred by the Agent and the Banks in enforcing any Obligations or in collecting any payments due from the Borrower hereunder or under the Note or any other Loan Document by reason of such Event of Default or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or incident to any insolvency or bankruptcy proceedings. All such amounts shall be payable within ten (10) days of receipt by the Borrower of an invoice therefor. Furthermore, if the Borrower fails to do any act or thing which it has covenanted to do herein or in any other Loan Document or if any representation or warranty of the Borrower herein or therein is breached, the Banks, acting through the Agent, may (but shall not be obligated to) do any such act or thing or cause any such act or thing to be done to remedy that failure or breach, and there shall be added to the Obligations the cost or expense incurred by the Banks in so doing. All amounts expended or incurred by the Banks in taking any such action shall be repayable to the Bank upon demand therefor and shall bear interest at the Reference Rate plus five percent (5%) from the date advanced to the date of repayment. (e) The agreements contained in this Section 8.5 shall survive the termination of this Agreement. 8.6 Binding Effect; Assignment. (a) This Agreement shall be binding upon and inure to the benefit of each party to this Agreement and their respective successors and assigns. Except as specifically permitted in this Agreement, the Borrower shall not have the right to assign any of its rights or obligations under this Agreement. (b) A Bank (for the purposes of this Section 8.6, the "Assignor") may, at any time, assign and delegate to one or more Eligible Assignees (each, for the purposes of this Section 8.6, an "Assignee") any ratable part of the Loans, the Commitment Amount and the other rights and obligations of the Bank under the Loan Documents, in a minimum amount of Five Million Dollars ($5,000,000) and in increments of One Million Dollars ($1,000,000) thereafter; provided, however, that except as provided in Section 8.6(f) below, in no event shall the Assignor assign more than forty-nine percent (49%) of its initial Pro Rata Share of the Secured Facility; and, provided further, notwithstanding anything to the contrary in Section 8.6(c) below, the Borrower may continue to deal solely and directly with the Assignor in connection with the interest so assigned to Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee shall have been given to the Borrower by the Assignor and (ii) the Assignor, the Assignee 64 65 and the other Banks shall have executed and delivered to the Borrower an Assignment and Acceptance in a form acceptable to the Assignor and the Agent ("Assignment and Acceptance") identifying the Pro Rata Share acquired by the Assignee and the Pro Rata Share, if any, retained by the Assignor. Notwithstanding the foregoing, BofA agrees that it, together with its Affiliates, will in the aggregate retain no less than a twenty-five percent (25%) interest in the Commitment Amount. (c) From and after the date the Assignor and the other Banks have received and executed the Assignment and Acceptance (and such Assignment and Acceptance has been executed by the Assignee), the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of the Assignor under the Loan Documents, and the Assignor shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (d) Except as provided in Section 2.4, no Bank shall be permitted to sell participating interests in the Secured Facility. (e) A Bank may at any time and from time to time pledge and assign all or any portion of its rights under all or any of the Loan Documents to a Federal Reserve Bank. (f) Subject to the provisions of this Section 8.6, NBD Bank shall have a one-time right to assign its entire Pro Rata Share to an Affiliate. 8.7 Counterparts. This Agreement may be signed in any number of counterparts with the same effect as it the signatures to all such counterparts were upon the same instrument, and all such counterparts shall constitute but one instrument. Complete sets of executed counterparts shall be delivered to the Borrower, the Agent and each of the Banks. 8.8 Governing Law and Choice of Forum. This Agreement and the Note and the rights and duties of the parties to this Agreement and the Note shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed within the State of California. Any arbitration, reference, or litigation brought under this Agreement or the Note shall be brought in the state or federal courts sitting in Los Angeles or Orange County, California and the Borrower hereby waives any claim or defense that such forum is not convenient or proper (except that foreclosure actions and other actions brought with respect to Collateral located outside of California or outside of Los Angeles or Orange County may be maintained in the appropriate forums in the states or counties where such Collateral is located). 65 66 8.9 Agreement Supersedes. This Agreement supersedes all previous negotiations, loan applications, and other understandings relating to the subject matter of this Agreement or any other modification of the terms of the Amended and Restated Credit Agreement; provided, however, that the foregoing clause shall not be construed to modify or waive in any way the provisions of, or any of BofA's or the Borrower's rights or remedies under, the Amended and Restated Credit Agreement, as amended, or any other agreement related thereto, until such time as this Agreement and all other documents required to be delivered hereunder have been executed and delivered by the party or parties thereto and all conditions precedent to the effectiveness thereof have been satisfied or waived in writing. 8.10 Headings; Table of Contents. The article, section and subsection headings and the Table of Contents to this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement. 8.11 Waiver of Notice; Termination of Agreement. The Borrower by executing this Agreement, waives any right it might otherwise have to require notice or acceptance by any other Person of its obligations or liabilities under this Agreement which are unconditional and absolute and waives diligence, presentment, demand of payment, protest or notice with respect to any of the obligations of the Borrower under this Agreement, the Note and the other Loan Documents and with respect to any action under Section 6.1 and all other notices and demands whatsoever, except as specifically provided for in this Agreement. If this Agreement shall be terminated in whole or in part by operation of law or for any reason whatsoever other than in accordance with its terms, the Borrower shall nevertheless be obligated to pay amounts equal to amounts payable by it at the time such amounts would have become due and payable by it in accordance with the terms of this Agreement, the Note and the other Loan Documents had this Agreement not been so terminated. 8.12 Survival of Representations and Warranties. All representations and warranties made in this Agreement and in any certificate or other document delivered pursuant to or in connection with this Agreement shall survive the execution and delivery of this Agreement and such certificate or other document. 8.13 Severability. Any provision of this Agreement or any Note or any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or the Note, or any Loan Document and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.14 Confidential Information. Upon notification in writing by the Borrower to the Agent and the Banks that certain specified financial data and information furnished to the Agent or any Bank relating to the Borrower are confidential, each Bank shall, insofar as it is legally possible, use its reasonable efforts to keep in confidence all 66 67 such data and information; provided, however, that (i) this Section 8.14 shall not be applicable to data and information otherwise disseminated to the public; (ii) such Bank may comply with any Applicable Law requiring disclosure of such data and information; (iii) such Bank may disclose such data and information to any transferee or prospective transferee of any part of such Bank's interest in the Loans or this Agreement which has agreed to hold such data and information confidential in accordance with this Section 8.14; and (iv) each Bank may disclose such data and information to its accountants, auditors, attorneys and other Persons whether in its employ, acting on its behalf, or engaged on an independent basis, insofar as disclosure of such data and information is necessary to enable such Persons to properly perform and discharge their duties and functions to such Bank (provided that such Bank will use reasonable efforts to request that such Persons keep such data and information confidential [but in no event shall the Bank have any obligation to obtain any written agreement or acknowledgment from such Persons to keep such data and information confidential]). No Bank shall be responsible or liable to the Borrower for any breach of this Section 8.14 by any other Person described in subparagraph (iv) above who is not an employee of such Bank. 8.15 Reference and Arbitration. (a) Judicial Reference. In any judicial action between or among the parties, including but not limited to any action or cause of action arising out of or relating to this Agreement, the Note, the Security Documents or any other Loan Document or based on or arising from an alleged tort, all decisions of fact and law shall at the request of any party be referred to a referee in accordance with California Code of Civil Procedure Sections 638 et seq. The parties shall designate to the court a referee or referees selected under the auspices of the American Arbitration Association ("AAA") in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee or referees shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (b) Mandatory Arbitration. After all Deeds of Trust have been released, fully reconveyed, or extinguished, any controversy or claim between or among the parties, including those arising out of or relating to this Agreement, the Note, the Security Documents or any other Loan Document and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the AAA. The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute 67 68 a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (c) Real Property Collateral. Notwithstanding the provisions of Section 8.15(b), no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to any of the Banks which is secured by real property collateral. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in Section 8.15(a). (d) Provisional Remedies, Self-Help and Foreclosure. No provision of this Section 8.15 shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or obtaining provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At the Banks' option, foreclosure under a Deed of Trust may be accomplished either by exercise or power of sale under the Deed of Trust or by judicial foreclosure. (e) Attorneys' Fees. In any arbitration or other proceeding relating to this Agreement or any other Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees (including the allocated cost of in-house counsel), costs and expenses. 68 69 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "BORROWER" PACIFIC GULF PROPERTIES INC., a Maryland corporation By: /s/ DONALD G. HERRMAN ---------------------------------- Donald G. Herrman, EVP ------------------------------------- [Printed Name and Title] "AGENT" BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association By: ---------------------------------- ------------------------------------- [Printed Name and Title] "BANKS" BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as a Bank and as the Issuing Bank By: ---------------------------------- ------------------------------------- [Printed Name and Title] 69 70 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "BORROWER" PACIFIC GULF PROPERTIES INC., a Maryland corporation By: ---------------------------------- ------------------------------------- [Printed Name and Title] "AGENT" BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association By: /s/ ELENA B. BENNETT ---------------------------------- Elena B. Bennett, Vice President ------------------------------------- [Printed Name and Title] "BANKS" BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as a Bank and as the Issuing Bank By: /s/ ELENA B. BENNETT ---------------------------------- Elena B. Bennett, Vice President ------------------------------------- [Printed Name and Title] 70 71 DRESDNER BANK AG, New York Branch and Grand Cayman Branch By: /s/ THOMAS J. NADRAMIA ---------------------------------- Thomas J. Nadramia, Vice President ------------------------------------- [Printed Name and Title] By: /s/ JOHN W. SWEENEY ---------------------------------- John W. Sweeney, Assistant Vice President ------------------------------------- [Printed Name and Title] NBD BANK, a Michigan banking corporation By: ---------------------------------- ------------------------------------- [Printed Name and Title] 71 72 DRESDNER BANK AG, New York Branch and Grand Cayman Branch By: ---------------------------------- ------------------------------------- [Printed Name and Title] By: ---------------------------------- ------------------------------------- [Printed Name and Title] NBD BANK, a Michigan banking corporation By: /s/ J. RICHARD SCHOELCH ---------------------------------- J. RICHARD SCHOELCH, FIRST VICE PRESIDENT ------------------------------------- [Printed Name and Title] 72 73 EXHIBIT "A" REVOLVING PROMISSORY NOTE $65,000,000 Newport Beach, California August __, 1996 For value received, the undersigned PACIFIC GULF PROPERTIES, INC., a Maryland corporation ("Borrower"), promises to pay to the order of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent for the benefit of the Banks described below ("Payee"), under that certain Syndicated Revolving Credit Agreement (Secured Facility), dated as of August __, 1996 (the "Credit Agreement"), by and among Borrower, Payee and the other banks party thereto (each, a "Bank"), at Payee's office in Irvine, California, or at such other place as may be designated in writing by Payee, the principal sum of Sixty-Five Million and No/100 Dollars ($65,000,000.00), or if less than such principal amount is outstanding hereunder, the aggregate unpaid principal balance of this Note (payable as specified below), with interest thereon (a) in the case of borrowings which constitute LIBO Rate Loans, at a rate equal to the Adjusted LIBO Rate for each Interest Period of such loan plus one and three-quarters percent (1.75%) per annum and (b) in the case of borrowings which constitute Reference Rate Loans, at a rate equal to the Reference Rate plus one-quarter of one percent (0.25%) per annum; provided that during the Term-out Option Period the applicable interest rates for LIBO Rate Loans and Reference Rate Loans shall increase by one-quarter of one percent (0.25%) per annum as set forth in Section 2.6 of the Credit Agreement. All computations of interest shall be based upon a three hundred and sixty-day (360-day) year and charged on the basis of actual days elapsed. Except as otherwise specified in the Credit Agreement, all or any portion of the principal of this Note may be borrowed, repaid and reborrowed from time to time prior to the Revolving Maturity Date as provided in the Credit Agreement. All capitalized terms used herein shall have the same meanings as set forth in the Credit Agreement unless otherwise defined herein. This Note is issued in replacement of, and substitution for, that certain Amended and Restated Revolving Promissory Note dated May 30, 1996, made by Borrower in favor of Bank of America National Trust and Savings Association, a national banking association, which Amended and Restated Revolving Promissory Note was made in connection with that certain Amended and Restated Revolving Credit Agreement (Secured Facility), dated as of May 30, 1996, by and between the Bank and the Borrower. The outstanding principal amount owing hereunder is subject to mandatory prepayment as provided in Article 2 of the Credit Agreement. The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable on the Revolving Maturity Date; provided that if Borrower elects to exercise the Term-out Option under Section 2.5(c) of the Credit Agreement, the principal shall be repaid in quarterly payments each in an amount equal to one-eightieth A-1 74 (1/80th) of the aggregate amount of Advances outstanding as of the Term-out Commencement Date, which payments shall be payable quarterly on the last Banking Day of each calendar quarter (beginning on the last Banking Day of the calendar quarter during which the Term-out Commencement Date occurs). The Credit Agreement contains provisions concerning the acceleration of the Revolving Maturity Date upon the happening of certain stated events. Interest shall be payable on the Interest Payment Date. In the event that any amounts are not paid within five (5) days from the date due hereunder or under the Credit Agreement (collectively, "Overdue Amounts"), such Overdue Amounts shall bear interest until paid in full at a fluctuating rate per annum (based upon a three hundred and sixty-day (360-day) year and charged on the basis of actual days elapsed) equal to three percent (3.0%) in excess of the Reference Rate. This Note is entered into pursuant to the Credit Agreement and is the Note described therein. This Note is a Loan Document as defined in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note shall alter or impair the obligation of Borrower, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Payee will make notations on either Schedule A or Schedule B, attached hereto, as appropriate, of all borrowings hereunder and of the other information provided for on such schedules, which notations shall constitute prima facie evidence of the accuracy of the information noted; provided, however, that the failure to make any such notation shall not limit or otherwise affect the obligations of the undersigned or the rights of the Payee hereunder or under the Credit Agreement. If an Event of Default shall occur under the Credit Agreement, then the Payee may, at its sole option, declare all sums owing under this Note immediately due and payable. Whenever any payment on this Note shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the next succeeding Banking Day and such extension of time shall be included in the computation of the payment of interest of this Note. Borrower agrees to pay all costs and expenses, including without limitation, attorneys' fees incurred by the holder or any Bank in connection with the enforcement of this Note or the protection or preservation of any rights of the holder hereunder as provided in the Credit Agreement. No single or partial exercise of any power hereunder or under the Credit Agreement shall preclude other or further exercise thereof or the exercise of any other power. No previous waiver and no delay or omission on the part of the holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. The release of any party liable on this Note shall not operate to release any other party liable hereon. The acceptance of any amount due and payable hereunder A-2 75 shall not operate as a waiver with respect to any other amount then owing and unpaid. A waiver of any term of this Note must be made in writing and shall be limited to the express written terms of such waiver. Presentment, demand, protest, notices of protests, dishonor and nonpayment of this Note and all notices of every kind are hereby waived by all parties to this Note, whether the undersigned, principal, surety, guarantor or endorser. To the extent permitted by applicable law, the defense of the statute of limitations is hereby waived by the undersigned. Principal and interest evidenced hereby are payable only in lawful money of the United States. Until notified in writing of the transfer of this Note, Borrower shall be entitled to deem Payee or such other Person who has been so identified by the transferor of this Note in writing to Borrower as the holder of this Note, as the owner and holder of this Note. Time is of the essence with respect to every provision hereof. This Note shall be construed by and enforced in accordance with the laws of the State of California, except to the extent that federal laws preempt the laws of the State of California, and all persons and entities in any manner obligated under this Note consent to the jurisdiction of any federal or state court within Los Angeles or Orange County, State of California having proper venue and also consent to service of process by any means authorized by California or federal law. "BORROWER" PACIFIC GULF PROPERTIES INC., a Maryland corporation By: ------------------------------------ ------------------------------------ [Printed Name and Title] A-3 76 SCHEDULE A TO NOTE LOANS AND PAYMENTS OF PRINCIPAL (Reference Rate Loans) - -------------------------------------------------------------------------------- Amount of Loan Amount of or of Principal Paid or Redesignation Redesignated from another into another type Unpaid Principal Notation Made Date type of loan of loan Balance by - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A-4 77 SCHEDULE B TO NOTE LOANS AND PAYMENTS OF PRINCIPAL (LIBO Rate Loans) - -------------------------------------------------------------------------------- Amount of Loan Amount of or of Principal Paid or Redesignation Redesignated from another into another type Unpaid Principal Notation Made Date type of loan of loan Balance by - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A-5 78 EXHIBIT "B" EXISTING COLLATERAL AND COLLATERAL VALUES Vista Distribution Center $12,500,000 1205-1225 Park Center Drive Vista, California Garden Grove Industrial Center $8,550,000 7446-7472 Orangewood Avenue 7361-7471 Doig Drive Garden Grove, California Golden West Industrial Park $9,000,000 9320-9500 Seventh Street Rancho Cucamonga, California Heatherwood Apartments $12,510,000 27314 24th Place South Federal Way, Washington Hoover Business Center $6,900,000 12600-12714 Hoover Street 7643-7725 Garden Grove Boulevard Garden Grove, California - --------------------------------------------------------------------------- Total Collateral Pool Value $49,460,000 B-1 79 EXHIBIT "C" APPLICATION AND AGREEMENT FOR STANDBY LETTER OF CREDIT ------------------------------------------------------ Application and Agreement [BANK OF AMERICA LOGO] for Standby Letter of Credit - ------------------------------------------------------------------------------- C-1 80 * This Letter of Credit shall be issued pursuant to and in connection with that certain Amended and Restated Revolving Credit Agreement, dated as of May __, 1996, by and between Pacific Gulf Properties, Inc. and Bank of America National Trust and Savings Association (the "Credit Agreement"), and is subject to the terms thereof. The provisions of this Application and Agreement for Standby Letter of Credit appearing on this page have been stricken because there are analogous provisions of the Credit Agreement which are controlling. Without limiting the foregoing, draws under this Letter of Credit shall bear interest at the rates specified in Section 2.7 of the Credit Agreement with respect to Overdue Amounts. C-2 81 EXHIBIT "D" REQUEST FOR ADVANCE, LETTER OF CREDIT OR CONVERSION/CONTINUATION OF LOAN Reference is hereby made to that certain Syndicated Revolving Credit Agreement (Secured Facility), dated as of August __, 1996 (which agreement, as it may be modified, supplemented, extended, renewed or replaced, is herein referred to as the "Credit Agreement"), by and among Pacific Gulf Properties Inc., a Maryland corporation (the "Borrower"), as the borrower, Bank of America National Trust and Savings Association, a national banking association, as the Agent ("Agent"), the Issuing Bank ("Issuing Bank") and as a Bank, and the other Banks party thereto (collectively, the "Banks". All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. [NOTE: SELECT APPROPRIATE PARAGRAPH CORRESPONDING TO REQUEST AND COMPLETE.] [THE BORROWER HEREBY REQUESTS THAT THE BANKS MAKE AN ADVANCE TO IT PURSUANT TO SECTION 2.2 OF THE CREDIT AGREEMENT. THE BORROWER REQUESTS THAT SUCH ADVANCE BE A [REFERENCE RATE LOAN] [LIBO RATE LOAN WITH AN INITIAL INTEREST PERIOD OF __ MONTHS.] The principal amount of the Advance requested is $____ and the date on which the requested Advance is to be made is _____, which is a Banking Day. The general purpose for which the requested Advance will be used is ________________. The proceeds of the Advance should be [(DEPOSITED INTO ACCOUNT NO. _____ MAINTAINED AT __________________________] [(transferred to the Borrower by means of a federal wire transfer of immediately available funds pursuant to the following instructions: ________ ____________________________________________________________________________ _________________________________________________________________________.]] [PURSUANT TO SECTION 2.3 OF THE CREDIT AGREEMENT, THE BORROWER HEREBY REQUESTS THAT THE BANKS CONVERT THAT CERTAIN [(REFERENCE RATE LOAN MADE ON ____________________ IN THE ORIGINAL PRINCIPAL AMOUNT OF $____________ INTO A LIBO RATE LOAN WITH AN INITIAL INTEREST PERIOD OF __ MONTHS] [(LIBO RATE LOAN MADE ON ______________ IN THE ORIGINAL PRINCIPAL AMOUNT OF $____________ INTO A REFERENCE RATE LOAN] ON WHICH _________________________, IS A BANKING DAY.] [PURSUANT TO SECTION 2.3 OF THE CREDIT AGREEMENT, THE BORROWER HEREBY REQUESTS THAT THE BANKS CONTINUE THAT CERTAIN LIBO RATE LOAN MADE ON ________ _____IN THE ORIGINAL PRINCIPAL AMOUNT OF $____________ FOR AN INTEREST PERIOD OF __ MONTHS UPON THE EXPIRATION OF THE EXISTING INTEREST PERIOD.] [PURSUANT TO SECTION 2.4 OF THE CREDIT AGREEMENT, THE BORROWER HEREBY REQUESTS THAT THE ISSUING BANK ISSUE A LETTER OF CREDIT IN THE AMOUNT OF D-1 82 $ _________________ NAMING _______________ AS THE BENEFICIARY AND HAVING A TERM OF _____________ ON _______________, WHICH IS A BANKING DAY. THE GENERAL PURPOSE FOR WHICH SUCH LETTER OF CREDIT WILL BE USED IS _____________________.] In connection with the foregoing, the Borrower hereby certifies to the Agent and the Banks that: 1. The representations and warranties of the Borrower set forth in the Credit Agreement are true and correct in all material respects on the date the Advance is to be made, the Letter of Credit is to be issued or the Loan is to be continued or converted, as applicable, after giving effect to that Advance or Letter of Credit with the same effect as though such representations and warranties had been made on and as of that date (except to the extent that such representations and warranties expressly relate to an earlier date; and except that it is understood that the representations contained in Sections 4.4(b), 4.5 and 4.13 do not need to be currently true for the undersigned to continue a LIBO Rate Loan or convert a Reference Rate Loan to a LIBO Rate Loan); 2. On the date the Advance is made, the Letter of Credit is issued or the Loan is continued or converted, as applicable, and after giving effect to that Advance or Letter of Credit, the Borrower will be in compliance in all material respects with all covenants set forth in the Credit Agreement on its part to be observed or performed, and no Default or Event of Default shall have occurred and be continuing or would result from that Advance or Letter of Credit; and 3. As of the date of this Request, (i) the total amount of the Borrowing Base is $_________ (as shown on the attached detailed calculation), (ii) the total amount of Advances (excluding the Advance requested hereby) outstanding is $_______________ and (iii) the total amount of Letter of Credit obligations outstanding is $___________________. IN WITNESS WHEREOF, the undersigned has caused this Request for Advance, Letter of Credit or Conversion/Continuation to be executed this __ day of __________________, 199_. PACIFIC GULF PROPERTIES INC., a Maryland corporation By: ------------------------------- ---------------------------------- [Printed Name and Title] D-2 83 EXHIBIT "E" REQUEST FOR BORROWING BASE INCREASE Reference is made to that certain Syndicated Revolving Credit Agreement (Secured Facility) (the "Agreement"), dated as of August __, 1996, by and among Pacific Gulf Properties Inc., a Maryland corporation (the "Borrower"), Bank of America National Trust and Savings Association, a national banking association, as the Agent ("Agent") and as a Bank, and the other Banks party thereto (collectively, the "Banks"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Agreement. Pursuant to Section 2.20 of the Agreement, the Borrower hereby requests that the following real property (herein, the "Property") be accepted as Collateral and added to the Borrowing Base: (a) Description of Property: __________________________ ____________________________________ [Improvements, acreage, etc.] in the City of __________________, County of __________________, State of _____________________. (b) Description of Entitlements: [zoning; occupancy permits, etc.] _______________________________________________________________________ _______________________________________________________________________. (c) Description of Any Needed Tenant Improvement, Maintenance or Refurbishment Work: ___________________________________________________ _______________________________________________________________________. (d) Known Environmental/Due Diligence Issues: ________________________________________________________________________ _______________________________________________________________________. To induce the Banks to accept the Collateral described above, the undersigned represents, warrants and certifies to the Agent and each of the Banks that: (a) As of the date of this Request, (i) the total amount of the Borrowing Base is $______________, (ii) the total amount of Advances outstanding is $______________, and (iii) the total amount of Letter of Credit Obligations outstanding is $_______________. (b) The representations and warranties of the Borrower set forth in the Agreement are true and correct in all material respects. E-1 84 (c) The Property is in conformity with all requirements of the Agreement. Dated: __________________, 199__. PACIFIC GULF PROPERTIES INC., a Maryland corporation By:___________________________________ [Printed Name and Title] E-2 85 EXHIBIT "F" TENANT ESTOPPEL CERTIFICATE To: Bank of America National Trust Savings Association, as Agent ("Agent") for the Banks (the "Banks") party to that certain Syndicated Revolving Credit Agreement (Secured Facility) dated as of August __, 1996 5 Park Place, Suite 500 Irvine, California 92714-8524 Attention: Ms. Edie Messerschmidt Re: Lease Dated: ____________________________________________ Current Landlord: ____________________________________________ Current Tenant: ____________________________________________ Square Feet: Approximately ______________________________ Floor(s): ____________________________________________ Located at: ____________________________________________ ___________________________________ ("Tenant") hereby certifies that as of _______________, 199__: 1. Tenant is the present owner and holder of the Tenant's interest under the lease described in Exhibit A (as it may be amended to date, the "Lease") with ____________________ ___________________________________________ as Landlord (who is called "Borrower" for purposes of this Certificate). (USE THE NEXT SENTENCE IF THE LANDLORD OR TENANT NAMED IN THE LEASE IS A PREDECESSOR TO THE CURRENT LANDLORD OR TENANT.) [The original landlord under the Lease was _________________ __________________________.] The Lease covers the premises commonly known as _______ ______________________________ (the "Premises") in the building (the "Building") at the address set forth above. 2. (a) A true, correct and complete copy of the Lease (including all modifications, amendments, supplements, side letters, addenda and riders of and to it, and all guaranties thereof) is attached to this Certificate as Exhibit B.] F-1 86 (b) (IF APPLICABLE) [The Lease provides that in addition to the Premises, Tenant has the right to use or rent _____________ [assigned/unassigned] parking spaces near the Building or in the garage portion of the Building during the term of the Lease.] (c) The term of the Lease commenced on _________________, 19__ and will expire on _______________________, 19__, including any presently exercised option or renewal term. (CHOOSE ONE OF THE FOLLOWING TWO SENTENCES.) [Tenant has no option or right to renew, extend or cancel the Lease, or to lease additional space in the Premises or Building, or to use any parking (IF APPLICABLE) [other than that specified in Section (b) above].] [Except as specified in Paragraph(s) ___________ of the Lease, Tenant has no option or right to renew, extend or cancel the Lease, or to lease additional space in the Premises or Building, or to use any parking (IF APPLICABLE) [other than that specified in Section 2(b) above].] (CHOOSE ONE OF THE FOLLOWING SECTION 2(D)S.) [(d) Tenant has no option or preferential right to purchase all or any part of the Premises (or the land of which the Premises are a part). Tenant has no right or interest with respect to the Premises or the Building other than as Tenant under the Lease.] [(d) Except as specified in Paragraph(s) ___________ of the Lease, Tenant has no option or preferential right to purchase all or any part of the Premises (or the land of which the Premises are a part). Except for the foregoing, Tenant has no right or interest with respect to the Premises or the Building other than as Tenant under the Lease.] (e) The annual minimum rent currently payable under the Lease is $___________ and such rent has been paid through _____________________, 19__. (f) (IF APPLICABLE) [Additional rent is payable in accordance with Paragraph(s) __________ of the Lease for (i) operating, maintenance or repair expenses, (ii) property taxes, (iii) consumer price index cost of living adjustments, or (iv) percentage of gross sales adjustments (i.e., adjustments made based on underpayments of percentage rent). Such additional rent has been paid in accordance with Borrower's rendered bills through ____________, 19__. The base year amounts for additional rental items are as follows: (1) operating, maintenance or repair expenses $______________, (2) property taxes $____________, and (3) consumer price index ____________ (please indicate base year CPI level).] (g) Tenant has made no agreement with Borrower or any agent, representative or employee of Borrower concerning free rent, partial rent, rebate of rental payments or any other similar concession (IF APPLICABLE) [except as expressly set forth in Paragraph(s) ___________ of the Lease]. F-2 87 (h) Borrower currently holds a security deposit in the amount of $___________ which is to be applied by Borrower or returned to Tenant in accordance with Paragraph(s) ___________ of the Lease. Tenant acknowledges and agrees that neither Agent nor the Banks shall have any responsibility or liability for any security deposit, except to the extent that any security deposit shall have been actually received by Agent or any of the Banks. 3. (a) The Lease constitutes the entire agreement between Tenant and Borrower with respect to the Premises, has not been modified, changed, altered or amended and is in full force and effect in the form attached as Exhibit B. There are no other agreements, written or oral, which affect Tenant's occupancy of the Premises. (b) All insurance required of Tenant under the Lease has been provided by Tenant and all premiums have been paid. (c) To the best knowledge of Tenant, no party is in default under the Lease. To the best knowledge of Tenant, no event has occurred which, with the giving of notice or passage of time, or both, would constitute such a default. (d) The interest of Tenant in the Lease has not been assigned or encumbered. Tenant is not entitled to any credit against any rent or other charge or rent concession under the Lease except as set forth in the Lease. No rental payments have been made more than one month in advance. 4. All contributions required to be paid by Borrower to date for improvements to the Premises have been paid in full and all of Borrower's obligations with respect to tenant improvements have been fully performed. Tenant has accepted the Premises, subject to no conditions other than those set forth in the Lease. 5. Neither Tenant nor any guarantor of Tenant's obligations under the Lease is the subject of any bankruptcy or other voluntary or involuntary proceeding, in or out of court, for the adjustment of debtor-creditor relationships. 6. (a) As used here, "Hazardous Substance" means any substance, material or waste (including petroleum and petroleum products) which is designated, classified or regulated as being "toxic" or "hazardous" or a "pollutant" or which is similarly designated, classified or regulated, under any federal, state or local law, regulation or ordinance. (b) Tenant represents and warrants that it has not used, generated, released, discharged, stored or disposed of any Hazardous Substances on, under, in or about the Building or the land on which the Building is located, other than Hazardous Substances used in the ordinary and commercially reasonable course of Tenant's business in compliance with all applicable laws. Except for such commercially reasonable use by Tenant, Tenant has no actual knowledge that any Hazardous Substance is present, or has F-3 88 been used, generated, released, discharged, stored or disposed of by any party, on, under, in or about such Building or land. 7. Tenant hereby acknowledges that Borrower (CHOOSE ONE) [intends to encumber/has encumbered[ the property containing the Premises with a deed of trust (the "Deed of Trust") in favor of Agent for the benefit of the Banks. Tenant acknowledges the right of Borrower, Agent, the Banks and any and all of Borrower's present and future lenders to rely upon the statements and representations of Tenant contained in this Certificate and further acknowledges that any loan secured by the Deed of Trust or further deeds of trust will be made and entered into in material reliance on this Certificate. 8. As used in this paragraph, "Transferee" means Agent or any other person or entity who acquires title to the Premises pursuant to foreclosure of the Deed of Trust, and their respective successors and assigns. Tenant shall attorn to any Transferee and pay all rent and perform all obligations under the Lease to such Transferee. Such attornment shall be effective and self-operative without notice and without the execution of any further documents, provided that Tenant shall, upon the written request of such Transferee, promptly confirm such attornment in writing. Transferee shall not be liable for any default of any prior landlord under the Lease, and Tenant shall not assert any claim or offset against Transferee that it may have had against any prior landlord under the Lease. Transferee shall not be bound by any amendments to the Lease not identified in this Certificate or consented to in writing by Agent or any subsequent holder of the Deed of Trust. 9. Tenant hereby agrees to furnish Agent with such other and further estoppels as Agent may reasonably request. "TENANT" ------------------------------- By: ---------------------------- Name: -------------------------- Title: ------------------------- F-4 89 EXHIBIT B COPY OF LEASE AND ANY GUARANTIES (Attach copies of all documents described in Exhibit A) F-6 90 EXHIBIT "G" LEGAL OPINION ------------- G-1 91 EXHIBIT "H" BORROWER'S CERTIFICATE Pursuant to Section 3.1(a)(vii) of that certain Syndicated Revolving Credit Agreement (Secured Facility), dated as of August ___, 1996 (the "Credit Agreement"; all capitalized terms used by not defined herein having the meaning set forth in the Credit Agreement), by and among Pacific Gulf Properties Inc., a Maryland corporation (the "Borrower"), Bank of America National Trust and Savings Association, a national banking association, as Agent for the other Banks party thereto ("Agent") and as a Bank, and the other Banks party thereto (collectively, the "Banks"), the Borrower, does hereby represent, warrant, certify and covenant in favor of the Agent and the Banks that as of the date hereof: 1. The representations and warranties of the Borrower contained in Article IV of Credit Agreement are true and correct; 2. No Default or Event of Default exists under the Credit Agreement; 3. All conditions precedent set forth in Section 3.1 of the Credit Agreement (other than those based solely upon the approval of the Banks) have been satisfied; 4. All conditions specified in Section 2.20(c) of the Credit Agreement have been satisfied as of the date hereof with respect to each property constituting a part of the Existing Collateral, and none of the Existing Collateral is required to be excluded as Collateral pursuant to Section 2.20(d); 5. The Articles of Incorporation and the Articles of Amendment and Restatement of the Borrower filed with the Maryland Department of Assessments and Taxation on August 4, 1993 and February 15, 1994, respectively, remain in full force and effect and have not been revoked, amended, supplemented or modified since the respective dates thereof; 6. The Amended and Restated Bylaws of Borrower dated October 27, 1993 remain in full force and effect and have not been revoked, amended, supplemented or modified since the date thereof; 7. To the best of the undersigned's knowledge after due inquiry, the information furnished in the attached schedules, including, without limitation, each of the calculations in attached Schedule 1 and the related attachments with respect to (a) the covenants of the Borrower in Sections 5.9, 5.17 and 5.21 of the Agreement and (b) the Borrowing Base is H-1 92 true, correct and complete in all material respects as of the last day of the most recent fiscal quarter ended and the periods covered thereby (the "Reporting Periods"). IN WITNESS WHEREOF, the undersigned, being duly authorized, has executed this Certificate on behalf of the Borrower as of this ___ day of August, 1996. PACIFIC GULF PROPERTIES INC., a Maryland corporation By:___________________________________ Name:_________________________________ Its:__________________________________ I, ____________________, being the __________________ of the Borrower, hereby certifies that appearing above is the true and correct signature of __________________ being the President of the Borrower. ______________________________________ (Name and Title) H-2 93 SCHEDULE 1 to Borrower's Certificate COVENANT COMPLIANCE As of __________________, 199_ and for the period from _____________, 199_ to _____________, 199_ I. FINANCIAL COVENANTS A. LIMITATION ON DEVELOPMENT ACTIVITIES (SECTION 5.9) AS OF _____________ , 199__ [Carrying Costs of construction and development activities not to exceed 10% of total tangible assets; Carrying Costs of unimproved land not to exceed 10% of Tangible Net Worth] Total tangible assets of the Borrower (A) $____________ Total Carrying Costs of all construction and development activities of the Borrower (B) $____________ Total Carrying Costs of all construction and development activities of the Borrower as a percentage of the Borrower's total tangible assets (Item (B) divided by Item (A)) (C) ____ % Covenant compliance? (Item (C) must be less than or equal to 10%) (D) ______ (yes or no) Tangible Net Worth (E) $____________ Total Carrying Costs of unimproved land held by the Borrower (F) $____________ Total Carrying Costs of unimproved land held by the Borrower as a percentage of Tangible Net Worth (Item (F) divided by Item (E)) (G) ____ %
H-3 94 Covenant compliance? (Item G must be less than or equal to 10%) (H) ______ (yes or no) B. TOTAL INDEBTEDNESS TO GROSS ASSET VALUE (SECTION 5.21(A)) AS OF _____________ , 199__ [not to exceed 75% at any time prior to December 31, 1997 and 70% at any time thereafter] Indebtedness Advances (I-1) $____________ Letter of Credit Obligations (I-2) $____________ Unsecured Advances (I-3) $____________ Indebtedness of the Borrower and its Subsidiaries with respect to unconsolidated (I-4) $____________ joint ventures and partnerships Other Indebtedness (itemize obligations greater than (I-5) $____________ $5,000,000) Total Indebtedness (sum of Items (I-1)+(I-2)+(I-3)+(I-4)+(I-5)) (I-6) $____________ Asset Value Net Operating Income from the real property assets of the Borrower (J-1) $____________ consisting of "industrial properties" (as such term is used in the definition of Gross Asset Value) for the most recent fiscal quarter ended _____, 19__ Annualized Net Operating Income (Item (J-1) multiplied by 4) (J-2) $____________
H-4 95 Item (J-2) capitalized at the Industrial Property Cap Rate (___%) (use current rate) (J-3) $____________ Net Operating Income from the real property assets of the Borrower consisting of "business park" properties (as such term is used in the definition of Gross Asset (J-4) $____________ Value) for the most recent Annualized Net Operating Income (Item fiscal quarter ended _____, 19__ (J-4) multiplied by 4) (J-5) $____________ Item (J-5) capitalized at the Business Park Property Cap Rate (___%) (use current rate) (J-6) $____________ Net Operating Income from the real property assets of the Borrower consisting of apartment properties for the most recent fiscal quarter ended _____, 19__ Annualized Net Operating Income (Item (J-7) $____________ (J-7) multiplied by 4) (J-8) $____________ Item (J-8) capitalized at the Apartment Property Cap Rate (___%) (use current rate) (J-9) $____________ All cash and Cash Equivalents held by the Borrower as of the last day of the most recent fiscal quarter ended _____, 19__ (J-10) $____________ Undepreciated Carrying Cost of the Borrower's investment in 363 San Miguel (J-11) $____________
H-5 96 Carrying Cost of the Borrower's other non-income producing properties held in accordance with Section 5.9 of the Credit Agreement (J-12) $____________ Gross Asset Value (sum of Items (J-3)+(J-6)+(J-9)+(J+10)+ (F-11)+(J-12)) (J-13) $____________ Total Indebtedness as a percentage of Gross Asset Value (Item (I-6) divided (K) ____ % by Item (J-13)) Covenant compliance? (Item (K) must be less than or equal to 75% for all periods prior to December 31, 1997 and 70% for all periods thereafter) (L) _____ (yes or no) C. INTEREST COVERAGE RATIO (SECTION 5.21(B)) FOR THE PERIOD FROM _________, 199_ TO __________, 199__ [not to exceed 1.50:1.0 at any time] EBITDA Net Income (M-1) $____________ Interest Expense (M-2) $____________ Depreciation (M-3) $____________ Amortization expenses (M-4) $____________ relating to intangibles Accrued taxes (M-5) $____________ EBITDA (sum of Items (M-1)+(M-2)+(M-3)+(M-4)+(M-5)) (M-6) $____________ Interest Incurred (includes capitalized interest) (N) $____________ Interest Coverage Ratio (Item (M-6) divided by Item (N)) (O) _______
H-6 97 Covenant compliance? (Item (O) must be less than or equal to 1.50:1.0) (P) ________ (yes or no) D. FIXED CHARGE COVERAGE RATIO (SECTION 5.21(C)) FOR THE PERIOD FROM _________ , 199_ TO __________, 199__ [not to exceed 1.35:1.0 at any time] EBITDA (Item (M-6)) (Q) $_____________ Interest Incurred (Item (N)) (R) $_____________ Amortization Indebtedness with a maturity of less than 12 months from the date of determination (exclusive of balloon payments on real estate secured debt) (S-1) $______________ Current portion of Indebtedness with a maturity of greater than 12 months from the date of determination (S-2) $______________ Scheduled Amortization (sum of Items (S-1)+(S-2)) (S-3) $______________ Fixed Charge Coverage Ratio (Item (Q) divided by the sum of Items (R)+(S-3)) (T) _______ Covenant Compliance? (Item (T) must be less than or equal to 1.35:1.0) (U) _______ (yes or no)
H-7 98 E. TANGIBLE NET WORTH (SECTION 5.21(D)) AS OF _________, 199_ [not to be less than $65,000,000 plus (i) 90% of all Net Cash Proceeds from any offerings of equity securities through the end of the Reporting Period minus (ii) amount by which cumulative dividends declared after June 6, 1996 exceed cumulative Net Income during the same period] Net Cash Proceeds from all equity security offerings occurring on or after June 6, 1996 through the end of the Reporting Period (attach a list indicating the date or each such offering, the number of securities offered, the type of securities offered, the amount of the gross cash proceeds of the offering and amount of Net Cash Proceeds of the offering) (V) $_____________ Item (V) multiplied by 90% (W) $_____________ Cumulative amount of all dividends declared by the Borrower in all fiscal quarters ending after June 6, 1996 through the end of the Reporting Period (attach a list of the payment dates and amounts of all such dividends) (X) $______________ Cumulative Net Operating Income for all fiscal quarters ending after June 6, 1996 through the end of the Reporting Period (Y) $_______________ Amount, if any, by which dividends declared exceed Net Operating Income (Item (X) less Item (Y)) (if a negative number, enter zero) (Z) $________________
H-8 99 Minimum Tangible Net Worth standard (the sum of $65,000,000 plus Item (W) less Item (Z)) (AA) $________________ Tangible Net Worth Net Worth (BB-1) $_______________ Intangible assets (BB-2) $_______________ Outstanding advances and loans to officers (BB-3) $_______________ Amounts due to the Borrower from Affiliates (BB-4) $_______________ Tangible Net Worth (sum of Items (BB-1) minus [(BB-2)+ (BB-3)+(BB-4)]) (BB-5) $______________ Covenant compliance? (Item (BB-5) must not be less than Item (AA)) (CC) _________ (yes or no) F. DISTRIBUTIONS (SECTION 5.17) FOR THE PERIOD FROM _________ , 199_ TO __________, 199__ (four consecutive quarters) [not to exceed 100% of Funds Available for Distribution] Funds From Operations Net Income (DD-1) $_______________ Less gains (or losses) from debt restructuring or the sale of property (DD-2) $(______________) Plus depreciation and amortization (DD-3) $_______________ Adjusted for income (or losses) attributable to unconsolidated joint ventures and partnerships (DD-4) $(______________) Funds From Operations (sum of Items (DD-1)-(DD-2)-(DD-3)-(DD-4)) (DD-5) $_______________ Imputed Capital Expenditures Average number of apartment units owned by the Borrower during such period (EE-1) _________ units Item (EE-1) multiplied by $250.00 (EE-2) $______________
H-9 100 Average number of square feet of gross leaseable industrial space owned by the Borrower during such period (EE-3) _________ sq. ft. Item (EE-3) multiplied by $0.20 (EE-4) $______________ Imputed Capital Expenditures (sum of Items (EE-2)+(EE-4)) (EE-5) $______________ Funds Available for Distribution (Items (DD-5) minus (EE-5)) (FF) $______________ Distributions paid or set apart (GG) $_______________ Covenant compliance ? (Item (GG) must not exceed Item (FF)) (HH) _______ yes or no II. BORROWING BASE AS OF __________, 199___ Loan Availability (Item (F) from Table 1 attached hereto) (II) $____________ Outstanding Advances plus Letter of Credit (JJ) $____________ Obligations Covenant Compliance? (Item II may not exceed Item (HH)) (KK) ______ (yes or no)
H-10 101 TABLE 1 TO BORROWER'S CERTIFICATE LOAN AVAILABILITY For period ending __________, 19 ____
(A) (B) (C) (D) Loan Amount @ Loan Amount @ Collateral 55% Loan to Value 1.35 x Debt Service Coverage Lower of (B) or (C) ---------- ----------------- ---------------------------- ------------------- Total (E) Loan Availability: Lesser of Borrowing Base or Revolving Commitment Availability (F)
H-11 102 SCHEDULE 2 to Compliance Certificate DEFAULTS; EVENTS OF DEFAULT ____________, 199_ Condition(s) or event(s) constituting a Default or Event of Default:__________ ______________________________________________________________________________ Period of existence: Remedial actions taken or proposed to be taken with respect to each such Default or Event of Default:___________________________________________________________ H-12 103 EXHIBIT "I" ADDITIONAL INSURANCE REQUIREMENTS --------------------------------- [LOGO] PACIFIC GULF PROPERTIES INC. 363 SAN MIGUEL DRIVE SUITE 100 NEWPORT BEACH CA 92660-7805 TELEPHONE 714 721 2700 FAX 714 721 2711 June 10, 1994 VIA HAND DELIVERY - ----------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION 555 Anton Boulevard, Suite 1100 Costa Mesa, CA 92626 Attention: Mr. James Weaver Vice President and Regional Manager Re: Bank of America NT & SA ("Bank") -- Pacific Gulf Properties Inc. ("Borrower"); 850,000,000 Revolving Line of Credit; Insurance Requirements ------------------------------------------ Gentlemen: This letter shall clarify Borrower's obligations under Section 5.3 of that certain Revolving Credit Agreement (the "Credit Agreement") dated as of even date herewith, pursuant to which Borrower has agreed to maintain insurance on all of the Collateral (as defined in the Credit Agreement). Capitalized terms used herein without definition shall have the meanings for them set forth in the Credit Agreement. Without in any way limiting Section 5.3 of the Credit Agreement, and in consideration of Bank's entering into the Credit Agreement, Borrower hereby agrees that its obligations under such Section shall include the following: 1. All policies of insurance required under the Loan Documents shall be issued by companies approved by Bank having a minimum A.M. Best's rating of A:IX. The limits, coverage, forms, deductibles, inception and expiration dates and cancellation provisions of all such policies shall be in form, substance, amount and date reasonably acceptable to Bank. In addition, each required property insurance policy shall contain a Lender's Loss Payable Form (Form 438 BFU or equivalent) in favor of Bank, and shall provide that all proceeds be payable to Bank to the extent of Bank's interest. An approval by Bank is not, and shall not be deemed to be, a representation of the solvency of any insurer or the sufficiency of any amount of insurance. 2. Each policy of insurance required under the Loan Documents shall provide that it may not be modified or cancelled without at least thirty (30) days' prior written notice to Bank. When any required insurance policy expires, Borrower shall furnish Bank with proof acceptable to Bank that I-1 104 [LOGO] PACIFIC GULF PROPERTIES INC. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION June 10, 1994 Page 2 the policy has been reinstated or a new policy issued, continuing in force the insurance covered by the policy which expired. Borrower shall also furnish Bank with evidence satisfactory to Bank that all premiums for such policy have been paid within thirty (30) days of renewal or issuance. If Bank fails to receive such proof and evidence, Bank shall have the right, but not the obligation, to obtain current coverage and advance funds to pay the premiums for it. Borrower shall repay Bank immediately on demand for any advance for such premiums, which shall be considered to be an additional loan to Borrower bearing interest at the Reference Rate plus three percent (3%), and secured by the Deeds of Trust and any other collateral held by Bank in connection with the Credit Agreement. 3. With respect to any construction repair or restoration work to be performed on any of the Collateral, Borrower shall provide such policy or policies of worker's compensation insurance as may be required by applicable worker's compensation insurance laws (including employer's liability insurance, if required by Bank), covering all employees of Borrower and the general contractor performing such work. 4. With respect to any construction repair or restoration work to be performed on any of the Collateral, Borrower shall provide a policy or policies of builder's "all risk" insurance in nonreporting form, in an amount not less than the full insurable completed value, on a replacement cost basis, of the Collateral on which the construction work is being performed. The policy or policies shall insure against loss or damage by hazards customarily included within such "all risk" policies and any other risks or hazards which Bank may reasonably specify, and each shall contain a Lender's Loss Payable Endorsement (Form 438 BFU) in favor of Bank. 5. Borrower shall provide comprehensive liability insurance naming Bank as an additional insured, on an "occurrence" basis against claims for "personal injury" liability, including bodily injury, death or property damage liability, with limit of not less than Five Million Dollars ($5,000,000.00) per occurrence, with a deductible not to exceed $10,000.00 per occurrence. Such insurance shall be primary and noncontributory with any other insurance carried by Bank. I-2 105 [LOGO] PACIFIC GULF PROPERTIES INC. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION June 10, 1994 Page 3 Please acknowledge your agreement to and acceptance of the ???? stated in this letter by signing in the space provided below. Sincerely, PACIFIC GULF PROPERTIES INC., a Maryland corporation By: /s/ GLENN L. CARPENTER ----------------------------- Glenn L. Carpenter President and Chief Executive Officer By: /s/ DONALD G. HERRMAN ----------------------------- Donald G. Herrman Senior Vice President and Chief Financial Officer DGH/cls L0694.18 cc: Ted C. Honold, Esq. Kevin L. Sherry, Esq. Dean A. Demetra, Esq. AGREED TO AND ACCEPTED AS OF JUNE 10, 1994. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------ ------------------------------ (Printed Name and Title) I-3 106 PACIFIC GULF PROPERTIES, INC. COMPREHENSIVE PACKAGE POLICY Term: April 20, 1994 through April 20, 1995 PROPERTY: COVERAGES: LIMITS: DEDUCTIBLE: MAIN LIMITS: Blanket Real & Personal Property: $156,041,000 $ 10,000 Blanket Business Income Including Extra Expense: $ 25,659,823 $ 10,000 SUBLIMITS & EXTENSIONS: Building Ordinance Including Demolition: $ 1,000,000 $ 10,000 Utility Service Interruption Time Element: $ 250,000 12 Hour Waiting Period Newly Acquired Locations (90 Days) Real Property: $ 1,000,000 $ 10,000 Personal Property: $ 500,000 $ 10,000 This proposal is a general explanation of the terms and conditions of your policy. Please refer to the actual policy for coverage questions. I-4 107 PROPERTY OPTIONS BUILDING ORDINANCE: Provides coverage in the event your building is damaged or destroyed, and the replacement materials are out dated or no longer in use. The difference in cost for the upgraded materials would be covered, as would costs of partial or complete demolition. UTILITY SERVICE INTERRUPTION: This coverage provides payment, in the event of an off-premises power failure, communication network breakdown, or lack of sufficient water supply, causes an interruption of business and subsequent loss of income. DEMOLITION COST: This coverage protects your business in the event demolition after a covered loss is necessary, to prepare for rebuilding of your property. This may be required if the remaining structure is deemed unsafe. AUTOMATIC COVERAGE: This endorsement extends your building and property coverage to include acquired property, for up to 90 days. I-5 108 PACIFIC GULF PROPERTIES, INC. COMPREHENSIVE GENERAL LIABILITY Term: April 20, 1994 through April 20, 1995 COVERAGES: LIMITS: General Policy Aggregate: $ 2,000,000 Products/Completed Operations Aggregate: $ 1,000,000 Personal and Advertising Injury Limit: $ 1,000,000 Fire Legal Liability: $ 100,000 Medical Payments: $ 15,000 Special Features: A. Aggregate "Per Location" B. Contractual Liability C. Fire Legal Liability D. Personal Injury E. Advertisers Liability F. Host Liquor This proposal is a general explanation of the terms and conditions of your policy. Please refer to the actual policy for coverage questions. I-6 109 GENERAL LIABILITY OPTIONS CONTRACTUAL LIABILITY: This coverage protects your business when liability arises from obligations you have assumed under contract with others. It coves the liability of others, which you had assumed either knowingly or otherwise. PERSONAL INJURY: This coverage protects your business in the event of "injury" due to: false arrest, detention, imprisonment, or malicious prosecution; libel or slander, and defamation of character; wrongful eviction, invasion of privacy, or personal injury assumed by a contract. This coverage is enforced by court decision holding your firm liable. ADVERTISING LIABILITY: This coverage protects your business from advertising "injury" to others. Coverage includes lawsuits arising from your advertising or promotional activities, where you are held liable for piracy, unfair competition, unknowing infringement of copyright, slander or libel. FIRE DAMAGE LEGAL LIABILITY: This coverage protects your business against financial loss, in the event your leased or rented property is damaged due to fire or explosion caused by your operations. Payment is made when your firm is legally held liable. HOST LIQUOR LIABILITY: This coverage protects against loss in the event arising from the serving of alcoholic beverages at a company function deemed incidental to your operations. I-7 110 PACIFIC GULF PROPERTIES, INC. BOILER & MACHINERY Term: April 20, 1994 through April 20, 1995 LIMIT: $5,000,000 Property Damage and Business Interruption/Extra Expense combined. DEDUCTIBLE: $1,000 Property Damage 12 Hours Business Interruption & Extra Expense EXTENSIONS: Sixty (60) Days Notice of Cancellation except for Non-Payment. This proposal is a general explanation of the terms and conditions of your policy. Please refer to the actual policy for coverage questions. I-8 111 PACIFIC GULF PROPERTIES, INC. UMBRELLA LIABILITY COVERAGE Term: April 20, 1994 through April 20, 1995 COVERAGE: Provides Personal Injury, Property Damage and Advertising Injury Liability and Employers Liability coverage in excess of scheduled underlying limits and, when no underlying insurance, in excess of the policy retained limit. NOTICE OF CANCELLATION: Sixty (60) Day Notice of Cancellation, Non-renewal or material change except for Non-Payment of Premium. LIMIT OF LIABILITY: $50,000,000 Each Occurrence $50,000,000 General Aggregate (Other than Products/Completed Operations) $50,000,000 Products/Completed Operations Aggregate SELF-INSURED RETENTION: $ 10,000 SCHEDULED UNDERLYING POLICY: Comprehensive General Liability, Automobile Liability and Employers Liability coverages. MAIN POLICY EXCLUSIONS: -Absolute Pollution except for Hostile Fire -Asbestos -ERISA -Nuclear Energy Liability This proposal is a general explanation of the terms and conditions of your policy. Please refer to the actual policy for coverage questions. I-9 112 EXHIBIT "J" COMPLIANCE CERTIFICATE ____________, 1996 Bank of America National Trust and Savings Association 5 Park Place, Suite 500 Irvine, California 92714 Re: Syndicated Credit Agreement, dated as of August ___, 1996 (as amended, modified, supplemented, restated, or renewed from time to time, the "Agreement"), by and among PACIFIC GULF PROPERTIES INC., a Maryland corporation (the "Borrower"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as Agent for the other Banks party thereto ("Agent") and as a Bank, and the other Banks party thereto (collectively, the "Banks") Ladies and Gentlemen: Reference is made to the Agreement. Capitalized terms used in this Compliance Certificate (including the schedules and other attachments hereto, this "Certificate") without definition have the meanings specified in the Agreement. Pursuant to Section 5.1(g) of the Agreement, the undersigned hereby certifies to the Agent and the Banks that, to the best of the undersigned's knowledge after diligent inquiry, the information furnished in the attached schedules, including, without limitation, each of the calculations in attached Schedule 1 and the related attachments with respect to (a) the covenants of the Company in Sections 5.9, 5.17 and 5.21 of the Agreement and (b) the Borrowing Base is true, correct and complete in all material respects as of the last day of the fiscal period subject to the financial statements being delivered to the Agent pursuant to Section 5.1 of the Agreement together with this Certificate (such statements the "Financial Statements" and the periods covered thereby the "Reporting Periods") and for such Reporting Period. The undersigned hereby further certifies to the Agent and the Banks that, to the best of the undersigned's knowledge after diligent inquiry: (1) Review of Financial Condition. The undersigned has reviewed the terms of the Agreement, including, without limitation, the representations and warranties of the Borrower and its Subsidiaries set forth in Article IV thereof and the covenants of the Borrower and its Subsidiaries set forth in Article V thereof, and has made, or caused to be made under his or her supervision, a review in reasonable detail of the transactions and condition of the Borrower and its Subsidiaries during the Reporting Periods. The Financial Statements accurately present the financial position of the Borrower and its Subsidiaries as of the date thereof and for the Reporting Periods covered thereby. (2) Representations and Warranties. The representations and warranties of the Borrower and its Subsidiaries contained in the Loan Documents, including those contained in Article IV of the Agreement, are true and correct as of the date hereof and were true and correct at all times during the Reporting Periods; J-1 113 (3) Covenants. During the Reporting Period, the Borrower and its Subsidiaries observed and performed all of their respective covenants and other agreements under the Loan Documents, and satisfied each of the conditions contained therein to be observed, performed or satisfied by the Borrower and its Subsidiaries; (4) No Default; Event of Default. [Except as expressly set forth in attached Schedule 2,] no Default or Event of Default exists as of the date hereof or existed at any time during the Reporting Period. [Schedule 2 sets forth a true, correct and complete description of the nature and period of existence of each Default or Event of Default that exists as of the date hereof or existed at any time during the Reporting Periods and the actions that the Borrower or its Subsidiaries have taken, are taking and propose to take with respect thereto]; and (5) No Excluded Collateral. No adjustment in the Borrowing Base or Collateral Value for any Collateral included in any of the calculations reflected in this Certificate is required under Section 2.20(d) of the Agreement. IN WITNESS WHEREOF, this Certificate is executed by the undersigned this ____ day of ____________, 19__. PACIFIC GULF PROPERTIES INC., a Maryland corporation By:_____________________________________ _____________________________________ [Printed Name and Title] J-2 114 SCHEDULE 1 to Compliance Certificate COVENANT COMPLIANCE As of __________________, 199_ and for the period from _____________, 199_ to _____________, 199_ I. FINANCIAL COVENANTS A. LIMITATION ON DEVELOPMENT ACTIVITIES (SECTION 5.9) AS OF _____________ , 199__ [Carrying Costs of construction and development activities not to exceed 10% of total tangible assets; Carrying Costs of unimproved land not to exceed 10% of Tangible Net Worth] Total tangible assets of the Borrower (A) $____________ Total Carrying Costs of all construction and development activities of the Borrower (B) $____________ Total Carrying Costs of all construction and development activities of the Borrower as a percentage of the Borrower's total tangible assets (Item (B) divided by Item (A)) (C) ____ % Covenant compliance? (Item (C) must be less than or equal to 10%) (D) ______ (yes or no) Tangible Net Worth (E) $____________ Total Carrying Costs of unimproved land held by the Borrower (F) $____________ Total Carrying Costs of unimproved land held by the Borrower as a percentage of Tangible Net Worth (Item (F) divided by Item (E)) (G) ____ %
J-3 115
Covenant compliance? (Item G must be less than or equal to 10%) (H) ______ (yes or no) B. TOTAL INDEBTEDNESS TO GROSS ASSET VALUE (SECTION 5.21(A)) AS OF _____________ , 199__ [not to exceed 75% at any time prior to December 31, 1997 and 70% at any time thereafter] Indebtedness Advances (I-1) $____________ Letter of Credit Obligations (I-2) $____________ Unsecured Advances (I-3) $____________ Indebtedness of the Borrower and its Subsidiaries with respect to unconsolidated joint ventures and partnerships (I-4) $____________ Other Indebtedness (itemize obligations greater than (I-5) $____________ $5,000,000) Total Indebtedness (sum of Items (I-1)+(I-2)+(I-3)+(I-4)+(I-5)) (I-6) $____________ Asset Value Net Operating Income from the real property assets of the Borrower consisting of "industrial properties" (as such term is used in the definition of Gross Asset Value) for the most recent fiscal quarter ended _____, 19__ (J-1) $____________ Annualized Net Operating Income (Item (J-1) multiplied by 4) (J-2) $____________
J-4 116 Item (J-2) capitalized at the Industrial Property Cap Rate (___%) (use current rate) (J-3) $____________ Net Operating Income from the real property assets of the Borrower consisting of "business park properties" (as such term is used in the definition of Gross Asset Value ) for the most recent fiscal quarter ended _____, 19__ Annualized Net Operating Income (Item (J-4) $____________ (J-4) multiplied by 4) (J-5) $____________ Item (J-5) capitalized at the Business Park Property Cap Rate (___%) (use current rate) (J-6) $____________ Net Operating Income from the real property assets of the Borrower consisting of apartment properties for the most recent fiscal quarter ended _____, 19__ Annualized Net Operating Income (Item (J-7) $____________ (J-7) multiplied by 4) (J-8) $____________ Item (J-8) capitalized at the Apartment Property Cap Rate (___%) (use current rate) (J-9) $____________ All cash and Cash Equivalents held by the Borrower as of the last day of the most recent fiscal quarter ended _____, 19__ (J-10) $___________
J-5 117 Undepreciated Carrying Cost of the Borrower's investment in 363 San Miguel (J-11) $____________ Carrying Cost of the Borrower's other non-income producing properties held in accordance with Section 5.9 of the Credit Agreement (J-12) $____________ Gross Asset Value (sum of Items (J-3)+(J-6)+(J-9)+(J+10)+ (J-13) $____________ (F-11)+(J-12)) Total Indebtedness as a percentage of Gross Asset Value (Item (I-6) divided by Item (J-13)) (K) ____ % Covenant compliance? (Item (K) must be less than or equal to 75% for all periods prior to December 31, 1997 and 70% for all periods thereafter) (L) _____ (yes or no) C. INTEREST COVERAGE RATIO (SECTION 5.21(B)) FOR THE PERIOD FROM _________, 199_ TO __________, 199__ [not to exceed 1.50:1.0 at any time] EBITDA Net Income (M-1) $____________ Interest Expense (M-2) $____________ Depreciation (M-3) $____________ Amortization expenses (M-4) $____________ relating to intangibles Accrued taxes (M-5) $____________ EBITDA (sum of Items (M-1)+(M-2)+(M-3)+(M-4)+(M-5)) (M-6) $____________
J-6 118 Interest Incurred (includes capitalized interest) (N) $____________ Interest Coverage Ratio (Item (M-6) divided by Item (N)) (O) _______ Covenant compliance? (Item (O) must be less than or equal to 1.50:1.0) (P) ________ (yes or no) D. FIXED CHARGE COVERAGE RATIO (SECTION 5.21(C)) FOR THE PERIOD FROM _________ , 199_ TO __________, 199__ [not to exceed 1.35:1.0 at any time] EBITDA (Item (M-6)) (Q) $_____________ Interest Incurred (Item (N)) (R) $_____________ Amortization Indebtedness with a maturity of less than 12 months from the date of determination (exclusive of balloon payments on real estate secured debt) (S-1) $______________ Current portion of Indebtedness with a maturity of greater than 12 months from the date of determination (S-2) $______________ Scheduled Amortization (sum of Items (S-1)+(S-2)) (S-3) $______________ Fixed Charge Coverage Ratio (Item (Q) divided by the sum of Items (R)+(S-3)) (T) _______ Covenant Compliance? (Item (T) must be less than or equal to 1.35:1.0) (U) _______ (yes or no)
J-7 119 E. TANGIBLE NET WORTH (SECTION 5.21(D)) AS OF _________, 199_ [not to be less than $65,000,000 plus (i) 90% of all Net Cash Proceeds from any offerings of equity securities through the end of the Reporting Period minus (ii) amount by which cumulative dividends declared after June 6, 1996 exceed cumulative Net Income during the same period] Net Cash Proceeds from all equity security offerings occurring on or after June 6, 1996 through the end of the Reporting Period (attach a list indicating the date or each such offering, the number of securities offered, the type of securities offered, the amount of the gross cash proceeds of the offering and amount of Net Cash Proceeds of the offering) (V) $_____________ Item (V) multiplied by 90% (W) $_____________ Cumulative amount of all dividends declared by the Borrower in all fiscal quarters ending after June 6, 1996 through the end of the Reporting Period (attach a list of the payment dates and amounts of all such dividends) (X) $______________ Cumulative Net Operating Income for all fiscal quarters ending after June 6, 1996 through the end of the Reporting Period (Y) $_______________ Amount, if any, by which dividends declared exceed Net Operating Income (Item (X) less Item (Y)) (if a negative number, enter zero) (Z) $________________
J-8 120 Minimum Tangible Net Worth standard (the sum of $65,000,000 plus Item (W) less Item (Z)) (AA) $_______________ Tangible Net Worth Net Worth (BB-1) $_______________ Intangible assets (BB-2) $_______________ Outstanding advances and loans to officers (BB-3) $_______________ Amounts due to the Borrower from Affiliates (BB-4) $_______________ Tangible Net Worth (sum of Items (BB-1) minus [(BB-2)+ (BB-3)+(BB-4)]) (BB-5) $_______________ Covenant compliance? (Item (BB-5) must not be less than Item (AA)) (CC) _______ (yes or no) F. DISTRIBUTIONS (SECTION 5.17) FOR THE PERIOD FROM _________ , 199_ TO __________, 199__ (four consecutive quarters) [not to exceed 100% of Funds Available for Distribution] Funds From Operations Net Income (DD-1) $_______________ Less gains (or losses) from debt restructuring or the sale of property (DD-2) $(______________) Plus depreciation and amortization (DD-3) $_______________ Adjusted for income (or losses) attributable to unconsolidated joint ventures and partnerships (DD-4) $(______________) Funds From Operations (sum of Items (DD-1)-(DD-2)-(DD-3)-(DD-4)) (DD-5) $______________ Imputed Capital Expenditures Average number of apartment units owned by the Borrower during such period (EE-1) __________ units Item (EE-1) multiplied by $250.00 (EE-2) $______________
J-9 121 Average number of square feet of gross leaseable industrial space owned by the Borrower during such period (EE-3) _________ sq. ft. Item (EE-3) multiplied by $0.20 (EE-4) $______________ Imputed Capital Expenditures (sum of Items (EE-2)+(EE-4)) (EE-5) $______________ Funds Available for Distribution (Items (DD-5) minus (EE-5)) (FF) $______________ Distributions paid or set apart (GG) $_______________ Covenant compliance ? (Item (GG) must not exceed Item (FF)) (HH) _______ yes or no II. BORROWING BASE AS OF __________, 199___ Loan Availability (Item (F) from Table 1 attached hereto) (II) $____________ Outstanding Advances plus Letter of Credit (JJ) $____________ Obligations Covenant Compliance? (Item II may not exceed Item (HH)) (KK) ______ (yes or no)
J-10 122 TABLE 1 TO COMPLIANCE CERTIFICATE LOAN AVAILABILITY For period ending __________, 19 ____
(A) (B) (C) (D) Loan Amount @ Loan Amount @ Collateral 55% Loan to Value 1.35 x Debt Service Coverage Lower of (B) or (C) ---------- ----------------- ---------------------------- ------------------- Total (E) Loan Availability: Lesser of Borrowing Base or Revolving Commitment Availability (F)
J-11 123 SCHEDULE 2 to Compliance Certificate DEFAULTS; EVENTS OF DEFAULT ____________, 199_ Condition(s) or event(s) constituting a Default or Event of Default:____________ ________________________________________________________________________________ Period of existence: Remedial actions taken or proposed to be taken with respect to each such Default or Event of Default:____________________________________________________________ J-12 124 SCHEDULE 1.5 EXISTING OBLIGATIONS Principal Balance of All Outstanding Advances: $18,169,050.00 Total Accrued and Unpaid Interest: $99,293.06 Outstanding Letter of Credit Obligations: $0.00 On the Effective Date of this Agreement, each Bank's Pro Rata Share of the Secured Facility shall be: BofA 50.76923076% Dresdner Bank: 24.61538461% NBD Bank: 24.61538461% Schedule 1.5 125 SCHEDULE 5.10 EXISTING INDEBTEDNESS Schedule 5.10 126 LOAN STATUS REPORT AS OF JUNE 30, 1996 127 LOAN STATUS REPORT AS OF JUNE 30, 1996 128 LOAN STATUS REPORT AS OF JUNE 30, 1996 129 SCHEDULE 5.11 EXISTING LIENS Schedule 5.11 130 LOAN STATUS REPORT AS OF JUNE 30, 1996 131 LOAN STATUS REPORT AS OF JUNE 30, 1996 132 LOAN STATUS REPORT AS OF JUNE 30, 1996 EX-23.01 3 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.01 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-3, No. 333-02798) pertaining to the registration of $250,000,000 of common stock, preferred stock and debt securities of Pacific Gulf Properties Inc. of our report dated February 13, 1997, with respect to the consolidated and combined financial statements and related financial statement schedule of Pacific Gulf Properties, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-73688) pertaining to the Pacific Gulf Properties Inc. 1993 Share Option Plan, and the Registration Statement (Form S-3, No. 33-92082) pertaining to the Pacific Gulf Properties Inc. Dividend Reinvestment Plan of our report dated February 13, 1997, with respect to the consolidated and combined financial statements and related financial statement schedule of Pacific Gulf Properties Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Newport Beach, California March 14, 1997 EX-27.00 4 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 1,523 0 3,125 1,000 0 0 381,711 28,844 364,640 9,672 211,628 0 0 98 139,724 364,640 0 49,887 0 31,668 0 0 18,411 0 0 (192) 0 0 0 (118) (.02) (.02)
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