-----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, Ls+dKcESTDiWWpEuob3ZfvUwuqqX4DIz3lohVvV2UAnKl7VOLEAkoGRIwzyxOxAw +mOshuRsBxUVg+q4T76AIw== 0000892569-98-000942.txt : 19980401 0000892569-98-000942.hdr.sgml : 19980401 ACCESSION NUMBER: 0000892569-98-000942 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX 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: SEC FILE NUMBER: 001-12768 FILM NUMBER: 98582554 BUSINESS ADDRESS: STREET 1: 4220 VON KARMAN STREET 2: SECOND FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2002 BUSINESS PHONE: 7142235000 MAIL ADDRESS: STREET 1: 4220 VON KARMAN STREET 2: SECOND FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2002 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 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, 1997 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 INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 4220 VON KARMAN, NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 223-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF SECURITY NAME OF EACH EXCHANGE ON WHICH REGISTERED ----------------- ----------------------------------------- COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE 8.375% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001 AMERICAN STOCK EXCHANGE
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 24, 1998 was approximately 453,119,000. On March 24, 1998, the registrant had 19,986,609 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE ================================================================================ 2 TABLE OF CONTENTS
PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 15 Item 3. Legal Proceedings........................................... 15 Item 4. Submission of Matters to a Vote of Security Holders......... 15 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters......................................... 16 Item 6. Selected Financial and Operating Data....................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 19 Item 8. Financial Statements and Supplementary Data................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 26 PART III Item 10. Directors and Management.................................... 26 Item 11. Executive Compensation...................................... 26 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 26 Item 13. Certain Relationships and Related Transactions.............. 26 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on form 8-K......................................................... 26
1 3 PART I ITEM 1. BUSINESS Pacific Gulf Properties Inc. (together with its consolidated operating partnerships, PGP Inland Communities, L.P., Terrace Gardens -- PGP L.P., Morning View Terrace -- PGP L.P., PGP Northern Industrial L.P. and PGP Von Karman Properties, collectively the "Company") was incorporated in August 1993 in the State of Maryland and completed its initial public offering on February 18, 1994 (the "Offering"). 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 4220 Von Karman Drive, Newport Beach, California 92660. 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. The Company's properties are located in California and the Pacific Northwest, with the largest concentration in Southern California. The Company focuses on the industrial and multifamily properties in this geographic region due to management's extensive experience in these property types and markets and management's belief that these markets present potential for long-term economic growth. As of December 31, 1997, the Company owned a portfolio of 49 operating industrial properties, containing an aggregate of 10.7 million leasable square feet, two industrial properties being rehabilitated containing approximately 639,000 leasable square feet and four industrial properties being developed that will contain approximately 578,000 leasable square feet (the "Industrial Properties"). The Company also owns a portfolio of 24 operating multifamily properties, which includes 17 apartment communities containing 3,383 units, seven active senior apartment communities containing 1,272 units and one active senior apartment community being developed that contains 166 apartment units (the "Multifamily Properties," and collectively with the Industrial Properties, the "Properties"). As of December 31, 1997, the operating Industrial Properties and Multifamily Properties then owned by the Company experienced occupancy rates of 95% and 94%, respectively. The following table presents information on the composition of the Company's operating properties based on the net book value at December 31, 1997:
PERCENTAGE OF REAL NUMBER OF ESTATE PROPERTIES ASSETS ---------- ------------- PROPERTY TYPE Industrial......................................... 49 69% Multifamily........................................ 24 31 -- --- Total...................................... 73 100% == === GEOGRAPHIC LOCATION California......................................... 62 87% Pacific Northwest.................................. 11 13 -- --- Total...................................... 73 100% == ===
2 4 The tables below set forth certain information relating to the Company's operating Industrial and Multifamily Properties by location and type as of December 31, 1997.
PERCENT OF NUMBER OF LEASABLE INDUSTRIAL GROSS PROPERTIES SQUARE FEET RENTAL REVENUE(1) OCCUPANCY ---------- ----------- ----------------- --------- INDUSTRIAL California Inland Empire(2)....................... 6 1,989,194 17% 97% San Diego.............................. 6 1,203,606 17 95 Orange County.......................... 16 2,453,590 22 94 Los Angeles............................ 4 1,326,886 11 94 Northern California.................... 12 2,841,706 21 95 Pacific Northwest Seattle, WA............................ 5 861,067 12 96 -- ---------- --- -- Total or Weighted Average...... 49 10,676,049 100% 95% == ========== === ==
PERCENT OF NUMBER OF MULTIFAMILY GROSS PROPERTIES UNITS RENTAL REVENUE OCCUPANCY ---------- ----- ----------------- --------- MULTIFAMILY California Inland Empire(2)........................... 13 1,806 36% 93% Orange County.............................. 3 742 18 96 San Diego.................................. 2 551 12 99 Pacific Northwest Seattle, WA................................ 6 1,556 34 93 -- ----- --- -- Total or Weighted Average.......... 24 4,655 100% 94% == ===== === ==
- --------------- (1) Based on rental revenues for the fourth quarter of 1997. (2) Includes the eastern portion of Los Angeles County adjacent to the Riverside-San Bernardino metropolitan statistical area. 3 5 1997 DEVELOPMENTS ACQUISITIONS During 1997, the Company acquired approximately $302.6 million of industrial properties and $38.8 million of multifamily properties. The following tables set forth information regarding these properties and properties currently under rehabilitation and development. As part of its acquisition program, the Company seeks properties whose financial performance can be enhanced through physical renovation and rehabilitation. The Company also periodically renovates and rehabilitates the properties it already owns. Rehabilitation activity generally involves updating older properties to conform to current market standards and may include the installation of additional loading facilities, sprinkler upgrades, mezzanine level upgrades, parking lot upgrades and cosmetic rehabilitation of the property. The Company capitalizes on senior management's experience with renovation and rehabilitation projects, as well as third party expertise, to expedite the renovation and rehabilitation process. See "Industrial Properties" and "Multifamily Properties" for additional information regarding these properties as of December 31, 1997. Operating Industrial Properties
NET BUDGETED TOTAL DATE RENTABLE ACQUISITION CAPITAL BUDGETED PROPERTY NAME LOCATION ACQUIRED SQUARE FOOTAGE COST EXPENDITURE COST - ------------- -------- --------- -------------- ----------- ----------- -------- (000'S) (000'S) (000'S) Norwood Industrial Park......... Sacramento, CA Dec. 1997 168,292 $ 4,716 $ 411 $ 5,127 PGDC-Montebello................. Montebello, CA Dec. 1997 143,391 4,809 160 4,969 PGBP-Cerritos................... Cerritos, CA Dec. 1997 213,755 8,485 285 8,770 PGBP-Irvine..................... Irvine, CA Dec. 1997 170,305 7,020 267 7,287 PGDC-Anaheim.................... Anaheim, CA Dec. 1997 91,200 3,322 119 3,441 Horn Road Industrial............ Sacramento, CA Dec. 1997 221,300 9,527 183 9,710 Bradshaw Business Center........ Sacramento, CA Dec. 1997 114,473 8,724 131 8,855 Fullerton Business Center....... Fullerton, CA Dec. 1997 110,900 5,533 37 5,570 611 Cerritos.................... Anaheim, CA Dec. 1997 129,426 6,139 190 6,329 Commerce Park-Sunnyvale......... Sunnyvale, CA Dec. 1997 129,513 14,346 443 14,789 Commerce Park-Santa Clara....... San Tomas, CA Dec. 1997 188,777 20,973 657 21,630 Commerce Park-Sacramento........ Sacramento, CA Dec. 1997 269,146 15,570 566 16,136 Commerce Park-Anaheim........... Anaheim, CA Dec. 1997 145,745 6,922 254 7,176 Tower Park...................... Anaheim, CA Nov. 1997 211,238 9,584 297 9,881 Acacia.......................... Fullerton, CA Nov. 1997 202,551 9,108 283 9,391 Eden Plaza(1)................... Hayward, CA Oct. 1997 101,084 19,370 1,676 21,046 Eden Industrial(1).............. Hayward, CA Oct. 1997 399,555 (2) (2) (2) Concord Business Park........... Concord, CA Sep. 1997 141,792 7,647 97 7,744 PGDC-Chino...................... Chino, CA Jul. 1997 302,166 10,691 67 10,758 PGDC-Downey..................... Downey, CA Jul. 1997 289,294 11,595 98 11,693 PGDC-Fontana.................... Fontana, CA Jul. 1997 380,634 14,223 54 14,277 PGDC-Rancho Bernardo............ Rancho Bernardo Jul. 1997 215,502 14,204 83 14,287 PGDC-Fremont.................... Fremont, CA Jul. 1997 344,416 17,019 100 17,119 PGDC-Woodland................... Woodland, CA Feb. 1997 570,000 12,826 -- 12,826 Harbor Business Park............ Santa Ana, CA Jan. 1997 193,136 9,155 141 9,296 Harbor Warner Business Park..... Santa Ana, CA Jan. 1997 127,836 5,556 140 5,696 PGDC-Algona..................... Algona, WA Jan. 1997 200,401 9,492 -- 9,492 --------- -------- ------ -------- Total................... 5,775,828 $266,556 $6,739 $273,295 ========= ======== ====== ========
- --------------- (1) Owned by PGP Northern Industrial, L.P., a limited partnership in which the Company has a minimum 59% equity interest and full management and control. (2) Included under Eden Plaza. 4 6 Operating Multifamily Properties
BUDGETED TOTAL DATE ACQUISITION CAPITAL BUDGETED PROPERTY NAME LOCATION ACQUIRED UNITS COST EXPENDITURE COST - ------------- ------------- --------- ----- ----------- ------------ -------- (000'S) (000'S) (000'S) Tyler Springs.................. Riverside, CA Dec. 1997 273 $13,458 $190 $13,648 Terrace Gardens................ Escondido, CA Jun. 1997 225 10,139 171 10,310(1) Morning View................... Escondido, CA Jun. 1997 326 15,161 140 15,301(2) --- ------- ---- ------- Total................ 824 $38,758 $501 $39,259 === ======= ==== =======
- --------------- (1) Owned by Terrace Gardens-PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. (2) Owned by Morning View Terrace-PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. Rehabilitation Properties
NET ESTIMATED RENTABLE ESTIMATED TOTAL DATE COMPLETION SQUARE ACQUISITION DEVELOPMENT ESTIMATED PROPERTY NAME LOCATION ACQUIRED DATE FOOTAGE COST COSTS COSTS - ------------- ------------- --------- ---------- -------- ----------- ----------- --------- (000'S) (000'S) (000'S) Whse/Distribution.... San Diego, CA Aug. 1997 Feb. 1998 375,919 $17,209 $2,291 $19,500 Whse/Distribution.... Algona, WA May 1997 Jan. 1998 263,155 8,780 1,248 10,028 ------- ------- ------ ------- Total...... 639,074 $25,989 $3,539 $29,528 ======= ======= ====== =======
Development Properties
ESTIMATED NET ESTIMATED RENTABLE ESTIMATED ESTIMATED DATE COMPLETION SQUARE ACQUISITION DEVELOPMENT TOTAL PROPERTY NAME LOCATION ACQUIRED DATE FOOTAGE COST COSTS COSTS - ------------- -------------------- --------- ---------- --------- ----------- ----------- --------- (000'S) (000'S) (000'S) Business Park........ Lake Forest, CA Jul. 1997 Dec. 1998 230,000 $ 6,516 $13,942 $20,458 Whse/Distribution.... Lake Forest, CA May 1997 Sept. 1998 203,500 3,554 8,745 12,299 Whse/Distribution.... San Diego, CA Aug 1997 Dec. 1998 88,000 (1) 3,428 3,428 Whse/Distribution.... City of Industry, CA Aug. 1996 Feb. 1998 56,000 (1) 1,860 1,860 ------- ------- ------- ------- Total................ 577,500 $10,070 $27,975 $38,045 ======= ======= ======= =======
ESTIMATED ESTIMATED ESTIMATED ESTIMATED DATE COMPLETION NUMBER DEVELOPMENT TOTAL PROPERTY NAME LOCATION ACQUIRED DATE OF UNITS LAND COSTS COSTS - ------------- ------------- --------- ---------- --------- ------- ----------- --------- (000'S) (000'S) (000'S) MULTIFAMILY PROPERTIES The Fountains........... Rancho Santa Sep. 1996 Feb. 1998 166 $1,642 $6,758 $8,400 Margarita, CA
- --------------- (1) Represents the Company's development of excess portions of properties previously acquired by the Company. 5 7 COMPLETION OF INDUSTRIAL REHABILITATION In April 1997, the Company completed a $1.7 million rehabilitation of the former Bullock's Distribution Center, representing the first phase of this project, consisting of a 327,000 square foot warehouse and distribution facility located in the City of Industry, California, originally purchased by the Company in August 1996 for approximately $8.8 million. The project, now renamed Pacific Gulf Distribution Center, is currently 100% leased and has two major tenants, a food service distributor occupying 182,000 leasable square feet and a computer terminal distributor occupying 82,000 leasable square feet. REDUCTION IN PUBLIC INDEBTEDNESS In December 1996, the Company completed an exchange offer (the "Exchange Offer") pursuant to which it exchanged an aggregate of 2,440,002 shares of Common Stock in exchange for approximately $42.1 million in aggregate principal amount (58 shares of Common Stock for each $1,000 in principal amount) of its 8.375% Convertible Subordinated Debentures Due 2001 (the "Debentures"). Approximately $12.7 million in principal amount of Debentures remained outstanding at December 31, 1997. The Debentures are traded on the American Stock Exchange (the "ASE"). COMMON STOCK OFFERINGS During 1997, the Company completed the following sales of its Common Stock:
NUMBER OF PRICE TO DATE OF OFFERING GROSS PROCEEDS(1) COMMON SHARES(1) THE PUBLIC - ---------------- ----------------- ---------------- ---------- (000'S) December 1997.......................... $ 20,000 874,317 $22.875 November 1997.......................... 99,108 4,776,300 20.75 June 1997.............................. 44,800 2,131,700 21.00 January 1997........................... 47,200 2,300,000 20.50 -------- ---------- $211,108 10,082,317 ======== ==========
- --------------- (1) Includes proceeds and shares from the underwriters' over-allotment exercised. CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK 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. As of December 31, 1997, the Company has issued 1,351,351 shares of the Class A Preferred Shares. 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. Mr. James E. Quigley 3rd has served on the Company's Board of Directors as Five Arrows' representative since January 1997. 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 6 8 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. At that time, Five Arrows has 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. CLASS B SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK In May 1997, the Company entered into a second agreement with Five Arrows to issue 1,411,765 shares of Class B Senior Cumulative Convertible Preferred Shares (the "Class B Preferred Shares") at a price of $21.25 per share. Since entering into this agreement, the Company has issued and sold to Five Arrows an aggregate of 1,411,765 Class B Preferred Shares for an aggregate purchase price of $30 million. Upon each issuance of Class B Preferred Shares, the Company paid a transaction fee of $0.75 per share. As part of this transaction, Five Arrows agreed to waive certain availability fees that were to be charged to the Company if all of the Class A Preferred Shares were not issued before July 1, 1997. Additionally, Five Arrows agreed that it would not transfer any Class A Preferred Shares or Class B Preferred Shares, or any shares of Common Stock into which such shares of Preferred Stock have been converted, until June 30, 1998. The terms of the Class B Preferred Shares are substantially similar to those of the Class A Preferred Shares, except that (i) the liquidation preference of the Class B Preferred Shares is $21.25 per share (plus accumulated, accrued and unpaid dividends) and (ii) Five Arrows will not be entitled to designate any additional representatives to the Company's Board of Directors while it owns both the Class A Preferred Shares and the Class B Preferred Shares. DEBT FINANCING ACTIVITIES Tax-Exempt Projects. The Company has established a pool agreement with the Federal National Mortgage Associations ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In June 1997, in conjunction with the Company's admission into the partnerships that own the Terrace Gardens and Morning View Terrace apartment communities, the partnerships refinanced their existing tax-exempt bond financing of $19.1 million through the FNMA facility. The effective interest rate on the bonds, after giving effect to credit enhancement and other costs, has been fixed at 6.4% for 10 years. The Company also received from FNMA a forward commitment, expiring December 1, 1998, to provide credit enhancement for the Rancho Santa Margarita property, 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 10 years. Property Refinancings. In October 1997, the Company borrowed $34.0 million at an interest rate of 7.11% for a term of 10 years. The proceeds of this loan were used to repay $33.6 million of indebtedness under the Company's Line of Credit. The loan is secured by five warehouse/distribution centers acquired by the Company in July 1997. Credit Facilities. The Company has a $65.0 million secured revolving line of credit (the "Line of Credit") which matures in July 1998. The Line of Credit bears interest at a rate of LIBOR plus 1.75%. As of December 31, 1997, the outstanding balance under the Company's Line of Credit was $17.2 million. Subsequent to year-end, the Company entered into an agreement with a lender for a $40 million unsecured bridge loan agreement. The agreement has an expiration date of April 30, 1998 and bears interest at a rate of LIBOR plus 1.25%. The Company and its lenders are currently negotiating the terms of a new unsecured credit facility. Terms being negotiated include an increase in the maximum loan amount, a decrease in the interest rate spread, extension of the term of the facility and conversion of the secured facility to an unsecured facility. There can be no assurance that any such terms will be agreed to by the lenders. 7 9 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 recovering 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 over 48% of its industrial leasable square footage subject to leases expiring during the next 24 months, the Company believes it is in a good position to capitalize on anticipated rental rate increases. Over 1,400 tenants currently occupy the Industrial Properties, and no one tenant accounts for more than 1.8% 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. 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. 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, 1997:
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY - ---------- -------------------- ---------------- ---------- ----------- --------- SEATTLE, WA Seattle I................. Seattle, WA 1968 42,240 $0.43 100% Seattle II................ Seattle, WA 1981 64,077 0.57 100 Seattle III............... Seattle, WA 1981 78,720 0.56 100 PGBP-Tukwila.............. Tukwila, WA 1975-79 475,629 0.57 92 PGDC-Algona............... Algona, WA 1989 200,401 0.34 100 INLAND EMPIRE, CA Golden West Industrial Park.................... Rancho Cucamonga, CA 1990 296,821 0.36 93 Etiwanda.................. Ontario, CA 1991 576,327 0.31 100 Crescent Business Center.................. Rancho Cucamonga, CA 1981 136,066 0.39 100 Riverview Industrial Park.................... San Bernardino, CA 1980 297,180 0.26 89 PGDC-Chino................ Chino, CA 1988 302,166 0.27 100 PGDC-Fontana.............. Fontana, CA 1988 380,634 0.29 100 SAN DIEGO, CA Vista..................... Vista, CA 1990 356,800 0.37 94 Bay San Marcos............ San Marcos, CA 1988 121,768 0.43 100 Escondido Business Center.................. Escondido, CA 1988-92 251,464 0.54 95 San Marcos Commerce Center.................. San Marcos, CA 1985 72,050 0.44 100 MiraMar Industrial Park(1)................. San Diego, CA 1981 186,022 0.70 100 PGDC-Rancho Bernardo...... Rancho Bernardo, CA 1990 215,502 0.47 85
8 10
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY - ---------- -------------------- ---------------- ---------- ----------- --------- ORANGE COUNTY, CA Garden Grove Industrial Park.................... Garden Grove, CA 1979 252,184 0.39 100 Pacific Gulf Business Park.................... Garden Grove, CA 1986 189,526 0.64 91 Bell Ranch Industrial Park.................... Santa Fe Springs, CA 1981 128,640 0.29 100 La Mirada Business Center.................. La Mirada, CA 1975 82,010 0.60 84 Pacific Park.............. Aliso Viejo, CA 1988 99,622 0.92 94 North County Business Park.................... Yorba Linda, CA 1987-89 105,516 0.56 100 Harbor Business Park...... Santa Ana, CA 1974-76 193,136 0.60 97 Harbor Warner Business Park.................... Santa Ana, CA 1974-76 127,836 0.62 91 Commerce Park-Anaheim..... Anaheim, CA 1972 145,745 0.53 83 Acacia.................... Fullerton, CA 1980 202,551 0.42 96 611 Cerritos.............. Anaheim, CA 1961 129,426 0.41 100 Tower Park................ Anaheim, CA 1986 211,238 0.32 100 Fullerton Business Center.................. Fullerton, CA 1977 110,900 0.49 97 PGDC-Anaheim.............. Anaheim, CA 1980 91,200 0.35 100 PGBP-Irvine(1)............ Lake Forest, CA 1979 170,305 0.72 85 PGBP-Cerritos(1).......... Anaheim, CA 1985 213,755 0.51 88 LOS ANGELES, CA Baldwin Industrial Park... Baldwin Park, CA 1986 567,605 0.37 100 City of Industry.......... City of Industry,CA 1973-77 326,596 0.36 81 PGDC-Downey............... Downey, CA 1988 289,294 0.33 100 PGDC-Montebello........... Montebello, CA 1985 143,391 0.37 89 NORTHERN CALIFORNIA Eden Landing Commerce Park.................... Hayward, CA 1972-74 193,358 0.67 97 PGDC-Woodland............. Woodland, CA 1986 570,000 0.18 100 PGDC-Fremont.............. Fremont, CA 1980,87 344,416 0.38 100 Concord Business Park..... Concord, CA 1989 141,792 0.61 95 Commerce Park-Sacramento......... Sacramento, CA 1973 269,146 0.79 92 Commerce Park-Santa Clara................... Santa Clara, CA 1972 188,777 1.20 97 Commerce Park-Sunnyvale... Sunnyvale, CA 1972 129,513 1.15 99 Bradshaw Business Center.................. Sacramento, CA 1988 114,473 0.87 79 Horn Road Industrial...... Sacramento, CA 1988 221,300 0.44 83 Norwood Industrial Park... Sacramento, CA 1988 168,292 0.28 83 Eden Plaza(2)............. Hayward, CA 1974 101,084 0.85 87 Eden Industrial(2)........ Hayward, CA 1973 399,555 0.32 100 ---------- --- Sub-Total or Weighted Average for Industrial Properties............ 10,676,049 $0.45 95% ========== ===== === INDUSTRIAL PROPERTY REHABILITATION Warehouse/Distribution.... San Diego, CA Feb. 1998(3) 375,919 N/A N/A Warehouse/Distribution.... Algona, WA Jan. 1998(3) 263,155 N/A N/A ---------- Sub-Total or Weighted Average............... 639,074 ==========
9 11
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY - ---------- -------------------- ---------------- ---------- ----------- --------- INDUSTRIAL PROPERTY UNDER DEVELOPMENT Warehouse/Distribution.... Lake Forest, CA Sept. 1998(3) 203,500 N/A N/A Business Park............. Lake Forest, CA Dec. 1998(3) 230,000 N/A N/A Warehouse/Distribution.... City of Industry, CA Feb. 1998(3) 56,000 N/A N/A Warehouse/Distribution.... San Diego, CA Dec. 1998(3) 88,000 N/A N/A ---------- Sub-Total or Weighted Average............... 577,500 ==========
- --------------- (1) Subject to ground lease. (2) Owned by PGP Northern Industrial, L.P., a limited partnership in which the Company has an ownership interest of approximately 59%, full management and control, and the right to substantially all of the cash flow. (3) Estimated. The following table shows scheduled lease expirations for all leases for the Industrial Properties (excluding properties under development) as of December 31, 1997.
PERCENTAGE LEASABLE ANNUAL BASE PERCENTAGE OF ANNUAL NUMBER OF SQUARE FEET OF RENT OF GROSS LEASABLE BASE RENT YEAR LEASES EXPIRING EXPIRING LEASES EXPIRING LEASES AREA EXPIRING EXPIRING ---- --------------- --------------- --------------- -------------- ---------- 1998................... 646 2,835,000 $16,430,000 30.1% 32.4% 1999................... 406 1,727,000 10,780,000 18.3 21.3 2000................... 226 1,577,000 8,884,000 16.7 17.5 2001................... 86 980,000 4,900,000 10.4 9.7 2002................... 57 1,527,000 5,447,000 16.2 10.7 2003................... 16 444,000 2,226,000 4.7 4.4 2004................... 2 96,000 551,000 1.0 1.1 2005................... 3 51,000 478,000 0.6 1.0 2006................... 1 2,000 16,000 -- -- 2007................... 4 192,000 969,000 2.0 1.9 ----- --------- ----------- ----- ----- Totals....... 1,447 9,431,000(1) $50,681,000 100.0% 100.0% ===== ========= =========== ===== =====
- --------------- (1) As of December 31, 1997, 721,000 square feet of tenants were on month-to-month leases (which are not included above) and 525,000 square feet were unoccupied. MULTIFAMILY PROPERTIES The Company invests primarily in two types of multifamily apartment communities: communities for active seniors ages 55 and older, and communities oriented to family-style living. The Company focuses on active senior housing for individuals 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. 10 12 The Company also owns 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. 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. While the Company has continued to adhere to the philosophy of focusing on industrial and multifamily product types, the Company has also experienced significantly increased competition for the acquisition of family-style apartment communities, thereby driving prices for such properties to levels at which the Company is not willing to acquire such properties. The Company does not anticipate a change in these circumstances for the foreseeable future. However, given the growing demand for senior rental housing, the Company continues to see opportunities for the acquisition and development of active senior rental housing. Consequently, the Company intends to explore the possibility of divestiture of its family-style apartment communities so as to redeploy its capital into industrial properties or active senior apartments with more favorable returns. There can be no assurance that the Company will actually dispose of such properties, nor can there be any assurance as to the timing of any such dispositions. Any such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions. 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, 1997:
AVERAGE AVERAGE YEAR UNIT SIZE RENT MULTIFAMILY LOCATION COMPLETED UNITS (SQ FT) PER UNIT OCCUPANCY - ----------- -------- --------- ----- --------- -------- --------- ORANGE COUNTY, CA Applewood................... Santa Ana, CA 1972 406 801 $732 97% Park Place.................. Santa Ana, CA 1990 196 799 665 92 Inn at Laguna Hills(1)...... Laguna Hills, CA 1994 140 500 616 99 INLAND EMPIRE, CA Daisy 5(2)(3)............... Covina, CA 1977 38 897 731 79 Daisy 7(2)(3)............... Diamond Bar, CA 1978 204 950 808 93 Daisy 12(2)(3).............. San Dimas, CA 1979 102 952 722 92 Daisy 16(2)(3).............. West Covina, CA 1981 250 986 737 93 Daisy 17(2)(3).............. San Dimas, CA 1981 156 962 716 90 Lariat(2)(3)................ San Dimas, CA 1981 30 970 782 97 Daisy 19(3)................. Ontario, CA 1983 125 1019 748 97 Daisy 20(3)................. Ontario, CA 1982 155 1000 678 92 Sunnyside I(1)(3)........... San Dimas, CA 1984 164 495 524 95 Sunnyside II(1)(3).......... Ontario, CA 1983 60 493 486 88 Sunnyside III(1)(3)......... Ontario, CA 1985 84 504 505 85 Raintree(2)................. Ontario, CA 1984 165 846 589 90 Tyler Springs(1)............ Riverside, CA 1987 273 714 481 96 SAN DIEGO, CA Terrace Gardens(1)(4)....... San Diego, CA 1985 225 780 573 100 Morning View(1)(5).......... San Diego, CA 1986 326 649 582 98
11 13
AVERAGE AVERAGE YEAR UNIT SIZE RENT MULTIFAMILY LOCATION COMPLETED UNITS (SQ FT) PER UNIT OCCUPANCY - ----------- -------- --------- ----- --------- -------- --------- SEATTLE, WA Fulton's Landing............ Everett, WA 1988 248 745 581 98 Fulton's Crossing........... Everett, WA 1986 256 803 603 93 Lora Lakes.................. Burien, WA 1987 234 907 666 93 Holly Ridge................. Burien, WA 1987 146 946 693 95 Hampton Bay................. Kent, WA 1987 304 884 686 92 Heatherwood(2).............. Federal Way, WA 1985 368 741 588 89 ----- --- Sub-Total or Weighted Average For Multifamily Properties......... 4,655 94% ===== === 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. (4) Owned by Terrace Gardens-PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. (5) Owned by Morning View Terrace-PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. 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, 1997:
PROPERTY (IN $000S) MATURITY DATE INTEREST RATE - -------- ---------- -------------- ------------- INDUSTRIAL Baldwin Industrial Park........................ $ 11,650 October 2005 8.150% Etiwanda....................................... 6,724 May 2000 8.745% PGBP-Tukwila................................... 11,421 December 2002 Libor + 1.5%(d) Vista(a)....................................... 7,800 October 2010 8.000% Golden West(a)................................. 3,800 October 2010 8.000% Garden Grove Industrial Park(a)................ 5,300 October 2010 8.000% Horn Road Industrial........................... 2,879 February 2006 7.950% Various(b)..................................... 34,000 October 2007 7.110% Eden Plaza/Eden Industrial..................... 12,000 December 2002 7.050% Bell Ranch Industrial Park(c) 2,475 December 2011 7.750% Pacific Park(c)................................ 4,425 December 2011 7.750% North County(c)................................ 4,125 December 2011 7.750% Bay San Marcos(c).............................. 2,700 December 2011 7.750%
12 14
PROPERTY (IN $000S) MATURITY DATE INTEREST RATE - -------- ---------- -------------- ------------- Escondido(c)................................... 6,300 December 2011 7.750% Riverview Industrial Park(c)................... 4,475 December 2011 7.750% Miramar Village(e)............................. 9,000 August 1998 8.000% Algona II(f)................................... 4,625 September 1998 8.500% -------- Total Industrial............................ 133,699 -------- MULTIFAMILY Inn at Laguna.................................. 4,679 August 2024 7.250% Applewood/Park Place(g)........................ 11,703 March 1999 8.490% Daisy V........................................ 1,284 September 2025 7.687%(h) Daisy VII...................................... 8,700 August 2000 8.000% Daisy XII...................................... 3,661 September 2025 7.687%(h) Daisy XVI...................................... 8,999 August 2000 8.000% Daisy XVII..................................... 5,788 August 2000 8.000% Lariat......................................... 1,184 September 2025 7.687% Daisy XIX(i)................................... 6,616 December 2026 6.300% Daisy XX(i).................................... 7,594 December 2026 6.300% Sunnyside I(i)................................. 5,600 December 2026 6.300% Sunnyside II(i)................................ 1,807 December 2026 6.300% Sunnyside III(i)............................... 2,923 December 2026 6.300% Lora Lakes, Fulton's Landing and Fulton's Crossing(g)................................. 14,625 March 1998 8.420% Hampton Bay.................................... 7,751 April 2006 7.300% Raintree....................................... 6,870 January 2027 6.400% Tyler Springs.................................. 9,400 December 2016 3.850%(j) Terrace Gardens................................ 8,044 January 2027 6.385% Morning View................................... 10,925 January 2027 6.375% The Fountains(k)............................... 4,800 November 1998 Prime -------- Total Multifamily........................... 132,953 -------- Total.................................. 266,652 ========
- --------------- (a) Vista, Golden West and Garden Grove jointly collateralize the $16,900,000 note payable. (b) PGDC-Fontana, PGDC-Chino, PGDC-Fremont, PGDC-Downey and PGDC-Rancho Bernardo jointly collateralize the $34,000,000 note payable. (c) Bell Ranch Industrial Park, Pacific Park, North County, Bay San Marcos, Escondido Business Center and Riverview Industrial Park jointly collateralize the $24,500,000 note payable. (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 rehabilitation of Miramar Village. The maximum loan amount under the agreement is $10,238,000. (f) Construction loan relating to rehabilitation of Algona II. The maximum loan amount under the agreement is $5,025,000. (g) Applewood and Park Place jointly collateralize the $11,703,000 note payable; and Lora Lakes, Fulton's Landing and Fulton's Crossing jointly collateralize the $14,625,000 note payable. (h) 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%. (i) These tax-exempt mortgage loans (other than Tyler Springs) are financed tax-exempt bond financing supported by credit enhancement from FNMA. The collateral properties, which also include Heatherwood and Hollyridge, not listed above, are subject to restrictions requiring that a specified 13 15 percentage of the apartment units in such properties be made available to persons with lower and moderate income. As of December 31, 1997, 316 apartment units, or 7% of the total apartments owned, were required to have been made available to persons with lower or moderate income pursuant to these requirements, and the Company has complied with such requirements. In addition, state and local authorities in some cases impose certain restrictions on the amount of rent that can be charged. (j) Interest rate is subject to periodic adjustments based on the Kenny Rate Index. (k) Represents construction loan relating to development and construction of the Fountains multifamily community with a maximum loan amount of $6,400,000. CORPORATE OFFICES The Corporate offices are located in Newport Beach, California in approximately 16,000 square feet of a 26,000 square foot office building, which is 99% owned by the Company. PROPERTY MANAGEMENT Industrial Properties. The Company manages all of its existing Industrial Properties in California and Pacific Northwest using its network of six regional offices. 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, 1997, the Company employed approximately 169 persons, of which 145 were onsite or property related and 24 were executive office employees. 14 16 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. While the Company has not experienced material competitive pressures confined to specific geographic regions, it is possible that material adverse changes in regional economies or in the operations of major regional employers (such as Boeing in the Pacific Northwest) could have a material adverse effect on the ability of the Company to lease its Properties and on the rents charged. Conversely, if any of the regional geographic areas in which the Company owns Properties experiences economic growth, the Company is likely to experience increased competition for acquisition and development projects, thereby increasing the Company's costs of acquisition and development and potentially reducing the Company's returns therefrom. 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, which 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 87% 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. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS The statements contained in Item 1 of this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: changes in general economic conditions in the markets that could impact demand for the Company's product, competition and changes in financial markets and interest rates impacting the Company's ability to meet it financing needs and obligations. 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. 15 17 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 HIGH LOW DISTRIBUTION RECORD DATE DATE PAID ---- --- ------------ ---------------- ----------------- 1995 1st Quarter........... 16 1/4 14 5/8 .39(1) April 14, 1995 May 12, 1995 2nd Quarter........... 16 1/4 14 1/2 .39(1) July 14, 1995 August 15, 1995 3rd Quarter........... 16 5/8 14 5/8 .39(1) October 16, 1995 November 14, 1995 4th Quarter........... 16 3/4 13 .40(2) January 2, 1996 January 10, 1996 1996 1st Quarter........... 18 3/4 15 7/8 .40(2) April 2, 1996 April 12, 1996 2nd Quarter........... 18 3/8 16 1/8 .40(2) July 1, 1996 July 12, 1996 3rd Quarter........... 18 3/4 16 1/2 .40(2) October 2, 1996 October 11, 1996 4th Quarter........... 20 18 1/8 .41(3) January 2, 1997 January 10, 1997 1997 1st Quarter........... $23 3/8 $19 1/4 .41(3) April 1, 1997 April 11, 1997 2nd Quarter........... 22 1/8 20 1/2 .41(3) July 1, 1997 July 11, 1997 3rd Quarter........... 24 5/16 20 7/8 .41(3) October 1, 1997 October 10, 1997 4th Quarter........... 24 5/16 20 3/4 .42 January 1, 1998 January 9, 1998
- --------------- (1) 68% of the distributions paid to beneficial owners in 1995 represented a return of capital ($1.06 per share). (2) 45% of the distributions paid to beneficial owners in 1996 represented a return of capital ($.72 per share). (3) 28.6% of the distributions paid to beneficial owners in 1997 are estimated to represent a capital gain distribution. The minimum distribution requirement to maintain REIT status was approximately $2,300,000 for 1995, $4,758,000 for 1996 and $22,834,000 for 1997. A regular quarterly distribution of $.42 per share was paid January 9, 1998. The closing price of the common stock on the New York Stock Exchange on March 24, 1998 was $22.875 per share. As of March 24, 1998, there were approximately 13,326 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. 16 18 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following table and footnotes set forth selected historical financial and operating data for the Company from February 18, 1994, the date of the Company's initial public offering, and for the predecessor multifamily and industrial operations acquired from Realty prior to that date.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 1994(A) 1993 ---------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) OPERATING DATA Rental income Industrial properties.......... $ 36,410 $ 20,783 $ 12,193 $ 7,207 $ 1,002 Multifamily properties......... 33,096 29,104 24,898 18,937 15,150 ---------- --------- --------- --------- -------- 69,506 49,887 37,091 26,144 16,152 ---------- --------- --------- --------- -------- Rental property expenses Industrial properties.......... 8,212 5,308 2,567 1,541 245 Multifamily properties......... 12,754 11,554 10,215 8,835 7,261 ---------- --------- --------- --------- -------- 20,966 16,862 12,782 10,376 7,506 Depreciation..................... 12,008 8,236 6,081 3,721 2,634 Interest (including amortization of debenture discount and financing costs)............... 17,337 18,411 14,066 8,164 6,028 General and administrative....... 3,159 2,974 2,423 1,725 1,538 Reduction in carrying value of Predecessor's properties....... -- -- -- -- 10,974 Minority interest in earnings (losses) of partnerships....... 172 -- -- -- (492) Nonrecurring loss on exchange of debentures for common stock.... -- 3,596(b) -- -- -- ---------- --------- --------- --------- -------- 53,642 50,079 35,352 23,986 28,188 ---------- --------- --------- --------- -------- Income (loss) before gain on sale of real estate and extraordinary item............. 15,864 (192) 1,739 2,158 (12,036) Gain on sale of real estate.... 5,594 74 6,664 -- -- Extraordinary item............. -- -- -- (2,990) -- ---------- --------- --------- --------- -------- Net income (loss)................ 21,458 (118) 8,403 (832) (12,036) Preferred dividend requirements................ (855)(f) -- -- -- -- ---------- --------- --------- --------- -------- Income available (loss attributable) to common shareholders................... $ 20,603 $ (118) $ 8,403 $ (832) $(12,036) ========== ========= ========= ========= ======== Earnings (loss) per share(c) Basic.......................... $ 1.51 $ (.02) $ 1.74 $ (.07)(d) -- Diluted........................ $ 1.47 $ (.02) $ 1.68 $ (.07)(d) -- Weighted average common shares outstanding.................... 13,685,693 6,311,963 4,830,723 4,273,337(d) --
17 19
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 1994(A) 1993 ---------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE SHEET DATA Operating properties, net of accumulated depreciation: Industrial properties.......... $ 455,045 $170,731 $102,813 $ 79,751 $ 7,323 Multifamily properties......... 206,756 179,965 175,879 113,706 90,375 ---------- --------- --------- --------- -------- Total operating properties....... 661,801 350,696 278,692 193,457 97,698 Properties under development, including land................. 32,107 2,171 -- -- -- ---------- --------- --------- --------- -------- Total real estate................ 693,908 352,867 278,692 193,457 97,698 Total assets..................... 712,471 364,640 288,591 202,519 99,984 Senior debt...................... 283,852 197,401 149,847 69,480 88,740 Convertible subordinated debentures..................... 12,592 14,227(b) 55,659 55,526 -- Total equity..................... 388,840 139,822 71,980 70,860 9,501 PROPERTY DATA (end of period) Total industrial properties...... 49 21 10 9 3 Industrial leasable area (sq. ft.)........................... 10,676 4,573 2,902 2,426 185 Industrial -- Occupancy %........ 95% 98% 96% 97% 95% Total multifamily properties..... 24 22 21 13 10 Total apartment units............ 4,655 4,110 3,945 3,292 2,654 Apartment -- Occupancy %......... 94% 93% 92% 93% 92% SUPPLEMENTAL DATA Funds From Operations(e)......... $ 27,017 $ 11,640 $ 7,820 $ 5,879 $ 1,572 Cash Flow Information: Operating activities........... $ 27,736 $ 8,523 $ 7,138 $ 3,950 $ 1,307 Investing activities........... $(350,597) $(81,918) $ (84,480) $(99,504) $(15,323) Financing activities........... $ 322,804 $ 72,071 $ 76,674 $ 98,649 $ 13,798 Ratio of Earnings to Fixed Charges(g)..................... 1.75 -- 1.12 1.26 --
- --------------- (a) Includes the combined historical operations of the Company from February 18 through December 31, 1994 and the predecessor multifamily and industrial operations acquired from Realty prior to February 18, 1994. (b) Reflects the $3,596,000 nonrecurring loss incurred on the exchange of $42,069,000 aggregate principal amount of convertible subordinated debentures into 2,440,002 shares of common stock in December 1996. (c) Earnings per share data for all periods presented reflects basic and diluted calculations in accordance with the new standard (Statement No. 128) and has been restated from the previous accounting standard of primary and fully diluted earnings per share. (See Part IV -- Financial Statements.) (d) 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 offerings) through December 31, 1994 and the Company's net loss for that period. (e) Management considers FFO to be an appropriate measure of the performance of an equity REIT. The National Association of Real Estate Investment Trusts ("NAREIT") currently defines FFO as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In addition, extraordinary or unusual items, along with significant non-recurring events that materially distort the comparative measure of FFO are typically disregarded in its calculation. Prior to March 1995 the NAREIT definition of FFO required 18 20 the add back of non-real estate depreciation and amortization, such as loan cost amortization. The Company adopted the new FFO definition prescribed by NAREIT as of January 1, 1996. The Company believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, FFO should be examined in conjunction with net income as presented in the consolidated financial statements and data included elsewhere in this report. FFO is not defined by generally accepted accounting principles. FFO should not be considered as an alternative to net income or as an indication of the Company's operating performance or to net cash provided by operating activities as a measure of the Company's liquidity. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation. CALCULATION OF FFO
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 1994(A) 1993 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Income available (loss attributable) to common shareholders..................... $20,603 $ (118) $ 8,403 (832) (12,036) Depreciation.............................. 12,008 8,236 6,081 3,721 2,634 Gain on sale of real estate............... (5,594) (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..................... $27,017 $11,640 $ 7,820 $5,879 $ 1,572 ======= ======= ======= ====== =======
(f) Represents dividends on Class A Preferred Shares and Class B Preferred Shares outstanding in 1997. (See Part IV -- Financial Statements) (g) Earnings for the year ended December 31, 1996 were inadequate to cover fixed charges by approximately $0.2 million as a result primarily of the nonrecurring loss of $3,596,000 relating to the Company's exchange of debentures for common stock. The ratio of earnings to fixed charges excluding this $3.6 million non-cash item is 1.18 to 1. Prior to completion of the Company's initial public offering in February 1994, the predecessor of the Company operated in a highly leveraged manner. As a result, although the Company and the predecessor have historically generated positive net cash flow, the financial statements of the predecessor show net losses for the periods prior to 1994. Consequently, the computation of the ratio of earnings to fixed charges for such period indicate that earnings were inadequate to cover fixed charges by approximately $1.6 million for the year ended December 31, 1993. 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 and Operating Data" and the financial statements and notes thereto of the Company appearing elsewhere in this report. Such financial statements and information have been prepared to reflect the Company's financial position as of December 31, 1997, 1996 and 1995 together with the results of its operations and its cash flows for the years then ended. Historical results and trends which might appear should not be taken as indicative of future operations. Management's representation statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: changes in general economic conditions in the 19 21 markets that could impact demand for the Company's properties, competition, and changes in financial markets and interest rates could impact the Company's ability to meet its financing needs and obligations. The comparability of the financial information discussed below is impacted by the following: the acquisition of 27 operating industrial properties containing approximately 5,776,000 leasable square feet, the acquisition of three multifamily properties containing 824 apartment units, and the disposition of one multifamily property containing 279 apartment units during 1997; the acquisition of twelve industrial properties containing approximately 2,054,000 leasable square feet, the acquisition of one multifamily property containing 165 apartment 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 leasable square feet, and the disposition of four multifamily properties consisting of 1,085 apartment units during 1995. RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 1997 to the Year Ended December 31, 1996. Industrial rental income increased by $15,627,000 or 75%, from $20,783,000 in 1996 to $36,410,000 in 1997. This increase was primarily attributable to the acquisition of 27 industrial properties in 1997. Industrial rental income for the year ended December 31, 1997 included $9,128,000 related to the 27 industrial acquisitions. Multifamily rental income increased by $3,992,000 or 14%, from $29,104,000 in 1996 to $33,096,000 in 1997. This increase was primarily attributable to an increase in rental rates and to the acquisition of three multifamily properties containing 824 apartment units during 1997. Multifamily rental income for the year ended December 31, 1997 included $2,150,000 related to the three multifamily acquisitions. As a result of these changes total revenues increased by $19,619,000 or 39%, from $49,887,000 in 1996 to $69,506,000 in 1997. Industrial rental property expenses increased by $2,904,000, or 55%, from $5,308,000 in 1996 to $8,212,000 in 1997. This increase was primarily related to the Company's acquisitions in 1997. Industrial rental property expenses for the year ended December 31, 1997 included $1,839,000 related to the 27 industrial acquisitions. Multifamily rental property expenses increased by $1,200,000, or 10%, from $11,554,000 in 1996 to $12,754,000 in 1997. This increase was primarily related to the Company's acquisitions in 1997. Multifamily rental property expenses for the year ended December 31, 1997 included $717,000 related to the three multifamily properties acquired during 1997. Depreciation increased by $3,772,000 or 46%, from $8,236,000 in 1996 to $12,008,000 in 1997. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) decreased by $1,074,000, or 6%, from $18,411,000 in 1996 to $17,337,000 in 1997. This decrease was attributable to a decrease in convertible subordinated debentures outstanding, (primarily associated with the exchange of $42,069,000 aggregate principal amount of debentures into 2,440,002 shares of Common Stock). This decrease was offset by an increase in outstanding borrowings due to new acquisitions made during 1996 and 1997. Interest resulting from the amortization of financing costs decreased by $384,000 or 32% from $1,211,000 in 1996 to $827,000 in 1997. This decrease is attributable to the exchange in subordinated debentures which converted into shares of Common Stock in December 1996. General and administrative expenses increased by $185,000, or 6%, from $2,974,000 in 1996 to $3,159,000 in 1997. This increase was primarily attributable to personnel increases related to the 1996 and 1997 acquisitions. 20 22 Minority interests in earnings of partnerships totaled $172,000 and represents earnings allocated to the minority partners in two partnerships in which the Company acquired a controlling general partner interest in June 1997 (Terrace Gardens, L.P. and Morning View Terrace L.P.). No earnings were allocated to the minority interests in the Company's other partnerships. For the year ended December 31, 1997, the Company had net income of $20,603,000 compared with a net loss of $118,000 in 1996. 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 "Recent Developments-Reduction in Public Indebtedness") while in 1997 a $5,594,000 net gain on sale of real estate was recognized primarily from the sale of a 279 unit apartment community located in Oregon. Comparison of the Year Ended December 31, 1996 to the Year Ended December 31, 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 leasable square feet. Industrial rental income for the year ended December 31, 1996 included $5,647,000 related to the twelve industrial acquisitions. 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 multifamily property 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. Multifamily rental income for the year ended December 31, 1996 increased by $10,558,000 related to the 13 multifamily acquisitions during 1995 and 1996 and was reduced by the sale of the four multifamily properties in 1995. As a result of these changes, total revenues increased by $12,796,000 or 34%, from $37,091,000 in 1995 to $49,887,000 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. This increase was primarily related to the Company's acquisitions described above. Industrial rental property expenses for the year ended December 31, 1996 included $1,630,000 related to the twelve industrial acquisitions. Multifamily rental property expenses increased by $1,339,000, or 13%, from $10,215,000 in 1995 to $11,554,000 in 1996. This increase was primarily related to the Company's acquisitions described above, offset by the sale of four properties in Texas in the prior year. Multifamily rental property expenses for the year ended December 31, 1996 increased by $4,422,000 related to the 13 multifamily properties acquired during 1996 and 1995 and was reduced by the sale of the four multifamily properties in 1995. Depreciation increased by $2,155,000, or 35%, from $6,081,000 in 1995 to $8,236,000 in 1996. The increases relate 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 $18,411,000 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 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 21 23 $3,596,000 non-recurring loss was incurred on the exchange of the convertible subordinated debentures for common stock (see Part I, Item 1) while in 1995 a $6,664,000 gain on sale of real estate was recognized from the sale of the four multifamily properties located in Texas. Comparison of the Year Ended December 31, 1995 to the Year Ended December 31, 1994. 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 properties during the last half of 1994 containing approximately 1,011,000 leasable square feet of space and one industrial acquisition in 1995. Industrial rental income for the year ended December 31, 1995 included $192,000 related to the 1995 industrial acquisition. 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. Multifamily rental income for the year ended December 31, 1995 included $3,990,000 related to the twelve multifamily acquisitions and $5,987,000 related to the four multifamily properties sold during the last quarter of 1995. 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. 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 and one industrial acquisition in 1995. Industrial rental property expenses for the year ended December 31, 1995 included $25,000 related to the 1995 industrial acquisition. 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. Multifamily rental property expenses for the year ended December 31, 1995 included $1,779,000 related to twelve multifamily properties acquired during 1995 and included $2,403,000 related to the four multifamily properties sold during the last quarter of 1995. Depreciation increased by $2,360,000, or 63%, from $3,721,000 in 1994 to $6,081,000 in 1995. The increases relate primarily to 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, a $6,664,000 net gain in 1995 from the sale of four multifamily properties located in Texas (See Part IV -- Financial Statements) and a $2,990,000 loss from the extinguishment of debt in 1994 relating to the acquisition of certain of the properties from Realty. 22 24 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had $1,466,000 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 Line of Credit and unsecured bridge loan agreement. 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 $7,138,000 for the year ended December 31, 1995 to $8,523,000 for the year ended December 31, 1996 and $27,684,000 for the year ended December 31, 1997. The primary reason for these increases related to the additional rental income contributed by properties acquired during 1995, 1996 and 1997. Cash used in investing activities decreased from $84,480,000 for the year ended December 31, 1995 to $81,918,000 for the year ended December 31, 1996 and then increased to $350,597,000 for the year ended December 31, 1997 primarily as a result of acquisitions and improvements to properties which decreased from $113,663,000 in 1995 to $87,442,000 in 1996, and then increased to $332,324,000 in 1997, offset by $29,183,000 of proceeds from the sale of the four multifamily properties located in Texas in 1995, $7,695,000 from the sale of land and an industrial building to an existing tenant in 1996, and $15,115,000 from the sale of a multifamily community in Oregon in 1997, respectively. Cash provided by financing activities decreased from $76,674,000 for the year ended December 31, 1995 to $72,071,000 for the year ended December 31, 1996 and then increased to $322,804,000 for the year ended December 31, 1997 primarily as a result of reduced borrowing activity associated with acquisitions in 1996 compared to 1995, the issuance of common stock in 1996 and 1997 and the issuance of preferred stock in 1997. 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. Line of Credit and Bridge Loan The Company's Line of Credit has a maximum commitment amount of $65,000,000 and expires in July, 1998. As of December 31, 1997, the Company had borrowed $17,200,000 under this line. Subsequent to year-end, the Company entered into an agreement with a lender for a $40 million unsecured bridge loan. The unsecured bridge loan agreement has an expiration date of April 30, 1998 and bears interest at a rate of LIBOR plus 1.25%. Proceeds from the unsecured loan agreement will be used for acquisitions and general corporate purposes. The Company and its lenders are currently negotiating the terms of a new unsecured credit facility. Terms being negotiated include an increase in the maximum loan amount, a decrease in the interest rate spread, extension of the term of the facility and conversion of the Line of Credit facility to an unsecured facility. There can be no assurance that any such terms will be agreed to by the lenders. Acquisitions During 1997, the Company invested $332,324,000 in real estate assets. Proceeds for these investments were generated primarily by: a public offering in January 1997 which generated gross proceeds, including exercise of the underwriter's over-allotment option, of approximately $47,200,000; a public offering of Common Stock in June 1997 which generated gross proceeds, including exercise of the underwriter's over-allotment, of approximately $44,800,000; a public offering in November 1997 which generated gross proceeds, including over-allotment, of approximately $99,108,000; a public offering in December 1997 which generated 23 25 gross proceeds of approximately $20,000,000; and the issuance of Class A Preferred Shares and Class B Preferred Shares at various times throughout the year, which generated gross proceeds of $55,000,000. (See Part I -- Item 1, 1997 Developments.) Subsequent to year-end, the Company acquired three additional properties (i) a 140,000 square foot industrial park in Upland, California for $5,100,000, (ii) a 125,000 square foot multi-tenant industrial park located in Chatsworth, California for $7,565,000 and (iii) a 300,000 square foot industrial center in Las Vegas, Nevada for $14,100,000. All of these 1998 industrial acquisitions were financed with borrowings from the Company's new unsecured bridge loan agreement. The Company intends to acquire additional properties and may seek to fund these acquisitions through proceeds received from a combination of its Line of Credit, bridge loan, equity offerings or debt financings. Debt Financings Tax-exempt Projects. The company has established a pool agreement with the Federal National Mortgage Association ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In June 1997, in conjunction with the Company's admission into the partnerships that own the Terrace Gardens and Morning View Terrace apartment communities, the partnerships refinanced their existing tax-exempt bond financing of $19,100,000 through the FNMA facility. The effective interest rate on the bonds, after giving effect to credit enhancement and other costs, has been fixed at 6.4% for 10 years. The Company also received from FNMA a forward commitment expiring December 1, 1998, to provide credit enhancement for the Fountains Senior Apartments 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 10 years. Property Refinancings. In October 1997, the Company borrowed $34,000,000 at an interest rate of 7.11% for a term of 10 years. The proceeds of this loan were used to repay $33,600,000 of indebtedness under the Company's Line of Credit. The loan is secured by five warehouse/distribution centers acquired by the Company in July 1997. Convertible Subordinated Debentures At December 31, 1997 the Company's outstanding convertible subordinated debentures total $12,592,000, net of unamortized discount of $102,000. Conversion of all the outstanding debentures, which are convertible into common shares at a rate of 53.6986 common shares of Common Stock per $1,000 of principal amount of debentures, would require the issuance of an additional 681,650 common shares. If the debentures were fully converted, the net income attributable to each common share would not be diluted. During 1997, $1,743,000 in aggregate principal amount of debentures ($1,635,000 net of discount) were converted into 93,564 shares of Common Stock. Shelf Registrations During 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $250,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase securities of the Company (the "1997 Shelf Registration Statement"). The 1997 Shelf Registration statement was declared effective April 11, 1997. At December 31, 1997, the Company has $56,126,000 available under the 1997 Shelf Registration Statement. On February 4, 1998, the Company filed a new shelf registration statement on Form S-3 covering a maximum aggregate offering price of $300,000,000 of the Company's Common Stock, Preferred Stock, debt securities and warrants to purchase such securities. It is anticipated that this filing will be declared effective in April of 1998. 24 26 Year 2000 Compliance The Company has recognized the need to ensure that its systems, equipment and operations will not be adversely impacted by the change to the calendar year 2000. As such, the Company has taken steps to identify potential areas of risk and has begun addressing these in its planning, purchasing and daily operations. The total cost of converting all internal systems, equipment and operations into the year 2000 has not been fully quantified, but it is not expected to be a material cost to The Company. The Company does not anticipate any material adverse impact resulting from the failure of third party service providers and vendors to prepare for the year 2000. The Company continues to monitor those risks and is attempting to receive compliance certificates from all third parties that have a material impact on the Company's operations. 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 that are considered revenue producing ("Revenue Producing") and other expenditures that 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 that had been deferred by prior owners. 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 for the years ended December 31, 1997 and 1996 (all amounts are in thousands):
1997 1996 -------- ------- Multifamily Acquisitions.......................................... $ 38,766 $ 6,213 Revenue-Producing..................................... -- 71 Rehabilitation........................................ 2,184 1,895 Restorations.......................................... 173 33 -------- ------- $ 41,123 $ 8,212 ======== ======= Industrial Acquisitions.......................................... $282,655 $75,336 Revenue-Producing..................................... 3,725 1,818 Rehabilitation........................................ 1,718 1,538 Restorations.......................................... 3,103 -- -------- ------- 291,201 78,692 -------- ------- $332,324 $86,904 ======== =======
The Company anticipates incurring similar capital expenditures in 1998. The Company expects such expenditures will be funded from available cash balances, revolving lines of credit, equity offerings, and proceeds from refinancing. 25 27 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. 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Election of Directors -- Nominees" and "Officers and Key Employees." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Officers and Key Employees -- Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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 Schedule. 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 December 23, 1997, under item 5 and 7 reporting the sale of 874,317 shares of common stock. The Company filed a report on Form 8-K filed December 18, 1997, under item 2, 5 and 7 reporting the acquisition of California Commerce Parks portfolio,Bradshaw Business Center, Horn Road Business Com- 26 28 plex, Fullerton Business Center, Norwood Industrial Parks and the possible acquisition of an industrial portfolio. The Company filed a report on Form 8-K filed November 21, 1997, under item 2, 5 and 7 reporting the issuance of 4,250,000 shares of its common stock (plus 637,500 shares of common stock issuable upon the exercise by the underwriters of an over-allotment option). The Company filed a report on Form 8-K filed November 18, 1997, under item 2, 5 and 7 reporting the acquisition of a Eden Plaza/Eden Industrial, the possible acquisition of a business park portfolio, and a common stock offering for the issuance of 4,250,000 shares of its common stock. The Company filed a report on Form 8-K filed October 31, 1997, under item 2, 5 and 7 reporting the probable acquisition of a Eden Plaza/Eden Industrial and other possible property acquisitions. 27 29 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 30, 1998 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/ CARL C. GREGORY, III Director - -------------------------------------------- Carl C. Gregory, III /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, 3RD Director - -------------------------------------------- James E. Quigley, 3rd
28 30 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, 1997 and 1996................................................... F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997...... F-4 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1997................................................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997...... F-6 Notes to Consolidated Financial Statements................ F-7 SCHEDULE FILED AS PART OF THIS REPORT Schedule III -- Real Estate and Accumulated Depreciation........................................... F-24
F-1 31 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Pacific Gulf Properties Inc. We have audited the accompanying consolidated balance sheets of Pacific Gulf Properties Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 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 Pacific Gulf Properties Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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, 1998 F-2 32 PACIFIC GULF PROPERTIES INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1997 1996 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Real estate assets Operating properties Land................................................... $185,789 $109,611 Buildings.............................................. 515,160 269,929 -------- -------- 700,949 379,540 Accumulated depreciation............................... (39,148) (28,844) -------- -------- 661,801 350,696 Properties under development, including land.............. 32,107 2,171 -------- -------- 693,908 352,867 Cash and cash equivalents................................... 1,466 1,523 Accounts and other receivable............................... 3,399 2,125 Other assets................................................ 13,698 8,125 -------- -------- $712,471 $364,640 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Loans payable............................................... $283,852 $197,401 Accounts payable and accrued liabilities.................... 9,009 5,671 Dividends payable........................................... 8,852 4,001 Convertible subordinated debentures......................... 12,592 14,227 -------- -------- 314,305 221,300 Minority interests in consolidated partnerships............. 9,326 3,518 Commitments and contingencies............................... -- -- Shareholders' equity Preferred shares, $.01 par value; 5,000,000 shares authorized; 1,351,351 Senior Cumulative Convertible Class A shares and 1,411,765 Senior Cumulative Convertible Class B shares issued and outstanding at December 31, 1997 and no shares outstanding at December 31, 1996............................................... 28 -- Common shares, $.01 par value; 25,000,000 shares authorized; shares issued and outstanding 19,968,189 at December 31, 1997 and 9,757,917 at December 31, 1996... 200 98 Excess shares, $.01 par value; 30,000,000 shares authorized; no shares outstanding...................... -- -- Outstanding restricted stock.............................. (818) (877) Additional paid-in capital................................ 411,187 157,895 Distributions in excess of earnings....................... (21,757) (17,294) -------- -------- 388,840 139,822 -------- -------- $712,471 $364,640 ======== ========
See accompanying notes. F-3 33 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) REVENUES Rental income Industrial properties........................... $ 36,410 $ 20,783 $ 12,193 Multifamily properties.......................... 33,096 29,104 24,898 -------- -------- -------- 69,506 49,887 37,091 -------- -------- -------- EXPENSES Rental property expenses Industrial properties........................... 8,212 5,308 2,567 Multifamily properties.......................... 12,754 11,554 10,215 -------- -------- -------- 20,966 16,862 12,782 Depreciation......................................... 12,008 8,236 6,081 Interest (including amortization of debenture discount and financing costs of $827, $1,211, and $1,009, respectively).............................. 17,337 18,411 14,066 General and administrative........................... 3,159 2,974 2,423 Minority interests in earnings of consolidated partnerships....................................... 172 -- -- Nonrecurring loss on exchange of debentures for common stock....................................... -- 3,596 -- -------- -------- -------- 53,642 50,079 35,352 -------- -------- -------- INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE..... 15,864 (192) 1,739 Gain on sale of real estate.......................... 5,594 74 6,664 -------- -------- -------- NET INCOME (LOSS).................................... 21,458 (118) 8,403 Preferred dividend requirements.................... (855) -- -- -------- -------- -------- INCOME AVAILABLE (LOSS ATTRIBUTABLE) TO COMMON SHAREHOLDERS....................................... $ 20,603 $ (118) $ 8,403 ======== ======== ======== EARNINGS (LOSS) PER SHARE Basic.............................................. $ 1.51 $ (.02) $ 1.74 ======== ======== ======== Diluted............................................ $ 1.47 $ (.02) $ 1.68 ======== ======== ========
See accompanying notes. F-4 34 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK --------------------------------- COMMON STOCK SERIES A SERIES B OUTSTANDING ADDITIONAL --------------- --------------- --------------- RESTRICTED PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL ------ ------ ------ ------ ------ ------ ----------- ---------- (IN THOUSANDS) Balance -- December 31, 1994................ 4,793 $ 48 -- $-- -- $-- $ -- $ 76,991 Common shares issued........................ -- -- -- -- -- -- -- 988 Issuance of restricted stock................ 64 1 -- -- -- -- (670) -- Dividends on common shares.................. -- -- -- -- -- -- -- -- Net Income.................................. -- -- -- -- -- -- -- -- ------ ---- ----- --- ----- --- ----- -------- Balance -- December 31, 1995................ 4,857 49 -- -- -- -- (670) 77,979 Common shares issued........................ 4,880 49 -- -- -- -- -- 79,917 Issuance of restricted stock................ 21 -- -- -- -- -- (208) -- Dividends on common shares.................. -- -- -- -- -- -- -- -- Net loss.................................... -- -- -- -- -- -- -- -- ------ ---- ----- --- ----- --- ----- -------- Balance -- December 31, 1996................ 9,758 98 -- -- -- -- (878) 157,896 Common shares issued........................ 10,189 102 -- -- -- -- -- 200,787 Preferred shares issued..................... -- -- 1,351 14 1,412 14 -- 52,504 Issuance of restricted stock................ 21 -- -- -- -- -- 60 -- Dividends on common shares.................. -- -- -- -- -- -- -- -- Dividends on preferred shares............... -- -- -- -- -- -- -- -- Net income.................................. -- -- -- -- -- -- -- -- ------ ---- ----- --- ----- --- ----- -------- Balance -- December 31, 1997................ 19,968 $200 1,351 $14 1,412 $14 $(818) $411,187 ====== ==== ===== === ===== === ===== ======== DISTRIBUTIONS IN EXCESS OF EARNINGS TOTAL ------------- -------- (IN THOUSANDS) Balance -- December 31, 1994................ $ (6,179) $ 70,860 Common shares issued........................ -- 988 Issuance of restricted stock................ -- (669) Dividends on common shares.................. (7,602) (7,602) Net Income.................................. 8,403 8,403 -------- -------- Balance -- December 31, 1995................ (5,378) 71,980 Common shares issued........................ -- 79,966 Issuance of restricted stock................ -- (208) Dividends on common shares.................. (11,798) (11,798) Net loss.................................... (118) (118) -------- -------- Balance -- December 31, 1996................ (17,294) 139,822 Common shares issued........................ -- 200,889 Preferred shares issued..................... -- 52,532 Issuance of restricted stock................ -- 60 Dividends on common shares.................. (25,066) (25,066) Dividends on preferred shares............... (855) (855) Net income.................................. 21,458 21,458 -------- -------- Balance -- December 31, 1997................ $(21,757) $388,840 ======== ========
See accompanying notes. F-5 35 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- ------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................ $ 21,458 $ (118) $ 8,403 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................... 12,008 8,236 6,081 Amortization of debenture discount and financing costs............................................... 827 1,211 1,009 Minority interests in earnings of consolidated partnerships........................................ 172 -- -- Nonrecurring loss on exchange of debentures for common stock................................................. -- 3,596 -- Gain on sale of real estate........................... (5,594) (74) (6,664) Compensation recognized related to restricted stock issued to employees................................. 59 208 83 Net increase in other assets.......................... (4,532) (4,563) (2,553) Net increase in liabilities........................... 3,338 27 779 --------- ------- -------- Net cash provided by operating activities................ 27,736 8,523 7,138 --------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions and improvements to properties.............. (332,324) (87,442) (113,663) Development expenditures................................. (29,936) (2,171) -- Proceeds from sale of real estate........................ 15,115 7,695 29,183 Purchase of property and equipment, net.................. (3,452) -- -- --------- ------- -------- Net cash used in investing activities.................... (350,597) (81,918) (84,480) --------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from revolving line of credit................... 158,278 28,075 4,300 Repayment of revolving line of credit.................... (154,764) (29,462) (27,278) Proceeds from mortgage notes payable..................... 97,921 63,600 112,070 Repayment of mortgage notes payable...................... (19,784) (14,659) (8,725) Proceeds from construction loans......................... 4,800 -- -- Debentures converted to common shares.................... (1,635) (42,114) -- Issuance of common shares................................ 200,891 76,370 317 Issuance of preferred shares............................. 52,531 -- -- Minority interests contributions......................... 5,636 -- 3,518 Dividends on common shares............................... (20,215) (9,739) (7,528) Dividends on preferred shares............................ (855) -- -- --------- ------- -------- Net cash provided by financing activities................ 322,804 72,071 76,674 --------- ------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (57) (1,324) (668) --------- ------- -------- CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD........... 1,523 2,847 3,515 --------- ------- -------- CASH AND CASH EQUIVALENTS -- END OF PERIOD................. $ 1,466 $ 1,523 $ 2,847 ========= ======= ========
See accompanying notes. F-6 36 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED 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 the completion of its initial public offerings and consummation of certain formation transactions. Basis of Presentation The consolidated financial statements include the accounts of Pacific Gulf Properties Inc., and all subsidiaries and partnerships over which it has control (the "Company"). The Company's controlled partnerships and subsidiaries include PGP Inland Communities, L.P., PGP -- Terrace Gardens Holdings Inc., PGP -- Morning View Terrace Holdings Inc., PGP Northern Industrial, L.P., Pacific Inland Communities LLC and PGP Von Karman Properties Minority interests represent the ownership interests of outside limited partners in certain of the partnerships controlled by the Company. All intercompany accounts and transactions have been eliminated in consolidation. Real Estate Assets Real estate assets consist of operating properties and properties under development. Operating properties are held for investment and stated at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that 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. Properties under development are stated at cost. The cost of development includes land and infrastructure costs, direct and indirect construction costs and carrying costs including interest and taxes, all of which are capitalized as incurred. Land acquisition and infrastructure costs are allocated to properties based on relative fair value. Interest and property taxes are capitalized to properties while development activities are in progress. When a project or property under development is completed, all related holding and operating costs are expensed or incurred. Impairment losses are recorded on long-lived assets used in operations and properties under development 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. As of December 31, 1997, no indicators of impairment existed and no impairment losses have been recorded. 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 that approximates the effective interest method. Amortization of financing costs is included in interest expense. F-7 37 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments and accounts receivable from tenants. 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 from tenants is limited. The Company performs credit evaluations of prospective tenants and security deposits are also obtained. 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, 1997. The fair value as of December 31, 1997 of the Company's convertible subordinated debentures, based on the closing price of the debentures on the last trading day in 1997 on the American Stock Exchange, was $13,329,000. Dividend Reinvestment Plan During the years ended December 31, 1997 and 1996, the Company issued 1,225 and 1,900 shares, respectively, under the Company's Dividend Reinvestment Plan. Rental Income Rental income from multifamily 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 incurred (net of interest income) for the years ended December 31, 1997, 1996 and 1995 totaled $19,469,000, $18,626,000 and $14,026,000, respectively. Interest incurred in 1997, 1996 and 1995 includes $1,100,000, $4,720,000 and $4,736,000 related to the Company's convertible subordinated debentures (Note 4). For the years ended December 31, 1997 and 1996, the Company capitalized $2,132,000 and $215,000 of interest related to properties under development.(Note 2). Interest paid for the years ended December 31, 1997, 1996 and 1995 totaled $18,932,000, $18,803,000 and $11,785,000, 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 debenture holders upon conversion; had the conversion not occurred, interest would have been paid to debenture holders in 1997. Gain on Sale of Real Estate Gains on sale of real estate 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 all other conditions necessary for profit recognition have been satisfied. F-8 38 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED 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, among other requirements. Per Share Data The Company has adopted and reported earnings per share giving effect to the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128 ("Statement No. 128")which requires the calculation and disclosure of basic and diluted earnings per share including a reconciliation of the weighted average shares utilized in the calculations. All earnings per share amounts for all periods presented reflect basic and diluted earnings per share and have been restated from the previous standard of primary and fully diluted earnings per share. See Note 10 for the disclosure requirements related to the computations and reconciliations of earnings per share amounts pursuant to Statement No. 128. 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, 1997 and 1996 and revenues and expenses for each of the three years in the period ended December 31, 1997. Actual results could differ from those estimates in the near term. Recently Issued Accounting Standards The Financial Accounting Standards Board has issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is required to be adopted on December 31, 1998. At that time, the Company will be required to report certain information about its operating segments, its products and services, the geographic areas in which the Company operates and its major customers. The Company's current financial statements include substantial information relating to its two operating segments: industrial and multifamily. The Company does not believe the additional requirements will have a significant impact on its disclosures. Reclassifications Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. F-9 39 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. REAL ESTATE ASSETS The Company's real estate assets consist of the following at December 31: OPERATING PROPERTIES
1997 1996 ------------ ------------ INDUSTRIAL Land.......................................... $130,586,000 $ 62,078,000 Buildings and improvements.................... 344,156,000 121,465,000 ------------ ------------ 474,742,000 183,543,000 Accumulated depreciation...................... (19,697,000) (12,812,000) ------------ ------------ 455,045,000 170,731,000 ------------ ------------ MULTIFAMILY Land.......................................... 55,203,000 47,533,000 Buildings and improvements.................... 171,004,000 148,464,000 ------------ ------------ 226,207,000 195,997,000 Accumulated depreciation...................... (19,451,000) (16,032,000) ------------ ------------ 206,756,000 179,965,000 ------------ ------------ TOTAL OPERATING PROPERTIES Land.......................................... 185,789,000 109,611,000 Buildings and improvements.................... 515,160,000 269,929,000 ------------ ------------ 700,949,000 379,540,000 Accumulated depreciation...................... (39,148,000) (28,844,000) ------------ ------------ $661,801,000 $350,696,000 ============ ============
OPERATING PROPERTIES Industrial Properties At December 31, 1997, the Company owns and operates 49 industrial properties containing an aggregate of 10,676,000 leasable square feet located in the states of California and Washington. During 1997, the Company purchased 27 industrial properties located in California and Washington containing an aggregate of 5,776,000 leasable square feet. 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: 1998.................................................... $16,430,000 1999.................................................... 10,780,000 2000.................................................... 8,884,000 2001.................................................... 4,900,000 2002.................................................... 5,447,000 Thereafter.............................................. 4,240,000 ----------- $50,681,000 ===========
F-10 40 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Multifamily Properties At December 31, 1997, the Company owns and operates 24 multifamily properties containing 4,655 apartment units located in Southern California and the Pacific Northwest. During 1997, the Company purchased three active senior multifamily properties containing 824 apartment units located in Southern California and sold a 279 unit multifamily property in Oregon. (Note 9.) PROPERTIES UNDER DEVELOPMENT
1997 1996 ----------- ---------- Multifamily properties Land............................................. $ 1,642,000 $1,642,000 Properties under development..................... 5,734,000 529,000 ----------- ---------- 7,376,000 2,171,000 ----------- ---------- Industrial properties Land............................................. 14,987,000 -- Properties under development..................... 9,744,000 -- ----------- ---------- 24,731,000 -- ----------- ---------- Total Properties under development Land............................................. 16,629,000 1,642,000 Properties under development..................... 15,478,000 529,000 ----------- ---------- $32,107,000 $2,171,000 =========== ==========
PROPERTIES UNDER DEVELOPMENT Industrial Properties In April 1997, the Company completed the rehabilitation of an industrial property containing approximately 327,000 leasable square feet located in the City of Industry, California. Rehabilitation costs for this property were $1,652,000. In 1997, the Company commenced development of four industrial properties that will contain approximately 578,000 leasable square feet, and the rehabilitation of two industrial properties containing approximately 639,000 leasable square feet, all of which are located in Southern California and Washington. Development and rehabilitation costs for these properties totaled $1,678,000 and $2,079,000, respectively through December 31, 1997. Multifamily Properties In 1996, the Company commenced development of a 166 unit multifamily property for active seniors located in the master planned community of Rancho Santa Margarita, California (Fountains Senior Apartments). The cost incurred for the year ended December 31, 1997 and 1996 totaled $5,205,000 and $2,171,000, respectively. F-11 41 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LOANS PAYABLE The Company's loans payable at December 31, 1997 and 1996 consist of the following:
1997 1996 ------------ ------------ Mortgage notes: Conventional mortgage debt............................ $188,449,000 $158,832,000 Tax exempt mortgage debt.............................. 59,778,000 24,850,000 Construction loans...................................... 18,425,000 33,000 Revolving line of credit................................ 17,200,000 13,686,000 ------------ ------------ $283,852,000 $197,401,000 ============ ============
Mortgage Notes At December 31, 1997, the Company's conventional mortgage debt consists of 20 notes which are secured by multifamily and industrial properties, due in monthly installments and maturing at various dates through September 2025. Certain of the Company's conventional mortgage note agreements contain cross- collateralization provisions (see schedule III). Approximately $182,320,000 or 17 conventional mortgage notes bear fixed rates of interest ranging from 7.05% to 8.75% per annum. The remaining three conventional mortgage notes totaling $6,129,000 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, 1997 was 7.78%. During the year ended December 31, 1997, the Federal Home Loan Bank 11th District Rate ranged from 4.76% to 4.94% and was 4.94% at December 31, 1997. At December 31, 1997, the Company's tax-exempt mortgage debt consists of seven notes totaling $59,778,000 that are secured by nine multifamily properties. The Company's tax-exempt mortgage debt includes five notes originated as part of refinancings described in the following paragraph. The weighted average interest rate of the Company's tax-exempt mortgage notes, all of which bear fixed rates of interest, at December 31, 1997, was 6.27%. The Company entered into a 30 year refunding agreement for all of its outstanding tax-exempt mortgage debt that closed in January 1997. As a result of the agreement, which is backed by credit and liquidity support from guaranteed mortgage pass-through certificates issued by the Federal National Mortgage Association ("FNMA"), the Company obtained three new loans from 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 FNMA. 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. As part of the refunding agreement, the Company is required to deposit impounds for property taxes, property and liability insurance and reserves for capital replacements on a semiannual basis with the trustee. Unamortized finance costs and fees related to the refinancing are included in other assets and totaled $1,484,000 and $1,451,000 at December 31, 1997 and 1996, respectively. In June 1997, in conjunction with the Company's admission into the partnerships that own the Terrace Gardens and Morning View Terrace apartment communities (Note 6), the partnerships refinanced their existing tax-exempt notes and the related bond financing of $19,100,000 through the FNMA facility. The effective interest rate on the bonds, after giving effect to credit enhancement and other costs, has been fixed at 6.4% for 10 years. F-12 42 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Construction Loans At December 31, 1997 the Company has three construction loans, which are payable to a bank, and are secured by a multifamily property for active seniors (The Fountains) and two industrial properties under development. The construction loans bear interest at the bank's prime rate payable monthly and mature between August and November 1998. Undisbursed funds on the construction loans at December 31, 1997 total $3,238,000. Upon completion of the properties, the Company has the option to convert the interest rate on the loans into a fixed rate of interest upon meeting certain conditions. At December 31, 1997, the prime rate was 8.5%. The Company has a forward commitment from FNMA expiring December 1, 1998 related to the Fountains which is under development at December 31, 1997. The commitment is subject to the property achieving certain lease ups and operating requirements. Revolving Line of Credit and Bridge Loan The revolving line of credit as of December 31, 1997, which is payable to a bank, is secured by certain of the Company's real estate properties and matures in July, 1998. Under the terms of this revolving bank line of credit, the Company may borrow up to $65,000,000 at the London Interbank Offered Rate (LIBOR) plus 1.75%. For the year ended December 31, 1997, the weighted average interest rate of the revolving line of credit was 7.7%. At December 31, 1997, the LIBOR was 5.7%. The Company's revolving line of credit agreement contains certain debt covenants. The most significant covenants 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, 1997, the Company was in compliance with all debt covenants. Subsequent to December 31, 1997, the Company entered into an unsecured bridge loan agreement with a bank. The loan, which has a commitment of $40,000,000, expires on April 30, 1998 and bears an interest rate of LIBOR plus 1.25%. Interest Rate Swap Agreements The Company has entered into interest rate swap agreements that effectively convert certain floating rate mortgage notes to a fixed-rate basis, thus reducing the impact on future earnings of fluctuations in interest rates. At December 31, 1997, the Company had interest rate swap agreements on notional amounts totaling $34,500,000 under which the Company pays fixed rates of interest and receives floating rates of interest based on an index that is reset weekly. The swap counterparties are all financial institutions rated AAA by Standard & Poor's. The rate differences to be paid or received are accrued and included in interest expense as a yield adjustment and the related payable or receivable from counterparties is included in accrued liabilities or other assets. F-13 43 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Loans Payable Maturities Principal payments due on loans payable as of December 31 are as follows: 1998................................................... $ 50,250,000 1999................................................... 11,703,000 2000................................................... 30,211,000 2001................................................... -- 2002................................................... 23,421,000 Thereafter............................................. 168,267,000 ------------ $283,852,000 ============
4. CONVERTIBLE SUBORDINATED DEBENTURES At December 31, 1997 and 1996, outstanding convertible subordinated debentures totaled $12,592,000 and $14,227,000, net of unamortized discount of $102,000 and $210,000, respectively. The Company's debentures, which were issued in an aggregate principal amount of $56,551,000, bear interest at 8.375% annually (payable in semiannual installments due in February and August of each year), and mature in February 2001. The Company's convertible subordinated debentures 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 1997 and 1996, $1,743,000 and $42,114,000 in aggregate principal amount of debentures were converted into shares of common stock, including $42,069,000 exchanged in December 1996 in connection with the Company's tender offer 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 in excess of the original conversion rate (the "excess common shares"). 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 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. The debenture discount is amortized to expense producing an effective interest rate of 8.76%. Costs capitalized upon issuance of the debentures are included in other assets net of related amortization and conversions. Deferred debenture costs totaled $3,005,000 upon issuance of which $1,317,000 has been amortized to expense and $1,386,000 has been charged to additional paid in capital related to conversions of debentures into common stock through December 31, 1997. At December 31, 1997, unamortized deferred debenture costs included in other assets totaled $302,000. At December 31, 1997, the Company was in compliance with the debenture 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 F-14 44 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1,050,000 common shares (150,000 of which have been reserved for awards to non-employee directors). Stock Options The Stock options listed in the table below primarily vest in equal installments over a five-year period from the date of the grant and expire ten years from the original grant date.
NUMBER OF EXERCISE PRICE OPTIONS PER SHARE --------- -------------- Outstanding at December 31, 1994................... 190,050 $18.25 Granted............................................ 40,500 $15.00 Canceled........................................... (2,850) $18.25 ------- ------------- Outstanding at December 31, 1995................... 227,700 $15.00-$18.25 Granted............................................ 13,500 $16.75 ------- ------------- Outstanding at December 31, 1996................... 241,200 $15.00-$18.25 Granted............................................ 468,000 $20.75-$23.75 ------- ------------- Canceled........................................... (4,000) $18.25 Exercised.......................................... (13,550) $16.25-$21.38 ------- ------------- Outstanding at December 31, 1997................... 691,650 $15.00-$23.75 =======
Pursuant to Statement No. 123, Accounting and Disclosure of Stock-Based Compensation, issued in October 1995, the Company applies 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 No. 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 5.59%; a dividend yield of 7.07%; a volatility factor for the market price of the Company's common stock of 0.126; and a weighted average expected life of 8.7 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 Company's balance sheets. The restricted stock awards listed in the table below were awarded to employees based on performance and vest over periods ranging between one to seven years. F-15 45 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NUMBER OF AWARDS --------- Outstanding at December 31, 1995............................ 7,296 Granted..................................................... 21,000 ------ Outstanding at December 31, 1996............................ 28,296 Granted..................................................... 20,500 ------ Outstanding at December 31, 1997............................ 48,796 ====== Vested at December 31, 1997................................. 7,100 ======
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 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, 1997 and 1996, the unamortized amount of outstanding restricted stock issued to employees which will be charged to compensation expense in future periods totaled $818,000 and $877,000, respectively. Thrift Plan The Company has a thrift plan under which employees may elect to contribute up to 21% of their annual compensation, excluding bonuses, on a combination before-and-after tax basis. 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, 1997, 1996 and 1995 totaled $29,000, $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 years of employment. Funding requirements comply with federal requirements that are imposed by law. 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, 1997 and 1996, the present values of accumulated plan benefits were $833,000 and $570,000 (calculated using a discount rate of 7% in 1997 and 7.5% in 1996), respectively, and the plan's net assets available for benefits were $704,000 in 1997 and $531,000 in 1996. F-16 46 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's net periodic pension cost for the years ended December 31, 1997, 1996, and 1995 are included in the following components:
1997 1996 1995 -------- -------- -------- Service cost............................... $116,000 $101,000 $ 64,000 Interest cost on projected benefit obligation............................... 65,000 53,000 41,000 Expected return on plan assets............. (41,000) (42,000) (34,000) Amortization of unrecognized prior service costs and unrecognized net obligation.... 1,000 6,000 8,000 -------- -------- -------- Net periodic pension cost.................. $141,000 $118,000 $ 79,000 ======== ======== ========
The following table sets forth the funded status of the Company's retirement income plan and the related amounts recognized in the December 31, 1997 and 1996 consolidated balance sheets: Actuarial present value of accumulated benefit obligations as of December 31:
1997 1996 ---------- --------- Vested.............................................. $ 629,000 $ 499,000 Nonvested........................................... 204,000 71,000 ---------- --------- Accumulated plan benefits........................... 833,000 570,000 Additional amounts related to projected future compensation levels............................... 765,000 296,000 ---------- --------- Total actuarial projected benefit obligations for service rendered.................................. 1,598,000 866,000 Plan assets as fair value as of December 31......... 704,000 531,000 ---------- --------- Projected benefit obligations in excess of plan assets............................................ (894,000) (335,000) Unrecognized net actuarial (gain) loss from difference in actual experience from that assumed........................................... 463,000 37,000 Unrecognized prior service cost..................... 132,000 -- Unrecognized transition obligation being recognized over 27 years..................................... 167,000 175,000 ---------- --------- $ (132,000) $(123,000) ========== =========
Assumptions used in determining the status of the Company's retirement income plan are as follows:
1997 1996 ---- ---- Weighted average discount rate.............................. 7.0% 7.5% Weighted average rate of increase in compensation levels.... 4.9% 5.0% Expected long-term rate of return on plan assets............ 7.5% 8.5%
Deferred Compensation Agreements Prior to 1995, defined benefit deferred compensation agreements 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 its predecessor. During 1995, the deferred compensation agreements were substantially replaced with restricted stock. (See "Restricted Stock Awards.") F-17 47 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CONSOLIDATED REAL ESTATE PARTNERSHIPS The Company's consolidated partnerships include the following: PGP Inland Communities LP PGP Inland Communities, L.P., a Delaware limited partnership (the "Partnership") was formed by the Company in August 1995 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 approximately 225,452 limited partnership units representing an initial ownership interest of approximately 22%. The Company is the sole general partner in the Partnership and currently holds an ownership interest of approximately 79%. 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 since 1995 have been fully allocated to the Company. As of December 31, 1997, limited partnership units can be tendered for redemption on a one-for-one basis at the election of the Company for cash or exchange for shares of common stock. As of December 31, 1997, 8,690 of these units have been tendered for cash, the cost of which has been capitalized to real estate assets. Terrace Gardens -- PGP L.P. and Morning View Terrace -- PGP L.P. In June 1997, the Company, through its subsidiaries, PGP Terrace Gardens Holdings Inc. and PGP Morning View Terrace Holdings Inc., acquired a controlling general partnership interest in two existing limited partnerships ("Terrace Gardens" and "Morning View") that own two adjacent active seniors apartment communities located in Escondido, California. The properties contain an aggregate of 551 apartment units. Following the acquisition, the Company became the sole general partner of the existing limited partnerships (Terrace Gardens-PGP L.P. and Morning View Terrace-PGP L.P.) that own and manage the properties. The existing partners of the partnerships received an aggregate of approximately 266,000 units of limited partnership interest in such partnerships valued at $5,596,000. The limited partnership units may be tendered for redemption to the Company any time beginning, in most cases, two years after the closing of the transaction. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the Company's common shares. During 1997, approximately 125,000 units were tendered for cash which was capitalized to the properties. As a result of the tender, the Company currently holds an ownership interest of approximately 58%. Net income from the partnership is allocated to the minority partner based on an amount equal to the dividend rate applied to the number of limited partnership units held and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. PGP Northern Industrial L.P On October 20, 1997, the Company acquired a controlling general partner interest in a newly-formed California limited partnership ("PGP Northern")which owns two industrial properties ("Eden Plaza/Eden Industrial") containing approximately 501,000 leasable square feet located in Hayward, California for a cash contribution of approximately $3,977,000. The previous owners of Eden Plaza/Eden Industrial became limited partners in PGP Northern and received 143,391 limited partnership units valued at $2,869,000 in exchange for the contribution of the properties. The limited partnership units may be tendered for redemption to the Company any time beginning, in most cases, two years after the closing of the transaction. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. At December 31, 1997, the Company holds an ownership interest of approximately 59%. Net income from the F-18 48 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) partnership is allocated to the minority partner based on an amount equal to the dividend rate applied to the number of limited partnership units held and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. Condensed unaudited combined financial information for the consolidated real estate partnerships as of December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996 follows:
1997 1996 ------------ ----------- Real estate assets Land........................................... $ 31,983,000 $19,827,000 Buildings and improvements..................... 86,453,000 52,471,000 ------------ ----------- 118,436,000 72,298,000 Accumulated depreciation......................... (3,764,000) (1,791,000) ------------ ----------- 114,672,000 70,507,000 Cash and other assets............................ 3,185,000 458,000 ------------ ----------- $117,857,000 $70,965,000 ============ =========== Liabilities (primarily tax-exempt mortgage debt and mortgage notes)............................ $ 86,430,000 $55,748,000 Partners' equity Company........................................ 22,101,000 11,699,000 Minority interests............................. 9,326,000 3,518,000 ------------ ----------- 31,427,000 15,217,000 ------------ ----------- $117,857,000 $70,965,000 ============ ===========
YEARS ENDED DECEMBER 31, AUGUST 16, 1995 -------------------------- THROUGH 1997 1996 DECEMBER 31, 1995 ----------- ----------- ----------------- Revenues......................................... $12,999,000 $10,415,000 $3,722,000 Expenses (including depreciation and amortization of financing costs totaling $2,096,000 in 1997, $1,485,000 in 1996 and $472,000 in 1995)....... 12,129,000 9,691,000 3,537,000 ----------- ----------- ---------- Net income....................................... $ 870,000 $ 724,000 $ 185,000 =========== =========== ========== Company's share of net income.................... $ 698,000 $ 724,000 $ 185,000 Minority interest in earnings of consolidated partnerships................................... 172,000 -- -- ----------- ----------- ---------- $ 870,000 $ 724,000 $ 185,000 =========== =========== ==========
7. COMMITMENTS AND CONTINGENCIES General Matters 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. As of December 31, 1997, 7% of the apartment units within the Company's multifamily portfolio were required to be set aside for residents within certain income levels and had limitations on the rent that could be charged to such tenants. F-19 49 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Ground Lease Commitments One of the Company's industrial properties is subject to a 57-year ground lease that expires in July 2035 and is accounted for as an operating lease. Monthly ground lease payments total $22,000 and are subject to increases based on the Consumer Price Index each September, with the next adjustment in September 1998. Ground lease payments during 1997 and 1996 totaled $246,000 and $53,000, respectively. Additionally, the Company acquired the "PGBP-Irvine" and "PGBP-Cerritos" industrial properties in December 1997 which are subject to ground leases which expire in August 2029 and April 2034, respectively. Monthly ground lease payments total $25,000 and $38,000 and are subject to increases based on the Consumer Price Index, with the next adjustment in April 1999 and October 1999 for Irvine and Cerritos, respectively. Ground lease payments during 1997 on the Irvine and Cerritos properties totaled $6,700 and $9,800, respectively. The minimum future ground lease payments to be made for each of the next five years ending December 31, and thereafter, are as follows: 1998.................................................. $ 1,021,000 1999.................................................. 1,021,000 2000.................................................. 1,021,000 2001.................................................. 1,021,000 2002.................................................. 1,021,000 Thereafter............................................ 30,200,000
8. CAPITAL STOCK Shelf Registrations During 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $250,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase such securities of the Company (the "1997 Shelf Registration Statement"). The 1997 Shelf Registration statement was declared effective April 11, 1997 by the Securities and Exchange Commission. Availability under the 1997 Shelf Registration Statement at December 31, 1997 was $56,126,000. Subsequent to December 31, 1997, the Company filed a shelf registration statement on Form S-3 covering a maximum aggregate price of $300,000,000 in Common Stock, Preferred Stock, debt securities and warrants to purchase such securities. 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 "1996 Shelf Registration Statement"). 1997 Common Stock Offerings In January 1997, the Company completed a public offering of 2,000,000 shares of common stock (2,300,000 shares after exercise of overallotment option) under the 1996 Shelf Registration Statement at a price of $20.50 per share. Net proceeds from the offering totaled approximately $44,399,000 (net of fees and costs) and were used to acquire two industrial properties and to reduce outstanding indebtedness on the Company's revolving line of credit. In June 1997, the Company received net proceeds of approximately $42,224,000 (net of fees and costs) from the issuance of 2,131,700 shares of common stock under the 1997 Shelf Registration Statement (including proceeds from the issuance of 31,700 shares of common stock sold pursuant to the exercise of the underwriter's overallotment option) at a price of $21.00 per share. The Company used the proceeds to repay debt and for general corporate purposes. F-20 50 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In November 1997, the Company received net proceeds of approximately $93,372,000 (net of fees and costs) from the issuance of 4,776,300 shares of common stock under the 1997 Shelf Registration Statement (including proceeds from the issuance of 526,300 shares of common stock sold pursuant to the exercise of the underwriter's overallotment option) at a price of $20.75 per share. The Company used the proceeds to fund the purchase of acquisitions, repay indebtedness outstanding under the Company's line of credit and general corporate purposes. In December 1997, the Company received net proceeds of approximately $18,899,000 from the issuance of 874,317 shares of common stock under the 1997 Registration Statement at a price of $22.875. The Company used the proceeds to repay indebtedness outstanding under the Company's revolving line of credit and for general corporate purposes. 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 1996 Shelf Registration Statement 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. Concurrent with the public offering, all of the Company's common stock held by Santa Anita Realty Enterprises was sold to the public. Exchange of Debentures for Common Stock In December 1996, the Company issued 2,440,002 shares of common stock under the 1996 Shelf Registration Statement 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 During 1997, the Company issued 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 pursuant to an agreement entered in December 1996. The Class A Preferred Shares were issued under the 1996 Shelf Registration Statement. The net proceeds which totaled approximately $24,224,000 (net of fees and costs) were used to pay off a portion of a mortgage note, to purchase a portion of an industrial property portfolio, and for general corporate purposes. The Class A Preferred Shares are convertible into shares of 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 June 30, 1998. In May 1997, the Company entered into a second agreement with Five Arrows to issue 1,411,765 shares of Class B Senior Cumulative Convertible Preferred Stock (the "Class B Preferred Shares") at a price of $21.25. On July 18, 1997, the Company, pursuant to this agreement, issued 470,588 shares of Class B Preferred Shares raising net proceeds of $9,014,000 (net of fees and costs). The proceeds were used together with funds from other sources to acquire an industrial portfolio consisting of five industrial properties. On October 23, 1997, the Company, pursuant to this agreement issued 235,294 additional Class B Preferred Shares raising net proceeds of $4,824,000 (net of fees and costs). The net proceeds were used for general corporate purposes. On December 23, 1997, the Company issued the remaining 705,883 Class B Preferred F-21 51 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shares pursuant to the Five Arrows agreement and received net proceeds of $14,471,000 (net of fees and costs). The net proceeds were used to purchase a portion of an industrial property portfolio consisting of four industrial properties. The terms of the Class B Preferred Shares are substantially similar to those of the Class A Preferred Shares, except that (i) the liquidation preference of the Class B Preferred Shares is $21.25 per share (plus accumulated, accrued and unpaid dividends) and (ii) Five Arrows will not be entitled to designate any additional representatives to the Company's Board of Directors while it owns both the Class A Preferred Shares and the Class B Preferred Shares. 9. GAIN ON SALE OF REAL ESTATE In December 1997, the Company sold an apartment property located in Oregon consisting of 279 apartment units for $15,575,000 and recognized a gain on sale of $5,705,000. In April 1997, the Company sold its 7,000 square foot Corporate office in Newport Beach, California for $850,000 and recognized a loss on the sale of $111,000. The Company has relocated to a newly acquired 26,000 square foot facility also located in Newport Beach, California. 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. 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 and is included in accounts and other receivables in the Company's balance sheets. 10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share which have been restated to comply with Statement No. 128:
1997 1996 1995 --------------------------------------- --------------------------------------- ----------- WEIGHTED WEIGHTED AVERAGE AVERAGE EARNINGS SHARES EARNINGS EARNINGS SHARES EARNINGS EARNINGS (NUMERATOR) (DENOMINATOR) PER SHARE (NUMERATOR) (DENOMINATOR) PER SHARE (NUMERATOR) ----------- ------------- --------- ----------- ------------- --------- ----------- BASIC EPS Income available (loss attributable) to common stockholders............ $20,603,000 13,686,000 $1.51 $(118,000) 6,312,000 $(0.02) $8,403,000 ===== ====== EFFECT OF DILUTIVE SECURITIES Stock options............. 17,000 6,000 Restricted stock.......... 63,000 30,000 Limited partnership units................... 172,000 363,000 225,000 DILUTED EPS................ $20,775,000 14,129,000 $1.47 $(118,000) 6,573,000 $(0.02) $8,403,000 ===== ====== 1995 ------------------------- WEIGHTED AVERAGE SHARES EARNINGS (DENOMINATOR) PER SHARE ------------- --------- BASIC EPS Income available (loss attributable) to common stockholders............ 4,831,000 $1.74 ===== EFFECT OF DILUTIVE SECURITIES Stock options............. 1,000 Restricted stock.......... 28,000 Limited partnership units................... 140,000 DILUTED EPS................ 5,000,000 $1.68 =====
F-22 52 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shares of Senior Cumulative Convertible Preferred Stock, convertible into 2,763,116 shares of Common Stock were outstanding during 1997 but were not included in computing diluted earnings per share. Including these shares in the computation increases earnings per share $.01, and are therefore considered antidilutive. Convertible subordinated debentures convertible into 682,000, 775,000 and 3,037,000 shares of Common Stock were outstanding during 1997, 1996 and 1995, respectively but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 11. SELECTED QUARTERLY DATA (UNAUDITED) The following tables set forth the quarterly results of operations of the Company for the years ended December 31, 1997 and 1996:
1997 -------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- Revenues.............................. $14,813,000 $15,919,000 $18,457,000 $20,317,000 Income before gain on sale of real estate.............................. $ 3,082,000 $ 3,597,000 $ 4,179,000 $ 5,006,000 Gain (loss) on sale of real estate.... -- (111,000) -- $ 5,705,000 Income available to common shareholders........................ $ 3,082,000 $ 3,371,000 $ 3,904,000 $10,246,000 Earnings per share: Basic............................... $ .27 $ .27 $ .27 $ .62 Diluted............................. $ .26 $ .26 $ .27 $ .60
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 real estate......................... $ 293,000 $ 652,000 $ 1,289,000 $(2,426,000) Gain on sale of real estate........... -- -- 74,000 $ -- Income (loss) available to common shareholders........................ $ 293,000 $ 652,000 $ 1,363,000 $(2,426,000) Earnings (loss) per share: Basic............................... $ .06 $ .12 $ .18 $ (.32) Diluted............................. $ .06 $ .12 $ .17 $ (.31)
F-23 53 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------- BUILDING LAND AND AND BUILDING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT ----------- ------------ -------- ------------ ------------- (IN $000S) MULTIFAMILY PROPERTIES California Laguna Hills......... $ 4,679 $ 1,798 $ 5,981 $ 436 Santa Ana(c)......... 11,703 6,985 18,581 1,501 Santa Ana(c)......... -- 1,488 5,764 845 Covina............... 1,284 558 1,466 72 Diamond Bar.......... 8,700 3,958 8,048 362 San Dimas............ 3,661 1,695 3,520 132 West Covina.......... 8,999 3,856 9,848 464 San Dimas............ 5,788 2,390 6,123 281 San Dimas............ 1,184 432 1,312 116 Ontario.............. 6,616 2,273 5,626 379 Ontario.............. 7,594 2,654 5,671 428 San Dimas............ 5,600 1,306 5,448 131 Ontario.............. 1,807 322 2,232 98 Ontario.............. 2,923 385 3,223 123 Ontario.............. 6,870 1,749 4,525 94 Escondido............ 8,045 2,064 8,075 103 Escondido............ 10,925 4,108 11,059 301 Riverside............ 9,400 2,394 11,064 -- Washington Burien(e)............ 14,625 1,419 7,176 33 Burien............... -- 956 4,836 23 Everett(e)........... -- 3,254 7,171 55 Everett(e)........... -- 3,181 6,994 30 Kent................. 7,751 2,635 10,709 392 Federal Way.......... -- 2,876 9,646 974 -------- -------- -------- ------- Total Multifamily.... 128,154 54,736 164,098 7,373 -------- -------- -------- ------- INDUSTRIAL PROPERTIES California Baldwin Park......... 11,650 999 27,878 (113) Garden Grove......... 5,300 4,230 4,564 392 Ontario.............. 6,724 5,310 10,801 744 Rancho Cucamonga..... 3,800 1,610 8,196 592 Rancho Cucamonga(f).. -- 1,666 3,367 492 Vista................ 7,800 3,465 7,896 476 Garden Grove(f)...... -- 3,905 3,016 451 Santa Fe Springs(g)......... 2,475 1,725 2,041 66 La Mirada(f)......... -- 1,541 2,057 255 Aliso Viejo(g)....... 4,425 2,760 4,142 118 Yorba Linda(g)....... 4,125 2,713 3,625 243 MAXIMUM LIFE ON WHICH DEPRECIATION GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF PERIOD IN -------------------------------------------------------------- INCOME BUILDINGS STATEMENT AND ACCUMULATED DATE OF DATE IS DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED ----------- -------- ------------ -------- ------------ ------------ -------- ------------- (IN $000S) MULTIFAMILY PROPERTIES California Laguna Hills......... $ 1,795 $ 6,420 $ 8,215 $ 565 1987 1994 40 Years Santa Ana(c)......... 6,985 20,082 27,067 6,371 1972 1994 33 Years Santa Ana(c)......... 1,488 6,609 8,097 643 1990 1994 40 Years Covina............... 569 1,527 2,096 98 1978-79 1995 40 Years Diamond Bar.......... 4,034 8,334 12,368 508 1979 1995 40 Years San Dimas............ 1,727 3,620 5,347 227 1981 1995 40 Years West Covina.......... 3,930 10,238 14,168 617 1981 1995 40 Years San Dimas............ 2,436 6,358 8,794 390 1981 1995 40 Years San Dimas............ 440 1,420 1,860 87 1981 1995 40 Years Ontario.............. 2,316 5,962 8,278 369 1983 1995 40 Years Ontario.............. 2,705 6,048 8,753 392 1982 1995 40 Years San Dimas............ 1,331 5,554 6,885 336 1984 1995 40 Years Ontario.............. 326 2,326 2,652 142 1983 1995 40 Years Ontario.............. 391 3,340 3,731 217 1985 1995 40 Years Ontario.............. 1,749 4,619 6,368 149 1984 1996 40 Years Escondido............ 2,064 8,178 10,242 152 1985 1997 30 Years Escondido............ 4,182 11,286 15,468 203 1986 1997 30 Years Riverside............ 2,394 11,064 13,458 9 1987 1997 30 Years Washington Burien(e)............ 1,419 7,209 8,628 1,414 1987 1994 37 Years Burien............... 956 4,859 5,815 951 1987 1994 37 Years Everett(e)........... 3,254 7,226 10,480 1,960 1986 1994 29 Years Everett(e)........... 3,181 7,024 10,205 1,892 1988 1994 29 Years Kent................. 2,635 11,101 13,736 1,055 1987 1994 40 Years Federal Way.......... 2,896 10,600 13,496 704 1985, 1986 1995 40 Years -------- -------- -------- ------- Total Multifamily.... 55,203 171,004 226,207 19,451 -------- -------- -------- ------- INDUSTRIAL PROPERTIES California Baldwin Park......... 8,155 20,609 28,764 8,134 1983, 1985 1994 30 Years Garden Grove......... 4,230 4,956 9,186 545 1979 1994 40 Years Ontario.............. 5,310 11,545 16,855 1,193 1991 1994 40 Years Rancho Cucamonga..... 1,610 8,788 10,398 1,141 1987, 1990 1994 40 Years Rancho Cucamonga(f).. 1,666 3,859 5,525 358 1981 1994 40 Years Vista................ 3,465 8,372 11,837 1,152 1990 1994 40 Years Garden Grove(f)...... 3,905 3,467 7,372 240 1986 1996 40 Years Santa Fe Springs(g)......... 1,725 2,107 3,832 87 1981 1996 40 Years La Mirada(f)......... 1,541 2,312 3,853 158 1975 1996 30 Years Aliso Viejo(g)....... 2,760 4,260 7,020 188 1988 1996 40 Years Yorba Linda(g)....... 2,713 3,868 6,581 165 1987-89 1996 40 Years
F-24 54 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) DECEMBER 31, 1997
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------- BUILDING LAND AND AND BUILDING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT ----------- ------------ -------- ------------ ------------- (IN $000S) San Marcos(g)........ 2,700 1,827 2,907 74 Escondido(g)......... 6,300 3,782 6,614 257 Hayward(f)........... -- 2,239 5,107 708 San Marcos(f)........ -- 825 1,838 131 San Bernardino(g).... 4,475 1,147 5,320 250 City of Industry(d)(f)..... -- 5,774 2,155 4,026 San Diego(f)......... -- -- 7,287 320 Santa Ana(f)......... -- 1,924 7,231 208 Santa Ana(f)......... -- 1,299 4,257 145 Woodland(f).......... -- 1,824 11,002 8 Chino(j)............. 34,000 2,208 8,483 120 Downey(j)............ -- 3,568 8,027 39 Fontana(j)........... -- 2,801 11,422 21 Fremont(j)........... -- 4,985 12,034 24 Rancho Bernardo(j)... -- 4,737 9,467 30 San Diego(k)......... -- 5,518 10,581 1,443 Concord.............. -- 1,593 6,054 15 Anaheim.............. -- 1,589 5,333 40 Sacramento........... -- 2,642 12,928 86 Santa Clara.......... -- 6,279 14,694 11 Sunnyvale............ -- 2,864 11,482 -- Fullerton............ -- 1,967 7,141 -- Anaheim.............. -- 2,509 3,630 -- Anaheim.............. -- 2,069 7,515 7 Fullerton............ -- 1,197 4,336 -- Sacramento........... -- 2,087 6,637 -- Sacramento........... 2,879 2,788 6,739 -- Anaheim.............. -- 946 2,376 -- Irvine............... -- -- 7,020 36 Cerritos............. -- -- 8,485 3 Montebello........... -- 2,338 2,471 -- Sacramento........... -- 1,216 3,500 -- Hayward(h)........... 12,000 2,062 4,617 80 Hayward(h)........... -- 653 1,462 -- Hayward(h)........... -- 653 1,462 10 Hayward(h)........... -- 2,614 5,847 5 Washington Seattle.............. -- 1,808 4,637 642 Algona(f)............ -- 2,490 7,002 -- Tukwila.............. 11,421 6,684 10,677 1,497 -------- -------- -------- ------- Total Industrial..... 120,074 123,430 337,360 13,952 -------- -------- -------- ------- Total Portfolio.. $248,228(k) $178,166 $501,458 $21,325 ======== ======== ======== ======= MAXIMUM LIFE ON WHICH DEPRECIATION IN GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF PERIOD ----------------------------------------------------- INCOME BUILDINGS STATEMENT AND ACCUMULATED DATE OF DATE IS DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED ----------- -------- ------------ -------- ------------ ------------ -------- ------------- (IN $000S) San Marcos(g)........ 1,827 2,981 4,808 146 1988 1996 40 Years Escondido(g)......... 3,782 6,871 10,653 321 1988-92 1996 40 Years Hayward(f)........... 2,239 5,815 8,054 381 1972-74 1996 30 Years San Marcos(f)........ 825 1,969 2,794 104 1985 1996 30 Years San Bernardino(g).... 1,147 5,570 6,717 235 1980 1996 30 Years City of Industry(d)(f)..... 5,774 6,181 11,955 303 n/a 1996 n/a San Diego(f)......... -- 7,607 7,607 254 1981 1996 30 Years Santa Ana(f)......... 1,924 7,439 9,363 225 1974, 1976 1997 40 Years Santa Ana(f)......... 1,299 4,402 5,701 133 1974, 1976 1997 40 Years Woodland(f).......... 1,824 11,010 12,834 234 n/a 1997 40 Years Chino(j)............. 2,208 8,603 10,811 124 1988 1997 30 Years Downey(j)............ 3,568 8,066 11,634 114 1988 1997 30 Years Fontana(j)........... 2,801 11,443 14,244 161 1989 1997 30 Years Fremont(j)........... 4,985 12,058 17,043 178 1980 1997 30 Years Rancho Bernardo(j)... 4,737 9,497 14,234 145 1990 1997 30 Years San Diego(k)......... 5,518 12,024 17,542 123 1980, 1997 1997 30 Years Concord.............. 1,593 6,069 7,662 83 1989 1997 30 Years Anaheim.............. 1,589 5,373 6,962 7 1972 1997 40 Years Sacramento........... 2,642 13,014 15,656 14 1972 1997 40 Years Santa Clara.......... 6,279 14,705 20,984 16 1972 1997 40 Years Sunnyvale............ 2,864 11,482 14,346 12 1972 1979 40 Years Fullerton............ 1,967 7,141 9,108 40 1980 1997 30 Years Anaheim.............. 2,509 3,630 6,139 4 1961 1997 40 Years Anaheim.............. 2,069 7,522 9,591 31 1951 1997 40 Years Fullerton............ 1,197 4,336 5,533 5 1979 1997 40 Years Sacramento........... 2,087 6,637 8,724 11 1988, 1989 1997 30 Years Sacramento........... 2,788 6,739 9,527 11 1988 1997 30 Years Anaheim.............. 946 2,376 3,322 2 1980 1997 30 Years Irvine............... -- 7,056 7,056 4 1979 1997 40 Years Cerritos............. -- 8,488 8,488 7 1985 1997 30 Years Montebello........... 2,338 2,471 4,809 2 1985 1997 30 Years Sacramento........... 1,216 3,500 4,716 4 1988 1997 30 Years Hayward(h)........... 2,062 4,697 6,759 34 1974 1997 40 Years Hayward(h)........... 653 1,462 2,115 8 1973 1997 40 Years Hayward(h)........... 653 1,472 2,125 9 1973 1997 40 Years Hayward(h)........... 2,614 5,852 8,466 37 1973 1997 40 Years Washington Seattle.............. 1,808 5,279 7,087 1,741 1968, 1981 1994 24 Years Algona(f)............ 2,490 7,002 9,492 177 1989 1997 30 Years Tukwila.............. 6,684 12,174 18,858 896 1975-1979 1995 40 Years -------- -------- -------- ------- Total Industrial..... 130,586 344,156 474,742 19,697 -------- -------- -------- ------- Total Portfolio.. $185,789 $515,160 $700,949(a) $39,148(b) ======== ======== ======== =======
F-25 55 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) (a) The changes in total real estate for the years ended December 31, 1997, 1996, and 1995 are as follows:
1997 1996 1995 -------- -------- -------- Balance at beginning of period............. $379,540 $300,153 $210,596 Acquisition of Baldwin Park................ -- -- 7,228 Acquisition of PGP Inland portfolio........ -- -- 73,718 Sale of land and building to existing tenant................................... -- (8,055) -- Sale of Texas multifamily portfolio........ -- -- (24,106) Acquisitions and improvements.............. 332,324 87,442 32,717 Sale of Oregon multifamily property........ (10,915) -- -- -------- -------- -------- Balance at end of period................... $700,949 $379,540 $300,153 ======== ======== ========
(b) The changes in accumulated depreciation for the years ended December 31, 1997, 1996 and 1995 are as follows: Balance at beginning of period............. $28,844 $21,461 $17,139 Additions -- depreciation expense.......... 11,809 8,236 5,908 Retirements -- Texas multifamily portfolio................................ -- -- (1,586) Retirement to existing tenant.............. -- (603) -- Retirement of Oregon multifamily property................................. (1,505) -- -- Other...................................... -- (250) -- -------- -------- -------- Balance at end of period................... $39,148 $28,844 $21,461 ======== ======== ========
(c) These properties collateralize borrowings under the same mortgage note payable totaling $11,703,000. (d) A portion of this property is currently under development. (e) These properties collateralize borrowings under the same mortgage note payable totaling $14,625,000. (f) These properties collateralize borrowings under the Company's revolving bank line of credit that has an outstanding balance of $17,200,000 as of December 31, 1997. (g) These properties collateralize borrowings under the same mortgage note payable totaling $24,500,000. (h) These properties collateralize borrowings under the same mortgage note payable totaling $12,000,000. (i) These properties collateralize borrowings under the same mortgage note payable totaling $4,625,000. (j) These properties collateralize borrowings under the same mortgage note payable totaling $34,000,000. (k) Excludes construction loans of $18,425,000. F-26 56 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., Golden 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 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+ 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+
F-27 57 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.**** 10.35 Investment Agreement, dated May 27, 1997, between Company and Five Arrows Realty Securities L.L.C.++++. 10.36 Articles Supplementary classifying 1,411,765 Shares of Preferred Stock as Class B Senior Cumulative Convertible Preferred Stock.++++ 10.37 Form of Amended and Restated Agreement and Waiver, between the Company and Five Arrows Realty Securities L.L.C.++++ 10.38 Rights Agreement, dated December 11, 1997, between the Company and Harris Trust Company of California, as Rights Agent.+++++ 10.39 Form of Change of Control Agreement. 10.40 Agreement of Limited Partnership of PGP Northern Industrial, L.P. 10.41 Agreement of Limited Partnership of Morning View Terrace-PGP, L.P. 10.42 Agreement of Limited Partnership Terrace Gardens -- PGP, L.P. 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 of the Company for the year ended December 31, 1996. + 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. ++++ Incorporated by reference form the Company's Current Report on Form 8-K filed on June 26, 1997. +++++ Incorporated by reference from the Company's registration statement on Form 8-A filed on December 17, 1997.
F-28 EX-3.2 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF PACIFIC GULF PROPERTIES INC. 2 AMENDED AND RESTATED BYLAWS OF PACIFIC GULF PROPERTIES INC. TABLE OF CONTENTS
Page ---- ARTICLE I MEETING OF STOCKHOLDERS.......................................................... 1 1.01. PLACE................................................................................. 1 1.02. ANNUAL MEETING........................................................................ 1 1.03. MATTERS TO BE CONSIDERED AT ANNUAL MEETING ........................................... 1 1.04. SPECIAL MEETINGS...................................................................... 3 1.05. NOTICE................................................................................ 3 1.06. SCOPE OF NOTICE....................................................................... 3 1.07. QUORUM................................................................................ 3 1.08. VOTING................................................................................ 3 1.09. PROXIES............................................................................... 4 1.10. CONDUCT OF MEETING.................................................................... 4 1.11. TABULATION OF VOTES................................................................... 4 1.12. INFORMAL ACTION BY STOCKHOLDERS....................................................... 4 1.13. VOTING BY BALLOT...................................................................... 5 ARTICLE II DIRECTORS....................................................................... 5 2.01. GENERAL POWERS........................................................................ 5 2.02. NUMBER, TENURE AND QUALIFICATION...................................................... 5 2.03. NOMINATION OF DIRECTORS............................................................... 5 2.04. ANNUAL AND REGULAR MEETINGS........................................................... 7 2.05. SPECIAL MEETINGS...................................................................... 7 2.06. NOTICE................................................................................ 7 2.07. QUORUM................................................................................ 7 2.08. VOTING................................................................................ 7 2.09. CONDUCT OF MEETINGS................................................................... 8 2.10. RESIGNATION........................................................................... 8 2.11. REMOVAL OF DIRECTORS.................................................................. 8 2.12. VACANCIES............................................................................. 8 2.13. INFORMAL ACTION BY DIRECTORS.......................................................... 8 2.14. COMPENSATION.......................................................................... 8
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Page ---- ARTICLE III COMMITTEES..................................................................... 9 3.01. NUMBER, TENURE AND QUALIFICATION...................................................... 9 3.02. DELEGATION OF POWER................................................................... 9 3.03. QUORUM AND VOTING .................................................................... 9 3.04. CONDUCT OF MEETING.................................................................... 9 3.05. INFORMAL ACTION BY COMMITTEES......................................................... 9 ARTICLE IV OFFICERS........................................................................ 10 4.02. REMOVAL............................................................................... 10 4.03. VACANCIES............................................................................. 10 4.04. CHAIRMAN OF THE BOARD................................................................. 10 4.05. PRESIDENT............................................................................. 10 4.06. VICE PRESIDENTS....................................................................... 11 4.07. SECRETARY............................................................................. 11 4.09. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS........................................ 11 4.10. SUBORDINATE OFFICERS.................................................................. 12 4.11. SALARIES.............................................................................. 12 ARTICLE V STOCK............................................................................ 12 5.01. CERTIFICATES FOR STOCK................................................................ 12 5.02. TRANSFERS............................................................................. 12 5.03. RECORD DATES AND CLOSING OF TRANSFER BOOKS............................................ 12 5.04. STOCK LEDGER.......................................................................... 13 5.05. CERTIFICATION OF BENEFICIAL OWNER..................................................... 13 5.06. LOST STOCK CERTIFICATES............................................................... 13 ARTICLE VI FINANCE......................................................................... 13 6.01. CHECKS, DRAFTS, ETC................................................................... 13 6.02. ANNUAL STATEMENT OF AFFAIRS........................................................... 14 6.03. FISCAL YEAR........................................................................... 14 6.04. DIVIDENDS............................................................................. 14 6.05. CONTRACTS............................................................................. 14 ARTICLE VII SUNDRY PROVISIONS.............................................................. 14 7.01. BOOKS AND RECORDS..................................................................... 14 7.02. CORPORATE SEAL........................................................................ 14 7.03. BONDS................................................................................. 14 7.04. VOTING UPON SHARES IN OTHER CORPORATIONS.............................................. 15 7.05. MAIL.................................................................................. 15 7.06. EXECUTION OF DOCUMENTS................................................................ 15 7.07. AMENDMENTS............................................................................ 15
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Page ---- ARTICLE VIII INDEMNIFICATION............................................................... 15 8.01. INDEMNIFICATION....................................................................... 15 8.02. PROCEDURE............................................................................. 15 8.03. EXCLUSIVITY, ETC...................................................................... 16 8.04. SEVERABILITY; DEFINITIONS............................................................. 16
iii 5 ARTICLE I MEETING OF STOCKHOLDERS 1.01. PLACE. All meetings of the holders of the issued and outstanding capital stock of the Corporation (the "Stockholders") shall be held at the principal executive office of the Corporation or such other place within the United States as shall be stated in the notice of the meeting. 1.02. ANNUAL MEETING. An annual meeting of the Stockholders for the election of Directors and the transaction of such other business as properly may be brought before the meeting shall be held at 10:00 a.m. on the second Wednesday in May of each year or at such other date and time as may be fixed by the Board of Directors. If the date fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If no annual meeting is held on the date designated, a special meeting in lieu thereof may be held, and such special meeting shall have, for purposes of these Bylaws other otherwise, all the force and effect of an annual meeting. Any and all references hereafter in these Bylaws to an annual meeting or to annual meetings shall be deemed to refer also to any special meeting(s) in lieu thereof. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. 1.03. MATTERS TO BE CONSIDERED AT ANNUAL MEETING. (a) At an annual meeting of Stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the annual meeting (i) by, or at the direction of, a majority of the Board of Directors, or (ii) by any holder of record (both as of the time notice of such proposal is given by the Stockholder as set forth below and as of the record date for the annual meeting in question) of any shares of the Corporation's capital stock entitled to vote at such annual meeting who complies with the procedures set forth in this Section 1.03. For a proposal to be properly brought before an annual meeting by a Stockholder, other than a stockholder proposal included in the Corporation's proxy statement pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, the Stockholder must have given timely notice thereof in writing to the Secretary of the corporation, and such Stockholder or his or her representative must be present in person at the annual meeting. For the first annual meeting following the initial public offering of common stock of the Corporation, a Stockholder's notice shall be timely if delivered to, or mailed and received at, the principal executive office of the corporation not later them the close of business on the 20th calendar day (or if that day is not a business day for the corporation, on the next business day) following the date on which notice of the date of the first annual meeting is mailed or otherwise transmitted to Stockholders. For all subsequent annual meetings, a Stockholders notice shall be timely if delivered to, or mailed and received at, the principal executive offices of the corporation (A) not less than 75 days nor more than 180 days prior to the anniversary date of the immediately preceding annual meeting of Stockholders or special meeting in lieu thereof (the "Anniversary Date") or (B) in the event that the annual meeting of Stockholders is called for a date more than 7 calendar days prior to the Anniversary Date not later than the close of business on the 20th 1 6 calendar day (or if that day is not a business day for the Corporation on the next succeeding business day) following the date on which notice of the date of such meeting was mailed to Stockholders. (b) A Stockholder's notice to the Secretary shall set forth as to each matter the Stockholder proposes to bring before the annual meeting (i) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's stock transfer books, of the Stockholder proposing such business and of the beneficial owners (if any) of the stock registered in such Stockholder's name and the name and address of other Stockholders known by such Stockholder to be supporting such proposal on the date of such Stockholder's notice, (iii) the class and number of shares of the Corporation's capital stock which are beneficially owned by the Stockholder and such beneficial owners (if any) on the date of such Stockholder's notice and by any other Stockholders known by such Stockholder to be supporting such proposal on the date of such Stockholder's notice, and (iv) any financial interest of the Stockholder or of any such beneficial owner in such proposal. (c) If the Board of Directors, or a designated committee thereof, determines that any Stockholder proposal was not timely made in accordance with the terms of this section 1.03, such proposal shall not be presented for action at the annual meeting in question. If the Board of Directors, or a designated committee thereof, determines that the information, provided in a Stockholder's notice does not satisfy the informational requirements of this section in any material respect, the Secretary of the Corporation shall promptly notify such Stockholder of the deficiency in the notice. Such Stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within the period of time, not to exceed five days from the date such deficiency notice is given to the Stockholder, determined by the Board of Directors or such committee. If the deficiency is not cured within such Period, or if the Board of Directors or such committee determines that the additional information provided by the Stockholder, together with the information previously provided, does not satisfy the requirements of this Section 1.03 in any material respect, then such proposal shall not be presented for action at the annual meeting in question. (d) Notwithstanding the procedure set forth in the preceding paragraph, if neither the Board of Directors nor such committee makes a determination as to the validity of any Stockholder proposal as set forth above, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the Stockholder proposal was made in accordance with the terms of this Section 1.03. If the presiding officer determines that a Stockholder proposal was made in accordance with the terms of this Section 1.03, the presiding officer shall so declare at the annual meeting. If the presiding officer determines that a Stockholder proposal was not made in accordance with the provisions of this Section 1.03, the presiding officer shall so declare at the annual meeting and such proposal shall not be acted upon at the annual meeting. (e) This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, Directors and committees of the Board of Directors, but 2 7 in connection with such reports, no new business shall be acted upon at such annual meeting except in accordance with the provisions of this Section 1.03. 1.04. SPECIAL MEETINGS. The Chairman of the Board, the President or a majority of the Board of Directors may call special meetings of the Stockholders. Special meetings of Stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to cast 45% or more of the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. The date, time, place and record date for any special meeting, including a special meeting called at the request of Stockholders, shall be established by the Board of Directors or officer calling the same. 1.05. NOTICE. Not less than 10 nor more than 90 days before the date of every meeting of Stockholders, written or printed notice of such meeting shall be given to each Stockholder entitled to vote or entitled to notice by statute, stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose or purposes for which the meeting is called. Notice is given to a Stockholder when it is personally delivered to him, left at his residence or usual place of business or mailed to him at his address as it appears in the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he before or after the meeting signs a waiver of the notice which in filed with the records of stockholder meetings or is present at the meeting in person or by proxy. 1.06. SCOPE OF NOTICE. No business shall be transacted at a special meeting of Stockholders except that specifically designated in the notice of the meeting. Any business of the Corporation may be transacted at the annual meeting without being specifically designated in the notice, except such business as is required by statute to be stated in such notice. 1.07. QUORUM. At any meeting of Stockholders, the presence in person or by proxy of Stockholders entitled to cast a majority of the votes shall constitute a quorum; but this Section shall not affect any requirement under any statute or the Articles of Incorporation of the Corporation, as amended or restated (the "Charter"), for the vote necessary for the adoption of any measure. If, however, a quorum is not present at any meeting of the Stockholders, the Stockholders present in person or by proxy shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum is present and the meeting so adjourned may be reconvened without further notice. At any adjourned meeting at which a quorum in present, any business may be transacted that might have been transacted at the meeting as originally notified. The Stockholders present at a meeting which has been duly called and convened and at which a quorum is present at the time counted may continue to transact business until adjournment, notwithstanding the withdrawal of enough Stockholders to leave less than a quorum. 1.08. VOTING. A majority of the votes cast at a meeting of Stockholders duly called and at which a quorum is present shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, unless more than a majority of the votes cast is specifically required by statute, the Charter or these Bylaws, and except that a plurality of all the 3 8 votes cast at a meeting at which a quorum is present is sufficient to elect a director. Unless otherwise provided by statute, the Charter or these Bylaws, each outstanding share (a "Share") of capital stock of the Corporation (the "Stock"), regardless of class, shall be entitled to one vote upon each matter submitted to a vote at a meeting of Stockholders. Pursuant to Section 3-702 of the Maryland General Corporation Law, any and all acquisitions of Shares of Stock are hereby exempted from the provisions of Title 3, Subtitle 7 of the Maryland General Corporation Law, which relates to voting rights of certain control shares. Shares of its own Stock directly or indirectly-owned by the Corporation shall not be voted in any meeting and shall not be counted in determining the total number of outstanding Shares entitled to vote at any given time, but Shares of its own voting Stock held by it in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding Shares at any Driven time. 1.09. PROXIES. A Stockholder may vote the shares owned of record by him or her, either in person or by proxy executed in writing by the Stockholder or by his or her duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. 10. CONDUCT OF MEETING. The Chairman of the Board or, in the absence of the Chairman, the President, or, in the absence of the Chairman, President and Vice Presidents, a presiding officer elected at the meeting, shall preside over meetings of the Stockholders. The Secretary of the Corporation, or, in the absence of the Secretary and Assistant Secretaries, the person appointed by the presiding officer of the meeting shall act as secretary of such meeting. 1.11. TABULATION OF VOTES. At any annual or special meeting of Stockholders, the presiding officer shall be authorized to appoint a teller for such meeting (the "Teller"). The Teller may, but need not, be an officer or employee of the Corporation. The Teller shall be responsible for tabulating or causing to be tabulated shares voted at the meeting and reviewing or causing to be reviewed all proxies. In tabulating votes, the Teller shall be entitled to rely in whole or in part on tabulations and analyses made by personnel of the corporation, its counsel, its transfer agent, its registrar or such other organizations that are customarily employed to provide such services. The Teller shall be authorized to determine the legality and sufficiency of all votes cast and proxies delivered under the Corporation's Charter, Bylaws and applicable law. The presiding officer may review all determinations made by the Teller hereunder, and in doing so the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the Teller. 1.12. INFORMAL ACTION BY STOCKHOLDERS. An action required or permitted to be taken at a meeting of Stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by all the Stockholders entitled to vote on the subject matter thereof and any other Stockholders entitled to notice of a meeting of Stockholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such consents and waivers are filed with the minutes of proceedings of the Stockholders. Such consents and waivers may be signed by different Stockholders on separate counterparts. 4 9 1.13. VOTING BY BALLOT. Voting on any question or in any election may be via voce unless the presiding officer shall order or any Stockholder shall demand that voting be by ballot. ARTICLE II DIRECTORS 2.01. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under the authority of the Board of Directors, except as conferred on or reserved to the Stockholders by statute, the Charter or these by-laws. 2.02. NUMBER, TENURE AND QUALIFICATION. The number of Directors of the Corporation shall be that number set forth in the Charter or such other number as malt be designated from time to time by resolution of a majority of the entire-Board of Directors; provided, however, that the number of Directors shall never be more than 11 nor less than the number required by Section 2-402 of the Maryland General Corporation Law, as amended from time to time, and further provided that the tenure of office of a Director shall not be affected by any decrease in the number of Directors. Each Director shall serve for the term set forth in the Charter and until his or her successor is elected and qualified. 2.03. NOMINATION OF DIRECTORS. (a) Nominations of candidates for election as Directors of the Corporation fit any annual meeting of Stockholders may be made (i) by, or at the direction of, a majority of the Board of Directors or (ii) by any holder of record (both as of the time notice of such nomination is given by the Stockholder as set forth below and as of the record date for the annual meeting in question) of any shares of the Corporation's capital stock entitled to vote at such meeting who complies with the procedures set forth in this Section 2.04. Any Stockholder who seeks to make such a nomination, or its representative, must be present in person at the annual meeting. Only persons nominated in accordance with the procedures set forth in this Section 2.03 shall be eligible for election as Directors at an annual meeting of Stockholders. (b) Nominations, other than those made by, or at the direction of, the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 2.03. For the first annual meeting of the Corporation following the initial public offering of common stock of the Corporation, notice shall be timely if delivered to, or mailed and received at, the principal executive office of the corporation not later than the close of business on 5 10 the 20th calendar day (or if that day is not a business day for the corporation, the next business day) following the date on which notice of the first annual meeting is mailed or otherwise transmitted to Stockholders. For all subsequent annual meetings of the Corporation, a stockholder's notice shall be timely if delivered to, or mailed and received at, the principal executive offices of the Corporation (i) not less than 75 days nor more than 180 days prior to the Anniversary Date or (ii) in the event that the annual meeting of Stockholders is called for a date more than 7 calendar days prior to the Anniversary Date, not later than the close of business on the 20th calendar day (or if that day is not a business day for, the Corporation, on the next succeeding business day) following the date on which notice of the date of such meeting was mailed to Stockholders. (c) A Stockholder's notice of nomination shall set forth as to each person the Stockholder proposes to nominate for election as a Director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person for the past five years; (iii) the class and number of shares of the Corporation's capital stock which are beneficially owned by such person on the date of such notice; (iv) such nominee's written consent to be named in the proxy statement as a nominee and to serve as a Director if elected, and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as may be deemed necessary or desirable by the Corporation's counsel, in the exercise of his or her discretion. Notice by a Stockholder shall, in addition to the above-referenced information set forth as to the Stockholder giving the notice (A) the name and address, as they appear on the Corporation's stock transfer, books, of such Stockholder and of the beneficial owners (if any) of the stock registered in such Stockholder's name; (B) the name and address of other stockholders known by such Stockholder to be supporting such nominees on the date of such Stockholder's notice; (C) the class and number of shares of the Corporation's capital stock which are beneficially owned by such Stockholder and such beneficial owners (if any) on the date of such Stockholder notice; and (D) the class and number of shares of the Corporation's capital stock which are beneficially owned by any other Stockholders known by such Stockholder to be supporting such nominees on the date of such Stockholder notice. At the request of the Board of Directors, any person nominated by or at the direction of the Board of Directors for election as a Director at an annual meeting shall furnish to the Secretary of the Corporation that information which would be required to be set forth in a stockholder's notice of nomination of such nominee. (d) No person not nominated by the Board of Directors shall be elected by the Stockholders as a Director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.03. If the Board of Directors, or a designated committee thereof, determines that a nomination made by any Stockholder was not timely made in accordance with the terms of this Section, such nomination shall not be considered at the annual meeting in question. If the Board of Directors, or a designated committee thereof, determines that the information provided in a Stockholders notice does not satisfy the informational requirements of, this Section 2.03 in any material respect, the secretary of the, Corporation shall promptly notify such Stockholder of the deficiency in the notice. Such Stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within the period of time, not to exceed five days from the date such deficiency notice is given to such Stockholder, determined by the Board of Directors or such committee. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by such Stockholder, together with the information previously provided, does not satisfy the requirements of this Section 2.03 in any material respect, such nomination shall not be considered at the annual meeting in question. (e) Notwithstanding the procedures get forth in the preceding paragraph, if neither the Board of Directors nor a designated committee thereof makes a determination as to the validity of 6 11 any nominations by any Stockholder as set forth above, the presiding officer of the Stockholders meeting shall determine and declare at the Stockholders meeting whether a nomination was made in accordance with the terms of this Section 2.03. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section 2.03, such nomination shall be disregarded, and the Board of Directors shall make all Director nominations on behalf of the Corporation. 2.04. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors may be held immediately after and at the same place as the annual meeting of Stockholders, or at such other time and place, either within or without the State of Maryland, as is selected by resolution of the Board of Directors, and no notice other than this Bylaw or such resolution shall be necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolutions. 2.05. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President or a majority of the Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. 2.06. NOTICE. Notice of any special meeting to be provided herein shall be given by written notice delivered personally, telegraphed or telecopied to each Director at his or her business or residence at least 24 hours, or by mail at least five days, prior to the meeting. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be specified in the notice, unless specifically required by statute, the Charter or these Bylaws. 2.07. QUORUM. A majority of the Board of Directors then in office shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. If less than a majority of the Board of Directors is present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. 2.08. VOTING. The act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute, the Charter or these Bylaws. 2.09. CONDUCT OF MEETINGS. All meetings of the Board of Directors shall be called to order and presided over by the Chairman of the Board, or in the absence of the Chairman of the Board, by the President (if a member of the Board of Directors) or, in the absence of the Chairman of the Board and the President, by a member of the Board of Directors selected by the members present. The Secretary of the Corporation, or in the absence of the Secretary, any, Assistant Secretary, shall act as secretary at all meetings of the Board of Directors, and in the absence of the Secretary and Assistant Secretaries, the presiding officer of the meeting shall designate any person to act as secretary of the meeting. Members of the Board of Directors may participate in meetings of the Board of Directors by conference telephone or similar 7 12 communications equipment by means of which all Directors participating in the meeting can hear each other at the same time, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for all purposes of these Bylaws. 2.10. RESIGNATION. Any Director may resign from the Board of Directors or any committee thereof at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of the receipt of notice of such resignation by the President or the Secretary. 2.11. REMOVAL OF DIRECTORS. Any director or the entire Board of Directors may, be removed only in accordance with the provisions of the Charter. 2.12. VACANCIES. The Stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a Director. Furthermore any vacancy occurring in the Board of Directors for any cause other than by reason of an increase in the number of directors may be filled by a majority vote of the remaining Directors, although such majority is less than a quorum. Any vacancy occurring in the Board of Directors by reason of an increase in the number of directors may be filled by a majority vote of the entire Board of Directors. A Director elected by the Board of Directors to fill a vacancy shall hold office until the next annual meeting of Stockholders at which the term of the class of Directors to which such Director is elected expires or until his or her successor is elected and qualified. 2.13. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to between at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by all of the Directors and such written consent is filed with the minutes of the Board of Directors. Consents may be signed by different Directors on separate counterparts. 2.14. COMPENSATION. An annual fee for services and payment for expenses of attendance at each meeting of the Board of Directors, or of any committee thereof, may be allowed to any Director by resolution of the Board of Directors. ARTICLE III COMMITTEES 3.01. NUMBER, TENURE AND QUALIFICATION. The Board of Directors may appoint from among its members an Executive Committee and other committees, composed of two or more Directors, to serve at the pleasure of the Board of Directors. 3.02. DELEGATION OF POWER. The Board of Directors may delegate to those committees in the intervals between meetings of the Board of Directors any of the powers of the Board of Directors to manage the business and affairs of the Corporation, except those powers which the Board of Directors is specifically prohibited from delegating pursuant to section 2-411 of the Maryland General Corporation Law. 8 13 3.03. QUORUM AND VOTING. A majority of the members of any committee shall constitute a quorum for the transaction of business by such committee, and the act of a majority of the quorum shall constitute the act of the committee. 3.04. CONDUCT OF MEETING. Each committee shall designate a presiding officer of Such committee, and if not present at a particular meeting, the committee shall select a presiding officer for such meeting. Members of any committee may participate in meetings of such committee by conference telephone or similar communications equipment by means of which all Directors participating in the meeting can hear each other at the same time, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for all purposes of these Bylaws. Each committee shall keep minutes of its meetings, and report the results of any proceedings at the next succeeding annual or regular meeting of the Board of Directors. 3.05. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may, be taken without a meeting, if a written consent to such action is signed by all members of the committee and such written consent is filed with the minutes of proceedings of such committee. Consents may be signed by different matters on separate counterparts. ARTICLE IV OFFICERS 4.01. POWERS AND DUTIES. The Corporation shall have a President, a Secretary and Treasurer. It may also have a Chairman of the Board. The Board of Directors shall designate who shall serve as chief executive officer, who shall have general supervision of the business and affairs of the Corporation, and may designate a chief operating officer, who shall have supervision of the operations of the Corporation. In the absence of the Chairman of the Board, or if there be none, the President shall be the chief executive officer. The same person may hold both offices. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of Stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his or her successor is duly elected and qualified or until his or her death, resignation or removal in the manner hereinafter provided. Any two or more offices except President and Vice President may be held by the same person. Election or appointment of an officer or agent shall not of itself create contract rights between the corporation and such officer or agent. 4.02. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. The fact that a person is elected to an office, whether or not for a specified term, shall not by itself constitute any undertaking or evidence of any employment obligation of the Corporation to that person. 9 14 4.03. VACANCIES. A vacancy in any office may be filled by the Board of Directors for the unexpired portion of the term. 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Stockholders and of the Board of Directors. Unless the Board of Directors shall otherwise determine, the Chairman of the Board shall be the Chief Executive officer and general manager of the Corporation and shall in general supervise and control all of the business and affairs of the Corporation. The Chairman of the Board may sign and execute all deeds, mortgages, bonds, contracts or other obligations or instruments on behalf of the Corporation, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise signed or executed. In general, the Chairman of the Board shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the Board of Directors from time to time. 4.05. PRESIDENT. Unless the Board of Directors shall otherwise determine, the President shall be the Chief operating officer of the Corporation. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Stockholders and of the Board of Directors (if a member of the Board of Directors). The President may sign any deeds, mortgages, bonds, contracts or other obligations or instruments on behalf of the Corporation except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise signed or executed. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. 4.06. VICE PRESIDENTS. The Board of Directors may appoint one or more Vice Presidents. In the absence of the President or in the event of a vacancy in such office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election) shall perform the duties of the President and when so acting shall have all, the powers of and be subject to all the restrictions upon the President. Every Vice President shall perform such other duties as from time to time may be assigned to him or her by the President or the Board of Directors. 4.07. SECRETARY. The Secretary shall (i) keep the minutes of the proceedings of the Stockholders and Board of Directors in one or more books provided for that purpose; (ii) see that all notices are dull, given in accordance with the provisions of these Bylaws or as required by law; (iii) be custodian of the corporate records of the Corporation; (iv) unless a transfer agent is appointed, keep a register of the post office address of each stockholder that shall be furnished to the Secretary by such Stockholder and have general charge of the Stock Ledger of the Corporation; (v) when authorized by the Board of Directors or the President, attest to or witness all documents requiring the same; (vi) perform all duties as from time to time may be assigned to him or her by the President or by the Board of Directors; and (vii) perform all the duties generally incident to the office of Secretary of a corporation. 10 15 4.08. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at the regular meetings of the Board of Directors or whenever they may require it, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. The Board of Directors may engage a custodian to perform some or all of the duties of the Treasurer, and if a custodian is so engaged then the Treasurer shall be relieved of the responsibilities set forth herein to the extent delegated to such custodian and, unless the Board of Directors otherwise determines, shall have general supervision over the activities of such custodian. The custodian shall not be an officer of the Corporation. 4.09. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Board of Directors may appoint one or more Assistant Secretaries or Assistant Treasurers. The Assistant Secretaries and Assistant Treasurers (i) shall have the power to perform and shall perform all the duties of the Secretary and the Treasurer, respectively, in such respective officer's absence and (ii) shall perform such duties an shall be assigned to him or her by the Secretary or Treasurer, respectively, or by the President or the Board of Directors. 4.10. SUBORDINATE OFFICERS. The Corporation shall have such subordinate officers as the Board of Directors may from time to time elect. Each such officer shall hold office for such period and perform such duties as the Board of Directors, the President or any designated committee or officer may prescribe. 4.11. SALARIES. The salaries, if any, of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary, if any, by reason of the fact that he or she is also a Director of the Corporation. ARTICLE V STOCK SECTION 5.01. CERTIFICATES FOR STOCK. Each Stockholder is entitled to certificates which represent and certify the shares of stock he or she holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the Stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a vice-president, and countersigned by the secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an Officer who signed it is still an officer when it is issued. 11 16 SECTION 5.02. TRANSFERS. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined. SECTION 5.03. RECORD DATES AND CLOSING OF TRANSFER BOOKS. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to Stockholders, including which Stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed nor, subject to Section 1.07, more than 90 days before the date on which the action rewiring the determination will be taken; the transfer or books may not be closed for a period longer than 20 days; and, in the case of a meeting of Stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting. SECTION 5.04. STOCK LEDGER. The Corporation shall maintain a stock ledger which contains the name and address of each Stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation. SECTION 5.05. CERTIFICATION OF BENEFICIAL OWNER. The Board of Directors may adopt by resolution a procedure by which a Stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the Stockholder are held for the account of a specified person other than the Stockholder. The resolution shall set forth the class of Stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board considers necessary or desirable. On receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth in the certification, the holder of record of the specified stock in place of the Stockholder who makes the certification. SECTION 5.06. LOST STOCK CERTIFICATES. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of come court having jurisdiction in the premises. 12 17 ARTICLE VI FINANCE SECTION 6.01. CHECKS, DRAFTS, ETC. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors, be signed by the President, a Vice-President or an Assistant Vice-President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. SECTION 6.02. ANNUAL STATEMENT OF AFFAIRS. The President or chief accounting officer shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of Stockholders and, within 20 days after the meetings, placed on file at the Corporation's principal office. SECTION 6.03. FISCAL YEAR. The fiscal year of the Corporation shall be the twelve calendar months period ending December 31 in each year, unless otherwise provided by the Board of Directors. SECTION 6.04. DIVIDENDS. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter. SECTION 6.05. CONTRACTS. To the extent permitted by applicable law, and except as otherwise prescribed by the Charter or these Bylaws with respect to certificates for shares, the Board of Directors may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. ARTICLE VII SUNDRY PROVISIONS SECTION 7.01. BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its Stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of a corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of the Bylaws shall be kept at the principal office of the Corporation. SECTION 7.02. CORPORATE SEAL. The Board of Directors shall provide a suitable seal, bearing the name of the corporation, which shall be in the charge of the Secretary. 13 18 The Board of Directors say authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "Seal" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. SECTION 7.03. BONDS. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his or her duties, with on or more sureties and in such amount an may be satisfactory to the Board of Directors. SECTION 7.04. VOTING UPON SHARES IN OTHER CORPORATIONS. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President, a Vice-President, or a proxy appointed by either of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. SECTION 7.05. MAIL. Any notice or other document which is required by these Bylaws to be mailed shall be deposited in the United States mails, postage prepaid. SECTION 7.06. EXECUTION OF DOCUMENTS. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. SECTION 7.07. AMENDMENTS. These Bylaws may be repealed, altered, amended or rescinded (a) by the stockholders of the Corporation only by vote of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose an one class) cast at any meeting of Stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission it included in the notice of such meeting) or (b) by vote of two-thirds of the Board of Directors at a meeting held in accordance with the provisions of these Bylaws. ARTICLE VIII INDEMNIFICATION SECTION 8.01. INDEMNIFICATION. Unless the Board of Directors otherwise determines prospectively in the case of any one or more specified individuals, the Corporation shall indemnify, to the full extent permitted by the Maryland General Corporation Laws, any person who is or was a Director or officer of the corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint ventures trust or other enterprise (an "Indemnified Person"), including the advancement of expenses under procedures provided under such law. 14 19 SECTION 8.02. PROCEDURE. Any indemnification, or payment of expenses in advance of the final disposition of any proceeding, shall be made Promptly, and in any event within 60 days, upon the written request of the Indemnified Person. The right to indemnification and advances hereunder shall be enforceable by the Indemnified Person in any court of competent jurisdiction, if (i) the corporation denies such request, in whole or in part, or (ii) no disposition thereof is made within 60 days. The Indemnified Person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be reimbursed by the Corporation. It shall be a defense to any action for advancement of expenses that (a) a determination has been made that the facts then known to those making the determination would preclude indemnification or (b) the Corporation has not received either (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not, been met or (ii) a written affirmation by the Indemnified Person of such Indemnified Person's good faith belief that the standard of conduct necessary for Indemnification by the Corporation has been met. SECTION 8.03. EXCLUSIVITY, ETC. The indemnification and advance of expenses provided by the charter and these Bylaws shall not be deemed exclusive of any other rights to which a person seeking indemnification or advance of expenses may be entitled under any law (common or statutory), or any agreement, vote of Stockholders or disinterested directors or other provision that is consistent with law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the corporation, shall continue in respect of all events occurring while a person was a director or officer after such person has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. All rights to indemnification and advance of expenses under the Charter of the Corporation and hereunder shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this Bylaw is in effect. Nothing herein shall prevent the amendment of this Bylaw, provided that no such amendment shall diminish the rights of any person hereunder with respect to events occurring or claims made before its adoption or as to claims made after its adoption in respect of events occurring before its adoption. Any repeal or modification of this Bylaw shall not in any way diminish any rights to indemnification or advance of expenses of such director or officer or the obligations of the corporation arising hereunder with respect to events occurring, or claims made, while this Bylaw or any provision hereof is in force. SECTION 8.04. SEVERABILITY; DEFINITIONS. The invalidity or unenforceability of any provision of this article VIII shall not affect the validity or enforceability of any other provision hereof. The phrase "this Bylaw" in this Article VIII means this Article VIII in its entirety. EX-10.39 3 FORM OF CHANGE OF CONTROL AGREEMENT 1 EXHIBIT 10.39 CHANGE OF CONTROL AGREEMENT THIS AGREEMENT made as of March 16, 1998 by and between PACIFIC GULF PROPERTIES INC., a Maryland corporation (the "COMPANY"), and ______ (the "EXECUTIVE"). WITNESSETH WHEREAS, the Board of Directors of the Company (the "BOARD") recognizes that the possibility of a Change of Control (as hereinafter defined) exists and that the threat or the occurrence of a Change of Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of Executive in the event of a threat or occurrence of a Change of Control and to ensure Executive's continued dedication and efforts in such event without undue concern for personal financial and employment security; and WHEREAS, in order to induce Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change of Control, the Company desires to enter into this Agreement with Executive to provide Executive with certain benefits in the event Executive's employment is terminated as a result of, or in connection with, a Change of Control and to provide Executive with certain other benefits whether or not Executive's employment is terminated. AGREEMENT NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows: 1. TERM OF AGREEMENT. This Agreement shall commence as of the date hereof and shall continue in effect until December 31, 2000; provided, however, that on December 31, 2000 and on each anniversary thereof, the term of this Agreement shall automatically be extended for one year unless either the Company or Executive shall have given written notice to the other prior thereto that the term of this Agreement shall not be so extended; provided, further, however, that notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of 24 months after the occurrence of a Change of Control. 2. DEFINITIONS. 2.1. "ACCRUED COMPENSATION" shall mean an amount that shall include all amounts earned or accrued through the "Termination Date" (as hereinafter defined) but not paid as of the Termination Date including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by Executive on behalf of the Company during the period ending on the Termination Date, (iii) vacation and sick leave pay (to the extent provided by Company policy or 2 applicable law) and (iv) bonuses and incentive compensation (other than the "Pro Rata Bonus" (as hereinafter defined)). 2.2. "BASE AMOUNT" shall mean the greater of (a) Executive's annual base salary, plus any auto allowance, at the rate in effect immediately prior to the Change of Control and (b) Executive's annual base salary, plus any auto allowance, at the rate in effect on the Termination Date, and shall include all amounts of Executive's base salary that are deferred under any other agreement or arrangement with the Company. 2.3. "BONUS AMOUNT" shall mean Executive's annual bonus for the fiscal year immediately preceding the fiscal year in which a Change of Control has occurred. 2.4. "CAUSE" (a) For purposes of this Agreement, except as set forth in Section 2.4(b) below, a termination of employment is for "CAUSE" if Executive has been convicted of a felony involving moral turpitude or the termination is evidenced by a resolution adopted in good faith by two-thirds of the Board that Executive (i) intentionally and continually failed substantially to perform his reasonably assigned duties with the Company (other than a failure resulting from Executive's death or incapacity due to physical or mental illness or from Executive's assignment of duties that would constitute "Good Reason" as hereinafter defined) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to Executive specifying the manner in which Executive has failed substantially to perform; or (ii) intentionally engaged in conduct that is demonstrably and materially injurious to the Company; provided, however, that no termination of Executive's employment shall be for Cause as set forth in clause (ii) above until (x) there shall have been delivered to Executive written notice setting forth that Executive was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail and (y) Executive shall have been provided an opportunity to be heard in person by the Board (with the assistance of Executive's counsel if Executive so desires). Neither an act nor a failure to act, on Executive's part, shall be considered "intentional" unless Executive has acted or failed to act with a lack of good faith and with a lack of reasonable belief that Executive's action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by Executive after a Notice of Termination is given by Executive shall constitute Cause for purposes of this Agreement. (b) In the event a written employment agreement is in place between Executive and the Company, the definition of "Cause" set forth in such employment agreement shall apply for all purposes of this Agreement in lieu of the provisions of Section 2.4(a). 2 3 2.5. "CHANGE OF CONTROL" shall mean any of the following events: (a) An acquisition (other than directly from the Company) of any voting securities (the "VOTING SECURITIES") of the Company by any "PERSON" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 ACT")), immediately after which such Person has "BENEFICIAL OWNERSHIP" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change of Control has occurred, Voting Securities that are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition that would cause a Change of Control. A "NON-CONTROL ACQUISITION" shall mean an acquisition of Voting Securities of the Company by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interests is owned directly or indirectly by the Company (a "SUBSIDIARY"), (ii) the Company or any Subsidiary or (iii) any Person as a result of a "Non-Control Transaction" (as hereinafter defined). (b) The individuals who, as of the date hereof, are members of the Board (the "INCUMBENT BOARD"), cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially became a director on the Board as a result of either an actual or threatened "ELECTION CONTEST" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "PROXY CONTEST") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) Approval by stockholders of the Company of: (i) A merger, consolidation or reorganization involving the Company, unless, after giving effect to such merger, consolidation or reorganization, all of the following criteria are met: (A) the stockholders of the Company, as constituted immediately prior to such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least fifty percent (50%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation or reorganization (the "SURVIVING CORPORATION") in substantially the same proportion as their ownership of the Voting Securities of the 3 4 Company immediately prior to such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the entity whose Voting Securities are held directly by the former stockholders of the Company in satisfaction of the criterion set forth in Section 2(c)(i)(A) above; and (C) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of fifteen percent (15%) or more of the then outstanding Voting Securities of the Company) owns, directly or indirectly, fifteen percent (15%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities. A merger, consolidation or reorganization meeting all of the criteria set forth in clauses (A) through (C) of this Section 2.5(c)(i) is herein referred to as a "NON-CONTROL TRANSACTION;" (ii) A complete liquidation or dissolution of the Company; or (iii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the "SUBJECT PERSON") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of by the Company of its own Voting Securities which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided, however, that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition by the Company of its own Voting Securities, and after such share acquisition by the Company the Subject Person becomes the Beneficial Owner of any additional Voting Securities of the Company that increases the percentage of the then outstanding Voting Securities of the Company Beneficially Owned by the Subject Person, then a Change of Control shall be deemed to have occurred. (d) Notwithstanding anything contained in this Agreement to the contrary, if Executive's employment is terminated prior to a Change of Control and Executive reasonably demonstrates that such termination (i) was at the request of a 4 5 third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control and who effectuates a Change of Control (a "THIRD PARTY") or (ii) otherwise occurred in connection with, or in anticipation of, a Change of Control that actually occurs, then for all purposes of this Agreement, the date of a Change of Control with respect to Executive shall mean the date immediately prior to the date of such termination of Executive's employment. 2.6. "COMPANY" shall mean Pacific Gulf Properties Inc., a Maryland corporation, and shall also include the Company's "Successors and Assigns" (as hereinafter defined). 2.7. "DISABILITY" (a) Except as set forth in Section 2.7(b) below, "DISABILITY" shall mean a physical or mental infirmity that impairs Executive's ability to substantially perform his duties with the Company for a period of 180 consecutive days and Executive has not returned to his full time employment prior to the Termination Date as stated in the "Notice of Termination" (as hereinafter defined). (b) In the event a written employment agreement is in place between Executive and the Company, the definition of "Disability" set forth in such employment agreement shall apply for all purposes of this Agreement in lieu of the provisions of Section 2.7(a). 2.8. "GOOD REASON" (a) Subject to Section 2.8(b), "GOOD REASON" shall mean the occurrence after a Change of Control of any of the events or conditions described in subsections (i) through (viii) hereof: (i) a change in Executive's status, position or responsibilities (including reporting responsibilities) that, in Executive's reasonable judgment, represents a substantial adverse change from his status, position or responsibilities as in effect at any time within 90 days preceding the date of a Change of Control or at any time thereafter; the assignment to Executive of any duties or responsibilities that, in Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities as in effect at any time within 90 days preceding the date of a Change of Control or at any time thereafter; or any removal of Executive from or failure to reappoint or reelect Executive to any of such offices or positions held prior to the Change of Control, except in connection with the termination of Executive's employment for Disability, Cause, as a result of his death or by Executive other than for Good Reason; (ii) a reduction in Executive's base salary or any failure to pay Executive any compensation or benefits to which Executive is entitled within five days of notice from Executive of such non-payment; 5 6 (iii) the Company's requiring Executive to be based at any place outside a 30-mile radius from Newport Beach, California, except for reasonably required travel on the Company's business that is not materially greater than such travel requirements prior to the Change of Control; (iv) the failure by the Company to provide Executive with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which Executive was participating at any time within ninety (90) days preceding the date of a Change of Control or at any time thereafter; (v) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company, which petition is not dismissed within sixty (60) days; (vi) any material breach by the Company of any provision of this Agreement; (vii) any purported termination of Executive's employment for Cause by the Company which does not comply with the terms of Section 2.4; or (viii) the failure of the Company to obtain an agreement, satisfactory to Executive, from any Successors and Assigns to assume and agree to perform this Agreement, as contemplated in Section 7 hereof. (b) Any event or condition described in Section 2.8(a) that occurs prior to a Change of Control but that Executive reasonably demonstrates (i) was at the request of a Third Party, or (ii) otherwise arose in connection with, or in anticipation of, a Change of Control that actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change of Control. (c) Executive's right to terminate his employment pursuant to this Section 2.8 shall not be affected by his incapacity due to a Disability. 2.9. "NOTICE OF TERMINATION" shall mean a written notice of termination, following a Change of Control, from the Company of Executive's employment, which notice indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 2.10. "PRO RATA BONUS" shall mean an amount equal to the Bonus Amount multiplied by a fraction, the numerator of which is the number of days in the Company's fiscal year in which Executive's employment terminates through the Termination Date and the denominator of which is 365. 6 7 2.11. "SUCCESSORS AND ASSIGNS" shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company, whether by operation of law or otherwise, and any affiliate of such Successors and Assigns. 2.12. "TERMINATION DATE" shall mean (a) in the case of Executive's death, his date of death, (b) in the case of Good Reason, the last day of his employment and (c) in all other cases, the date specified in the Notice of Termination; provided, however, that if Executive's employment is terminated by the Company due to Disability, the date specified in the Notice of Termination shall be the 30th day after receipt of the Notice of Termination by Executive, provided that Executive shall not have returned to the full-time performance of his duties within 30 days after such receipt. 2.13 "THIRD PARTY" shall have the meaning set forth in Section 2.5(d). 3. TERMINATION OF EMPLOYMENT. If, during the term of this Agreement, Executive's employment with the Company shall be terminated within twenty-four months (24) following a Change of Control, Executive shall be entitled to the following compensation and benefits: (a) If Executive's employment with the Company shall be terminated (i) by the Company for Cause or Disability, (ii) by reason of Executive's death or (iii) by Executive other than for Good Reason, the Company shall pay to Executive the Accrued Compensation and, if such termination is other than by the Company for Cause, the Pro Rata Bonus; provided, however, if an employment agreement is in existence between the Company and/or any of its affiliates and Executive on the Termination Date, the Company and/or its affiliates, as the case may be, shall pay to Executive any amounts owed to Executive pursuant to such employment agreement. Any such termination of Executive's employment contemplated under this Section 3(a) shall be without prejudice to any and all retirement benefits of Executive vested as of the Termination Date under all retirement plans of the Company, and the Company shall honor and pay all such vested benefits in accordance with the terms of such retirement plans. (b) If Executive's employment with the Company shall be terminated for any reason other than as specified in Section 3(a), Executive shall be entitled to the following: (i) the Company shall pay Executive all Accrued Compensation and a Pro Rata Bonus; (ii) the Company shall pay Executive as severance pay in a single payment an amount in cash equal to the product of two multiplied by the sum of (A) the Base Amount plus (B) the Bonus Amount; (iii) for a number of months equal to 24 (the "CONTINUATION PERIOD"), the Company shall at its expense continue on behalf of Executive and Executive's dependents and beneficiaries the medical, dental and hospitalization benefits provided (A) to Executive at any time during the 90-day period prior to the Change of Control or at any time thereafter or (B) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The 7 8 coverage and benefits (including deductibles and costs) provided in this Section 3(b)(iii) during the Continuation Period shall be no less favorable to Executive and Executive's dependents and beneficiaries than the most favorable of such coverages and benefits during any of the periods referred to in clauses (A) and (B) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to Executive than the coverages and benefits required to be provided hereunder. This Section 3(b)(iii) shall not be interpreted so as to limit any benefits to which Executive, Executive's dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; (iv) all theretofore unvested stock options, restricted options, restricted stock and other awards issued to Executive pursuant to the Company's share option plan and any and all other stock option or incentive plans shall immediately vest; (v) all theretofore unvested employer contributions in Executive's account pursuant to the Company's plan maintained under Section 401(k) of the Code shall immediately vest, or the Company shall pay to Executive in cash the financial equivalent thereof on an after-tax basis; and (vi) the Company shall honor and pay any and all retirement benefits of Executive vested as of the Termination Date under all retirement plans of the Company in accordance with the terms of such retirement plans. (c) The amounts provided for in Sections 3(a) and 3(b)(i) and (ii) shall be paid in a single lump sum cash payment within five (5) days after Executive's Termination Date (or earlier, if required by applicable law). (d) Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to Executive in any subsequent employment except as provided in Section 3(b)(iii). (e) The severance pay and benefits provided for in this Section 3 shall be reduced by the amount of any other severance or termination pay to which Executive may be entitled under any agreement with the Company or any of its affiliates. (f) Executive's entitlement to any other compensation or benefits or any indemnification shall be determined in accordance with the Company's employee benefit plans and other applicable programs, policies and practices or any indemnification agreement then in effect. 8 9 4. NOTICE OF TERMINATION. Following a Change of Control, any purported termination of Executive's employment by the Company shall be communicated by Notice of Termination to Executive. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 5. EXCISE TAX GROSS-UP. (a) Notwithstanding anything contained in this Agreement to the contrary, in the event it is determined (pursuant to Section 5(b) below) or finally determined (as defined in Section 5(c)(iii) below) that any payment, distribution, transfer, benefit or other event with respect to the Company or its predecessors, successors, direct or indirect subsidiaries or affiliates (or any predecessor, successor or affiliate of any of them, and including any benefit plan of any of them), to or for the benefit of Executive or Executive's dependents, heirs or beneficiaries (whether such payment, distribution, transfer, benefit or other event occurs pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (each a "PAYMENT" and collectively the "PAYMENTS") is or was subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), and any successor provision or any comparable provision of state or local income tax law (collectively, "SECTION 4999"), or any interest, penalty or addition to tax is or was incurred by Executive with respect to such excise tax (such excise tax, together with any such interest, penalty or addition to tax, hereinafter collectively referred to as the "EXCISE TAX"), then, within 10 days after such determination or final determination, as the case may be, the Company shall pay to Executive an additional cash payment (hereinafter referred to as the "GROSS-UP PAYMENT") in an amount such that after payment by Executive of all taxes, interest, penalties and additions to tax imposed with respect to the Gross-Up Payment (including, without limitation, any income and excise taxes imposed upon the Gross-Up Payment), Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon such Payment or Payments. This provision is intended to put Executive in the same position as Executive would have been had no Excise Tax been imposed upon or incurred as a result of any Payment. (b) Except as provided in Section 5(c) below, the determination that a Payment is subject to an Excise Tax shall be made in writing by a certified public accounting firm selected by Executive ("EXECUTIVE'S ACCOUNTANT"). Such determination shall include the amount of the Gross-Up Payment and detailed computations thereof, including any assumptions used in such computations (the written determination of Executive's Accountant, hereinafter, the "EXECUTIVE'S DETERMINATION"). Executive's Determination shall be reviewed on behalf of the Company by a certified public accounting firm selected by the Company (the "COMPANY'S ACCOUNTANT"). The Company shall notify Executive within 10 business days after receipt of Executive's Determination of any disagreement or dispute therewith, and failure to so notify within that period shall be considered an agreement by the Company with Executive's Determination, and any agreement by the Company with Executive's Determination shall obligate the Company to make payment as provided in Section 5(a) above within 10 days from the expiration of such 10 business-day period. In the event of an objection by the Company to Executive's Determination, any 9 10 amount not in dispute shall be paid within 10 days following the 10 business-day period referred to herein, and with respect to the amount in dispute Executive's Accountant and the Company's Accountant shall jointly select a third nationally recognized certified public accounting firm to resolve the dispute and the decision of such third firm shall be final, binding and conclusive upon Executive and the Company. In such a case, the third accounting firm's findings shall be deemed the binding determination with respect to the amount in dispute, obligating the Company to make any payment as a result thereof within 10 days following the receipt of such third accounting firm's determination. All fees and expenses of each of the accounting firms referred to in this Section 5 shall be borne solely by the Company. (c) (i) Executive shall notify the Company in writing of any claim by the Internal Revenue Service (or any successor thereof) or any state or local taxing authority (individually or collectively, the "TAXING AUTHORITY") that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 30 days after Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid; provided, however, that failure by Executive to give such notice within such 30-day period shall not result in a waiver or forfeiture of any of Executive's rights under this Section 5 except to the extent of actual damages suffered by the Company as a result of such failure. Executive shall not pay such claim prior to the expiration of the 15-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes, interest, penalties or additions to tax with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such 15-day period that it desires to contest such claim (and demonstrates to the reasonable satisfaction of Executive its ability to make the payments to Executive that may ultimately be required under this section before assuming responsibility for the claim), Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company that is reasonably acceptable to Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all attorneys fees, costs and expenses (including additional interest, penalties and additions to tax) incurred in connection with such contest and shall indemnify and hold harmless Executive, on an after-tax basis, for all 10 11 taxes (including, without limitation, income and excise taxes), interest, penalties and additions to tax imposed in relation to such claim and in relation to the payment of such costs and expenses or indemnification. Without limitation on the foregoing provisions of this Section 5, and to the extent its actions do not unreasonably interfere with or prejudice Executive's disputes with the Taxing Authority as to other issues, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the Taxing Authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax, interest or penalties claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance an amount equal to such payment to Executive, on an interest-free basis, and shall indemnify and hold harmless Executive, on an after-tax basis, from all taxes (including, without limitation, income and excise taxes), interest, penalties and additions to tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and, provided, further, that any extension of the statute of limitations relating to payment of taxes, interest, penalties or additions to tax for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount; and, provided, further, that any settlement of any claim shall be reasonably acceptable to Executive and the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and Executive shall be entitled to settle or contest, as the case may be, any other issue. (ii) If, after receipt by Executive of an amount advanced by the Company pursuant to Section 5(c)(i), Executive receives any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 5) promptly pay to the Company an amount equal to such refund (together with any interest paid or credited thereon after taxes applicable thereto), net of any taxes (including without limitation any income or excise taxes), interest, penalties or additions to tax and any other costs incurred by Executive in connection with such advance, after giving effect to such repayment. If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c)(i), it is finally determined that Executive is not entitled to any refund with respect to such claim, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be treated as a Gross-Up Payment and shall offset, to the extent thereof, the amount of any Gross-Up Payment otherwise required to be paid. 11 12 (iii) For purposes of this Section 5, whether the Excise Tax is applicable to a Payment shall be deemed to be "finally determined" upon the earliest of: (A) the expiration of the 15-day period referred to in Section 5(c)(i) above if the Company has not notified Executive that it intends to contest the underlying claim, (B) the expiration of any period following which no right of appeal exists, (C) the date upon which a closing agreement or similar agreement with respect to the claim is executed by Executive and the Taxing Authority (which agreement may be executed only in compliance with this Section 5), (D) the receipt by Executive of notice from the Company that it no longer seeks to pursue a contest (which notice shall be deemed received if the Company does not, within 15 days following receipt of a written inquiry from Executive, affirmatively indicate in writing to Executive that the Company intends to continue to pursue such contest). (d) As a result of uncertainty in the application of Section 4999 that may exist at the time of any determination that a Gross-Up Payment is due, it may be possible that in making the calculations required to be made hereunder, the parties or their accountants shall determine that a Gross-Up Payment need not be made (or shall make no determination with respect to a Gross-Up Payment) that properly should be made ("UNDERPAYMENT"), or that a Gross-Up Payment not properly needed to be made should be made ("OVERPAYMENT"). The determination of any Underpayment shall be made using the procedures set forth in Section 5(b) above and shall be paid to Executive as an additional Gross-Up Payment. The Company shall be entitled to use procedures similar to those available to Executive in Section 5(b) to determine the amount of any Overpayment (provided that the Company shall bear all costs of the accountants as provided in Section 5(b)). In the event of a determination that an Overpayment was made, any such Overpayment shall be treated for all purposes as a loan to Executive with interest at the applicable Federal rate provided for in Section 1274(d) of the Code; provided, however, that the amount to be repaid by Executive to the Company shall be subject to reduction to the extent necessary to put Executive in the same after-tax position as if such Overpayment were never made. 6. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal personal representative. 7. FEES AND EXPENSES. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by Executive as they become due as a result of (a) Executive seeking to obtain or enforce any right or benefit provided by this Agreement (including, but not limited to, any such fees and expenses incurred in connection with a dispute hereunder) and (b) Executive's hearing before the Board as contemplated in Section 2.4 of this Agreement; provided, however, that the circumstances set forth in clause (a) (other than as a 12 13 result of Executive's termination of employment under circumstances described in Section 2.5(d)) occurred on or after a Change of Control. 8. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, by overnight courier or by facsimile, addressed to the respective addresses and facsimile numbers last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 9. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company (except for any severance or termination policies, plans, programs or practices) and for which Executive may qualify, nor shall anything herein limit or reduce such rights as Executive may have under any other agreements with the Company (except for any severance or termination agreement). Amounts that are vested benefits or that Executive is otherwise entitled to receive under any plan or program of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 10. NO GUARANTEED EMPLOYMENT. Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company is "at will" and may be terminated by either Executive or the Company at any time. 11. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right that the Company may have against Executive or others. 12. MUTUAL NON-DISPARAGEMENT. The Company, its affiliates and subsidiaries agree and the Company shall use its best efforts to cause their respective executive officers and directors to agree, that they will not make or publish any statement critical of Executive, or in any way adversely affecting or otherwise maligning Executive's reputation. Executive agrees that Executive will not make or publish any statement critical of the Company, its affiliates and their respective executive officers and directors, or in any way adversely affecting or otherwise maligning the business or reputation of any member of the Company, its affiliates and subsidiaries and their respective officers, directors and employees. 13. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or 13 14 otherwise, express or implied, with respect to the subject matter hereof have been made by either party that are not expressly set forth in this Agreement. 14. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Orange County in the State of California. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. ENTIRE AGREEMENT; CONSTRUCTION. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. Neither party hereto nor its respective counsel shall be deemed the drafter of this Agreement, and this Agreement shall be construed in accordance with its fair meaning and not strictly for or against either party. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Executive has executed this Agreement as of the day and year first above written. THE COMPANY PACIFIC GULF PROPERTIES INC. By: ---------------------------------- Glenn L. Carpenter Chief Executive Officer EXECUTIVE ------------------------------------- 14 EX-10.40 4 AGREEMENT OF LIMITED PARTNERSHIP - EXHIBIT 10.40 1 EXHIBIT 10.40 AGREEMENT OF LIMITED PARTNERSHIP OF PGP NORTHERN INDUSTRIAL, L.P. 2 TABLE OF CONTENTS Page ARTICLE 1 DEFINED TERMS............................................ 1 ARTICLE 2 ORGANIZATIONAL MATTERS................................... 13 Section 2.1 Organization....................................... 13 Section 2.2 Name............................................... 13 Section 2.3 Registered Office and Agent; Principal Office............................................. 13 Section 2.4 Power of Attorney.................................. 14 Section 2.5 Term............................................... 15 ARTICLE 3 PURPOSE.................................................. 15 Section 3.1 Purpose and Business............................... 15 Section 3.2 Powers............................................. 16 Section 3.3 Technical Revisions................................ 16 ARTICLE 4 CAPITAL CONTRIBUTIONS.................................... 16 Section 4.1 Initial Capital Contributions of the Partners........................................... 16 Section 4.2 Additional Capital Contributions by the General Partner.................................... 18 Section 4.3 Issuances of Additional Partnership Interests.......................................... 18 Section 4.4 Preemptive Rights.................................. 20 ARTICLE 5 DISTRIBUTIONS............................................ 21 Section 5.1 Requirement and Characterization of Distributions...................................... 21 Section 5.2 General Partner Election........................... 22 Section 5.3 Amounts Withheld................................... 22 Section 5.4 Distributions Upon Liquidation..................... 22 Section 5.5 Other Assets Present............................... 22 Section 5.6 Seismic Costs...................................... 23 ARTICLE 6 ALLOCATIONS.............................................. 23 Section 6.1 Allocations of Net Income and Net Loss............. 23 Section 6.2 Other Allocations.................................. 25 ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS.................... 25 Section 7.1 Management......................................... 25 Section 7.2 Limitations on General Partner..................... 29 Section 7.3 Certificate of Limited Partnership................. 30 Section 7.4 Management Fee and Reimbursement of the General Partner.................................... 31 Section 7.5 Outside Activities of the General Partner........................................... 33 Section 7.6 Contracts with Affiliates.......................... 33 Section 7.7 Indemnification.................................... 34 Section 7.8 Liability of the General Partner................... 36 Section 7.9 Other Matters Concerning the General - i - 3 Page Partner........................................... 37 Section 7.10 Title to Partnership Assets........................ 38 Section 7.11 Reliance by Third Parties.......................... 38 ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS............... 39 Section 8.1 Limitation of Liability............................ 39 Section 8.2 Management of Business............................. 39 Section 8.3 Outside Activities of Limited Partners............. 39 Section 8.4 Return of Capital.................................. 40 Section 8.5 Rights of Limited Partners Relating to the Partnership.................................... 40 Section 8.6 No Redemption Right................................ 41 Section 8.7 Representations and Warranties..................... 41 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS................... 43 Section 9.1 Records and Accounting............................. 43 Section 9.2 Fiscal Year........................................ 43 Section 9.3 Reports............................................ 43 ARTICLE 10 TAX MATTERS.............................................. 44 Section 10.1 Preparation of Tax Returns......................... 44 Section 10.2 Tax Elections...................................... 44 Section 10.3 Tax Matters Partner................................ 45 Section 10.4 Organizational Expenses............................ 46 Section 10.5 Withholding........................................ 46 ARTICLE 11 TRANSFERS AND WITHDRAWALS................................ 47 Section 11.1 Transfer........................................... 47 Section 11.2 Transfer of the General Partner's Partner Interest and Limited Partner Interest........................................... 48 Section 11.3 Limited Partners' Rights to Transfer............... 48 Section 11.4 Substituted Limited Partners....................... 50 Section 11.5 Assignees.......................................... 51 Section 11.6 General Provisions................................. 51 Section 11.7 No Exchange........................................ 52 ARTICLE 12 ADMISSION OF PARTNERS.................................... 52 Section 12.1 Admission of Successor General Partner............. 52 Section 12.2 Admission of Additional Limited Partners.......................................... 53 Section 12.3 Amendment of Agreement and Certificate of Limited Partnership............................. 53 ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION................. 54 Section 13.1 Dissolution........................................ 54 Section 13.2 Winding Up......................................... 55 Section 13.3 Compliance with Timing Requirements of Regulations........................................ 57 Section 13.4 Deemed Distribution and Re-contribution............ 57 Section 13.5 Rights of Limited Partners......................... 57 Section 13.6 Notice of Dissolution.............................. 58 - ii - 4 Page Section 13.7 Termination of Partnership and Cancellation of Certificate of Limited Partnership........................................ 58 Section 13.8 Reasonable Time for Winding-Up..................... 58 Section 13.9 Waiver of Partition................................ 58 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS............. 58 Section 14.1 Amendments......................................... 58 Section 14.2 Meetings of the Partners........................... 60 ARTICLE 15 GENERAL PROVISIONS....................................... 61 Section 15.1 No Assurances...................................... 61 Section 15.2 Addresses and Notices.............................. 62 Section 15.3 Titles and Captions................................ 62 Section 15.4 Pronouns and Plurals............................... 62 Section 15.5 Further Action..................................... 62 Section 15.6 Binding Effect..................................... 62 Section 15.7 Creditors.......................................... 62 Section 15.8 Waiver............................................. 63 Section 15.9 Counterparts....................................... 63 Section 15.10 Applicable Law..................................... 63 Section 15.11 Invalidity of Provisions........................... 63 Section 15.12 Entire Agreement................................... 63 Section 15.13 No Rights as Shareholders.......................... 63 Section 15.14 Venue.............................................. 64 - iii - 5 AGREEMENT OF LIMITED PARTNERSHIP OF PGP NORTHERN INDUSTRIAL, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP OF PGP NORTHERN INDUSTRIAL, L.P. (this "Agreement"), dated as of October 20, 1997, is entered into by and between Pacific Gulf Properties Inc., a Maryland corporation, as the sole general partner (the "General Partner"), and Eden Plaza Associates, LLC, a California limited liability company ("Eden"), as the initial "Original Limited Partner" (as hereafter defined). WHEREAS, the General Partner and Eden desire to form a Delaware limited partnership (the "Partnership") pursuant to this Agreement of Limited Partnership and the "Act" (as hereinafter defined); NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1 DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. Section 1.1 "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute. Section 1.2 "Additional Limited Partner" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.3 hereof and who is shown as such on the books and records of the Partnership. Section 1.3 "Adjusted Capital Account" means the Capital Account maintained for each Partner as of the end of each Partnership taxable year: (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. 6 Section 1.4 "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Adjusted Capital Account as of the end of the relevant Partnership taxable year. Section 1.5 "Adjusted Property" means any property, the Carrying Value of which has been adjusted pursuant to Exhibit "B" hereof. Section 1.6 "Affiliate" means, with respect to any Person: (i) any Person directly or indirectly controlling, controlled by or under common control with such Person; (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person; (iii) any Person of which such Person owns or controls ten percent (10%) or more of the voting interests; or (iv) any officer, director, general partner or trustee of such Person or of any Person referred to in clauses (i), (ii), and (iii) above. Section 1.7 "Agreed Value" means: (i) in the case of any Contributed Property set forth on Exhibit "D" and as of the time of its contribution to the Partnership, the Agreed Value of such property as set forth in Exhibit "D"; (ii) in the case of any Contributed Property not set forth in Exhibit "D" and as of the time of its contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed; and (iii) in the case of any property distributed to a Partner by the Partnership, the Partnership's Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder. Section 1.8 "Agreement" means this Agreement of Limited Partnership, as it may be amended, supplemented or restated from time to time. Section 1.9 "Assignee" means a Person to whom one or more Limited Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. Section 1.10 "Available Cash" means, with respect to any period for which such calculation is being made, (i) the sum of: (a) the Partnership's gross revenues for such period from all sources related to the operation of the Partnership assets (excluding the proceeds of the sale or financing of Partnership assets); and -2- 7 (b) the amount of any reduction during such period in the reserves of the Partnership referred to in clause (ii)(d) below (including, without limitation, reductions resulting from the General Partner's determination that such amounts are no longer necessary); (ii) less the sum of: (a) all payments made by the Partnership during such period on Partnership debts; (b) all costs and expenses of operating the Partnership and owning, operating, maintaining, repairing, improving, acquiring and selling Partnership assets paid during such period; (c) to the extent not already including in clause (ii)(b) above, any management fee paid during such period pursuant to Section 7.4; and (d) the amount of any reserves and other cash or similar balances (including, but not limited to, reserves for working capital, reserves, debt service, property taxes, insurance and capital improvements reserves) set aside during such period which the General Partner determines to be necessary or appropriate in its sole and absolute discretion. Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, or take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership. Additionally, if and after the Partnership acquires Non- Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then for purposes of determining distributions of Available Cash to the Original Limited Partners and their heirs, successors and assigns under the terms of this Agreement, Available Cash shall be calculated separately with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets, and shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto. (Without limiting the foregoing, Available Cash shall not take into account any items referred to in Paragraph 1.10(ii) which were -3- 8 not incurred or otherwise attributable to the Original Limited Partner Related Assets.) Section 1.11 "Book-Tax Disparities" means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Exhibit "B" and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles. Section 1.12 "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Los Angeles, California are authorized or required by law to close. Section 1.13 "Capital Account" means the Capital Account maintained for a Partner pursuant to Exhibit "B" hereof. Section 1.14 "Capital Contribution" means, with respect to any Partner, any cash, cash equivalents or the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Article 4 hereof. Section 1.15 "Carrying Value" means: (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such property charged to the Partners' Capital Accounts following the contribution of or adjustment with respect to such property; and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit "B" hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. Section 1.16 "Certificate" means a Certificate of Limited Partnership relating to the Partnership filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. Section 1.17 "Cigna Debt" shall have the meaning given thereto in the Master Contribution Agreement. Section 1.18 "Closing" shall have the meaning given thereto in the Master Contribution Agreement. -4- 9 Section 1.19 "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provisions of future law. Section 1.20 "Consent" means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof. Section 1.21 "Contributed Property" means each property or other asset, in such form as may be permitted by the Act (but excluding cash), contributed or deemed contributed to the Partnership (including deemed contributions to the Partnership on termination pursuant to Section 708 of the Code). Once the Carrying Value of a Contributed Property is adjusted pursuant to Exhibit "B" hereof, such property shall no longer constitute a Contributed Property for purposes of Exhibit "B" hereof, but shall be deemed an Adjusted Property for such purposes. Section 1.22 "Current Year Deficit" means with respect to any calendar year, the amount, if any, by which the aggregate cash dividend paid to the common shareholders of the General Partner on account of one share of common stock of the General Partner for such calendar year exceeds the aggregate cash distributed to the Limited Partners pursuant to Sections 5.1A(1) and 5.1A(2) on account of one Limited Partnership Unit for such calendar year. A Current Year Deficit for any calendar year shall not carry forward or be used in calculating the Current Year Deficit for any subsequent calendar year. Section 1.23 "Depreciation" means, for each taxable year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner. Section 1.24 "Eden" shall mean Eden Plaza Associates, LLC, a California limited liability company. Section 1.25 "Effective Date" shall mean the date of the Closing. -5- 10 Section 1.26 "Equity Affiliate" means any Subsidiary of the General Partner, and any entity in which the General Partner has a direct or indirect equity interest. Section 1.27 "Excess Distributions" means distributions to a Limited Partner for all periods in excess of allocations of Net Income to the Limited Partner for all periods pursuant to Sections 6.1B(2), (3) and (4) . Section 1.28 "Exchange Rights Agreement" means that certain Exchange Rights Agreement entered into concurrently herewith by and between the Partnership, the General Partner, and Eden concurrently herewith. Section 1.29 "General Partner" shall mean Pacific Gulf Properties Inc., a Maryland corporation, or any successor general partner of the Partnership in compliance with this Agreement. Section 1.30 "General Partner Interest" means a Partnership Interest held by the General Partner, in its capacity as general partner. Section 1.31 "General Partner Security Rights" has the meaning set forth in Section 4.3B. Section 1.32 "Incapacity" or "Incapacitated" means: (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when: (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any -6- 11 substantial part of the Partner's properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect which has not been dismissed within one hundred twenty (120) days after the commencement thereof; (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator which has not been vacated or stayed within ninety (90) days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay. Section 1.33 "Indemnitee" means any Person made a party to a proceeding by reason of (i) his status as the General Partner, an Affiliate of the General Partner, or as a director, officer, employee, partner, agent or representative of the General Partner or an Affiliate of the General Partner, or (ii) his or its liabilities pursuant to a loan guarantee or otherwise for or as a result of any indebtedness or obligation of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness or obligation which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to). Section 1.34 "IRS" means the Internal Revenue Service, which administers the internal revenue laws of the United States. Section 1.35 "Limited Partner" means any Person named as a Limited Partner on Exhibit "A" attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner of the Partnership. Section 1.36 "Limited Partner Interest" means a Partnership Interest of a Limited Partner in the Partnership. A Limited Partner Interest may be expressed as a number of Limited Partnership Units. Section 1.37 "Limited Partner Percentage Interest" means, as to a Limited Partner, its interest in the Partnership relative to all other Limited Partners, as determined by dividing the Limited Partnership Units owned by such Limited Partner by the total number of Limited Partnership Units then outstanding and as specified in Exhibit "A" attached hereto, as such Exhibit may be amended from time to time. Section 1.38 "Limited Partnership Unit" means a fractional, undivided share of the Limited Partnership Interests of all Limited Partners issued pursuant to Article 4 hereof. The number of Limited Partnership Units outstanding and the Limited Partner Percentage Interest represented by such Limited Partnership Units are set forth in Exhibit "A" attached hereto, as such Exhibit may be amended from time to time. The ownership of Limited Partnership Units shall be evidenced by such form of -7- 12 certificate for units as the General Partner adopts from time to time unless the General Partner determines that the Limited Partnership Units shall be uncertificated securities. If the General Partner elects to evidence the Limited Partnership Units with a certificate, such certificate may be imprinted with a legend setting forth such restrictions placed on the units as specified in this Agreement and such restrictions will be binding upon all holders of the certificate along with the terms and conditions set forth in this Agreement. Section 1.39 "Liquidating Event" has the meaning set forth in Section 13.1. Section 1.40 "Liquidator" has the meaning set forth in Section 13.2. Section 1.41 "Management Agreement" means a Property Management Agreement between the Partnership and the General Partner or an Affiliate of the General Partner substantially in the form of Exhibit "E" attached hereto. Section 1.42 "Master Contribution Agreement" means that certain Master Contribution Agreement, as amended, by and between the General Partner and Eden providing for the formation of this Partnership and the contributions of cash by the General Partner and the Original Properties by Eden. Section 1.43 "Net Income" means, for any taxable period, the excess, if any, of the Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit "B". Additionally, if and after the Partnership acquires Non- Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then for purposes of determining allocations of Net Income to the Original Limited Partners and their heirs, successors and assigns under this Agreement, Net Income shall be calculated separately with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets and the ownership and operation thereof, and shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto. -8- 13 Section 1.44 "Net Loss" means, for any taxable period, the excess, if any, of the Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit "B". Additionally, if and after the Partnership acquires Non- Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then for purposes of determining allocations of Net Loss to the Original Limited Partners and their heirs, successors and assigns under this Agreement, Net Loss shall be calculated separately with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets and the ownership and operation thereof, and shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto. Section 1.45 "No Exchange Period" shall have the meaning given thereto in the Exchange Rights Agreement. Section 1.46 "Non-Original Limited Partner Related Assets" means all of the real properties and all other assets and property of the Partnership other than such as constitute "Original Limited Partner Related Assets" (as defined below). Section 1.47 "Nonrecourse Built-in-Gain" means, with respect to any Contributed Properties or Adjusted Properties that are subject to a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit "C" if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. Section 1.48 "Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). Section 1.49 "Nonrecourse Liability" has the meaning set forth in Regulations Section 1.752-1(a)(2). -9- 14 Section 1.50 "No Sale Period" means the period from the date hereof to the date which is four (4) years after the Effective Date. Section 1.51 "Original Limited Partners" means the parties listed on Exhibit "A" as attached hereto at the time of the initial execution and delivery of this Agreement, without regard to any subsequent changes to said Exhibit, and with respect to any such parties which are partnerships or limited liability companies, the partners or members, directly or indirectly, of such partnerships or limited liability companies (or the partners or members thereof) if and when the Limited Partnership Units received by such partnerships or limited liability companies under the Master Contribution Agreement are distributed by such partnerships or limited liability companies to such partners or members and the provisions of Section 11.3, below, have been satisfied. Section 1.52 "Original Limited Partner Related Assets" means all of the real properties and all other assets and property contributed, assigned, transferred or conveyed to the Partnership in connection with the transactions contemplated by the Master Contribution Agreement, together with all other assets and properties acquired, owned, or used by the Partnership in any way relating thereto, as well as all replacements thereof and substitutions therefor. Section 1.53 "Original Property" or "Original Properties" means the "Property" or "Properties" (as defined in the Master Contribution Agreement), together with all other assets and properties contributed to the Partnership by Eden pursuant to the terms and provisions of the Master Contribution Agreement. Section 1.54 "Partner" means a General Partner or a Limited Partner, and "Partners" means the General Partner and all Limited Partners collectively. Section 1.55 "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). Section 1.56 "Partner Nonrecourse Debt" has the meaning set forth in Regulations Section 1.704-2(b)(4). Section 1.57 "Partner Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). -10- 15 Section 1.58 "Partnership" means the limited partnership formed under this Agreement and any successor thereto. Section 1.59 "Partnership Interest" means an ownership interest in the Partnership representing a Capital Contribution by either a Limited Partner or the General Partner, and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. Section 1.60 "Partnership Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). Section 1.61 "Partnership Record Date" means the record date established by the General Partner for the distribution of Available Cash pursuant to Article 5 hereof with respect to a calendar quarter, which record date shall be the same as the record date established by the General Partner for the making of dividend distributions to its shareholders on account of their common stock holdings in the General Partner with respect to the same calendar quarter. Section 1.62 "Partnership Year" means the fiscal year of the Partnership, which shall be the calendar year. Section 1.63 "Person" means an individual or a corporation, partnership, trust, limited liability company, unincorporated organization, association or other entity. Section 1.64 "Plan" means any plan or arrangement, whether or not approved by shareholders or partners, and whether formal or informal, utilized by the General Partner to provide incentives, benefits or other compensation to its employees, consultants or advisors, or the employees, consultants or advisors of any Equity Affiliate. Section 1.65 "Recapture Income" means any gain recognized by the Partnership upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. Section 1.66 "Regulations" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). Section 1.67 "REIT" means a real estate investment trust under Section 856 of the Code. -11- 16 Section 1.68 "REIT Share" shall mean a share of common stock of the General Partner, par value $.01 per share. Section 1.69 "Residual Gain" or "Residual Loss" means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit "C" to eliminate Book-Tax Disparities. Section 1.70 "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.71 "704(c) Value" of any Contributed Property means the value of such property as set forth in Exhibit "D", or if no value is set forth in Exhibit "D", the fair market value of such property or other consideration at the time of contribution, as determined by the General Partner using such reasonable method of valuation as it may adopt. Subject to Exhibit "B" hereof, the General Partner shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of Contributed Properties in a single or integrated transaction among the separate properties on a basis proportional to their respective fair market values. Section 1.72 "Seismic Costs" means all costs and expenses paid or incurred by the Partnership or the General Partner on or after the Closing to repair, retrofit or upgrading the Original Properties to cause the Original Properties to be in compliance with all federal, state, county and city statutes, laws, ordinances, orders, rules and regulations related to seismic safety and compliance as such statutes, laws, ordinances, orders, rules and regulations existed as of the Closing; provided, however, that the total amount of all Seismic Costs shall not exceed $200,000. Section 1.73 "Subscription Documents" means those certain subscription documents executed and delivered by a partner or member of an Original Limited Partner which is itself a partnership or limited liability company concurrently with such partner or member being admitted as an additional Original Limited Partner pursuant to Section 11.3. Section 1.74 "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the voting equity securities, or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person. Section 1.75 "Substituted Limited Partner" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4. -12- 17 Section 1.76 "Unrealized Gain" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit "B" hereof) as of such date, over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit "B" hereof) as of such date. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name The name of the Partnership shall be PGP Northern Industrial, L.P. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time, and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners. Section 2.3 Registered Office and Agent; Principal Office The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The principal office of the Partnership shall be c/o Pacific Gulf Properties Inc., 4220 Von Karman, Second Floor, Newport Beach, California 92660-2002, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. -13- 18 Section 2.4 Power of Attorney A. Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices: (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatement thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13 hereof or the Capital Contribution of any Partner; (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interest; and (f) any and all financing statements, continuation statements and other documents necessary or desirable to create, perfect, continue or validate the security interest granted by a Limited Partner pursuant to Section 10.5 of this Agreement or to exercise or enforce the Partnership's rights with respect to such security interest; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except -14- 19 in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's Assignee's Limited Partnership Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney in accordance with the provisions of this Agreement. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term The term of the Partnership shall commence on the Effective Date and shall continue until December 31, 2097, unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. ARTICLE 3 PURPOSE Section 3.1 Purpose and Business The purpose and nature of the business to be conducted by the Partnership is: (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act; provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to be classified as a REIT, unless the General Partner ceases to qualify as a REIT for reasons other than the conduct of the business of the Partnership; (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged in any of the foregoing; and (iii) to do -15- 20 anything necessary or incidental to the foregoing. In connection with the foregoing, and without limiting the General Partner's right, in its sole discretion, to cease qualifying as a REIT, the Partners acknowledge the General Partner's current status as a REIT inures to the benefit of all of the Partners and not solely the General Partner. Section 3.2 Powers The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership; provided, however, that the Partnership shall not take, or refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion: (i) could adversely affect the ability of the General Partner to continue to qualify as a REIT; (ii) could subject the General Partner to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the General Partner or its securities, unless such action (or inaction) shall have been specifically consented to by the General Partner in writing. Section 3.3 Technical Revisions The Limited Partners agree to, and the General Partner is hereby authorized to make, any modifications or amendments to this Agreement that may be necessary for the General Partner to maintain its status as a real estate investment trust or in order for it to avoid a penalty or tax; provided, however, that such modification or amendment does not materially alter or affect adversely any Limited Partner's rights, duties, or obligations under this Agreement. ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Initial Capital Contributions of the Partners A. (1) Concurrently with the Closing, the General Partner shall contribute to the Partnership cash up to, but not exceeding, a maximum of $4,000,000, as described and in accordance with the terms, provisions, and conditions of the Master Contribution Agreement as necessary for the purposes of paying down and/or restructuring the Cigna Debt. (2) Concurrently with the Closing, the General Partner shall pay or credit Eden with the "Commissions" and "Qualifying Eden Closing Costs" (pursuant to and as defined in the Master Contribution Agreement). The Commissions and Qualifying Eden -16- 21 Closing Costs paid or credited to Eden by the General Partner shall constitute Capital Contributions by the General Partner. (3) Concurrently with the Closing, the General Partner shall contribute to (or pay on behalf of) the Partnership or the General Partner the cash necessary to pay the transaction costs, closing costs and prorations to be paid by the Partnership or the General Partner or which are designated as Partnership or General Partner expenses pursuant to the Master Contribution Agreement. The amounts so contributed or paid by the General Partner shall constitute Capital Contributions by the General Partner. B. Concurrently with the Closing, Eden shall transfer, assign, convey, and deliver all right, title, and interest in and to the real properties, improvements, and other assets relating to the Original Properties as described and in accordance with the terms, provisions, and conditions of the Master Contribution Agreement. As stated therein, the Original Properties shall be subject to debt in an amount no less than $12,000,000 (including holdbacks as described therein) at the Closing, $12,000,000 of which shall be guaranteed by Eden, but without recourse to the partners or members of Eden; provided, however, that nothing contained herein shall preclude amortization of such debt in accordance with the applicable loan documents. The Agreed Value of the Original Properties is set forth on Exhibit "D". The Capital Contribution of the Original Limited Partners to the Partnership shall be equal to the Agreed Value of the Original Properties. The number of Limited Partnership Units issued to the Original Limited Partners on account of such Capital Contribution shall be equal to the Agreed Value of the Original Properties divided by the "PGP Share Price" (as defined in the Master Contribution Agreement). C. In consideration of their initial Capital Contributions, the Limited Partners shall receive Limited Partnership Units in the amounts set forth on Exhibit "A", and such amounts shall represent the initial Limited Partner Percentage Interests shown on said Exhibit. The Limited Partner Percentage Interests shall be adjusted in Exhibit "A" from time to time by the General Partner to the extent necessary to reflect accurately redemptions, additional Capital Contributions, the issuance of additional Limited Partnership Units (pursuant to any merger or otherwise), or similar or other events having an effect on any Limited Partner's Limited Partner Percentage Interest. Except as provided hereinabove and as expressly provided in Sections 4.3 and 10.5, the Partners shall have no obligation whatsoever to make any additional or further Capital Contributions, loans, or advances of any kind to the Partnership, or to in any way finance the operation of the Partnership or any of the debt or obligations of the Partnership. D. Except as provided in Section 13.3 of this Agreement and as otherwise expressly provided herein, the Capital Contribution of each Partner will be returned to that Partner -17- 22 only in the manner and to the extent provided in Article 5 and Article 13 hereof, and no Partner may withdraw from the Partnership or otherwise have any right to demand or receive the return of its Capital Contribution to the Partnership, except as specifically provided herein. Under circumstances requiring a return of any Capital Contribution, no Partner shall have the right to receive property other than cash, except as specifically provided herein. No Partner shall be entitled to interest on any Capital Contribution or Capital Account. The General Partner shall not be liable for the return of any portion of the Capital Contribution of any Limited Partner, and the return of such Capital Contributions shall remain solely from Partnership assets. E. No Limited Partner shall have any further personal liability to contribute money to, or in respect of, the liabilities or the obligations of the Partnership, nor shall any Limited Partner be personally liable for any obligations of the Partnership, except as otherwise provided in this Agreement or in the Act. No Limited Partner shall be required to make any contributions to the capital of the Partnership other than as expressly provided in this Agreement. Section 4.2 Additional Capital Contributions by the General Partner From time to time at or following the Closing, the General Partner may, but shall not be obligated to, contribute additional capital to the Partnership to pay for any and all costs and expenses of (a) operating the Partnership; financing, refinancing and paying off or down Partnership debt (subject to the limitations in Section 7.2 hereof; and (c) owning, operating, maintaining, repairing, improving, acquiring and selling both Original and Non-Original Limited Partner Related Assets, including but not limited to Seismic Costs and any other Capital Contributions made to correct or repair any items of seismic compliance, deferred maintenance and capital improvements to the Original Properties. Section 4.3 Issuances of Additional Partnership Interests A. The General Partner is hereby authorized to cause the Partnership from time to time to issue to the Partners (including the General Partner) or other Persons additional Limited Partnership Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including, rights, powers and duties senior to the Limited Partners (including the Original Limited Partners and their heirs, successors and assigns), except that, notwithstanding the foregoing, with respect to the Original Limited Partners Related Assets, any such additional Limited Partnership Units or Partnership Interests shall, if at all, only carry or give to their holders rights to -18- 23 receive distributions (as to amount, timing, and priority) junior to the rights of the Original Limited Partners as set forth in this Agreement with respect to the Original Limited Partners Related Assets unless and until (and not before) the General Partner has made the election provided for in Section 5.2 of this Agreement. Following the making of such election, the rights as to distributions pertaining to such additional Limited Partnership Units or Partnership Interests may be equal or junior to those of the Original Limited Partners and their heirs, successors and assigns. Subject to the foregoing, the rights, privileges, benefits, burdens, and restrictions relating to any such additional Limited Partnership Units or Partnership Interests shall be determined by the General Partner in its sole and absolute discretion (but without creating different priorities as between the Limited Partner Interests and the General Partner Interests received by the General Partner and the Original Limited Partners in connection with the contributions provided for under the Master Contribution Agreement), subject to Delaware law, including, without limitation: (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; provided that no such additional Limited Partnership Units or other Partnership Interests shall be issued to the General Partner, as the General Partner, or a Limited Partner, or to an Affiliate of either the General Partner or a Limited Partner, unless the additional Partnership Interests are issued for a fair economic consideration determined at the time of or within ninety (90) days prior to the issuance, or unless the issuance of such additional Partnership Interests is otherwise permitted under the terms and provisions of this Agreement. A determination by an independent investment banker or financial advisor that the consideration paid or proposed to be paid by the General Partner in this regard is a fair economic consideration, or is otherwise fair from a financial point of view, to the Partnership shall be conclusive and binding upon all parties hereto for all purposes, and shall constitute a conclusive, non-rebuttable presumption that the consideration so paid represented fair, good faith, and proper action by the General Partner with the Partnership as concerns the General Partner's dealings and transactions with the Partnership in relation to such issuance. B. If the General Partner makes the election provided for in Section 5.2 of this Agreement, then thereafter the General Partner shall be authorized at any time, in its sole discretion, and without the need for any vote, consent or approval from, or consultation with, any Limited Partner, and further without the need for any appraisal, valuation, or any other analysis or evaluation of any property, assets, rights, debts, liabilities, obligations, claims, title, encumbrances, or any other matters of any sort from any person, to contribute, assign, convey, and -19- 24 transfer all, but not less than all, of the General Partner's rights, title, claims, interests, debts, duties, liabilities, and obligations, in, to, and relating to all, but not less than all, of the General Partner's assets, properties, debts, liabilities, and obligations (excluding the General Partner's rights, title, claims, interests, debts, duties, liabilities, and obligations in, to, and relating to its interest in the Partnership, and also excluding same as such relates to any other entity in which the General Partner has an interest but which does not own a direct or indirect interest in real property) to the Partnership. In exchange therefor, the Partnership shall immediately issue to the General Partner (A) that number of Limited Partnership Units equal to the number of the outstanding shares of common stock of the General Partner at the time of such contribution by the General Partner to the Partnership, and (B) options, warrants, and other rights to acquire additional Limited Partnership Units in the Partnership and other securities of the Partnership on a unit-for-unit basis equivalent to, and on the same terms and conditions as, all options, warrants, and other rights and securities issued and then outstanding ("General Partner Security Rights") with regard to any shares of capital stock or other securities of any kind of the General Partner then or thereafter issued. After consolidation of the General Partner's affairs into the Partnership as described in this Section, upon the exercise by any holder of any General Partner Security Rights and the General Partner's issuance of its securities to the exercising party with respect thereto, or the issuance of any other securities of the General Partner, the General Partner promptly shall contribute to the Partnership any consideration received upon such exercise (net of all costs, fees, expenses, and commissions relating thereto), and the Partnership shall thereupon issue to the General Partner an equivalent number of Limited Partnership Units (in the case of issuances by the General Partner of shares of its common stock) or an equivalent number of other interests in the Partnership which have parallel and comparable rights and privileges to the rights and privileges of the securities issued by the General Partner (in the case of issuances by the General Partners other than shares of its common stock.) Section 4.4 Preemptive Rights Only the General Partner shall have the right to make the additional Capital Contributions described in Section 4.2. Except as provided in Section 4.2 hereof, no Person shall have any preemptive, preferential or other similar right with respect to: (i) the making of additional Capital Contributions or loans to the Partnership; or (ii) the issuance or sale of any Limited Partnership Units or other Partnership Interests. -20- 25 ARTICLE 5 DISTRIBUTIONS Section 5.1 Requirement and Characterization of Distributions A. Subject to Section 5.6, on or before ninety (90) days after the end of each calendar quarter the General Partner shall distribute to the Partners who are partners on the Partnership Record Date for such calendar quarter an amount equal to 100% of the Available Cash for such calendar quarter in the following order of priority: (1) First, to the Limited Partners pro rata in accordance with their respective Limited Partner Percentage Interests, until such time as the distribution made pursuant to this Section 5.1A(1) on account of each Limited Partnership Unit held by a Limited Partner for the calendar quarter in which the distributions are made equals the cash dividend paid to the common shareholders of the General Partner on account of one share of common stock of the General Partner for such calendar quarter; (2) Second, if there then exists a Current Year Deficit, to the Limited Partners pro rata in accordance with their respective Limited Partner Percentage Interests until such time as the distribution made pursuant to this Section 5.1A(2) eliminates the Current Year Deficit; provided, however, that if Available Cash is not sufficient to eliminate the Current Year Deficit for the calendar year on account of which the distributions are made, any remaining Current Year Deficit shall not be carried forward and shall be disregarded in determining distributions to be made pursuant to this Section 5.1A in subsequent quarters; and (3) Thereafter, to the General Partner. B. Distributions made pursuant to this Section 5.1 shall be made in the foregoing order of priority, with all Available Cash being distributed at the highest level of priority until that level of priority is completely satisfied before any Available Cash is distributed at a lower level of priority, and distributions at a lower level of priority not being made or being only partially made if Available Cash is insufficient therefor. C. Anything contained herein to the contrary notwithstanding, the quarterly distribution of Available Cash made on account of each Limited Partnership Unit for the calendar quarter which contains the Effective Date shall not exceed the dividend paid to common shareholders of the General Partner on account of a share of common stock of the General Partner for the calendar quarter which contains the Effective Date, multiplied by -21- 26 a fraction (x) the numerator of which is the number of days from and including the Effective Date to and including the last day of such calendar quarter, and (y) the denominator of which is the total number of days in such calendar quarter. Section 5.2 General Partner Election The General Partner may elect, at any time, in its sole and absolute discretion, to have all future calculations of Available Cash based upon all Partnership assets without distinction between Original and Non-Original Limited Partner Related Assets, and to have all future distributions to Limited Partners made pursuant to the following terms in lieu of the terms of Section 5.1 (an election under this Section, once made, shall be irrevocable): A. First, the General Partner shall make distributions or payments to the Limited Partners regardless of the availability or amount of Available Cash, in an amount, on account of each Limited Partnership Unit held by a Limited Partner for the calendar quarter in which the distributions are made, equal to the cash dividend paid to the common shareholders of the General Partner on account of one share of common stock of the General Partner for such calendar quarter; and B. Thereafter, to the General Partner. Section 5.3 Amounts Withheld All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.5 hereof with respect to any allocation, payment or distribution to the Partners or Assignees shall be treated as amounts distributed to the Partners or Assignees pursuant to Sections 5.1 or 5.2 for all purposes under this Agreement. Section 5.4 Distributions Upon Liquidation Proceeds from a Liquidating Event, if any, and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2. Section 5.5 Other Assets Present Notwithstanding the foregoing, if and after the Partnership acquires Non-Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then distributions of Available Cash to the General Partner and the Original Limited Partners (and the Original Limited Partners' heirs, successors -22- 27 and assigns) under the terms of the foregoing shall be calculated and made only with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets. Distributions under the terms of the foregoing shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto, all of which shall be as separately determined by the General Partner in its sole and absolute discretion. Section 5.6 Seismic Costs Anything contained herein to the contrary notwithstanding, from the amounts otherwise distributable to the Original Limited Partners pursuant to Sections 5.1A(1), 5.1A(2) and 5.2A, the General Partner shall instead pay or establish a reserve to pay (or to reimburse the General Partner to the extent the General Partner has paid) the Seismic Costs. The amount so reserved or paid (or reimbursed to the General Partner) in each calendar quarter shall equal the greater of either (a) $25,000; or (b) the amount which, when added to all amounts previously reserved or paid (or reimbursed to the General Partner) equals the total amount of all Seismic Costs incurred by the Partnership and the General Partner to the date of such quarterly distribution. The Seismic Costs shall be incurred and paid (or reimbursed to the General Partner) in such order as the General Partner may determine in its sole and absolute discretion. No amounts shall be distributed to the Limited Partners pursuant to Sections 5.1A(1), 5.1A(2) or 5.2A unless and until the full amount set forth in the second sentence of this Section 5.6 has been reserved or paid (or reimbursed to the General Partner)in full. Nevertheless, all amounts on account of Seismic Costs which would otherwise have been distributed to the Limited Partners but for the provisions of this Section 5.6 shall be treated as having been distributed to the Limited Partners pursuant to Sections 5.1A(1), 5.1A(2) or 5.2 for all purposes under this Agreement. When all Seismic Costs have been paid (or reimbursed to the General Partner) in full, any funds remaining in such Seismic Costs reserve shall be distributed to the Original Limited Partners pro rata in accordance with their respective Limited Partner Percentage Interests. ARTICLE 6 ALLOCATIONS Section 6.1 Allocations of Net Income and Net Loss For purposes of maintaining the Capital Accounts and in determining the rights of the General and Limited Partners among -23- 28 themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Exhibit "B" hereof) shall be allocated among the General and Limited Partners in each taxable year (or portion thereof) as provided herein below. A. Net Loss for a particular period shall be allocated as follows: (1) First, to the General and Limited Partners in proportion to and to the extent of their positive Capital Account balances, if any. (2) Second, to the Limited Partners, in proportion to and to the extent of, their respective aggregate Excess Distributions, until the amount allocated under this Section 6.1A(2) for the current fiscal year and all prior fiscal years equals the Excess Distributions of all Limited Partners. (3) Third, to the General Partner. B. Net Income for a particular period shall be allocated as follows: (1) First, to the Partners that have previously been allocated Net Loss pursuant to Section 6.1A in amounts and among such Partners in the reverse order (and in the corresponding amounts) of all Net Loss previously allocated to them until the amount of Net Income allocated pursuant to this Section 6.1B(1) equals the aggregate amount of all Net Loss theretofore allocated pursuant to Section 6.1A. (2) Second, if applicable, to the Limited Partners in proportion to their respective Limited Partner Percentage Interests until the aggregate Net Income allocated pursuant to this Section 6.1B(2) for the current taxable period and all previous taxable periods equals the aggregate amount of Available Cash distributed to the Limited Partners pursuant to Section 5.1A(1). (3) Third, if applicable, to the Limited Partners in proportion to their respective Limited Partner Percentage Interests until the aggregate Net Income allocated pursuant to this Section 6.1B(3) for the current taxable period and all previous taxable periods equals the aggregate amount of Available Cash distributed to the Limited Partners pursuant to Section 5.1A(2). (4) Fourth, if applicable, to the Limited Partners in proportion to their respective Limited Partner Percentage Interests until the aggregate Net income allocated pursuant to this Section 6.1B(4) for the current taxable period and all previous taxable periods equals the aggregate amount of Available Cash distributed to the Partners pursuant to Section 5.2A; and -24- 29 (5) Fifth, to the General Partner. Section 6.2 Other Allocations A. For purposes of Regulations Section 1.752, the Partners agree that $12,000,000 of the Partnership debt secured by the Original Properties at the Closing shall be allocated to Eden as a result of Eden's guaranty of $12,000,000 of such debt, which guaranty is nonrecourse to the partners and members of Eden; provided, however, that nothing contained herein shall preclude amortization of such debt in accordance with the applicable loan documents. B. Any gain allocated to the General Partner and the Original Limited Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to Exhibit "C", be characterized as Recapture Income in the same proportions and to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income. C. If and after the Partnership acquires Non-Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then allocations of Net Income, Net Loss, and any other items to the Original Limited Partners and their heirs, successors and assigns under this Agreement shall be calculated separately with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets and the ownership and operation thereof. Such allocations and calculations shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto, all of which shall be as separately determined by the General Partner in its sole and absolute discretion. ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the -25- 30 General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the General Partner (so long as the General Partner qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its shareholders in amounts sufficient to permit the General Partner to maintain REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidence of indebtedness (including the securing of the same by deed, mortgage, deed of trust or other lien or encumbrance on the Partnership's assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity; (4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the General Partner, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Subsidiaries of the Partnership and/or the General Partner) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to its Subsidiaries, the holding of any -26- 31 real, personal and mixed property of the Partnership in the name of the Partnership or in the name of a nominee or trustee and the creation, by grant or otherwise, of easements or servitudes; (5) the management, operation, leasing, collection of rents, marketing, landscaping, repair, alteration, renovation, rehabilitation, demolition or improvement of the Original Properties or any other real property or improvements owned by the Partnership or any Subsidiary of the Partnership and the performance of any and other acts necessary or appropriate to the operation of such properties, including, without limitation, applications for rezoning or objections to rezoning of such properties; (6) the negotiation, execution, and performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including, without limitation, the execution and delivery of leases on behalf of or in the name of the Partnership, contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership's assets; (7) the opening and closing of bank accounts, the investment of Partnership funds in securities, certificates of deposit and other instruments, and the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; (8) the holding, managing, investing and reinvesting cash and other assets of the Partnership; (9) the collection and receipt of revenues and income of the Partnership; (10) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer" of the Partnership), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or hiring (whether or not any of the foregoing are also employed by, consultants to, independent contractors for, or otherwise do business with the General Partner or its Affiliates in related or unrelated matters); (11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate (whether or not such is done as part of a group, combined or other policy or policies under which the Partnership and the General Partner (or its Affiliates) are also insured, so -27- 32 long as the General Partner fairly allocates the expense thereof among the covered parties); (12) the formation of, or acquisition of an interest in, and the contribution of some or all of property (or any part thereof or interest therein) to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity investment from time to time); (13) the control of any and all matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of, any claim, cause of action, liability, debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitration or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law and consistent with the terms of this Agreement, including in each and all of the foregoing instances any such matter or thing in which the General Partner or its Affiliates have a direct interest; (14) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including without limitation, the contribution or loan of funds by the Partnership to such Persons); (15) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt; (16) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or an interest jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in -28- 33 which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person; (19) the making, execution and delivery of any and all deeds, leases, notes, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate, in the judgment of the General Partner, for the accomplishment of any of the powers of the General Partner enumerated in this Agreement; and (20) the issuance of additional Limited Partnership Units or Partnership Interests, as appropriate, in connection with Capital Contributions by Additional Limited Partners and additional Capital Contributions by Partners pursuant to Article 4 hereof. B. Each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. D. In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner of any action taken by it. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner taken pursuant to its authority under this Agreement and in accordance with the terms hereof. Section 7.2 Limitations on General Partner Anything contained herein to the contrary notwithstanding, without the prior Consent of all Original Limited Partners, the General Partner shall not cause the Partnership to do any of the -29- 34 following during the No Sale Period unless and until (on a property-by-property basis if applicable) such is accomplished in a manner which is fully tax deferred to, and does not produce any income tax liability for, an Original Limited Partner as a result thereof: A. sell, transfer or otherwise dispose of any of the Original Properties; B. pay down the Cigna Debt or, if the Cigna Debt is refinanced, any refinanced debt, or change any of the terms of the Cigna Debt or refinanced debt such that the debt is less than $12,000,000, not secured by the Original Properties, or not guaranteed by Eden (other than as contemplated by the Master Contribution Agreement or as required by the loan documents or any other agreement ancillary thereto), nor take any other action which would result in a reduction of the allocation of debt to the Original Limited Partners for purposes of computing such parties' basis for income tax purposes; provided, however, that nothing contained herein shall preclude amortization of such debt in accordance with the applicable loan documents; C. fail to use reasonable, good faith and diligent efforts to avoid a foreclosure of the Cigna Debt or, if the Cigna Debt is refinanced, any refinanced debt, or a bankruptcy filing by or against the Partnership; D. elect to dissolve the Partnership. Section 7.3 Certificate of Limited Partnership The General Partner has filed the Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. -30- 35 Section 7.4 Management Fee and Reimbursement of the General Partner A. The General Partner and/or its Affiliates shall have the right, but not the obligation, in the sole discretion of the General Partner, to perform all or any of the property management services on account of the property owned or managed by the Partnership. If the General Partner elects to so perform, or to have an Affiliate so perform, the property management services, then the General Partner or its Affiliate shall be reimbursed by the Partnership for the expenses it incurs in providing such services in amounts determined by the General Partner, in its good faith discretion, to be comparable to amounts which would be reimbursable on account of expenses to reputable unrelated third party property management companies which have substantial experience in performing property management services for properties of the type owned or managed by the Partnership for institutional owners with portfolios under management which are substantially similar in size, nature, and condition of property owned or managed by the Partnership. In addition, if the General Partner elects to so perform, or to have an Affiliate so perform, the property management services described herein, it is agreed that a management fee of four percent (4%) of gross income shall be paid by the Partnership to the General Partner or its Affiliates for the property management services as contemplated hereunder. The reimbursements and fees payable to the General Partner or its Affiliates under this Section shall be paid no less frequently than monthly. Except as provided in this Section 7.4A and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. In furtherance of this Section, the General Partner may cause the Partnership to enter into one or more property management agreements with the General Partner or an Affiliate of the General Partner, substantially in the form of the Management Agreement. B. The General Partner shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all costs and expenses that it incurs relating to the ownership and operation of, or for the benefit of, the Original Properties, the Partnership or any of its other assets or related to the administration of the Partnership and the Limited Partnership Units. After consummation of the transactions and election described in, respectively, Sections 4.3B and 5.2 of this Agreement as a result of which the assets of the General Partner are conveyed to the Partnership, such reimbursement shall include reimbursement to the General Partner for all general and administrative costs, fees, and expenses incurred by the General Partner due to its status as a public company, a qualified real estate investment trust, or otherwise, and any and all other expenses incurred by the General Partner for any matter, reason or thing whatsoever. Any reimbursement -31- 36 under this Section shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.7 hereof. C. It is also acknowledged and agreed that, after consummation of the transactions and election described in, respectively, Sections 4.3B and 5.2 of this Agreement as a result of which the assets of the General Partner are conveyed to the Partnership, the General Partner will directly or indirectly incur costs and expenses, and may issue stock or other securities, or both, to persons employed or not employed, or retained or not retained, directly by the Partnership. Such costs, expenses, and issuances may include, but not be limited to, payment of general and administrative expenses by the General Partner, including compensation and bonuses to its officers and directors, and the award of stock grants and options to purchase securities of the General Partner. In light of the foregoing, it is agreed that, after consummation of the transactions and election described in, respectively, Section 4.3B and 5.2 of this Agreement, appropriate actions shall be taken by the Partnership, as determined by the General Partner, in its sole discretion, to either (i) reimburse the General Partner an appropriate portion of any such cost, expense, or issuance, or (ii) adjust the General Partner's Interest in the Partnership so as to prevent dilution of the General Partner's Interest. D. Without limiting the generality of Section 7.4C above, it is agreed that if, at any time or from time to time after consummation of the transactions and election described in, respectively, Sections 4.3B and 5.2 of this Agreement, options to purchase REIT Shares or any other securities granted to employees, consultants or advisors of the General Partner or any Equity Affiliate under any Plan or otherwise as compensation or incentive are exercised, or REIT Shares or any other securities are granted or awarded to employees, consultants or advisors of the General Partner or any Equity Affiliate under any Plan or otherwise as compensation or incentive, then the Partnership promptly shall issue to the General Partner Limited Partnership Units or other interests in the Partnership with comparable rights, benefits, and privileges in an amount equal to the REIT Shares or other securities granted and/or issued, as the case may be. If Limited Partnership Units or other interests in the Partnership are issued to the General Partner as a result of the exercise of options to purchase REIT Shares or other securities, then concurrently with the issuance of the Limited Partnership Units or other interests to the General Partner, the General Partner shall pay to the Partnership the cash consideration received by the General Partner on account of such exercise. E. After consummation of the transactions and elections described in Sections 4.3B and 5.2 of this Agreement, in the event that the General Partner shall elect to purchase from its shareholders REIT Shares for the purpose of delivering such REIT Shares to satisfy an obligation under any dividend reinvestment program adopted by the General Partner, any employee stock -32- 37 purchase plan adopted by the Company, or any similar obligation or arrangement undertaken by the General Partner in the future, the purchase price paid by the General Partner for such REIT Shares and any other expenses incurred by the General Partner in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the General Partner, subject to the conditions that: (i) if such REIT Shares subsequently are to be sold by the General Partner, the General Partner shall pay to the Partnership any proceeds received by the General Partner for such REIT Shares (provided that a transfer of REIT Shares for Limited Partnership Units pursuant to the Exchange Rights Agreement would not be considered a sale for such purposes); and (ii) if such REIT Shares are not re-transferred by the General Partner within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel a number of Limited Partnership Units held by the General Partner equal to the number of such REIT Shares (adjusted for stock dividends, stock splits, reorganizations, reclassifications, mergers, and the like with regard to the REIT Shares prior to such cancellation of Limited Partnership Units). Section 7.5 Outside Activities of the General Partner The General Partner and its Affiliates shall be permitted to purchase, own, operate, manage and otherwise deal with and profit from any property, real, personal or mixed, not owned by the Partnership for their own account and benefit, whether or not competitive with the business and affairs of the Partnership, and neither the Partnership, any Limited Partner, or any other Person shall have any right, claim, interest or cause of action therein or as a result thereof. Without limiting the generality of the above, nothing in this Agreement shall obligate the General Partner or its Affiliates to first offer the Partnership an opportunity to invest in any investment which has been offered to or found by the General Partner or its Affiliates, whether or not such investment is of a nature that may be invested in by the Partnership or would compete directly or indirectly with the business of the Partnership. The Limited Partners hereby acknowledge that the General Partner currently owns a variety of real estate investments and may in the future acquire additional real estate investments that may be competitive with the business of the Partnership. Section 7.6 Contracts with Affiliates A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. -33- 38 B. Subject to the restrictions contained in Section 7.2 hereof, the Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable. C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase or otherwise acquire any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, employee benefit plans, stock option plans, and similar plans funded by the Partnership for the benefit of employees of the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership or any Subsidiaries of the Partnership. Any or all of the foregoing may be jointly established with the General Partner or its Affiliates, provided that in such case the allocation of expense shall be shared among the parties on whose behalf such plans exist as determined by the General Partner in good faith to be fair and reasonable. Section 7.7 Indemnification A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys' fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the General Partner in its capacity as general partner of the Partnership as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, whether or not suit or other legal proceedings are commenced, unless it is established by a court of competent jurisdiction, and all appeals relating thereto have been fully completed or the applicable appeal periods have expired, that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceedings and either was committed in intentional bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper and unpermitted personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee knew, or was reckless in not knowing, that the act or omission was unlawful. Without limitation, the -34- 39 foregoing indemnity shall extend to any liability of any Indemnitee pursuant to a loan guaranty, recourse obligation, general partner liability, or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct as set forth in this Section 7.7A. The termination of any proceeding by conviction of an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, in each case after all appeals relating thereto have been fully completed or the applicable appeal periods have expired, creates a rebuttable presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.7A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.7. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding. C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitees are indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or -35- 40 beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 7.7; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the Indemnification provisions set forth in this Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators, and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the Partnership's liability to any Indemnitee under this Section 7.7, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.8 Liability of the General Partner A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or any act or omission of the General partner undertaken in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the shareholders of the General Partner collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (except as otherwise provided herein) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. -36- 41 C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith. D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's and its officers' and directors' liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.9 Other Matters Concerning the General Partner A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order: (i) to protect the ability of the General Partner to continue to qualify as a REIT; or (ii) to avoid the -37- 42 General Partner incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. Section 7.10 Title to Partnership Assets Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is being held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Section 7.11 Reliance by Third Parties Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, engage or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that: (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed -38- 43 and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS Section 8.1 Limitation of Liability The Limited Partners shall have no liability under this Agreement, except as expressly provided in this Agreement (including Section 10.5 hereof) or under the Act. Section 8.2 Management of Business No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Limited Partners A. Subject to the terms and provisions hereof, it is agreed that any Partner (General and/or Limited) and any Affiliate of any Partner (including any officer, director, employee, agent, or representative of any Partner) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights, claims, or interests by virtue of this Agreement or any relationships, duties or obligations hereunder (including, but not limited to, any fiduciary or similar duties created by this Agreement, under the Act, or otherwise existing at law or in equity) in any business ventures or investments of any General Partner or Limited Partner, or any Affiliate of any of the foregoing. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person, and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to -39- 44 the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person could be taken by such Person. B. It is further agreed that none of the Partners, General or Limited, or any of their Affiliates, have any duty, obligation, or liability to present to the Partnership any business or investment opportunity which may arise in the course of activity for or on behalf of the Partnership, or otherwise, for investment by the Partnership or any of the Partners (even if within the line and scope of the business and affairs of the Partnership), and instead any Partner, General or Limited, and any Affiliate may pursue such opportunity for such Partner's or Affiliate's own benefit and account, without any participation, right, or claim therein by the Partnership or any other Partner, and without notification or disclosure to the Partnership or any other Partner. Section 8.4 Return of Capital No Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Exhibit "C" hereof or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (including such copying and administrative charges as the General Partner may establish from time to time): (1) to obtain a copy of the most recent annual and quarterly balance sheet, income statement, and related financial statements prepared by the Partnership; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; -40- 45 (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner to the extent the foregoing is materially different from information contained in financial statements or other reports provided to Limited Partners. (6) to obtain quarterly and annual balance sheets and income statements regularly prepared by the Partnership in order to verify the correctness of distributions of cash, if any, to the Limited Partner in accordance with the terms and provisions of this Agreement. B. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, desirable or necessary any information that: (i) the General Partner reasonably believes to be in the nature of trade secrets or other information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreement with an unaffiliated third party to keep confidential. If the General Partner desires to disclose any information of the type described in the preceding paragraphs (i) or (ii) to a Limited Partner, the General Partner may require, as a condition to such disclosure, that the Limited Partner agree in writing that such information will be held in strictest confidence and no distribution of such information will be made. Section 8.6 No Redemption Right No Limited Partner (other than the General Partner) shall have the right to require the Partnership to redeem all or a portion of the Limited Partnership Units held by such Limited Partner. Section 8.7 Representations and Warranties Each Limited Partner represents and warrants to the General Partner and the Partnership that: A. He, she or it has received and reviewed that certain Prospectus of the General Partner dated May 27, 1997, that certain Prospectus Supplement dated June 5, 1997, and that certain Registration Statement, filed March 19, 1997, as amended -41- 46 and filed April 10, 1997, of which the Prospectus and Prospectus Supplement are a part, filed with the Securities and Exchange Commission under the Act and has had access to such additional financial and other information, including without limitation the General Partner's most current Form 10-Q and Form 10-K, the General Partners' 1996 Annual Report to Shareholders' and the General Partners' Notice of 1997 Annual Meeting of Shareholders and accompanying Proxy Statement, and has been afforded the opportunity to ask questions of representatives of the General Partner, and to receive answers to those questions, as they have deemed necessary. B. He, she or it acknowledges that the Limited Partnership Units are being acquired in a transaction not involving any public offering within the meaning of the Securities Act and that the Limited Partnership Units have not been registered under the Securities Act and agrees not to offer, sell, transfer or otherwise dispose of the Limited Partnership Units (except for such transfer as described in subsection D, below) in the absence of registration under the Securities Act unless such Limited Partner delivers to the Partnership and the General Partner an opinion of a lawyer reasonably satisfactory to the Partnership and the General Partner, in form and substance satisfactory to the Partnership and the General Partner, to the effect that the proposed sale, transfer or other disposition may be effected without registration under the Securities Act and under applicable state securities or blue sky laws. C. He, she or it is either (a) an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act, or (b) a person who either alone or with his, her or its purchaser representative (as defined in Rule 501(h) of Regulation D under the Securities Act) has such knowledge and experience in financial and business matters that he, she or it is capable of evaluating the merits and risks of an investment in the Limited Partnership Units or any other security acquired hereunder. He, she or it has such knowledge and experience in financial and business matters as to be capable of evaluating alone, or together with his, her or its purchaser representative or personal advisor the merits and risks of an investment in the Limited Partnership Units or any other security delivered hereunder and protecting his, her or its own interests in connection with the investment and has obtained, in his, her or its judgment, alone, or together with his, her or its purchaser representative or personal advisor sufficient information from the General Partner to evaluate the merits and risks of an investment in the Limited Partnership Units or any other security delivered hereunder. He, she or it acknowledges that he, she or it has the financial ability to bear the economic risk of his, her or its investment in the Limited Partnership Units, has adequate means for providing for his, her or its current needs and personal contingencies and has no need for liquidity with respect to the investment in the Limited Partnership Units. If other than an individual, it has not been organized solely for -42- 47 the purpose of acquiring the Limited Partnership Units or other security acquired under this Agreement. D. Although Eden may elect to transfer the Limited Partnership Units to its constituent entities, and those constituent entities may, in turn, elect to transfer the Limited Partnership Units to their respective constituent entities, they are not acquiring any Limited Partnership Units with a view to the distribution of the Limited Partnership Units or any present intention of offering or selling any of the Limited Partnership Units in a transaction that would violate the Securities Act or the securities laws of any State or any other applicable jurisdiction. ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or such other basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year The fiscal year of the Partnership shall be the calendar year. Section 9.3 Reports A. The Partnership shall mail to each Limited Partner no later than ninety (90) days after the close of each Partnership Year an annual report containing financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, for such Partnership year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner in its discretion (such selection may include any such accountants who also perform accounting or auditing work for the General Partner and its Affiliates). -43- 48 B. The Partnership shall mail to each Limited Partner no later than ninety (90) days after the close of each calendar quarter (except the last calendar quarter of each year), a report containing unaudited financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate. C. All accounting and other professional fees associated with the preparation, compilation, review, audit, and any other matters relating to the Partnership's records, financial statements and reports, tax returns, and any other Partnership items described in the preceding paragraphs shall be at the expense of the Partnership, not the General Partner. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by the Limited Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that if requested by a transferee of a Partnership Interest, the General Partner shall file an election on behalf of the Partnership pursuant to Section 754 of the Code to adjust the basis of the Partnership property in the case of a transfer of a Partnership Interest made in accordance with the provisions of this Agreement. The General Partner intends to elect the so-called "traditional method" of making Section 704(c) allocations pursuant to Regulations Section 1.704-3 with respect to property contributed as of the date hereof. The General Partner shall have the right to seek to revoke any tax election it makes (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination, in its sole and absolute discretion, that such revocation is in the best interest of the Partners. -44- 49 Section 10.3 Tax Matters Partner A. The General Partner shall be the "tax matters partner" of the Partnership for federal income purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address, taxpayer identification number, and profit interest of each of the Limited Partners and the Assignees; provided, however, that such information is provided to the Partnership by the Limited Partners and the Assignees. B. The tax matters partner is authorized, but not required: (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner: (i) who (within the time period prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" ( as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the IRS and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and -45- 50 (6) to take any other action of behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. C. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. D. The tax matters partner shall receive no special compensation for its services as such. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne or reimbursed by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, including an accounting firm which also renders services to the General Partner and its Affiliates. Section 10.4 Organizational Expenses The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code. Section 10.5 Withholding Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code and similar state and local income tax laws, if any. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made, unless: (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a -46- 51 security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall at its own expense take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer A. The term "transfer" when used in this Article 11 with respect to a Limited Partnership Unit shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any acquisition of Partnership Interests or Limited Partnership Units by the General Partner from any Limited Partner, nor does it include any grant of a security interest or any related action involving levy, execution, or the like contemplated under Section 10.5 of this Agreement. B. No Partnership Interest shall be transferred, in whole or in part (including any interest therein), except in accordance with the terms and conditions set forth in this Article 11. Any -47- 52 transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void ab initio, and the Partnership shall have no duty or obligation to recognize the transferee as a partner or holder of any interest whatsoever in the Partnership, and the transferee shall have no rights, interests or claims in or against the Partnership or any Partner. Section 11.2 Transfer of the General Partner's Partner Interest and Limited Partner Interest The General Partner may transfer any of its General Partner Interest or withdraw as General Partner, or transfer any of its Limited Partner Interest, without consent or approval from any Limited Partners. Such transfer includes transfer to an entity which is wholly-owned by the General Partner and is a Qualified REIT Subsidiary under Section 856(d) of the Code. Section 11.3 Limited Partners' Rights to Transfer A. Subject to the provisions of Sections 11.3C, 11.3D, 11.3E, 11.3F and 11.4, a Limited Partner (other than the General Partner) may transfer, with or without the consent of the General Partner, all or any portion of its Partnership Interest, or any of such Limited Partner's economic rights as a Limited Partner. In addition, those Original Limited Partners which are themselves partnerships or limited liability companies shall have the right to transfer, assign, and convey their Limited Partnership Units to their constituent partners or members, provided that such constituent partners or members shall first have executed and delivered the Subscription Documents and a written agreement to be bound by the terms, provisions, and conditions of this Agreement, the Exchange Rights Agreement, and the Master Contribution Agreement, and that at the time of such transfer, assignment, and conveyance to such constituent partners, the representations and warranties made by such constituent partners or members in the aforementioned Subscription Documents and the related agreement are true and correct in all material respects. B. If a Limited Partner is subject to Incapacity, the partners, executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. C. The General Partner may prohibit any transfer by a Limited Partner if, in the opinion of legal counsel to the Partnership or the General Partner, such transfer would require filing of a registration statement under the Securities Act of -48- 53 1933 or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Limited Partnership Units. D. No transfer by a Limited Partner of its Limited Partnership Units may be made to any Person if: (i) in the opinion of legal counsel for the Partnership or the General Partner, it would result in the Partnership being treated as an association taxable as a corporation; (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code; (iii) such transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (iv) such transfer would, in the opinion of legal counsel for the Partnership or the General Partner, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (v) such transfer would subject the Partnership to be regulated under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; or (vi) in the opinion of legal counsel for the Partnership or the General Partner, it would adversely affect the ability of the General Partner to continue to qualify as a REIT or subject the General Partner to any additional taxes under Section 857 or Section 4981 of the Code. E. No transfer of any Limited Partnership Unit may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the consent of the General Partner, in its sole and absolute discretion. Without limiting the restriction of the foregoing sentence, if any such consent is given, a condition to such consent shall be that the lender enter into an arrangement with the Partnership or the General Partner to exchange or redeem at a price agreeable to the lender, the General Partner, and the transferring Partner (each in their respective discretion) all Limited Partnership Units in which a security interest is held immediately prior to the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. F. The Limited Partners acknowledge that each certificate or instrument representing Limited Partnership Units shall bear the following legend and any other legend required under any applicable state securities law: "NEITHER THE LIMITED PARTNERSHIP UNITS IN THE PARTNERSHIP REPRESENTED BY THIS CERTIFICATE OR -49- 54 INSTRUMENT NOR ANY PART THEREOF OR INTEREST THEREIN HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE 'ACT') AND NEITHER MAY BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, IN WHOLE OR IN PART, UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP OF PGP NORTHERN INDUSTRIAL, L.P., AS AMENDED FROM TIME TO TIME (A COPY OF WHICH IS ON FILE WITH THE PARTNERSHIP); AND, IN ALL EVENTS, NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE LIMITED PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE (OR ANY SECURITY ISSUED ON ACCOUNT HEREOF OR WITH RESPECT HERETO) MAY BE MADE UNLESS THE PARTNERSHIP HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION BOTH MUST BE ACCEPTABLE TO THE PARTNERSHIP IN ITS SOLE DISCRETION) FOR THE HOLDER THAT, BECAUSE OF THE AVAILABILITY OF AN EXEMPTION, NO SUCH REGISTRATION, QUALIFICATION OR OTHER COMPLIANCE IS REQUIRED UNDER THE ACT, APPLICABLE BLUE SKY OR STATE SECURITIES LAWS, OR OTHERWISE." Section 11.4 Substituted Limited Partners A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his place. The General Partner shall, however, have the right to consent to the admission of a transferee of the interest of a Limited Partner pursuant to this Section 11.4 as a Substituted Limited Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. Notwithstanding the foregoing, in the event of transfers of Limited Partnership Units by Original Limited Partners in accordance with the second sentence of Section 11.3A, the transferees shall be admitted as Substituted Limited Partners, and the General Partner hereby consents to such. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. C. Upon admission of a Substituted Limited Partner, the General Partner shall amend Exhibit "A" to reflect the name, address, number of Limited Partnership Units, and Limited Partner Percentage Interest of such Substituted Limited Partner. -50- 55 Section 11.5 Assignees If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items, gain, loss deduction and credit of the Partnership attributable to the Limited Partnership Units assigned to such transferee, but shall not be deemed to be a holder of Limited Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Limited Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Limited Partnership Units in any matter presented to the Limited Partners for a vote (such Limited Partnership Units being deemed to have been voted on such matters in the same proportion as all other Limited Partnership Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Limited Partnership Units, such transferee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Limited Partnership Units. Section 11.6 General Provisions A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all such Limited Partner's Limited Partnership Units in accordance with this Article 11 or pursuant to any agreement consented to by the Partnership pursuant to which the Limited Partner's interests in the Partnership are conveyed and the Limited Partner's withdrawal is provided for. B. Any Limited Partner who shall transfer all of its Limited Partnership Units in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such Limited Partnership Units as Substitute Limited Partners. Similarly, any Limited Partner who shall transfer all of its Limited Partnership Units pursuant to any agreement of the type referred to in the preceding paragraph shall cease to be a Limited Partner. C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees. D. Without limiting the restriction of Section 11.6C, if any Partnership Interest is transferred or assigned during any quarterly segment of the Partnership's fiscal year in compliance with the provisions of this Article 11 on any day other than the first day of a Partnership Year, then Net Income, Net Losses, -51- 56 each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which a redemption occurs shall be allocated to a redeeming Partner. All distributions of Available Cash attributable to such Limited Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment, or redemption shall be made to the transferor Partner, all distributions of Available Cash thereafter attributable to such Limited Partnership Unit shall be made to the transferee Partner. Section 11.7 No Exchange Notwithstanding anything in this Section 11 to the contrary, each of the Limited Partners hereby agrees that, during the No Exchange Period, it shall be prohibited from tendering its Limited Partnership Units for exchange or redemption under the Exchange Rights Agreement. ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner A successor to all of the General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. The admission of any such transferee shall not cause a dissolution of the Partnership and such transferee shall carry on the business of the Partnership in accordance with the forms and provisions of this Agreement. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6.D hereof. -52- 57 Section 12.2 Admission of Additional Limited Partners A. Except as otherwise provided elsewhere in this Agreement, after the admission of Eden to the Partnership as the initial Original Limited Partner on the date hereof, a Person who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof, and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner. Section 12.3 Amendment of Agreement and Certificate of Limited Partnership For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment to this Agreement (including an amendment of Exhibit "A") and, if -53- 58 required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs be wound up, only upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. an event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless within ninety (90) days after such event of withdrawal a majority in interest in capital and profits of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal of a successor General Partner; C. an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; E. the sale of all or substantially all of the assets and properties of the Partnership; provided, however, that the sale of one or more, but less than all, of the Original Properties shall not be a Liquidating Event so long as the Partnership retains at least one of the Original Properties; or F. a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner. -54- 59 Section 13.2 Winding Up A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner, or in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator"), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of common stock in the General Partner) shall be applied and distributed in the following order: (1) First, to the satisfaction of all of the Partnership's debts and liabilities to creditors other than the Partners (whether by payment or the reasonable provision for payment thereof); (2) Second, to the satisfaction of all of the Partnership's debts and liabilities to the General Partner and its Affiliates (whether by payment or the reasonable provision for payment thereof); (3) Third, to the satisfaction of all of the Partnership's debts and liabilities to the other Partners (whether by payment or the reasonable provision for payment thereof); and (4) The balance, if any, to the General Partner and Limited Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any special compensation for any services performed pursuant to this Article 13. B. Notwithstanding the foregoing, if and after the Partnership acquires Non-Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then distributions under the terms of Section 13.2A shall be calculated and made only with respect to Original Limited Partner -55- 60 Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets. Distributions under the terms of Section 13.2A shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto, all of which shall be as separately determined by the General Partner in its sole and absolute discretion. C. Anything contained herein to the contrary notwithstanding, pursuant to the Exchange Rights Agreement all Limited Partnership Units then held by any Limited Partner (other than Limited Partnership Units held by the General Partner) will be mandatorily exchanged or redeemed prior to any distribution, or the determination of any entitlement to any distribution, pursuant to Section 13.2A. As a result of such mandatory exchange or redemption of Limited Partnership Units, no Limited Partner (other than the General Partner in its capacity as a Limited Partner) will receive, nor shall he, she or it be entitled to receive, any distribution upon a Liquidating Event. D. Notwithstanding the provisions of Section 13.2A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners and their Affiliates as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. E. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made pursuant to this Article 13 may be: (1) distributed to one or more trust(s) established for the benefit of the creditors and the General Partner and Limited Partners for the purposes of liquidating Partnership -56- 61 assets, collecting amounts owed to the Partnership, and paying any contingent, conditional or unmatured liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust(s) shall be distributed to the creditors and General Partner and Limited Partners from time to time, in the reasonable direction of the Liquidator, in the same manner and proportions as the amount distributed to such trust(s) by the Partnership would otherwise have been distributed to the creditors and General Partner and Limited Partners pursuant to this Agreement; and (2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the creditors and General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2A as soon as practicable. Section 13.3 Compliance with Timing Requirements of Regulations In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2) (provided, however, in no event shall the Partnership be liquidated prior to the date which would be the Settlement Date within the meaning of the Exchange Rights Agreement for Partners who tender an Exchange Notice (within the meaning of the Exchange Rights Agreement) on or before the fifth (5th) day after the date of receipt of the notice of liquidation by the Partnership. Section 13.4 Deemed Distribution and Re-contribution Notwithstanding any other provision of this Article 13, in the event the Partnership is considered "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership's property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Section 13.5 Rights of Limited Partners Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right, power or claim to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as -57- 62 to the return of its Capital Contributions, distributions, or allocations. Section 13.6 Notice of Dissolution In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners. Section 13.7 Termination of Partnership and Cancellation of Certificate of Limited Partnership Upon the completion of the liquidation of the Partnership's assets, as provided in Section 13.2 hereof, a certificate of cancellation shall be filed, the Partnership shall be terminated, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.8 Reasonable Time for Winding-Up A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. Section 13.9 Waiver of Partition Each Partner hereby waives any right to partition of the Partnership property. ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS Section 14.1 Amendments A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the General Partner) holding twenty-five percent (25%) or more of the Limited Partner Percentage Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a -58- 63 reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. Except as provided in Section 13.1C, 14.1B, 14.1C, or 14.1D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Partners holding a majority of the Limited Partner Percentage Interests of all Limited Partners; provided, however, that, except as otherwise provided in Sections 4.3A and 5.2 hereof, any amendment which materially and adversely alters the right of a Limited Partner (including an Original Limited Partner) to receive distributions of Available Cash or allocations of Net Income, Net Loss or any other items in the amounts, in the priorities or at the times described in this Agreement shall require the consent of such Limited Partner in order to become effective. B. Notwithstanding Section 14.1.A, the General Partner shall have the power, without the consent or approval of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of other holders of any additional Partnership Interests issued pursuant to Section 4.3, or otherwise pursuant to the terms of this Agreement; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions of this Agreement, or make any other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; (5) to satisfy any requirements, conditions, or guidelines, contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; and (6) the purposes set forth in Section 3.3. -59- 64 The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1.B is taken. C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement shall not be amended without Consent of each Partner adversely affected if such amendment would: (i) convert a Limited Partner's interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.3 and Section 14.1.B(3) hereof); (iv) cause the termination of the Partnership prior to the time set forth in Sections 2.5 or 13.1; or (v) amend this Section 14.1.C. D. Notwithstanding Section 14.1.A and 14.1.B hereof, the General Partner shall not amend Sections 7.4, 7.5, 14.1A, 14.1C or 14.2 without Consent of Limited Partners holding a majority of the Limited Partner Percentage Interests of the Limited Partners, excluding Limited Partner Interests held by the General Partner; and, to the extent that any such amendment would affect the amount, priority, or timing of distributions to any of the Original Limited Partners or their heirs, successors and assigns under this Agreement, the General Partner shall not amend Sections 7.4, 7.5, 14.1A, 14.1C, or 14.2 without Consent of Original Limited Partners holding a majority of the Limited Partner Percentage Interests of the Original Limited Partners (in each case including their heirs, successors and assigns), unless the transactions and election described in, respectively, Sections 4.3B and 5.2 of this Agreement have occurred and been made, in which case the special Consent of the Original Limited Partners as herein provided shall not be required. Section 14.2 Meetings of the Partners A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the General Partner) holding twenty-five percent (25%) or more of the Limited Partner Percentage Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or consent of the Partners is permitted or required under this Agreement, such vote or consent may be given at a meeting of the Partners or may be given in accordance with the procedures prescribed in Sections 14.1A or 14.2B hereof. Except as otherwise expressly provided in this Agreement, whenever the Consent of the Limited Partners is required the Consent of holders of a majority of the Limited Partner Percentage Interests held by Limited Partners (including -60- 65 Limited Partnership Interests held by the General Partner) shall control. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by Limited Partners holding a majority of the Limited Partner Percentage Interests (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of Limited Partners holding a majority of the Limited Partner Percentage Interests (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation from the Limited Partner executing such proxy. D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the General Partner and may be held at the same time, and as part of, meetings of the shareholders of the General Partner. Anything contained herein to the contrary notwithstanding, all meetings of the Partners shall be held within the State of California at such location as may be designated by the General Partner. ARTICLE 15 GENERAL PROVISIONS Section 15.1 No Assurances. Eden acknowledges and agrees that it is solely responsible for its tax planning and the structuring of this Agreement to accommodate such tax planning, and that neither the Partnership nor the General Partner makes any representation or provides any assurance to Eden that the provisions of this Agreement affecting or impacting Eden's tax planning, structuring or liability will be respected or upheld by any agency or authority or achieve the result desired by the -61- 66 Limited Partners. Therefore, notwithstanding the provisions of this Agreement, and without limiting the generality of the foregoing, Eden acknowledges and agrees that neither the Partnership nor the General Partner makes any representation or provides any assurance that the allocation provided in section 6.2 will be respected or upheld by any agency or authority or achieve the result desired by the Limited Partners, or that the Cigna Debt or any refinanced debt terms or allocation will be respected or upheld by any agency or authority or achieve the result desired by the Limited Partners. Section 15.2 Addresses and Notices Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee at the address set forth in Exhibit "A" or such other address of which the Partner shall notify the General Partner in writing. Section 15.3 Titles and Captions All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.4 Pronouns and Plurals Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 15.5 Further Action The parties shall execute and deliver all documents, provide all information and take or refrain form taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.6 Binding Effect This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.7 Creditors -62- 67 Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 15.8 Waiver No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any covenant, duty, agreement or condition. Section 15.9 Counterparts This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.10 Applicable Law This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. Section 15.11 Invalidity of Provisions If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of other remaining provisions contained herein shall not be affected thereby. Section 15.12 Entire Agreement This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto. Section 15.13 No Rights as Shareholders Nothing contained in this Agreement shall be construed as conferring upon the holders of the Limited Partnership Units any rights whatsoever as shareholders of the General Partner, including, without limitation, any right to receive dividends or other distributions made to shareholders of the General Partner or to vote or to consent or to receive notice as shareholders in respect of any meeting of shareholders for the election of directors of the General Partner or any other matter. Nothing contained in this Section shall be deemed a waiver or -63- 68 relinquishment of any parties rights under the Exchange Rights Agreement. Section 15.14 Venue Any action initiated by any party under this Agreement shall be brought and prosecuted in the State of California which the parties acknowledge and agree is a convenient forum in which to -64- 69 litigate such action, and the parties waive any right to commence or transfer such action in or to any other state. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day first above written. GENERAL PARTNER: PACIFIC GULF PROPERTIES INC., a Maryland corporation By:__________________________________________ Glenn L. Carpenter, President and Chief Executive Officer By:__________________________________________ Donald G. Herrman, Executive Vice President, Chief Financial Officer and Secretary EDEN: EDEN PLAZA ASSOCIATES, LLC, a California limited liability company By: ________________________________________ Elbert P. Bressie, Managing Member -65- 70 EXHIBIT A Partners Contributions and Partnership Interests
Limited Limited Partner Name and Address Cash Agreed Value of Total Partnership Percentage of Partner Contribution Contributed Property Contribution Units Interest - ---------------- ------------ -------------------- ------------ ---------- --------- General Partner Pacific Gulf $4,300,000** N/A $ 4,300,000** N/A N/A Properties Inc. 4220 Von Karman, Second Floor Newport Beach, California 92660 Attn: Don Herrman Limited Partners Eden Plaza N/A $2,857,062.21* $2,857,062.21 143,391 100% Associates, LLC 520 Third Street, Suite 555 San Francisco, California 94107 Attn: Elbert Bressie
* SEE NOTE ON EXHIBIT D ** ESTIMATE SUBJECT TO CHANGE -1- 71 EXHIBIT B CAPITAL ACCOUNT MAINTENANCE 1. Capital Accounts of the Partners A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions and any other deemed contributions made by such Partner to the Partnership pursuant to this Agreement; and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1B of the Agreement and Exhibit "C" hereof, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to this Agreement; and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1A of the Agreement and Exhibit "C" hereof. B. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (1) Except as otherwise provided in Regulations Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership, provided that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners' Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4). (2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. -1- 72 (3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. (4) In lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year. (5) In the event the Carrying Value of any Partnership Asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset. (6) Any items specifically allocated under Section 1 of Exhibit "C" hereof shall not be taken into account. C. Generally, a transferee (including an Assignee) of a Limited Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor; provided, however, that if the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, the Partnership's properties shall be deemed solely for federal income tax purposes, to have been contributed to the successor Partnership. The Capital Accounts of such successor Partnership shall be maintained in accordance with the principles of this Exhibit "B". D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D.(2), the Carrying Value of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D.(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement. (2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; and (c) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect economic interests of the Partners in the Partnership. -2- 73 (3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed. (4) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit "B", the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article 13 of the Agreement, shall be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties). E. The provisions of this Agreement (including this Exhibit "B" and other Exhibits to this Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify (i) the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed; or (ii) the manner in which items are allocated among the Partners for federal income tax purposes in order to comply with such Regulations or to comply with Section 704(c) of the Code, the General Partner may make such modification without regard to Article 14 of the Agreement, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) where appropriate, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), make any adjustments that are necessary or appropriate to maintain equality between Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes; and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). In addition, the General Partner may adopt and employ such methods and procedures for (i) the maintenance of book and tax capital accounts; (ii) the determination and allocation of adjustments under Sections 704(c), 734 and 743 of the Code; (iii) the determination of Net Income, Net Loss, taxable loss and items thereof under this Agreement and pursuant to the Code; (iv) conventions for the -3- 74 determination of cost recovery, depreciation and amortization deductions, as it determines in its sole discretion are necessary or appropriate to execute the provisions of this Agreement, to comply with federal and state tax laws, and are in the best interest of the Partners. 2. No Interest No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts. 3. No Withdrawal No Partner shall be entitled to withdraw any part of his Capital Contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement. 4. Non-Original Limited Partner Related Assets Notwithstanding the foregoing, if and after the Partnership acquires Non-Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then allocations provided for in this Exhibit "B" shall be calculated separately with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets and the ownership and operation thereof. Such allocations and calculations shall not include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto, all of which shall be separately determined by the General Partner in its sole and absolute discretion. -4- 75 EXHIBIT C SPECIAL ALLOCATION RULES 1. Special Allocation Rules Notwithstanding any other provision of the Agreement or this Exhibit "C", the following special allocations shall be made in the following order: A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of the Agreement or any other provisions of this Exhibit "C", if there is a net decrease in Partnership Minimum Gain during any Partnership taxable year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704- 2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. Solely for purposes of this Section 1.A, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of Partner Minimum Gain during such Partnership taxable year. B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.1 of this Agreement or any other provisions of this Exhibit "C" (except Section 1.A hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership taxable year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.702-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain charge- back requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such -1- 76 Partnership taxable year, other than allocations pursuant to Section 1.A hereof. C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 1.A and 1.B hereof such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership taxable year) shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership taxable year shall be allocated to the General Partner. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio for such Partnership taxable year which satisfy such requirements. E. Partner Nonrecourse Deductions. Any Partner Nonre-course Deductions for any Partnership taxable year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i). F. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. G. Curative Allocations. The allocations set forth in Section 1.A through 1.F of this Exhibit "C" (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations under Section 704(b) of the Code. The Regulatory Allocations may not be consistent with the manner in which the Partners intend to divide Partnership distributions. Accord- -2- 77 ingly, the General Partner is hereby authorized to divide other allocations of income, gain, deduction and loss among the Partners so as to prevent the Regulatory Allocations from distorting the manner in which Partnership distributions will be divided among the Partners. In general, the Partners anticipate that this will be accomplished by specially allocating other items of income, gain, loss and deduction among the Partners so that the net amount of the Regulatory Allocations and such special allocations to each person is zero. However, the General Partner will have discretion to accomplish this result in any reasonable manner; provided, however, that no allocation pursuant to this Section 1.G shall cause the Partnership to fail to comply with the requirements of Regulations Sections 1.7041(b)(2)(ii)(d), -2(e) or -2(i). 2. Allocations for Tax Purposes A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit "C". B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Partners as follows: (1) (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners, consistent with the principles of Section 704(c) of the Code and the Regulations thereunder, to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution; and (b) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit "C". (2) (a) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principals of Section 704(c) of the Code and the Regulations thereunder to take into account the Unrealized Gain or Unrealized Loss attribut- -3- 78 able to such property and the allocations thereof pursuant to Exhibit "B"; and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit "C"; and (b) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit "C". (3) all other items of income, gain, loss and deduction shall be allocated among the Partners in the same manner as their correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit "C". C. To the extent that the Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit the Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners. 3. No Withdrawal No Partner shall be entitled to withdrawal any part of his Capital Contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 8 and 13 of the Agreement. 4. Non-Original Limited Partner Related Assets Notwithstanding the foregoing, if and after the Partnership acquires Non-Original Limited Partner Related Assets, or becomes obligated, indebted or liable for or on account of Non-Original Limited Partner Related Assets or the ownership or operation thereof, and so long as the General Partner has not consummated the transactions and made the election described in Sections 4.3B and 5.2, respectively, of this Agreement, then allocations provided for in this Exhibit "C" shall be calculated separately with respect to Original Limited Partner Related Assets and the ownership and operation thereof, together with the operation and existence of the Partnership insofar as such concerns the Original Limited Partner Related Assets and the ownership and operation thereof. Such allocations and calculations shall not -4- 79 include any revenues, expenses, assets, or liabilities of the Partnership relating to the Non-Original Limited Partner Related Assets, the ownership or operation thereof, or the operation or existence of the Partnership with respect thereto, all of which shall be separately determined by the General Partner in its sole and absolute discretion. -5- 80 EXHIBIT D VALUE OF CONTRIBUTED PROPERTY
Underlying Property 704(c) Value Agreed Value - ------------------- ------------ ------------ Eden Plaza, $18,498,185.50 $2,857,062.21 Eden Rock #5, Eden Rock #9, Eden Rock #10.
[*704(c) VALUE IS THE AGREED VALUE PLUS THE AMOUNT OF THE CIGNA DEBT AT CLOSING PRIOR TO ANY REDUCTION] [**THE AGREED VALUE OF THE ORIGINAL PROPERTIES SHALL BE THE "EDEN CAPITAL CONTRIBUTION" AS DEFINED IN THE MASTER CONTRIBUTION AGREEMENT] 81 EXHIBIT E PROPERTY MANAGEMENT AGREEMENT THIS PROPERTY MANAGEMENT AGREEMENT (this "AGREEMENT") is made and entered into as of ______________, by and between PGP SOUTHERN INDUSTRIAL, L.P., a Delaware limited partnership ("OWNER") and Pacific Gulf Properties Inc., a Maryland corporation ("MANAGER") with reference to the following. RECITALS A. The Owner is the owner of an industrial park located on the land identified in Exhibit A attached hereto (the "PROJECT"). Manager is the sole general partner of Owner. B. Manager is experienced in managing and operating properties similar to the Project, and Manager possesses the personnel, skills and experience necessary for the efficient management and operation of the Project. C. Owner desires to engage Manager to manage and operate the Project, and Manager desires to render such management services to Owner, upon and subject to the terms and conditions set forth below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, Owner and Manager agree as follows: 1. ENGAGEMENT OF MANAGER. 1.1 Exclusive Manager. Owner engages Manager as, and Manager agrees to serve as, the sole and exclusive manager of the Project, with the authority to direct, supervise and manage the operation of the Project, for the period of time and upon the terms and conditions hereinafter set forth. 1.2 Employment of Personnel. Manager shall investigate, hire, train, pay, supervise and discharge the personnel reasonably necessary to be employed in order to properly maintain and operate the Project. All salaries, wages and other compensation of personnel employed by Manager hereunder, including so-called fringe benefits, medical health insurance, pension plans, social security taxes, Worker's Compensation insurance and the like (collectively, the "PERSONNEL COMPENSATION"), shall be payable by Manager from, and reimbursable to Manager out of, gross revenues generated from the operation of the Project, including, without limitation, all rent and/or lease payments, security, cleaning, and other deposits, common area maintenance charges, taxes, insurance, casualty -1- 82 and/or condemnation loss proceeds and other income due to Owner from each Project ("PROJECT REVENUES"). Personnel Compensation shall not reduce the "MANAGEMENT FEE" (defined below). 2. DUTIES OF MANAGER. 2.1 Performance of Duties. During the term of this Agreement, Manager agrees, for and in consideration of the compensation set forth herein, to supervise and direct the management and operation of the Project on behalf of Owner and for the account of Owner in an efficient and satisfactory manner as an industrial park. Manager shall at all times maintain an organization, systems and personnel sufficient to enable it to carry out all its duties, obligations and functions under this Agreement. Manager will perform its duties under this Agreement in accordance with all laws, codes and regulations applicable to the Project. 2.2 Service Contracts. Manager shall make or renew in Owner's name as agent of Owner and at Owner's expense, contracts and/or leases for water, electricity, gas, telephone, vermin extermination, landscape, trash removal and other services deemed by Manager or Owner to be necessary or advisable for the operation of the Project. In entering into any contracts or leases herein contemplated, Manager shall include as a condition thereof the right to terminate on thirty (30) calendar days' prior written notice with or without cause, unless Manager obtains the prior written consent of Owner. 2.3 Leasing. Manager shall be responsible for coordinating the leasing activities of the Project. Manager is hereby authorized to contract, in Owner's name as agent of Owner and at Owner's expense, with such brokers and leasing agents as Manager deems necessary or appropriate to facilitate the leasing activities of the Project. Manager is hereby authorized to prepare, execute, deliver and renew all leases, lease amendments and lease renewals and extensions, and to terminate tenancies, evict tenants and recover possession of rented space within the Project, prosecute legal actions in the name of Owner in connection with the foregoing, settle, compromise and/or release such actions or reinstate such tenancies, as Manager deems necessary or appropriate, all on Owner's behalf and as agent of Owner and at Owner's expense. References of all prospective tenants shall be investigated carefully by Manager, and Manager shall use reasonable efforts to ensure that space in the Projects is rented to desirable and financially responsible tenants. -2- 83 2.4 Payment of Expenses. Manager shall establish and maintain on behalf of Owner at a bank or banks as Manager may, from time to time, determine, an account for the Project (an "Account"). Manager shall collect all Project Revenue, and deposit all such income in the Account for the Project. From the Account, Manager shall make such disbursements to pay Project operating expenses, including, without limitation, Personnel Compensation, as are necessary, in Manager's reasonable judgment, to manage, operate and maintain the Project as provided in this Agreement. All items specified herein to be at Owner's expense shall be considered operating expenses of the Project. 2.5 Funding Of Account. Owner agrees to deposit moneys into the Account in the amount and to the extent that Project Revenues are insufficient to pay any operating expenses, including Personnel Compensation, hereunder. Manager shall notify Owner in writing as to the amount of any such insufficiency. 3. INSURANCE. The Manager shall obtain, upon Owner's request and approval, at Owner's cost and expense, such insurance as may be required by Owner in connection with the Project, including, without limitation, comprehensive general public liability, contractual liability and such other insurance as Owner deems necessary or desirable. Owner shall designate Manager as an additional named insured on each such insurance policy. 4. MANAGER'S COMPENSATION. 4.1 Management Fee. In consideration of the management services to be rendered by Manager pursuant to Article 2 of this Agreement, Manager shall receive as compensation a monthly sum equal to four percent (4%) of all Project Revenues from the Project collected during each month during the term of this Agreement (the "MANAGEMENT FEE"). 4.2 Payment of Management Fee. The Management Fee shall be paid on the first day of each calendar month during the term of this Agreement, based upon the Project Revenues from the Project collected for the preceding calendar month. If the term of this Agreement begins on a date other than the first day of a month or ends on a date other than the last day of a month, the Management Fee shall be prorated based on the number of days in such month. 4.3 Other Compensation. Manager shall be separately compensated for any services other than the usual and customary services performed in its capacity as the manager of the Project; provided that Manager shall not perform any extraordinary services without obtaining the prior written approval of Owner. -3- 84 5. BOOKS, RECORDS AND STATEMENTS. 5.1 Maintenance and Access of Records. Manager agrees to maintain adequate accounting records (which records shall be and remain the property of Owner) in connection with all matters contemplated by this Agreement in accordance with the provisions of this Agreement. 5.2 Operating Budget. Within thirty (30) calendar days after the execution of this Agreement, Manager shall prepare and submit to Owner for its approval a proposed operating budget setting forth in reasonable detail the estimated income and operating expenses of the Project, by month, for the remainder of the then calendar year for which this Agreement is in effect. On or before thirty (30) calendar days before each subsequent calendar year during the term of this Agreement, Manager shall prepare and submit to Owner for its approval a proposed operating budget setting forth in reasonable detail the estimated income and operating expenses of the Project, by month, for the succeeding calendar year. Owner will consider the proposed budgets and then will consult with the Manager in the ensuing period prior to the commencement of the forthcoming calendar year in order to agree on an "APPROVED OPERATING BUDGET." The parties will use reasonable efforts to agree upon an Approved Operating Budget for the forthcoming calendar year on or before December 15th of the then current calendar year. If the parties are unable to reach such agreement, the Approved Operating Budget for the forthcoming calendar year will be established by Owner. Manager agrees to employ reasonable efforts to ensure that the actual costs of maintaining and operating the Project shall not exceed the Approved Operating Budget, either in total or in any one accounting category. In the event it appears to Manager that the actual costs of maintaining and operating the Project shall exceed the Approved Operating Budget, Manager shall submit a revised budget proposal for Owner's approval as provided above. Upon approval, such revised budget shall become the Approved Operating Budget. In all events, Owner shall pay all actual costs of maintaining and operating the Project. 5.3 Capital Expenditure Budget. Within thirty (30) calendar days after the execution of this Agreement, Manager shall prepare and submit to Owner for its approval a proposed capital expenditure budget setting forth in reasonable detail the estimated capital expenditures of the Project, by month, for the remainder of the then calendar year for which this Agreement is in effect. On or before thirty (30) calendar days before each subsequent calendar year during the term of this Agreement, Manager shall prepare and submit to Owner for its approval a proposed capital expenditure budget setting forth in reasonable detail the estimated capital expenditures of the Project, by month, for the succeeding calendar year. -4- 85 Owner will consider the proposed budgets and then will consult with Manager in the ensuing period prior to the commencement of the forthcoming calendar year in order to agree on an "APPROVED CAPITAL BUDGET." The parties will use reasonable efforts to agree upon an Approved Capital Budget for the succeeding calendar year on or before December 15th of the then current calendar year. If the parties are unable to reach such agreement, the Approved Capital Budget for the forthcoming calendar year will be established by Owner. 6. TERM. 6.1 Initial Term. The term of this Agreement shall commence as of the date first set forth above and shall continue for an initial term ending on __________. Unless written notice to terminate is given by either party to the other at least thirty (30) days prior to the end of the initial term, this Agreement shall be automatically renewed for another _________ year term, upon and subject to the terms and conditions set forth in this Agreement. 6.2 Termination. This Agreement may be terminated for "cause" at any time by Owner upon thirty (30) days prior written notice to Manager setting forth in detail the "cause" for such termination. The term "cause" shall mean (i) any material breach of this Agreement by Manager, (ii) any willful misconduct, intentional misrepresentation or gross negligence of Manager related to, or in connection with, the management and operation of the Project, (iii) the commencement of a case under Title 11 U.S.C., or under any similar insolvency proceeding under applicable state or federal law, involving Manager as debtor, (iv) Owner's transfer or sale of the Property to an independent third party, (v) the occurrence of a total destruction of the Project, and (vi) the taking of the Project by condemnation, eminent domain, or by agreement in lieu thereof. 7. INDEMNIFICATION AND HOLD HARMLESS. Neither Manager nor any employee of Manager shall be liable, responsible or accountable in damages or otherwise to Owner for any acts performed by it in good faith and within the scope of this Agreement if any such act or failure to act is not attributable to Manager's or such employee's gross negligence or willful misconduct. Owner shall indemnify, defend and hold Manager (and each employee thereof) harmless for any loss, damage, liability, cost or expense (including reasonable attorneys' fees) arising out of any act or failure to act by Manager (or any employee thereof) if such act or failure to act is in good faith, is within the scope of this Agreement, and is not attributable to Manager's or such employee's gross negligence or willful misconduct. -5- 86 8. MISCELLANEOUS. 8.1 Applicable Law. This Agreement shall be construed in accordance with the laws of the State of California. 8.2 Severability. Each provision of this Agreement is intended to be severable. If any term or provision of this Agreement shall be determined by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, that provision shall be severed from this Agreement and shall not affect the validity of the remainder of this Agreement. 8.3 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. IN WITNESS OF THE FOREGOING, Owner and Manager have caused their duly authorized representatives to execute this Agreement as of the date first above written. OWNER: PGP NORTHERN INDUSTRIAL, L.P., a Delaware limited partnership By: Pacific Gulf Properties Inc., a Maryland corporation, its General Partner By: _________________________ Name: _________________________ Title: ________________________ By: _________________________ Name: _________________________ Title: ________________________ MANAGER: PACIFIC GULF PROPERTIES INC., a Maryland corporation By: ______________________________ Name: ______________________________ Title:______________________________ By: ______________________________ Name:_______________________________ Title: _____________________________ -6- 87 EXHIBIT A LEGAL DESCRIPTION THE LAND REFERRED TO IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ALAMEDA, CITY OF HAYWARD, DESCRIBED AS FOLLOWS: PARCEL 1: PARCEL 1, PARCEL MAP 1288, FILED SEPTEMBER 25, 1973, BOOK 80 OF PARCEL MAPS, PAGE 27, ALAMEDA COUNTY RECORDS. ASSESSOR'S PARCEL NO. 461-0015-028 PARCEL 2: PARCEL 1, PARCEL MAP 939, FILED JULY 13, 1972, BOOK 76 OF PARCEL MAPS, PAGE 10, ALAMEDA COUNTY RECORDS. EXCEPTING THEREFROM THAT PORTION DESCRIBED IN THE DEED TO EDEN ROCK CO. NO. 3, A JOINT VENTURE, RECORDED JULY 31, 1978, REEL 5508, IMAGE 378, SERIES NO. 78-145175, OFFICIAL RECORDS. ASSESSOR'S PARCEL NO. 461-0015-020-2 PARCEL 3: PARCEL 2, PARCEL MAP NO. 939, FILED JULY 13, 1972, IN BOOK 76 OF PARCEL MAPS, PAGE 10, ALAMEDA COUNTY RECORDS. TOGETHER WITH: ALL THAT CERTAIN REAL PROPERTY BEING A PORTION OF PARCEL 1 AS SHOWN ON "PARCEL MAP NO. 939" WHICH MAP IS FILED IN BOOK 76 OF PARCEL MAPS AT PAGE 10, ALAMEDA COUNTY RECORDS, SAID REAL PROPERTY BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE CORNER COMMON TO PARCELS 1 AND 2 ON THE NORTHWESTERLY LINE OF CORPORATE PLACE, AS SHOWN ON THE ABOVE MENTIONED PARCEL MAP, THENCE FROM SAID POINT OF BEGINNING ALONG SAID NORTHERLY LINE SOUTH 76 DEGREES 38'05" WEST 8.22 FEET; THENCE LEAVING THE LAST SAID LINE AND RUNNING ALONG A LINE PARALLEL TO AND 7.806 FEET SOUTHWESTERLY AT RIGHT ANGLES, FROM THE DIVIDING LINE BETWEEN SAID PARCELS 1 AND 2 NORTH 31 DEGREES 37'51" WEST 205.78 FEET; THENCE LEAVING SAID PARALLEL LINE NORTH 58 DEGREES 22'09" EAST 7.806 FEET TO SAID DIVIDING LINE; THENCE ALONG THE LAST SAID LINE SOUTH 31 DEGREES 37'51" EAST 208.356 FEET TO THE POINT OF BEGINNING. SAID REAL PROPERTY IS THE SAME AS "LOT LINE ADJUSTMENT NO. 77-4" APPROVED BY THE CITY OF HAYWARD PLANNING COMMISSION ON SEPTEMBER 22, 1977. ASSESSOR'S PARCEL NO. 461-0015-021-01 -7- 88 PARCEL 4: PARCEL ONE OF AMENDED PARCEL MAP 1035 FILED SEPTEMBER 5, 1975 IN BOOK 80 OF PARCEL MAPS ON PAGE 15, ALAMEDA COUNTY RECORDS. ASSESSOR'S PARCEL NO. 461-0085-018-03 (PORTION). PARCEL 5: PORTION OF INVESTMENT BOULEVARD, AS SAID BOULEVARD WAS ESTABLISHED BY THE GRANT OF EASEMENT FROM EDEN LANDING CORPORATION, A CALIFORNIA CORPORATION, TO THE CITY OF HAYWARD, A MUNICIPAL CORPORATION, DATED JUNE 20, 1967, AND RECORDED JULY 24, 1967 IN REEL 2005 OF OFFICIAL RECORDS OF ALAMEDA COUNTY AT IMAGE 500 (AZ-71982), DESCRIBED AS FOLLOWS: BEGINNING AT THE INTERSECTION OF THE NORTHERLY RIGHT OF WAY LINE OF INVESTMENT BOULEVARD WITH THE EASTERLY RIGHT OF WAY LINE OF EDEN LANDING ROAD AS SHOWN ON PARCEL MAP NO. 1035 FILED IN BOOK 79 OF PARCEL MAPS, PAGE 28, IN THE OFFICE OF THE ALAMEDA COUNTY RECORDER; THENCE ALONG SAID NORTHERLY RIGHT OF WAY LINE OF INVESTMENT BOULEVARD THE FOLLOWING THREE COURSES: 1) SOUTH 81 DEGREES 53'26" EAST 40.130 FEET; 2) SOUTH 48 DEGREES 12'02" EAST 61.294 FEET; 3) SOUTH 08 DEGREES 06'34" WEST 40.000 FEET; THENCE LEAVING SAID NORTHERLY RIGHT OF WAY LINE NORTH 81 DEGREES 53'26" WEST 67.124 FEET TO A TANGENT CURVE TO THE RIGHT; THENCE ALONG SAID TANGENT CURVE TO THE RIGHT HAVING A RADIUS OF 24.000 FEET THROUGH A CENTRAL ANGLE OF 89 DEGREES 59'35" AN ARC DISTANCE OF 37.696 FEET; THENCE NORTH 08 DEGREES 06'09" EAST 50.003 FEET TO THE POINT OF BEGINNING. ASSESSOR'S PARCEL NO. 416-0085-018-03 -8- EX-10.41 5 AGREEMENT OF LIMITED PARTNERSHIP - EXHIBIT 10.41 1 Exhibit 10.41 AGREEMENT OF LIMITED PARTNERSHIP OF MORNING VIEW TERRACE - PGP, L.P. 2 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINED TERMS.............................................................. 1 ARTICLE 2 ORGANIZATIONAL MATTERS..................................................... 9 SECTION 2.1 ORGANIZATION............................................. 9 SECTION 2.2 NAME..................................................... 9 SECTION 2.3 REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE............ 9 SECTION 2.4 POWER OF ATTORNEY........................................ 9 SECTION 2.5 TERM..................................................... 10 ARTICLE 3 PURPOSE.................................................................... 11 SECTION 3.1 PURPOSE AND BUSINESS..................................... 11 SECTION 3.2 POWERS................................................... 11 ARTICLE 4 CAPITAL.................................................................... 11 SECTION 4.1 CAPITAL OF THE PARTNERS.................................. 11 SECTION 4.2 ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS............ 12 SECTION 4.3 PREEMPTIVE RIGHTS........................................ 12 SECTION 4.4 GENERAL PARTNER LOANS.................................... 13 ARTICLE 5 DISTRIBUTIONS.............................................................. 13 SECTION 5.1 AMOUNT AND PRIORITY OF QUARTERLY DISTRIBUTIONS.......... 13 SECTION 5.2 FIRST DISTRIBUTION....................................... 13 SECTION 5.3 AMOUNTS WITHHELD......................................... 14 SECTION 5.4 DISTRIBUTIONS UPON LIQUIDATION........................... 14 ARTICLE 6 ALLOCATIONS................................................................ 14 SECTION 6.1 ALLOCATIONS OF NET INCOME AND NET LOSS................... 14 SECTION 6.2 OTHER ALLOCATIONS........................................ 15
- i - 3 ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS...................................... 16 SECTION 7.1 MANAGEMENT............................................... 16 SECTION 7.2 CERTIFICATE OF LIMITED PARTNERSHIP....................... 19 SECTION 7.3 NO PROPERTY TRANSFER PERIOD.............................. 19 SECTION 7.4 NO PAY DOWN PERIOD....................................... 19 SECTION 7.5 NO DISSOLUTION ACTION.................................... 20 SECTION 7.6 NO TAX TERMINATION OR DISSOLUTION........................ 20 SECTION 7.7 MANAGEMENT FEE AND REIMBURSEMENT OF THE GENERAL PARTNER.. 20 SECTION 7.8 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER................ 21 SECTION 7.9 CONTRACTS WITH AFFILIATES................................ 21 SECTION 7.10 INDEMNIFICATION......................................... 21 SECTION 7.11 LIABILITY OF THE GENERAL PARTNER........................ 23 SECTION 7.12 OTHER MATTERS CONCERNING THE GENERAL PARTNER............ 24 SECTION 7.13 TITLE TO PARTNERSHIP ASSETS............................. 24 SECTION 7.14 RELIANCE BY THIRD PARTIES............................... 24 ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS................................. 25 SECTION 8.1 LIMITATION OF LIABILITY.................................. 25 SECTION 8.2 MANAGEMENT OF BUSINESS................................... 25 SECTION 8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS................... 25 SECTION 8.4 RETURN OF CAPITAL........................................ 26 SECTION 8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP... 26 SECTION 8.6 NO REDEMPTION RIGHT...................................... 27 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS..................................... 27 SECTION 9.1 RECORDS AND ACCOUNTING................................... 27 SECTION 9.2 FISCAL YEAR.............................................. 27 SECTION 9.3 REPORTS.................................................. 27 ARTICLE 10 TAX MATTERS................................................................ 28 SECTION 10.1 PREPARATION OF TAX RETURNS.............................. 28 SECTION 10.2 TAX ELECTIONS........................................... 28 SECTION 10.3 TAX MATTERS PARTNER..................................... 28 SECTION 10.4 ORGANIZATIONAL EXPENSES................................. 29 SECTION 10.5 WITHHOLDING............................................. 29
- ii - 4 ARTICLE 11 TRANSFERS AND WITHDRAWALS.................................................. 30 SECTION 11.1 TRANSFER................................................ 30 SECTION 11.2 TRANSFER OF THE GENERAL PARTNER'S PARTNER INTEREST AND LIMITED PARTNER INTEREST................................ 31 SECTION 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER.................... 31 SECTION 11.4 SUBSTITUTED LIMITED PARTNERS............................ 32 SECTION 11.5 ASSIGNEES............................................... 32 SECTION 11.6 GENERAL PROVISIONS...................................... 32 SECTION 11.7 NO EXCHANGE............................................. 33 ARTICLE 12 ADMISSION OF PARTNERS...................................................... 34 SECTION 12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER.................. 34 SECTION 12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS................ 34 SECTION 12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP............................................. 35 ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION................................... 35 SECTION 13.1 DISSOLUTION............................................. 35 SECTION 13.2 WINDING UP.............................................. 35 SECTION 13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS...... 37 SECTION 13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION.................. 37 SECTION 13.5 RIGHTS OF LIMITED PARTNERS.............................. 37 SECTION 13.6 NOTICE OF DISSOLUTION................................... 37 SECTION 13.7 TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP...................... 38 SECTION 13.8 REASONABLE TIME FOR WINDING-UP.......................... 38 SECTION 13.9 WAIVER OF PARTITION..................................... 38 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS............................... 38 SECTION 14.1 AMENDMENTS.............................................. 38 SECTION 14.2 MEETINGS OF THE PARTNERS................................ 39
- iii - 5 ARTICLE 15 GENERAL PROVISIONS......................................................... 40 SECTION 15.1 ADDRESSES AND NOTICES................................... 40 SECTION 15.2 TITLES AND CAPTIONS..................................... 40 SECTION 15.3 PRONOUNS AND PLURALS.................................... 40 SECTION 15.4 FURTHER ACTION.......................................... 41 SECTION 15.5 BINDING EFFECT.......................................... 41 SECTION 15.6 CREDITORS............................................... 41 SECTION 15.7 WAIVER.................................................. 41 SECTION 15.8 COUNTERPARTS............................................ 41 SECTION 15.9 APPLICABLE LAW.......................................... 41 SECTION 15.10 INVALIDITY OF PROVISIONS.............................. 41 SECTION 15.11 ENTIRE AGREEMENT...................................... 41 SECTION 15.12 NO RIGHTS AS SHAREHOLDERS............................. 42 EXHIBIT A PARTNERS CAPITAL AND PARTNERSHIP INTERESTS EXHIBIT B CAPITAL ACCOUNT MAINTENANCE EXHIBIT C SPECIAL ALLOCATION RULES EXHIBIT D VALUE OF EXISTING PROPERTY EXHIBIT E TRANSACTION DOCUMENTS
- iv - 6 AGREEMENT OF LIMITED PARTNERSHIP OF MORNING VIEW TERRACE - PGP, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP OF MORNING VIEW TERRACE - PGP, L.P. (this "Agreement"), dated June 12, 1997 (the "Effective Date"), is entered into by and among PGP Morning View Terrace Holdings Inc., a Delaware corporation, as the general partner (the "General Partner"), and the Persons (as defined below) whose names are set forth on Exhibit A as attached hereto (as it may be amended from time to time), collectively as the limited partners (the "Limited Partners"). WHEREAS, the Limited Partners formed that certain general partnership known as Morning View Terrace, a California general partnership (the "California General Partnership"), pursuant to that certain General Partnership Agreement of Morning View Terrace dated November 6, 1984, as amended (the "Prior Agreement"); WHEREAS, the General Partner was admitted to the California General Partnership as a general partner through an amendment to the Prior Agreement; WHEREAS, the General Partner and the Limited Partners have entered into an Agreement and Plan of Conversion of even date herewith whereby the California General Partnership is being converted (the "Conversion") to a Delaware Limited Partnership (the "Partnership"); WHEREAS, as a part of the Conversion, the General Partner and the Limited Partners desire to amend and restate the Prior Agreement under the laws of the State of Delaware; and WHEREAS, upon admission to the California General Partnership, the General Partner made certain capital contributions. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto amend and restate the Partnership Agreement, and do hereby agree as follows: ARTICLE 1 DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute. "Added Net Value" means an amount computed by dividing (i) the positive difference, if any, of Available Cash for the period from and including the Effective Date to and including the Date over $1,930,500, multiplied by 50%, by (ii) .083. "Additional Limited Partner" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.2 hereof and who is shown as such on the books and records of the Partnership. 1 7 "Adjusted Capital Account" means the Capital Account maintained for each Partner as of the end of each Partnership taxable year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Adjusted Capital Account as of the end of the relevant Partnership taxable year. "Adjusted Property" means any property, the Carrying Value of which has been adjusted pursuant to Exhibit B hereof. The parties hereto agree that as a result of the admission of the General Partner just prior to Conversion, the Carrying Value of the Existing Property shall have been adjusted in accordance with Exhibit B hereof, and as of the Effective Date, the Existing Property is included in the definition of Adjusted Property. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person; (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person; (iii) any Person of which such Person owns or controls ten percent (10%) or more of the voting interests; or (iv) any officer, director, general partner or trustee of such Person or of any Person referred to in clauses (i), (ii), and (iii) above. "Agreed Value" means (i) in the case of the Existing Property, the Net Value; (ii) in the case of any other property and as of the time of its contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed; and (iii) in the case of any property distributed to a Partner by the Partnership, the Partnership's Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder. "Agreement" means this Agreement of Limited Partnership, as it may be amended, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. "Available Cash" means, with respect to any period for which such calculation is being made, Partnership gross revenues less (i) operation and maintenance expenses (including, but not limited to, reserves for property taxes and insurance), (ii) debt service on Partnership debt, and (iii) management fees and expenses. "Book-Tax Disparities" means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's 2 8 Capital Account balance as maintained pursuant to Exhibit B and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Los Angeles, California are authorized or required by law to close. "California General Partnership" means Morning View Terrace, a California general partnership. "Capital Account" means the Capital Account maintained for a Partner pursuant to Exhibit B hereof. "Capital " means, with respect to the Limited Partners, the Agreed Value of the Existing Property, with respect to the General Partner, the cash contributed to the Partnership, and with respect to the Additional Limited Partners, the cash, cash equivalents or the Agreed Value of property which such Partner contributes or is deemed to contribute to the Partnership, pursuant to Section 4.1 hereof. "Carrying Value" means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such Property charged to the Partners' Capital Accounts following the date hereof with respect to such Property; and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "Certificate" means a Certificate of Limited Partnership relating to the Partnership to be filed with the execution and delivery hereof, or as soon thereafter as is practicable in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provisions of future law. "Consent" means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof. "Contributed Property" means each property or other asset, in such form as may be permitted by the Act (but excluding cash), contributed or deemed contributed to the Partnership (including deemed contributions to the Partnership as a result of the termination thereof pursuant to Section 708 of the Code and the regulations thereunder to the extent the property was Contributed Property prior to the Section 708 termination). Once the Carrying Value of Contributed Party is adjusted pursuant to Exhibit B hereof, such property shall no longer constitute Contributed Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes. "Conversion" means the process of converting the California General Partnership to the Partnership pursuant to Section 17-217 of the Act and Article 9 of the California Uniform Partnership Act of 1994 (being Section 16901 et seq. of the California Corporations Code). 3 9 "Date" means the date which is eighteen (18) months after the Effective Date. "Depreciation" means, for each taxable year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner. "Effective Date" means the effective date set forth in the Certificate of Conversion filed with the Delaware Secretary of State. "Excess Distributions" means distributions to a Limited Partner for all periods in excess of allocations of Net Income to the Limited Partner for all periods pursuant to Section 6.1A(3). "Excess Transfer" means the sale or transfer or conversion of at least eighty percent (80%), in the aggregate, of the Partnership Units received by the Original Limited Partners and/or their respective successors and assigns in transactions not constituting transfers permitted under this Agreement. For purposes of the foregoing, a pledge, encumbrance or hypothecation of a Partnership Unit or an interest therein shall not constitute a sale, transfer or conversion. "Exchange Rights Agreement" means that certain Exchange Rights Agreement, dated as of June 12, 1997, by and among PGP, the Partnership and all of the Limited Partners. "Existing Property" means each property or other asset, in such form as may be permitted by the Act (but excluding cash) held by the Partnership on the date hereof. "General Partner Interest" means a Partnership Interest held by the General Partner, in its capacity as general partner. "IRS" means the Internal Revenue Service, which administers the internal revenue laws of the United States. "Incapacity" or "Incapacitated" means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the 4 10 Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof; (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay. "Indemnification Agreement" means that certain indemnification agreement, dated June 12, 1997, by and among PGP, the Delaware Limited Partnership, Terrace Gardens - PGP, L.P., and Pacific Inland Communities, LLC.. "Indemnitee" means any Person made a party to a proceeding or against whom a claim is made by reason of (i) his status as the General Partner, or as a director, officer, employee, partner, agent, representative or Affiliate of the General Partner, or (ii) his or its liabilities pursuant to a loan guarantee or otherwise for or as a result of any indebtedness or obligation of the Partnership or any Subsidiary of the Partnership (including, without limitation, the Tax Exempt Debt prior to and subsequent to any refunding thereof and any indebtedness or obligation which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to). Notwithstanding the foregoing, no Original Limited Partner shall be treated as an Indemnitee in connection with the Tax Exempt Debt (as it may be refunded from time to time) or in respect of the Indemnification Agreement. "Limited Partner" means any Person named as a Limited Partner in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner of the Partnership. "Limited Partner Interest" means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units. "Liquidating Event" has the meaning set forth in Section 13.1. "Liquidator" has the meaning set forth in Section 13.2. "Master Reimbursement Agreement" means the Master Reimbursement Agreement, dated as of December 1, 1996 and amended and restated as of June 1, 1997, by and among the Federal National Mortgage Association, Pacific Inland Communities, LLC, Terrace Gardens - PGP, L.P. and the Partnership. "Negative Capital Account Balance" means, as to any Original Limited Partner, the aggregate negative capital account balance of such partner in the Partnership immediately prior to the date of admission of the General Partner (the "Admission Date") as a general partner of the Partnership (as reflected on the books of the Partnership at that time, and without taking into account any revaluation of property of the Partnership which may occur as a result of, or as required by, Regulations Section 1.704-1(b)(2)(iv)(f)), and with respect to any Original Limited Partner which is itself a partnership on the Effective Date, the aggregate negative capital account balances of all the partners of such Original Limited Partner immediately prior to the Admission Date (as reflected on the books of the Partnership at that time, and without taking into account any revaluation of property of the Partnership which may occur as a result of, or as required by, applicable Regulations (including, without limitation, 5 11 Regulations Section 1.704-1(b)(2)(iv)(f)); provided, however, that the Negative Capital Account Balance in each case shall be deemed to be reduced by the amount (determined at the time of reference) of the Original Limited Partner's share of Non-Recourse Liabilities of the Partnership. "Net Income" means, for any taxable period, the excess, if any, of the Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit "B". "Net Loss" means, for any taxable period, the excess, if any, of the Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit "B". "Net Value" is equal to $3,844,972. "No Exchange Period" means a period expiring two (2) years after the date of the Exchange Rights Agreement. "Nonrecourse Built-in-Gain" means, with respect to any Existing Property or Adjusted Property that is subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. "Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). "Nonrecourse Liability" has the meaning set forth in Regulations Section 1.752-1(a)(2). "Original Limited Partner" means each person listed on Exhibit A as attached hereto at the time of initial execution of this Agreement (excluding the General Partner) without regard to any subsequent changes to such Exhibit, and with regard to any such persons which are themselves partnerships, the partners of such partnerships if and when the Partnership Units held by such partnerships hereunder are distributed by such partnerships to such partners. "Partner" means a General Partner or a Limited Partner, and "Partners" means the General Partner and the Limited Partners collectively. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" has the meaning set forth in Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). 6 12 "Partnership" means the limited partnership formed under the Act by conversion of the California General Partnership, and pursuant to the Prior Agreement, as amended and restated, pursuant to this Agreement and any successor thereto. "Partnership Interest" means an ownership interest in the Partnership by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest held by a Limited Partner may be expressed as a number of Partnership Units. "Partnership Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "Partnership Record Date" means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall be no later than ten (10) days prior to any date of distribution. "Partnership Unit" means a fractional, undivided share of the Partnership Interests of all Limited Partners issued pursuant to Sections 4.1 and 4.2. The number of Partnership Units outstanding and the Percentage Interest in the Partnership represented by such Partnership Units are set forth in Exhibit A attached hereto, as such Exhibit may be amended from time to time. The ownership of Partnership Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the Partnership Units shall be uncertificated securities. If the General Partner elects to evidence the Partnership Units with a certificate, such certificate may be imprinted with a legend setting forth such restrictions placed on the units as specified in this Agreement and the Exchange Rights Agreement and such restrictions will be binding upon all holders of the certificate along with the terms and conditions set forth in this Agreement and the Exchange Rights Agreement. "Partnership Year" means the fiscal year of the Partnership, which shall be the calendar year. "Percentage Interest" means, as to a Limited Partner, its interest in the Partnership as determined by dividing the Partnership Units owned by such Limited Partner by the total number of Partnership Units then outstanding and as specified in Exhibit A attached hereto, as such Exhibit A may be amended from time to time. "Person" means an individual or a corporation, partnership, trust, limited liability company, unincorporated organization, association or other entity. "PGP" means Pacific Gulf Properties Inc., a Maryland corporation and an Affiliate of the General Partner. "Project" means the Morning View Terrace Apartments located in the City of Escondido, County of San Diego, California, including all real and personal property, now or hereafter existing, necessary or desirable for the proper ownership, management and operation of the apartment complex. "Property" means Existing Property, Contributed Property and Adjusted Property. 7 13 "Recapture Income" means any gain recognized by the Partnership upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "Regulations" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "REIT" means a real estate investment trust under Section 856 of the Code. "REIT Share" shall mean a share of common stock of PGP, par value $.01 per share. "Residual Gain" or "Residual Loss" means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property, or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax Disparities. "Restructuring Agreement" means that certain Restructuring Agreement, dated as of May 23, 1997, by and among PGP, the General Partner, the California General Partnership and all of the Limited Partners. "704(c) Value" of any Existing Property means the value of such property as set forth in Exhibit D, or if no value is set forth in Exhibit D, the fair market value of such property or other consideration at the time of contribution, as determined by the General Partner using such reasonable method of valuation as it may adopt. The 704(c) Value of any property deemed contributed by the Partnership to a new partnership for federal income tax purposes upon termination of the Partnership thereof pursuant to Section 708 of the Code shall not change by virtue of such termination. Subject to Exhibit B hereof, the General Partner shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values in a single or integrated transaction among the separate properties on a basis proportional to their respective fair market values. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the voting equity securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person. "Substituted Limited Partner" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4. "Terminating Capital Transaction" means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. "Tax Exempt Debt" means the existing tax exempt financing encumbering the Property, namely the outstanding principal balance of the City of Escondido, California, Variable Rate Demand Multifamily Housing Revenue Bonds, Series 1985B (Morning View Terrace Project), and any successor or refunding debt with respect thereto. "Unrealized Gain" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereof) as of such date; over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date. 8 14 "Value" means, with respect to a REIT Share, the average of the daily market price on the New York Stock Exchange for the ten (10) consecutive trading days immediately preceding the Effective Date. The market price for each such trading day shall be the closing price on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. The Partners hereby amend and restate the Prior Agreement in its entirety as of the date hereof. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name The name of the Partnership shall be Morning View Terrace - PGP, L.P. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners. Section 2.3 Registered Office and Agent; Principal Office The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware, 19805. The principal office of the Partnership shall be c/o PGP Morning View Terrace Holdings Inc., 363 San Miguel Drive, Suite 100, Newport Beach, California, 92660-7805, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. Section 2.4 Power of Attorney A. Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices:(a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatement thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the 9 15 Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13 hereof or the Capital of any Partner; (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of a Partnership Interest; and (f) any and all financing statements, continuation statements and other documents necessary or desirable to create, perfect, continue or validate the security interest granted by a Limited Partner pursuant to Section 10.5 of this Agreement or to exercise or enforce the Partnership's rights with respect to such security interest; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's Assignee's Partnership Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney in accordance with the provisions of this Agreement. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term The term of the Partnership commenced on November 6, 1984 and shall continue until December 31, 2095, unless, the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. 10 16 ARTICLE 3 PURPOSE Section 3.1 Purpose and Business The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act with regard to the Project only; provided, however, that such business shall be limited to and conducted in such a manner as to permit PGP at all times to be classified as a REIT, unless PGP ceases to qualify as a REIT for reasons other than the conduct of the business of the Partnership; (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged in any of the foregoing; and (iii) to do anything necessary or incidental to the foregoing. In connection with the foregoing, and without limiting PGP's right, in its sole discretion, to cease qualifying as a REIT, the Partners acknowledge PGP's current status as a REIT inures to the benefit of all of the Partners and not solely to PGP and the General Partner. Section 3.2 Powers The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership; provided, however, that the Partnership shall not take, or refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of PGP to continue to qualify as a REIT; (ii) could subject PGP to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over PGP, the General Partner or its securities, unless such action (or inaction) shall have been specifically consented to by the General Partner in writing. ARTICLE 4 CAPITAL Section 4.1 Capital of the Partners A. The General Partner has made, and will make, in a timely manner, a cash contribution equal to the Transaction Expenses and Deferred Maintenance, as both terms are defined in the Restructuring Agreement. By execution and delivery of this Agreement, the Partners hereby acknowledge and agree that the aggregate Capital of the Limited Partners equals the Net Value. The Capital of the Limited Partners is allocated initially among each of the Limited Partners as set forth in Exhibit A. The Limited Partners shall own Partnership Units in the amounts set forth for such Limited Partner in Exhibit A. The number of Partnership Units received by each Limited Partner was calculated by dividing the respective Partner's Capital by the Value of a REIT Share. The Limited Partners shall have a Percentage Interest in the Partnership as set forth in Exhibit A, which Percentage Interest was determined by dividing the respective Limited Partner's Partnership Units by the aggregate number of Partnership Units issued to all Limited Partners. The Percentage Interests shall be adjusted from time to time by the General Partner to the extent determined by the General Partner to be necessary to reflect accurately redemptions, additional capital, the issuance of additional Partnership Units (pursuant to any merger or otherwise), or similar events having an effect on any Limited Partner's Percentage Interest. At the Date, any Added Net Value shall be ascertained, and if 11 17 Added Net Value exists, the Limited Partners shall be credited with such Added Net Value in their Capital Accounts and be deemed to own, pro rata in accordance with the Partnership Units owned just prior to the Date, that additional number of Partnership Units computed by dividing the Added Net Value by the Value (determined using the Date in lieu of the Effective Date); provided, however, that if Short Morning View Ltd. shall have been dissolved and liquidated prior to the Date, the partners of Short Morning View Ltd. as of the date of liquidation thereof shall be deemed to own the additional number of Partnership Units that the partners of Short Morning View Ltd. would have been distributed to each of them upon liquidation of Short Morning View Ltd. had Short Morning View Ltd. been deemed to have owned the additional Partnership Units provided for herein on the date of such liquidation. Except as provided in Sections 10.5, and 13.3, the Partners shall have no obligation whatsoever to make any additional capital contributions or loans, or advances of any kind to the Partnership, or to in any way finance the operation of the Partnership or any of the debt or obligations of the Partnership. B. Except as provided in Section 13.3 of this Agreement and as otherwise expressly provided herein, the Capital of each Partner will be returned to that Partner only in the manner and to the extent provided in Article 5 and Article 13 hereof, and no Partner may withdraw from the Partnership or otherwise have any right to demand or receive the return of its Capital in the Partnership, except as specifically provided herein. Under circumstances requiring a return of any Capital, no Partner shall have the right to receive property other than cash, except as specifically provided herein. No Partner shall be entitled to interest on any Capital or Capital Account. The General Partner shall not be liable for the return of any portion of the Capital of any Limited Partner, and the return of such Capital shall remain solely from Partnership assets. C. No Limited Partner shall have any further personal liability to contribute money to, or in respect of, the liabilities or the obligations of the Partnership, nor shall any Limited Partner be personally liable for any obligations of the Partnership, except as otherwise provided in this Agreement or in the Act. No Limited Partner shall be required to make any contributions to the capital of the Partnership other than as expressly provided in this Agreement. Section 4.2 Issuances of Additional Partnership Interests Upon the consent of a majority in interest of the Limited Partners, the General Partner is hereby authorized to cause the Partnership from time to time to issue to the Partners (including the General Partner) or other Persons additional Partnership Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including, rights, powers and duties senior to the Limited Partners (including the Original Limited Partners), except that, notwithstanding the foregoing, none of such additional Partnership Units or Partnership Interests shall carry or give to their holders rights to receive distributions (as to amount, timing, and priority) senior to the rights of the Original Limited Partners as set forth in this Agreement. Section 4.3 Preemptive Rights No Person shall have any preemptive, preferential or other similar right with respect to (i) additional capital contributions or loans to the Partnership; or (ii) issuance or sale of any Partnership Units or other Partnership Interests. 12 18 Section 4.4 General Partner Loans The General Partner and its Affiliates shall have the right, but not the obligation, to make loans and advances to the Partnership, and shall be treated as a third party lender to the Partnership (with all attendant rights, privileges, and remedies) to the extent that it does so. Loans and advances, if any, funded by the General Partner or its Affiliates shall be on commercially competitive terms, comparable to similar loans and advances made by unrelated third party institutional lenders; and, if institutional lenders would not regularly make such loans or advances, then terms for a comparable loan or advance described by any unrelated third party loan broker upon request by the General Partner shall be conclusively presumed to be commercially competitive and comparable to similar loans and advances made by unrelated third parties for purposes of this Agreement. ARTICLE 5 DISTRIBUTIONS Section 5.1 Amount and Priority of Quarterly Distributions Except as provided in Sections 5.2 and 5.4 hereof, the General Partner shall cause to be distributed within 60 days of the end of each calendar quarter, beginning with the calendar quarter ending March 31, 1998, an amount equal to 100% of Available Cash generated by the Partnership during such calendar quarter to those Partners who are Partners on the Partnership Record Date for such calendar quarter, as follows: A. First, to the Limited Partners who are Partners on the Partnership Record Date, an amount (the "Quarterly Distribution Amount") equal to the lesser of (i) 100% of such Available Cash, or (ii) an amount determined by multiplying the total number of Partnership Units held by such Limited Partners by the amount of the dividend per share paid to common stock shareholders of PGP with respect to such calendar quarter. As among such Limited Partners, the Quarterly Distribution Amount shall be distributed pro rata in accordance with their respective Partnership Interests; and B. The balance to the General Partner. Section 5.2 First Distribution The General Partner shall cause to be distributed not later than February 28, 1998 an amount equal to 100% of Available Cash generated by the Partnership from and including the Effective Date to and including December 31, 1997, to those Partners who are Partners on the Partnership Record Date for the calendar quarter ending December 31, 1997, as follows: A. First, to the Limited Partners who are Partners on the Partnership Record Date, an amount (the "First Distribution Amount") equal to the lesser of (i) 100% of such Available Cash, or (ii) an amount which is the sum of the following: (A) an amount determined by multiplying the number of total Partnership Units held by such Limited Partners by the amount of the dividend per share paid to common stock shareholders of PGP with respect to the calendar quarter ended September 30, 1997 and multiplying that product by a fraction (x) the numerator of which is the number of days from and including the Effective Date to and including September 30, 1997, and (y) the denominator of which is 92, and (B) an amount determined by multiplying the total number of Partnership Units held by such Limited Partners by the amount of the dividend per share paid to common stock shareholders of PGP with respect to the 13 19 calendar quarter ended December 31, 1997. As among such Limited Partners, the First Distribution Amount shall be distributed pro rata in accordance with their respective Partnership Interests; and B. The balance to the General Partner. Section 5.3 Amounts Withheld All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.5 hereof with respect to any allocation, payment or distribution to the Partners or Assignees shall be treated as amounts distributed to the Partners or Assignees pursuant to Sections 5.1 or 5.2 for all purposes under this Agreement. Section 5.4 Distributions Upon Liquidation Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2. ARTICLE 6 ALLOCATIONS Section 6.1 Allocations of Net Income and Net Loss For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Exhibit B hereof) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below. A. Net Loss for a particular period shall be allocated as follows: (1) First, to the General and Limited Partners in proportion to and to the extent of their positive Capital Account balances, if any. (2) Second, to the Limited Partners in proportion to and to the extent of their respective Negative Capital Account Balances, until the amount allocated under this Section 6.1A(2) for the current fiscal year and all prior fiscal years equals the Negative Capital Account Balances of all Limited Partners. (3) Third, to the Limited Partners, in proportion to and to the extent of, their respective aggregate Excess Distributions, until the amount allocated under this Section 6.1A(3) for the current fiscal year and all prior fiscal years equals the Excess Distributions of all Limited Partners. (4) Fourth, to the Limited Partners, in proportion to their respective Percentage Interests until the amount allocated under this Section 6.1(A)(4) for the current fiscal year and all prior fiscal years equals the principal paid on the Tax Exempt Debt of the Partnership for all periods up to an amount equal to $800,000. (5) Fifth, to the General Partner. 14 20 B. Net Income for a particular period shall be allocated as follows: (1) First, to the Partners that have previously been allocated Net Loss pursuant to Section 6.1A in amounts and among such Partners in the reverse order (and in the corresponding amounts) of all Net Loss previously allocated to them until the amount of Net Income allocated pursuant to this Section 6.1B(1) equals the aggregate amount of all Net Loss theretofore allocated pursuant to Section 6.1A. (2) Second, if applicable, to the Limited Partners in proportion to their respective Partnership Interests until the aggregate Net Income allocated pursuant to this Section 6.1B(2) for the current taxable period and all previous taxable periods equals the aggregate amount of Available Cash distributed to the Limited Partners pursuant to Section 5.1A and 5.2. (3) Third, to the General Partner. Section 6.2 Other Allocations A. For purposes of Regulations Section 1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (i) the amount of Partnership Minimum Gain; and (ii) the total amount of Nonrecourse Built-in Gain shall be allocated among the Limited Partners in accordance with their respective Percentage Interests. B. Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to Exhibit C, be characterized as Recapture Income in the same proportions and to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income. C. Notwithstanding the provisions of Sections 6.1A and 6.1B, to the extent that the Partnership is treated for income tax purposes as having sold all or a portion of the Existing Property in connection with the Conversion, any gain recognized as a result of such sale shall be allocated to the Partners to whom the consideration deemed to have been received by the Partnership in respect of such sale, and by reason of the receipt of which the gain is recognized, is deemed distributed (in proportion to their respective Partnership Interests immediately prior to such distribution). D. Notwithstanding the provisions of Sections 6.1A and 6.1B, to the extent that interest income is imputed or otherwise deemed to have been paid to the Limited Partners as the result of the receipt of additional Partnership Units in accordance with the provisions of Section 4.1A, for the year in which such interest income is imputed to or otherwise deemed to have been paid to the Limited Partners, and for each subsequent fiscal year, corresponding items of interest expense deemed paid or incurred by the Partnership and attributable to the issuance of such additional Partnership Units shall first be allocated to the Limited Partners (in proportion to the amount of imputed interest income) until the amount of interest expense so allocated equals the amount of such interest income. 15 21 ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation (but in all cases subject to the terms of this Agreement): (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, money to be used to pay off a portion of the existing debt encumbering the Partnership's assets) and making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit PGP (so long as PGP qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its shareholders in amounts sufficient to permit PGP to maintain REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidence of indebtedness (including the securing of the same by deed, mortgage, deed of trust or other lien or encumbrance on the Partnership's assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity; (4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the General Partner, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Subsidiaries of the Partnership and/or the General Partner) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to its Subsidiaries, the holding of any real, personal and mixed property of the Partnership in the name of the Partnership or in the name of a nominee or trustee and the creation, by grant or otherwise, of easements or servitudes; (5) the management, operation, leasing, collection of rents, marketing, landscaping, repair, alteration, renovation, rehabilitation, demolition or improvement of the Property 16 22 or any other assets owned by the Partnership or any Subsidiary of the Partnership and the performance of any and all other acts necessary or appropriate to the operation of the Property or other assets including, without limitation, applications for rezoning or objections to rezoning of the Property or other assets; (6) the negotiation, execution, and performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including, without limitation, the execution and delivery of leases on behalf of or in the name of the Partnership, contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership's assets; (7) the opening and closing of bank accounts, the investment of Partnership funds in securities, certificates of deposit and other instruments, and the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; (8) holding, managing, investing and reinvesting cash and other assets of the Partnership; (9) the collection and receipt of revenues and income of the Partnership; (10) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer" of the Partnership), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or hiring (whether or not any of the foregoing are also employed by, consultants to, independent contractors for, or otherwise do business with the General Partner or its Affiliates in related or unrelated matters); (11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate (whether or not such is done as part of a group, combined or other policy or policies under which the Partnership and the General Partner (or its Affiliates) are also insured, so long as the General Partner fairly allocates the expense thereof among the covered parties); (12) the formation of, or acquisition of an interest in, and the contribution of some or all of property (or any part thereof or interest therein) to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity investment from time to time); (13) the control of any and all matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of, any claim, cause of action, liability, debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitration or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law and consistent with the terms of this Agreement, including in each and all of the foregoing instances any such matter or thing in which the General Partner or its Affiliates have a direct interest; 17 23 (14) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including without limitation, the contribution or loan of funds by the Partnership to such Persons); (15) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt; (16) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person; (19) the making, execution and delivery of any and all deeds, leases, notes, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate, in the judgment of the General Partner, for the accomplishment of any of the powers of the General Partner enumerated in this Agreement; and (20) the issuance of additional Partnership Units or Partnership Interests, as appropriate, in connection with capital contributions by Additional Limited Partners and additional capital contributions by Partners pursuant to Article 4 hereof. B. Except as otherwise expressly provided in this Agreement, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. D. In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner of any action taken by it. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner taken pursuant to its authority under this Agreement and in accordance with the terms hereof. 18 24 E. The General Partner, on behalf of the Partnership, may hire, employ or otherwise contract with any Affiliate of the General Partner to manage the Property, and the Limited Partners do hereby waive any conflict which may exist because of the Affiliate relationship. F. Without any further act, approval or vote of the Partners and notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, the Partnership and Partners on behalf of the Partnership, hereby authorize, approve and ratify the Partnership's, and the General Partner's on behalf of the Partnership, execution, delivery and performance of the Transaction Documents described in Exhibit E attached hereto and all other documents deemed necessary or required by the General Partner. The General Partner is hereby authorized to enter into the Transaction Documents on behalf of the Partnership, but such authorization shall not be deemed a restriction on the power of the General Partner to enter into other agreements on behalf of the Partnership. Section 7.2 Certificate of Limited Partnership The General Partner shall file the Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. Section 7.3 No Property Transfer Period. The General Partner covenants and agrees not to cause the Partnership to sell, transfer or otherwise dispose of any of the Existing Property which is real property, or any interest therein, directly or indirectly, whether as a result of a Terminating Capital Transaction or otherwise (collectively referred to as a "Property Transfer"), nor distribute to the Original Limited Partners or their successors and assigns any property if such distribution would trigger tax liability under Section 737 of the Code, for a period of five (5) years after the Effective Date, in either case unless and until either (i) during said five-year period there has been an Excess Transfer, or (ii) the Property Transfer occurs in a manner which, upon such transfer, is fully tax free to, and as such does not produce any income taxation upon, the Original Limited Partners or their successors and assigns. Section 7.4 No Pay Down Period. During a period of five (5) years after the Effective Date, the General Partner shall not cause the Partnership to pay down any of the Tax Exempt Debt (other than as required by the debt instrument or any other agreement ancillary thereof) nor take any other action which would result in a reduction of the allocation of debt to the Original Limited Partners or their successors or assigns for purposes of computing such parties' basis for income tax purposes, unless either (i) simultaneously with such pay down the Partnership refinances the full amount paid down with other debt, and such refinanced debt shall not result in a reduction of the allocation of debt to the Original Limited Partners or their successors or assigns for purposes of computing such parties' basis for income tax purposes, or (ii) during said five-year period there has been an Excess Transfer. 19 25 Section 7.5 No Dissolution Action. Without limiting the provisions of Section 7.4, for the five-year period immediately following the Effective Date, the General Partner will not cause the Partnership to take any action which results in dissolution of the Partnership. Section 7.6 No Tax Termination or Dissolution. The General Partner hereby covenants and agrees that for the five-year period immediately following the Effective Date, the General Partner will not make a disposition of its general partner interest in the Partnership (i) which would cause a termination of the Partnership pursuant to Section 708(b)(1)(B) of the Code when the fair market value of the property deemed contributed to the successor partnership as a result of such termination is less than the liabilities to which such property is then subject, or (ii) which in the opinion of legal counsel for the Partnership or the General Partner would result in the Partnership being treated as an association taxable as a corporation. Section 7.7 Management Fee and Reimbursement of the General Partner A. The General Partner and/or its Affiliates shall have the right, but not the obligation, in the sole discretion of the General Partner, to perform all or any of the property management services on account of the property owned or managed by the Partnership. If the General Partner elects to so perform, or to have an Affiliate so perform, the property management services, then the General Partner or its Affiliate shall be reimbursed expenses and otherwise compensated therefor by the Partnership in amounts determined by the General Partner, in its good faith discretion, to be comparable to amounts which would be charged by reputable unrelated third party property management companies which have substantial experience in performing property management services for properties of the type owned or managed by the Partnership for institutional owners with portfolios under management which are substantially similar in size, nature, and condition of property owned or managed by the Partnership. It is agreed that a management fee of four percent (4%) of gross income may be charged by the General Partner or its Affiliates for property management services as contemplated hereunder, and such shall be deemed conclusively to satisfy the foregoing requirements. The reimbursements and fees payable to the General Partner or its Affiliates shall be paid no less frequently than monthly. Except as provided in this Section 7.7A and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B. The General Partner shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all expenses that it incurs relating to the ownership and operation of, or for the benefit of, the Existing Property, the Partnership or any of its assets. The General Partner shall also be reimbursed for all expenses it incurs relating to (i) the ownership and operation of the Existing Property and other assets or properties owned by the Partnership, (ii) the reorganization or restructuring thereof, and (iii) the management of Partnership Units. Any reimbursement in this paragraph (B) shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.10 hereof. 20 26 Section 7.8 Outside Activities of the General Partner The General Partner and its Affiliates shall be permitted to purchase, own, operate, manage and otherwise deal with and profit from any property, real, personal or mixed, not owned by the Partnership for their own account and benefit, whether or not competitive with the business and affairs of the Partnership, and neither the Partnership, any Limited Partner, or any other Person shall have any right, claim, interest or cause of action therein or as a result thereof. Without limiting the generality of the above, nothing in this Agreement shall obligate the General Partner or its Affiliates to first offer the Partnership an opportunity to invest in any investment which has been offered to or found by the General Partner or its Affiliates, whether or not such investment is of a nature that may be invested in by the Partnership or would compete directly or indirectly with the business of the Partnership. The Limited Partners hereby acknowledge that the PGP and its Affiliates currently own a variety of real estate investments and may in the future acquire additional real estate investments that may be competitive with the business of the Partnership. Section 7.9 Contracts with Affiliates A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. B. The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable. C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, employee benefit plans, stock option plans, and similar plans funded by the Partnership for the benefit of employees of the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership or any Subsidiaries of the Partnership. E. Any or all of the foregoing may be jointly established with the General Partner or its Affiliates, provided that in such case the allocation of expense shall be shared among the parties on whose behalf such plans exist as determined by the General Partner in good faith to be fair and reasonable. Section 7.10 Indemnification A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys' fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the 21 27 Partnership or the General Partner in its capacity as general partner of the Partnership as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, whether or not suit or other legal proceedings are commenced, unless it is established by a court of competent jurisdiction and all appeals relating thereto have been fully completed or the applicable appeal periods have expired that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceedings and either was committed in intentional bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper and unpermitted personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee knew, or was reckless in not knowing, that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee pursuant to a loan guaranty, recourse obligation, general partner liability, or otherwise for any indebtedness of the Partnership (including without limitation the Tax Exempt Debt and guarantee of PGP in favor of Fannie Mae in its capacity as credit-enhancer for the Tax Exempt Debt) or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.10 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct as set forth in this Section 7.10A. The termination of any proceeding by conviction of an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, in each case after all appeals relating thereto have been fully completed or the applicable appeal periods have expired, creates a rebuttable presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.10A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.10 shall be made only out of the assets of the Partnership (including those assets required to be contributed by the Limited Partners to restore deficits in their respective Capital Accounts in accordance with the terms hereof), and, except as otherwise may be required herein, neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.10. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding. C. The indemnification provided by this Section 7.10 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitee is indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.10, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of Section 7.10; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the 22 28 performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement, except to the extent the Partners are required to restore negative balances in their Capital Account; provided, however, that nothing in this Section 7.10(F) shall restrict or otherwise limit personal liability arising by application of the Indemnification Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.10 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.10 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.10 or any provision hereof shall be prospective only and shall not in any way affect the Partnership's liability to any Indemnitee under this Section 7.10, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.11 Liability of the General Partner A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or any act or omission if the General Partner acted in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the shareholders of the General Partner collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (except as otherwise provided herein) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith. D. Any amendment, modification or repeal of this Section 7.11 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's and its officers' and directors' liability to the Partnership and the Limited Partners under this Section 7.11 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 23 29 Section 7.12 Other Matters Concerning the General Partner A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of PGP to continue to qualify as a REIT; or (ii) to avoid PGP incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. Section 7.13 Title to Partnership Assets Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is being held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Section 7.14 Reliance by Third Parties Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally 24 30 and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, engage or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS Section 8.1 Limitation of Liability The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.5 hereof, or under the Act. Section 8.2 Management of Business No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Limited Partners Subject to the terms and provisions hereof, it is agreed that any Partner (General and/or Limited) and any Affiliate of any Partner (including any officer, director, employee, agent, or representative of any Partner) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights, claims, or interests by virtue of this Agreement or any relationships, duties or obligations hereunder (including, but not limited to, any fiduciary or similar duties created by this Agreement, under the Act, or otherwise existing at law or in equity) in any business ventures or investments of any General Partner or Limited Partner, or any Affiliate of any of the foregoing. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person, and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if 25 31 presented to the Partnership, any Limited Partner or such other Person could be taken by such Person. It is further agreed that none of the Partners, General or Limited, or any of their Affiliates, have any duty, obligation, or liability to present to the Partnership any business or investment opportunity which may arise in the course of activity for or on behalf of the Partnership, or otherwise, for investment by the Partnership or any of the Partners (even if within the line and scope of the business and affairs of the Partnership), and instead any Partner, General or Limited, and any Affiliate may pursue such opportunity for such Partner's or Affiliate's own benefit and account, without any participation, right, or claim therein by the Partnership or any other Partner, and without notification or disclosure to the Partnership or any other Partner. Section 8.4 Return of Capital No Limited Partner shall be entitled to the withdrawal or return of its Capital, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Exhibit C hereof or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (including such copying and administrative charges as the General Partner may establish from time to time): (1) to obtain a copy of the most recent annual and quarterly balance sheet, income statement, and related financial statements prepared by the Partnership; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner to the extent the foregoing is materially different from information contained in financial statements or other reports provided to Limited Partners. The request by a Limited Partner of quarterly and annual balance sheets and income statements regularly prepared by the Partnership in order to verify the correctness of distributions of cash, if any, to the Limited Partner in accordance with the terms and provisions of this Agreement 26 32 shall be considered a purpose reasonably related to the Limited Partner's interest as a limited partner in the Partnership. B. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, desirable or necessary any information that: (i) the General Partner reasonably believes to be in the nature of trade secrets or other information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreement with an unaffiliated third party to keep confidential. If the General Partner desires to disclose any information of the type described in the preceding paragraphs (i) or (ii) to a Limited Partner, the General Partner may require, as a condition to such disclosure, that the Limited Partner agree in writing that such information will be held in strictest confidence and no distribution of such information will be made. Section 8.6 No Redemption Right No Limited Partner (other than the General Partner) shall have the right to require the Partnership to redeem all or a portion of the Partnership Units held by such Limited Partner. ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business, including without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Sections 8.5A and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or such other basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year The fiscal year of the Partnership shall be the calendar year. Section 9.3 Reports A. The Partnership shall mail to each Limited Partner no later than ninety (90) days after the close of each Partnership Year an annual report containing financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, for such Partnership year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner in its discretion (such selection may include any 27 33 such accountants who also perform accounting or auditing work for the General Partner and its Affiliates). The Partnership shall mail to each Limited Partner no later than ninety (90) days after the close of each calendar quarter (except the last calendar quarter of each year), a report containing unaudited financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate. All accounting and other professional fees associated with the preparation, compilation, review, audit, and any other matters relating to the Partnership's records, financial statements and reports, tax returns, and any other Partnership items described in the preceding paragraphs shall be at the expense of the Partnership, not the General Partner. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by the Limited Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that if requested by a transferee of a Partnership Interest, the General Partner shall file an election on behalf of the Partnership pursuant to Section 754 of the Code to adjust the basis of the Partnership property in the case of a transfer of a Partnership Interest made in accordance with the provisions of this Agreement. The General Partner shall have the right to seek to revoke any tax election it makes (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination, in its sole and absolute discretion, that such revocation is in the best interest of the Partners. Section 10.3 Tax Matters Partner A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address, taxpayer identification number and profit interest of each of the Limited Partners and the Assignees to the extent the General Partner has such information. B. The tax matters partner is authorized, but not required (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement 28 34 the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time period prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" ( as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the IRS and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action of behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.10 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no special compensation for its services as such. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne or reimbursed by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, including an accounting firm which also renders services to the General Partner and its Affiliates. Section 10.4 Organizational Expenses The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code. Section 10.5 Withholding Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, 29 35 without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code and any provision of state or local income tax law. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall at its own expense take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer A. The term "transfer" when used in this Article 11 with respect to a Partnership Unit shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any acquisition of Partnership Interests by the General Partner from any Limited Partner of any Partnership Units, nor does it include any grant of a security interest or any related action involving levy, execution, or the like contemplated under Section 10.5 of this Agreement. B. No Partnership Interest shall be transferred, in whole or in part (including any interest therein), except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void ab initio, and the Partnership shall have no duty or obligation to recognize the transferee as a partner or holder of any interest whatsoever in the Partnership, and the transferee shall have no rights, interests or claims in or against the Partnership or any Partner. 30 36 Section 11.2 Transfer of the General Partner's Partner Interest and Limited Partner Interest Subject to the provisions of Section 7.5 and 7.6, the General Partner may transfer any of its General Partner Interest or withdraw as General Partner, or transfer any of its Limited Partner Interest, without consent or approval from any Limited Partners. Such transfer includes transfer to PGP or to an entity which is wholly-owned by PGP and is a Qualified REIT Subsidiary under Section 856(i) of the Code. Section 11.3 Limited Partners' Rights to Transfer A. Subject to the provisions of Sections 11.3.C, 11.3.D, 11.3.E, and 11.4, a Limited Partner (other than the General Partner) may transfer, with or without the consent of the General Partner, all or any portion of its Partnership Interest, or any of such Limited Partner's economic rights as a Limited Partner. In addition, those Original Limited Partners which are themselves partnerships shall have the right to transfer, assign, and convey their Partnership Units to their constituent partners, provided that such constituent partners shall first have executed and delivered a written agreement to be bound by the terms, provisions, and conditions of the Exchange Rights Agreement and the Restructuring Agreement, and that at the time of such transfer, assignment, and conveyance to such constituent partners, the representations and warranties made by such constituent partners in any subscription or other documents are true and correct in all material respects. B. If a Limited Partner is subject to Incapacity, the partners, executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. C. The General Partner may prohibit any transfer by a Limited Partner or its Partnership Units if, in the opinion of legal counsel to the Partnership or the General Partner, such transfer would require filing of a registration statement under the Securities Act of 1933 or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Units. D. No transfer by a Limited Partner of its Partnership Units may be made to any Person if: (i) in the opinion of legal counsel for the Partnership or the General Partner, it would result in the Partnership being treated as an association taxable as a corporation; (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code; (iii) such transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (iv) such transfer would, in the opinion of legal counsel for the Partnership or the General Partner, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (v) such transfer would subject the Partnership to be regulated under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; or (vi) in the opinion of legal counsel for the Partnership or the General Partner, it would adversely affect the ability of PGP to continue to qualify as a REIT or subject PGP to any additional taxes under Section 857 or Section 4981 of the Code. E. No transfer of any Partnership Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender 31 37 to the Partnership whose loan, immediately prior to such transfer, constitutes a Nonrecourse Liability, without the consent of the General Partner, in its sole and absolute discretion; provided that as a condition to such consent the lender will be required to enter into an arrangement with the Partnership or the General Partner to exchange or redeem at a price agreeable to the lender, the General Partner, and the transferring Partner (each in their respective discretion) any Partnership Units in which a security interest is held immediately prior to the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. Section 11.4 Substituted Limited Partners A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his place. The General Partner shall, however, have the right to consent to the admission of a transferee of the interest of a Limited Partner pursuant to this Section 11.4 as a Substituted Limited Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. Notwithstanding the foregoing, in the event of transfers of Partnership Units by Original Limited Partners in accordance with the second sentence of Section 11.3A, the transferees shall be admitted as Substituted Limited Partners, and the General Partner hereby consents to such. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. C. Upon admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address, number of Partnership Units, and Percentage Interest of such Substituted Limited Partner. Section 11.5 Assignees If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee of a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items, gain, loss deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units in any matter presented to the Limited Partners for a vote (such Partnership Units being deemed to have been voted on such matters in the same proportion as all other Partnership Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units. Section 11.6 General Provisions A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all such Limited Partner's Partnership Units in accordance with this Article 11 or pursuant to any agreement consented to by the Partnership pursuant to which the Limited Partner's interests in the Partnership are conveyed and the Limited Partner's withdrawal is provided for. 32 38 B. Any Limited Partner who shall transfer all of its Partnership Units in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such Partnership Units as Substitute Limited Partners. Similarly, any Limited Partner who shall transfer all of its Partnership Units pursuant to any agreement of the type referred to in the preceding paragraph shall cease to be a Limited Partner. C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees. D. If any Partnership Interest is transferred or assigned during any quarterly segment of the Partnership's fiscal year in compliance with the provisions of this Article 11 on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which a redemption occurs shall be allocated to a redeeming Partner. All distributions of Available Cash attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment, or redemption shall be made to the transferor Partner, all distributions of Available Cash thereafter attributable to such Partnership Unit shall be made to the transferee Partner. Section 11.7 No Exchange Notwithstanding anything in this Section 11 to the contrary, each of the Limited Partners hereby agrees that, except as set forth below, from the date hereof until two (2) years following the Effective Date (the "No Exchange Period"), without the prior written consent of the General Partner (which may be granted or withheld in its sole and absolute discretion), it shall be prohibited from transferring any Partnership Units; provided, however, that where a Limited Partner is a natural person and such Limited Partner dies (or, in the case of Partnership Units owned as community property by the Limited Partner and its spouse, then where either the Limited Partner or its spouse dies) prior to the expiration of the No Exchange Period, the No Exchange Period shall, as to such Limited Partner only, expire on the later of (i) one (1) year from the Effective Date or (ii) the death of such Limited Partner (or such Limited Partner's spouse, as the case may be); provided, further, however, that the foregoing shall not apply to the Short Family Trust as an owner of Partnership Units in its capacity as an Original Limited Partner, but shall apply to the Short Family Trust as an owner of Partnership Units in its capacity as a partner (or former partner) of Short Morning View Ltd. Notwithstanding anything in this Section 11.7 to the contrary, each of the Limited Partners hereby agree that, without the prior written consent of the General Partner (which may be granted in its sole and absolute discretion), each Limited Partner shall be prohibited from transferring any Partnership Units following the occurrence of a Liquidating Event. 33 39 ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner A successor to all of the General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. The admission of any such transferee shall not cause a dissolution of the Partnership and such transferee shall carry on the business of the Partnership in accordance with the forms and provisions of this Agreement. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6.D hereof. Section 12.2 Admission of Additional Limited Partners A. Except as otherwise provided elsewhere in this Agreement, after the admission to the Partnership of the initial Limited Partners on the date hereof, a Person who makes a capital contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner. 34 40 Section 12.3 Amendment of Agreement and Certificate of Limited Partnership For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment to this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs be wound up, only upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. an event of withdrawal of the General Partner, as defined in the Act (other than an event of voluntary bankruptcy), unless within ninety (90) days after such event of withdrawal a majority in interest in capital and profits of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; C. on or before December 31, 2095, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; E. the sale of all or substantially all of the assets and properties of the Partnership; or So long as Fannie Mae (as defined in the Master Reimbursement Agreement) continues to provide a Facility (as defined in the Master Reimbursement Agreement), no dissolution shall occur under paragraph (C) above or as a result of the filing by the General Partner of a voluntary petition in bankruptcy without the consent of Fannie Mae. Section 13.2 Winding Up A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner, or in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator"), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership 35 41 property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of common stock in the General Partner) shall be applied and distributed in the following order: (1) First, to the satisfaction of all of the Partnership's debts and liabilities to creditors other than the Partners (whether by payment or the reasonable provision for payment thereof); (2) Second, to the satisfaction of all of the Partnership's debts and liabilities to the General Partner (whether by payment or the reasonable provision for payment thereof); (3) Third, to the satisfaction of all of the Partnership's debts and liabilities to the other Partners (whether by payment or the reasonable provision for payment thereof); and (4) The balance, if any, to the General Partner and Limited Partners in accordance with their positive Capital Account balances, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding any provision herein to the contrary, if the Project is sold, all Partnership Units held by the Limited Partners (other than PGP or any Affiliate) shall be mandatorily converted to REIT Shares and shall be automatically deemed tendered for acquisition by PGP pursuant to Section 4 of the Exchange Rights Agreement (regardless of whether the Limited Partner was a signatory to the Exchange Rights Agreement); provided, however, that the foregoing provision shall not apply in the event the Property is sold for less than its Carrying Value or is otherwise sold for a loss for either book or tax purposes. C. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. D. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be: (1) distributed to one or more trust(s) established for the benefit of the creditors and the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent, conditional or unmatured liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust(s) shall be distributed to the creditors and General 36 42 Partner and Limited Partners from time to time, in the reasonable direction of the Liquidator, in the same manner and proportions as the amount distributed to such trust(s) by the Partnership would otherwise have been distributed to the creditors and General Partner and Limited Partners pursuant to this Agreement; and (2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the creditors and General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2.A as soon as practicable. Section 13.3 Compliance with Timing Requirements of Regulations In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2) (provided, however, in no event shall the Partnership be liquidated prior to the date which would be the Settlement Date within the meaning of the Exchange Rights Agreement for Partners who tender an Exchange Notice (within the meaning of the Exchange Rights Agreement) on or before the fifth (5th) day after the date of receipt of the notice of liquidation by the Partnership). If any Partner has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall make a contribution to the capital of the Partnership equal to such deficit, and such deficit shall be considered a debt owed to the Partnership. The Partners intend that the deficit restoration contributions be used to repay obligations of the Partnership, including, without limitation, the Tax Exempt Debt and obligations under the Indemnification Agreement. Section 13.4 Deemed Distribution and Recontribution Notwithstanding any other provision of this Article 13, in the event the Partnership is considered "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership's property shall not be liquidated, the Partnership's labilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Section 13.5 Rights of Limited Partners Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its capital contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its capital contributions, distributions, or allocations. Section 13.6 Notice of Dissolution In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners. 37 43 Section 13.7 Termination of Partnership and Cancellation of Certificate of Limited Partnership Upon the completion of the liquidation of the Partnership's assets, as provided in Section 13.2 hereof, a certificate of cancellation shall be filed, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.8 Reasonable Time for Winding-Up A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. Section 13.9 Waiver of Partition Each Partner hereby waives any right to partition of the Partnership property. ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS Section 14.1 Amendments A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the General Partner) holding twenty-five percent (25%) or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. Except as provided in Section 13.1C, 14.1B, 14.1C, or 14.1D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Partners holding a majority of the Percentage Interests of all Partners; provided, however, that, except as otherwise provided in Section 4.2 hereof, any amendment which materially and adversely alters the right of a Limited Partner (including an Original Limited Partner) to receive distributions of Available Cash or allocations of Net Income, Net Loss or any other items in the amounts, in the priorities or at the times described in this Agreement shall require the consent of such Limited Partner (including Original Limited Partner) in order to become effective. B. Notwithstanding Section 14.1.A, the General Partner shall have the power, without the consent or approval of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; 38 44 (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of other holders of any additional Partnership Interests issued pursuant to Section 4.2, or otherwise pursuant to the terms of this Agreement; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions of this Agreement, or make any other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; (5) to satisfy any requirements, conditions, or guidelines, contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; and (6) to satisfy any requirements, conditions, or guidelines, contained in any order, directive, opinion, ruling or regulation of a federal court or agency or contained in federal or state law necessary to maintain the REIT status of PGP. The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1.B is taken. C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement shall not be amended without Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.2 and Section 14.1.B(3) hereof); (iv) cause the termination of the Partnership prior to the time set forth in Sections 2.5 or 13.1; or (v) amend this Section 14.1.C. D. Notwithstanding Section 14.1.A and 14.1.B hereof, the General Partner shall not amend Sections 7.5, 7.6, 14.1A, 14.1C or 14.2 without Consent of Limited Partners holding a majority of the Percentage Interests of the Limited Partners, excluding Limited Partner Interests held by the General Partner; and, to the extent that any such amendment would affect the amount, priority, or timing of distributions to any of the Original Limited Partners or their successors and assigns under this Agreement, the General Partner shall not amend Sections 7.5, 7.6, 14.1A, 14.1C, or 14.2 without Consent of Original Limited Partners holding a majority of the percentage interest of the Original Limited Partners (in each case including their successors and assigns). Section 14.2 Meetings of the Partners A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the General Partner) holding twenty-five percent (25%) or more of the Partnership Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or consent of the Partners is permitted or required under this Agreement, such vote or consent may be given at a meeting of the Partners or may be given in accordance with the procedures prescribed in Sections 39 45 14.1A or 14.2B hereof. Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests held by Limited Partners (including Limited Partnership Interests held by the General Partner) shall control. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by majority of the Percentage Interests of the Limited Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Limited Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date hereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation from the Limited Partner executing such proxy. D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the General Partner and may be held at the same time, and as part of, meetings of the shareholders of the General Partner. ARTICLE 15 GENERAL PROVISIONS Section 15.1 Addresses and Notices Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee at the address set forth in Exhibit A or such other address of which the Partner shall notify the General Partner in writing. Section 15.2 Titles and Captions All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 40 46 Section 15.4 Further Action The parties shall execute and deliver all documents, provide all information and take or refrain form taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Creditors Other than as expressly set forth herein with respect to the Indemnities, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 15.7 Waiver No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any covenant, duty, agreement or condition. Section 15.8 Counterparts This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.9 Applicable Law This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. Section 15.10 Invalidity of Provisions If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of other remaining provisions contained herein shall not be affected thereby. Section 15.11 Entire Agreement This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes the Prior Agreement and any other prior written or oral understandings or agreements among them with respect thereto. 41 47 Section 15.12 No Rights as Shareholders Nothing contained in this Agreement shall be construed as conferring upon the holders of the Partnership Units any rights whatsoever as shareholders of PGP or the General Partner, including, without limitation, any right to receive dividends or other distributions made to shareholders of PGP or the General Partner or to vote or to consent or to receive notice as shareholders in respect of any meeting of shareholders for the election of directors of PGP or the General Partner or any other matter. [Remainder of page intentionally left blank] 42 48 IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Limited Partnership as of the day first above written. GENERAL PARTNER: PGP Morning View Terrace Holdings Inc., a Delaware corporation By: __________________________ Title: _______________________ LIMITED PARTNERS: Short Morning View Ltd., a California limited partnership By: Short Family Trust, its Managing General Partner By: ___________________________ Donald R. Short, Trustee By: ___________________________ Marilyn M. Short, Trustee Short Family Trust By: ____________________________ Donald M. Short, Trustee By: ___________________________ Marilyn M. Short, Trustee 43 49 EXHIBIT A Partners Capital and Partnership Interests
Name and Address Cash Agreed Value of Total Partnership Percentage of Partner Contribution Capital Contribution Units Interest - ---------------- ------------ --------------- ------------ ----------- ---------- PGP-MVT PGP Morning View Terrace Holdings Inc. $800,000* N/A $ 800,000* N/A N/A --------- ---------- Totals $800,000* $ 800,000* ========= ========== Partners Short Morning View Ltd. N/A $1,960,938 $1,960,938 93,267 51.0% Short Family Trust N/A $1,884,036 $1,884,036 89,609 49.0% ---------- ---------- ------- ----- Totals $3,844,972 $3,844,972 182,876 100.0% ========== ========== ======= =====
* These figures are only an estimate of the total Transaction Expenses and Deferred Maintenance paid by, or on behalf of, the General Partner. These figures will be adjusted as the actual amounts of Transaction Expenses and Deferred Maintenance expended as of the date of the Closing are verified. 50 EXHIBIT B Capital Account Maintenance 1. Capital Accounts of the Partners A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all capital contributions and any other deemed contributions made by such Partner to the Partnership pursuant to this Agreement; and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to this Agreement; and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of the Agreement and Exhibit C hereof. B. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (1) Except as otherwise provided in Regulations Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership, provided that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners' Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4). (2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. (3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. B-1 51 (4) In lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year. (5) In the event the Carrying Value of any Partnership Asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset. (6) Any items specifically allocated under Section 1 of Exhibit C hereof shall not be taken into account. C. Generally, a transferee (including an Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor. If the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, the capital accounts of the Partners in the successor Partnership shall be maintained in accordance with the principles of this Exhibit B. D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D.(2), the Carrying Value of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D.(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement. (2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis capital contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; and (c) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect economic interests of the Partners in the Partnership. (3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed. (4) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit B, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article 13 of the Agreement, shall be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties). B-2 52 E. The provisions of this Agreement (including this Exhibit B and other Exhibits to this Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify (i) the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed; or (ii) the manner in which items are allocated among the Partners for federal income tax purposes in order to comply with such Regulations or to comply with Section 704(c) of the Code, the General Partner may make such modification without regard to Article 14 of the Agreement, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) where appropriate, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), make any adjustments that are necessary or appropriate to maintain equality between Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes; and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). In addition, the General Partner may adopt and employ such methods and procedures for (i) the maintenance of book and tax capital accounts; (ii) the determination and allocation of adjustments under Sections 704(c), 734 and 743 of the Code; (iii) the determination of Net Income, Net Loss, taxable loss and items thereof under this Agreement and pursuant to the Code; (iv) conventions for the determination of cost recovery, depreciation and amortization deductions, as it determines in its sole discretion are necessary or appropriate to execute the provisions of this Agreement, to comply with federal and state tax laws, and are in the best interest of the Partners. 2. No Interest No interest shall be paid by the Partnership on capital contributions or on balances in Partners' Capital Accounts. 3. No Withdrawal No Partner shall be entitled to withdraw any part of his capital contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement. B-3 53 Exhibit C Special Allocation Rules 1. Special Allocation Rules Notwithstanding any other provision of the Agreement or this Exhibit C, the following special allocations shall be made in the following order: A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of the Agreement or any other provisions of this Exhibit C, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. Solely for purposes of this Section 1.A, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of Partner Minimum Gain during such Partnership taxable year. B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.1 of this Agreement or any other provisions of this Exhibit C (except Section 1.A hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership taxable year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.702-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such Partnership taxable year, other than allocations pursuant to Section 1.A hereof. C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 1.A and 1.B hereof such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro C-1 54 rata portion of each item of Partnership income, including gross income and gain for the Partnership taxable year) shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership taxable year shall be allocated to the Limited Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio for such Partnership taxable year which satisfy such requirements. E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Partnership taxable year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i). F. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. G. Curative Allocations. The allocations set forth in Section 1.A through 1.F of this Exhibit C (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations under Section 704(b) of the Code. The Regulatory Allocations may not be consistent with the manner in which the Partners intend to divide Partnership distributions. Accordingly, the General Partner is hereby authorized to divide other allocations of income, gain, deduction and loss among the Partners so as to prevent the Regulatory Allocations from distorting the manner in which Partnership distributions will be divided among the Partners. In general, the Partners anticipate that this will be accomplished by specially allocating other items of income, gain, loss and deduction among the Partners so that the net amount of the Regulatory Allocations and such special allocations to each person is zero. However, the General Partner will have discretion to accomplish this result in any reasonable manner; provided, however, that no allocation pursuant to this Section 1.G shall cause the Partnership to fail to comply with the requirements of Regulations Sections 1.7041(b)(2)(ii)(d), -2(e) or -2(i). 2. Allocations for Tax Purposes A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the C-2 55 Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Partners as follows: (1) (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners, consistent with the principles of Section 704(c) of the Code and the Regulations thereunder, to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution; and (b) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. (2) (a) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principals of Section 704(c) of the Code and the Regulations thereunder to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Exhibit B; and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit C; and (b) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. (3) all other items of income, gain, loss and deduction shall be allocated among the Partners in the same manner as their correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. C. To the extent that the Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit the Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners. C-3 56 3. No Withdrawal No Partner shall be entitled to withdraw any part of his capital contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement. C-4 57 Exhibit D Value of Existing Property
Property 704(c) Value Agreed Value - -------- ------------ ------------ Morning View Terrace Apartments $15,000,000 $3,844,972
D-1 58 Exhibit E Transaction Documents The "Transaction Documents" consist of the "Partnership Transaction Documents" and the "Partnership Bond Documents", which terms are defined as follows: PARTNERSHIP TRANSACTION DOCUMENTS The "Partnership Transaction Documents" consist of the following documents each dated June 1, 1997 (unless otherwise indicated): 1. Master Reimbursement Agreement dated December 1, 1996, as amended and restated as of June 1, 1997, executed by the Partnership, the Federal National Mortgage Association (herein, "Fannie Mae"), Terrace Gardens - PGP, L.P., and Pacific Inland Communities, LLC; 2. First Amendment to Cash Management, Security, Pledge and Assignment Agreement executed by the Partnership, Terrace Gardens - PGP, L.P., Pacific Inland Communities, LLC, Fannie Mae and Bankers Mutual (herein, the "Lender") in its capacity as custodian for Fannie Mae; 3. Blocked Account Agreement executed by Partnership, Fannie Mae, Lender and Bank of America, National Trust & Savings Association; 4. Estoppel Certificate dated June 12, 1997 executed by the Partnership; 5. Multifamily Note in the original principal amount of Eleven Million Dollars ($11,000,000) executed by the Partnership in favor of the Lender (the "Note"); 6. Multifamily Deed of Trust, Assignment of Rents and Security Agreement (with Fixture Filing), executed by the Partnership to First American Title Company, as trustee, for the benefit of the Lender (collectively, the "Lender Deed of Trust"), granting a security interest in the Project as more specifically described in the Lender Deed of Trust; 7. Multifamily Deed of Trust, Assignment of Rents and Security Agreement (with Fixture Filing), executed by the Partnership to First American Title Company, as trustee, for the benefit of Fannie Mae (collectively, the "Fannie Mae Deed of Trust"), granting a security interest in the Project, as more specifically described in the Fannie Mae Deed of Trust; 8. California Financing Statement, Form UCC-1, executed by Partnership as debtor and Lender as secured party and naming Fannie Mae as assignee of secured party; 9. California Financing Statement, Form UCC-1, executed by Partnership as debtor and Fannie Mae as secured party; 10. Property Management Agreement, dated June 12, 1997, by and between the Partnership and PGP; E-1 59 11. Assignment of Management Agreement executed by Partnership and Fannie Mae, and consented to by PGP as agent, with respect to the Project; 12. Exchange Rights Agreement, dated June 12, 1997, by and among PGP, the Partnership and the Original Limited Partners; and 13. Replacement Reserve and Security Agreement relating to the Project executed by Partnership and Lender. PARTNERSHIP BOND DOCUMENTS The "Partnership Bond Documents" consist of the following documents, each dated June 1, 1997 (unless otherwise indicated): 1. Financing Agreement, relating to the Project, executed by the Partnership, the City of Escondido (herein, the "Issuer"), the Lender, and First Trust of California, National Association (herein, the "Bond Trustee"); 2. Amended and Restated Regulatory Agreement and Declaration of Restrictive Covenants executed by the Partnership, the Bond Trustee and the Issuer with respect to the Project; 3. Remarketing Agreement executed by the Issuer, the Partnership and the Newman and Associates, Inc. (the "Remarketing Agent"); 4. Agreement Regarding Redemption, Defeasance and Payment of Prior Bonds executed by the Bond Trustee, the Issuer, the Partnership and Glendale Federal Savings and Loan Association; and 5. Bond Purchase Agreement executed by the Issuer, the Partnership and the Remarketing Agent relating to the purchase of the Bonds. E-2 EX-10.42 6 AGREEMENT OF LIMITED PARTNERSHIP - EXHIBIT 10.42 1 EXHIBIT 10.42 AGREEMENT OF LIMITED PARTNERSHIP OF TERRACE GARDENS - PGP, L.P. 2 TABLE OF CONTENTS PAGE ARTICLE 1 DEFINED TERMS.............................................................. 1 ARTICLE 2 ORGANIZATIONAL MATTERS..................................................... 9 SECTION 2.1 ORGANIZATION............................................. 9 SECTION 2.2 NAME..................................................... 9 SECTION 2.3 REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE............ 9 SECTION 2.4 POWER OF ATTORNEY........................................ 9 SECTION 2.5 TERM..................................................... 10 ARTICLE 3 PURPOSE.................................................................... 10 SECTION 3.1 PURPOSE AND BUSINESS..................................... 10 SECTION 3.2 POWERS................................................... 11 ARTICLE 4 CAPITAL.................................................................... 11 SECTION 4.1 CAPITAL OF THE PARTNERS.................................. 11 SECTION 4.2 ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS............ 12 SECTION 4.3 PREEMPTIVE RIGHTS........................................ 12 SECTION 4.4 GENERAL PARTNER LOANS.................................... 12 ARTICLE 5 DISTRIBUTIONS.............................................................. 12 SECTION 5.1 AMOUNT AND PRIORITY OF QUARTERLY DISTRIBUTIONS........... 12 SECTION 5.2 FIRST DISTRIBUTION....................................... 13 SECTION 5.3 AMOUNTS WITHHELD......................................... 13 SECTION 5.4 DISTRIBUTIONS UPON LIQUIDATION........................... 13 ARTICLE 6 ALLOCATIONS................................................................ 14 SECTION 6.1 ALLOCATIONS OF NET INCOME AND NET LOSS................... 14 SECTION 6.2 OTHER ALLOCATIONS........................................ 15 3 ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS...................................... 15 SECTION 7.1 MANAGEMENT............................................... 15 SECTION 7.2 CERTIFICATE OF LIMITED PARTNERSHIP....................... 18 SECTION 7.3 NO PROPERTY TRANSFER PERIOD.............................. 18 SECTION 7.4 NO PAY DOWN PERIOD....................................... 19 SECTION 7.5 NO DISSOLUTION ACTION.................................... 19 SECTION 7.6 NO TAX TERMINATION OR DISSOLUTION........................ 19 SECTION 7.7 MANAGEMENT FEE AND REIMBURSEMENT OF THE GENERAL PARTNER.. 19 SECTION 7.8 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER................ 20 SECTION 7.9 CONTRACTS WITH AFFILIATES................................ 20 SECTION 7.10 INDEMNIFICATION......................................... 20 SECTION 7.11 LIABILITY OF THE GENERAL PARTNER........................ 22 SECTION 7.12 OTHER MATTERS CONCERNING THE GENERAL PARTNER............ 23 SECTION 7.13 TITLE TO PARTNERSHIP ASSETS............................. 23 SECTION 7.14 RELIANCE BY THIRD PARTIES............................... 23 ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS................................. 24 SECTION 8.1 LIMITATION OF LIABILITY.................................. 24 SECTION 8.2 MANAGEMENT OF BUSINESS................................... 24 SECTION 8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS................... 24 SECTION 8.4 RETURN OF CAPITAL........................................ 25 SECTION 8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP... 25 SECTION 8.6 NO REDEMPTION RIGHT...................................... 26 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS..................................... 26 SECTION 9.1 RECORDS AND ACCOUNTING................................... 26 SECTION 9.2 FISCAL YEAR.............................................. 26 SECTION 9.3 REPORTS.................................................. 26 ARTICLE 10 TAX MATTERS................................................................ 27 SECTION 10.1 PREPARATION OF TAX RETURNS.............................. 27 SECTION 10.2 TAX ELECTIONS........................................... 27 SECTION 10.3 TAX MATTERS PARTNER..................................... 27 SECTION 10.4 ORGANIZATIONAL EXPENSES................................. 28 SECTION 10.5 WITHHOLDING............................................. 28 - ii - 4 ARTICLE 11 TRANSFERS AND WITHDRAWALS.................................................. 29 SECTION 11.1 TRANSFER................................................ 29 SECTION 11.2 TRANSFER OF THE GENERAL PARTNER'S PARTNER INTEREST AND LIMITED PARTNER INTEREST................................ 29 SECTION 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER.................... 30 SECTION 11.4 SUBSTITUTED LIMITED PARTNERS............................ 31 SECTION 11.5 ASSIGNEES............................................... 31 SECTION 11.6 GENERAL PROVISIONS...................................... 31 SECTION 11.7 NO EXCHANGE............................................. 32 ARTICLE 12 ADMISSION OF PARTNERS...................................................... 32 SECTION 12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER.................. 32 SECTION 12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS................ 33 SECTION 12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP............................................. 33 ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION................................... 33 SECTION 13.1 DISSOLUTION............................................. 33 SECTION 13.2 WINDING UP.............................................. 34 SECTION 13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS...... 35 SECTION 13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION.................. 36 SECTION 13.5 RIGHTS OF LIMITED PARTNERS.............................. 36 SECTION 13.6 NOTICE OF DISSOLUTION................................... 36 SECTION 13.7 TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP...................... 36 SECTION 13.8 REASONABLE TIME FOR WINDING-UP.......................... 36 SECTION 13.9 WAIVER OF PARTITION..................................... 36 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS............................... 37 SECTION 14.1 AMENDMENTS.............................................. 37 SECTION 14.2 MEETINGS OF THE PARTNERS................................ 38 - iii - 5 ARTICLE 15 GENERAL PROVISIONS......................................................... 39 SECTION 15.1 ADDRESSES AND NOTICES................................... 39 SECTION 15.2 TITLES AND CAPTIONS..................................... 39 SECTION 15.3 PRONOUNS AND PLURALS.................................... 39 SECTION 15.4 FURTHER ACTION.......................................... 39 SECTION 15.5 BINDING EFFECT.......................................... 39 SECTION 15.6 CREDITORS............................................... 39 SECTION 15.7 WAIVER.................................................. 39 SECTION 15.8 COUNTERPARTS............................................ 40 SECTION 15.9 APPLICABLE LAW.......................................... 40 SECTION 15.10 INVALIDITY OF PROVISIONS......................... 41 SECTION 15.11 ENTIRE AGREEMENT................................. 41 SECTION 15.12 NO RIGHTS AS SHAREHOLDERS........................ 41 EXHIBIT A PARTNERS CAPITAL AND PARTNERSHIP INTERESTS EXHIBIT B CAPITAL ACCOUNT MAINTENANCE EXHIBIT C SPECIAL ALLOCATION RULES EXHIBIT D VALUE OF EXISTING PROPERTY EXHIBIT E TRANSACTION DOCUMENTS - iv - 6 AGREEMENT OF LIMITED PARTNERSHIP OF TERRACE GARDENS - PGP, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP OF TERRACE GARDENS - PGP, L.P. (this "Agreement"), dated June 12, 1997 (the "Effective Date"), is entered into by and among PGP Terrace Gardens Holdings Inc., a Delaware corporation, as the general partner (the "General Partner"), and the Persons (as defined below) whose names are set forth on Exhibit A as attached hereto (as it may be amended from time to time), collectively as the limited partners (the "Limited Partners"). WHEREAS, the Limited Partners formed that certain general partnership known as Terrace Gardens Apartments, a California general partnership (the "California General Partnership"), pursuant to that certain General Partnership Agreement of Terrace Gardens Apartments dated November 1, 1983, as amended (the "Prior Agreement"); WHEREAS, the General Partner was admitted to the California General Partnership as a general partner through an amendment to the Prior Agreement; WHEREAS, the General Partner and the Limited Partners have entered into an Agreement and Plan of Conversion of even date herewith whereby the California General Partnership is being converted (the "Conversion") to a Delaware Limited Partnership (the "Partnership"); WHEREAS, as a part of the Conversion, the General Partner and the Limited Partners desire to amend and restate the Prior Agreement under the laws of the State of Delaware; and WHEREAS, upon admission to the California General Partnership, the General Partner made certain capital contributions; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto amend and restate the Partnership Agreement, and do hereby agree as follows: ARTICLE 1 DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute. "Additional Limited Partner" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.2 hereof and who is shown as such on the books and records of the Partnership. "Adjusted Capital Account" means the Capital Account maintained for each Partner as of the end of each Partnership taxable year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. 1 7 "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Adjusted Capital Account as of the end of the relevant Partnership taxable year. "Adjusted Property" means any property, the Carrying Value of which has been adjusted pursuant to Exhibit B hereof. The parties hereto agree that as a result of the admission of the General Partner just prior to Conversion, the Carrying Value of the Existing Property shall have been adjusted in accordance with Exhibit B hereof, and as of the Effective Date, the Existing Property is included in the definition of Adjusted Property. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person; (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person; (iii) any Person of which such Person owns or controls ten percent (10%) or more of the voting interests; or (iv) any officer, director, general partner or trustee of such Person or of any Person referred to in clauses (i), (ii), and (iii) above. "Agreed Value" means (i) in the case of the Existing Property, the Net Value; (ii) in the case of any other property and as of the time of its contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed; and (iii) in the case of any property distributed to a Partner by the Partnership, the Partnership's Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder. "Agreement" means this Agreement of Limited Partnership, as it may be amended, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. "Available Cash" means, with respect to any period for which such calculation is being made, Partnership gross revenues less (i) operation and maintenance expenses (including, but not limited to, reserves for property taxes and insurance), (ii) debt service on Partnership debt, and (iii) management fees and expenses. "Book-Tax Disparities" means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Exhibit B and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Los Angeles, California are authorized or required by law to close. "California General Partnership" means Terrace Gardens Apartments, a California general partnership. 2 8 "Capital Account" means the Capital Account maintained for a Partner pursuant to Exhibit B hereof. "Capital " means, with respect to the Limited Partners, the Agreed Value of the Existing Property, with respect to the General Partner, the cash contributed to the Partnership, and with respect to Additional Limited Partners, the cash, cash equivalents or the Agreed Value of property which such Partner contributes or is deemed to contribute to the Partnership, pursuant to Section 4.1 hereof. "Carrying Value" means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such Property charged to the Partners' Capital Accounts following the date hereof with respect to such Property; and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "Certificate" means a Certificate of Limited Partnership relating to the Partnership to be filed with the execution and delivery hereof, or as soon thereafter as is practicable in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provisions of future law. "Consent" means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof. "Contributed Property" means each property or other asset, in such form as may be permitted by the Act (but excluding cash), contributed or deemed contributed to the Partnership (including deemed contributions to the Partnership as a result of the termination thereof pursuant to Section 708 of the Code and the regulations thereunder to the extent the property was Contributed Property prior to the Section 708 termination). Once the Carrying Value of Contributed Party is adjusted pursuant to Exhibit B hereof, such property shall no longer constitute Contributed Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes. "Conversion" means the process of converting the California General Partnership to the Partnership pursuant to Section 17-217 of the Act and Article 9 of the California Uniform Partnership Act of 1994 (being Section 16901 et seq. of the California Corporations Code). "Depreciation" means, for each taxable year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner. 3 9 "Effective Date" means the effective date set forth in the Certificate of Conversion filed with the Delaware Secretary of State. "Excess Distributions" means distributions to a Limited Partner for all periods in excess of allocations of Net Income to the Limited Partner for all periods pursuant to Section 6.1A(3). "Excess Transfer" means the sale or transfer or conversion of at least eighty percent (80%), in the aggregate, of the Partnership Units received by the Original Limited Partners and/or their respective successors and assigns in transactions not constituting transfers permitted under this Agreement. For purposes of the foregoing, a pledge, encumbrance or hypothecation of a Partnership Unit or an interest therein shall not constitute a sale, transfer or conversion. "Exchange Rights Agreement" means that certain Exchange Rights Agreement, dated as of June 12, 1997, by and among PGP, the Partnership and all of the Limited Partners. "Existing Property" means each property or other asset, in such form as may be permitted by the Act (but excluding cash) held by the Partnership on the date hereof. "General Partner Interest" means a Partnership Interest held by the General Partner, in its capacity as general partner. "IRS" means the Internal Revenue Service, which administers the internal revenue laws of the United States. "Incapacity" or "Incapacitated" means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof; (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay. "Indemnification Agreement" means that certain indemnification agreement, dated June 12, 1997, by and among PGP, the Delaware Limited Partnership, Morning View Terrace - PGP, L.P., and Pacific Inland Communities, LLC. 4 10 "Indemnitee" means any Person made a party to a proceeding or against whom a claim is made by reason of (i) his status as the General Partner, or as a director, officer, employee, partner, agent, representative or Affiliate of the General Partner, or (ii) his or its liabilities pursuant to a loan guarantee or otherwise for or as a result of any indebtedness or obligation of the Partnership or any Subsidiary of the Partnership (including, without limitation, the Tax Exempt Debt prior to and subsequent to any refunding thereof and any indebtedness or obligation which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to). Notwithstanding the foregoing, no Original Limited Partner shall be treated as an Indemnitee in connection with the Tax Exempt Debt (as it may be refunded from time to time) or in respect of the Indemnification Agreement. "Limited Partner" means any Person named as a Limited Partner in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner of the Partnership. "Limited Partner Interest" means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units. "Liquidating Event" has the meaning set forth in Section 13.1. "Liquidator" has the meaning set forth in Section 13.2. "Master Reimbursement Agreement" means the Master Reimbursement Agreement, dated as of December 1, 1996 and amended and restated as of June 1, 1997, by and among the Federal National Mortgage Association, Pacific Inland Communities, LLC, Morning View Terrace - PGP, L.P. and the Partnership. "Negative Capital Account Balance" means, as to any Original Limited Partner, the aggregate negative capital account balance of such partner in the Partnership immediately prior to the date of admission of the General Partner (the "Admission Date") as a general partner of the Partnership (as reflected on the books of the Partnership at that time, and without taking into account any revaluation of property of the Partnership which may occur as a result of, or as required by, Regulations Section 1.704- 1(b)(2)(iv)(f)), and with respect to any Original Limited Partner which is itself a partnership on the Effective Date, the aggregate negative capital account balances of all the partners of such Original Limited Partner immediately prior to the Admission Date (as reflected on the books of the Partnership at that time, and without taking into account any revaluation of property of the Partnership which may occur as a result of, or as required by, applicable Regulations (including, without limitation, Regulations Section 1.704-1(b)(2)(iv)(f)); provided, however, that the Negative Capital Account Balance in each case shall be deemed to be reduced by the amount (determined at the time of reference) of the Original Limited Partner's share of Non-Recourse Liabilities of the Partnership. "Net Income" means, for any taxable period, the excess, if any, of the Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit "B". 5 11 "Net Loss" means, for any taxable period, the excess, if any, of the Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit "B". "Net Value" is equal to $1,752,607. "No Exchange Period" means a period expiring two (2) years after the date of the Exchange Rights Agreement. "Nonrecourse Built-in-Gain" means, with respect to any Existing Property or Adjusted Property that is subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. "Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). "Nonrecourse Liability" has the meaning set forth in Regulations Section 1.752-1(a)(2). "Original Limited Partner" means each person listed on Exhibit A as attached hereto at the time of initial execution of this Agreement (excluding the General Partner) without regard to any subsequent changes to such Exhibit, and with regard to any such persons which are themselves partnerships, the partners of such partnerships if and when the Partnership Units held by such partnerships hereunder are distributed by such partnerships to such partners. "Partner" means a General Partner or a Limited Partner, and "Partners" means the General Partner and the Limited Partners collectively. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" has the meaning set forth in Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). "Partnership" means the limited partnership formed under the Act by conversion of the California General Partnership, and pursuant to the Prior Agreement, as amended and restated, pursuant to this Agreement and any successor thereto. "Partnership Interest" means an ownership interest in the Partnership by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest held by a Limited Partner may be expressed as a number of Partnership Units. 6 12 "Partnership Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "Partnership Record Date" means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall be no later than ten (10) days prior to any date of distribution. "Partnership Unit" means a fractional, undivided share of the Partnership Interests of all Limited Partners issued pursuant to Sections 4.1 and 4.2. The number of Partnership Units outstanding and the Percentage Interest in the Partnership represented by such Partnership Units are set forth in Exhibit A attached hereto, as such Exhibit may be amended from time to time. The ownership of Partnership Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the Partnership Units shall be uncertificated securities. If the General Partner elects to evidence the Partnership Units with a certificate, such certificate may be imprinted with a legend setting forth such restrictions placed on the units as specified in this Agreement and the Exchange Rights Agreement and such restrictions will be binding upon all holders of the certificate along with the terms and conditions set forth in this Agreement and the Exchange Rights Agreement. "Partnership Year" means the fiscal year of the Partnership, which shall be the calendar year. "Percentage Interest" means, as to a Limited Partner, its interest in the Partnership as determined by dividing the Partnership Units owned by such Limited Partner by the total number of Partnership Units then outstanding and as specified in Exhibit A attached hereto, as such Exhibit A may be amended from time to time. "Person" means an individual or a corporation, partnership, trust, limited liability company, unincorporated organization, association or other entity. "PGP" means Pacific Gulf Properties Inc., a Maryland corporation and an Affiliate of the General Partner. "Project" means the Terrace Gardens Apartments located in the City of Escondido, County of San Diego, California, including all real and personal property, now or hereafter existing, necessary or desirable for the proper ownership, management and operation of the apartment complex. "Property" means Existing Property, Contributed Property and Adjusted Property. "Recapture Income" means any gain recognized by the Partnership upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "Regulations" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "REIT" means a real estate investment trust under Section 856 of the Code. "REIT Share" shall mean a share of common stock of PGP, par value $.01 per share. 7 13 "Residual Gain" or "Residual Loss" means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property, or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax Disparities. "Restructuring Agreement" means that certain Restructuring Agreement, dated as of May 23, 1997, by and among PGP, the General Partner, the California General Partnership and all of the Limited Partners. "704(c) Value" of any Existing Property means the value of such property as set forth in Exhibit D, or if no value is set forth in Exhibit D, the fair market value of such property or other consideration at the time of contribution, as determined by the General Partner using such reasonable method of valuation as it may adopt. The 704(c) Value of any property deemed contributed by the Partnership to a new partnership for federal income tax purposes upon termination of the Partnership thereof pursuant to Section 708 of the Code shall not change by virtue of such termination. Subject to Exhibit B hereof, the General Partner shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values in a single or integrated transaction among the separate properties on a basis proportional to their respective fair market values. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the voting equity securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person. "Substituted Limited Partner" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4. "Tax Exempt Debt" means the existing tax exempt financing encumbering the Property, namely the outstanding principal balance of the City of Escondido, California, Variable Rate Demand Multifamily Housing Revenue Bonds, Series 1985A (Terrace Gardens Project), and any successor or refunding debt with respect thereto. "Terminating Capital Transaction" means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. "Unrealized Gain" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereof) as of such date; over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date. "Value" means, with respect to a REIT Share, the average of the daily market price on the New York Stock Exchange for the ten (10) consecutive trading days immediately preceding the Effective Date. The market price for each such trading day shall be the closing price on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day. 8 14 ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. The Partners hereby amend and restate the Prior Agreement in its entirety as of the date hereof. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name The name of the Partnership shall be Terrace Gardens - PGP, L.P. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners. Section 2.3 Registered Office and Agent; Principal Office The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware, 19805. The principal office of the Partnership shall be c/o PGP Terrace Gardens Holdings Inc., 363 San Miguel Drive, Suite 100, Newport Beach, California, 92660-7805, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. Section 2.4 Power of Attorney A. Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices:(a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatement thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13 hereof or the Capital of any Partner; (e) all certificates, documents and 9 15 other instruments relating to the determination of the rights, preferences and privileges of a Partnership Interest; and (f) any and all financing statements, continuation statements and other documents necessary or desirable to create, perfect, continue or validate the security interest granted by a Limited Partner pursuant to Section 10.5 of this Agreement or to exercise or enforce the Partnership's rights with respect to such security interest; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's Assignee's Partnership Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney in accordance with the provisions of this Agreement. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term The term of the Partnership commenced on November 1, 1983 and shall continue until December 31, 2095, unless, the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. ARTICLE 3 PURPOSE Section 3.1 Purpose and Business The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act with regard to the Project only; provided, however, that such business shall be limited to and conducted in such a manner as to permit PGP at all times to be classified as a REIT, unless PGP ceases to qualify as a REIT for reasons other than the conduct of the business of the Partnership; (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own 10 16 interests in any entity engaged in any of the foregoing; and (iii) to do anything necessary or incidental to the foregoing. In connection with the foregoing, and without limiting PGP's right, in its sole discretion, to cease qualifying as a REIT, the Partners acknowledge PGP's current status as a REIT inures to the benefit of all of the Partners and not solely to PGP and the General Partner. Section 3.2 Powers The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership; provided, however, that the Partnership shall not take, or refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of PGP to continue to qualify as a REIT; (ii) could subject PGP to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over PGP, the General Partner or its securities, unless such action (or inaction) shall have been specifically consented to by the General Partner in writing. ARTICLE 4 CAPITAL Section 4.1 Capital of the Partners A. The General Partner has made, and will make, in a timely manner, a cash contribution equal to the Transaction Expenses and Deferred Maintenance, as both terms are defined in the Restructuring Agreement. By execution and delivery of this Agreement, the Partners hereby acknowledge and agree that the aggregate Capital of the Limited Partners equals the Net Value. The Capital of the Limited Partners is allocated initially among each of the Limited Partners as set forth in Exhibit A. The Limited Partners shall own Partnership Units in the amounts set forth for such Limited Partner in Exhibit A. The number of Partnership Units received by each Limited Partner was calculated by dividing the respective Partner's Capital by the Value of a REIT Share. The Limited Partners shall have a Percentage Interest in the Partnership as set forth in Exhibit A, which Percentage Interest was determined by dividing the respective Limited Partner's Partnership Units by the aggregate number of Partnership Units issued to all Limited Partners. The Percentage Interests shall be adjusted from time to time by the General Partner to the extent determined by the General Partner to be necessary to reflect accurately redemptions, additional capital, the issuance of additional Partnership Units (pursuant to any merger or otherwise), or similar events having an effect on any Limited Partner's Percentage Interest. Except as provided in Sections 10.5, and 13.3, the Partners shall have no obligation whatsoever to make any additional capital contributions or loans, or advances of any kind to the Partnership, or to in any way finance the operation of the Partnership or any of the debt or obligations of the Partnership. B. Except as provided in Section 13.3 of this Agreement and as otherwise expressly provided herein, the Capital of each Partner will be returned to that Partner only in the manner and to the extent provided in Article 5 and Article 13 hereof, and no Partner may withdraw from the Partnership or otherwise have any right to demand or receive the return of its Capital in the Partnership, except as specifically provided herein. Under circumstances requiring a return of any Capital, no Partner shall have the right to receive property other than cash, except as specifically provided herein. No Partner shall be entitled to interest on any Capital or Capital Account. The General Partner shall not be liable for the return of any portion of the Capital of any Limited Partner, and the return of such Capital shall remain solely from Partnership assets. 11 17 C. No Limited Partner shall have any further personal liability to contribute money to, or in respect of, the liabilities or the obligations of the Partnership, nor shall any Limited Partner be personally liable for any obligations of the Partnership, except as otherwise provided in this Agreement or in the Act. No Limited Partner shall be required to make any contributions to the capital of the Partnership other than as expressly provided in this Agreement. Section 4.2 Issuances of Additional Partnership Interests Upon the consent of a majority in interest of the Limited Partners, the General Partner is hereby authorized to cause the Partnership from time to time to issue to the Partners (including the General Partner) or other Persons additional Partnership Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including, rights, powers and duties senior to the Limited Partners (including the Original Limited Partners), except that, notwithstanding the foregoing, none of such additional Partnership Units or Partnership Interests shall carry or give to their holders rights to receive distributions (as to amount, timing, and priority) senior to the rights of the Original Limited Partners as set forth in this Agreement. Section 4.3 Preemptive Rights No Person shall have any preemptive, preferential or other similar right with respect to (i) additional capital contributions or loans to the Partnership; or (ii) issuance or sale of any Partnership Units or other Partnership Interests. Section 4.4 General Partner Loans The General Partner and its Affiliates shall have the right, but not the obligation, to make loans and advances to the Partnership, and shall be treated as a third party lender to the Partnership (with all attendant rights, privileges, and remedies) to the extent that it does so. Loans and advances, if any, funded by the General Partner or its Affiliates shall be on commercially competitive terms, comparable to similar loans and advances made by unrelated third party institutional lenders; and, if institutional lenders would not regularly make such loans or advances, then terms for a comparable loan or advance described by any unrelated third party loan broker upon request by the General Partner shall be conclusively presumed to be commercially competitive and comparable to similar loans and advances made by unrelated third parties for purposes of this Agreement. ARTICLE 5 DISTRIBUTIONS Section 5.1 Amount and Priority of Quarterly Distributions Except as provided in Sections 5.2 and 5.4 hereof, the General Partner shall cause to be distributed within 60 days of the end of each calendar quarter, beginning with the calendar quarter ending March 31, 1998, an amount equal to 100% of Available Cash generated by the Partnership during such calendar quarter to those Partners who are Partners on the Partnership Record Date for such calendar quarter, as follows: A. First, to the Limited Partners who are Partners on the Partnership Record Date, an amount (the "Quarterly Distribution Amount") equal to the lesser of (i) 100% of such Available Cash, or (ii) an amount determined by multiplying the total number of Partnership Units held by such Limited Partners by the amount of the dividend per share 12 18 paid to common stock shareholders of PGP with respect to such calendar quarter. As among such Limited Partners, the Quarterly Distribution Amount shall be distributed pro rata in accordance with their respective Partnership Interests; and B. The balance to the General Partner. Section 5.2 First Distribution The General Partner shall cause to be distributed not later than February 28, 1998 an amount equal to 100% of Available Cash generated by the Partnership from and including the Effective Date to and including December 31, 1997, to those Partners who are Partners on the Partnership Record Date for the calendar quarter ending December 31, 1997, as follows: A. First, to the Limited Partners who are Partners on the Partnership Record Date, an amount (the "First Distribution Amount") equal to the lesser of (i) 100% of such Available Cash, or (ii) an amount which is the sum of the following: (A) an amount determined by multiplying the number of total Partnership Units held by such Limited Partners by the amount of the dividend per share paid to common stock shareholders of PGP with respect to the calendar quarter ended September 30, 1997 and multiplying that product by a fraction (x) the numerator of which is the number of days from and including the Effective Date to and including September 30, 1997, and (y) the denominator of which is 92, and (B) an amount determined by multiplying the total number of Partnership Units held by such Limited Partners by the amount of the dividend per share paid to common stock shareholders of PGP with respect to the calendar quarter ended December 31, 1997. As among such Limited Partners, the First Distribution Amount shall be distributed pro rata in accordance with their respective Partnership Interests; and B. The balance to the General Partner. Section 5.3 Amounts Withheld All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.5 hereof with respect to any allocation, payment or distribution to the Partners or Assignees shall be treated as amounts distributed to the Partners or Assignees pursuant to Sections 5.1 or 5.2 for all purposes under this Agreement. Section 5.4 Distributions Upon Liquidation Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2. 13 19 ARTICLE 6 ALLOCATIONS Section 6.1 Allocations of Net Income and Net Loss For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Exhibit B hereof) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below. A. Net Loss for a particular period shall be allocated as follows: (1) First, to the General and Limited Partners in proportion to and to the extent of their positive Capital Account balances, if any. (2) Second, to the Limited Partners in proportion to and to the extent of their respective Negative Capital Account Balances, until the amount allocated under this Section 6.1A(2) for the current fiscal year and all prior fiscal years equals the Negative Capital Account Balances of all Limited Partners. (3) Third, to the Limited Partners, in proportion to and to the extent of, their respective aggregate Excess Distributions, until the amount allocated under this Section 6.1A(3) for the current fiscal year and all prior fiscal years equals the Excess Distributions of all Limited Partners. (4) Fourth, to the Limited Partners, in proportion to their respective Percentage Interests until the amount allocated under this Section 6.1(A)(4) for the current fiscal year and all prior fiscal years equals the principal paid on the Tax Exempt Debt of the Partnership for all periods up to an amount equal to $600,000. (5) Fifth, to the General Partner. B. Net Income for a particular period shall be allocated as follows: (1) First, to the Partners that have previously been allocated Net Loss pursuant to Section 6.1A in amounts and among such Partners in the reverse order (and in the corresponding amounts) of all Net Loss previously allocated to them until the amount of Net Income allocated pursuant to this Section 6.1B(1) equals the aggregate amount of all Net Loss theretofore allocated pursuant to Section 6.1A. (2) Second, if applicable, to the Limited Partners in proportion to their respective Partnership Interests until the aggregate Net Income allocated pursuant to this Section 6.1B(2) for the current taxable period and all previous taxable periods equals the aggregate amount of Available Cash distributed to the Limited Partners pursuant to Section 5.1A and 5.2. (3) Third, to the General Partner. 14 20 Section 6.2 Other Allocations A. For purposes of Regulations Section 1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (i) the amount of Partnership Minimum Gain; and (ii) the total amount of Nonrecourse Built-in Gain shall be allocated among the Limited Partners in accordance with their respective Percentage Interests. B. Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to Exhibit C, be characterized as Recapture Income in the same proportions and to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income. C. Notwithstanding the provisions of Sections 6.1A and 6.1B, to the extent that the Partnership is treated for income tax purposes as having sold all or a portion of the Existing Property in connection with the Conversion, any gain recognized as a result of such sale shall be allocated to the Partners to whom the consideration deemed to have been received by the Partnership in respect of such sale, and by reason of the receipt of which the gain is recognized, is deemed distributed (in proportion to their respective Partnership Interests immediately prior to such distribution). ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation (but in all cases subject to the terms of this Agreement): (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, money to be used to pay off a portion of the existing debt encumbering the Partnership's assets) and making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit PGP (so long as PGP qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its shareholders in amounts sufficient to permit PGP to maintain REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidence of indebtedness (including the securing of the same by deed, mortgage, deed of trust or other lien or encumbrance on the Partnership's assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; 15 21 (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity; (4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the General Partner, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Subsidiaries of the Partnership and/or the General Partner) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to its Subsidiaries, the holding of any real, personal and mixed property of the Partnership in the name of the Partnership or in the name of a nominee or trustee and the creation, by grant or otherwise, of easements or servitudes; (5) the management, operation, leasing, collection of rents, marketing, landscaping, repair, alteration, renovation, rehabilitation, demolition or improvement of the Property or any other assets owned by the Partnership or any Subsidiary of the Partnership and the performance of any and all other acts necessary or appropriate to the operation of the Property or other assets including, without limitation, applications for rezoning or objections to rezoning of the Property or other assets; (6) the negotiation, execution, and performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including, without limitation, the execution and delivery of leases on behalf of or in the name of the Partnership, contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership's assets; (7) the opening and closing of bank accounts, the investment of Partnership funds in securities, certificates of deposit and other instruments, and the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; (8) holding, managing, investing and reinvesting cash and other assets of the Partnership; (9) the collection and receipt of revenues and income of the Partnership; (10) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer" of the Partnership), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or hiring (whether or not any of the foregoing are also employed by, consultants to, independent contractors for, or otherwise do business with the General Partner or its Affiliates in related or unrelated matters); (11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate (whether or not such is done as part of a group, combined or other policy or policies under which the Partnership and the General Partner (or its Affiliates) are also insured, so long as the General Partner fairly allocates the expense thereof among the covered parties); 16 22 (12) the formation of, or acquisition of an interest in, and the contribution of some or all of property (or any part thereof or interest therein) to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity investment from time to time); (13) the control of any and all matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of, any claim, cause of action, liability, debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitration or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law and consistent with the terms of this Agreement, including in each and all of the foregoing instances any such matter or thing in which the General Partner or its Affiliates have a direct interest; (14) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including without limitation, the contribution or loan of funds by the Partnership to such Persons); (15) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt; (16) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person; (19) the making, execution and delivery of any and all deeds, leases, notes, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate, in the judgment of the General Partner, for the accomplishment of any of the powers of the General Partner enumerated in this Agreement; and (20) the issuance of additional Partnership Units or Partnership Interests, as appropriate, in connection with capital contributions by Additional Limited Partners and additional capital contributions by Partners pursuant to Article 4 hereof. B. Except as otherwise expressly provided in this Agreement, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law, rule or regulation. The 17 23 execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. D. In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner of any action taken by it. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner taken pursuant to its authority under this Agreement and in accordance with the terms hereof. E. The General Partner, on behalf of the Partnership, may hire, employ or otherwise contract with any Affiliate of the General Partner to manage the Property, and the Limited Partners do hereby waive any conflict which may exist because of the Affiliate relationship. F. Without any further act, approval or vote of the Partners and notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, the Partnership and Partners on behalf of the Partnership, hereby authorize, approve and ratify the Partnership's, and the General Partner's on behalf of the Partnership, execution, delivery and performance of the Transaction Documents described in Exhibit E attached hereto and all other documents deemed necessary or required by the General Partner. The General Partner is hereby authorized to enter into the Transaction Documents on behalf of the Partnership, but such authorization shall not be deemed a restriction on the power of the General Partner to enter into other agreements on behalf of the Partnership. Section 7.2 Certificate of Limited Partnership The General Partner shall file the Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. Section 7.3 No Property Transfer Period. The General Partner covenants and agrees not to cause the Partnership to sell, transfer or otherwise dispose of any of the Existing Property which is real property, or any interest therein, directly or indirectly, whether as a result of a Terminating Capital Transaction or otherwise (collectively referred to as a "Property Transfer"), nor distribute to the Original Limited Partners or their successors and assigns any property if such distribution would trigger tax liability under Section 737 of the Code, for a period of five (5) years after the Effective Date, in either 18 24 case unless and until either (i) during said five-year period there has been an Excess Transfer, or (ii) the Property Transfer occurs in a manner which, upon such transfer, is fully tax free to, and as such does not produce any income taxation upon, the Original Limited Partners or their successors and assigns. Section 7.4 No Pay Down Period. During a period of five (5) years after the Effective Date, the General Partner shall not cause the Partnership to pay down any of the Tax Exempt Debt (other than as required by the debt instrument or any other agreement ancillary thereof) nor take any other action which would result in a reduction of the allocation of debt to the Original Limited Partners or their successors or assigns for purposes of computing such parties' basis for income tax purposes, unless either (i) simultaneously with such pay down the Partnership refinances the full amount paid down with other debt, and such refinanced debt shall not result in a reduction of the allocation of debt to the Original Limited Partners or their successors or assigns for purposes of computing such parties' basis for income tax purposes, or (ii) during said five-year period there has been an Excess Transfer. Section 7.5 No Dissolution Action. Without limiting the provisions of Section 7.4, for the five-year period immediately following the Effective Date, the General Partner will not cause the Partnership to take any action which results in dissolution of the Partnership. Section 7.6 No Tax Termination or Dissolution. The General Partner hereby covenants and agrees that for the five-year period immediately following the Effective Date, the General Partner will not make a disposition of its general partner interest in the Partnership (i) which would cause a termination of the Partnership pursuant to Section 708(b)(1)(B) of the Code when the fair market value of the property deemed contributed to the successor partnership as a result of such termination is less than the liabilities to which such property is then subject, or (ii) which in the opinion of legal counsel for the Partnership or the General Partner would result in the Partnership being treated as an association taxable as a corporation. Section 7.7 Management Fee and Reimbursement of the General Partner A. The General Partner and/or its Affiliates shall have the right, but not the obligation, in the sole discretion of the General Partner, to perform all or any of the property management services on account of the property owned or managed by the Partnership. If the General Partner elects to so perform, or to have an Affiliate so perform, the property management services, then the General Partner or its Affiliate shall be reimbursed expenses and otherwise compensated therefor by the Partnership in amounts determined by the General Partner, in its good faith discretion, to be comparable to amounts which would be charged by reputable unrelated third party property management companies which have substantial experience in performing property management services for properties of the type owned or managed by the Partnership for institutional owners with portfolios under management which are substantially similar in size, nature, and condition of property owned or managed by the Partnership. It is agreed that a management fee of four percent (4%) of gross income may be charged by the General Partner or its Affiliates for property management services as contemplated hereunder, and such shall be deemed conclusively to satisfy the foregoing requirements. The reimbursements and fees payable to the General Partner or its Affiliates shall be paid no less frequently than monthly. Except as provided in this Section 7.7A and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B. The General Partner shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all expenses that it incurs relating to the ownership and operation of, or for the benefit of, the Existing Property, the Partnership or any of its assets. The General Partner shall also be reimbursed for all expenses it incurs relating to (i) the ownership and operation of the Existing Property and other assets or properties owned by the Partnership, (ii) the reorganization or 19 25 restructuring thereof, and (iii) the management of Partnership Units. Any reimbursement in this paragraph (B) shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.10 hereof. Section 7.8 Outside Activities of the General Partner The General Partner and its Affiliates shall be permitted to purchase, own, operate, manage and otherwise deal with and profit from any property, real, personal or mixed, not owned by the Partnership for their own account and benefit, whether or not competitive with the business and affairs of the Partnership, and neither the Partnership, any Limited Partner, or any other Person shall have any right, claim, interest or cause of action therein or as a result thereof. Without limiting the generality of the above, nothing in this Agreement shall obligate the General Partner or its Affiliates to first offer the Partnership an opportunity to invest in any investment which has been offered to or found by the General Partner or its Affiliates, whether or not such investment is of a nature that may be invested in by the Partnership or would compete directly or indirectly with the business of the Partnership. The Limited Partners hereby acknowledge that the PGP and its Affiliates currently own a variety of real estate investments and may in the future acquire additional real estate investments that may be competitive with the business of the Partnership. Section 7.9 Contracts with Affiliates A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. B. The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable. C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, employee benefit plans, stock option plans, and similar plans funded by the Partnership for the benefit of employees of the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership or any Subsidiaries of the Partnership. E. Any or all of the foregoing may be jointly established with the General Partner or its Affiliates, provided that in such case the allocation of expense shall be shared among the parties on whose behalf such plans exist as determined by the General Partner in good faith to be fair and reasonable. Section 7.10 Indemnification A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys' fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, 20 26 civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the General Partner in its capacity as general partner of the Partnership as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, whether or not suit or other legal proceedings are commenced, unless it is established by a court of competent jurisdiction and all appeals relating thereto have been fully completed or the applicable appeal periods have expired that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceedings and either was committed in intentional bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper and unpermitted personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee knew, or was reckless in not knowing, that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee pursuant to a loan guaranty, recourse obligation, general partner liability, or otherwise for any indebtedness of the Partnership (including without limitation the Tax Exempt Debt and guarantee of PGP in favor of Fannie Mae in its capacity as credit-enhancer for the Tax Exempt Debt) or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.10 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct as set forth in this Section 7.10A. The termination of any proceeding by conviction of an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, in each case after all appeals relating thereto have been fully completed or the applicable appeal periods have expired, creates a rebuttable presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.10A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.10 shall be made only out of the assets of the Partnership (including those assets required to be contributed by the Limited Partners to restore deficits in their respective Capital Accounts in accordance with the terms hereof), and, except as otherwise may be required herein, neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.10. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding. C. The indemnification provided by this Section 7.10 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitee is indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.10, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of Section 7.10; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries 21 27 of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement, except to the extent the Partners are required to restore negative balances in their Capital Account; provided, however, that nothing in this Section 7.10(F) shall restrict or otherwise limit personal liability arising by application of the Indemnification Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.10 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.10 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.10 or any provision hereof shall be prospective only and shall not in any way affect the Partnership's liability to any Indemnitee under this Section 7.10, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.11 Liability of the General Partner A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or any act or omission if the General Partner acted in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the shareholders of the General Partner collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (except as otherwise provided herein) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith. D. Any amendment, modification or repeal of this Section 7.11 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's and its officers' and directors' liability to the Partnership and the Limited Partners under this Section 7.11 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 22 28 Section 7.12 Other Matters Concerning the General Partner A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of PGP to continue to qualify as a REIT; or (ii) to avoid PGP incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. Section 7.13 Title to Partnership Assets Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is being held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Section 7.14 Reliance by Third Parties Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be 23 29 available against such Person to contest, engage or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS Section 8.1 Limitation of Liability The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.5 hereof, or under the Act. Section 8.2 Management of Business No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Limited Partners Subject to the terms and provisions hereof, it is agreed that any Partner (General and/or Limited) and any Affiliate of any Partner (including any officer, director, employee, agent, or representative of any Partner) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights, claims, or interests by virtue of this Agreement or any relationships, duties or obligations hereunder (including, but not limited to, any fiduciary or similar duties created by this Agreement, under the Act, or otherwise existing at law or in equity) in any business ventures or investments of any General Partner or Limited Partner, or any Affiliate of any of the foregoing. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person, and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person could be taken by such Person. 24 30 It is further agreed that none of the Partners, General or Limited, or any of their Affiliates, have any duty, obligation, or liability to present to the Partnership any business or investment opportunity which may arise in the course of activity for or on behalf of the Partnership, or otherwise, for investment by the Partnership or any of the Partners (even if within the line and scope of the business and affairs of the Partnership), and instead any Partner, General or Limited, and any Affiliate may pursue such opportunity for such Partner's or Affiliate's own benefit and account, without any participation, right, or claim therein by the Partnership or any other Partner, and without notification or disclosure to the Partnership or any other Partner. Section 8.4 Return of Capital No Limited Partner shall be entitled to the withdrawal or return of its Capital, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Exhibit C hereof or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (including such copying and administrative charges as the General Partner may establish from time to time): (1) to obtain a copy of the most recent annual and quarterly balance sheet, income statement, and related financial statements prepared by the Partnership; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner to the extent the foregoing is materially different from information contained in financial statements or other reports provided to Limited Partners. The request by a Limited Partner of quarterly and annual balance sheets and income statements regularly prepared by the Partnership in order to verify the correctness of distributions of cash, if any, to the Limited Partner in accordance with the terms and provisions of this Agreement shall be considered a purpose reasonably related to the Limited Partner's interest as a limited partner in the Partnership. B. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, desirable or necessary any information that: (i) the General 25 31 Partner reasonably believes to be in the nature of trade secrets or other information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreement with an unaffiliated third party to keep confidential. If the General Partner desires to disclose any information of the type described in the preceding paragraphs (i) or (ii) to a Limited Partner, the General Partner may require, as a condition to such disclosure, that the Limited Partner agree in writing that such information will be held in strictest confidence and no distribution of such information will be made. Section 8.6 No Redemption Right No Limited Partner (other than the General Partner) shall have the right to require the Partnership to redeem all or a portion of the Partnership Units held by such Limited Partner. ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business, including without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Sections 8.5A and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or such other basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year The fiscal year of the Partnership shall be the calendar year. Section 9.3 Reports A. The Partnership shall mail to each Limited Partner no later than ninety (90) days after the close of each Partnership Year an annual report containing financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, for such Partnership year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner in its discretion (such selection may include any such accountants who also perform accounting or auditing work for the General Partner and its Affiliates). The Partnership shall mail to each Limited Partner no later than ninety (90) days after the close of each calendar quarter (except the last calendar quarter of each year), a report containing unaudited financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate. All accounting and other 26 32 professional fees associated with the preparation, compilation, review, audit, and any other matters relating to the Partnership's records, financial statements and reports, tax returns, and any other Partnership items described in the preceding paragraphs shall be at the expense of the Partnership, not the General Partner. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by the Limited Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that if requested by a transferee of a Partnership Interest, the General Partner shall file an election on behalf of the Partnership pursuant to Section 754 of the Code to adjust the basis of the Partnership property in the case of a transfer of a Partnership Interest made in accordance with the provisions of this Agreement. The General Partner shall have the right to seek to revoke any tax election it makes (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination, in its sole and absolute discretion, that such revocation is in the best interest of the Partners. Section 10.3 Tax Matters Partner A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address, taxpayer identification number and profit interest of each of the Limited Partners and the Assignees to the extent the General Partner has such information. B. The tax matters partner is authorized, but not required (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time period prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" ( as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing 27 33 of a petition for readjustment with the Tax Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the IRS and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action of behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.10 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no special compensation for its services as such. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne or reimbursed by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, including an accounting firm which also renders services to the General Partner and its Affiliates. Section 10.4 Organizational Expenses The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code. Section 10.5 Withholding Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code and any provision of state or local income tax law. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited 28 34 Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall at its own expense take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer A. The term "transfer" when used in this Article 11 with respect to a Partnership Unit shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any acquisition of Partnership Interests by the General Partner from any Limited Partner of any Partnership Units, nor does it include any grant of a security interest or any related action involving levy, execution, or the like contemplated under Section 10.5 of this Agreement. B. No Partnership Interest shall be transferred, in whole or in part (including any interest therein), except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void ab initio, and the Partnership shall have no duty or obligation to recognize the transferee as a partner or holder of any interest whatsoever in the Partnership, and the transferee shall have no rights, interests or claims in or against the Partnership or any Partner. Section 11.2 Transfer of the General Partner's Partner Interest and Limited Partner Interest Subject to the provisions of Section 7.5 and 7.6, the General Partner may transfer any of its General Partner Interest or withdraw as General Partner, or transfer any of its Limited Partner Interest, without consent or approval from any Limited Partners. Such transfer includes transfer PGP or to an entity which is wholly-owned by PGP and is a Qualified REIT Subsidiary under Section 856(i) of the Code. 29 35 Section 11.3 Limited Partners' Rights to Transfer A. Subject to the provisions of Sections 11.3.C, 11.3.D, 11.3.E, and 11.4, a Limited Partner (other than the General Partner) may transfer, with or without the consent of the General Partner, all or any portion of its Partnership Interest, or any of such Limited Partner's economic rights as a Limited Partner. In addition, those Original Limited Partners which are themselves partnerships shall have the right to transfer, assign, and convey their Partnership Units to their constituent partners, provided that such constituent partners shall first have executed and delivered a written agreement to be bound by the terms, provisions, and conditions of the Exchange Rights Agreement and the Restructuring Agreement, and that at the time of such transfer, assignment, and conveyance to such constituent partners, the representations and warranties made by such constituent partners in any subscription or other documents are true and correct in all material respects. B. If a Limited Partner is subject to Incapacity, the partners, executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. C. The General Partner may prohibit any transfer by a Limited Partner or its Partnership Units if, in the opinion of legal counsel to the Partnership or the General Partner, such transfer would require filing of a registration statement under the Securities Act of 1933 or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Units. D. No transfer by a Limited Partner of its Partnership Units may be made to any Person if:(i) in the opinion of legal counsel for the Partnership or the General Partner, it would result in the Partnership being treated as an association taxable as a corporation; (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code; (iii) such transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (iv) such transfer would, in the opinion of legal counsel for the Partnership or the General Partner, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (v) such transfer would subject the Partnership to be regulated under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; or (vi) in the opinion of legal counsel for the Partnership or the General Partner, it would adversely affect the ability of PGP to continue to qualify as a REIT or subject PGP to any additional taxes under Section 857 or Section 4981 of the Code. E. No transfer of any Partnership Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose loan, immediately prior to such transfer, constitutes a Nonrecourse Liability, without the consent of the General Partner, in its sole and absolute discretion; provided that as a condition to such consent the lender will be required to enter into an arrangement with the Partnership or the General Partner to exchange or redeem at a price agreeable to the lender, the General Partner, and the transferring Partner (each in their respective discretion) any Partnership Units in which a security interest is held immediately prior to the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. 30 36 Section 11.4 Substituted Limited Partners A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his place. The General Partner shall, however, have the right to consent to the admission of a transferee of the interest of a Limited Partner pursuant to this Section 11.4 as a Substituted Limited Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. Notwithstanding the foregoing, in the event of transfers of Partnership Units by Original Limited Partners in accordance with the second sentence of Section 11.3A, the transferees shall be admitted as Substituted Limited Partners, and the General Partner hereby consents to such. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. C. Upon admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address, number of Partnership Units, and Percentage Interest of such Substituted Limited Partner. Section 11.5 Assignees If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee of a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items, gain, loss deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units in any matter presented to the Limited Partners for a vote (such Partnership Units being deemed to have been voted on such matters in the same proportion as all other Partnership Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units. Section 11.6 General Provisions A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all such Limited Partner's Partnership Units in accordance with this Article 11 or pursuant to any agreement consented to by the Partnership pursuant to which the Limited Partner's interests in the Partnership are conveyed and the Limited Partner's withdrawal is provided for. B. Any Limited Partner who shall transfer all of its Partnership Units in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such Partnership Units as Substitute Limited Partners. Similarly, any Limited Partner who shall transfer all of its Partnership Units pursuant to any agreement of the type referred to in the preceding paragraph shall cease to be a Limited Partner. C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees. 31 37 D. If any Partnership Interest is transferred or assigned during any quarterly segment of the Partnership's fiscal year in compliance with the provisions of this Article 11 on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which a redemption occurs shall be allocated to a redeeming Partner. All distributions of Available Cash attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment, or redemption shall be made to the transferor Partner, all distributions of Available Cash thereafter attributable to such Partnership Unit shall be made to the transferee Partner. Section 11.7 No Exchange Notwithstanding anything in this Section 11 to the contrary, each of the Limited Partners hereby agrees that, except as set forth below, from the date hereof until two (2) years following the Effective Date (the "No Exchange Period"), without the prior written consent of the General Partner (which may be granted or withheld in its sole and absolute discretion), it shall be prohibited from transferring any Partnership Units; provided, however, that where a Limited Partner is a natural person and such Limited Partner dies (or, in the case of Partnership Units owned as community property by the Limited Partner and its spouse, then where either the Limited Partner or its spouse dies) prior to the expiration of the No Exchange Period, the No Exchange Period shall, as to such Limited Partner only, expire on the later of (i) one (1) year from the Effective Date or (ii) the death of such Limited Partner (or such Limited Partner's spouse, as the case may be); provided, further, however, that the foregoing shall not apply to the Stewart Family Trust as an owner of Partnership Units in its capacity as an Original Limited Partner, but shall apply to the Stewart Family Trust as an owner of Partnership Units, if any, in its capacity as a partner (or former partner) of any Limited Partner. Notwithstanding anything in this Section 11.7 to the contrary, each of the Limited Partners hereby agree that, without the prior written consent of the General Partner (which may be granted in its sole and absolute discretion), each Limited Partner shall be prohibited from transferring any Partnership Units following the occurrence of a Liquidating Event. ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner A successor to all of the General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. The admission of any such transferee shall not cause a dissolution of the Partnership and such transferee shall carry on the business of the Partnership in accordance with the forms and provisions of this Agreement. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6.D hereof. 32 38 Section 12.2 Admission of Additional Limited Partners A. Except as otherwise provided elsewhere in this Agreement, after the admission to the Partnership of the initial Limited Partners on the date hereof, a Person who makes a capital contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner. Section 12.3 Amendment of Agreement and Certificate of Limited Partnership For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment to this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs be wound up, only upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; 33 39 B. an event of withdrawal of the General Partner, as defined in the Act (other than an event of voluntary bankruptcy), unless within ninety (90) days after such event of withdrawal a majority in interest in capital and profits of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; C. on or before December 31, 2095, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; E. the sale of all or substantially all of the assets and properties of the Partnership; or So long as Fannie Mae (as defined in the Master Reimbursement Agreement) continues to provide a Facility (as defined in the Master Reimbursement Agreement), no dissolution shall occur under paragraph (C) above or as a result of the filing by the General Partner of a voluntary petition in bankruptcy without the consent of Fannie Mae. Section 13.2 Winding Up A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner, or in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator"), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of common stock in the General Partner) shall be applied and distributed in the following order: (1) First, to the satisfaction of all of the Partnership's debts and liabilities to creditors other than the Partners (whether by payment or the reasonable provision for payment thereof); (2) Second, to the satisfaction of all of the Partnership's debts and liabilities to the General Partner (whether by payment or the reasonable provision for payment thereof); (3) Third, to the satisfaction of all of the Partnership's debts and liabilities to the other Partners (whether by payment or the reasonable provision for payment thereof); and (4) The balance, if any, to the General Partner and Limited Partners in accordance with their positive Capital Account balances, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding any provision herein to the contrary, if the Project is sold, all Partnership Units held by the Limited Partners (other than PGP or any Affiliate) shall be mandatorily converted to REIT Shares and shall be automatically deemed tendered for acquisition by PGP pursuant to Section 4 of the Exchange Rights Agreement (regardless of whether the Limited Partner was a signatory to the 34 40 Exchange Rights Agreement); provided, however, that the foregoing provision shall not apply in the event the Property is sold for less than its Carrying Value or is otherwise sold for a loss for either book or tax purposes. C. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. D. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be: (1) distributed to one or more trust(s) established for the benefit of the creditors and the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent, conditional or unmatured liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust(s) shall be distributed to the creditors and General Partner and Limited Partners from time to time, in the reasonable direction of the Liquidator, in the same manner and proportions as the amount distributed to such trust(s) by the Partnership would otherwise have been distributed to the creditors and General Partner and Limited Partners pursuant to this Agreement; and (2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the creditors and General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2.A as soon as practicable. Section 13.3 Compliance with Timing Requirements of Regulations In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2) (provided, however, in no event shall the Partnership be liquidated prior to the date which would be the Settlement Date within the meaning of the Exchange Rights Agreement for Partners who tender an Exchange Notice (within the meaning of the Exchange Rights Agreement) on or before the fifth (5th) day after the date of receipt of the notice of liquidation by the Partnership). If any Partner has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall make a contribution to the capital of the Partnership equal to such deficit, and such deficit shall be considered a debt owed to the Partnership. The Partners intend that the deficit restoration contributions be used to repay obligations of the Partnership, including, without limitation, the Tax Exempt Debt and obligations under the Indemnification Agreement. 35 41 Section 13.4 Deemed Distribution and Recontribution Notwithstanding any other provision of this Article 13, in the event the Partnership is considered "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership's property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Section 13.5 Rights of Limited Partners Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its capital contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its capital contributions, distributions, or allocations. Section 13.6 Notice of Dissolution In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners. Section 13.7 Termination of Partnership and Cancellation of Certificate of Limited Partnership Upon the completion of the liquidation of the Partnership's assets, as provided in Section 13.2 hereof, a certificate of cancellation shall be filed, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.8 Reasonable Time for Winding-Up A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. Section 13.9 Waiver of Partition Each Partner hereby waives any right to partition of the Partnership property. 36 42 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS Section 14.1 Amendments A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the General Partner) holding twenty-five percent (25%) or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. Except as provided in Section 13.1C, 14.1B, 14.1C, or 14.1D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Partners holding a majority of the Percentage Interests of all Partners; provided, however, that, except as otherwise provided in Section 4.2 hereof, any amendment which materially and adversely alters the right of a Limited Partner (including an Original Limited Partner) to receive distributions of Available Cash or allocations of Net Income, Net Loss or any other items in the amounts, in the priorities or at the times described in this Agreement shall require the consent of such Limited Partner (including Original Limited Partner) in order to become effective. B. Notwithstanding Section 14.1.A, the General Partner shall have the power, without the consent or approval of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of other holders of any additional Partnership Interests issued pursuant to Section 4.2, or otherwise pursuant to the terms of this Agreement; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions of this Agreement, or make any other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; (5) to satisfy any requirements, conditions, or guidelines, contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; and (6) to satisfy any requirements, conditions, or guidelines, contained in any order, directive, opinion, ruling or regulation of a federal court or agency or contained in federal or state law necessary to maintain the REIT status of PGP. 37 43 The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1.B is taken. C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement shall not be amended without Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.2 and Section 14.1.B(3) hereof; (iv) cause the termination of the Partnership prior to the time set forth in Sections 2.5 or 13.1; or (v) amend this Section 14.1.C. D. Notwithstanding Section 14.1.A and 14.1.B hereof, the General Partner shall not amend Sections 7.5, 7.6, 14.1A, 14.1C or 14.2 without Consent of Limited Partners holding a majority of the Percentage Interests of the Limited Partners, excluding Limited Partner Interests held by the General Partner; and, to the extent that any such amendment would affect the amount, priority, or timing of distributions to any of the Original Limited Partners or their successors and assigns under this Agreement, the General Partner shall not amend Sections 7.5, 7.6, 14.1A, 14.1C, or 14.2 without Consent of Original Limited Partners holding a majority of the percentage interest of the Original Limited Partners (in each case including their successors and assigns). Section 14.2 Meetings of the Partners A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the General Partner) holding twenty-five percent (25%) or more of the Partnership Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or consent of the Partners is permitted or required under this Agreement, such vote or consent may be given at a meeting of the Partners or may be given in accordance with the procedures prescribed in Sections 14.1A or 14.2B hereof. Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests held by Limited Partners (including Limited Partnership Interests held by the General Partner) shall control. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by majority of the Percentage Interests of the Limited Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Limited Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date hereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation from the Limited Partner executing such proxy. 38 44 D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the General Partner and may be held at the same time, and as part of, meetings of the shareholders of the General Partner. ARTICLE 15 GENERAL PROVISIONS Section 15.1 Addresses and Notices Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee at the address set forth in Exhibit A or such other address of which the Partner shall notify the General Partner in writing. Section 15.2 Titles and Captions All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 15.4 Further Action The parties shall execute and deliver all documents, provide all information and take or refrain form taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Creditors Other than as expressly set forth herein with respect to the Indemnities, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 15.7 Waiver No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any covenant, duty, agreement or condition. 39 45 Section 15.8 Counterparts This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.9 Applicable Law This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. [Remainder of page intentionally left blank] 40 46 Section 15.10 Invalidity of Provisions If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of other remaining provisions contained herein shall not be affected thereby. Section 15.11 Entire Agreement This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes the Prior Agreement and any other prior written or oral understandings or agreements among them with respect thereto. Section 15.12 No Rights as Shareholders Nothing contained in this Agreement shall be construed as conferring upon the holders of the Partnership Units any rights whatsoever as shareholders of PGP or the General Partner, including, without limitation, any right to receive dividends or other distributions made to shareholders of PGP or the General Partner or to vote or to consent or to receive notice as shareholders in respect of any meeting of shareholders for the election of directors of PGP or the General Partner or any other matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Limited Partnership as of the day first above written. GENERAL PARTNER: PGP Terrace Gardens Holdings Inc., a Delaware corporation By: __________________________ Title: _______________________ LIMITED PARTNERS: The Short Family Trust By: _______________________________ Donald R. Short, Trustee By: ________________________________ Marilyn M. Short, Trustee _________________________________ Bruce H. White _________________________________ Betty C. White [Signatures for the Agreement of Limited Partnership continued on page 42] 41 47 [Signatures for the Agreement of Limited Partnership continued on page 41] 225 Units Limited, a California limited partnership __________________________________ Donald R. Short General Partner The Stewart Family Trust __________________________________ Richard Stewart, Trustee __________________________________ Mattie Stewart, Trustee 42 48 EXHIBIT A Partners Capital and Partnership Interests
Name and Address Cash Agreed Value of Total Partnership Percentage of Partner Contribution Capital Contribution Units Interest ---------- ------------ ------- ------------ ----- -------- General Partner PGP Terrace Gardens Holdings Inc. $ 800,000* N/A $ 800,000* N/A N/A ---------- ---------- Totals $ 800,000* $ 800,000* ========== ========== Limited Partners Short Family Trust N/A $ 581,798 $ 581,798 27,672 33.196139% Stewart Family Trust N/A $ 739,425 $ 739,425 35,169 42.190000% Bruce H. and Betty C. White N/A $ 295,162 $ 295,162 14,038 16.841290% 225 Units Limited N/A $ 136,222 $ 136,222 6,479 7.772571% ---------- ---------- ---------- ---------- Totals $1,752,607 $1,752,607 83,358 100.00000% ========== ========== ========== ==========
* These figures are only an estimate of the total Transaction Expenses and Deferred Maintenance paid by, or on behalf of, the General Partner. These figures will be adjusted as the actual amounts of Transaction Expenses and Deferred Maintenance expended as of the date of the Closing are verified. 49 EXHIBIT B Capital Account Maintenance 1. Capital Accounts of the Partners A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all capital contributions and any other deemed contributions made by such Partner to the Partnership pursuant to this Agreement; and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to this Agreement; and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of the Agreement and Exhibit C hereof. B. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (1) Except as otherwise provided in Regulations Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership, provided that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners' Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4). (2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. (3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. B-1 50 (4) In lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year. (5) In the event the Carrying Value of any Partnership Asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset. (6) Any items specifically allocated under Section 1 of Exhibit C hereof shall not be taken into account. C. Generally, a transferee (including an Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor. If the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, the capital accounts of the Partners in the successor Partnership shall be maintained in accordance with the principles of this Exhibit B. D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D.(2), the Carrying Value of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D.(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement. (2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis capital contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; and (c) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect economic interests of the Partners in the Partnership. (3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed. (4) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit B, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article 13 of the Agreement, shall be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties). B-2 51 E. The provisions of this Agreement (including this Exhibit B and other Exhibits to this Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify (i) the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed; or (ii) the manner in which items are allocated among the Partners for federal income tax purposes in order to comply with such Regulations or to comply with Section 704(c) of the Code, the General Partner may make such modification without regard to Article 14 of the Agreement, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) where appropriate, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), make any adjustments that are necessary or appropriate to maintain equality between Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes; and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). In addition, the General Partner may adopt and employ such methods and procedures for (i) the maintenance of book and tax capital accounts; (ii) the determination and allocation of adjustments under Sections 704(c), 734 and 743 of the Code; (iii) the determination of Net Income, Net Loss, taxable loss and items thereof under this Agreement and pursuant to the Code; (iv) conventions for the determination of cost recovery, depreciation and amortization deductions, as it determines in its sole discretion are necessary or appropriate to execute the provisions of this Agreement, to comply with federal and state tax laws, and are in the best interest of the Partners. 2. No Interest No interest shall be paid by the Partnership on capital contributions or on balances in Partners' Capital Accounts. 3. No Withdrawal No Partner shall be entitled to withdraw any part of his capital contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement. B-3 52 Exhibit C Special Allocation Rules 1. Special Allocation Rules Notwithstanding any other provision of the Agreement or this Exhibit C, the following special allocations shall be made in the following order: A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of the Agreement or any other provisions of this Exhibit C, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. Solely for purposes of this Section 1.A, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of Partner Minimum Gain during such Partnership taxable year. B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.1 of this Agreement or any other provisions of this Exhibit C (except Section 1.A hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership taxable year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.702-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such Partnership taxable year, other than allocations pursuant to Section 1.A hereof. C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 1.A and 1.B hereof such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership taxable year) shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate, to the C-1 53 extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership taxable year shall be allocated to the Limited Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio for such Partnership taxable year which satisfy such requirements. E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Partnership taxable year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i). F. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. G. Curative Allocations. The allocations set forth in Section 1.A through 1.F of this Exhibit C (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations under Section 704(b) of the Code. The Regulatory Allocations may not be consistent with the manner in which the Partners intend to divide Partnership distributions. Accordingly, the General Partner is hereby authorized to divide other allocations of income, gain, deduction and loss among the Partners so as to prevent the Regulatory Allocations from distorting the manner in which Partnership distributions will be divided among the Partners. In general, the Partners anticipate that this will be accomplished by specially allocating other items of income, gain, loss and deduction among the Partners so that the net amount of the Regulatory Allocations and such special allocations to each person is zero. However, the General Partner will have discretion to accomplish this result in any reasonable manner; provided, however, that no allocation pursuant to this Section 1.G shall cause the Partnership to fail to comply with the requirements of Regulations Sections 1.7041(b)(2)(ii)(d), -2(e) or -2(i). 2. Allocations for Tax Purposes A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Partners as follows: C-2 54 (1) (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners, consistent with the principles of Section 704(c) of the Code and the Regulations thereunder, to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution; and (b) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. (2) (a) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principals of Section 704(c) of the Code and the Regulations thereunder to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Exhibit B; and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit C; and (b) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. (3) all other items of income, gain, loss and deduction shall be allocated among the Partners in the same manner as their correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. C. To the extent that the Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit the Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners. 3. No Withdrawal No Partner shall be entitled to withdraw any part of his capital contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement. C-3 55 Exhibit D Value of Existing Property
Property 704(c) Value Agreed Value - -------- ------------ ------------ Terrace Gardens Apartments $ 10,000,000 $ 1,752,607
56 Exhibit E Transaction Documents The "Transaction Documents" consist of the "Partnership Transaction Documents" and the "Partnership Bond Documents", which terms are defined as follows: PARTNERSHIP TRANSACTION DOCUMENTS The "Partnership Transaction Documents" consist of the following documents each dated June 1, 1997 (unless otherwise indicated): 1. Master Reimbursement Agreement dated December 1, 1996, as amended and restated as of June 1, 1997, executed by the Partnership, the Federal National Mortgage Association (herein, "Fannie Mae"), Morning View Terrace - PGP, L.P., and Pacific Inland Communities, LLC; 2. First Amendment to Cash Management, Security, Pledge and Assignment Agreement executed by the Partnership, Morning View Terrace - PGP, L.P., Pacific Inland Communities, LLC, Fannie Mae and Bankers Mutual (herein, the "Lender") in its capacity as custodian for Fannie Mae; 3. Blocked Account Agreement executed by Partnership, Fannie Mae, Lender and Bank of America, National Trust & Savings Association; 4. Estoppel Certificate dated June 12, 1997 executed by the Partnership; 5. Multifamily Note in the original principal amount of Eight Million One Hundred Thousand Dollars ($8,100,000) executed by the Partnership in favor of the Lender (the "Note"); 6. Multifamily Deed of Trust, Assignment of Rents and Security Agreement (with Fixture Filing), executed by the Partnership to First American Title Company, as trustee, for the benefit of the Lender (collectively, the "Lender Deed of Trust"), granting a security interest in the Project as more specifically described in the Lender Deed of Trust; 7. Multifamily Deed of Trust, Assignment of Rents and Security Agreement (with Fixture Filing), executed by the Partnership to First American Title Company, as trustee, for the benefit of Fannie Mae (collectively, the "Fannie Mae Deed of Trust"), granting a security interest in the Project, as more specifically described in the Fannie Mae Deed of Trust; 8. California Financing Statement, Form UCC-1, executed by Partnership as debtor and Lender as secured party and naming Fannie Mae as assignee of secured party; 9. California Financing Statement, Form UCC-1, executed by Partnership as debtor and Fannie Mae as secured party; 10. Property Management Agreement, dated June 12, 1997, by and between the Partnership and PGP; 57 11. Assignment of Management Agreement executed by Partnership and Fannie Mae, and consented to by PGP as agent, with respect to the Project; 12. Exchange Rights Agreement, dated June 12, 1997, by and among PGP, the Partnership and the Original Limited Partners; and 13. Replacement Reserve and Security Agreement relating to the Project executed by Partnership and Lender. PARTNERSHIP BOND DOCUMENTS The "Partnership Bond Documents" consist of the following documents, each dated June 1, 1997 (unless otherwise indicated): 1. Financing Agreement, relating to the Project, executed by the Partnership, the City of Escondido (herein, the "Issuer"), the Lender, and First Trust of California, National Association (herein, the "Bond Trustee"); 2. Amended and Restated Regulatory Agreement and Declaration of Restrictive Covenants executed by the Partnership, the Bond Trustee and the Issuer with respect to the Project; 3. Remarketing Agreement executed by the Issuer, the Partnership and the Newman and Associates, Inc. (the "Remarketing Agent"); 4. Agreement Regarding Redemption, Defeasance and Payment of Prior Bonds executed by the Bond Trustee, the Issuer, the Partnership and Glendale Federal Savings and Loan Association; and 5. Bond Purchase Agreement executed by the Issuer, the Partnership and the Remarketing Agent relating to the purchase of the Bonds. EX-23.01 7 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, debt securities and warrants to purchase such securities of Pacific Gulf Properties Inc. of our report dated February 13, 1998, with respect to the consolidated 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, 1997. 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, 1998, with respect to the consolidated 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, 1997. /s/ ERNST & YOUNG LLP Newport Beach, California March 31, 1998 EX-27.A 8 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 APR-01-1996 JUL-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 2,466 13,115 2,631 0 0 0 1,857 2,168 2,114 1,000 1,000 1,000 0 0 0 0 14,283 3,745 308,201 355,565 366,091 23,231 25,133 26,634 294,390 350,922 349,691 7,208 10,279 10,268 213,255 232,443 232,740 0 0 0 0 0 0 49 74 74 70,360 104,608 103,091 294,390 350,922 349,691 0 0 0 10,835 11,865 13,442 0 0 0 6,493 6,431 7,371 0 0 0 0 0 0 4,049 4,782 4,782 0 0 0 0 0 0 293 652 1,289 0 0 0 0 0 0 0 0 0 293 652 1,363 .06 .12 .18 .06 .12 .17
EX-27.B 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1997 DEC-31-1996 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) .04 .04
EX-27.C 10 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-01-1997 JUL-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 7,302 14,008 1,258 0 0 0 2,506 3,266 3,501 1,000 1,000 1,000 0 0 0 8,808 16,274 3,759 421,166 462,817 566,994 31,170 33,691 36,744 406,830 458,119 548,576 10,842 11,908 14,850 208,998 210,170 290,035 0 0 0 0 3 7 122 143 143 183,350 227,500 235,076 406,830 458,119 548,576 0 0 0 14,813 15,919 18,457 0 0 0 7,778 8,303 9,515 0 0 0 0 0 0 3,953 3,999 4,699 0 0 0 0 0 0 3,082 3,597 4,179 0 0 0 0 0 0 0 0 0 3,082 3,371 3,904 .27 .27 .27 .26 .26 .27
EX-27.D 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,466 0 4,399 1,000 0 4,865 733,056 39,146 712,471 17,861 296,444 0 28 200 388,612 712,471 0 69,506 0 36,133 172 0 17,337 0 0 15,864 0 0 0 21,458 1.51 1.47
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