-----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, ICAuIcS0WyZp8tdKL6MN8yLzDKAG9ji9NAA4rxrK8dj3bpWSl4AVuH7eFR/E3U4s qxpKn5azy8vI4OZtr3QoDA== 0000950132-98-000321.txt : 19980401 0000950132-98-000321.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950132-98-000321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAUL CENTERS INC CENTRAL INDEX KEY: 0000907254 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 521833074 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12254 FILM NUMBER: 98582193 BUSINESS ADDRESS: STREET 1: 8401 CONNECTICUT AVE CITY: CHEVY CHASE STATE: MD ZIP: 20815 BUSINESS PHONE: 3019866207 MAIL ADDRESS: STREET 1: 8401 CONNECTICUT AVE CITY: CHEVY CHASE STATE: MD ZIP: 20815 10-K 1 FORM 10-K 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 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 1-12254 SAUL CENTERS, INC. --------------------------- (Exact name of registrant as specified in its charter) MARYLAND 52-1833074 - --------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 CONNECTICUT AVENUE CHEVY CHASE, MARYLAND 20815 - ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (301) 986-6000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of each class registered ------------------- ------------------------------ COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE - ----------------------------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: N/A --------------------- (Title of class) ---------------- Indicate by check mark whether 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 the 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 number of shares of Common Stock, $0.01 par value, outstanding as of February 20, 1998 was 12,524,785. TABLE OF CONTENTS -----------------
PART I Page Numbers ------------ Item 1. Business.................................................... 3 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 12 Item 6. Selected Financial Data..................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 Item 8. Financial Statements and Supplementary Data................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 21 PART III Item 10. Directors and Executive Officers of the Registrant.......... 22 Item 11. Executive Compensation...................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 22 Item 13. Certain Relationships and Related Transactions............... 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................... 22 FINANCIAL STATEMENT SCHEDULE Schedule III. Real Estate and Accumulated Depreciation................. F-18
2 PART I ITEM 1. BUSINESS General - ------- Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland General Corporation Law on June 10, 1993. The authorized capital stock of Saul Centers consists of 30,000,000 shares of common stock, having a par value of $0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common stock is entitled to one vote for each share held. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the "Company". B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers. Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B.F. Saul Real Estate Investment Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the "Operating Partnership"), and two newly formed subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping center properties, one office property, one research park and one office/retail property and the management functions related to the transferred properties. Since its formation, the Company has purchased three additional community and neighborhood shopping center properties, and purchased a land parcel which it developed into a community shopping center. Therefore, as of December 31, 1997, the Company's properties (the "Current Portfolio Properties") consisted of 30 operating shopping center properties (the "Shopping Centers") and three predominantly office properties (the "Office Properties"). To facilitate the placement of collateralized mortgage debt, the Company established Saul QRS, Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. As a consequence of the transactions constituting the formation of the Company, Saul Centers serves as the sole general partner of the Operating Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc., Saul Centers' wholly owned subsidiary, serves as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100 percent of the Current Portfolio Properties Saul Centers operates as a real estate investment trust under the Internal Revenue Code of 1986, as amended (a "REIT"). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 95 percent of its real estate investment trust taxable income to its stockholders and meets certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. The Company's principal business activity is the ownership, management and development of income-producing properties. The Company's long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate. Management of the Current Portfolio Properties - ---------------------------------------------- The Partnerships manage the Current Portfolio Properties and will manage any subsequently acquired properties. The Management of the properties includes performing property management, leasing, design, 3 renovation, development and accounting duties for each property. The Partnerships provide each property with a fully integrated property management capability, with approximately 100 employees and with an extensive and mature network of relationships with tenants and potential tenants as well as with members of the brokerage and property owners' communities. The Company currently does not, and does not intend to, retain third party managers or provide management services to third parties. The Company augments its property management capabilities by sharing with The Saul Organization certain ancillary functions, at cost, such as computer and payroll services, benefits administration and in-house legal services. The company also shares insurance administration expenses on a pro rata basis with The Saul Organization. The Saul Organization subleases office space to the Company at its cost. Management believes that these arrangements result in lower costs than could be obtained by contracting with third parties. These arrangements permit the Company to capture greater economies of scale in purchasing from third party vendors than would otherwise be available to the Company alone and to capture internal economies of scale by avoiding payments representing profits with respect to functions provided internally. The terms of all sharing arrangements with The Saul Organization, including payments related thereto, are reviewed periodically by the Audit Committee of the Company's Board of Directors. Principal Offices - ----------------- The principal offices of the Company are located at 8401 Connecticut Avenue, Chevy Chase, Maryland 20815, and the Company's telephone number is (301) 986-6000. Operating Strategies - -------------------- The Company's primary operating strategy is to focus on its community and neighborhood shopping center business and to operate its properties to achieve both cash flow growth and capital appreciation. Community and neighborhood shopping centers typically provide reliable cash flow and steady long-term growth potential. Management intends to actively manage its property portfolio by engaging in strategic leasing activities, tenant selection, lease negotiation and shopping center expansion and reconfiguration. The Company seeks to optimize tenant mix by selecting tenants for its shopping centers that provide a broad spectrum of goods and services, consistent with the role of community and neighborhood shopping centers as the source for day-to-day necessities. Management believes that such a synergistic tenanting approach results in increased cash flow from existing tenants by providing the Shopping Centers with consistent traffic and a desirable mix of shoppers, resulting in increased sales and, therefore, increased percentage rents. Management believes there is significant potential for growth in cash flow as existing leases for space in the Shopping Centers expire and are renewed, or newly available or vacant space is leased. The Company intends to renegotiate leases aggressively and seek new tenants for available space in order to maximize this potential for increased cash flow. As leases expire, management expects to revise rental rates, lease terms and conditions, relocate existing tenants, reconfigure tenant spaces and introduce new tenants to increase cash flow. In those circumstances in which leases are not otherwise expiring, management intends to attempt to increase cash flow through a variety of means, including renegotiating rents in exchange for additional renewal options or in connection with renovations or relocations, recapturing leases with below market rents and re-leasing at market rates, as well as replacing financially troubled tenants. When possible, management also will seek to include scheduled increases in base rent, as well as percentage rental provisions in its leases. The Shopping Centers contain numerous undeveloped parcels within the centers which are suitable for development as free-standing retail facilities, such as restaurants, banks, auto centers or cinemas. Management will continue to seek desirable tenants for facilities to be developed on these sites and to develop and lease these sites in a manner that complements the Shopping Centers in which they are located. 4 Management intends to negotiate lease renewals or to re-lease available space in the Office Properties, while considering the strategic balance of optimizing short-term cash flow and long-term asset value. It is management's intention to hold properties for long-term investment and to place strong emphasis on regular maintenance, periodic renovation and capital improvement. Management believes that such characteristics as cleanliness, lighting and security are particularly important in community and neighborhood shopping centers, which are frequently visited by shoppers during hours outside of the normal work day. Management believes that the Shopping Centers generally are attractive and well maintained. The Shopping Centers will undergo expansion, renovation, reconfiguration and modernization from time to time when management believes that such action is warranted by changes in the competitive environment of a Shopping Center. Several of the Shopping Centers have been renovated recently, and a major expansion and renovation was completed during 1997 at the Company's largest retail property. The Company will continue its practice of expanding existing properties by undertaking new construction on outparcels suitable for development as free standing retail facilities. Redevelopment, Renovations and Acquisitions - ------------------------------------------- The Company's redevelopment, renovation and acquisition objective is to selectively and opportunistically redevelop and renovate its properties, by replacing leases with below market rents with strong, traffic-generating anchor stores such as supermarkets and drug stores, as well as other desirable local, regional and national tenants. The Company's strategy remains focused on continuing the operating performance and internal growth of its existing Shopping Centers, while enhancing this growth with selective retail redevelopments and renovations. Management also believes that attractive opportunities for investment in existing and new shopping center properties will continue to be available. Management believes that the Company will be well situated to take advantage of these opportunities because of its access to capital markets, ability to acquire properties either for cash or securities (including Operating Partnership interests in tax advantaged transactions) and because of management's experience in seeking out, identifying and evaluating potential acquisitions. In addition, management believes its shopping center expertise should permit it to optimize the performance of shopping centers once they have been acquired. In evaluating a particular redevelopment, renovation, acquisition, or development, management will consider a variety of factors, including (i) the location and accessibility of the property; (ii) the geographic area (with an emphasis on the Mid-Atlantic region) and demographic characteristics of the community, as well as the local real estate market, including potential for growth and potential regulatory impediments to development; (iii) the size of the property; (iv) the purchase price; (v) the non-financial terms of the proposed acquisition; (vi) the availability of funds or other consideration for the proposed acquisition and the cost thereof; (vii) the "fit" of the property with the Company's existing portfolio; (viii) the potential for, and current extent of, any environmental problems; (ix) the current and historical occupancy rates of the property or any comparable or competing properties in the same market; (x) the quality of construction and design and the current physical condition of the property; (xi) the financial and other characteristics of existing tenants and the terms of existing leases; and (xii) the potential for capital appreciation. Although it is management's present intention to concentrate future acquisition and development activities on community and neighborhood shopping centers in the Mid-Atlantic region, the Company may, in the future, also acquire other types of real estate in other regions of the country. Capital Strategies - ------------------ As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50 percent or less and to actively manage the Company's leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by 5 reference to the properties' aggregate cash flow. Given the Company's current debt level, it is management's belief that the ratio of the Company's total debt to asset value as of December 31, 1997 remains less than 50 percent. The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company's debt capitalization policy in light of current economic conditions, relative costs of capital, market values of the Company Portfolio, opportunities for acquisition, development or expansion, and such other factors as the Board of Directors then deems relevant. The Board of Directors may modify the Company's debt capitalization policy based on such a reevaluation and consequently, may increase or decrease the Company's debt ratio above or below 50 percent. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in order to achieve longer maturities, and obtain generally more favorable loan terms, whenever management determines the financing environment is favorable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources - - -Borrowing Capacity." The Company intends to finance future acquisitions and to make debt repayments by utilizing the sources of capital then deemed to be most advantageous. Such sources may include undistributed operating cash flow, secured or unsecured bank and institutional borrowings, private and public offerings of debt or equity securities, proceeds from the Company's Dividend Reinvestment and Stock Purchase Plan, and proceeds from the sale of properties. Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnerships' level and securities offerings may include (subject to certain limitations) the issuance of Operating Partnership interests convertible into Common Stock or other equity securities. Competition - ----------- As an owner of, or investor in, commercial real estate properties, the Company is subject to competition from a variety of other owners of similar properties in connection with their sale, lease or other disposition and use. Management believes that success in such competition is dependent in part upon the geographic location of the property, the tenant mix, the performance of property managers, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors impacting upon retail and 6 commercial properties include the ease of access to the properties, the adequacy of related facilities such as parking, and the demographic characteristics in the markets in which the properties compete. Overall economic circumstances and trends and new properties in the vicinity of each of the properties in the Current Portfolio Properties are also competitive factors. Environmental Matters - --------------------- The Current Portfolio Properties are subject to various laws and regulations relating to environmental and pollution controls. The effect upon the Company of the application of such laws and regulations either prospectively or retrospectively is not expected to have a materially adverse effect on the Company's property operations. As a matter of policy, the Company requires an environmental study be performed with respect to a property that may be subject to possible environmental hazards prior to its acquisition to ascertain that there are no material environmental hazards associated with such property. Employees - --------- As of February 20, 1998, the Company employed approximately 100 persons, including six full-time leasing officers. None of the Company's employees are covered by collective bargaining agreements. Management believes that its relationship with employees is good. Current Developments - -------------------- A significant enhancement to the Company's sustained historical internal growth in shopping centers has been its continuing program of renovation and expansion activities. These development activities serve to position the Company's centers as architecturally consistent with the times in terms of facade image, site improvements and flexibility to accommodate tenant size requirements and merchandising evolution. In February 1998, the Company commenced construction on a facade renovation and retenanting of a 103,000 square foot anchor space at the 213,000 square foot French Market center in Oklahoma City, Oklahoma. The Company successfully negotiated the termination of a below market Venture lease in the fourth quarter of 1997. Construction of the first two new tenant spaces, a 40,000 square foot Bed, Bath and Beyond and an 8,000 square foot Lakeshore Learning, a children's educational toy store, is projected to be completed in late spring of 1998. The redevelopment will include a complete facade renovation of the 103,000 square foot building to incorporate new anchor tenant architectural features, new store fronts, tenant signage and decorative awnings. The Company announced on March 23, 1998 that it will purchase, through its operating partnership, a newly constructed, 100% leased office/flex building adjacent to its Avenel Business Park in Gaithersburg, Maryland. The building contains 46,335 square feet of net leasable area, which will increase the Company's Avenel Business Park by 16%, to 332,000 square feet. The purchase price is $5,600,000, to include $3,657,000 in debt assumption, with the balance to be paid through the issuance of new units in Saul Centers' operating partnership. The seller is a company which is an existing limited partner in the operating partnership. The initial cash yield on the purchase price, after deducting capital reserves and a market vacancy factor, is 10.3%. all of the property's leases provide for contractual annual rental increases which will further enhance this attractive return. Closing is expected on April 1, 1998. The Company also continues to take advantage of retail redevelopment, renovation and expansion opportunities within the portfolio, as demonstrated by its redevelopment activities at Seven Corners, recently completed facade renovation at Thruway and an expansion of the Leesburg Pike shopping center. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Redevelopment, Renovation and Acquisitions." 7 Financial Information - --------------------- In 1997, the Company reported Funds From Operations (FFO) of $27,637,000 on a fully converted basis. This represents a 10.0 percent increase over 1996 FFO of $25,122,000. The following table represents a reconciliation from net income before minority interests to FFO:
For the Years Ended December 31, (Dollars in thousands) 1997 1996 1995 - ---------------------- --------- --------- --------- Net income before minority interests $ 9,406 $ 12,703 $ 13,213 Depreciation and amortization of real property 10,642 10,860 10,425 Debt restructuring losses: Disposition of interest rate protection agreements 4,392 972 --- Write-off of unamortized loan costs 3,197 587 998 -------- -------- -------- Funds From Operations $ 27,637 $ 25,122 $ 24,636 ======== ======== ======== Cash Flow provided by (used in): Operating activities $ 28,936 $ 29,677 $ 25,055 Investing activities $(16,094) $ (8,035) $(20,992) Financing activities $(12,192) $(22,278) $ (4,416)
FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs. FFO, as defined by the National Association of Real Estate Investment Trusts, is calculated using net income excluding gains or losses from debt restructuring, sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. ITEM 2. PROPERTIES Overview - -------- The Company is the owner and operator of a real estate portfolio of 33 properties totaling approximately 5.8 million square feet of gross leasable area ("GLA") located primarily in the Washington, D.C./Baltimore metropolitan area. The portfolio is composed of 30 neighborhood and community Shopping Centers and three Office Properties totaling approximately 5.1 and 0.7 million square feet of GLA, respectively. With the exception of four Shopping Center properties purchased or developed during the past three years, the Company Portfolio consists of seasoned properties that had been owned and managed by The Saul Organization for 15 years or more. The Company expects to hold its properties as long-term investments, although it has no maximum period for retention of any investment. It plans to selectively acquire additional income-producing properties and to expand, renovate, and improve its properties when circumstances warrant. See "Business--Operating Strategies" and "Business-- Capital Strategies." 8 The Shopping Centers - -------------------- Community and neighborhood shopping centers typically are anchored by one or more supermarkets, discount department stores or drug stores. These anchors offer day-to-day necessities rather than apparel and luxury goods and, therefore, generate consistent local traffic. By contrast, regional malls generally are larger and typically are anchored by one or more full-service department stores. The Shopping Centers (typically) are seasoned community and neighborhood shopping centers located in well established, highly developed, densely populated, middle and upper income areas. Based upon census data, the average estimated population within a three- and five-mile radius of the Shopping Centers is approximately 110,000 and 260,000, respectively. The average household income within a three and five-mile radius of the Shopping Centers is $59,000 and $60,000, respectively, compared to a national average of $51,000. Because the Shopping Centers generally are located in highly developed areas, management believes that there is little likelihood that any significant numbers of competing centers will be developed in the future. The Shopping Centers range in size from 4,900 to 545,800 square feet of GLA, with six in excess of 300,000 square feet, and a weighted average of approximately 171,000 square feet. A majority of the Shopping Centers are anchored by several major tenants. Eighteen of the 30 Shopping Centers are anchored by a grocery store, and offer primarily day-to-day necessities and services. As of February 1998, no single Shopping Center accounted for more than 11.0 percent of the total Shopping Center GLA. Only one Shopping Center tenant, Giant Food, accounted for more than 2.0 percent of the Company's total revenues for the year ending December 31, 1997 and only three Shopping Center tenants, Giant Food, Best Buy, and Chevy Chase Bank, F.S.B., individually accounted for more than 1.5 percent of total revenues for this period. The Office Properties - --------------------- The three Office Properties are all located in the Washington, D.C. metropolitan area and contain an aggregate GLA of approximately 671,000 square feet, composed of 638,000 and 33,000 square feet of office and retail space, respectively. The Office Properties represent three distinct styles of facilities, are located in differing commercial environments with distinctive demographic characteristics, and are geographically removed from one another. As a consequence, management believes that the Office Properties compete for tenants in different commercial and geographic sub-markets of the metropolitan Washington, D.C. market and do not compete with one another. 601 Pennsylvania Ave. is a nine-story, Class A office building (with a small amount of street level retail space) built in 1986 and located in a prime downtown location. Van Ness Square is a six-story office/retail building rebuilt in 1990. Van Ness Square is located in a highly developed commercial area of Northwest Washington, D.C. which offers extensive retail and restaurant amenities. Management believes that the Washington, D.C. office market is one of the strongest and most stable leasing markets in the nation, with relatively low vacancy rates in comparison to other major metropolitan areas. Despite continuing announcements of government downsizing, management believes that the long-term stability of this market is attributable to the status of Washington, D.C. as the nation's capital and to the presence of the federal government, international agencies, and an expanding private sector job market throughout the metropolitan area. Avenel Business Park is a research park located in a Maryland suburb of Washington, D.C. and consists of eight one-story buildings built in three phases in 1981, 1985 and 1989. Management believes that, due to its desirable location, the high quality of the property and the relative scarcity of research and development space in its immediate area, Avenel should continue to attract and retain desirable tenants in the future. The following table sets forth, at the dates indicated, certain information regarding the Current Portfolio Properties: 9 SAUL CENTERS, INC. SCHEDULE OF CURRENT PORTFOLIO PROPERTIES DECEMBER 31, 1997
Leasable Year Area Developed Land (Square or Acquired Area Percentage Leased Property Location Feet) (Renovated) Acres Dec-1997 Dec-1996 Anchor/Significant Tenants - ------------------ -------------- -------- ----------- ----- -------- -------- --------------------------------------------- SHOPPING CENTERS - ---------------- Ashburn Village Ashburn, VA 108,204 1994 12.7 95% 100% Giant Food, Blockbuster Beacon Mall Alexandria, VA 290,845 1972(1993) 32.3 69% 73% Giant Food, Office Depot, Outback Steakhouse, Marshalls, Sneaker Stadium, Hollywood Video Belvedere Baltimore, MD 54,941 1972 4.8 100% 100% Giant Food, Rite Aid Boulevard Fairfax, VA 56,578 1994 5.0 100% 100% Danker Furniture, Petco Clarendon Arlington, VA 6,940 1973 0.5 100% 100% Clarendon Station Arlington, VA 4,868 1996 0.1 100% 100% Crosstown Tulsa, OK 197,135 1975 26.4 20% 29% Flagship Center Rockville, MD 21,500 1972,1989 0.5 100% 100% French Market Oklahoma City, OK 213,658 1974(1984) 13.8 62% 94% Bed Bath & Beyond, Lakeshore Learning Center, Fleming Food, Furr's Cafetaria Germantown Germantown, MD 26,241 1992 2.7 92% 93% Giant Baltimore, MD 70,040 1972(1990) 5.0 100% 100% Giant Food The Glen Lake Ridge, VA 112,639 1994 14.7 100% 95% Safeway Marketplace, CVS Pharmacy Great Eastern District Heights, MD 255,448 1972(1995) 23.9 89% 90% Giant Food, Caldor, Pep Boys Hampshire Langley Langley Park, MD 134,425 1972(1979) 9.9 100% 100% Safeway, McCrory Leesburg Pike Baileys Crossrds, VA 97,888 1966(1982/95) 9.4 100% 100% Zany Brainy, CVS Pharmacy, Hollywood Video Lexington Mall Lexington, KY 315,551 1974 30.0 88% 95% McAlpin's, Dawahares of Lexington, Rite Aid Lumberton Plaza Lumberton, NJ 189,729 1975(1992/96) 23.3 89% 82% Super Fresh, Rite Aid, Blockbuster, Mandee North Washington Alexandria, VA 41,500 1973 2.0 100% 100% Mastercraft Interiors Olney Olney, MD 53,765 1975(1990) 3.7 92% 83% Rite Aid Park Rd. Washington, DC 106,650 1973(1993) 1.7 100% 100% Woolworth Ravenwood Baltimore, MD 87,750 1972 8.0 100% 100% Giant Food
10 SAUL CENTERS, INC. SCHEDULE OF CURRENT PORTFOLIO PROPERTIES DECEMBER 31, 1997
Leasable Year Area Developed Land (Square or Acquired Area Percentage Leased Property Location Feet) (Renovated) Acres Dec-1997 Dec-1996 Anchor/Significant Tenants - ------------------ -------------- --------- ----------- ----- -------- -------- --------------------------------------------- SHOPPING CENTERS (CONTINUED) - --------------------------- Seven Corners Falls Church, VA 545,061 1973(1994-7) 31.6 92% 88% Home Depot, Shoppers Club, Best Buy, Michaels, Barnes & Noble, Ross Dress For Less, Centex Life Solutions Shops at Fairfax Fairfax, VA 64,580 1975(1992-3) 6.7 65% 54% Office Depot, Hollywood Video Southdale Glen Burnie, MD 475,099 1972(1986) 39.6 99% 98% Giant Food, Hechinger, Circuit City, Kids R Us, Michaels, Marshalls, PetSmart, Value City Furniture Southside Plaza Richmond, VA 352,516 1972 32.8 92% 97% CVS Pharmacy, Nick's Supermarket Sunshine City Atlanta, GA 195,653 1976 14.6 88% 98% Bolton Furniture, MacFrugals, Pep Boys, The Emory Clinic Thruway Winston-Salem, NC 339,564 1972 30.5 96% 94% Stein Mart, Reading China & Glass, Harris Teeter, Fresh Market, Blockbuster, Bocock-Stroud, Houlihan's Village Center Centreville, VA 142,881 1990 17.2 87% 84% Giant Food West Park Oklhamoa City, OK 107,895 1975 11.2 66% 69% Homeland Stores, Treasury Drug White Oak Silver Spring, MD 480,156 1972(1993) 28.5 100% 99% Giant Food, Sears, Rite Aid, Blockbuster --------- ----- -------- -------- Total Shopping Centers 5,149,700 443.1 88% 90% --------- ----- -------- -------- COMMERCIAL PROPERTIES - --------------------- Avenel Business Park Gaithersburg, MD 285,218 1981/85/89 28.2 99% 86% Oncor, Inc., Quanta Systems, General Services Administration 601 Pennsylvania Washington, DC 225,153 1973(1986) 1.0 100% 100% General Services Administration, Capital Grille Van Ness Square Washington, DC 161,058 1973(1990) 1.2 88% 77% United Mine Workers Pension Trust, Office Depot, Pier 1 --------- ----- -------- -------- Total Commercial Properties 671,429 30.4 97% 89% --------- ----- -------- -------- TOTAL PORTFOLIO 5,821,129 SF 473.5 89.0% 89.6% --------- ----- -------- --------
11 ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Company is involved in litigation, including litigation arising out of the collection of rents, the enforcement or defense of the priority of its security interests, and the continued development and marketing of certain of its real estate properties. In the opinion of management, litigation that is currently pending should not have a material adverse impact on the financial condition or future operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information - ------------------ Saul Centers completed the Offerings on August 26, 1993. Shares of Common Stock were sold at an initial offering price of $20 per share and the net offering proceeds were used to acquire general partnership interests in the Operating Partnership and Subsidiary Partnerships, which hold the Portfolio Properties and the Management Functions. The shares are listed on the New York Stock Exchange under the symbol "BFS". The high and low sales prices for the Common Stock shares for each quarter of 1996 and 1997 were as follows:
Period Share Price ------ ----------- High Low -------- -------- January 1, 1997 -- March 31, 1997 $17 3/8 $15 1/2 April 1, 1997 -- June 30, 1997 $17 1/4 $15 1/8 July 1, 1997 -- September 30, 1997 $19 1/8 $16 3/16 October 1, 1997 -- December 31, 1997 $19 3/8 $16 1/4 January 1, 1996 -- March 31, 1996 $16 1/4 $13 7/8 April 1, 1996 -- June 30, 1996 $14 7/8 $13 July 1, 1996 -- September 30, 1996 $14 1/4 $12 5/8 October 1, 1996 -- December 31, 1996 $16 $13 1/2
Holders - ------- The approximate number of holders of record of the Common Stock was 550 as of February 20, 1998. Dividends - --------- Saul Centers was formed on June 10, 1993 and from that time through August 27, 1993, distributions were not paid to stockholders. Subsequent to its initial public offering, the Company has declared and paid regular quarterly distributions to its stockholders. The first distribution, in the amount of $0.15 per share for the partial quarter ended September 30, 1993, was paid on October 29, 1993 to stockholders of record as of October 15, 1993. This initial amount was based upon a full quarterly distribution of $0.39 per share. The Company paid four quarterly distributions in the amount of $0.39 per share, during each of the years ended December 31, 1997, 1996, 1995 and 1994, totaling $1.56 per share for each of these years, or an annual yield of 8.5 percent based on the closing price of the Common Stock on the New York Stock Exchange as of February 20, 1998. The Company has determined that 50.2 percent of the total $1.56 per share paid in calendar year 1997 represents currently taxable dividend income to the stockholders. 12 The Company's estimate of cash flow available for distributions is believed to be based on reasonable assumptions and represents a reasonable basis for setting distributions. However, the actual results of operations of the Company will be affected by a variety of factors, including actual rental revenue, operating expenses of the Company, interest expense, general economic conditions, federal, state and local taxes (if any), unanticipated capital expenditures, and the adequacy of reserves. While the Company intends to continue paying regular quarterly distributions, any future payments will be determined solely by the Board of Directors and will depend on a number of factors, including cash flow of the Company, its financial condition and capital requirements, the annual distribution requirements required to maintain its status as a REIT under the Code, and such other factors as the Board of Directors deems relevant. ITEM 6. SELECTED FINANCIAL DATA The selected financial data of the Company contained herein has been derived from the consolidated and combined financial statements of the Company and The Saul Organization. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this report. The historical selected financial data have been derived from audited financial statements for all periods. 13 Saul Centers, Inc. SELECTED FINANCIAL DATA (In thousands, except per share data)
Predecessor to Saul Saul Centers, Inc. Centers, Inc. ------------------------------------------------------ ---------- August 27, January 1, through through Years Ended December 31, December 31, August 26, 1997 1996 1995 1994 1993 1993 -------- -------- --------- -------- ------------ ---------- OPERATING DATA: - --------------- Total Revenue....................................... $ 67,717 $ 64,023 $ 61,469 $ 57,397 $ 18,519 $ 34,472 -------- -------- --------- -------- -------- -------- Operating expenses.................................. 50,722 49,761 47,258 42,787 13,594 39,744 Operating Income.................................... 16,995 14,262 14,211 14,610 4,925 (5,272) Non-operating income Sale of interest rate protection agreements....... (4,392) (972) -- -- -- -- -------- -------- --------- -------- -------- -------- Net income (loss) before extraordinary item and minority interest............................. 12,603 13,290 14,211 14,610 4,925 (5,272) Extraordinary item: Early extinguishment of debt...................... (3,197) (587) (998) (3,341) (3,519) -- -------- -------- --------- -------- -------- -------- Net income (loss) before minority interests......... 9,406 12,703 13,213 11,269 1,406 (5,272) Minority Interests.................................. (6,854) (6,852) (6,852) (4,274) (380) -- -------- -------- --------- -------- -------- -------- Net income (loss)................................... $ 2,552 $ 5,851 $ 6,361 $ 6,995 $ 1,026 $ (5,272) ======== ======== ========= ======== ======== ======== PER SHARE DATA: - --------------- Net income (loss) before extraordinary item and minority interests....................... $ 0.76 $ 0.81 $ 0.87 $ 0.90 $ 0.30 Net income.......................................... $ 0.21 $ 0.49 $ 0.54 $ 0.59 $ 0.09 Weighted average shares outstanding: NO Fully converted................................... 16,690 16,424 16,285 16,272 16,272 ======== ======== ========= ======== ======== Common stock...................................... 12,297 12,031 11,892 11,879 11,879 COMMON ======== ======== ========= ======== ======== DIVIDENDS PAID: - --------------- SHARES Cash dividends to common stockholders...........(1) $ 19,063 $ 18,669 $ 18,531 $ 18,531 $ 1,782 ======== ======== ========= ======== ======== Cash dividends per share.......................... $ 1.56 $ 1.56 $ 1.56 $ 1.56 $ 0.15 ======== ======== ========= ======== ======== OUTSTANDING BALANCE SHEET DATA: - ------------------- Income-producing properties (before accumulated depreciation)................. $335,268 $329,664 $ 321,662 $300,404 $263,519 Total assets........................................ 260,942 263,495 269,407 259,041 213,365 Total debt, including accrued interest.............. 273,731 273,731 273,979 248,681 192,199 OTHER DATA: - ----------- Funds from operations (2) Net income before minority interests.............. $ 9,406 $ 12,703 $ 13,213 $ 11,269 Depreciation and amortization of real property.... 10,642 10,860 10,425 9,582 Debt restructuring losses: Disposition of interest rate protection agreements.................................... 4,392 972 -- -- Write-off of unamortized loan costs............. 3,197 587 998 3,341 -------- -------- --------- -------- Funds from operations............................... $ 27,637 $ 25,122 $ 24,636 $ 24,192 ======== ======== ========= ======== Cash flows provided by (used in): Operating activities.............................. $ 28,936 $ 29,677 $ 25,055 $ 23,811 Investing activities.............................. $(16,094) $ (8,035) $ (20,992) $(43,487) Financing activities.............................. $(12,192) $(22,278) $ (4,416) $ 17,948
- -------------------- (1) By operation of the Company's dividend reinvestment plan, $4,305 and $3,378, was reinvested in newly issued common stock during 1997 and 1996, respectively. (2) Funds From Operations (FFO) does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs. FFO, as defined by the National Association of Real Estate Investment Trusts (NAREIT), represents net income excluding gains or losses from debt restructuring, sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - ------- The following discussion is based on the consolidated financial statements of the Company as of December 31, 1997 and for the year ended December 31, 1997. Prior year data is based on the Company's consolidated financial statements as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995. Liquidity and Capital Resources - ------------------------------- The Company's principal demands for liquidity are expected to be distributions to its stockholders, debt service and loan repayments, expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 95 percent of its "real estate investment trust taxable income," as defined in the Internal Revenue Code of 1986, as amended. The Company anticipates that operating revenues will provide the funds necessary for operations, debt service, distributions, and required recurring capital expenditures. Balloon principal repayments are expected to be funded by refinancings. Management anticipates that during the coming year the Company may: 1) redevelop certain of the Shopping Centers, 2) develop additional freestanding outparcels or expansions within certain of the Shopping Centers, 3) acquire existing neighborhood and community shopping centers and/or office properties and 4) develop new shopping center sites. Acquisition and development of properties are undertaken only after careful analysis and review, and such property is expected to provide long-term earnings and cash flow growth. During the coming year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company's credit line or other external capital resources available to the Company. The Company expects to fulfill its long range requirements for capital resources in a variety of ways, including undistributed cash flow from operations, secured or unsecured bank and institutional borrowings, private or public offerings of debt or equity securities and proceeds from the sales of properties. Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Partnership which can be converted into shares of Saul Centers common stock. Management believes that the Company's current capital resources, including approximately $46,500,000 of the Company's credit line which was available for borrowing as of December 31, 1997, will be sufficient to meet its liquidity needs for the foreseeable future. 15 Financial Information - --------------------- In 1997, the Company reported Funds From Operations (FFO) of $27,637,000 on a fully converted basis. This represents a 10.0 percent increase over 1996 FFO of $25,122,000. The following table represents a reconciliation from net income before minority interests to FFO:
For the Years Ended December 31, (Dollars in thousands) 1997 1996 1995 - ---------------------- --------- --------- --------- Net income before minority interests $ 9,406 $ 12,703 $ 13,213 Depreciation and amortization of real property 10,642 10,860 10,425 Debt restructuring losses: Disposition of interest rate protection agreements 4,392 972 --- Write-off of unamortized loan costs 3,197 587 998 -------- -------- -------- Funds From Operations $ 27,637 $ 25,122 $ 24,636 ======== ======== ======== Cash Flow provided by (used in): Operating activities $ 28,936 $ 29,677 $ 25,055 Investing activities $(16,094) $ (8,035) $(20,992) Financing activities $(12,192) $(22,278) $ (4,416)
FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs. FFO, as defined by the National Association of Real Estate Investment Trusts, is calculated using net income excluding gains or losses from debt restructuring, sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Capital Strategy and Financing Activity - --------------------------------------- The Company's capital strategy is to maintain a ratio of total debt to total asset value of 50 percent or less, and to actively manage the Company's leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Management believes that current total debt remains less than 50 percent of total asset value. During 1997, the Company closed two long-term fixed rate mortgages, which management believes enhance the balance sheet. The first was a $38.5 million loan closed in January 1997, for a term of 16 years at a fixed interest rate of 7.88 percent, and a twenty-year principal amortization schedule. A balloon payment of approximately $24.5 million will be due at maturity in January 2013. This loan is secured by the 601 Pennsylvania Avenue office property. The proceeds of this new loan were used to repay existing floating rate debt, which had a weighted remaining term of less than 3 years and a weighted average interest rate of LIBOR plus 2.05 percent, or 7.58 percent assuming the three month LIBOR rate effective as of December 31, 1997. In October 1997, the Company closed another loan in the amount of $147 million, for a 15-year term, at a fixed rate of 7.67 percent, and a twenty-five year principal amortization schedule. A balloon payment of approximately $87.9 million will be due at maturity in October 2012. This loan is secured by nine of the Company's retail properties. Also, in conjunction with the closing of the loan, the Company closed a new three- 16 year $60 million unsecured credit line, which replaces the previous secured credit line. The interest rate floats at 1.375 percent to 1.625 percent over LIBOR, depending on certain covenant tests. As of February 20, 1998, outstanding borrowings total $18 million, leaving $42 million of uncommitted credit availability. This availability provides the Company with capital to pursue new redevelopment, renovation, and expansion opportunities within its portfolio. The proceeds of these new loans were used to repay existing floating rate debt, which had a remaining term of approximately 3.5 years. The Company now has fixed interest rates on approximately 94 percent of its total debt outstanding, which now has a weighted remaining term of approximately 14 years. In connection with the refinancing, the Company sold all of its remaining interest rate protection agreements. Redevelopment, Renovations and Acquisitions - ------------------------------------------- The Company has been selectively involved in redevelopment, renovation and acquisition activities. It continues to evaluate land parcels for retail development and potential acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to take advantage of retail redevelopment, renovation and expansion opportunities within the portfolio, as demonstrated by its redevelopment activities at Seven Corners, recently completed facade renovation at Thruway and an expansion of the Leesburg Pike shopping center. The newly constructed 127,000 square foot Home Depot and 70,000 square foot Shoppers Club stores at Seven Corners shopping center, the Company's 545,000 square foot community shopping center in Falls Church, Virginia, opened during the third quarter of 1997. The opening of Home Depot and Shoppers Club substantially completes the Company's redevelopment of Seven Corners from an enclosed mall to an updated community strip center. The redevelopment effort added 145,000 square feet of new retail area. During the second quarter, Centex Life Solutions executed a lease for a 31,000 square foot health concepts superstore and Michaels Stores signed a lease for a 21,000 square foot arts and crafts store at Seven Corners. Saul Centers had recently recaptured the space leased by Michaels and received a termination fee from Petstuff, which had closed their store subsequent to merging with PetSmart. Centex leased and substantially renovated the interior and exterior of the former F&M Distributors drug store space. These two new anchor tenants recently opened their stores. In August 1997, the Company substantially completed construction on a facade renovation of its Harris Teeter and Stein Mart anchored 340,000 square foot, Thruway shopping center located in Winston-Salem, North Carolina. Construction includes a 40-foot clock tower, a new tenant sign band, colonial style anchor tenant features, new lighting and a complete facade upgrade. Leesburg Pike is a 98,000 square foot shopping center, where a facade renovation was completed in 1995. Construction was subsequently completed as of June 1997 on a 13,000 square foot expansion of in-line shop space for new retail uses. The expansion is 100 percent leased and occupied by tenants including Hollywood Video and Men's Wearhouse. Portfolio Leasing Status - ------------------------ At December 31, 1997, the portfolio consisted of thirty Shopping Centers and three Office Properties located in seven states and the District of Columbia. The Office Properties consist of one office property and one office/retail property, both located in the District of Columbia, and one research park located in a Maryland suburb of Washington, DC. At December 31, 1997, 89.0 percent of the Company's 5.8 million square feet of leasable space was leased to tenants, as compared to 89.6 percent at December 31, 1996. The shopping center portfolio was 87.9 percent leased at December 31, 1997 versus 89.8 percent as of December 31, 1996. The Office Properties were 96.8 percent leased at December 31, 1997 compared to 88.5 percent as of December 31, 1996. The overall reduction in the year-end 1997 leasing percentage was primarily caused by the Company's termination of a major 17 retail lease for redevelopment, offset in part by improved leasing activity at the Company's Avenel Business Park and Van Ness Square office properties. The decline in the 1997 shopping center portfolio leasing percentage resulted primarily from the Company's redevelopment activities at its French Market property. In order to redevelop its French Market center in Oklahoma City, the Company acquired the lease of a 103,000 square foot tenant, of which only 49,000 square feet was leased as of year end. The annual rent committed under the 49,000 square feet of new leases exceeds that of the former tenant's entire space. Lease negotiations for the remaining space are in progress. Results of Operations - --------------------- The following discussion compares the results of the Company for the year ended December 31, 1997 with the year ended December 31, 1996, and compares the year ended December 31, 1996 with the year ended December 31, 1995. This information should be read in conjunction with the accompanying consolidated financial statements and the notes related thereto. Years Ended December 31, 1997 and 1996 - -------------------------------------- Base rent increased to $51,779,000 in 1997 from $49,814,000 in 1996, representing a $1,965,000 (3.9 percent) increase. The increase in base rent resulted primarily from increased rents received at the redeveloped Seven Corners, Leesburg Pike and Thruway shopping centers, and to a lesser extent, increased shopping center minimum rents at several properties due to improved leasing and generally higher rents on lease renewals. Expense recoveries increased to $9,479,000 in 1997 from $9,301,000 in 1996, representing an increase of $178,000 (1.9 percent). The increase in expense recoveries resulted primarily from real estate tax recovered from tenants at the recently redeveloped Seven Corners center. Percentage rent was $2,948,000 in 1997, compared to $2,924,000 in 1996, representing an increase of $24,000 (0.8%). This increase resulted from generally improved reported sales throughout the portfolio. Other income, which consists primarily of parking income at two of the Office Properties, kiosk leasing, temporary leases and payments associated with early termination of leases, was $3,511,000 in 1997, compared to $1,984,000 in 1996, representing an increase of $1,527,000 (77.0%). The increase in other income resulted from two large lease termination payments. As a consequence of the foregoing the 1997 total revenues of $67,717,000 represented an increase of $3,694,000 (5.8 percent) over total revenues of $64,023,000 in 1996. Operating expenses, which consist mainly of repairs and maintenance, utilities, payroll and insurance expense, increased $6,000 (0.1 percent) to $8,075,000 in 1997 from $8,069,000 in 1996. The provision for credit losses was $505,000 in 1997 compared to $457,000 in 1996, representing an increase of $48,000 (10.5 percent) . The increase resulted primarily from the provision required for a shopping center tenant which vacated its space prior to lease expiration. Real estate taxes were $6,084,000 in 1997 compared to $5,914,000 in 1996, representing an increase of $170,000 (2.9 percent). This increase was generally attributable to increased tax assessments at the Company's shopping center properties, particularly its redeveloped Seven Corners and Leesburg Pike shopping centers. Interest expense was $20,308,000 in 1997 compared to $18,509,000 in 1996, representing an increase of $1,799,000 (9.7 percent). The increase is primarily attributable to higher interest rates resulting from the Company's refinancing and conversion of approximately $263 million of its mortgage debt from floating rate loans to longer term, fixed-rate loans during the period November 1996 through October 1997. 18 Amortization of deferred debt expense decreased $1,128,000 (39.5 percent) to $1,729,000 in 1997 from $2,857,000 in 1996. The decrease in the 1997 year's expense resulted from the elimination of amortization on interest rate protection agreements with notional values of $162.8 million and $87.0 million, sold during the fourth quarters of 1997 and 1996, respectively, and reduced loan cost amortization because new fixed rate debt costs are being amortized over a longer term than the floating rate debt costs they replaced. Depreciation and amortization expense decreased $218,000 (2.0 percent) from $10,860,000 in 1996 to $10,642,000 in 1997. The decrease resulted primarily from a non-recurring write-off of tenant improvement costs in 1996 upon the early termination of tenant leases. General and administrative expense, which consists primarily of administrative payroll and other overhead expenses, was $3,379,000 in 1997 compared to $3,095,000 in 1996, representing an increase of $284,000 (9.2 percent). The increase in 1997 expenses resulted from generally higher personnel expenses. Non-operating item, sales of interest rate protection agreements, resulted in losses of $4,392,000 and $972,000, in 1997 and 1996, respectively, due to the write-off of unamortized costs in excess of sale proceeds received when the Company sold a portion of its interest rate protection agreements. Extraordinary item, early extinguishment of debt, losses were $3,197,000 and $587,000, in 1997 and 1996, respectively. The losses in each period resulted from the write-off of unamortized loan costs when the Company refinanced a portion of its loan portfolio. Years Ended December 31, 1996 and 1995 - -------------------------------------- Base rent increased to $49,814,000 in 1996 from $47,673,000 in 1995, representing a $2,141,000 (4.5 percent) increase. The increase in base rent resulted primarily from increased rents received at the redeveloped Seven Corners and Great Eastern shopping centers, and to a lesser extent, increased shopping center minimum rents at several properties due to improved leasing and generally higher rents on lease renewals. Expense recoveries increased to $9,301,000 in 1996 from $8,770,000 in 1995, representing an increase of $531,000 (6.1 percent). The increase in expense recoveries resulted primarily from improved leasing levels at the recently redeveloped Seven Corners, Great Eastern and Leesburg Pike shopping centers. Percentage rent was $2,924,000 in 1996, compared to $2,782,000 in 1995, representing an increase of $142,000 (5.1%). This increase resulted from generally improved reported sales throughout the portfolio. Other income, which consists primarily of parking income at two of the Office Properties, kiosk leasing, temporary leases and payments associated with early termination of leases, was $1,984,000 in 1996, compared to $2,244,000 in 1995, representing a decrease of $260,000 (11.6%). The decline in other income resulted largely from a decline in lease termination payments. As a consequence of the foregoing, the 1996 total revenues of $64,023,000 represented an increase of $2,554,000 (4.2 percent) over total revenues of $61,469,000 in 1995. Operating expenses, which consist mainly of repairs and maintenance, utilities, payroll and insurance expense, decreased $71,000 (0.9 percent) to $8,069,000 in 1996 from $8,140,000 in 1995. The provision for credit losses was $457,000 in 1996 compared to $404,000 in 1995, representing an increase of $53,000 (13.1 percent) . The increase resulted primarily from the provision required for a shopping center tenant which vacated its space prior to lease expiration. 19 Real estates taxes were $5,914,000 in 1996 compared to $5,427,000 in 1995, representing an increase of $487,000 (9.0 percent). This was largely attributable to the increased tax assessment resulting from the redevelopment work put in place by the Company during the past two years. Interest expense was $18,509,000 in 1996 compared to $17,639,000 in 1995, representing an increase of $870,000 (4.9 percent). This increase is primarily attributed to an approximately $14.6 million increase in average loan balances resulting largely from the Company's acquisition and redevelopment activities. Amortization of deferred debt expense increased $389,000 (15.8 percent) to $2,857,000 in 1996 from $2,468,000 in 1995. This increase was primarily due to an increased level of amortization arising from the November 1995 restructuring of the Company's revolving credit agreement. Depreciation and amortization expense increased $435,000 (4.2 percent) from $10,425,000 in 1995 to $10,860,000 in 1996. This increase was due to the redevelopment of the Seven Corners and Leesburg Pike shopping centers. General and administrative expense, which consists primarily of administrative payroll and other overhead expenses, was $3,095,000 in 1996 compared to $2,984,000 in 1995, representing an increase of $111,000 (3.7 percent). Non-operating item, sales of interest rate protection agreements, resulted in a loss of $972,000 in 1996 due to the write-off of unamortized costs in excess of sale proceeds received when the Company sold a portion of its interest rate protection agreements. The agreements sold had a notional value of $87.0 million, and were sold subsequent to the November 1996 closing of a $77.0 million fixed rate mortgage. No sale occurred in 1995. Extraordinary item, early extinguishment of debt, decreased from a loss of $998,000 in 1995 to a loss of $587,000 in 1996. The losses in each period resulted from the write-off of unamortized loan costs when the Company refinanced a portion of its loan portfolio. Other - ----- The Company has evaluated its information technology systems to ensure compliance with the requirements to process transactions in the year 2000. The Company's primary internal information systems are fully compliant new systems. The majority of the Company's internal information systems are fully compliant new systems. In the event that any of the Company's significant tenants or suppliers do not successfully and timely achieve Year 2000 compliance, the Company's operations may be affected. The Company does not anticipate any material impact on its results from operations or its financial condition as a result of any Year 2000 compliance issues. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company and its consolidated subsidiaries are included in this report on the pages indicated, and are incorporated herein by reference:
Page - ---- F-1 (a) Report of Independent Public Accountants F-2 (b) Consolidated Balance Sheets - December 31, 1997 and 1996 F-3 (c) Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995. F-4 (d) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995. F-5 (e) Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995. F-6 (f) Notes to Consolidated Financial Statements
The selected quarterly financial data included in Note 15 of The Notes to Consolidated Financial Statements referred to above are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 21 PART III The information required under Items 10, 11, 12, and 13 is contained in pages 3 through 14, inclusive, of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 17, 1998, and is hereby incorporated herein by reference. The Company's Proxy Statement was filed within 120 days after the close of the Company's fiscal year in accordance with General Instruction G(3) of Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements -------------------- The following financial statements of the Company and their consolidated subsidiaries are incorporated by reference in Part II, Item 8. (a) Report of Independent Public Accountants (b) Consolidated Balance Sheets - December 31, 1997 and 1996 (c) Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 (d) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 (e) Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 (f) Notes to Consolidated Financial Statements 2. Financial Statement Schedule and Supplementary Data --------------------------------------------------- (a) Selected Quarterly Financial Data for the Company are incorporated by reference in Part II, Item 8 (b) Report of Independent Public Accountants on the Schedule (included in Report of Independent Public Accountants on the Financial Statements) (c) Schedule of the Company: Schedule III - Real Estate and Accumulated Depreciation All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 22 3. Exhibits -------- 3. (a) First Amended and Restated Articles of Incorporation of Saul Centers, Inc. filed with the Maryland Department of Assessments and Taxation on August 23, 1994 and filed as Exhibit 3.(a) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at and after August 24, 1993 and as of August 26, 1993 and filed as Exhibit 3 (b) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. 10. (a) First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to Registration Statement No. 33-64562 is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, and the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 1997 Quarterly Report of the Company is hereby incorporated by reference. (b) First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership is filed herewith. (c) First Amended and Restated Agreement of Limited Partnership of Saul II Subsidiary Partnership and Amendment No. 1 thereto filed as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby incorporated by reference. (d) Property Conveyance Agreement filed as Exhibit 10.4 to Registration Statement No. 33-64562 is hereby incorporated by reference. (e) Management Functions Conveyance Agreement filed as Exhibit 10.5 to Registration Statement No. 33-64562 is hereby incorporated by reference. (f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference. (g) Exclusivity and Right of First Refusal Agreement filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference. (h) Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8 to Registration Statement No. 33-64562 is hereby incorporated by reference. (i) Agreement of Assumption dated as of August 26, 1993 executed by Saul Holdings Limited Partnership and filed as Exhibit 10. (I) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. 23 (j) Saul Centers, Inc. 1995 Dividend Reinvestment and Stock Purchase Plan as filed with the Securities and Exchange Commission as File No. 33-80291 is hereby incorporated by reference. (k) Deferred Compensation Plan for Directors dated as of December 13, 1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (l) Deed of Trust, Assignment of Rents, and Security Agreement dated as of June 9, 1994 by and between Saul Holdings Limited Partnership and Ameribanc Savings Bank, FSB as filed as Exhibit 10.(t) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (m) Deed of Trust Note dated as of January 22, 1996 by and between Saul Holdings Limited Partnership and Clarendon Station Limited Partnership, filed as Exhibit 10.(s) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (n) Loan Agreement dated as of November 7, 1996 by and among Saul Holdings Limited Partnership, Saul Subsidiary II Limited Partnership and PFL Life Insurance Company, c/o AEGON USA Realty Advisors, Inc., filed as Exhibit 10.(t) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (o) Promissory Note dated as of January 10, 1997 by and between Saul Subsidiary II Limited Partnership and The Northwestern Mutual Life Insurance Company, filed as Exhibit 10.(z) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (p) Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I Limited Partnership, as Borrower and Nomura Asset Capital Corporation, as Lender, is filed herewith (q) Revolving Credit Agreement dated as of October 1, 1997 by and between Saul Holdings Limited Partnership and Saul Subsidiary II Limited Partnership, as Borrower and U.S. Bank National Association, as agent, is filed herewith. 23 Consent of Certified Public Accountants 27 Financial Data Schedule Reports on Form 8-K. -------------------- None. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SAUL CENTERS, INC. (Registrant) Date: ------------------------------------------------------ Date: ------------------------------------------------------ B. Francis Saul II Chairman of the Board of Directors & Chief Executive Officer (Principal Executive Officer) Date: March 31, 1998 /s/ Philip D. Caraci ------------------------------------------------------ Philip D. Caraci, President and Director Date: March 31, 1998 /s/ B. Francis Saul III ------------------------------------------------------ B. Francis Saul III, Vice President and Director Date: March 31, 1998 /s/ Scott V. Schneider ------------------------------------------------------ Scott V. Schneider, Vice President and Secretary (Principal Financial and Accounting Officer) Date: March 31, 1998 /s/ Gilbert M. Grosvenor ------------------------------------------------------ Gilbert M. Grosvenor, Director Date: March 31, 1998 /s/ General Paul X. Kelley ------------------------------------------------------ General Paul X. Kelley, Director Date: March 31, 1998 /s/ Charles R. Longsworth ------------------------------------------------------ Charles R. Longsworth, Director Date: March 31, 1998 /s/ Patrick F. Noonan ------------------------------------------------------ Patrick F. Noonan, Director Date: March 31, 1998 /s/ Mr. Mark Sullivan III ------------------------------------------------------ Mark Sullivan III, Director Date: March 31, 1998 /s/ James W. Symington ------------------------------------------------------ James W. Symington, Director Date: March 31, 1998 /s/ John R. Whitmore ------------------------------------------------------ John R. Whitmore, Director
25 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Saul Centers, Inc.: We have audited the accompanying consolidated balance sheets of Saul Centers, Inc., (a Maryland corporation) and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the three years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Saul Centers, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole, Schedule III "Real Estate and Accumulated Depreciation", appearing on pages F-18 and F-19, is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Washington, D.C. February 6, 1998 F-1 SAUL CENTERS, INC. CONSOLIDATED BALANCE SHEETS
December 31, (Dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------ ASSETS Real estate investments Land $ 65,630 $ 65,604 Buildings and equipment 269,638 264,060 --------------------- -------------------- 335,268 329,664 Accumulated depreciation (92,615) (94,965) --------------------- -------------------- 242,653 234,699 Construction in progress 974 1,508 Cash and cash equivalents 688 38 Accounts receivable and accrued income, net 6,190 7,446 Prepaid expenses 5,423 4,808 Deferred debt costs, net 3,853 11,287 Other assets 1,161 3,709 --------------------- -------------------- Total assets $ 260,942 $ 263,495 ===================== ==================== LIABILITIES Notes payable $ 284,473 $ 273,261 Accounts payable, accrued expenses and other liabilities 13,093 14,733 Deferred income 1,430 1,441 --------------------- -------------------- Total liabilities 298,996 289,435 --------------------- -------------------- MINORITY INTERESTS -- -- --------------------- -------------------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $0.01 par value, 30,000,000 shares authorized, 12,428,145 and 12,152,771 shares issued and outstanding, respectively 124 121 Additional paid-in capital 20,447 15,950 Accumulated deficit (58,625) (42,011) --------------------- -------------------- Total stockholders' equity (deficit) (38,054) (25,940) --------------------- -------------------- Total liabilities and stockholders' equity $ 260,942 $ 263,495 ===================== ====================
The accompanying notes are an integral part of these statements. F-2 SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, (Dollars in thousands, except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- REVENUE Base rent $ 51,779 $ 49,814 $ 47,673 Expense recoveries 9,479 9,301 8,770 Percentage rent 2,948 2,924 2,782 Other 3,511 1,984 2,244 --------------------- --------------------- -------------------- Total revenue 67,717 64,023 61,469 --------------------- --------------------- -------------------- OPERATING EXPENSES Property operating expenses 8,075 8,069 7,911 Provision for credit losses 505 457 404 Real estate taxes 6,084 5,914 5,427 Interest expense 20,308 18,509 17,639 Amortization of deferred debt expense 1,729 2,857 2,468 Depreciation and amortization 10,642 10,860 10,425 General and administrative 3,379 3,095 2,984 --------------------- --------------------- -------------------- Total operating expenses 50,722 49,761 47,258 --------------------- --------------------- -------------------- OPERATING INCOME 16,995 14,262 14,211 Non-operating item Sales of interest rate protection agreements (4,392) (972) -- --------------------- --------------------- -------------------- NET INCOME BEFORE EXTRAORDINARY ITEM AND MINORITY INTERESTS 12,603 13,290 14,211 Extraordinary item Early extinguishment of debt (3,197) (587) (998) --------------------- --------------------- -------------------- NET INCOME BEFORE MINORITY INTERESTS 9,406 12,703 13,213 --------------------- --------------------- -------------------- MINORITY INTERESTS Minority share of income (2,483) (3,430) (3,568) Distributions in excess of earnings (4,371) (3,422) (3,284) --------------------- --------------------- -------------------- Total minority interests (6,854) (6,852) (6,852) --------------------- --------------------- -------------------- NET INCOME $ 2,552 $ 5,851 $ 6,361 ===================== ===================== ==================== NET INCOME PER SHARE (BASIC) Net income before extraordinary item and minority interests $ 0.76 $ 0.81 $ 0.87 Extraordinary item (0.19) (0.04) (0.06) --------------------- --------------------- -------------------- Net income before minority interests $ 0.57 $ 0.77 $ 0.81 ===================== ===================== ==================== Net income $ 0.21 $ 0.49 $ 0.54 ===================== ===================== ====================
The accompanying notes are an integral part of these statements. F-3 SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN ACCUMULATED (Dollars in thousands, except per share amounts) STOCK CAPITAL DEFICIT TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY (DEFICIT): BALANCE, DECEMBER 31, 1994 $ 119 $ 12,371 $ (16,926) $ (4,436) Issuance of 8,913 shares of common stock -- 140 -- 140 Net income -- -- 6,361 6,361 Distributions ($1.17 per share) -- -- (13,899) (13,899) Distributions payable ($.39 per share) -- -- (4,633) (4,633) ----------------- --------------------- --------------------- -------------------- BALANCE, DECEMBER 31, 1995 119 12,511 (29,097) (16,467) Issuance of 257,454 shares of common stock 2 3,439 -- 3,441 Net income -- -- 5,851 5,851 Distributions ($1.17 per share) -- -- (14,036) (14,036) Distributions payable ($.39 per share) -- -- (4,729) (4,729) ----------------- --------------------- --------------------- -------------------- BALANCE, DECEMBER 31, 1996 121 15,950 (42,011) (25,940) Issuance of 275,374 shares of common stock 3 4,497 -- 4,500 Net income -- -- 2,552 2,552 Distributions ($1.17 per share) -- -- (14,334) (14,334) Distributions payable ($.39 per share) -- -- (4,832) (4,832) ----------------- --------------------- --------------------- -------------------- BALANCE, DECEMBER 31, 1997 $ 124 $ 20,447 $ (58,625) $ (38,054) ================= ===================== ===================== ====================
The accompanying notes are an integral part of these statements. F-4 SAUL CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, (Dollars in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,552 $ 5,851 $ 6,361 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 6,854 6,852 6,852 Loss on sale of interest rate protection agreements 4,392 972 -- Loss on early extinguishment of debt 3,197 587 998 Depreciation and amortization 12,371 13,717 12,893 Provision for credit losses 505 457 404 Decrease (increase) in accounts receivable (406) (45) 41 Increase in prepaid expenses (1,426) (1,136) (2,273) Decrease (increase) in other assets 2,548 (961) 1,250 Increase (decrease) in accounts payable and other liabilities (1,640) 3,019 (745) Increase (decrease) in deferred income (11) 364 (726) --------------------- --------------------- -------------------- Net cash provided by operating activities 28,936 29,677 25,055 --------------------- --------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to real estate investments (4,377) (4,469) (4,852) Additions to construction in progress (11,717) (3,566) (16,140) --------------------- --------------------- -------------------- Net cash used in investing activities (16,094) (8,035) (20,992) --------------------- --------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 223,600 98,620 114,000 Repayments on notes payable (212,388) (98,442) (89,568) Proceeds from sale of interest rate protection agreements 1,370 681 -- Note prepayment fees (95) -- -- Additions to deferred debt expense (3,159) (961) (3,604) Proceeds from the issuance of common stock 4,500 3,441 140 Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership (26,020) (25,617) (25,384) --------------------- --------------------- -------------------- Net cash used in financing activities (12,192) (22,278) (4,416) --------------------- --------------------- -------------------- Net increase (decrease) in cash 650 (636) (353) Cash, beginning of year 38 674 1,027 ===================== ===================== ==================== Cash, end of year $ 688 $ 38 $ 674 ===================== ===================== ==================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest net of amount capitalized $ 19,804 $ 18,829 $ 17,465
The accompanying notes are an integral part of these statements. F-5 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, FORMATION, AND BASIS OF PRESENTATION ORGANIZATION Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland General Corporation Law on June 10, 1993. The authorized capital stock of Saul Centers consists of 30,000,000 shares of common stock, having a par value of $0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common stock is entitled to one vote for each share held. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the "Company". Saul Centers operates as a real estate investment trust under the Internal Revenue Code of 1986, as amended (a "REIT"). FORMATION AND STRUCTURE OF COMPANY Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B.F. Saul Real Estate Investment Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the "Operating Partnership"), and two newly formed subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping center properties, one office property, one research park and one office/retail property and the management functions related to the transferred properties. Since its formation, the Company has purchased three additional community and neighborhood shopping center properties, and purchased a land parcel which it developed into a community shopping center. Therefore, as of December 31, 1997, the Company's properties (the "Current Portfolio Properties") consisted of 30 operating shopping center properties (the "Shopping Centers") and three predominantly office properties (the "Office Properties"). To facilitate the placement of collateralized mortgage debt, the Company established Saul QRS, Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. As a consequence of the transactions constituting the formation of the Company, Saul Centers serves as the sole general partner of the Operating Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc., Saul Centers' wholly owned subsidiary, serves as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100 percent of the Current Portfolio Properties. BASIS OF PRESENTATION The accompanying financial statements of the Company have been presented on the historical cost basis of The Saul Organization because of affiliated ownership and common management and because the assets and liabilities were the subject of a business combination with the Operating Partnership, the Subsidiary Partnerships and Saul Centers, all newly formed entities with no prior operations. F-6 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and office properties, primarily in the Mid-Atlantic region. A majority of the Shopping Centers are anchored by several major tenants. Eighteen of the 30 Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of December 1997, no single Shopping Center accounted for more than 10.6 percent of the total Shopping Center gross leasable area. Only Giant Food, at 6.5 percent of the Company's 1997 total revenues, accounted for more than 2.5 percent of revenues. Only two other retail tenants represented more than 2.0 percent of total revenues for the year. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the accounts of Saul Centers, its subsidiaries, and the Operating Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REAL ESTATE INVESTMENT PROPERTIES Real estate investment properties are stated at the lower of depreciated cost or fair value less cost to sell. Management believes that these assets have generally appreciated in value and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company's liabilities as reported in these financial statements. These financial statements are prepared in conformity with generally accepted accounting principles, and accordingly, do not report the current value of the Company's real estate assets. Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is substantially complete and the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. Expenditures for repairs and maintenance are charged to operations as incurred. Repairs and maintenance expense totaled $2,479,000, $2,730,000 and $2,600,000, for calendar years 1997, 1996, and 1995, respectively, and is included in operating expenses in the accompanying financial statements. Interest expense capitalized totaled $297,000, $384,000 and $525,000, for calendar years 1997, 1996 and 1995, respectively. In the initial rental operations of development projects, a project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of 33 to 50 years for buildings and up to 20 years for certain other improvements. Leasehold improvements are amortized over the lives of the related leases using the straight-line method. F-7 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTS RECEIVABLE AND ACCRUED INCOME Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. In addition, accounts receivable included $1,663,000, $1,913,000 and $2,158,000, at December 31, 1997, 1996 and 1995, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the term of the respective leases. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying financial statements are shown net of an allowance for doubtful accounts of $506,000, $427,000 and $169,000, at December 31, 1997, 1996 and 1995, respectively.
Allowance for Doubtful Accounts --------------------------------- (In thousands) For the Years Ended December 31 1997 1996 1995 ------ ------ ------ Beginning Balance............... $ 427 $ 169 $ 280 Provision for Credit Losses..... 505 457 404 Charge-offs..................... (426) (199) (515) ----- ----- ----- Ending Balance.................. $ 506 $ 427 $ 169 ===== ===== =====
DEFERRED DEBT COSTS Deferred debt costs consists of fees and costs incurred to obtain long-term financing and interest rate protection agreements. These fees and costs are being amortized over the terms of the respective loans or agreements. Deferred debt costs in the accompanying financial statements are shown net of accumulated amortization of $171,000, $6,240,000 and $5,000,000, at December 31, 1997, 1996 and 1995, respectively. REVENUE RECOGNITION Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis, because of free rent periods or stepped increases (excluding those increases which approximate inflationary increases), income is recognized on a straight-line basis in accordance with generally accepted accounting principles. Expense recoveries represent property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period the expenses are incurred. Generally, additional rental income based on tenant's revenues ("percentage rent") is accrued on the basis of the prior year's percentage rent, adjusted to give effect to current sales data. INCOME TAXES The Company made an election to be treated, and intends to continue operating so as to qualify as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1993. A REIT generally will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 95 percent of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying financial statements. As of December 31, 1997 and 1996, the total tax basis of the Company's assets was $276,754,000 and $276,975,000, and the tax basis of the liabilities was $298,223,000 and $288,938,000, respectively. F-8 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIRECTORS' DEFERRED COMPENSATION PLAN A Deferred Compensation Plan was established by Saul Centers, effective January 1, 1994, for the benefit of its directors and their beneficiaries. Before the beginning of any calendar year, a director may elect to defer all or part of his or her director's fees to be earned in that year and the following years. A director has the option to have deferred director's fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock. If the director elects to have the deferred fees paid in stock, the number of shares allocated to the director is determined based on the market value of the common stock on the day the deferred director's fee was earned. Deferred compensation of $144,500, $118,950, and $120,950 has been reported in the Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995, respectively. The Company has registered 70,000 shares for use under the plan, of which 40,000 were authorized at December 31, 1997. As of December 31, 1997, 38,607 shares had been credited to the directors' deferred fee accounts. NEW ACCOUNTING PRONOUNCEMENTS During 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 required that an impairment loss be recognized when the carrying amount of an asset exceeds the sum of the estimated future cash flows (undiscounted) of the asset. The standard was implemented in 1996 and, in the opinion of management, no such impairment loss reductions are required. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires entities to measure compensation costs related to awards of stock-based compensation using either the fair value method or the intrinsic value method. The Company adopted SFAS No. 123 in 1996 utilizing the method which provides for pro-forma disclosure of the impact of stock-based compensation. In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which establishes new standards for computing, presenting and disclosing earnings per share. The standard was implemented in 1997. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which establishes standards for the reporting and display of comprehensive income in the Company's financial statements. Adoption of the new standard is required for the year 1998. Because SFAS 130 address only disclosure-related issues, its adoption will not have an impact on the Company's financial condition or its results of operations. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas, and major customers. Adoption of the new standard is required for the 1998. Because SFAS 131 addresses only disclosure-related issues, its adoption will not have an impact on the Company's financial condition or its results of operations. CONSTRUCTION IN PROGRESS Construction in progress includes the costs of redeveloping the French Market shopping center and other predevelopment project costs. Development costs include direct construction costs and indirect costs such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and F-9 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS insurance. Construction in progress balances as of December 31, 1997 are as follows:
Construction in Progress - ------------------------ (In thousands) French Market.................. $807 Other development costs........ 167 ---- Total $974 ====
CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash and short-term investments with maturities of three months or less. PER SHARE DATA Per share data is calculated in accordance with SFAS No. 128, "Earnings Per Share". The Company has no dilative securities, therefore, basic and diluted earnings per share are identical. Net income before minority interests is presented on a fully converted basis, that is, assuming the limited partners exercise their right to convert their partnership ownership into shares of Saul Centers and is computed using weighted average shares of 16,690,417, 16,423,984 and 16,284,666, shares for the years ended December 31, 1997, 1996 and 1995, respectively. Per share data relating to net income after minority interests is computed on the basis of 12,297,254, 12,030,821 and 11,891,503, weighted average common shares for the years ended December 31, 1997, 1996 and 1995, respectively. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassifications have no impact on operating results previously reported. 3. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNER UNITS IN THE OPERATING PARTNERSHIP The Saul Organization has a 26.2 percent limited partnership interest, represented by 4,393,163 convertible limited partnership units, in the Operating Partnership, as of December 31, 1997. These Convertible Limited Partnership Units are convertible into shares of Saul Centers' common stock on a one-for-one basis, provided the rights may not be exercised at any time that The Saul Organization owns, directly or indirectly, in the aggregate more than 24.9 percent of the outstanding equity securities of Saul Centers. The impact of the Saul Organization's 26.2 percent limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying financial statements. 4. NOTES PAYABLE DECEMBER 31, 1997 During 1997 the Company repaid a total of $185.5 million of variable rate mortgage notes which were outstanding at December 31, 1996, with the net proceeds of a $147.0 million 15-year fixed rate mortgage note and F-10 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS a $38.5 million 16-year fixed rate mortgage note. The $44.0 million secured revolving credit facility in effect at December 31, 1996 was replaced with a $60.0 million unsecured revolving credit facility during 1997. Notes payable totaled $284.5 million at December 31, 1997, as follows:
Notes Payable Principal Interest Scheduled --------------- (In thousands) Outstanding Rate Maturity ----------------------------- -------------- --------- --------- Fixed Rate Mortgage Notes Payable $ 146,705 (a) 7.67% 10/2012 75,105 (b) 8.64% 12/2011 38,064 (c) 7.88% 1/2013 10,798 (d) 7.00% 5/2004 301 8.00% 1/2000 -------------- Subtotal 270,973 Variable Rate Revolving Credit Facility 13,500 (e) 7.36% 9/2000 -------------- Total Notes Payable $ 284,473 ==============
(a) The loan is collateralized by nine shopping centers. (b) The loan is collateralized by Avenel Business Park, Van Ness Square and four shopping centers - Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. (c) The loan is collateralized by 601 Pennsylvania Avenue. (d) The stated interest rate of 7.00 percent increases by 0.25 percent in June 1998. For the final five years of the term of the loan, beginning in June 1999, the interest rate is fixed at the then current 5-year Treasury Securities rate plus 2.00 percent. The loan is collateralized by The Glen shopping center. (e) The facility is a revolving credit facility totaling $60.0 million. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.375 percent to 1.625 percent (determined by certain debt service coverage and leverage tests) or upon the bank's reference rate plus 1/2 percent at the Company's option. The line may be extended one year with payment of a fee of 1/4 percent at the company's option. The interest rate in effect on December 31, 1997 was based on a 30 Day LIBOR of 5.86 percent and spread of 1.5 percent. The mortgages outstanding at December 31, 1997 have a weighted average remaining term of 13.7 years, and a weighted average interest rate of 7.90 percent. Of the $284.5 million total debt at December 31, 1997, $271.0 million was fixed rate (95.3 percent of the total notes payable) and $13.5 million was variable rate (4.7 percent of the total notes payable). The December 31, 1997 depreciated cost of properties collateralizing the mortgage notes payable totaled $192.7 million. Notes payable of $270.7 million at December 31, 1997 require monthly installments of principal and interest, with principal amortization on schedules averaging approximately 20 years. The $0.3 million note requires monthly interest and an annual principal payment of $0.1 million. The remaining notes payable totaling $13.5 million at December 31, 1997, require monthly installments of interest only. Notes payable at December 31, 1997 totaling $209.1 million are guaranteed by members of The Saul Organization. F-11 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1997, the scheduled maturities of all debt for years ended December 31, are as follows:
Debt Maturity Schedule ---------------------- (In thousands) 1998............. $ 4,774 1999............. 5,163 2000............. 19,047 2001............. 5,949 2002............. 5,607 Thereafter....... 243,933 -------- $284,473 ========
DECEMBER 31, 1996 During 1996, the Company repaid a total of $76.6 million of variable rate mortgage notes which were outstanding at December 31, 1995, with the net proceeds of a $77.0 million 15-year fixed rate mortgage note. The revolving credit facility in the amount of $100.1 million at December 31, 1995 was reduced to $44.0 million during 1996, as a result of this fixed rate financing. The mortgages outstanding at December 31, 1996 had a weighted average remaining term of 7.2 years, and a December 31, 1996 weighted average interest rate of 7.26 percent. A total of $185.0 million was variable rate (67.7 percent of the total notes payable) and $88.3 million was fixed rate (32.3 percent of the total notes payable). Notes payable of $115.0 million at December 31, 1996 required monthly installments of principal and interest, with principal amortization on schedules averaging approximately 20 years. A $10.9 million note required monthly installments of interest only through June 1997, with monthly principal and interest thereafter. The remaining notes payable totaling $147.4 million at December 31, 1996, required monthly installments of interest only. Notes payable at December 31, 1996 totaling $195.9 million were guaranteed by members of The Saul Organization. INTEREST RATE PROTECTION As of December 31, 1996, the Company held interest rate protection agreements with a total notional value of $162.8 million to limit the Company's exposure to increases in interest rates on its variable rate debt. All of the interest rate protection agreements were sold for cash proceeds of $1.465 million on October 1, 1997. The Company is exposed to interest rate risk on its line of credit balance outstanding of $13.5 million at December 31, 1997. Income earned by the operation of the interest rate protection agreements for the years ended December 31, 1997, 1996 and 1995 was $499,000, $516,000 and $1,637,000, respectively, and was reported as an offset to interest expense. F-12 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LEASE AGREEMENTS Lease income includes primarily base rent arising from noncancellable commercial leases. Base rent for the years ended December 31, 1997, 1996, and 1995 amounted to $51,779,000, $49,814,000 and $47,673,000, respectively. Future base rentals under noncancellable leases for years ended December 31, are as follows:
Future Base Rental Income ------------------------- (In thousands) 1998............. $ 51,205 1999............. 44,775 2000............. 39,507 2001............. 34,233 2002............. 28,089 Thereafter....... 200,397 -------- $398,206 ========
The majority of the leases also provide for rental increases and expense recoveries based on increases in the Consumer Price Index or increases in operating expenses, or both. These increases generally are payable in equal installments throughout the year based on estimates, with adjustments made in the succeeding year. Expense recoveries for the years ended December 31, 1997, 1996 and 1995 amounted to $9,479,000, $9,301,000 and $8,770,000, respectively. In addition, certain retail leases provide for percentage rent based on sales in excess of the minimum specified in the tenant's lease. Percentage rent amounted to $2,948,000, $2,924,000, and $2,782,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 6. LONG-TERM LEASE OBLIGATIONS Certain properties are subject to noncancellable long-term leases which apply principally to land underlying the Shopping Centers. Certain of the leases provide for periodic adjustments of the basic annual rent and require the payment of real estate taxes on the underlying land. The leases will expire between 2058 and 2068. Reflected in the accompanying financial statements is minimum ground rent expense of $152,000 for each of the years ended December 31, 1997, 1996, and 1995. The minimum future rental commitments under these ground leases are as follows:
Ground Lease Rental Commitments --------------------------------- (In thousands) Annual Total 1998-2002 Thereafter --------- ---------- Beacon Center................... $ 47 $3,512 Olney........................... 45 4,691 Southdale....................... 60 3,425 ------- ------ $ 152 $11,628 ======= =======
The Company's Flagship Center consists of two developed outparcels that are part of a larger adjacent community shopping center formerly owned by The Saul Organization and sold to an affiliate of a tenant in 1991. The Company has a 90- year ground leasehold interest which commenced in September 1991 with a minimum rent of one dollar per year. F-13 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS The Consolidated Statement of Operations for the year ended December 31, 1997 includes a charge for minority interests of $6,854,000, consisting of $2,483,000 related to The Saul Organization's share of the net income for the year and $4,371,000 related to distributions to minority interests in excess of allocated net income for the year. The charge for the year ended December 31, 1996 of $6,852,000, consists of $3,430,000 related to The Saul Organization's share of net income for the year and $3,422,000 related to distributions to minority interests in excess of allocated net income for the year. The charge for the year ended December 31, 1995 of $6,852,000 consists of $3,568,000 related to The Saul Organization's share of the net income for the year and $3,284,000 related to distributions to minority interests in excess of allocated net income for the year. 8. RELATED-PARTY TRANSACTIONS Chevy Chase Bank, F.S.B. leases space in twelve of the properties. Total rental income from Chevy Chase Bank, F.S.B. amounted to $1,181,000, $1,063,000 and $964,000, for the years ended December 31, 1997, 1996, and 1995, respectively. The Chairman and Chief Executive Officer, the President and a Vice President of the Company remain officers of The Saul Organization and devote a substantial amount of time to the management of the Company. The annual compensation for these officers is fixed by the Compensation Committee of the Board of Directors for each year. The Company shares with The Saul Organization on a prorata basis certain ancillary functions such as computer and payroll services and insurance expense based on management's estimate of usage or time incurred, as applicable. Also, The Saul Organization subleases office space to the Company. The terms of all such arrangements with The Saul Organization, including payments related thereto, are periodically reviewed by the Audit Committee of the Board of Directors. Included in general and administrative expense for the years ended December 31, 1997, 1996 and 1995, are charges totaling $1,624,000, $1,229,000 and $1,112,000, related to shared services, of which $1,436,000, $1,073,000 and $975,000, was paid during the years ended December 31, 1997, 1996 and 1995, respectively. 9. STOCK OPTION PLAN The Company has established a stock option plan for the purpose of attracting and retaining executive officers and other key personnel. The plan provides for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares are available under the plan. The plan authorizes the Compensation Committee of the Board of Directors to grant options at an exercise price which may not be less than the market value of the common stock on the date the option is granted. The Compensation Committee has granted options to purchase a total of 180,000 shares (90,000 shares from incentive stock options and 90,000 shares from nonqualified stock options) to five Company officers. The options vested 25 percent per year over four years, have an exercise price of $20 per share and a term of ten years, subject to earlier expiration upon termination of employment. A total of 170,000 of the options expire September 23, 2003 and 10,000 expire September 24, 2004. As of December 31, 1997, all 180,000 of the options are fully vested. No compensation expense has been recognized as a result of these grants. F-14 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. NON-OPERATING ITEM - SALES OF INTEREST RATE PROTECTION AGREEMENTS The Company sold a portion of its interest rate protection agreements with a notional value of $87 million in November 1996 and all of the remaining agreements with a notional value of $162.8 million on October 1, 1997. The sales resulted in the $4,392,000 and $972,000, write-off of the unamortized costs in excess of the proceeds received for the years ended December 31, 1997 and 1996, respectively. 11. EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT The consolidated statements of operations for the years ending December 31, 1997, 1996 and 1995 include $3,197,000, $587,000 and $998,000, respectively, related to the repayment of debt associated with mortgage refinancings. These amounts consist of the write-off of associated deferred financing costs. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure about fair value for all financial instruments. The carrying values of cash, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. Based on interest rates currently available to the Company, the carrying value of the variable rate credit line payable is a reasonable estimation of fair value, because the debt bears interest based on short-term interest rates. Based upon management's estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing in the amount of the total notes payable, the fair value is not materially different from its carrying value. 13. COMMITMENTS AND CONTINGENCIES Neither the Company nor the Current Portfolio Properties are subject to any material litigation, nor, to management's knowledge, is any material litigation currently threatened against the Company, other than routine litigation and administrative proceedings arising in the ordinary course of business. Management believes that these items, individually or in aggregate, will not have a material adverse impact on the Company or the Current Portfolio Properties. 14. DISTRIBUTIONS In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the "Plan"), to allow its stockholders and holders of limited partnership interests an opportunity to buy additional shares of Common Stock by reinvesting all or a portion of their dividends or distributions. The Plan provides for investing in newly issued shares of Common Stock at a 3 percent discount from market price without payment of any brokerage commission, service charges or other expenses. All expenses of the Plan will be paid for by the Company. The January 31, 1996 dividend was the initial dividend payment date under which the Company's stockholders and holders of limited partnership interests could participate in the Plan. Of the distributions paid during 1997, $0.78 per share represented ordinary dividend income and $0.78 per share represented return of capital to the shareholders. The following summarizes distributions paid during the years ending December 31, 1997 and December 31, 1996, including activity in the Plan: F-15 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Distributions to Dividend Reinvestment Plan ---------------------------- -------------------------- Common Limit Partner Shares Discounted Stockholders Unitholders Issued Share Price ------------ -------------- ------ ------------------ (In thousands) Distributions during 1997 - ----------------------------- January 31 $ 4,729 $1,713 58,728 $16.01 April 30 4,752 1,713 68,913 15.16 July 31 4,779 1,715 63,291 16.98 October 31 4,803 1,713 72,901 17.10 ------- ------ $19,063 $6,854 ======= ====== Distributions during 1996 - ----------------------------- January 31 $ 4,633 $1,713 56,050 $14.19 April 30 4,654 1,713 58,980 13.94 July 31 4,678 1,713 67,421 12.61 October 31 4,704 1,713 64,154 14.19 ------- ------ $18,669 $6,852 ======= ======
For the year ending December 31, 1995, the Company paid quarterly distributions totaling $6,346,000 ($0.39 per share) per quarter consisting of $4,633,000 and $1,713,000 related to common stockholders and limited partnership unitholders, respectively. For the year ending December 31, 1995, a total of $25,384,000 ($1.56 per share) was paid, consisting of $18,532,000 and $6,852,000 related to common stockholders and limited partnership unitholders, respectively. In December 1997, 1996 and 1995, the Board of Directors of the Company authorized a distribution of $0.39 per share payable in January 1998, 1997 and 1996, to holders of record on January 16, 1998, January 17, 1997 and January 17, 1996, respectively. As a result, $4,832,000, $4,729,000 and $4,633,000 was paid to common shareholders on January 30, 1998, January 31, 1997, and January 31, 1996 and $1,713,000 was paid to limited partnership unitholders on January 30, 1998, January 31, 1997 and January 31, 1996 ($0.39 per Operating Partnership unit), respectively. These amounts are reflected as a reduction of stockholders' equity and are included in accounts payable in the accompanying financial statements. F-16 SAUL CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. INTERIM RESULTS (UNAUDITED) The following summary represents the results of operations of the Company for the interim periods from January 1, 1996 through December 31, 1997.
(In thousands, except Three Months Ended per share amounts) ---------------------------------------------------------- 12/31/1997 09/30/1997 06/30/1997 03/31/1997 ---------- ---------- ---------- ---------- Revenues $ 17,386 $ 17,145 $ 16,624 $ 16,562 ---------- ---------- ---------- ---------- Net income before extraordinary item and minority interests (238) 4,381 4,211 4,249 Extraordinary Item: Early extinguishment of debt (2,828) -- -- (369) Minority interests (1,713) (1,715) (1,713) (1,713) ---------- ---------- ---------- ---------- Net Income $ (4,779) $ 2,666 $ 2,498 $ 2,167 ========== ========== ========== ========== Per Share Data: Net income before extraordinary item and minority interests $ (0.01) $ 0.26 $ 0.25 $ 0.26 Net Income $ (0.39) $ 0.22 $ 0.20 $ 0.18 (In thousands, except Three Months Ended per share amounts) ---------------------------------------------------------- 12/31/1996 09/30/1996 06/30/1996 03/31/1996 ---------- ---------- ---------- ---------- Revenues $ 16,439 $ 16,131 $ 15,820 $ 15,633 ---------- ---------- ---------- ---------- Net income before extraordinary item and minority interests 2,553 4,115 3,223 3,399 Extraordinary Item: Early extinguishment of debt (587) -- -- -- Minority interests (1,713) (1,713) (1,713) (1,713) ---------- ---------- ---------- ---------- Net Income $ 253 $ 2,402 $ 1,510 $ 1,686 ========== ========== ========== ========== Per Share Data: Net income before extraordinary item and minority interests $ 0.15 $ 0.25 $ 0.20 $ 0.21 Net Income $ 0.02 $ 0.20 $ 0.13 $ 0.14
F-17 SCHEDULE III SAUL CENTERS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (Dollars in Thousands) Costs Capitalized Basis at Close of Period ------------------------------------------------------------ Subsequent Buildings Initial to and Leasehold Basis Acquisition Land Improvements Interests Total -------------- --------------- -------------- -------------- --------------- -------------- SHOPPING CENTERS Ashburn Village, Ashburn, VA $ 11,431 $ 359 $ 3,738 $ 8,052 $ -- $ 11,790 Beacon Center, Alexandria, VA 1,493 10,155 -- 10,554 1,094 11,648 Belvedere, Baltimore, MD 932 442 263 1,111 -- 1,374 Boulevard, Fairfax, VA 4,883 22 3,687 1,218 -- 4,905 Clarendon, Arlington, VA 385 351 635 101 -- 736 Clarendon Station, Arlington, VA 834 16 425 425 -- 850 Crosstown, Tulsa, OK 3,454 417 604 3,267 -- 3,871 Flagship Center, Rockville, MD 160 9 169 -- -- 169 French Market, Oklahoma City, OK 5,781 796 1,118 5,459 -- 6,577 Germantown, Germantown, MD 3,576 284 2,034 1,826 -- 3,860 Giant, Baltimore, MD 998 263 422 839 -- 1,261 The Glen, Lake Ridge, VA 12,918 265 5,300 7,883 -- 13,183 Great Eastern, District Heights., MD 3,472 7,980 2,264 9,188 -- 11,452 Hampshire Langley, Langley Park, MD 3,159 1,643 1,856 2,946 -- 4,802 Leesburg Pike, Baileys Crossroads, VA 2,418 4,772 1,132 6,058 -- 7,190 Lexington Mall, Lexington, KY 4,868 5,644 2,111 8,401 -- 10,512 Lumberton Plaza, Lumberton, NJ 4,400 7,337 950 10,787 -- 11,737 North Washington, Alexandria, VA 2,034 (1,169) 544 321 -- 865 Olney, Olney, MD 1,884 872 -- 2,756 -- 2,756 Park Rd., Washington, DC 942 215 1,011 146 -- 1,157 Ravenwood, Baltimore, MD 1,245 653 703 1,195 -- 1,898 Seven Corners, Falls Church, VA 4,848 36,913 4,913 36,848 -- 41,761 Shops at Fairfax, Fairfax, VA 2,708 3,384 992 5,100 -- 6,092 Southdale, Glen Burnie, MD 3,650 14,702 -- 17,730 622 18,352 Southside Plaza, Richmond, VA 6,728 3,015 1,878 7,865 -- 9,743 Sunshine City, Atlanta, GA 2,474 1,792 703 3,563 -- 4,266 Thruway, Winston-Salem, NC 4,778 8,360 5,464 7,569 105 13,138 Village Center, Centreville, VA 16,502 538 7,851 9,189 -- 17,040 West Park, Oklahoma City, OK 1,883 507 485 1,905 -- 2,390 White Oak, Silver Spring, MD 6,277 3,364 4,787 4,854 -- 9,641 -------------- --------------- -------------- -------------- --------------- -------------- Total Shopping Centers 121,115 113,901 56,039 177,156 1,821 235,016 -------------- --------------- -------------- -------------- --------------- -------------- COMMERCIAL PROPERTIES Avenel Business Park, Gaithersburg, MD 21,459 3,573 3,093 21,939 -- 25,032 601 Pennsylvania Ave., Washington DC 5,479 43,492 5,667 43,304 -- 48,971 Van Ness Square, Washington, DC 812 25,437 831 25,418 -- 26,249 -------------- --------------- -------------- -------------- --------------- -------------- Total Commercial Properties 27,750 72,502 9,591 90,661 -- 100,252 -------------- --------------- -------------- -------------- --------------- -------------- Total $ 148,865 $ 186,403 $ 65,630 $ 267,817 $ 1,821 $ 335,268 ============== =============== ============== ============== =============== ==============
Buildings and Improvements Accumulated Related Date of Date Depreciable Depreciation Debt Construction Acquired Lives in Years --------------- -------------- --------------- -------------- --------------- SHOPPING CENTERS Ashburn Village, Ashburn, VA $ 723 $ 12,451 1994 3/94 40 Beacon Mall, Alexandria, VA 4,891 2,571 1960 & 1974 1/72 40 & 50 Belvedere, Baltimore, MD 621 2,754 1958 1/72 40 Boulevard, Fairfax, VA 113 554 1969 4/94 40 Clarendon, Arlington, VA 29 115 1949 7/73 33 Clarendon Station, Arlington, VA 20 301 1949 1/96 40 Crosstown, Tulsa, OK 1,816 -- 1974 10/75 40 Flagship Center, Rockville, MD -- 190 -- 1/72 -- French Market, Oklahoma City, OK 2,647 798 1972 3/74 50 Germantown, Germantown, MD 253 418 1990 8/93 40 Giant, Baltimore, MD 528 2,794 1959 1/72 40 The Glen, Lake Ridge, VA 730 10,798 1993 6/94 40 Great Eastern, District Heights., MD 1,811 11,976 1958 & 1960 1/72 40 Hampshire Langley, Langley Park, MD 1,449 10,968 1960 1/72 40 Leesburg Pike, Baileys Crossroads, VA 2,141 12,648 1965 2/66 40 Lexington Mall, Lexington, KY 3,974 2,751 1971 & 1974 3/74 50 Lumberton Plaza, Lumberton, NJ 4,759 8,922 1975 12/75 40 North Washington, Alexandria, VA 130 356 1952 7/73 33 Olney, Olney, MD 1,378 914 1972 11/75 40 Park Rd., Washington, DC 28 355 1950 7/73 30 Ravenwood, Baltimore, MD 513 7,071 1959 1/72 40 Seven Corners, Falls Church, VA 6,819 47,869 1956 7/73 33 Shops at Fairfax, Fairfax, VA 1,738 636 1975 6/75 50 Southdale, Glen Burnie, MD 8,548 2,894 1962 & 1987 1/72 40 Southside Plaza, Richmond, VA 4,458 10,599 1958 1/72 40 Sunshine City, Atlanta, GA 1,882 909 1970 2/76 40 Thruway, Winston-Salem, NC 3,182 27,381 1955 & 1965 5/72 40 Village Center, Centreville, VA 1,102 9,951 1990 8/93 40 West Park, Oklahoma City, OK 805 39 1974 9/75 50 White Oak, Silver Spring, MD 2,291 25,293 1958 & 1967 1/72 40 --------------- -------------- Total Shopping Centers 59,379 215,276 --------------- -------------- COMMERCIAL PROPERTIES Avenel Business Park, Gaithersburg, MD 8,810 21,324 1984, 1986 12/84, 8/85 35 & 40 & 1990 & 2/86 601 Pennsylvania Ave., Washington DC 15,424 38,065 1986 7/73 35 Van Ness Square, Washington, DC 9,002 9,808 1990 7/73 35 --------------- -------------- Total Commercial Properties 33,236 69,197 --------------- -------------- Total $ 92,615 $ 284,473 =============== ==============
F-18 SCHEDULE III SAUL CENTERS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 Depreciation and amortization related to the real estate investments reflected in the statements of operations is calculated over the estimated useful lives of the assets as follows: Base building 33 - 50 years Building components 20 years Tenant improvements The lesser of the term of the lease or the useful life of the improvements The aggregate remaining net basis of the real estate investments for federal income tax purposes was approximately $263,079,423 at December 31, 1997. Depreciation and amortization are provided on the declining balance and straight-line methods over the estimated useful lives of the assets. The changes in total real estate investments and related accumulated depreciation for each of the years in the three year period ended December 31, 1997 are summarized as follows.
(In thousands) 1997 1996 1995 - --------------------------------------------------- ----------------- ----------------- ------------------ Total real estate investments: Balance, beginning of year $ 329,664 $ 321,662 $ 300,404 Improvements 17,785 15,177 21,762 Retirements 12,181 7,175 504 ----------------- ----------------- ------------------ Balance, end of year $ 335,268 $ 329,664 $ 321,662 ================= ================= ================== Total accumulated depreciation: Balance, beginning of year $ 94,965 $ 92,237 $ 83,044 Depreciation expense 9,797 10,860 9,583 Retirements 12,147 8,132 390 ----------------- ----------------- ------------------ Balance, end of year $ 92,615 $ 94,965 $ 92,237 ================= ================= ================== - --------------------------------------------------------------------------------------------------------------------
F-19 EX-10.B 2 AGREEMENT OF LIMITED PARTNERSHIP SECOND AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP THIS SECOND AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP (this "Second Amendment"), dated July 21, 1994, is entered into by and among the undersigned parties. W I T N E S S E T H: WHEREAS, Saul Subsidiary I Limited Partnership (the "Partnership") was formed as a Maryland limited partnership pursuant to that certain Certificate of Limited Partnership dated June 16, 1993 and filed on June 16, 1993 among the partnership records of the Maryland State Department of Assessments and Taxation, and that certain Agreement of Limited Partnership dated June 16, 1993 (the "Original Agreement"); WHEREAS, the Original Agreement was amended and restated in its entirety by that certain First Amended and Restated Agreement of Limited Partnership of the Partnership dated as of August 26, 1993, as amended by that certain First Amendment date August 26, 1993 (as amended, the "Agreement"); WHEREAS, the undersigned parties desire to amend the Agreement to reflect the transfer of the one percent (1%) general partnership interest in the Partnership of Saul Centers, Inc. ("SCI") to Saul QRS, Inc. ("QRS"), a wholly- owned subsidiary corporation of SCI. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows: 1. SCI hereby transfers its entire one percent (1%) general partnership interest in the Partnership to QRS, a corporation which is a wholly-owned subsidiary of SCI, pursuant to the provisions of Section 11.1.B of the Agreement. QRS hereby accepts and agrees to be bound by all of the terms and conditions of the Agreement. 2. SCI hereby withdraws as sole general partner of the Partnership, and QRS is hereby admitted as a substituted general partner in the place and stead of SCI pursuant to the provisions of Section 12.1 and Section 14.1.B (2) of the Agreement. 3. SCI and QRS hereby agree to file an amended certificate with the Maryland State Department of Assessments and Taxation (and any required amendments to the foreign 1 qualifications of the Partnership in each of the jurisdictions in which the Partnership is doing business) to reflect the withdrawal of SCI as the sole general partner of the Partnership and the admission of QRS as a substituted general partner. 4. In order to reflect the aforementioned transfer of SCI's general partnership interest to QRS, Exhibit A to the Agreement is hereby deleted in its entirety and replaced with the Exhibit A attached to this Second Amendment. 5. The definition of "Articles of Incorporation" contained in Article I of the Agreement is hereby deleted in its entirety. 6. The definition of "Independent Directors of the General Partner" contained in Article I of the Agreement is hereby deleted in its entirety and replaced with the following: "Independent Director(s) of the General Partner" means the independent ------------------------------------------------ director(s) of the General Partner, as defined in the Articles of Incorporation of the General Partner, as in effect from time to time. 7. All references to the "General Partner" in the definition of "Registration Statement" contained in Article I of the Agreement shall hereinafter be references to "Saul Centers, Inc." 8. All references to the "General Partner" in Section 3.1 of the Agreement shall hereinafter be references to "Saul Centers, Inc." The reference to "its Articles of Incorporation" in Section 3.1 of the Agreement shall hereinafter be a reference to "the articles of incorporation of Saul Centers, Inc." 9. Section 3.2 of the Agreement is hereby deleted in its entirety, and replaced with the following: Section 3.2. Powers ------ Subject to all of the terms, covenants, conditions and limitations contained in this Agreement and any other agreement entered into by the Partnership, the Partnership shall have full power and authority to do any and all acts and thins necessary, appropriate, proper, advisable, desirable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, including, without limitation, full power and authority to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness, whether or not secured by mortgage, deed of trust, pledge or other lien, and acquire and 2 develop real property; provided, however, that the Partnership shall not ----------------- take, or refrain from taking, any action which, in the judgement of General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of Saul Centers, Inc. to achieve or maintain qualification as a REIT, (ii) could subject Saul Centers, Inc. 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 of Saul Centers, Inc. or its securities, unless such action (or inaction) shall have been specifically consented to by Saul Centers, Inc. in writing. 10. The last sentence of Section 5.2 of the Agreement is hereby deleted in its entirety. 11. All references to the "General Partner" in Section 7.1.A(3) of the Agreement shall hereinafter be references to "Saul Centers, Inc." 12. Section 7.1.F of the Agreement is hereby deleted in its entirety and replaced with the following: F. The Limited Partners acknowledge that the taking of certain actions hereunder by the General Partner may require the consent of the Independent Director(s) of the General Partner. 13. Section 7.5 of the Agreement is hereby deleted in its entirety and replaced with the following: Section 7.5 (Intentionally Deleted) 14. Section 7.9.D of the Agreement is hereby deleted in its entirety and replaced with the following: D. Notwithstanding any other provision of this Agreement or the Act (except for any limitations set forth in Section 3.1 of the Agreement), any action of the General Partner of 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 to (i) protect the ability of Saul Centers, Inc. to achieve or maintain qualification as a REIT or (ii) avoid Saul Center, Inc.'s 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, to the extent such approval may be necessary. 3 15. Except as the context may otherwise require, any terms used in this Second Amendment which are defined in the Agreement shall have the same meaning for purposes of this Second Amendment as in the Agreement. 16. Except as herein amended, the Agreement is hereby ratified, confirmed and reaffirmed for all purposes and in all respects. 17. This Second Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Second Amendment immediately upon affixing its signature hereto. IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of the date first written above. WITHDRAWING GENERAL PARTNER: --------------------------- SAUL CENTERS, INC. a Maryland Corporation By: ___________________________________ Name: Philip D. Caraci Title: President NEW GENERAL PARTNER: ------------------- SAUL QRS, INC. a Maryland Corporation By: ___________________________________ Name: Philip D. Caraci Title: President 4 EXHIBIT A PARTNERS, CONSTRIBUTIONS AND PARTNERSHIP INTERESTS
Amount of Name and Address Cash/Net Partnership of Partner Contribution Asset Value Interest ---------------- ------------ ----------- ----------- General Partner: - --------------- Saul Centers, Inc. Cash $ 1,019,871 1% 8401 Connecticut Avenue Chevy Chase, Maryland 20815 Limited Partner: - --------------- Saul Holdings Limited Cash $ 19,680,129 99% Partnership 8401 Connecticut Avenue The following $103,230,313 Chevy Chase, Maryland properties: 20815 Beacon Mall Hampshire Langley Lexington Mall Southdale Thruway White Oak Total ____________ ____________ $123,930,313 100% ____________ ____________
5 EXHIBIT A PARTNERS, CONSTRIBUTIONS AND PARTNERSHIP INTERESTS
Amount of Name and Address Cash/Net Partnership of Partner Contribution Asset Value Interest ---------------- ------------ ----------- ----------- General Partner: - --------------- Saul QRS, Inc. Cash $ 1,019,871 1% 8401 Connecticut Avenue Chevy Chase, Maryland 20815 Limited Partner: - --------------- Saul Holdings Limited Cash $ 19,680,129 99% Partnership 8401 Connecticut Avenue The following $103,230,313 Chevy Chase, Maryland properties: 20815 Beacon Mall Hampshire Langley Lexington Mall Southdale Thruway White Oak Total ____________ ____________ $123,930,313 100% ____________ ____________
6 THIRD AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP THIS THIRD AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP (this "Third Amendment"), dated as of July 21, 1994, is entered into by and among the undersigned parties. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Saul Subsidiary I Limited Partnership (the "Partnership") was formed as a Maryland limited partnership pursuant to that certain Certificate of Limited Partnership dated June 16,1993 and filed on June 16, 1993 among the partnership records of the Maryland State Department of Assessments and Taxation, and that certain Agreement of Limited Partnership dated June 16, 1993 (the "Original Agreement"); WHEREAS, the Original Agreement was amended and restated in its entirely by that certain First Amended and Restated Agreement of Limited Partnership of the Partnership dated as of August 26, 1993, as amended by that certain First Amendment dated August 26, 1993 and that certain Second Amendment dated July 21, 1994 (as amended, the "Agreement"); WHEREAS, the undersigned parties, constituting all of the Partners of the Partnership, desire to amend the Agreement to reflect (1) an amended purpose and separateness covenants for the Partnership, (2) the contribution of additional assets to the Partnership by Saul Holdings Limited Partnership (the "Operating Partnership"), (3) the contribution of a promissory note to the Partnership by Saul QRS, Inc. ("QRS"), and (4) the admission of Saul Subsidiary II Limited Partnership ("Sub II"), a Maryland limited partnership, as an additional Limited Partner of the Partnership in exchange for the contribution of certain real property to the Partnership, and (5) a special distribution to the Operating Partnership. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows: 1. ARTICLE I of the Agreement is hereby amended by inserting the following new definitions: "Lender" is defined in Section 3.1.B hereof. "Mortgage" is defined in Section 3.1.B hereof. "Properties" is defined in Section 3.1.A hereof. 2. Section 3.1 of the Agreement is hereby deleted in its entirety and replaced with the following: Section 3.1 Purpose and Business -------------------- The sole purpose and nature of the business to be conducted by the Partnership is to: A. acquire, own, hold, maintain, manage, operate, improve, develop, finance, pledge, encumber, mortgage, sell, exchange, lease, dispose of and otherwise deal with the following seventeen (17) real properties (together with all personal property used in connection with the operation of such real properties, the "Properties"): 1. Beacon Mall 2. Lexington Mall 3. Thruway 4. Hampshire-Langley 5. Southdale 6. White Oak 7. Belvedere 8. French Market 9. Giant 10. Great Eastern 11. North Washington 12. Olney 13. Ravenwood 14. Southside Plaza 15. Sunshine City 16. West Park 17. Park Road Center (the properties noted at 1 through 3 above are more fully described in those certain Conveyance Agreements between Dearborn Corporation and the Operating Partnership dated on or about the date of the Agreement; the properties noted at 4 through 6 above are more fully described in those certain Conveyance Agreements between Dearborn Corporation and the Partnership dated on or about the date of the Agreement; the properties noted at 7 through 16 above are more fully described in Attachment 2 to the Third Amendment; and the property noted at 17 above is more fully described in Attachment 3 to the Third Amendment), together with such other activities as may be necessary or advisable in connection with the ownership of the Properties; provided, however, that the Partnership shall --------- ------- not take -2- or fail to take any action if such action or failure would cause Saul Centers, Inc. to fail to qualify as a REIT, unless Saul Centers, Inc. voluntarily terminates its REIT status pursuant to its articles of incorporation; B. borrow funds from Value Line Mortgage Corporation or an affiliate or designee thereof (the "Lender") in the approximate principal amount of One Hundred Twenty-Eight Million Dollars ($128,000,000), pursuant to a Deed to Secure Debt, Deed of Trust, Mortgage, Security Agreement and Assignment of Rents; Modification and Consolidation Agreement and related documents (the "Mortgage") to be entered into between the Partnership and the Lender, for the purpose of operating the Properties, and incurring other indebtedness to the extent not prohibited by the Mortgage; and C. give security for the loan made pursuant to the Mortgage or for any other indebtedness to the extent not prohibited by the Mortgage. The Partnership shall not engage in any business unrelated to the Properties and shall not own any assets other than those related to the Properties or otherwise in furtherance of the purposes of the Partnership as set forth above in this Section 3.1. The Partnership shall not incur any indebtedness other than the indebtedness related to the Properties and otherwise provided herein. 3. Section 7.1.A(9) of the Agreement is hereby deleted in its entirety and replaced with the following: (9) [Intentionally Deleted] 4. Section 7.1.A (10) of the Agreement is hereby deleted in its entirely and replaced with the following: (10) invest assets of the Partnership on a temporary basis in commercial paper, government securities, checking or savings accounts, money market funds, or any other highly liquid investments deemed appropriate by the General Partner; 5. Section 7.1.A(15) of the Agreement is hereby deleted in its entirety and replaced with the following: (15) [Intentionally Deleted] -3- 6. Section 7.6.A of the Agreement is hereby deleted in its entirety and replaced with the following: A. [Intentionally Deleted] 7. The following new Section 7.6.F is hereby added at the end of Section 7.6 of the Agreement: F. The Partnership may hire Saul Subsidiary II Limited Partnership to provide management services for Park Road Center, a property owned by the Partnership and located in Washington, D.C. In such event, the Partnership shall pay to Saul subsidiary II Limited Partnership in exchange for the performance of such property management services a monthly fee in an amount to be determined by the mutual agreement of the Partnership and Saul Subsidiary II Limited Partnership. Any such fee amount shall be fair and reasonable and no less favorable to the Partnership than could be obtained from an unaffiliated third party. 8. The following new Article XVII is added to the Agreement: ARTICLE XVIII - SEPARATENESS COVENANTS A. The Partnership shall (i) observe all partnership formalities, including the maintenance of current partnership books and records, (ii) maintain its own separate and distinct books of account and partnership records, (iii) cause its financial statements to be prepared in a manner that indicates the separate existence of the Partnership and its assets and liabilities, (iv) pay all its liabilities out of its own funds, (v) identify itself as a separate and distinct entity in its financial statements and legal documents, (vi) execute its legal documents under its own name, (vii) independently make decision with respect to its business and daily operations, (viii) maintain an arm's length relationship with its Affiliates, (ix) allocate fairly and reasonably any overhead for shared office space, and (x) use separate stationery, invoices and checks. B. The Partnership shall not (i) commingle its assets with those of, or pledge its assets for the benefit of, any other person, (ii) assume or guarantee, or hold out its credit as being available to satisfy, the liabilities of any other person, (iii) purchase obligations or securities of, or make loans or advances -4- to, an Affiliate or (iv) incur any indebtedness except in accordance with the Mortgage. 9. QRS hereby agrees to assign to the Partnership a promissory note from Saul Centers, Inc. in the amount of Two Hundred Sixty-One Thousand Four Hundred Eighty-Five Dollars ($261,485), a copy of which is attached as Attachment 1 to this Third Amendment. 10. The Operating Partnership agrees to contribute to the Partnership certain assets more fully described in Attachment 2 to this Third Amendment, as encumbered by certain indebtedness described in said Attachment 2. 11. Each of the undersigned parties hereby consents to a distribution by the Partnership of Twenty-Five Million Dollars ($25,000,000) to the Operating Partnership. 12. In exchange for its admission as a Two and 47/100 percent (2.47%) limited partner in the Partnership, Sub II hereby agrees to contribute to the Partnership certain real property more fully described in Attachment 3 to this Third Amendment. Sub II hereby accepts and agrees to be bound by all of the terms and conditions of the Agreement. 13. Pursuant to the terms of Section 4.2A of the Agreement, each of the undersigned parties hereby consents to the additional capital contributions to the Partnership of QRS, the Operating Partnership and Sub 14. In order to reflect the aforementioned capital contributions to the Partnership by QRS, the Operating Partnership and Sub II, Exhibit A to the Agreement is hereby deleted in its entirety and replaced with the Exhibit A attached to this Third Amendment. 15. Except as the context may otherwise require, any terms used in this Third Amendment which are defined in the Agreement shall have the same meaning for purposes of this Third Amendment as in the Agreement. 16. Except as herein amended, the Agreement is hereby ratified, confirm and reaffirmed for all purposes and in all respects. 17. This Third Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each -5- party shall become bound by this Third Amendment immediately upon affixing its signature hereto. IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment as of the date first written above. GENERAL PARTNER: --------------- SAUL QRS, INC., a Maryland corporation By: /s/ Philip D. Caraci ----------------------------------------- Name: Philip D. Caraci ------------------------------------ Title: President ---------------------------------- EXISTING LIMITED PARTNER: ------------------------- SAUL HOLDINGS LIMITED PARTNERSHIP a Maryland limited partnership By: Saul Centers, Inc., a Maryland corporation, its sole general partner By: /s/ Philip D. Caraci ----------------------------------------- Name: Philip D. Caraci ------------------------------------ Title: President ---------------------------------- NEW LIMITED PARTNER: -------------------- SAUL SUBSIDIARY II PARTNERSHIP, a Maryland limited partnership By: Saul Centers, Inc., a Maryland corporation, its sole general partner By: /s/ Philip D. Caraci ----------------------------------------- Name: Philip D. Caraci ------------------------------------ Title: President ---------------------------------- -6-
Name and Address Amount of of Partner Cash/Net Partnership Limited Partner: Contribution Asset Value Interest - ----------------------- ------------------------- ------------- ----------- Saul Holdings Limited Cash Partnership $ 19,680,129 96.53% 8401 Connecticut Ave. The following properties: Chevy Chase, Maryland 20815 Beacon Mall $103,230,313 Hampshire Langley Lexington Mall Southdale Thruway White Oak Belvedere $ 41,162,692 French Market Giant Great Eastern North Washington Olney Ravenwood Southside Plaza Sunshine City West Park $83,000,000 of the $154,780,000 of interest rate protection given by The First National Bank of Chicago pursuant to that certain Rate Cap. No. 93230.1.1000.S.C..3L dated August 18, 1993
ATTACHMENT 1 PROMISSORY NOTE --------------- August 1, 1994 Chevy Chase, Maryland FOR VALUE RECEIVED, SAUL CENTERS, INC., a Maryland corporation (hereinafter called "Borrower"), hereby promises to pay to order of SAUL QRS, INC, a Maryland corporation, at its place of business at 8401 Connecticut Avenue, Chevy Chase, Maryland, 20815, or at such other place as the holder hereof (the "Noteholder") may in writing designate, in lawful money of the United States of America, the principal sum of One Hundred Ninety-Three Thousand Five Hundred Sixty-Three Dollars ($193,563), with interest from the date hereof on the principal balance outstanding at a rate per annum equal to the standard rate of interest that is published in the "Money Rates" section of The Wall Street Journal as the "Prime ----------------------- Rate," as in effect from time to time. Interest only shall be payable monthly in arrears on the first day of each month beginning September 1, 1994. If not sooner paid, the entire principal balance and all interest accrued thereon shall be payable on August 1, 2009. All payments shall be made without offset or deduction of any kind or nature. The principal sum of this Note may be prepaid in full or in part at any time without penalty. Notwithstanding anything to the contrary contained in this Note, Borrower shall not be required to make any payment under this Note to the extent that the making of such payment would (1) adversely affect the ability of Borrower to maintain qualifications as a real estate investment trust ("REIT") as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), unless Borrower voluntarily terminates its REIT status, or (2) subject Borrower to any additional taxes under Section 857 or 4981 of the Code. The due date of any such payment shall be delayed until such time as the adverse tax consequences noted in the preceding sentence will not occur with respect to Borrower. Interest at the rate specified above in this Note shall accrue on any such delayed payment. This Note shall be governed by the laws of the State of Maryland. WITNESS the following signature. SAUL CENTERS, INC., a Maryland corporation By: ---------------------------------------- Title: ------------------------------------- PAY TO THE ORDER OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP, A MARYLAND LIMITED PARTNERSHIP, WITHOUT RECOURSE. SAUL QRS, INC. a Maryland corporation By: ---------------------------------- Title: ------------------------------- ATTACHMENT 2 Saul Holdings Limited Partnership will contribute the following assets to the Partnership, and the Partnership will assume the following indebtedness from Saul Holdings Limited Partnership: Gross Asset Value of Property/Amount Description of Property/Indebtedness of Indebtedness ------------------------------------ ------------------ 1. Certain land and the improvements located thereon know as $3,800,000 Belvedere, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 2. Certain land and the improvements located thereon known as $4,400,000 French Market, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 3. Certain land and the improvements located thereon known as $4,000,000 Giant, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 4. Certain land and the improvements located thereon known as $9,100,000 Great Eastern, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 5. Certain land and the improvements located thereon known as $3,160,000 North Washington, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 6. Certain land and the improvements located thereon known as $8,500,000 Olney, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 2-1 7. Certain land and the improvements located thereon known as $8,500,000 Ravenwood, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 8. Certain land and the improvements located thereon known as $10,600,000 Ravenwood, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 9. Certain land and the improvements located thereon known as $6,800,000 Sunshine City, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 10. Certain land and the improvements located thereon known as $970,000 West Park, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 11. $83,000,000 of the $154,780,000 of interest rate protection $5,337,000 given to Saul Holdings Limited Partnership by The First National Bank of Chicago pursuant to that certain Rate Cap. No. 93230.1.1000.S.C.3L dated August 18, 1993. 12. A portion of the indebtedness owed to Windy City ($24,004,308) Holdings, Inc. evidenced by that certain Agreement of Modification, Restatement and Consolidation of Promissory Notes dated as of August 26, 1993, executed by Saul Holdings Limited Partnership in the face amount of $43,034,557.19, which encumbers Belvedere, Giant, Great Eastern, Olney Ravenwood and Southside Plaza. -------------- Total value of properties contributed, net of assumed indebtedness $41,162,692 2-2 ATTACHMENT 3 Saul Subsidiary II Limited Partnership will contribute the following real property to the Partnership: Gross Asset Value Description of Property of Property ----------------------- ------------------ 1. Certain land and the improvements located thereon known as $3,000,000 Park Road Center, as more fully described in the attached legal description, together with all personal property located at and used in connection with the operation of such real property. 3-1 EXHIBIT A PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
Name and Address Amount of of Partner Cash/Net Partnership General Partner: Contribution Asset Value Interest - ---------------- ------------ ----------- -------- Saul QRS, Inc. Cash $1,019,871 8401 Connecticut Ave. 1% Chevy Chase, Maryland Promissory Note $ 193,563 20815
Name and Address Amount of of Partner Cash/Net Partnership General Partner: Contribution Asset Value Interest - ---------------- ------------ ------------- ---------- Saul Subsidiary II Park Road Center $ 3,000,000 2.47% Limited Partnership 8401 Connecticut Ave. Chevy Chase, Maryland ____________ ----- 20815 Total $168,286,568 100% ============ =====
EXHIBIT 10(b) FOURTH AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP THIS FOURTH AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP (this "Fourth Amendment"), dated as of September 30, 1997, is entered into by and among the undersigned parties. Preliminary Statement Saul Subsidiary I Limited Partnership (the "Partnership") was formed as a Maryland limited partnership pursuant to that certain Certificate of Limited Partnership dated June 16, 1993 and filed on June 16, 1993 among the partnership records of the Maryland State Department of Assessments and Taxation, and that certain Agreement of Limited Partnership dated June 16, 1993 (the "Original Agreement"). The Original Agreement was amended and restated in its entirety by that certain First Amended and Restated Agreement of Limited Partnership of the Partnership dated as of August 26, 1993, as amended by that certain First Amendment dated August 26, 1993, that certain Second Amendment dated July 21, 1994, and that certain Third Amendment dated as of July 21, 1994 (as amended, the "Agreement"). The undersigned parties, constituting all of the Partners of the Partnership, desire to amend the Agreement to resect: (i) the withdrawal of Saul Subsidiary II Limited Partnership ("Sub II") as a Limited Partner and the distribution of certain assets to Sub [I in redemption of its Partnership Interest; (ii) an amended purpose and separateness covenants for the Partnership; (iii) the contribution of additional assets to the Partnership by the Operating Partnership; and (iv) the distribution of certain assets to the Operating Partnership and the General Partner by the Partnership, as further provided herein. Accordingly, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows: 21 1. Amendment of Article I. Article I of the Agreement is hereby ---------------------- amended by (i) deleting the definition of "Mortgage" contained therein, and (ii) inserting the following new definitions: "Loan" is defined in Section 3.1.B hereof "Loan Agreement" is defined in Section 3.1.B hereof. 2. Amendment of Section 3.1. Section 3.1 of the Agreement is hereby ------------------------ deleted in its entirety and replaced with the following: Section 3.1. Purpose and Business -------------------- The sole purpose and nature of the business to be conducted by the Partnership is to: A. acquire, own, hold, maintain, manage, operate, improve, develop, finance, pledge, encumber, mortgage, sell, exchange, lease, dispose of and otherwise deal with the following nine (9) real properties (together with all personal property used in connection with the operation of such real properties, the "Properties"): 1. Thruway 2. Hampshire Langley 3. White Oak 4. Belvedere 5. Giant 6. Great Eastern 7. Ravenwood 8. Southside Plaza 9. Seven Corners (the property noted at 1 above is more fully described in those certain Conveyance Agreements between Dearborn Corporation and the Operating Partnership dated on or about the date of the Agreement; the properties noted at 2 and 3 above are more fully described in-those certain Conveyance Agreements between Dearborn Corporation and the Partnership dated on or about the date of the Agreement; the properties noted at 4 through 8 above are more fully described in Attachment 2 to the Third Amendment; the property noted at 9 above is more fully described in Attachment 1 to this Fourth Amendment), together with such other activities as may be necessary or advisable in connection with the ownership of the Properties; provided, however, that the Partnership shall not take or fail to take any action if such action or failure would cause Saul Centers, Inc. to fail to qualify as a REIT, unless Saul Centers, Inc. voluntarily terminates its REIT status pursuant to its articles of incorporation; 22 B. borrow funds from Nomura Asset Capital Corporation or an affiliate or designee thereof (the "Lender") in the approximate principal amount of One Hundred Forty-Seven Million Dollars ($147,000,000) (the "Loan"), pursuant to that certain Loan Agreement dated on or about the date hereof (the "Loan Agreement') to be entered into between the Partnership and the Lender, for the purpose of operating the Properties, and incurring other indebtedness to the extent not prohibited by the Loan Agreement; and C. give security for the Loan or for any other indebtedness to the extent not prohibited by the Loan Agreement. From and after the date on which the obligations of the Partnership under the Loan are created and become outstanding, and continuing until such time as the Loan has been paid in full and is no longer outstanding, the Partnership shall not engage in any business unrelated to the Properties and shall not own any assets other than those related to the Properties or otherwise in furtherance of the purposes of the Partnership as set forth above in this Section 3.1. The Partnership shall not incur any indebtedness other than the indebtedness related to the Properties and otherwise provided herein. 3. Amendment of Section 7.6.F. Section 7.6.F of the Agreement is hereby -------------------------- deleted in its entirety and replaced with the following: F. [Intentionally Deleted]. 4. Amendment of Article XVIII. Article XVIII of the Agreement is hereby -------------------------- deleted in its entirety and replaced by the following: ARTICLE XVIII - SEPARATENESS COVENANTS Notwithstanding any other provisions of this Agreement, from and after the date on which the obligations of the Partnership under the Loan are created and become outstanding, and continuing until such time as the Loan has been paid in full and is no longer outstanding, the General Partner and the Partnership shall take all actions necessary to cause the Partnership and General Partner to comply with, and will refrain from taking any actions in violation of, the defined term "Special Purpose Bankruptcy Remote Entity," as such term is defined in section 5.15 of the Loan Agreement. Any substitute General Partner permitted under this agreement shall be required to comply with this Article XVIII. 5. Withdrawal of Sub II. Sub II hereby withdraws as a Limited Partner -------------------- and Sub II's Partnership Interest is hereby redeemed in exchange for a cash distribution in the amount of $981,875 (to be funded by the Operating Partnership on behalf of the Partnership, as set forth in paragraph 6(iii) hereof) and an in-kind distribution of that certain property known as Park Road 23 Center, as more fully described in the Third Amendment. Each of the undersigned parties hereby acknowledges and agrees that the value of Park Road Center is $3,516,000. 6. Contribution of Assets by the Operating Partnership. The Operating --------------------------------------------------- Partnership hereby agrees to contribute to the Partnership the following assets: (i) cash in the amount of $ 15,000,000; (ii) its agreement to convert the account payable by the Partnership to the Operating Partnership in the amount of $624,988 to capital; (iii) its agreement to fund on behalf of the Partnership the $981,875 cash distribution to be made to Sub II pursuant to paragraph 5 hereof; (iv) its agreement to fund on behalf of the Partnership the $424,727 cash distribution to be made to the General Partner pursuant to paragraph 8(ii) hereof; and (v) that certain property known as Seven Corners, as more fully described in Attachment 1 to this Fourth Amendment, as encumbered by certain indebtedness described in said Attachment 1 (which indebtedness shall be immediately paid in full by the Partnership upon such contribution of the Seven Corners property to the Partnership). Each of the undersigned parties hereby acknowledges and agrees that the value of Seven Corners is $32,497,000 (gross fair market value of $63,284,000, reduced by assumed indebtedness of $30,787,000). 7. Distribution of Assets to the Operating Partnership. Each of the --------------------------------------------------- undersigned parties hereby consents to a distribution by the Partnership to the Operating Partnership of the following real properties, as each is more fully described in the Third Amendment: Beacon Mall; Lexington Mall; Southdale; French Market; North Washington; Olney; Sunshine City; and West Park. Each of the undersigned parties hereby acknowledges and agrees that the aggregate value of the foregoing real properties is $111,369,000. 8. Distribution of Assets to the General Partner. Each of the --------------------------------------------- undersigned parties hereby consents to a distribution by the Partnership to the General Partner of the following assets: (i) a promissory note of Saul Centers, Inc. (a copy of which was attached as Attachment I to the Third Amendment) having an outstanding balance of principal and accrued interest of $245,336; and (ii) cash in the amount of $424,747 (to be funded by the Operating Partnership on behalf of the Partnership, as set forth in paragraph 6(iv) hereof) 9. Amendment of Exhibit A. In order to reflect the foregoing ---------------------- distributions, Exhibit A to the Agreement is hereby deleted in its entirety and replaced with the Exhibit A attached to this Fourth Amendment. 10. Pro Rata Distributions of Assets to the Partners. Each of the ------------------------------------------------ undersigned parties hereby consents to the following distributions by the Partnership to the Partners, to be made on a pro rata basis, in proportion to their respective Partnership Interests of the Partners as set forth on Exhibit A attached to this Fourth Amendment (i.e., ninety-nine percent (99%) to the Operating Partnership and one percent (1%) to the General Partner): (i) a receivable from the Operating Partnership in the amount of $57,600,000 (which will be distributed $57,024,000 to the Operating Partnership and $576,000 to the General Partner); and (ii) a receivable from Saul Centers, Inc. in the amount of $1,019,871 (which will be distributed $1,009,672 to the Operating Partnership and $ 10,199 to the General Partner). 24 11. Defined Terms. Except as the context may otherwise require, any ------------- terms used in this Fourth Amendment which are defined in the Agreement shall have the same meaning for purposes of this Fourth Amendment as in the Agreement. 12. Headings. All headings in this Fourth Amendment are for convenience -------- of reference only and are not intended to qualify the meaning of any of the provisions hereof 13. Ratification of Agreement. Except as herein amended, the Agreement ------------------------- is hereby ratified, confirmed and reaffirmed for all purposes and in all respects. 14. Counterparts. This Fourth Amendment may be executed in counterparts, ------------ all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Fourth Amendment immediately upon affixing its signature hereto. /signatures are on the following page/ 25 IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as of the date first above written. GENERAL PARTNER: SAUL QRS, INC., a Maryland corporation Name: Scott V Schneider Title: Vice President LIMITED PARTNER: SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership By: Saul Centers, Inc., a Maryland corporation, its sole general partner Name: Scott V. Schneider Title: Vice President WITHDRAWING LIMITED PARTNER: SAUL SUBSIDIARY II LIMITED PARTNERSHIP, a Maryland limited partnership By: Saul Centers, Inc., a Maryland corporation, its sole general partner Name: Scott V Schneider Title: Vice President 26 EXHIBIT A PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
General Partner: Amount of Name and Address Cash/Net Partnership of Partner Contribution Asset Value Interest - -------------------------------------------------------------------------------------------------------------- Saul QRS, Inc. Cash $ 1,019,871 1% 8401 Connecticut Ave. Chevy Chase, Maryland 20815 Promissory Note $ 193,563 Limited Partner: Saul Holdings Limited Partnership Cash $ 19,680,129 99% 8401 Connecticut Ave. Chevy Chase, Maryland 20815 The following properties - Beacon Mall $103,230,313 Hampshire Langley Lexington Mall Southdale Thruway White Oak Belvedere $ 41,162,692 French Market Giant Great Eastern North Washington Olney Ravenwood Southside Plaza Sunshine City West Park $83,000,000 of the $154,780,000 $ 5,337,000 of interest rate protection given by The First National Bank of Chicago pursuant to that certain Rate Cap No. 93230.1.1000.S.C.3L dated August 18, 1993
A-1
Amount of Name and Address Cash/Net Partnership of Partner Contribution Asset Value Interest - -------------------------------------------------------------------------------------------------------------- Cash $ 15,000,000 Agreement to fund cash distributions $ 981,875 to Saul Subsidiary II Limited Partnership Agreement to fund cash distribution $ 424,747 to Saul QRS, Inc. Conversion of account payable by the $ 624,988 Partnership to Saul Holdings Limited Partnership into a capital contribution Seven Corners $ 32,497,000
A-2 ATTACHMENT 1 Saul Holdings Limited Partnership is contributing the following real property to the Partnership, and in connection therewith the Partnership will assume the following indebtedness from Saul Holdings Limited Partnership: Description of Property/Indebtedness Gross Asset Value of Property or Amount of Indebtedness Certain land and the improvements $ 63,284,000 located thereon known as Seven Corners, as more fully described in the attached legal description, together with all personal properly located at and used in connection with the operation of such real property. That certain indebtedness of Saul Holdings (30,787,000) Limited Partnership in the original principal amount of $100,065,000 owed to The First National Bank of Chicago and certain other lenders (collectively, the "First Chicago Lenders"), evidenced by those certain documents and instruments entered into between Saul Holdings Limited Partnership and the First Chicago Lenders on or about November 2, 1995, as such documents may have been amended from time to time. Total value of property contributed, net of assumed indebtedness $ 32,497,000 1 - 1 EX-10.P 3 LOAN AGREEMENT - -------------------------------------------------------------------------------- LOAN AGREEMENT Dated as of October 1, 1997 Between SAUL SUBSIDIARY I LIMITED PARTNERSHIP, as Borrower AND NOMURA ASSET CAPITAL CORPORATION, as Lender - --------------------------------------------------------------------------------
TABLE OF CONTENTS ----------------- Page -- I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION.............. 1 1.1 Specific Definitions................................. 1 1.2 Index of Other Definitions........................... 8 1.3 Principles of Construction........................... 10 II. GENERAL.............................................. 10 2.1 The Loan............................................. 10 2.2 Interest; Monthly Payments........................... 10 2.2.1 Generally 10 2.2.2 Accrued Interest 11 2.2.3 Property Cash Flow Allocation........................ 11 2.2.4 Default Rate 11 2.3 Loan Repayment and Defeasance........................ 11 2.3.1 Repayment 11 2.3.2 Mandatory Prepayments................................ 12 2.3.3 Voluntary Defeasance of the Note..................... 12 2.4 Release of Property.................................. 14 2.4.1 Release of All of the Properties..................... 14 2.4.2 Release of Individual Properties..................... 14 2.4.3 Release on Payment in Full........................... 15 2.4.4 Release of Portion of Seven Corners Property......... 15 2.5 Payments and Computations............................ 16 2.5.1 Making of Payments................................... 16 2.5.2 Computations 16 2.5.3 Late Payment Charge.................................. 16 III. CASH MANAGEMENT; ESCROWS AND RESERVES................ 16 3.1 Cash Management Arrangements......................... 17 3.2 Required Repairs; Required Repair Funds.............. 17 3.2.1 Required Repairs: Deposits........................... 17 3.2.2 Release of Required Repair Funds..................... 17 3.3 Tax and Insurance Escrow Fund........................ 18 3.3.1 Tax and Insurance Escrow Fund........................ 18 3.3.2 Payment of Insurance Premiums by Borrower............ 18 3.4 Capital Reserve Fund................................. 19 3.4.1 Capital Reserve Fund................................. 19 3.4.2 Payment of Capital Expenses.......................... 19 3.5 Rollover Reserve Fund................................ 19 3.5.1 Rollover Reserve Fund................................ 19 3.5.2 Payment of Leasing Expenses.......................... 20 3.6 Payment of Approved Operating Expenses............... 20 3.7 Security Deposits.................................... 20
i Page -- 3.8 Grant of Security Interest; Application of Funds..... 21 3.9 Security in Lieu of Deposits......................... 21 IV. REPRESENTATIONS AND WARRANTIES....................... 22 4.1 Borrower Representations............................. 22 4.1.1 Organization; Special Purpose........................ 22 4.1.2 Proceedings; Enforceability.......................... 22 4.1.3 No Conflicts 23 4.1.4 Litigation 23 4.1.5 Agreements 23 4.1.6 Title 23 4.1.7 Survey 23 4.1.8 No Bankruptcy Filing................................. 23 4.1.9 Full and Accurate Disclosure......................... 24 4.1.10 No Plan Assets 24 4.1.11 Compliance 24 4.1.12 Contracts 24 4.1.13 Financial Information................................ 24 4.1.14 Condemnation 25 4.1.15 Federal Reserve Regulations.......................... 25 4.1.16 Utilities and Public Access.......................... 25 4.1.17 Not a Foreign Person................................. 25 4.1.18 Separate Lots 25 4.1.19 Assessments 25 4.1.20 Enforceability 25 4.1.21 Insurance 25 4.1.22 Use of Property; Licenses............................ 25 4.1.23 Flood Zone 26 4.1.24 Physical Condition................................... 26 4.1.25 Encroachments 26 4.1.26 Leases 26 4.1.27 Filing and Recording Taxes........................... 27 4.1.28 Investment Company Act............................... 27 4.1.29 Fraudulent Transfer.................................. 27 4.1.30 Partners 27 4.1.31 Management Agreement................................. 27 4.1.32 Hazardous Substances 28 4.2 Survival of Representations.......................... 28 4.3 Agreement Concerning Subordination, Nondisturbance... 28 V. AFFIRMATIVE COVENANTS................................ 29 5.1 Existence............................................ 29 5.2 Taxes and Other Charges.............................. 29 5.3 Repairs; Maintenance and Compliance.................. 29 5.4 Litigation........................................... 30 5.5 Performance of Other Agreements...................... 31
ii Page -- 5.7 Cooperate in Legal Proceedings....................... 31 5.8 Further Assurances................................... 31 5.9 Financial Reporting.................................. 31 5.9.1 Bookkeeping 31 5.9.2 Annual Reports 32 5.9.3 Monthly Reports 32 5.9.4 Other Reports 32 5.9.5 Annual Budget 32 5.9.6 Breach 33 5.10 Environmental Matters................................ 33 5.10.1 Hazardous Substances................................. 33 5.10.2 Environmental Monitoring............................. 34 5.10.3 Survival. 34 5.11 Title to the Property................................ 35 5.12 Estoppel Statement................................... 35 5.13 Principal Place of Business.......................... 35 5.14 Management Agreement................................. 35 5.15 Special Purpose Bankruptcy Remote Entity............. 35 5.16 Assumptions in Non-Consolidation Opinion............. 37 VI. NEGATIVE COVENANTS................................... 37 6.1 Management Agreement................................. 37 6.2 Liens 37 6.3 Dissolution.......................................... 38 6.4 Change In Business................................... 38 6.5 Debt Cancellation.................................... 38 6.6 Assets 38 6.7 Transfers............................................ 38 6.8 Debt 38 VII. INSURANCE; CASUALTY; AND CONDEMNATION................ 38 7.1 Insurance............................................ 38 7.1.1 Coverage 38 7.1.2 Policies 39 7.2 Casualty............................................. 40 7.2.1 Notice; Restoration.................................. 40 7.2.2 Settlement of Proceeds............................... 40 7.3 Condemnation......................................... 40 7.3.1 Notice; Restoration.................................. 40 7.3.2 Collection of Award.................................. 41 7.4 Application of Proceeds or Award..................... 41 7.4.1 Application to Restoration........................... 41 7.4.2 Application to Debt.................................. 41 7.4.3 Release of Property upon Casualty or Condemnation.... 42 7.4.4 Procedure for Application to Restoration............. 42
iii Page -- VIII. DEFAULTS............................................. 43 8.1 Events of Default.................................... 43 8.2 Remedies............................................. 45 8.2.1 Acceleration. 45 8.2.2 Remedies Cumulative.................................. 45 8.2.3 Severance. 46 8.2.4 Delay 46 IX. SPECIAL PROVISIONS................................... 46 9.1 Sale of Note and Securitization...................... 46 9.1.1 Cooperation 46 9.1.2 Use of Information................................... 47 9.1.3 Borrower Obligations Regarding Disclosure Documents.. 47 9.1.4 Indemnities Regarding Filings........................ 48 9.1.5 Indemnification Procedure............................ 49 9.1.6 Contribution. 49 9.1.7 Rating Surveillance.................................. 50 9.2 Exculpation.......................................... 50 9.3 Termination of Manager............................... 51 9.4 Retention of Servicer................................ 51 X. MISCELLANEOUS........................................ 51 10.1 Survival............................................. 51 10.2 Lender's Discretion.................................. 52 10.3 Governing Law........................................ 52 10.4 Modification, Waiver in Writing...................... 52 10.5 Delay Not a Waiver................................... 52 10.6 Notices.............................................. 53 10.7 Trial by Jury........................................ 54 10.8 Headings............................................. 54 10.9 Severability......................................... 54 10.10 Preferences.......................................... 54 10.11 Waiver of Notice..................................... 54 10.12 Intentionally Deleted................................ 55 10.13 Expenses; Indemnity.................................. 55 10.14 Prior Agreements..................................... 56 10.15 Offsets, Counterclaims and Defenses.................. 56 10.16 Publicity............................................ 56 10.17 Controlling Agreement................................ 57 10.18 Conflict; Construction of Documents.................. 57 10.19 Brokers and Financial Advisors....................... 57 10.20 No Third Party Beneficiaries......................... 58
iv Page -- v Page -- vi Page -- vii Page -- SCHEDULES Schedule 1 - Allocated Loan Amounts Schedule 2 - Location of Property Schedule 3 - Matters Regarding Representations Schedule 4 - Rent Roll Schedule 5 - Required Repairs Schedule 6 - Environmental Recommendations Schedule 7 - Form of Monthly Operating Statement Schedule 8 - Form of Leasing Status Report Schedule 9 - Description of Deeds of Trust Schedule 10 - Form of Subordination, Non-Disturbance and Attornment Agreement Schedule 11 - Legal Description of Released Property (Portion of Seven Corners) viii LOAN AGREEMENT LOAN AGREEMENT dated as of October 1, 1997, 1997 between SAUL SUBSIDIARY I LIMITED PARTNERSHIP, a Maryland limited partnership ("SAUL SUB I") ("BORROWER") and NOMURA ASSET CAPITAL CORPORATION, a Delaware corporation (together with its successors and assigns, "LENDER"). I0 DEFINITIONS; PRINCIPLES OF CONSTRUCTION I.1 SPECIFIC DEFINITIONS . The following terms have the meanings -------------------- set forth below: "AFFILIATE": as to any Person, any other Person that, directly or indirectly, is in Control of, is Controlled by or is under common Control with such Person or is a director or officer of such Person or of an Affiliate of such Person. "ALLOCATED LOAN AMOUNT": The principal portion of the Loan attributable to each Property as set forth on SCHEDULE 1 attached hereto. ---------- "APPROVED CAPITAL EXPENSES": Capital Expenses incurred by Borrower which (i) are included in the approved Capital Budget for the Current Month or (ii) have been approved by Lender. "APPROVED LEASING EXPENSES": expenses incurred in leasing space at the Property pursuant to Leases entered into in accordance with the Loan Documents, including brokerage commissions, tenant improvements and other inducements, which expenses (i) are (A) specifically approved by Lender in connection with approving the applicable Lease, (B) incurred in the ordinary course of business and on market terms and conditions in connection with Leases which do not require Lender's approval under the Loan Documents, or (C) otherwise approved by Lender, which approval shall not be unreasonably withheld or delayed, and (ii) are substantiated by executed Lease documents and brokerage agreements. "APPROVED OPERATING EXPENSES": Operating Expenses incurred by Borrower which (i) are included in the approved Operating Budget for the Current Month, (ii) are for electric, gas, oil, water, sewer or other utility service to the Property or (iii) have been approved by Lender. "BORROWER": Shall have the meaning set forth on the first page of this Agreement, and shall also mean the permitted successors and assigns of the entity identified on the first page of this Agreement as the Borrower. "BUSINESS DAY": any day other than a Saturday, Sunday or any other day on which national banks in New York are not open for business. "CAPITAL EXPENSES": expenses that are required under GAAP to be capitalized. "CODE": the Internal Revenue Code of 1986, as amended, any successor statutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto in temporary or final form. "CONTROL": with respect to any Person, either (i) ownership directly or through other entities of more than 50% of all beneficial equity interest in such Person, or (ii) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, by contract or otherwise. "CURRENT MONTH": as of any date of determination, the then current calendar month. "DEBT": the unpaid Principal, all interest accrued and unpaid thereon, the Yield Maintenance Premium and all other sums due to Lender in respect of the Loan, or under any Loan Document. "DEBT SERVICE": with respect to any particular period, scheduled Principal and interest payments under the Note in such period. "DEBT SERVICE COVERAGE RATIO": as of any date, the ratio of (i) the Net Operating Income for the 12-month period ending with the most recently completed calendar month to (ii) the Debt Service for such period. "DEFAULT": the occurrence of any event under any Loan Document which, with the giving of notice or passage of time, or both, would be an Event of Default. "DEFAULT RATE": a rate per annum equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) four (4%) percent above the Interest Rate or the Revised Interest Rate, as applicable. "DEFEASANCE DEPOSIT": an amount equal to the sum of (i) an amount sufficient to purchase U.S. Obligations which provide payments that will meet the Scheduled Defeasance Payments, (ii) any reasonable costs and expenses incurred or to be incurred in the purchase of such U.S. Obligations and (iii) any revenue, documentary stamp or intangible taxes or any other tax or charge due in connection with the transfer of the Note, the creation of the Defeased Note and the Undefeased Note, if applicable, any transfer of the Defeased Note or otherwise required to accomplish the agreements of Sections 2.3 and 2.4. "DEPOSIT ACCOUNT": the account established and maintained pursuant to the Deposit Account Agreement. "DEPOSIT BANK": LaSalle National Bank, or such other bank as selected by Lender from time to time. 2 "ELIGIBLE ACCOUNT": (i) an account maintained with a federal or state chartered depository institution or trust company whose (x) commercial paper, short-term debt obligations or other short-term deposits are rated at least A-1 by the applicable Rating Agencies if the deposits in such account are to be held in such account for 30 days or less or (y) long-term unsecured debt obligations are rated at least AA- by the applicable Rating Agencies if the deposits in such account are to be held in such account for more than 30 days; or (ii) a segregated trust account maintained with the trust department of a federal or state chartered depository institution or trust company acting in its fiduciary capacity which institution or trust company is subject to regulations regarding fiduciary funds on deposit substantially similar to 12 C.F.R. (S) 9.10(b); or (iii) an account otherwise acceptable to the applicable Rating Agencies, as confirmed in writing that such account would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to any Security. "FAIR MARKET VALUE": With respect to a given Property, the fair market value of such Property as if unencumbered by the Deed of Trust and any other Loan Documents granting a Lien on such Property in favor of Lender, as reasonably determined by Lender. "FISCAL YEAR": each twelve month period commencing on January 1 and ending on December 31 during each year of the Term. "GAAP": generally accepted accounting principles in the United States of America as of the date of the applicable financial report. "GENERAL PARTNER": Saul QRS, Inc., a Maryland corporation. "GOVERNMENTAL AUTHORITY": any court, board, agency, commission, office or authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) now or hereafter in existence. "INDEPENDENT DIRECTOR": an individual reasonably satisfactory to Lender who shall not have been at the time of such individual's appointment as a director, and may not have been at any time during the preceding five years (i) a shareholder of, or an officer or employee of, Borrower or any of its shareholders, subsidiaries or Affiliates (provided, however, that an individual -------- holding 500 shares or less of Saul Centers, Inc. may be an Independent Director if such individual meets the remaining conditions set forth in this definition), (ii) a customer of, or supplier to, Borrower or any of its shareholders, subsidiaries or Affiliates, (iii) a Person Controlling any such shareholder, supplier or customer, or (iv) a member of the immediate family of any such shareholder, officer, employee, supplier or customer of any other director of the General Partner. "INTEREST RATE": a rate of interest equal to 7.67% per annum. "LEASE": any lease, or, to the extent of the interest therein of Borrower, any sublease or sub-sublease, letting, license, concession or other agreement (whether written or oral and whether now or hereafter in effect) pursuant to which any person is granted a possessory interest in, or right 3 to use or occupy, any space in a given Property, and every modification, amendment or other agreement relating thereto and every guaranty or other agreement entered into in connection therewith. "LEGAL REQUIREMENTS": statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting all or part of the Property or the construction, use, alteration or operation thereof, whether now or hereafter enacted and in force, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instrument, either of record or known to Borrower, at any time in force affecting all or part of the Property, including any that may (i) require repairs, modifications or alterations in or to all or part of the Property, or (ii) in any way limit the use and enjoyment thereof. "LIEN": any mortgage, deed of trust, lien, pledge, hypothecation, assignment, security interest or any other encumbrance, charge or transfer of, on or affecting all or part of the Property or any interest therein, or in Borrower, including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement, and mechanic's, materialmen's and other similar liens and encumbrances. "LOAN DOCUMENTS": this Agreement and all other documents, agreements and instruments evidencing, securing or delivered to Lender in connection with the Loan, including the following, each of which is dated as of the date hereof: (i) Note made by Borrower to Lender in the principal amount of the Loan (the "NOTE"), (ii) the various deeds of trust made by Borrower for the benefit of Lender, more particularly described on Schedule 9 hereto (collectively, the ---------- "DEEDS OF TRUST"), which cover the Properties, (iii) Assignments of Leases and Rents from Borrower to Lender (collectively, the "ASSIGNMENTS OF LEASES"), (iv) Assignments of Agreements from Borrower to Lender (collectively, the "ASSIGNMENTS OF AGREEMENTS"), (v) Deposit Account Agreement among Borrower, Lender, Manager and LaSalle National Bank (the "DEPOSIT ACCOUNT AGREEMENT"), and (vi) that certain agreement by and among the Clearing Bank, Borrower and Lender relating to the Clearing Account (the "CLEARING ACCOUNT AGREEMENT"); as each of the foregoing may be (and each of the foregoing defined terms shall refer to such documents as they may be) amended, restated, replaced, supplemented or otherwise modified from time to time. "MANAGEMENT AGREEMENT": the management agreement dated July 31, 1994, between Borrower and Manager, as modified by an amendment of even date herewith, pursuant to which Manager is to manage the Properties. "MANAGEMENT FEE": the fee payable to Manager under the Management Agreement. "MANAGER": Saul Holdings Limited Partnership, a Maryland limited partnership. "MATURITY DATE": the date on which the final payment of principal of the Note (or the Defeased Note, if applicable) becomes due and payable as therein provided, whether at the Stated Maturity Date, by declaration of acceleration, or otherwise. 4 "NACC": Nomura Asset Capital Corporation, a Delaware corporation. "NET OPERATING INCOME": for any period, all Operating Income during such period minus all Operating Expenses during such period; determined by audit or in accordance with other agreed-upon procedures determined by Lender; provided that Net Operating Income shall not include payments to be received in respect of U.S. Obligations purchased in connection with a Defeasance. "OFFICERS' CERTIFICATE": a certificate delivered to Lender by Borrower which is signed by a senior executive officer of the General Partner. "OPERATING EXPENSES": for any period, all expenditures by or on behalf of Borrower as and to the extent required to be expensed or allowed to be expensed and in fact expensed under GAAP during such period in connection with the ownership, operation, maintenance, repair or leasing of the Property, including (i) Management Fees; Insurance Premiums; bank charges; expenses for accounting, advertising, marketing, architectural services, utilities, extermination, cleaning, trash removal, window washing, landscaping and security; and reasonable and necessary legal expenses incurred in connection with the operation of the Property; (ii) Taxes and Other Charges (excluding fines, penalties, interest or Taxes or Other Charges payable by reason of Borrower's failure to pay an imposition timely); (iii) wages, benefits, payroll taxes, uniforms, insurance costs and all other related expenses for employees of Borrower or its Affiliate engaged in the repair, operation or maintenance of the Property; and (iv) the cost of tenant improvements, routine interior and exterior maintenance, repairs and minor alterations; provided that Operating Expenses will not include Debt Service, Capital Expenses, non-cash items such as depreciation and amortization or any extraordinary one-time expenditures not considered operating expenses under GAAP. "OPERATING INCOME": for any period, all regular on-going revenues actually received by Borrower from the operation of the Property during such period, including (i) Rents and (ii) all other amounts received which in accordance with GAAP are required to be or are included in Borrower's annual financial statements as operating income of the Property; provided, that Operating Income will not include income from non-recurring income sources, advance Rents or other payments, deposits, escrows, any income otherwise includable in Operating Income but paid to a Person other than Borrower, or income from a sale, financing or other capital transaction. "OPTIONAL PREPAYMENT DATE": October 11, 2012. "OTHER CHARGES": all ground rents, impositions other than Taxes, and any other charges now or hereafter levied or assessed or imposed against a Property or any part thereof, including maintenance charges, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Property. "PAYMENT DATE": the 11th day of each calendar month or, if in any month the 11th day is not a Business Day, then the Payment Date for such month shall be the first Business Day thereafter. 5 "PERMITTED ENCUMBRANCES": (a) the Liens created by the Loan Documents, (b) all Liens and other matters disclosed in the Title Insurance Policy, (c) Liens, if any, for Taxes or Other Charges not yet payable or delinquent, (d) such customary easements for utilities as Borrower may from time to time grant or enter into, in its reasonable discretion, which easements shall not require Lender's prior approval, provided that the same do not adversely affect the -------- value or marketability of any Property, and (e) such other title and survey exceptions as Lender approves in writing in Lender's sole discretion. "PERMITTED TRANSFERS": (i) a Lease entered into in accordance with the Loan Documents, (ii) a Special Transfer or (iii) a Transfer of a limited partnership interest in Borrower, a direct or indirect interest in a limited partner of Borrower or stock in the General Partner if either (A) such Transfer would not cause the transferee to increase its direct or indirect interest in Borrower or its stock in the General Partner to an amount which equals or exceeds 49%, or (B) Borrower shall have delivered (or caused to be delivered) (1) to Lender, written confirmation from the applicable Rating Agencies that such Transfer will not cause a qualification, withdrawal or downgrading of the ratings in effect immediately prior to such Transfer for the Securities then outstanding and (2) to Lender and the applicable Rating Agencies, a substantive non-consolidation opinion with respect to Borrower in form and substance satisfactory to Lender and the applicable Rating Agencies. "PERSON": any individual, corporation, partnership, joint venture, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing. "POOLING AND SERVICING AGREEMENT": the Servicing Agreement entered into with the Servicer in connection with any Securitization. "PROPERTIES": shall mean, collectively, the parcels of real property and improvements thereon owned by Borrower and encumbered by a Deed of Trust, together with all rights pertaining to the property and improvements, as more particularly described in the Granting Clauses of the Deeds of Trust and referred to therein as the "Property" or the "Trust Property," as the case may be. A list of the Properties and their respective locations is set forth in SCHEDULE 2. - ---------- "RATING AGENCY": each of Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. and Fitch Investors Service, Inc. or any other nationally-recognized statistical rating agency which has been approved by Lender. "RELEASE AMOUNT": with respect to (i) a given Property, other than the Seven Corners Property, for which Borrower is seeking a release of Lien pursuant to Section 2.4.2 hereof, one hundred ten percent (110%) of the Allocated Loan Amount for such Property and (ii) the Seven Corners Property, if Borrower is seeking a release of Lien for the same pursuant to Section 2.4.2 hereof, one hundred twenty percent (120%) of the Allocated Loan Agreement for such Property; 6 provided, however, that notwithstanding clause (i) of this paragraph, at such - -------- ------- time as no more than four (4) of the Properties remain encumbered by the Liens of the respective Deeds of Trust, the Release Amounts for each of the Properties which have not yet been so released shall equal one hundred twenty percent (120%) of the Allocated Loan Amount for such Property and provided further that, -------- ------- in the case of any Property for which Borrower is seeking a release of Lien pursuant to Section 7.4.3 hereof, the Release Amount shall be one hundred percent (100%) of the Allocated Loan Amount for such Property. In no event shall the Release Amount for any Property or Properties exceed the outstanding balance of the Note or the Undefeased Note, as the case may be. "RELEASE DATE": the earlier of (i) three years after the date hereof and (b) two years from the "start-up day" (within the meaning of Section 860G(a)(9) of the Code) of the REMIC Trust. "REMIC": a "real estate mortgage investment conduit" within the meaning of Section 860D of the Code. "REMIC TRUST": a REMIC that holds the Note. "RENTS": all rents, rent equivalents, moneys payable as damages or in lieu of rent or rent equivalents, royalties (including oil and gas or other mineral royalties and bonuses), income, receivables, receipts, revenues, deposits (including security, utility and other deposits), accounts, cash, issues, profits, charges for services rendered, and other consideration of whatever form or nature received by or paid to or for the account of or benefit of Borrower or its agents or employees from any and all sources arising from or attributable to the Property, including all receivables, customer obligations, installment payment obligations and other obligations now existing or hereafter arising or created out of the sale of the Property or any Lease, and proceeds, if any, from business interruption or other loss of income insurance. "REVISED INTEREST RATE": the per annum rate of interest that is the greater of (i) the Interest Rate plus 5% and (ii) the Treasury Rate on the Optional Prepayment Date plus 5%. "SECURITY DEPOSIT ACCOUNT": that certain account established and maintained by Lender at the Deposit Bank for the purpose of holding all security deposits of lessees under Leases. "SERVICER": the entity appointed by Lender to service the Loan or its successor in interest, or if any successor servicer is appointed pursuant to the Pooling and Servicing Agreement, such successor servicer. "SEVEN CORNERS PROPERTY": the real property and improvements, together with all rights pertaining thereto, owned by Borrower and located in Falls Church, Virginia. "SPECIAL TRANSFER": the sale by the original Borrower of all of the Properties to one purchaser of all of the obligations of Borrower under the Loan Documents; provided Lender shall have received (i) evidence in writing from the applicable Rating Agencies to the effect that such a sale and assumption will not result in a qualification, withdrawal or downgrading of the ratings in effect 7 immediately prior to such sale for the Securities then outstanding. and (ii) all reasonable out-of-pocket expenses incurred by Lender in connection with such assumption. "STATE": the state in which a given Property is located. "STATED MATURITY DATE": October 11, 2022. "TAXES": all real estate and personal property taxes, assessments, water rates or sewer rents, now or hereafter levied or assessed or imposed against all or part of the Property. "TERM": the entire term of this Agreement, which shall expire upon repayment in full of the Debt and full performance of each and every obligation to be performed by Borrower pursuant to the Loan Documents. "TITLE INSURANCE POLICIES": collectively, the mortgagee title insurance policies, in form acceptable to Lender, issued with respect to the Properties and insuring the liens of the Deeds of Trust. "TRANSFER": any sale, conveyance, transfer, Lease (including any amendment, extension, modification, waiver or renewal thereof), assignment, mortgage, pledge, grant of a security interest or hypothecation, whether by law or otherwise, of or in (i) all or part of the Property (including any legal or beneficial direct or indirect interest therein), (ii) any direct or indirect interest in Borrower, or (iii) any stock in the General Partner. "TREASURY RATE": as of the Optional Prepayment Date, the linear interpolation of the bond equivalent yields as reported in Federal Reserve Statistical Release H.15-Selected Interest Rates under the heading "U.S. Government Securities/Treasury Constant Maturities" (or such other recognized source of financial market information as lender shall select) for the week ending prior to the Optional Prepayment Date of U.S. Treasury constant maturities with maturity dates (one longer and one shorter) most nearly approximating the remaining term of the Note as of the Optional Prepayment Date. "UCC": with respect to any given Property, the Uniform Commercial Code as in effect in its State. "U.S. OBLIGATION": direct non-callable obligations of the United States of America. "YIELD MAINTENANCE PREMIUM": the amount (if any) which, when added to the unpaid Principal or the principal amount of the Defeased Note, as applicable, will be sufficient to purchase U.S. Obligations providing the required Scheduled Defeasance Payments. I.2 INDEX OF OTHER DEFINITIONS . The following terms are defined in -------------------------- the sections or Loan Documents indicated below: "Accrued Interest" - 2.2.2 8 "Annual Budget" - 5.9.5 "Award" - 7.3.2 "Capital Budget" - 5.9.5 "Capital Reserve Fund" - 3.4.1 "Capital Reserve Subaccount" - Deposit Account Agreement "Casualty" - 7.1.3 "Casualty/Condemnation Prepayment" - 2.3.2 "Casualty/Condemnation Subaccount" - Deposit Account Agreement "Clearing Account" - 3.1 "Clearing Bank" - 3.1 "Condemnation" - 7.3.1 "Defeasance" - 2.3.3 "Defeasance Date" - 2.3.3 "Defeased Note" - 2.3.3 "Disclosure Document" - 9.1.2 "Environmental Laws" - 4.1.32 "Equipment" - Deeds of Trust "Event of Default" - 8.1 "Exchange Act" - 9.1.2 "Funds" - 3.8 "Hazardous Substances" - 4.1.32 "Improvements" - Deeds of Trust "Insurance Premiums" - 7.1.2 "Insured Casualty" - 7.2.2 "Lender's Consultant" - 5.10.1 "Liabilities" - 9.1.3 "Licenses" - 4.1.22 "Loan" - 2.1 "Lockbox Event" - 3.1 "Lockbox Termination" - 3.1 "Monthly Debt Service Payment Amount"- 2.2.1 "Nomura" - 9.1.2 "Nomura Group" - 9.1.2 "Operating Budget" - 5.9.5 "Operating Expense Subaccount" - Deposit Account Agreement "Permitted Investments" - Deposit Account Agreement "Policies" - 7.1.2 "Principal" - 2.1 "Provided Information" - 9.1 "Registration Statement" - 9.1.3 "Remedial Work" - 5.10.2 "Required Records" - 5.9.6 "Required Repair Fund" - 3.2.1 "Required Repairs" - 3.2.1 "Restoration" - 7.4.1 9 "Rollover Letter of Credit" - 3.9 "Rollover Reserve Fund" - 3.5.1 "Rollover Reserve Subaccount" - Deposit Account Agreement "Scheduled Defeasance Payments" - 2.3.3 "Securities" - 9.1 "Securities Act" - 9.1.2 "Securitization" - 9.1 "Security Agreement" - 2.3.3 "Special Purpose Bankruptcy Remote Entity" - 5.15 "Subaccounts" - Deposit Account Agreement "Successor Borrower" - 2.3.3 "Tax and Insurance Escrow Fund" - 3.3.1 "Tax and Insurance Escrow Subaccount" - Deposit Account Agreement "Undefeased Note" - 2.3.3 "Underwriter Group" - 9.1.2 I.3 PRINCIPLES OF CONSTRUCTION . Unless otherwise specified, (i) -------------------------- all references to sections and schedules are to those in this Agreement, (ii) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision, (iii) all definitions are equally applicable to the singular and plural forms of the terms defined, (iv) the word "including" means "including but not limited to," and (v) accounting terms not specifically defined herein shall be construed in accordance with GAAP. II. GENERAL ------- II.1 THE LOAN . Lender is making a loan (the "LOAN") to Borrower on -------- the date hereof, in the aggregate original principal amount (the "PRINCIPAL") of $147,000,000.00, which shall mature on the Stated Maturity Date. Borrower acknowledges receipt of the Loan, the proceeds of which are being and shall be used solely to (i) repay and discharge any existing loans relating to the Properties, (ii) fund the Tax and Insurance Escrow Fund and the Required Repair Fund, and (iii) pay approved costs and expenses incurred in connection with the Loan. No amount repaid in respect of the Loan may be reborrowed. II.2 INTEREST; MONTHLY PAYMENTS . -------------------------- II.2.1 GENERALLY . (a) From the date hereof to but not including --------- the Optional Prepayment Date, Borrower shall pay interest on the unpaid Principal at the Interest Rate. From and after the Optional Prepayment Date, interest on the unpaid Principal shall accrue at the Revised Interest Rate and be payable as provided in Sections 2.2.2 and 2.2.3(b). (b On the date hereof, Borrower shall pay interest on the unpaid Principal from the date hereof through October 10, 1997. On November 11, 1997 and each Payment Date thereafter through and including the Maturity Date, the Principal and interest thereon at the Interest Rate shall be payable in equal monthly installments of $1,102,623.87 (the "MONTHLY DEBT SERVICE PAYMENT 10 AMOUNT"); which is based on the Interest Rate and a 300-month amortization schedule. The Monthly Debt Service Payment Amount due on any Payment Date shall first be applied to the payment of interest accrued from the 11th day of the month preceding the Payment Date through the 10th day of the month in which the Payment Date occurs, notwithstanding that the Payment Date may not have been the 11th day of such month because the 11th day of such month is not a Business Day. The remainder of such Monthly Debt Service Payment Amount shall be applied to the reduction of the unpaid Principal. II.2.2 ACCRUED INTEREST . From and after the Optional Prepayment ---------------- Date, all interest accruing in respect of the unpaid Principal in excess of the Interest Rate ("ACCRUED INTEREST") shall, to the extent not paid, be deferred, be added to the Debt and, to the extent permitted by applicable law, accrue interest at the Revised Interest Rate, compounded monthly. All Accrued Interest shall be due and payable on the Maturity Date. II.2.3 PROPERTY CASH FLOW ALLOCATION (a On each Payment Date ----------------------------- during every period commencing on the occurrence of a Lockbox Event and ending on the date of the Lockbox Termination relating to such Lockbox Event, any Rents deposited into the Deposit Account during the immediately preceding calendar month shall, subject to Section 3.8 hereof, be applied as follows in the following order of priority: (i) First, to make required payments to the Tax and Insurance Escrow Fund for each of the Properties; (ii) Second, to Lender to pay the Monthly Debt Service Payment Amount (plus, if applicable, interest at the Default Rate); (iii) Third, to make required payments to the Capital Reserve Fund for each of the Properties; (iv) Fourth, to make required payments to the Rollover Reserve Fund for each of the Properties; (v) Fifth, payments for Approved Operating Expenses for each of the Properties; and (vi) Lastly, payment to Borrower of any excess amounts. (b Commencing on the first Payment Date after the Optional Prepayment Date and continuing on each Payment Date thereafter until the entire Debt has been paid in full, and at any time during the continuance of an Event of Default (subject to the right of Lender, to apply Rents to the Debt following an Event of Default, as provided in Section 10(a)(viii) of the Deeds of Trust), any Rents deposited into the Deposit Account (or otherwise received by Borrower) during the immediately preceding calendar month shall be applied by Lender as follows in the following order of priority: (i) First, to make required payments to the Tax and Insurance Escrow Fund for each of the Properties; (ii) Second, to Lender to pay the Monthly Debt Service Payment Amount (plus, if applicable, interest at the Default Rate); (iii) Third, payments for Approved Operating Expenses for each of the Properties; (iv) Fourth, to make required payments to the Capital Reserve Fund for each of the Properties; (v) Fifth, to make required payments to the Rollover Reserve Fund for each of the Properties; (vi) Sixth, payments to Lender to prepay the unpaid Principal until paid in full; (vii Seventh, payments to Lender to be applied against Accrued Interest and interest accrued thereon; and (viii) Lastly, payment to Borrower of any excess amounts. II.2.4 DEFAULT RATE. After the occurrence and during the ------------ continuance of an Event of Default, the entire unpaid Principal shall bear interest at the Default Rate, and shall be payable upon demand from time to time, to the extent permitted by applicable law. Payment or acceptance 11 of interest at the Default Rate is not a permitted alternative to timely payment and shall not constitute a waiver of any Default or Event of Default or an amendment to this Agreement or any other Loan Document and shall not otherwise prejudice or limit any rights or remedies of Lender. II.3 LOAN REPAYMENT AND DEFEASANCE. ----------------------------- II.3.1 REPAYMENT. Borrower shall repay any unpaid Principal in --------- full on the Maturity Date, together with interest thereon to (but excluding) the date of repayment. Other than as set forth in Sections 2.3.2, 2.3.3 and 7.4.3 below, Borrower shall have no right to prepay all or any portion of the Principal before the sixth Payment Date immediately preceding the Optional Prepayment Date. From and after the sixth Payment Date immediately preceding the Optional Prepayment Date, the Principal may be prepaid in whole or in part without penalty or premium. II.3.2 MANDATORY PREPAYMENTS. The Loan is subject to mandatory --------------------- prepayment, without premium or penalty (other than in connection with such a prepayment while an Event of Default exists), in certain instances of Insured Casualty or Condemnation (each a "CASUALTY/CONDEMNATION PREPAYMENT"), in the manner and to the extent set forth in Section 7.4.2. Each Casualty/Condemnation Prepayment shall be made on a Payment Date and include all accrued and unpaid interest on the Principal prepaid up to but not including such Payment Date or, if not paid on a Payment Date, include interest that would have accrued on the Principal prepaid to but not including the next Payment Date. II.3.3 VOLUNTARY DEFEASANCE OF THE NOTE. (a) Subject to the terms -------------------------------- and conditions set forth in this Section 2.3.3, Borrower may defease all or any portion of the Principal (hereinafter, a "DEFEASANCE"); provided, that no such Defeasance may occur prior to the Release Date. Each Defeasance shall be subject, in each case, to the satisfaction of the following conditions precedent: (i Borrower shall provide not less than thirty (30) days' prior written notice to Lender specifying a Payment Date (the "DEFEASANCE DATE") on which the Defeasance is to occur. Such notice shall indicate the amount of Principal to be defeased (and, if such Defeasance involves the release of any Property pursuant to Section 2.4.2 hereof, such notice shall also identify such Property or Properties). (ii Borrower shall pay to Lender (A) all accrued and unpaid interest on the unpaid Principal to but not including the Defeasance Date, (B) all other sums, not including scheduled interest or Principal payments, then due under the Loan Documents, (C) the required Defeasance Deposit for such Defeasance, and (D) all reasonable costs and expenses of Lender incurred in the Defeasance, including any costs and expenses associated with a release of Lien as provided in Section 2.4 and reasonable attorney's fees and expenses. If for any reason the Defeasance Date is not a Payment Date, Borrower shall also pay interest that would have accrued on the Note to but not including the next Payment Date. 12 (iii Except in the case of a Defeasance of the entire outstanding Principal balance of the Note, no Event of Default shall exist (unless such Event of Default relates solely to the Property or Properties to be released in connection with a partial Defeasance). (iv If only a portion of the unpaid Principal is the subject of the Defeasance, Borrower shall execute and deliver all necessary documents to amend and restate the Note and issue two substitute notes: one having a principal balance equal to the defeased portion of the original Note (the "DEFEASED NOTE") and the other having a principal balance equal to the undefeased portion of the original Note (the "UNDEFEASED NOTE"). The Defeased Note and Undefeased Note shall have terms identical to the terms of the Note, except for the principal balance. A Defeased Note cannot be the subject of any further Defeasance. (v Borrower shall execute and deliver a security agreement, in form and substance satisfactory to Lender, creating a first priority lien on the Defeasance Deposit and the U.S. Obligations purchased with the Defeasance Deposit in accordance with this Section 2.3.3 (the "SECURITY AGREEMENT"). (vi Borrower shall deliver (A) an opinion of counsel for Borrower in form satisfactory to Lender in its sole discretion stating, among other things, that (1) Lender has a perfected first priority security interest in the Defeasance Deposit and the U.S. Obligations delivered by Borrower and (2) such U.S. Obligations have been validly assigned to the REMIC Trust, (B) if required by the applicable Rating Agencies, a non- consolidation opinion with respect to the Successor Borrower in form and substance satisfactory to Lender and the applicable Rating Agencies, (C) an Officer's Certificate certifying that the requirements set forth in this Section 2.3.3(a) have been satisfied, (D) a certificate from an independent certified public accountant certifying that the amounts of the U.S. Obligations comply with all of the requirements of this Agreement, and (E) such other certificates, documents or instruments as Lender may reasonably request. . (vii Lender shall receive evidence in writing from the applicable Rating Agencies to the effect that such Defeasance will not result in a qualification, withdrawal or downgrading of the ratings in effect immediately prior to such Defeasance for the Securities then outstanding. (b In connection with each Defeasance, Borrower hereby appoints Lender as its agent and attorney-in-fact for the purpose of using the Defeasance Deposit to purchase U.S. Obligations (which purchases, if made by Lender, shall be made by Lender on an arms-length basis at then prevailing market rates) which provide payments on or prior to, but as close as possible to, all successive Payment Dates after the Defeasance Date through and including the Optional Prepayment Date, for the entire unpaid Principal in the case of a Defeasance, or for the principal amount of the Defeased Note, in the case of a Defeasance for only a portion of the unpaid Principal (including, on the Optional Prepayment Date, the unpaid Principal of either the Note or the Defeased Note), and in amounts equal to the scheduled payments due on such dates under the Note or the Defeased Note, as applicable (the "SCHEDULED DEFEASANCE PAYMENTS"). Borrower, pursuant to the 13 Security Agreement or other appropriate document, shall irrevocably authorize and direct that the payments received from the U.S. Obligations be made directly to Lender and applied to satisfy the obligations of Borrower under the Note or the Defeased Note, as applicable. Any portion of the Defeasance Deposit in excess of the amount necessary to purchase the U.S. Obligations required by this Section 2.3.3(b) and satisfy Borrower's obligations under Section 2.3 or 2.4 shall be remitted to Borrower. Any amounts received in respect of the U.S. Obligations in excess of the amounts necessary to make monthly payments pursuant to Section 2.2 shall be retained by Lender until payment in full of the Debt. Semi-annual payments in respect of U.S. Obligations shall be applied to payments under the Note or the Defeased Note, as applicable, as the same become due thereunder. (c If requested by Borrower in connection with any Defeasance under this Section 2.3.3, NACC shall establish or designate a successor entity (the "SUCCESSOR BORROWER") and Borrower shall transfer and assign all obligations, rights and duties under and to the Note or the Defeased Note, as applicable, together with the pledged U.S. Obligations, to such Successor Borrower. The obligation of NACC to establish or designate a Successor Borrower shall be retained by NACC notwithstanding the sale or transfer of this Agreement unless such obligation is specifically assumed by the transferee. Such Successor Borrower shall assume the obligations under the Note or the Defeased Note, as applicable, and the Security Agreement, and Borrower shall be relieved of its obligations thereunder. Borrower shall pay $1,000 to any such Successor Borrower as consideration for assuming the obligations under the Note or the Defeased Note, as applicable, and the Security Agreement. Notwithstanding anything in this Agreement to the contrary, no other assumption fee shall be payable upon a transfer of the Note or the Defeased Note in accordance with this Section 2.3.3, but Borrower shall pay all reasonable out-of-pocket costs and expenses incurred by Lender, including Lender's reasonable attorneys' fees and expenses, incurred in connection therewith. For purposes of this Section 2.3.3(c), the term "NACC" shall include NACC and its successors and assigns. II.4 RELEASE OF PROPERTY. Except as set forth in this Section ------------------- 2.4, no repayment, prepayment or defeasance of all or any portion of the Note shall cause, give rise to a right to require, or otherwise result in, the release of the Lien of the Deed of Trust on any Property. II.4.1 RELEASE OF ALL OF THE PROPERTIES. (a) If Borrower has -------------------------------- elected to defease the Note in its entirety, and the requirements of Section 2.3 have been satisfied, the Properties shall be released from the Lien of the Deeds of Trust, and the U.S. Obligations, pledged pursuant to the Security Agreement, shall be the sole source of collateral securing the Note. (b In connection with the releases of the Lien, Borrower shall submit to Lender, not less than ten (10) days prior to the Defeasance Date, a form of release for execution by Lender appropriate in the States in which the Properties are located and satisfactory to Lender in its reasonable discretion and all other documentation Lender requires to be delivered by Borrower, together with an Officer's Certificate certifying that such documentation (i) is in compliance with all Legal Requirements, and (ii) will effect such release in accordance with the terms of this Agreement. 14 II.4.2 RELEASE OF INDIVIDUAL PROPERTIES. Borrower on one or more -------------------------------- occasions may obtain (i) the release of an individual Property from the Lien of the Deed of Trust thereon (and related Loan Documents) and (ii) the release of Borrower's obligations under the Loan Documents with respect to such Property (other than those expressly stated to survive), upon payment of the applicable Release Amount and satisfaction of each of the following conditions: (a In connection with a Defeasance of the Note under Section 2.3.3, the principal balance of the Defeased Note shall equal or exceed the Release Amount and the requirements of Section 2.3.3, shall have been satisfied. (b Borrower shall submit to Lender, not less than ten (10) days prior to the date of such release, a release of Lien (and related Loan Documents) for such Property (for execution by Lender) in a form appropriate in each jurisdiction in which the Property is located satisfactory to Lender in its reasonable discretion and all other documentation Lender requires to be delivered by Borrower in connection with such release, together with an Officer's Certificate certifying that such documentation (i) is in compliance with all Legal Requirements, (ii) will effect such release in accordance with the terms of this Agreement, and (iii) will not impair or otherwise adversely affect the Liens, security interests and other rights of Lender under the Loan Documents not being released (or as to the parties to the Loan Documents and Properties subject to the Loan Documents not being released). (c With respect to any release of an individual Property, after giving effect to such release, the Debt Service Coverage Ratio for all of the Properties then remaining subject to the Liens of the Deeds of Trust shall be equal to the greater of (i) the Debt Service Coverage Ratio on the Closing Date and (ii) the Debt Service Coverage Ratio on the date of the release of such Property. II.4.3 RELEASE ON PAYMENT IN FULL. Lender shall, upon the written -------------------------- request and at the expense of Borrower, upon payment in full of the Debt in accordance herewith, release the Liens of the Deeds of Trust if not theretofore released. II.4.4 RELEASE OF PORTION OF SEVEN CORNERS PROPERTY. (a) Lender -------------------------------------------- agrees that it will release the portion of the Seven Corners Property described in Schedule 11 annexed hereto (the "Released Property") from the lien of the ----------- applicable Deed of Trust for development as a hotel project, with up to 30,000 square feet of compatible retail space, substantially in accordance with the existing Agreement dated December 11, 1995, between Borrower and the Board of Supervisors of Fairfax County, Virginia, recorded in Deed Book 9612, Page 1848 in the office of the Fairfax County Clerk (it being understood and agreed that any such development which deviates materially from the terms and provisions of such Agreement shall be subject to Lender's prior consent (not to be unreasonably withheld or delayed)) at Borrower's request and without the requirement of the payment of the applicable Release Amount (or any portion thereof), on the following terms and conditions: (i) no Default or Event of Default shall have occurred and be continuing, (ii) the Released Property and the portion of the Seven Corners Property remaining encumbered by the Deed of Trust (the "Remaining Property") shall constitute separate tax lots, (iii) the Released Property and the Remaining Property 15 shall, subject to the provisions of Section 2.4.4(b) below, be legally subdivided, (iv) Borrower shall deliver to Lender an updated survey showing the Released Property and the Remaining Property, (v) the Released Property shall be transferred to and developed by an Affiliate of Borrower, (vi) the transferee of the Released Property and Borrower shall enter into a reciprocal easement agreement, satisfactory in all respects to Lender, which shall provide for pedestrian and vehicular access to and from the Remaining Property, easements for all utility services provided to the Remaining Property over or across the Released Property, easements benefitting the Remaining Property for parking on the Released Property and the completion by the transferee of all improvements on the Released Property required for the continued compliance of the Remaining Property with all applicable Legal Requirements, (vii) Borrower shall provide Lender with an endorsement to the Title Insurance Policy relating to the Seven Corners Property confirming the matters described in clauses (ii) and (iii) above, insuring that the lien of the Deed of Trust on the Remaining Property is unaffected by the release of the Released Property therefrom and insuring Lender's lien on Borrower's interest in the foregoing reciprocal easement agreement, (viii) Borrower shall furnish Lender with evidence reasonably satisfactory to Lender that the Improvements located on the Remaining Property shall continue to be in compliance with applicable Legal Requirements notwithstanding such subdivision, the failure (if any) of the transferee to complete the planned improvements thereon, and any violations of Legal Requirements on or by the Released Property, and (ix) Borrower shall deliver to Lender such documents or instruments as Lender may reasonably require and shall pay the reasonable out of pocket costs incurred by Lender in connection with such release. (b) Notwithstanding anything to the contrary contained in Section 2.2.4(a) above, if Borrower reasonably determines that it is unable to cause the Released Property to be legally subdivided from the Remaining Property, then Borrower shall have the right, upon notice to Lender, prior to development of the Released Property as provided herein, to enter into a long-term ground lease of the Released Property on the terms and conditions set forth in this Section 2.2.4(b). Such ground lease shall be a "triple-net" lease with an Affiliate of Borrower and shall be otherwise in form and substance reasonably satisfactory to Lender. In connection with any such ground lease and as a condition precedent to the release of the Released Property, Borrower shall deliver to Lender (i) a currently dated substantive non-consolidation opinion of Borrower's counsel, covering (inter alia) Borrower, the General Partner and the ground lessee, and otherwise in form and substance reasonably satisfactory to Lender and (ii) written confirmation, reasonably satisfactory to Lender, from the appropriate rating agency or agencies, that the rating(s) of Securities issued in the Securitization (if any) will not be downgraded as a result of the proposed ground lease and release of the Released Property from the lien of the applicable Deed of Trust. Upon satisfaction of all of the conditions set forth herein and in Section 2.2.4(a) above (other than subdivision as provided clause (iii) thereof and the other conditions therein that are applicable only in the case of a subdivision), Lender shall release the Released Property from the lien of the applicable Deed of Trust. II.5 PAYMENTS AND COMPUTATIONS. ------------------------- II.5.1 MAKING OF PAYMENTS. Each payment by Borrower hereunder or ------------------ under the Note shall be made in funds settled through the New York Clearing House Interbank Payments System or other funds immediately available to Lender by 11:00 a.m., New York City time, on the 16 date such payment is due, to Lender by deposit to such account as Lender may designate by written notice to Borrower. Whenever any payment hereunder or under the Note shall be stated to be due on a day that is not a Business Day, such payment shall be made on the first Business Day thereafter. II.5.2 COMPUTATIONS. Interest payable hereunder or under the Note ------------ shall be computed on the basis of the actual number of days elapsed and a 360- day year. II.5.3 LATE PAYMENT CHARGE. If any Principal, interest or other ------------------- sum due under any Loan Document is not paid by Borrower on the date on which it is due, Borrower shall pay to Lender upon demand an amount equal to the lesser of four (4%) percent of such unpaid sum or the maximum amount permitted by applicable law, in order to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment. Such amount shall be secured by the Loan Documents. III. CASH MANAGEMENT; ESCROWS AND RESERVES ------------------------------------- III.1 CASH MANAGEMENT ARRANGEMENTS. All Rents shall be transmitted ---------------------------- directly by tenants of each of the Properties into an account of Borrower (the "CLEARING ACCOUNT") maintained by Borrower at a local bank selected by Borrower (the "CLEARING BANK"). All Rents received by Borrower or Manager shall be deposited into the Clearing Account within one (1) Business Day of receipt. Borrower may, in its sole discretion, withdraw and dispose of any and all amounts on deposit from time to time in the Clearing Account, until (x) the Optional Prepayment Date occurs or (y) if earlier, a Lockbox Event occurs, and Lender has given notice to the Clearing Bank of such event as required by the provisions of the Clearing Account Agreement. Subject to the provisions of this Section 3.1, (a) from and after the occurrence of a Lockbox Event, and until the Lockbox Termination (if any) in respect of such Lockbox Event, and (b) in any case, from and after the Optional Prepayment Date, all funds on deposit in the Clearing Account shall be swept by the Clearing Bank on a daily basis into the Deposit Account and applied and disbursed in accordance with this Agreement and the Deposit Account Agreement. The Deposit Account and all Subaccounts shall at all times be Eligible Accounts. A "LOCKBOX EVENT" shall mean (i) either (A) the failure by Borrower to pay any Monthly Debt Service Payment Amount, or any payment into any Fund, within five (5) days after the due date thereof, or (B) an Event of Default other than the failure by Borrower to pay when due any Monthly Debt Service Payment Amount or payment into any Fund, and (ii) the giving by Lender to the Clearing Bank of notice of such failure or Event of Default, in accordance with the terms and provisions of the Clearing Account Agreement. "LOCKBOX TERMINATION" shall mean the giving by Lender to the Clearing Bank, in accordance with the terms and provisions of the Clearing Account Agreement, of a notice and direction to terminate such sweeping of funds into the Deposit Account. Lender shall be required to give a Lockbox Termination notice to the Clearing Bank if and only if, for one year after the occurrence of a Lockbox Event, no Event of Default shall have occurred and, as of the end of such one-year period, the Debt Service Coverage Ratio shall be at least equal to the Debt Service Coverage Ratio immediately prior to such Lockbox Event. Upon a Lockbox Termination, the sweep of funds from the Clearing Account to the Deposit Account shall cease until the earlier of the occurrence of another Lockbox Event or the Optional Prepayment Date. 17 III.2 REQUIRED REPAIRS; REQUIRED REPAIR FUNDS. --------------------------------------- III.2.1 REQUIRED REPAIRS: DEPOSITS. Borrower shall perform and -------------------------- complete each item of the repairs at the Properties described on SCHEDULE 5 (the ---------- "REQUIRED REPAIRS") on or before the deadline for such item set forth on SCHEDULE 5. On the date hereof, Borrower shall deposit with Lender the amount - ---------- set forth on SCHEDULE 5 (the "REQUIRED REPAIR FUND"). ---------- III.2.2 RELEASE OF REQUIRED REPAIR FUNDS. Lender shall disburse -------------------------------- the Required Repair Fund to Borrower within thirty (30) days after the delivery by Borrower to Lender of a request therefor, accompanied by the following items, provided that on the date such payment is to be made, no Default or Event of Default shall have occurred and be continuing: (i) an Officer's Certificate (A) certifying that all Required Repairs have been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, (B) identifying each Person that supplied materials or labor in connection with the Required Repairs and (C) stating that each such Person has been or, upon receipt of the requested disbursement, will be paid in full, (ii) copies of appropriate Lien waivers or other evidence of payment satisfactory to Lender, (iii) at Lender's option, a title search for the Property indicating that it is free from all Liens not previously approved by Lender (other than Permitted Encumbrances as to which this Agreement expressly provides that Lender's prior approval is not required), (iv) a copy of each License required by applicable law in connection with such Required Repairs in question, and (v) such other evidence as Lender shall reasonably request that the Required Repairs have been completed and paid for. III.3 TAX AND INSURANCE ESCROW FUND. ----------------------------- III.3.1 TAX AND INSURANCE ESCROW FUND. Subject to Sections 3.3.2 ----------------------------- and 3.9 hereof, Borrower shall pay to Lender on each Payment Date (i) one- twelfth of the Taxes that Lender estimates will be payable during the next twelve (12) months in order to accumulate with Lender sufficient funds to pay all such Taxes at least thirty (30) days prior to their respective due dates, and (ii) one-twelfth of the Insurance Premiums that Lender estimates will be payable for the renewal of the coverage afforded by the Policies upon the expiration thereof in order to accumulate with Lender sufficient funds to pay all such Insurance Premiums at least thirty (30) days prior to the expiration of the Policies (the amounts in the foregoing clauses (i) and (ii) being called the "TAX AND INSURANCE ESCROW FUND"). Lender will apply the Tax and Insurance Escrow Fund to payments of Taxes and Insurance Premiums required to be made by Borrower pursuant to Sections 5.2 and 7.1, or to reimburse Borrower for such amounts upon presentation of evidence of payment and an Officer's Certificate in form and substance satisfactory to Lender; subject, however, to Borrower's right to contest Taxes in accordance with Section 5.2 In making any payment relating to the Tax and Insurance Escrow Fund, Lender may do so according to any bill, statement or estimate procured from the appropriate public office (with respect to Taxes) or insurer or agent (with respect to Insurance Premiums), without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof. If the amount of the Tax and Insurance Escrow Fund shall exceed the amounts due for Taxes and Insurance Premiums pursuant to Sections 5.2 and 7.1. Lender shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Tax and Insurance Escrow Fund. If at any 18 time Lender determines that the Tax and Insurance Escrow Fund is not or will not be sufficient to pay the Taxes or Insurance Premiums next coming due, Lender shall notify Borrower of such determination and Borrower shall increase its monthly payments to Lender by the amount that Lender estimates is sufficient to make up the deficiency at least thirty (30) days prior to delinquency of the Taxes and/or expiration of the Policies, as the case may be. III.3.2 PAYMENT OF INSURANCE PREMIUMS BY BORROWER. Notwithstanding ----------------------------------------- any provisions to the contrary contained in Section 3.3.1 above or elsewhere in this Agreement, for so long as (i) Borrower shall pay all Insurance Premiums on a monthly basis when due, (ii) Borrower shall submit to Lender, promptly thereafter, evidence satisfactory to Lender of each such monthly payment, and (iii) no Event of Default shall exist, Borrower shall be required to maintain on deposit with Lender only an amount equal to one-twelfth of the annual Insurance Premiums that Lender estimates will be payable for the renewal of the coverage afforded by the Policies upon the expiration thereof, and shall not be required pay to Lender the additional monthly deposits for Insurance Premiums described in clause (ii) of Section 3.3.1 above. If any of the conditions described in clauses (i) through (iii) of this Section 3.3.2 shall cease at any time to be met, Borrower shall, commencing with the first Payment Date occurring after the failure of such condition and on each Payment Date thereafter, deposit with Lender the amounts described in Section 3.3.1 above in respect of Insurance Premiums (in addition to the amounts required to be deposited in respect of Taxes), subject to and in accordance with the provisions thereof. III.4 CAPITAL RESERVE FUND. -------------------- III.4.1 CAPITAL RESERVE FUND. Borrower shall pay to Lender on each -------------------- Payment Date (in addition to other payments required hereunder) a monthly installment of $24,435, as such monthly installment may be proportionately reduced from time to time by Lender, in connection with the release of one or more Properties as provided in Sections 2.4.2 and 7.4.3, to the extent applicable (the "CAPITAL RESERVE FUND"). If the amount of the Capital Reserve Fund shall exceed the amounts due for Approved Capital Expenses pursuant to the terms hereof, Lender shall, in its discretion, return any excess to Borrower or, if future Capital Reserve Fund payments are then required, credit such excess against such future payments. III.4.2 PAYMENT OF CAPITAL EXPENSES. From time to time (but not --------------------------- more often than once per month), Lender shall disburse funds held in the Capital Reserve Fund to Borrower, within fifteen (15) days after the delivery by Borrower to Lender of a request therefor, provided (i) no Event of Default shall have occurred and be continuing; (ii) such disbursement is for a Capital Expense; and (iii) the request for disbursement is accompanied by (A) an Officer's Certificate from the appropriate Borrower certifying (v) the amount of funds to be disbursed, (w) that such funds will be used to pay Capital Expenses and a description thereof, (x) that all outstanding trade payables (other than those to be paid from the requested disbursement or those otherwise permitted to be outstanding under Section 6.8) have been paid in full, (y) that the same has not been the subject of a previous disbursement, and (z) that all previous disbursements have been used to pay the previously 19 identified Capital Expenses, and (B) reasonably detailed documentation as to the amount, necessity and purpose therefor. III.5 ROLLOVER RESERVE FUND. --------------------- III.5.1 ROLLOVER RESERVE FUND. Subject to Section 3.9 hereof, --------------------- Borrower shall pay to Lender $67,500 on each Payment Date (in addition to other payments required hereunder). Lender will apply such payments (the "ROLLOVER RESERVE FUND") to payment of Approved Leasing Expenses pursuant to the terms hereof. If the amount of the Rollover Reserve Fund shall exceed the amounts due for Approved Leasing Expenses pursuant to the terms hereof, Lender shall, in its discretion, return any excess to Borrower, credit such excess against future payments to the Rollover Reserve Fund or allocate such excess to other Subaccounts. If Lender determines in its reasonable judgment that the amount of the Rollover Reserve Fund will be insufficient to pay the amounts due or to become due for Approved Leasing Expenses, Lender may, in its reasonable discretion, adjust the monthly amounts required to be deposited into the Rollover Reserve Fund upon thirty (30) days' notice to Borrower. Alternatively, Lender may in its reasonable discretion determine that the amount of the Rollover Reserve Fund will exceed the amounts due or to become due for Approved Leasing Expenses, in which case Lender shall reduce the monthly amounts to be deposited therein. III.5.2 PAYMENT OF LEASING EXPENSES. From time to time (but not --------------------------- more than once per month) Lender shall disburse funds held in the Rollover Reserve Fund to Borrower, within fifteen (15) days after the delivery by Borrower to Lender of a request therefor, provided (i) no Event of Default shall have occurred and be continuing; (ii) such disbursement is for an Approved Leasing Expense; and (iii) the request for disbursement is accompanied by (A) an Officer's Certificate from the appropriate Borrower certifying (v) the amount of funds to be disbursed, (w) that such funds will be used only to pay (or reimburse such Borrower for) Approved Leasing Expenses and a description thereof, (x) that all outstanding trade payables (other than those to be paid from the requested disbursement or those otherwise permitted to be outstanding under Section 6.8) have been paid in full, (y) that the same has not been the subject of a previous disbursement, and (z) that all previous disbursements have been used only to pay (or reimburse such Borrower for) the previously identified Approved Leasing Expenses, and (B) reasonably detailed supporting documentation as to the amount, necessity and purpose therefor. III.6 PAYMENT OF APPROVED OPERATING EXPENSES. From time to time -------------------------------------- (1) after the occurrence of a Lockbox Event and prior to a Lockbox Termination and (2) after the Optional Prepayment Date (but in any event not more than once per month), Lender shall disburse funds held in the Operating Expense Subaccount to Borrower, provided (i) no Event of Default shall have occurred and be continuing; (ii) such disbursement is for an Approved Operating Expense; and (iii) such disbursement is requested by Borrower in writing, accompanied by (A) an Officer's Certificate certifying (v) the amount of funds to be disbursed, (w) that such funds will be used to pay Approved Operating Expenses and a description thereof, (x) that all outstanding trade payables (other than those to be paid from the requested disbursement or those otherwise permitted to be outstanding under Section 6.8) have been paid in full, (y) that the same has not been the subject of a previous disbursement, and (z) that all previous disbursements have been or will be used to pay the previously identified Approved Operating Expenses, and (B) reasonably detailed documentation as to the 20 amount, necessity and purpose therefor. Subject to satisfaction of the preceding conditions, if Lender receives from Borrower a valid request for a disbursement for payment of Approved Operating Expenses for the then Current Month at least five Business Days prior to the Payment Date occurring in such Current Month, then the disbursement in respect of such Approved Operating Expenses shall be made to Borrower on such Payment Date. If Borrower shall fail to validly request a disbursement for payment of Approved Operating Expenses for the then Current Month at least five (5) Business Days prior to the Payment Date in such Current Month, then Lender shall retain in the Operating Expense Subaccount an amount equal to the anticipated Operating Expenses for the then Current Month as set forth in the approved Operating Budget for such month, and Lender shall, subject to satisfaction of the preceding conditions, disburse the same to Borrower five (5) Business Days after Lender receives a valid request therefor. III.7 SECURITY DEPOSITS. During the continuance of any Event of ----------------- Default, Borrower shall, upon Lender's request, if permitted by applicable Legal Requirements, turn over to Lender the security deposits (and any interest theretofore earned thereon) under Leases, to be held by Lender subject to the terms of the Leases. Any letter of credit or other instrument that Borrower receives in lieu of a cash security deposit shall (i) be maintained in full force and effect in the full amount unless replaced by a cash deposit as hereinabove described, (ii) be issued by an institution reasonably satisfactory to Lender, (iii) if permitted pursuant to any Legal Requirements, name Lender as payee or mortgagee thereunder (or at Lender's option, be fully assignable to Lender) and (iv) in all respects, comply with any applicable Legal Requirements and otherwise be reasonably satisfactory to Lender. Borrower shall, upon request, provide Lender with evidence reasonably satisfactory to Lender of Borrower's compliance with the foregoing. III.8 GRANT OF SECURITY INTEREST; APPLICATION OF FUNDS. As ------------------------------------------------ security for payment of the Debt and the performance by Borrower of all other terms, conditions and provisions of the Loan Documents, Borrower hereby pledges and assigns to Lender, and grants to Lender a security interest in, all of Borrower's right, title and interest in and to the Required Repair Fund, the Tax and Insurance Escrow Fund, the Capital Reserve Fund and the Rollover Reserve Fund (collectively, the "FUNDS"). Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in any Fund, or permit any Lien to attach thereto, or any levy to be made thereon, or any UCC-l Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto. This Agreement is, among other things, intended by the parties to be a security agreement for purposes of the UCC. Upon the occurrence and during the continuance of an Event of Default, Lender may apply any sums in any Fund to the payment of the Debt and/or to the payment of Required Repairs, Taxes, Insurance Premiums, Capital Expenses, Approved Leasing Expenses and/or Operating Expenses, in any order in its sole discretion. No Fund shall constitute a trust fund and may be commingled with other monies held by Lender. Sums in each Fund shall be held by Lender in a Subaccount and invested in Permitted Investments. Earnings or interest, if any, on each Fund shall become part of such Fund and shall be disbursed as provided herein for such Fund. Lender shall not be liable for any loss sustained on the investment of any funds constituting any Fund. Amounts disbursed to Borrower under Sections 3.2 through 3.7 shall be used by Borrower solely to pay the expenses for which such disbursement is requested. 21 III.9 SECURITY IN LIEU OF DEPOSITS. Provided no Default or Event ---------------------------- of Default shall have occurred and be continuing hereunder, Borrower shall have the right, in lieu of making the payments required pursuant to Section 3.3 and/or Section 3.5 hereof, to deliver to Lender (i) a single letter of credit in form, substance and amount acceptable to Lender, and issued by a bank acceptable to Lender or (ii) other security for such obligations as shall be acceptable to Lender. In the event that Borrower posts a letter of credit in lieu of making any payments under any or all of the foregoing provisions, such letter of credit shall be for a term of at least one (1) year and shall itself provide for automatic, successive renewal terms of at least one (1) year each through the term of the Loan. Notwithstanding such provision for automatic renewal, in the event that Borrower or Lender receives notice that the letters of credit will not be renewed, Borrower shall provide Lender with a replacement letter of credit in form, substance and amount acceptable to Lender, and issued by a bank acceptable to Lender, no later than thirty (30) days prior to the expiration date of the original letter of credit. If Borrower should fail to timely provide Lender with such replacement letter of credit, Lender shall be entitled to draw upon the original letter of credit and apply the proceeds thereof to Borrower's obligations under the foregoing sections by depositing the required amounts in the Tax and Insurance Escrow Fund and/or the Rollover Reserve Fund, as appropriate. Such letter of credit or other collateral shall constitute security for the Loan, and upon the occurrence and continuance of an Event of Default, Lender may draw upon such letter of credit or other security and apply the proceeds thereof to the payment of the Debt and/or to the payment of Required Repairs, Taxes, Insurance Premiums, Approved Leasing Expenses and/or Operating Expenses, in any such order and priority as Lender shall determine in its sole discretion. In addition, in the case of a letter of credit (a "Rollover Letter of Credit") delivered to Lender in lieu of making the payments required by Section 3.5 of this Agreement, Lender shall have the right, semiannually on the first day of the fifth month and the eleventh month (respectively occurring after the month in which the Rollover Letter of Credit is posted) and on each anniversary of each such date for so long as a Rollover Letter of Credit is being maintained pursuant to the provisions of this Section,, to review the amounts anticipated to become due for Approved Leasing Expenses during the 12-month period immediately following such determination and the then available amount of the Rollover Letter of Credit. If Lender determines, in its reasonable discretion, that an amount greater than the available amount of the existing Rollover Letter of Credit will be required to pay the amounts to become due for Approved Leasing Expenses during such 12-month period, then Lender shall notify Borrower, in writing, of the additional amount required to pay such Approved Leasing Expenses. Thereupon, Borrower shall furnish to Lender an amendment increasing the amount of the existing Rollover Letter of Credit to the amount specified by Lender in such notice, or a substitute Rollover Letter of Credit in such specified amount. If Borrower shall fail to furnish Lender with such amendment to or substitution for the existing Rollover Letter of Credit within 30 days after receipt of request by Lender therefor, then Borrower shall deposit with Lender, in cash, the difference between the amount of such existing Rollover Letter of Credit and the amount specified by Lender in such notice as required, in Lender's reasonable determination, to pay the Approved Leasing Expenses due or to become due during the ensuing 12-month period. Alternatively, Lender may in its reasonable discretion determine that the amount of the existing Rollover Letter of Credit exceeds the amounts necessary to pay the Approved Leasing Expenses due or to become due during such 12-month period, in which case Lender shall notify Borrower, in writing, of such determination. Borrower may thereupon reduce the amount of the existing Rollover Letter of Credit or obtain a substitute Rollover Letter of Credit in the amount specified by Lender in such notice. 22 IV. REPRESENTATIONS AND WARRANTIES ------------------------------ IV.1 BORROWER REPRESENTATIONS. Borrower hereby represents and ------------------------ warrants as of the date hereof that, except to the extent (if any) disclosed on SCHEDULE 3 with reference to a specific subsection of this Section 4.1: - ---------- IV.1.1 ORGANIZATION; SPECIAL PURPOSE. Borrower has been duly ----------------------------- organized and is validly existing and in good standing, with requisite power and authority, and all rights, licenses, permits and authorizations, governmental or otherwise, necessary to own its properties and to transact the business in which it is now engaged. Borrower is duly qualified to do business and is in good standing in each jurisdiction where it is required to be so qualified in connection with its properties, business and operations. Each of Saul Sub I and the Saul Sub I General Partner is a Special Purpose Bankruptcy Remote Entity, and the sole business of Borrower is the ownership, management and operation of the Properties. IV.1.2 PROCEEDINGS; ENFORCEABILITY. Borrower has taken all --------------------------- necessary action to authorize the execution, delivery and performance of the Loan Documents. The Loan Documents have been duly executed and delivered by Borrower and constitute legal, valid and binding obligations of Borrower, enforceable, to the best of Borrower's knowledge, against Borrower in accordance with their respective terms, subject to applicable bankruptcy, insolvency and similar laws affecting rights of creditors generally, and general principles of equity. IV.1.3 NO CONFLICTS. The execution, delivery and performance of ------------ the Loan Documents by Borrower will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any Lien (other than pursuant to the Loan Documents) upon any of the property of Borrower pursuant to the terms of, any agreement or instrument to which such Borrower is a party or by which its property is subject, nor will such action result in any violation of the provisions of any statute or any order, rule or regulation of any Governmental Authority having jurisdiction over Borrower or any of its properties; and any consent, approval, authorization, order, registration or qualification of or with any Governmental Authority required for the execution, delivery and performance by Borrower of the Loan Documents has been obtained and is in full force and effect. IV.1.4 LITIGATION. There are no actions, suits or proceedings at ---------- law or in equity by or before any Governmental Authority now pending or, to Borrower's knowledge, threatened against or affecting Borrower or any Property, which, if determined against Borrower or such Property, might materially adversely affect the condition (financial or otherwise) or business of such Borrower or the condition or ownership of such Property. IV.1.5 AGREEMENTS. Borrower is not a party to any agreement or ---------- instrument or subject to any restriction which might adversely affect Borrower or any Property, or Borrower's business, properties, operations or condition, financial or otherwise. Borrower is not in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or 23 conditions contained in any Permitted Encumbrance or any other agreement or instrument to which it is a party or by which it or any Property is bound. IV.1.6 TITLE. Borrower has good and indefeasible title in fee to ----- the real property comprising part of each Property and good title to the balance of each such Property, free and clear of all Liens except the Permitted Encumbrances. The Deeds of Trust when properly recorded in the appropriate records, together with any UCC financing statements required to be filed in connection therewith, will create (i) a valid, perfected first priority-lien on each Property and (ii) perfected security interests in and to, and perfected collateral assignments of, all personalty included in such Property (including the Leases affecting such Property), all in accordance with the terms thereof, in each case subject only to any applicable Permitted Encumbrances. The Permitted Encumbrances do not materially adversely affect the value or use of any Property, or Borrower's ability to repay the Loan. There are no claims for payment for work, labor or materials affecting any Property which are or may become a Lien prior to, or of equal priority with, the Liens created by the Loan Documents. IV.1.7 SURVEY. The surveys for the Properties delivered to Lender ------ do not fail to reflect any material matter affecting the Properties or the title thereto. IV.1.8 NO BANKRUPTCY FILING. Borrower is not contemplating either -------------------- the filing of a petition by it under any state or federal bankruptcy or insolvency law or the liquidation of all or a major portion of its property, and Borrower has no knowledge of any Person contemplating the filing of any such petition against it. IV.1.9 FULL AND ACCURATE DISCLOSURE. No statement of fact made by ---------------------------- Borrower in any Loan Documents contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained therein not misleading in any material respect. There is no material fact presently known to Borrower that has not been disclosed to Lender which adversely affects, or, as far as Borrower can reasonably foresee, might adversely affect, in any material respect, the Properties or the business, operations or condition (financial or otherwise) of Borrower. IV.1.10 NO PLAN ASSETS. Borrower is not an "employee benefit -------------- plan," as defined in Section 3(3) of ERISA, subject to Title I of ERISA, and none of the assets of Borrower constitutes or will constitute "plan assets" of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101. IV.1.11 COMPLIANCE. Borrower and each Property and the use thereof ---------- comply in all material respects with all applicable Legal Requirements. To the best of Borrower's knowledge, Borrower is not in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority, the violation of which might materially adversely affect the condition (financial or otherwise) or business of Borrower. There has not been and shall never be committed by Borrower or, to the best of Borrower's knowledge, any other Person in occupancy of or involved with the operation or use of any Property, any act or omission affording any Governmental Authority the right of forfeiture as against any Property or any part thereof or any monies paid in performance of Borrower's obligations under any Loan Document. 24 IV.1.12 CONTRACTS. There are no service, maintenance or repair --------- contracts affecting any Property that are not terminable on one (1) month's notice or less without cause and without penalty or premium. All service, maintenance or repair contracts affecting the Properties have been entered into at arms-length in the ordinary course of the applicable Borrower's business and provide for the payment of fees in amounts and upon terms comparable to existing market rates. IV.1.13 FINANCIAL INFORMATION. All financial data, including the --------------------- statements of cash flow and income and operating expense, that have been delivered to Lender in respect of the Properties (i) are true, complete and correct in all material respects, (ii) accurately represent the financial condition of the Properties as of the date of such reports, and (iii) to the extent prepared by an independent certified public accounting firm, have been prepared in accordance with GAAP consistently applied throughout the periods covered, except as disclosed therein. Borrower has no contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are known to such Borrower and reasonably likely to have a materially adverse effect on any Property or the operation thereof, except as referred to or reflected in such financial statements. Since the date of such financial statements, there has been no materially adverse change in the financial condition, operations or business of Borrower from that set forth in said financial statements. IV.1.14 CONDEMNATION. No Condemnation or other proceeding has been ------------ commenced or, to Borrower's best knowledge, is contemplated with respect to all or part of any Property or for the relocation of roadways providing access to any Property. IV.1.15 FEDERAL RESERVE REGULATIONS. No part of the proceeds of --------------------------- the Loan will be used for the purpose of purchasing or acquiring any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose that would be inconsistent with such Regulation U or any other Regulation of such Board of Governors, or for any purpose prohibited by Legal Requirements or any Loan Document. IV.1.16 UTILITIES AND PUBLIC ACCESS. Each Property has rights of --------------------------- access to public ways and is served by water, sewer, sanitary sewer and storm drain facilities adequate to service it for its intended uses. All public utilities necessary or convenient to the full use and enjoyment of each Property are located in the public right-of-way abutting such Property, and all such utilities are connected thereto so as to serve such Property. All roads necessary for the use of each Property for its current purpose have been completed and dedicated to public use and accepted by all Governmental Authorities. IV.1.17 NOT A FOREIGN PERSON. Borrower is not a "foreign person" -------------------- within the meaning of (S) 1445(f)(3) of the Code. IV.1.18 SEPARATE LOTS. Each Property is one or more separate tax ------------- lots and is not a portion of any other tax lot that is not a part of such Property. 25 IV.1.19 ASSESSMENTS. There are no pending or proposed special or ----------- other assessments for public improvements or otherwise affecting any Property, or any contemplated improvements to any Property that may result in such special or other assessments. IV.1.20 ENFORCEABILITY. The Loan Documents are not subject to, and -------------- Borrower has not asserted, any right of rescission, set-off, counterclaim or defense, including the defense of usury. To the best of Borrower's knowledge, no exercise of any of the terms of the Loan Documents, or any right thereunder, will render any Loan Document unenforceable as a whole or impair the principal protections available to Lender thereunder. IV.1.21 INSURANCE. Borrower has obtained and have delivered to --------- Lender insurance policies reflecting the insurance coverages, amounts and other requirements set forth in this Agreement. IV.1.22 USE OF PROPERTY; LICENSES. Each Property is used ------------------------- exclusively for retail and other appurtenant and related uses. All certifications, permits, licenses and approvals, including certificates of completion and occupancy permits and any applicable liquor licenses required for the legal use, occupancy and operation of each Property (collectively, the "LICENSES"), have been obtained and are in full force and effect. The use being made of each Property is in conformity with the certificate of occupancy issued for such Property. The representations set forth in the preceding two sentences are to the best of Borrower's knowledge to the extent that such representations relate to Licenses maintained by tenants of the Property and use of the Property by tenants. IV.1.23 FLOOD ZONE. To the best of Borrower's knowledge, none of ---------- the Improvements is located in an area as identified by the Federal Emergency Management Agency as an area having special flood hazards. IV.1.24 PHYSICAL CONDITION. Except for the Required Repairs set ------------------ forth on SCHEDULE 5 hereto and the matters disclosed in the engineering reports ---------- concerning the Properties which reports have been obtained by Lender in connection with the closing of the Loan, each Property, including all Improvements, parking facilities, systems, Equipment and landscaping pertaining thereto, is in good condition, order and repair in all material respects; and, to the best of Borrower's knowledge, there exists no structural or other material defect or damages to any Property, whether latent or otherwise. Borrower has received no notice from any insurance company or bonding company of any defect or inadequacy in any Property, or any part thereof, which would adversely affect its insurability or cause the imposition of extraordinary premiums or charges thereon or any termination of any policy of insurance or bond. IV.1.25 ENCROACHMENTS. All of the improvements included in ------------- determining the appraised value of any Property lie wholly within the boundaries and building restriction lines of such Property, and, except as shown on the surveys of the Properties delivered by Borrower to Lender in connection with the closing of the Loan, no improvement on an adjoining property encroaches upon any Property, and no easement or other encumbrance upon any Property encroaches upon any of the Improvements, so as to materially adversely affect the value or marketability of any Property, except those insured against by the Title Insurance Policy. 26 IV.1.26 LEASES. Attached hereto as SCHEDULE 4 is a true, correct ------ ---------- and complete rent roll for each Property (the "RENT ROLL"), which includes all Leases affecting such Property. Except as set forth in SCHEDULE 4, with respect ---------- to the Rent Roll applicable to a given Property: (i) each Lease is in full force and effect; (ii) the tenants under the Leases have accepted possession of and are in occupancy of all of their respective demised premises, have commenced the payment of rent under such Leases, and, to the best of Borrower's knowledge, there are no offsets, claims or defenses to the enforcement thereof; (iii) all rents due and payable under the Leases have been paid and no portion thereof has been paid for any period more than thirty (30) days in advance; (iv) the rent payable under each Lease is the amount of fixed rent set forth in the Rent Roll, and Borrower has not received written notice from any tenant of any claim or basis for a claim by the tenant thereunder for an adjustment to the rent; (v) Borrower has received no notice of default from any tenant under any of the Leases which which default remains uncured; to the best of Borrower's knowledge, there are no defaults on the part of the landlord under any Lease; and no event has occurred which, with the giving of notice or passage of time, or both, would constitute such a default; (vi) to Borrower's best knowledge, there is no present material default by the tenant under any Lease; (vii) Borrower does not hold any security deposits under the Leases; and (viii) none of the Leases contains any option to purchase or right of first refusal to purchase any Property or any part thereof. Neither the Leases nor the Rents have been assigned or pledged except to Lender, and no other Person has any interest therein except the tenants thereunder. IV.1.27 FILING AND RECORDING TAXES. All transfer taxes, deed -------------------------- stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid by any Person under applicable Legal Requirements in connection with the transfer of any Property to Borrower have been paid. All mortgage, mortgage recording, stamp, intangible or other similar taxes required to be paid by any Person under applicable Legal Requirements in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents have been paid. IV.1.28 INVESTMENT COMPANY ACT. Borrower is not (i) an "investment ---------------------- company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended; (ii) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of either a "holding company" or a "subsidiary company" within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (iii) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money. IV.1.29 FRAUDULENT TRANSFER. Borrower has not entered into the ------------------- Loan or any Loan Document with the actual intent to hinder, delay, or defraud any creditor, and Borrower has received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the transactions contemplated by the Loan Documents, the fair saleable value of Borrower's assets exceeds and will, immediately following the execution and delivery of the Loan Documents, exceed Borrower's total liabilities, including subordinated, unliquidated, disputed or contingent liabilities. The fair saleable value of Borrower's assets is and will, immediately following the execution and delivery of the Loan Documents, be greater than Borrower's probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute 27 and matured. Borrower's assets, now or immediately following the execution and delivery of the Loan Documents, do not and will not constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower). IV.1.30 PARTNERS. The sole general partner of Saul Sub I is the -------- Saul Sub I General Partner. Saul Centers, Inc., a Maryland corporation, is the owner of all of the issued and outstanding capital stock of the Saul Sub I General Partner, all of which capital stock has been validly issued and fully paid and is nonassessable. The only limited partner of Borrower is Saul Holdings Limited Partnership, a Maryland limited partnership. The stock of the Saul Sub I General Partner and the limited partnership interests in Borrower are owned free and clear of all liens, warrants, options and rights to purchase. Borrower has no obligation to any Person to purchase, repurchase or issue any ownership interest in it. IV.1.31 MANAGEMENT AGREEMENT. The Management Agreement is in full -------------------- force and effect. There is no default, breach or violation existing thereunder, and no event has occurred (other than payments due but not yet delinquent) that, with the passage of time or the giving of notice, or both, would constitute a default, breach or violation thereunder, by either party thereto. Borrower's rights under the Management Agreement will not be adversely affected by the execution and delivery of the Loan Documents, Borrower's performance thereunder, the recordation of the Deeds of Trust, or the exercise of any remedies by Lender. IV.1.32 HAZARDOUS SUBSTANCES. To the best of Borrower's knowledge -------------------- and except as set forth in the environmental reports delivered to Lender in connection with the closing of the Loan, (i) no Property is in violation of any Legal Requirement pertaining to or imposing liability or standards of conduct concerning environmental regulation, contamination or clean-up, including the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Emergency Planning and Community Right-to-Know Act of 1986, the Hazardous Substances Transportation Act, the Solid Waste Disposal Act, the Clean Water Act, the Clean Air Act, the Toxic Substance Control Act, the Safe Drinking Water Act, the Occupational Safety and Health Act, any state super-lien and environmental clean-up statutes and all amendments to and regulations in respect of the foregoing laws (collectively, "ENVIRONMENTAL LAWS"); (ii) no Property is subject to any private or governmental Lien or judicial or administrative notice or action or inquiry, investigation or claim relating to hazardous, toxic, dangerous and/or regulated substances, wastes, materials, raw materials which include hazardous constituents, pollutants or contaminants, including asbestos, asbestos containing materials, petroleum, tremolite, anthlophylite, actinolite, polychlorinated biphenyls and any other substances or materials which are included under or regulated by Environmental Laws or which are considered by scientific opinion to be otherwise dangerous in terms of the health, safety and welfare of humans (collectively, "HAZARDOUS SUBSTANCES"); (iii) no Hazardous Substances are or have been (including the period prior to the applicable Borrower's acquisition of any Property), discharged, generated, treated, disposed of or stored on, incorporated in, or removed or transported from such Property other than in compliance with all Environmental Laws; (iv) no Hazardous Substances are present in, on or under 28 any nearby real property which could migrate to or otherwise affect any Property; and (v) no underground storage tanks exist on any Property. IV.2 SURVIVAL OF REPRESENTATIONS. All of the representations and --------------------------- warranties in Section 4.1 and elsewhere in the Loan Documents by Borrower (i) shall survive for so long as any portion of the Debt remains owing to Lender and (ii) shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf. IV.3 AGREEMENT CONCERNING SUBORDINATION, NONDISTURBANCE. Lender hereby -------------------------------------------------- agrees that if the tenant under any Lease requiring approval by Lender pursuant to the provisions of the Deed of Trust requests, as a condition to subordinating to the Debt and the lien of the applicable Deed of Trust such tenant's interests in the applicable Property under such Lease, that Lender enter into a subordination, nondisturbance and attornment agreement, Lender shall, in connection with such approved Lease, execute and deliver to such tenant a subordination, nondisturbance and attornment agreement substantially in the form of SCHEDULE 10 attached hereto, with such changes thereto as may be reasonably acceptable to Lender. V. AFFIRMATIVE COVENANTS --------------------- Until the end of the Term or the Defeasance of the entire unpaid Principal, Borrower hereby covenants and agrees with Lender that: V.1 EXISTENCE. Borrower shall (i) do or cause to be done all --------- things necessary to preserve, renew and keep in full force and effect its existence, rights, and franchises, (ii) continue to engage in the business presently conducted by it, (iii) obtain and maintain all Licenses, and (iv) qualify to do business and remain in good standing under the laws of each jurisdiction, in each case as and to the extent required for the ownership, maintenance, management and operation of the Properties. V.2 TAXES AND OTHER CHARGES. Borrower shall pay all Taxes and ----------------------- Other Charges as the same become due and payable (except to the extent that Taxes are payable by Lender pursuant to Section 3.3.1 hereof, subject, however, to Lender's right to apply sums in any Fund to the payment of the Debt after an Event of Default, as provided in Section 3.8). Borrower shall deliver to Lender receipts for payment, to the extent available, or other evidence reasonably satisfactory to Lender that the Taxes and Other Charges have been so paid no later than ten (10) days before they would be delinquent if not paid (provided, however, that Borrower need not furnish such receipts for payment of Taxes paid by Lender pursuant to Section 3.3.1). Borrower shall not suffer and shall promptly cause to be paid and discharged any Lien (other than a Permitted Encumbrance) against any Property, and shall promptly pay for all utility services provided to any Property. After prior notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application of any Taxes or Other Charges, provided that (i) no Default or Event of Default has occurred and remains uncured, (ii) such proceeding shall suspend the collection of the Taxes or Other Charges, (iii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (iv) no part of or interest in any Property will be in danger of being sold, forfeited, terminated, canceled or lost, (v) Borrower 29 shall have furnished such security as may be required in the proceeding, or as may be requested by Lender, to insure the payment of any such Taxes or Other Charges, together with all interest and penalties thereon, and (vi) Borrower shall promptly upon final determination thereof pay the amount of such Taxes or Other Charges, together with all costs, interest and penalties. Lender will pay over any such cash deposit or part thereof held by Lender to the claimant entitled thereto or to Borrower, at any time when, in the judgment of Lender, the entitlement of Borrower or such claimant is established and provided, in the -------- case of Borrower, that no Event of Default exists. Notwithstanding the foregoing, Borrower may freely contest the amount, validity or application of Taxes or Other Charges as permitted by applicable law, if Borrower has paid the contested Taxes or Other Charges in full. V.3 REPAIRS; MAINTENANCE AND COMPLIANCE. (a) Borrower shall cause ----------------------------------- the Properties to be maintained in a good and safe condition and repair and shall not remove, demolish or materially alter the Improvements or Equipment (except for normal replacement of the Equipment). Notwithstanding the foregoing, it shall not be a Default for Borrower to perform (i) tenant improvements required by the terms of the Leases to be performed by Borrower (or for tenants to perform tenant improvements permitted by the terms of the Leases to be performed by the tenants thereunder), (ii) capital expenditures made in the ordinary course of Borrower's business, including without limitation facade renovations, (iii) pad development under Leases approved by Lender, (iv) Restoration in accordance with the terms, conditions and provisions of Sections 7.2, 7.3 and 7.4 of this Agreement, and (v) nonstructural alterations (except as expressly provided in the foregoing clause (iii)) not affecting building systems, changing the amount of gross leasable area of any Property or any of the common areas constituting a part thereof, or changing the use of the Property from retail and other ancillary and related uses. Borrower shall promptly comply with all Legal Requirements, subject to Borrower's right to contest Legal Requirements as provided below in this Section. In connection with any and all repairs, improvements or alterations carried out at the Properties (or any of them) the cost of which for any one project exceeds the sum of $300,000, Borrower shall deliver to Lender an Officer's Certificate (A) certifying that all such work has been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, (B) identifying each Person that supplied materials or labor in connection with such work and (C) stating that each such Person has been or will be paid in full and, at Lender's option and promptly upon request by Lender, any or all of the following: (i) copies of appropriate Lien waivers or other evidence of payment satisfactory to Lender, (ii) a title search for the Property in question, indicating that it is free of all Liens not previously approved by Lender (other than Permitted Encumbrances as to which this Agreement expressly provides that Lender's prior approval is not required), (iii) copies of all Licenses required by applicable law in connection with such work and (v) such other evidence as Lender shall reasonably request that the work has been completed and paid for. Notwithstanding any provision to the contrary contained in this Section, any work constituting Required Repairs shall be subject to the provisions of Section 3.2, and any work constituting Restoration shall be subject to the provisions of Section 7.4.4. (b) Borrower shall promptly repair, replace or rebuild any part of any Property that becomes damaged, worn or dilapidated and shall complete and pay for any Improvements at any time in the process of construction or repair. After prior notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the validity or application of any Legal Requirements, provided that (i) no 30 Default or Event of Default has occurred and remains uncured, (ii) such proceeding shall suspend the enforcement of such Legal Requirements, (iii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (iv) no part of or interest in any Property will be in danger of being sold, forfeited, terminated, canceled or lost, (v) Borrower shall have furnished such security as may be required in the proceeding, or as may be requested by Lender, to insure the payment or performance (as the case may be) of any such Legal Requirements (including all interest and penalties), and (vi) Borrower shall promptly upon final determination thereof pay in full or perform such Legal Requirements (as the case may be), together with all costs, interest and penalties; and Lender may pay over any such cash deposit or part thereof held by Lender to the claimant entitled thereto at any time when, in the judgment of Lender, the entitlement of such claimant is established. V.4 LITIGATION. Borrower shall give prompt written notice to ---------- Lender of any litigation or governmental proceedings pending or threatened against Borrower which might materially adversely affect such Borrower's condition (financial or otherwise) or business or any Property. V.5 PERFORMANCE OF OTHER AGREEMENTS. Borrower shall observe and ------------------------------- perform each and every term to be observed or performed by it pursuant to the terms of any agreement or recorded instrument affecting or pertaining to any Property. V.6 NOTICE OF DEFAULT. Borrower shall promptly advise Lender of any ----------------- material adverse change in its condition, financial or otherwise, or of the occurrence of any Default or Event of Default of which it has knowledge. V.7 COOPERATE IN LEGAL PROCEEDINGS. Borrower shall cooperate fully ------------------------------ with Lender with respect to, and permit Lender, at its option, to participate in, any proceedings before any Governmental Authority which may in any way affect the rights of Lender under any Loan Document. All costs and expenses of Lender's optional participation in any such proceedings shall be borne by Lender (except for costs and expenses relating to proceedings in connection with enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting the Loan Documents or any other security given for the Loan and enforcing any obligations of or collecting any payments due from Borrower under any Loan Document or with respect to the Properties or in connection with any refinancing or restructuring of the Loan in the nature of a "work-out", or any insolvency or bankruptcy proceedings, provided that such -------- costs and expenses have not arisen by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender). V.8 FURTHER ASSURANCES. Borrower shall, at Borrower's sole cost ------------------ and expense, (i) furnish to Lender all instruments, documents, boundary surveys, footing or foundation surveys, certificates, plans and specifications, appraisals, title and other insurance reports and agreements, reasonably requested by Lender; (ii) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the Debt, as Lender may reasonably require; and (iii) do and execute all and such further lawful and reasonable 31 acts, conveyances and assurances for the better and more effective carrying out of the intents and purposes of the Loan Documents, as Lender shall reasonably require from time to time. V.9 FINANCIAL REPORTING. ------------------- V.9.1 BOOKKEEPING. Borrower shall keep on a Fiscal Year basis, in ----------- accordance with GAAP, proper and accurate books, records and accounts reflecting all of the financial affairs of Borrower and all items of income and expense and any services, equipment or furnishings provided in connection with the operation of each of the Properties, whether such income or expense is realized by Borrower or by any other Person, except lessees under Leases who are not Affiliates of Borrower. Lender shall have the right from time to time during normal business hours upon reasonable notice to examine such books, records and accounts at the office of Borrower or other Person maintaining them, and to make such copies or extracts thereof as Lender shall desire. After an Event of Default, Borrower shall pay any reasonable costs incurred by Lender to examine its accounting records, as Lender shall determine to be necessary or appropriate in the protection of Lender's interest. V.9.2 ANNUAL REPORTS. Borrower shall furnish to Lender annually, -------------- (i) within forty-five (45) days after each Fiscal Year, an unaudited operating statement with respect to each of the Properties; (ii) within 100 days after each Fiscal Year, a complete copy of the annual consolidated financial statements of Saul Centers, Inc., audited by a "big five" accounting firm or another independent certified public accountant reasonably acceptable to Lender, in accordance with GAAP; and (iii) within 100 days after each Fiscal Year, a consolidating schedule of operating statements distinguishing the respective operating statements of each of the Properties and the operating statements of all other properties of Saul Centers, Inc., certified by such "big five" accounting firm or independent certified public accountant. Each of the operating statements with respect to the Properties as described in clause (i) above (x) shall set forth the income and expenses for the subject Property for the immediately preceding calendar year, including a statement of annual Net Operating Income, and (y) shall be accompanied by an Officer's Certificate from Borrower certifying (1) that such statement presents fairly the financial condition of such Property and has been prepared in accordance with GAAP and (2) whether there exists a Default or Event of Default, and if so, the nature thereof, the period of time it has existed and the action then being taken to remedy it. V.9.3 MONTHLY REPORTS. Borrower shall furnish to Lender within --------------- thirty (30) days after the end of each calendar month the following items, accompanied by an Officer's Certificate certifying that such items are true, correct, accurate, and complete and fairly present the financial condition and results of the operations of Borrower and the Properties in accordance with GAAP (subject to normal year-end adjustments) as applicable: (i) monthly and year-to- date operating statements, noting Net Operating Income and other information necessary and sufficient under GAAP to fairly represent the financial position and results of operation of each of the Properties during such calendar month, each in substantially the form attached hereto as SCHEDULE 7; (ii) with respect ---------- to the first month in each calendar quarter, a statement of the actual Capital Expenses made by each Borrower during the prior calendar quarter as of the last day of such prior calendar quarter; (iii) a calculation reflecting the annual Debt Service Coverage Ratio as of the last day of such calendar month; (iv) a statement by Borrower that it has not incurred any indebtedness other than Permitted Indebtedness; and (v) occupancy rates, rent rolls and leasing status reports substantially in the form 32 attached hereto as SCHEDULE 8 (identifying the leased premises, names of all ---------- tenants, units leased, monthly rental and all other charges payable under each Lease, Lease commencement dates and Lease expiration dates, and listing delinquencies of over thirty (30) days for each Property). V.9.4 OTHER REPORTS. Borrower shall furnish to Lender, within ten ------------- (10) Business Days after request, such further detailed information with respect to the operation of the Properties and the financial affairs of Borrower as may be reasonably requested by Lender or any applicable Rating Agency. V.9.5 ANNUAL BUDGET. During each period commencing on a Lockbox ------------- Event and ending on the date of the Lockbox Termination (if any) with respect to such Lockbox Event and in any case after the Optional Prepayment Date, Borrower shall prepare and submit (or shall cause Manager to prepare and submit) to Lender by November 15 of each year during the Term, for approval by Lender, which approval shall not be unreasonably withheld or delayed, a proposed pro forma budget for each of the Properties for the succeeding Fiscal Year (the "ANNUAL BUDGET"), and, promptly after preparation thereof, any revisions to such Annual Budget. Lender's failure to approve or disapprove any Annual Budget within thirty (30) days after Lender's receipt thereof shall be deemed to constitute Lender's approval thereof. Each Annual Budget shall consist of (i) an operating expense budget (the "OPERATING BUDGET") showing, on a month-by- month basis, in reasonable detail, each line item of the Borrower's anticipated Operating Income and Operating Expenses (on a cash and accrual basis), including amounts required to establish, maintain and/or increase reserves, and (ii) a Capital Expense budget (the "CAPITAL BUDGET") showing, on a month-by-month basis, in reasonable detail, each line item of anticipated Capital Expenses. The approved Annual Budgets for the period commencing on the date hereof and ending on December 31, 1997 has been submitted to and approved by Lender. V.9.6 BREACH. If Borrower fails to provide to Lender or its ------ designee any of the financial statements, certificates, reports or information (the "REQUIRED RECORDS") required by this Section 5.9 within thirty (30) days after the date upon which such Required Record is due, Borrower shall pay to Lender, at Lender's option and in its sole discretion, an amount equal to $5,000 for each Required Record that is not delivered; provided Lender has given -------- Borrower at least fifteen (15) days prior written notice of such failure, and provided further that Lender shall not require any such payment after a - -------- ------- Securitization as contemplated by Section 9.1 of this Agreement. V.10 ENVIRONMENTAL MATTERS. --------------------- V.10.1 HAZARDOUS SUBSTANCES. So long as Borrower owns or is in -------------------- possession of the Properties, Borrower (i) shall keep the Properties free from Hazardous Substances unrelated to the operation of the Property in question by Borrower or any tenant thereof and in compliance with all Environmental Laws and provided that Borrower shall not generate, store, handle, process, dispose of or - -------- otherwise use Hazardous Substances (or knowingly permit tenants under any Leases to do any of the foregoing) at, in, on, under or about any of the Properties in a manner that could reasonably foreseeably lead to the imposition on Borrower, Lender, or any Property of any liability or lien of any nature whatsoever under any Environmental Laws, (ii) shall promptly notify Lender if (A) Borrower shall become aware that any Hazardous Substance is on or near the Properties in violation of any 33 Environmental Laws, (B) Borrower shall become aware that any Property is in violation of any Environmental Laws or (C) Borrower or Manager shall have received notice from any Governmental Authority regarding any condition on or near any Property which condition could pose a threat to the health, safety or welfare of humans, (iii) shall remove such Hazardous Substances and/or cure such violations and/or remove such threats, as applicable, as required by law (or as shall be required by Lender in the case of removal which is not required by law but is recommended by a licensed hydrogeologist, licensed environmental engineer or other qualified consultant engaged by Lender and which, if not cured or removed could have a material adverse effect on the value or operation of any Property), promptly after Borrower becomes aware of same, at Borrower's sole expense and (iv) shall comply with all of the environmental consultants' recommendations described on SCHEDULE 6 attached hereto. Nothing herein shall ---------- prevent Borrower from recovering expenses from any other party that may be liable for such removal or cure. V.10.2 ENVIRONMENTAL MONITORING. Borrower shall give prompt ------------------------ written notices to Lender of (i) any proceeding or inquiry by any party with respect to the presence of any Hazardous Substance on, under, from or about any Property, (ii) all claims made or threatened by any third party against Borrower or any Property relating to any loss or injury resulting from any Hazardous Substance, and (iii) Borrower's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Property that could cause such Property to be subject to any investigation or cleanup pursuant to any Environmental Law. Borrower shall permit Lender to join and participate in, as a party if it so elects, any legal proceedings or actions initiated with respect to the Properties in connection with any Environmental Law or Hazardous Substance, and Borrower shall be responsible to pay all reasonable attorneys' fees and disbursements incurred by Lender in connection therewith. Upon Lender's request, at any time and from time to time, Borrower shall provide an inspection or audit of the Properties prepared by a licensed hydrogeologist, licensed environmental engineer or qualified environmental consulting firm approved by Lender indicating the presence or absence of Hazardous Substances on, in or near any Property. The cost and expense of such audit or inspection shall be paid by Borrower not more frequently than once every five (5) calendar years after the occurrence of a Securization, unless Lender, in its good faith judgment, determines that reasonable cause exists for the performance of an environmental inspection or audit of any Property, in which case such inspections or audits shall be at Borrower's sole expense. If Borrower fails to provide any such inspection or audit within thirty (30) days after such request (provided that such 30-day period shall, upon Borrower's request, be -------- extended for such additional period as may be reasonably necessary to complete such inspection or audit, but in no event more than an additional 30 days), Lender may order same, and Borrower hereby grants to Lender and its employees and agents access to such Property and a license to undertake such inspection or audit (subject to the rights of tenants of the Property). The cost of such inspection or audit may be added to the Debt and shall bear interest thereafter at the Default Rate until paid. If any environmental site assessment report prepared in connection with such inspection or audit recommends that an operations and maintenance plan be implemented for any Hazardous Substance, Borrower shall cause such operations and maintenance plan to be prepared and implemented at its expense upon request of Lender. In the event that any investigation, site monitoring, containment, cleanup, removal, restoration or other work of any kind is reasonably necessary or desirable under an applicable Environmental Law ("REMEDIAL WORK"), Borrower shall commence and thereafter diligently prosecute to completion all such Remedial Work within thirty (30) days after written demand by 34 Lender for performance thereof (or such shorter period of time as may be required under applicable law). All Remedial Work shall be performed by contractors approved in advance by Lender, and under the supervision of a consulting engineer approved by Lender. All costs of such Remedial Work shall be paid by Borrower, including Lender's reasonable attorneys' fees and disbursements incurred in connection with the monitoring or review of such Remedial Work. Borrower shall not install or permit to be installed on any Property any underground storage tank, unless such tank installation is required by a tenant under the provisions of a Lease approved by Lender or permitted under the provisions of such Lease to be performed by the tenant thereunder, and provided that such tank shall be installed and maintained in compliance with - -------- applicable Environmental Laws. V.10.3 SURVIVAL. The obligations and liabilities of Borrower under -------- this Section 5.10 shall survive the Term and the exercise by Lender of any of its rights or remedies under the Loan Documents, including the acquisition of Properties by foreclosure or a conveyance in lieu of foreclosure. V.11 TITLE TO THE PROPERTY. Borrower will warrant and defend the --------------------- title to each Property, and the validity and priority of the Lien of the applicable Deed of Trust, subject only to Permitted Encumbrances, against the claims of all Persons. V.12 ESTOPPEL STATEMENT. After request by Lender, Borrower shall ------------------ within ten (10) days furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the unpaid Principal, (ii) the Interest Rate, (iii) the date installments of interest and/or Principal were last paid, (iv) any offsets or defenses to the payment of the Debt, and (v) that the Loan Documents are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification. Within ten (10) days after request by Lender (but no more frequently than twice in any year), Borrower shall furnish to Lender a certificate reaffirming all representations and warranties of Borrower set forth in the Loan Documents as of the date requested by Lender or, to the extent of any changes to any such representations and warranties, so stating such changes; and Borrower shall use diligent, good faith efforts to furnish to Lender, within thirty (30) days after request by Lender (but no more frequently than once a year), tenant estoppel certificates from each tenant at the Properties, which certificates shall be in form and substance reasonably satisfactory to Lender. V.13 PRINCIPAL PLACE OF BUSINESS. Borrower shall not change its --------------------------- principal place of business without first giving Lender thirty (30) days' prior notice. V.14 MANAGEMENT AGREEMENT. Borrower shall (i) cause the Properties -------------------- to be operated pursuant to the Management Agreement; (ii) promptly perform and observe all of the covenants required to be performed and observed by it under the Management Agreement and do all things necessary to preserve and to keep unimpaired its material rights thereunder; (iii) promptly notify Lender of any default under the Management Agreement of which it is aware; (iv) if and only if Manager is not an Affiliate of Borrower, promptly deliver to Lender a copy of each financial statement, business plan, capital expenditure plan, and property improvement plan and any other material notice, report and estimate received by Borrower under the Management Agreement; and 35 (v) promptly enforce the performance and observance of all of the covenants and agreements required to be performed and observed by Manager under the Management Agreement. V.15 SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY. Borrower shall ---------------------------------------- continue to be a Special Purpose Bankruptcy Remote Entity. A "SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY" means a corporation, limited partnership or limited liability company which (i) is organized solely for the purpose of (A) owning its Property or Properties or (B) acting as a general partner of the limited partnership that owns its Property or Properties or member of the limited liability company that owns its Property or Properties, (ii) will not engage in any business unrelated to (A) the ownership of its Property or Properties, (B) acting as general partner of the limited partnership that owns its Property or Properties or (C) acting as a member of the limited liability company that owns its Property or Properties, as applicable, (iii) will not have any assets other than those related to its Property or Properties or its partnership or member interest in the limited partnership or limited liability company that owns its Property or Properties, as applicable, (iv) will not engage in, seek or consent to any dissolution, winding up, liquidation, consolidation, merger, asset sale, transfer of partnership or membership interests other than Permitted Transfers (if such entity is a general partner in a limited partnership or a member in a limited liability company), or amendment of its limited partnership agreement, articles of incorporation, articles of organization, certificate of formation or operating agreement (as applicable), unless such amendment does not otherwise contravene any term, provision or condition of any of the Loan Documents and would not result in Borrower's or the General Partner's failure to be a Special Purpose Bankruptcy Remote Entity, and provided that Borrower shall promptly -------- furnish Lender with copies of any and all such amendments (regardless of whether Lender's consent to the same is required hereunder), (v) if such entity is a limited partnership, has, as its only general partners, Special Purpose Bankruptcy Remote Entities that are corporations, (vi) if such entity is a corporation, has at least one (1) Independent Director, and has not caused or allowed and will not cause or allow the board of directors of such entity to take any action requiring the unanimous affirmative vote of one hundred percent (100%) of the members of its board of directors unless an Independent Director shall have participated in such vote, (vii) if such entity is a limited liability company, has at least one member that is a Special Purpose Bankruptcy Remote Entity that is a corporation and such corporation is the managing member of such limited liability company, (viii) if such entity is a limited liability company, has articles of organization, a certificate of formation and/or an operating agreement, as applicable, providing that (A) such entity will dissolve only upon the bankruptcy of the managing member, (B) the vote of a majority-in- interest of the remaining members is sufficient to continue the life of the limited liability company in the event of such bankruptcy of the managing member and (C) if the vote of a majority-in-interest of the remaining members to continue the life of the limited liability company following the bankruptcy of the managing member is not obtained, the limited liability company may not liquidate its Property or Properties without the consent of the applicable Rating Agencies for as long as the Loan is outstanding, (ix) without the unanimous consent of all of its partners, directors or members, as applicable, shall not (A) file a bankruptcy or insolvency petition or otherwise institute insolvency proceedings with respect to itself or to any other entity in which it has a direct or indirect legal or beneficial ownership interest, (B) dissolve, liquidate, consolidate, merge, or sell all or substantially all of its assets or the assets of any other entity in which it has a direct or indirect legal or beneficial ownership interest, (C) engage in any other business activity, or amend its organizational documents, 36 (x) is and will remain solvent and is maintaining and will maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations, (xi) has not and will not fail to correct any known misunderstanding regarding the separate identity of such entity, (xii) has maintained and will maintain its accounts, books and records separate from any other person or entity and will file its own tax returns, as applicable, (xiii) has maintained and will maintain its books, records, resolutions and agreements as official records, (xiv) has not and will not commingle its funds or assets with those of any other Person, (xv) has held and will hold its assets in its own name, (xvi) has conducted and will conduct its business in its name, (xvii) has maintained and will maintain its financial statements, accounting records and other entity documents separate from any other Person, provided, however, that financial statements for such -------- entity may be prepared on a consolidated basis with other Persons if such entity is identified therein as a separate entity, (xviii) has paid (directly or indirectly through reimbursement) and will pay directly its own liabilities, including the salaries of its own employees, if any, out of its own funds and assets, (xix) has observed and will observe all partnership, corporate or limited liability company formalities, as applicable, (xx) has no indebtedness other than the Loan and liabilities in the ordinary course of business relating to the ownership and operation of its Property or Properties; (xxi) will not assume or guarantee or become obligated for the debts of any other Person or hold out its credit as being available to satisfy the obligations of any other Person except for the Loan and the liabilities permitted pursuant to this Agreement, (xxii) will not acquire obligations or securities of its partners, members or shareholders, (xxiii) has allocated and will allocate fairly and reasonably any overhead for shared office space and uses separate stationery, invoices and checks, (xxiv) except in connection with the Loan will not pledge its assets for the benefit of any other Person, (xxv) has held itself out and identified itself and will hold itself out and identify itself as a separate and distinct entity under its own name and not as a division or part of any other Person, other than common advertising, (xxvi) has maintained and will maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any other Person, (xxvii) will not make loans to any Person, and (xxviii) will not enter into or be a party to, any transaction with its partners, members, shareholders or Affiliates except in the ordinary course of its business and on terms which are intrinsically fair and are no less favorable to it than would be obtained in a comparable arm's-length transaction with an unrelated third party. V.16 ASSUMPTIONS IN NON-CONSOLIDATION OPINION. Borrower shall ---------------------------------------- conduct its business so that the assumptions made in that certain substantive non-consolidation opinion, dated as of the date hereof, delivered by Borrower's counsel in connection with the Loan, shall be true and correct in all respects. VI. NEGATIVE COVENANTS ------------------ Until the end of the Term or the Defeasance of the entire unpaid Principal, Borrower covenants and agrees with Lender that it will not, directly or indirectly: VI.1 MANAGEMENT AGREEMENT. Without Lender's prior consent: (i) -------------------- surrender, terminate or cancel the Management Agreement or otherwise replace the Manager or enter into any other management agreement (except pursuant to Section 9.3); (ii) reduce or consent to the reduction 37 of the term of the Management Agreement; (iii) increase or consent to the increase of the amount of any charges under the Management Agreement, provided, -------- however, that Borrower may without Lender's prior consent increase the incentive portion of the Manager's fee by an amount not to exceed one (1%) percent, so long as such increase is consistent with market conditions concerning comparable management contracts; or (iv) otherwise modify, change, supplement, alter or amend in any material respect, or waive or release any of its rights and remedies under, the Management Agreement; provided, however, that Borrower shall -------- be permitted to make immaterial changes, modifications, or amendments to the Management Agreement without Lender's prior approval, it being understood and agreed that no change, modification or amendment to the Management Agreement which affects the financial rights or obligations of Borrower, Lender or Manager shall be deemed an "immaterial change". VI.2 LIENS. Without Lender's prior consent, create, incur, assume, ----- permit or suffer to exist any Lien on any portion any of the Properties or legal or beneficial ownership interest in such Borrower, except Permitted Encumbrances; VI.3 DISSOLUTION. Dissolve, terminate, liquidate, merge with or ----------- consolidate into another Person; VI.4 CHANGE IN BUSINESS. Enter into any line of business other ------------------ than the ownership and operation of the Properties, or make any material change in the scope or nature of its business objectives, purposes or operations, or undertake or participate in activities other than the continuance of its present business; VI.5 DEBT CANCELLATION. Cancel or otherwise forgive or release any ----------------- claim or debt owed to any Borrower by any Person, except for adequate consideration and in the ordinary course of Borrower's business in its reasonable judgment; VI.6 ASSETS. Purchase or own any property other than the ------ Properties owned by Borrower on the date hereof and personal property related to the ownership and operation of the Properties; VI.7 TRANSFERS. Make, suffer or permit the occurrence of any --------- Transfer other than a Permitted Transfer; or VI.8 DEBT. Create, incur or assume any indebtedness other than the ---- Debt and unsecured trade debt customarily payable within sixty (60) days. VII. INSURANCE; CASUALTY; AND CONDEMNATION ------------------------------------- VII.1 INSURANCE . --------- VII.1.1 COVERAGE. Borrower, at its sole cost, for the mutual benefit --------- of Borrower and Lender, shall obtain and maintain during the Term the following policies of insurance: 38 (a) Property insurance insuring against loss or damage by standard, "all-risk" perils, which shall (i) be in an amount equal to the greatest of (A) the then full replacement cost of the Properties without deduction for physical depreciation, (B) the unpaid Principal, and (C) such amount as is necessary so that the insurer would not deem Borrower a co- insurer under such policies, (ii) have a deductible for each Property in an amount no greater than five (5%) percent of the full replacement cost of such Property, (iii) be paid annually in advance or monthly in accordance with the provisions of Section 3.3 of this Agreement, and (iv) contain a "Replacement Cost Endorsement" with a waiver of depreciation. (b) Flood insurance if any part of any Property is located in an area identified by the Federal Emergency Management Agency as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Program, in an amount at least equal to the unpaid Principal or the maximum limit of coverage available with respect to such Property under such program, whichever is less. (c) Comprehensive public liability insurance, including broad form property damage, blanket contractual and personal injuries (including death resulting therefrom) coverages and containing minimum limits per occurrence of $1,000,000 and $ 2,000,000 in the aggregate for any policy year; together with at least $ 20,000,000 excess and/or umbrella liability insurance for any and all claims, including all legal liability imposed upon such Borrower and all court costs and attorneys' fees incurred in connection with the ownership, operation and maintenance of the Properties. (d) Rental loss and/or business interruption insurance in an amount equal to the greater of (i) the estimated Rents for the next succeeding twelve (12) month period or (ii) the projected Operating Expenses and Debt Service for such period. The amount of such insurance shall be increased from time to time during the Term as and when the estimated or actual Rents increase. (e) Insurance against loss or damage from (i) leakage of sprinkler systems and (ii) explosion of steam boilers, air conditioning equipment, high pressure piping, machinery and equipment, pressure vessels or similar apparatus now or hereafter installed in any of the Improvements (without exclusion for explosions), in an amount at least equal to $25,000,000. (f) Worker's compensation insurance with respect to any employees of Borrower, as required by any Legal Requirement. (g) During any period of repair or restoration, builder's "all- risk" insurance in an amount equal to not less than the full insurable value of the applicable Property, against such risks (including fire and extended coverage and collapse of the Improvements to agreed limits) as Lender may request, in form and substance reasonably acceptable to Lender. 39 (h) Coverage to compensate for the cost of demolition and the increased cost of construction for each Property in an amount reasonably satisfactory to Lender. (i) Such other insurance (including earthquake insurance and hurricane insurance) as may from time to time be reasonably required by Lender in order to protect its interests. VII.1.2 POLICIES. All policies of insurance (the "POLICIES") -------- required pursuant to Section 7.1.1 shall (i) be issued by companies approved by Lender and licensed to do business in the State, with a claims paying ability rating of "AA" or better by Standard & Poor's Ratings Group; (ii) name Lender and its successors and/or assigns as their interest may appear as the mortgagee; (iii) contain a Non-Contributory Standard Lender Clause and a Lender's Loss Payable Endorsement, or their equivalents, naming Lender as the person to which all payments made by such insurance company in excess of $150,000 shall be paid; (iv) contain a waiver of subrogation against Lender; (v) be assigned (to the full extent of Borrower's interest therein and to the full extent assignable under the terms thereof and under applicable law) and the originals or certified copies thereof delivered to Lender; (vi) contain such provisions as Lender deems reasonably necessary or desirable to protect its interest, including endorsements providing that neither Borrower nor Lender nor any other party shall be a co-insurer under the Policies and that Lender shall receive at least thirty (30) days' prior written notice of any modification, reduction or cancellation of any of the Policies; and (vii) be satisfactory in form and substance to Lender and approved by Lender as to amounts, form, risk coverage, deductibles, loss payees and insureds. Borrower shall pay the premiums for its Policies (the "INSURANCE PREMIUMS") as the same become due and payable and furnish to Lender evidence of the renewal of each of the Policies together with (unless such Insurance Premiums have been paid by Lender pursuant to Section 3.3) receipts for or other evidence of the payment of the Insurance Premiums reasonably satisfactory to Lender. If Borrower does not furnish such evidence and receipts at least twenty (20) days prior to the expiration of any expiring Policy, then Lender may, but shall not be obligated to, procure such insurance and pay the Insurance Premiums therefor, and Borrower agrees to reimburse Lender for the cost of such Insurance Premiums promptly on demand. Within thirty (30) days after request by Lender, Borrower shall obtain such increases in the amounts of coverage required hereunder as may be reasonably requested by Lender, taking into consideration changes in the value of money over time, changes in liability laws, changes in prudent customs and practices, and the like. VII.2 CASUALTY. -------- VII.2.1 NOTICE; RESTORATION. If any Property is damaged or ------------------- destroyed, in whole or in part, by fire or other casualty (a "CASUALTY"), Borrower shall give prompt notice thereof to Lender. Following the occurrence of a Casualty, Borrower, regardless of whether insurance proceeds are available but subject to the provisions of Section 7.4.3, shall promptly proceed to restore, repair, replace or rebuild the affected Property in accordance with Legal Requirements to be of at least equal value and of substantially the same character as prior to such damage or destruction. VII.2.2 SETTLEMENT OF PROCEEDS. In the event of a Casualty covered ---------------------- by any of the Policies (an "INSURED CASUALTY") where the loss does not exceed $300,000, Borrower may 40 settle and adjust any claim without the consent of Lender; provided such adjustment is carried out in a competent and timely manner; and Borrower is hereby authorized to collect and receipt for any such insurance proceeds. In the event of an Insured Casualty where the loss equals or exceeds$300,000, Borrower may, with Lender's consent (which consent shall not be unreasonably withheld or delayed), settle and adjust of any claim and agree with the insurer(s) to be paid on the loss, and the proceeds of any such Policy shall be due and payable solely to Lender and held by Lender in the Casualty/Condemnation Subaccount and disbursed in accordance herewith. The expenses incurred by Lender (in the adjustment and collection of insurance proceeds shall become part of the Debt and be secured hereby and shall be reimbursed by Borrower to Lender upon demand. VII.3 CONDEMNATION. ------------ VII.3.1 NOTICE; RESTORATION. Borrower shall promptly give Lender ------------------- notice of the actual or threatened commencement of any condemnation or eminent domain proceeding affecting Property (a "CONDEMNATION") and shall deliver to Lender copies of any and all papers served in connection with such Condemnation. Following the occurrence of a Condemnation, Borrower, regardless of whether an Award is available but subject to the provisions of Section 7.4.3, shall promptly proceed to restore, repair, replace or rebuild the affected Property in accordance with Legal Requirements to the extent practicable to be of at least equal value and of substantially the same character as prior to such Condemnation. VII.3.2 COLLECTION OF AWARD. Lender is hereby irrevocably ------------------- appointed as Borrower's attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain any award or payment in respect of a Condemnation (an "AWARD") and to make any compromise or settlement in connection with such Condemnation, which power of attorney shall be effective upon the occurrence and during the continuance of an Event of Default. Notwithstanding any Condemnation (or any transfer made in lieu of or in anticipation of such a Condemnation), Borrower shall continue to pay the Debt at the time and in the manner provided for in the Loan Documents, and the Debt shall not be reduced unless and until any Award shall have been actually received and applied by Lender to expenses of collecting the Award and to discharge of the Debt. Lender shall not be limited to the interest paid on the Award by the condemning authority but shall be entitled to receive out of the Award interest at the rate or rates provided in the Note. If any Property is sold, through foreclosure or otherwise, prior to the receipt by Lender of such Award, Lender shall have the right, whether or not a deficiency judgment on the Note shall be recoverable or shall have been sought, recovered or denied, to receive all or a portion of the Award sufficient to pay the Debt. Borrower shall cause any Award that is payable to Borrower to be paid directly to Lender. Lender shall hold such Award in the Casualty/Condemnation Subaccount and disburse such Award in accordance with the terms hereof. VII.4 APPLICATION OF PROCEEDS OR AWARD. -------------------------------- VII.4.1 APPLICATION TO RESTORATION. In the event of an Insured -------------------------- Casualty or Condemnation where (i) the loss is in an aggregate amount less than twenty percent (20%) of the Fair Market Value of the affected Property immediately prior to such Insured Casualty or Condemnation, (ii) in the reasonable judgment of Lender, such Property can be restored within six (6) months, and 41 prior to the Scheduled Maturity Date and the expiration of the business interruption insurance with respect thereto, to an economic unit not less valuable and not less useful than the same was prior to the Insured Casualty or Condemnation, and after such restoration will adequately secure the unpaid Principal, and (iii) no Default or Event of Default shall have occurred and be then continuing, then the proceeds of insurance or the Award, as the case may be (after reimbursement of any expenses incurred by Lender), shall be disbursed to Borrower for application to the cost of restoring, repairing, replacing or rebuilding such Property (the "RESTORATION"), in the manner set forth herein. Borrower shall commence and diligently prosecute such Restoration; provided that (i) Borrower shall pay (and if required by Lender, Borrower shall deposit with Lender in advance) all costs of such Restoration in excess of the net proceeds of insurance or the Award made available pursuant to the terms hereof; and (ii) Lender shall have received evidence reasonably satisfactory to it that, during the period of the Restoration, the Rents for the affected Property will be at least equal to the sum of the Operating Expenses and Debt Service for such Property, as reasonably determined by Lender. VII.4.2 APPLICATION TO DEBT. Except as provided in Sections 7.4.1 ------------------- (and subject to the provisions of Section 7.4.3), the proceeds of insurance collected upon any Insured Casualty, and any Award, may, at the option of Lender in its sole discretion, be applied to the payment of the Debt or applied to reimburse the Borrower for the cost of any Restoration, in the manner set forth in Section 7.4.4. Any such application to the Debt shall be without any prepayment consideration, unless an Event of Default has occurred and is continuing at the time the insurance proceeds are received from the insurance company or the Award is received from the condemning authority, as the case may be, in which event Borrower shall pay to Lender an additional amount equal to the Yield Maintenance Premium, if any, that would be required under Section 2.3.3 if a Defeasance Deposit were to be made by Borrower with respect to a Defeased Note in the amount of the insurance proceeds or Award applied to the Debt. Any such application to the Debt shall be subject to the provisions of Section 2.3.2 of this Agreement. After any such application to the Debt, the unpaid Principal shall be reamortized over the remaining term thereof. VII.4.3 RELEASE OF PROPERTY UPON CASUALTY OR CONDEMNATION. ------------------------------------------------- Notwithstanding the provisions of Section 7.4.2, if all of the conditions to release of the proceeds of insurance relating to a Casualty or of an Award (as the case may be) set forth in Section 7.4.1 are not met, then Borrower may elect, at its option, to obtain the release of the Property affected by the Casualty or Condemnation in question, as provided in this Section. Borrower may obtain the release of such Property from the Lien of the Deed of Trust thereon (and related Loan Documents) and the release of Borrower's obligations under the Loan Documents with respect to such Property (other than those expressly stated to survive), upon payment of the applicable Release Amount and satisfaction of the other conditions set forth in Sections 2.4.2(b) and (c). Borrower shall receive a credit against the applicable Release Amount in the amount of the insurance proceeds or Award collected upon such Casualty or Condemnation (as the case may be). The Release Amount so paid by Borrower shall be applied by Lender first, to Lender's reasonable costs and expenses in connection with such release - ----- (including reasonable attorneys' fees and expenses) and second to the Debt, in ------ such order, proportion and priority as Lender may designate in its sole and absolute discretion. After any such application to the Debt, the unpaid Principal shall be reamortized over the remaining term thereof. 42 VII.4.4 PROCEDURE FOR APPLICATION TO RESTORATION. If Borrower is ---------------------------------------- entitled to reimbursement out of insurance proceeds or an Award held by Lender, such proceeds or Award shall be disbursed from time to time from the Casualty/Condemnation Subaccount upon Lender being furnished with (i) evidence satisfactory to it of the estimated cost of completion of the Restoration, (ii) funds or, at Lender's option, assurances satisfactory to Lender that such funds are available, sufficient in addition to the proceeds of insurance or Award to complete the proposed Restoration, (iii) such architect's certificates, waivers of lien, contractor's sworn statements, title insurance endorsements, bonds, plats of survey and such other evidences of cost, payment and performance as Lender may reasonably require and approve, and (iv) all plans and specifications for such Restoration, such plans and specifications to be approved by Lender prior to commencement of any work. No payment made prior to the final completion of the Restoration shall exceed ninety (90%) of the value of the work performed from time to time; funds other than the proceeds of insurance or Award shall be disbursed prior to disbursement of such proceeds or Award; and at all times, the undisbursed balance of such proceeds or Award remaining in the hands of Lender, together with funds deposited for that purpose or irrevocably committed to the satisfaction of Lender by or on behalf of such Borrower for that purpose, shall be at least sufficient in the reasonable judgment of Lender to pay for the cost of completion of the Restoration, free and clear of all Liens or claims for Lien. Any surplus that remains out of the insurance proceeds held by Lender after payment of such costs of Restoration shall be paid to Borrower. Any surplus that remains out of the Award received by Lender after payment of such costs of Restoration shall, in the sole and absolute discretion of Lender, be retained by Lender and applied to payment of the Debt or returned to Borrower. VIII. DEFAULTS VIII.1 EVENTS OF DEFAULT. Each of the following events shall ----------------- constitute an "EVENT OF DEFAULT": (a) on any Payment Date, the Monthly Debt Service Payment Amount, or any required payment to the Tax and Insurance Escrow Fund, the Capital Reserve Fund or the Rollover Reserve Fund for any Property, is not paid in full; (b) any portion of the Debt, other than the regularly scheduled payments described in the foregoing clause (a), is not paid within five (5) days after Lender notifies Borrower in writing that the same is due and payable; (c) any of the Taxes or Other Charges are not paid when due, subject to Borrower's right to contest Taxes in accordance with Section 5.2; (d) the Policies are not kept in full force and effect, or if originals or certified copies thereof are not delivered to Lender within ten (10) days after written request; (e) a Transfer other than a Permitted Transfer occurs; (f) any representation or warranty made by Borrower herein or in any Loan Document, or in any report, certificate, financial statement or other instrument, 43 agreement or document furnished by or on behalf of Borrower in connection with any Loan Document, shall be false or misleading in any material respect as of the date the representation or warranty was made, and the default described above in this clause (f) is not cured by Borrower within 30 days after written notice by Lender; (g) Borrower shall make an assignment for the benefit of creditors, or shall generally not be paying its debts as they become due; (h) a receiver, liquidator or trustee shall be appointed for Borrower; or Borrower shall be adjudicated a bankrupt or insolvent; or any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower; or any proceeding for the dissolution or liquidation of Borrower shall be instituted; provided, however, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by such Borrower, only upon the same not being discharged, stayed or dismissed within sixty (60) days; (i) Borrower shall assign or attempt to assign its rights or interest under any Loan Document in contravention of any Loan Document; (j) Borrower shall breach any negative covenant contained in Section 6 or any covenant contained in Section 5.15 and with respect to Section 5.15 such breach is not cured by Borrower within fifteen (15) days after written notice by Lender; (k) Borrower shall be in default under any other mortgage, deed of trust or security agreement covering any part of any Property whether it be superior or junior in Lien to the Deed of Trust; (l) any Property becomes subject to any mechanic's, materialman's or other Lien and such Lien is not bonded or discharged within thirty (30) days after Borrower first receives notice in writing of such Lien, except a Lien for Taxes not then due or other Permitted Encumbrance; (m) Borrower shall fail to cure properly any violation of a Legal Requirement within thirty (30) days after such Borrower first receives written notice of such violation, provided that, if such violation cannot -------- reasonably be cured within such thirty (30) day period, and Borrower shall have commenced to cure such violation within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, then such thirty (30) day period shall be extended for an additional period of time as is reasonably necessary for Borrower in the exercise of due diligence to cure such violation, such additional period not to exceed 90 days; (n) except as expressly permitted by the provisions of this Agreement, the alteration, improvement, demolition or removal of any of the Improvements without the prior consent of Lender; 44 (o) without Lender's prior consent, (i) the Manager under the Management Agreement (or any successor management agreement) resigns or is removed, or (ii) the ownership, management or control of the Manager is transferred to a person or entity other than an Affiliate of Borrower, or (iii) there is any material change in the Management Agreement (or any successor management agreement); (p) a default has occurred and continues beyond any applicable cure period under the Management Agreement (or any successor management agreement) if such default permits the Manager to terminate the Management Agreement (or such successor management agreement); (q) Borrower shall cease to operate any Property for retail, office and ancillary uses (other than temporary cessation in connection with renovations to such Property or as a result of a Casualty or Condemnation); (r) an Event of Default as defined or described in any other Loan Document occurs; or any other event shall occur or condition shall exist, if the effect of such event or condition is to accelerate the maturity of any portion of the Debt; (s) Borrower shall fail to pay when due any deposit into any Fund; (t) any of the assumptions contained in any substantive non- consolidation opinion, delivered to Lender by Borrower's counsel in connection with the Loan or otherwise hereunder, were not true and correct as of the date of such opinion or thereafter became untrue or incorrect, and the default described above in this clause (t) is not cured by Borrower within 15 days after written notice by Lender; or (u) Borrower shall continue to be in Default under any of the other terms, covenants or conditions of this Agreement not specified in subsections (a) through (t) above, for ten (10) days after notice to such Borrower from Lender, in the case of any Default which can be cured by the payment of a sum of money, or for thirty (30) days after notice from Lender in the case of any other Default; provided, however, that if such non- monetary Default is susceptible of cure but cannot reasonably be cured within such thirty (30)-day period, and such Borrower shall have commenced to cure such Default within such thirty (30)-day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30)- day period shall be extended for an additional period of time as is reasonably necessary for such Borrower in the exercise of due diligence to cure such Default, such additional period not to exceed ninety (90) days. VIII.2 REMEDIES. -------- VIII.2.1 ACCELERATION. Upon the occurrence of an Event of Default ------------ (other than an Event of Default described in paragraph (f), (g) or (h) of Section 8.1) and at any time thereafter, in addition to any other rights or remedies available to it pursuant to the Loan Documents or at law 45 or in equity, Lender may take such action, without notice or demand, that Lender deems advisable to protect and enforce its rights against Borrower and in and to any Property, including declaring the Debt to be immediately due and payable; and upon any Event of Default described in paragraph (f), (g) or (h) of Section 8.1, the Debt shall immediately and automatically become due and payable, without notice or demand, and Borrower hereby expressly waives any such notice or demand, anything contained in any Loan Document to the contrary notwithstanding. VIII.2.2 REMEDIES CUMULATIVE. Upon the occurrence of an Event of ------------------- Default, all or any one or more of the rights, powers, privileges and other remedies available to Lender against Borrower under the Loan Documents or at law or in equity may be exercised by Lender at any time and from time to time, whether or not all or any of the Debt shall be declared due and payable, and whether or not Lender shall have commenced any foreclosure proceeding or other action for the enforcement of its rights and remedies under any of the Loan Documents. Any such actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by law, equity or contract or as set forth in the Loan Documents. Without limiting the generality of the foregoing, Borrower agrees that if an Event of Default is continuing, (i) to the extent permitted by applicable law, Lender is not subject to any "one action" or "election of remedies" law or rule, and (ii) all liens and other rights, remedies or privileges provided to Lender shall remain in full force and effect until Lender has exhausted all of its remedies against all of the Properties, each of the Deeds of Trust have been foreclosed, all of the Properties have been sold and/or otherwise realized upon in satisfaction of the Debt or the Debt has been paid in full. To the extent permitted by applicable law, nothing contained in any Loan Document shall be construed as requiring Lender to resort to any portion of any Property for the satisfaction of any of the Debt in preference or priority to any other portion, and Lender may seek satisfaction out of the entirety of all of the Properties or any part of any Property in its absolute discretion. VIII.2.3 SEVERANCE. Lender shall have the right from time to time --------- to sever the Note and the other Loan Documents into one or more separate notes, deeds of trust and other security documents in such denominations as Lender shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies, provided that no such severance will adversely affect -------- or diminish the rights of Borrower as presently set forth in this Agreement or any of the other Loan Documents or increase the obligations of Borrower above those presently set forth in this Agreement and the other Loan Documents. Borrower shall execute and deliver to Lender from time to time, promptly after the request of Lender, a severance agreement and such other documents as Lender shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Lender. VIII.2.4 DELAY. No delay or omission to exercise any remedy, right ----- or power accruing upon an Event of Default shall impair any such remedy, right or power or be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default shall not be construed to be a waiver of any subsequent Default or Event of Default or to impair any remedy, right or power consequent thereon. 46 IX. SPECIAL PROVISIONS ------------------ IX.1 SALE OF NOTE AND SECURITIZATION. ------------------------------- IX.1.1 COOPERATION. At Lender's request (to the extent not already ----------- required to be provided by Borrower under this Agreement), Borrower shall use reasonable efforts to satisfy the market standards to which Lender customarily adheres or which may be reasonably required in the marketplace or by the Rating Agencies in connection with the sale of the Note or participation therein or the first successful securitization (such sale and/or securitization, the "SECURITIZATION") of rated single or multi-class securities (the "SECURITIES") secured by or evidencing ownership interests in the Note and the Deeds of Trust. Without limiting the generality of the foregoing, Borrower shall: (a) at no cost to Borrower other than for the expenses of Provided Information being delivered by Borrower or Manager in connection with the closing of the Loan, (i) provide such financial and other information with respect to the Properties, Borrower and its Affiliates, Manager and any tenants of the Properties, (ii) provide business plans and budgets relating to the Properties and (iii) perform or permit or cause to be performed or permitted such site inspection, appraisals, market studies, environmental reviews and reports (Phase I's and, if appropriate, Phase II's), engineering reports and other due diligence investigations of the Properties, as may be reasonably requested by Lender or the Rating Agencies or as may be necessary or appropriate in connection with the Securitization (the items provided to Lender pursuant to this paragraph (a) being called the "PROVIDED INFORMATION"), together, if customary, with appropriate verification of and/or consents to the Provided Information through letters of auditors or opinions of counsel of independent attorneys acceptable to Lender and the Rating Agencies; (b) at Borrower's expense, cause counsel to render opinions as to non- consolidation, fraudulent conveyance, true sale and true contribution and any other opinion customary in securitization transactions with respect to the Properties and Borrower and its Affiliates, which counsel and opinions shall be reasonably satisfactory to Lender and the Rating Agencies; (c) make such representations and warranties as of the closing date of the Securitization with respect to the Properties, Borrower and the Loan Documents as are customarily provided in securitization transactions and as may be reasonably requested by Lender or the Rating Agencies and consistent with the facts covered by such representations and warranties as they exist on the date thereof, including the representations and warranties made in the Loan Documents; (d) provide current certificates of good standing and qualification with respect to Borrower from appropriate Governmental Authorities; and (e) execute such amendments to the Loan Documents and Borrower's organizational documents, and establish and fund such reserve funds (including reserve funds for deferred maintenance and capital improvements) as may be requested by Lender or the Rating Agencies or otherwise to effect the Securitization, provided that nothing contained in this subsection (e) shall result in a material economic change in the transaction. 47 IX.1.2 USE OF INFORMATION. Borrower understands that certain of ------------------ the Provided Information and the Required Records may be included in disclosure documents in connection with the Securitization, including a prospectus or private placement memorandum (each, a "DISCLOSURE DOCUMENT") and may also be included in filings with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "SECURITIES ACT"), or the Securities and Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or provided or made available to investors or prospective investors in the Securities, the Rating Agencies, and service providers relating to the Securitization. In the event that the Disclosure Document is required to be revised prior to the sale of all Securities, Borrower shall cooperate with Lender in updating the Provided Information or Required Records for inclusion or summary in the Disclosure Document by providing all current information pertaining to Borrower and the Properties necessary to keep the Disclosure Document accurate and complete in all material respects with respect to such matters. IX.1.3 BORROWER OBLIGATIONS REGARDING DISCLOSURE DOCUMENTS. In --------------------------------------------------- connection with a preliminary and a final private placement or prospectus, as applicable, Borrower agrees: (a) if requested by Lender, to certify in writing that such Borrower has carefully examined those portions of such memorandum or prospectus, as applicable, pertaining to Borrower, the Properties and the Loan, including applicable portions of the sections entitled "Special Considerations", "Description of the Deeds of Trust", "Description of the Deeds of Trust Loans and Trust Property", "The Manager", "The Borrower" and "Certain Legal Aspects of the Deeds of Trust Loan", and such sections (and any other sections reasonably requested and pertaining to Borrower, the Properties or the Loan) do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; (b) to indemnify Lender and the Affiliates of Nomura Securities International, Inc. ("NOMURA"), that have filed the registration statement relating to the Securitization (the "REGISTRATION STATEMENT"), each of its directors, each of its officers who have signed the Registration Statement and each person or entity who controls Nomura within the meaning of Section 15 of the Securities Act or Section 30 of the Exchange Act of 1933, as amended (collectively, the "NOMURA GROUP"), and Nomura, each of its directors and each person who controls Nomura, within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act (collectively, the "UNDERWRITER GROUP") for any losses, claims, damages or liabilities (the "LIABILITIES") to which Lender, the Nomura Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the applicable portions of such sections applicable to, Borrower, the Properties or the Loan, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated in the applicable portions of such sections or necessary in order to make the statements in the applicable portions of such sections or in light of the circumstances under which they were made, not misleading; and (c) to reimburse Lender and Nomura for any legal or other expenses reasonably incurred by Lender and Nomura in connection with investigating or defending the Liabilities. 48 Borrower's respective Liabilities under clause (a) or (b) above shall be limited to Liabilities arising out of or based upon any such untrue statement or omission made therein in reliance upon and in conformity with information furnished to Lender by or on behalf of Borrower in connection with the preparation of those portions of the Disclosure Document pertaining to Borrower, the Properties or the Loan or in connection with the underwriting of the debt, including financial statements of Borrower, operating statements, rent rolls, environmental site assessment reports and property condition reports with respect to the Properties. The foregoing indemnity will be in addition to any liability which Borrower may otherwise have. IX.1.4 INDEMNITIES REGARDING FILINGS. (a) In connection with ----------------------------- filings under the Exchange Act, Borrower agrees to (i) indemnify Lender, the Nomura Group and the Underwriter Group for any Liabilities to which Lender, the Nomura Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon the omission or alleged omission to state in the Provided Information or Required Records a material fact required to be stated in the Provided Information or Required Records in order to make the statements in the Provided Information or Required Records, in light of the circumstances under which they were made not misleading and (ii) reimburse Lender or Nomura for any legal or other expenses reasonably incurred by Lender and Nomura in connection with defending or investigating the Liabilities. (b) NACC agrees (i) to indemnify Borrower for any Liabilities to which Borrower may become subject insofar as the Liabilities arise out of or are based on any violations by NACC of the Securities Act, the Exchange Act or other applicable law in connection with a Securitization, other than Liabilities arising out of or based upon the acts or omissions, or alleged acts or omissions, of Borrower giving rise to Borrower's obligations to indemnify the Nomura Group and the Underwriter Group as provided in this Section 9.1. IX.1.5 INDEMNIFICATION PROCEDURE. Promptly after receipt by an ------------------------- indemnified party under Section 9.1.3 or 9.1.4 of notice of the commencement of any action for which a claim for indemnification is to be made against Borrower or NACC, as the case may be, such indemnified party shall notify the indemnitor in writing of such commencement, but the omission to so notify the indemnitor will not relieve Borrower or NACC, as the case may be, from any liability that such indemnitor may have to any indemnified party hereunder except to the extent that failure to notify causes prejudice to the indemnitor. In the event that any action is brought against any indemnified party, and such party notifies the indemnitor of the commencement thereof, the indemnitor will be entitled, jointly with any other indemnifying party, to participate therein and, to the extent that it (or they) may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice of commencement, to assume the defense thereof with counsel satisfactory to such indemnified party. After notice from Borrower to such indemnified party under this Section 9.1.5, the indemnitor shall not be responsible for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, if the defendants in any such action include both the indemnitor and the indemnifying party, and the indemnitor shall have reasonably concluded that there are any legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnitor, then the indemnified party or parties shall have the right to select separate 49 counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. The indemnitor shall not be liable to any indemnified party for the expenses of more than one separate counsel unless there are legal defenses available to it that are different from or additional to those available to another indemnified party. IX.1.6 CONTRIBUTION. In order to provide for just and equitable ------------ contribution in circumstances in which the indemnity agreement provided for in Section 9.1.3 or 9.1.4 is for any reason held to be unenforceable by an indemnified party in respect of any Liabilities (or action in respect thereof) referred to therein which would otherwise be indemnifiable under Section 9.1.3 or 9.1.4, Borrower shall contribute to the amount paid or payable by the indemnified party as a result of such Liabilities (or action in respect thereof); provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person not guilty of such fraudulent misrepresentation. In determining the amount of contribution to which the respective parties are entitled, the following factors shall be considered: (i) the Nomura Group's and Borrower's relative knowledge and access to information concerning the matter with respect to which the claim was asserted; (ii) the opportunity to correct and prevent any statement or omission; and (iii) any other equitable considerations appropriate in the circumstances. Lender and Borrower hereby agrees that it may not be equitable if the amount of such contribution were determined by pro rata or per capita allocation. IX.1.7 RATING SURVEILLANCE. Lender will retain the Rating Agencies ------------------- to provide rating surveillance services on Securities, at the sole expense of Lender. 50 IX.2 EXCULPATION. Subject to the qualifications below, Lender ----------- shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Loan Documents by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Loan Documents, or in the Properties, the Rents or any other collateral given to Lender pursuant to the Loan Documents; provided, however, that, except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender, and Lender agrees that it shall not sue for, seek or demand any deficiency judgment against Borrower in any such action or proceeding under or by reason of or under or in connection with any Loan Document. The provisions of this section shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by any Loan Document; (ii) impair the right of Lender to name Borrower as a party defendant in any action or suit for foreclosure and sale under any Deed of Trust to which it is a party; (iii) affect the validity or enforceability of any guaranty made in connection with the Loan or any of the rights and remedies of Lender thereunder; (iv) impair the right of Lender to obtain the appointment of a receiver; (v) impair the enforcement of any of the Assignments of Leases; (vi) constitute a prohibition against Lender to commence any other appropriate action or proceeding in order for Lender to fully realize the security granted by the Deeds of Trust or to exercise its remedies against the Properties; or (vii) constitute a waiver of the right of Lender to enforce the liability and obligation of Borrower, by money judgment or otherwise, to the extent of any loss, damage, cost, expense, liability, claim or other obligation incurred by Lender (including reasonable attorneys' fees and costs reasonably incurred) arising out of or in connection with the following: (a) fraud or intentional misrepresentation by Borrower or any guarantor in connection with the Loan; (b) the gross negligence or willful misconduct of Borrower; (c) the breach of any representation, warranty, covenant or indemnification in any Loan Document concerning Environmental Laws or Hazardous Substances, including Sections 4.1.32 and 5.10, and clauses (viii) through (xi) of Section 10.13(b); (d) the removal or disposal of any portion of any Property after an Event of Default; (e) the misapplication or conversion by Borrower of (x) any insurance proceeds paid by reason of any Insured Casualty, (y) any Award received in connection with a Condemnation, or (z) any Rents received by Borrower or Manager following an Event of Default; 51 (f) failure to pay charges for labor or materials or other charges payable by Borrower that can create Liens on any portion of any Property unless such charges are the subject of a bona fide dispute in which Borrower is contesting the amount or validity thereof; (g) any security deposits collected with respect to the Properties which are not delivered to Lender upon a foreclosure of or action in lieu thereof, except to the extent any such security deposits were applied in accordance with the terms and conditions of any of the Leases prior to such foreclosure or action in lieu thereof; and (h) Borrower's indemnifications of Lender set forth in Sections 9.1.3 and 9.1.4. Notwithstanding anything to the contrary in this Agreement or any of the Loan Documents, Lender shall not be deemed to have waived any right which Lender may have under Section 506(a), 506(b), 1111(b) or any other provisions of the U.S. Bankruptcy Code to file a claim for the full amount of the Debt or to require that all collateral shall continue to secure all of the Debt in accordance with the Loan Documents. IX.3 TERMINATION OF MANAGER. If an Event of Default shall be ---------------------- continuing, Borrower shall, at the request of Lender, terminate the Management Agreement and replace the Manager with a manager approved by Lender and any applicable Rating Agency, at then market rate management fees and otherwise on terms and conditions satisfactory to Lender. IX.4 RETENTION OF SERVICER. Lender reserves the right to retain --------------------- the Servicer to act as its agent hereunder with such powers as are specifically delegated to the Servicer by Lender, whether pursuant to the terms of this Agreement, the Pooling and Servicing Agreement, the Deposit Account Agreement or otherwise, together with such other powers as are reasonably incidental thereto. Borrower shall pay any reasonable fees and expenses of the Servicer in connection with a Defeasance, release of Property, assumption or modification of the Loan or enforcement of the Loan Documents, but in no event shall Borrower be responsible for the Servicer's fees in connection with ordinary, ongoing administration of the Loan. X. MISCELLANEOUS ------------- X.1 SURVIVAL. This Agreement and all covenants, agreements, -------- representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making by Lender of the Loan and the execution and delivery to Lender of the Note, and shall continue in full force and effect so long as all or any of the Debt is unpaid. All Borrower's covenants and agreements in this Agreement shall inure to the benefit of the respective legal representatives, successors and assigns of Lender. X.2 LENDER'S DISCRETION. Whenever pursuant to this Agreement, ------------------- Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide whether arrangements or terms are satisfactory or not satisfactory shall (except as is otherwise specifically herein provided) be in the sole discretion of Lender and shall be final and conclusive. 52 X.3 GOVERNING LAW. PARTIES AGREE THAT THE STATE OF MARYLAND HAS A ------------- SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS CREATED PURSUANT TO THE LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE APPLICABLE PROPERTY IS LOCATED, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF MARYLAND SHALL GOVERN THE VALIDITY AND THE ENFORCEABILITY OF ALL LOAN DOCUMENTS AND THE DEBT. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND. X.4 MODIFICATION, WAIVER IN WRITING. No modification, amendment, ------------------------------- extension, discharge, termination or waiver of any provision of this Agreement or of any other Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to or demand on Borrower shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances. X.5 DELAY NOT A WAIVER. Neither any failure nor any delay on the ------------------ part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, or under any other Loan Document, shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under any Loan Document, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under the Loan Documents, or to declare a Default for failure to effect prompt payment of any such other amount. X.6 NOTICES. All notices, consents, approvals and requests ------- required or permitted hereunder or under any other Loan Document (a "NOTICE") shall be given in writing and shall be effective for all purposes if hand delivered or sent (i) by certified or registered United States mail, postage prepaid, or (ii) by (A) expedited prepaid delivery service, either commercial or United States Postal Service, with proof of attempted delivery, and (B) telecopier (with answer back 53 acknowledged), in any case addressed as follows (or to such other address or Person as a party shall designate from time to time by notice to the other party): If to Lender: Nomura Asset Capital Corporation Two World Financial Center Building B New York, New York 10281 Attention: Sheryl McAfee Telecopier: 212-667-1206 with copies to: Nomura Asset Capital Corporation Two World Financial Center Building B New York, New York 10281 Attention: Barry Funt Telecopier: 212-667-1567 and Battle Fowler LLP 75 East 55th Street New York, New York 10022 Attention: Kenneth J. Friedman, Esq. Telecopier: 212-856-7802 If to Borrower: c/o Saul Centers, Inc. 8401 Connecticut Avenue Chevy Chase, Maryland 20815 Attention: Scott Schneider Telecopier: (301) 986-6023 with a copy to: Shaw, Pittman, Potts & Trowbridge 2300 N Street, N.W. Washington, DC 20037 Attention: Sheldon J. Weisel, Esq. Telecopier: (202) 663-8007 54 A notice shall be deemed to have been given: in the case of hand delivery, at the time of delivery; in the case of registered or certified mail, when delivered or the first attempted delivery on a Business Day; or in the case of expedited prepaid delivery and telecopy, upon the first attempted delivery on a Business Day. X.7 TRIAL BY JURY. BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY ------------- JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY Borrower, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY Borrower. X.8 HEADINGS. The Section headings and Table of Contents in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. X.9 SEVERABILITY. Wherever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. X.10 PREFERENCES. Lender shall have the continuing and exclusive ----------- right to apply or reverse and reapply any and all payments by Borrower to any portion of the Debt. To the extent Borrower makes a payment to Lender, or Lender receives proceeds of any collateral, which is in whole or part subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Debt or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender. X.11 WAIVER OF NOTICE. Borrower shall not be entitled to any ---------------- notices of any nature whatsoever from Lender except with respect to matters for which this Agreement or any other Loan Document specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Borrower is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which no Loan Document specifically and expressly provides for the giving of notice by Lender to Borrower. X.12 INTENTIONALLY DELETED. 55 X.13 EXPENSES; INDEMNITY. (a) Borrower shall reimburse Lender upon ------------------- receipt of notice for all reasonable costs and expenses (including reasonable attorneys' fees and disbursements) incurred by Lender in connection with (i) the preparation, negotiation, execution and delivery of the Loan Documents and the consummation of the transactions contemplated thereby and all the costs of furnishing all opinions by counsel for Borrower; (ii) Borrower's and Lender's ongoing performance under and compliance with the Loan Documents, including confirming compliance with environmental and insurance requirements; (iii) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications of or under any Loan Document and any other documents or matters requested by Lender; (iv) filing and recording of any Loan Documents; (v) title insurance, surveys, inspections and appraisals; (vi) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting Borrower, the Loan Documents, the Properties or any other security given for the Loan; and (vii) enforcing any obligations of or collecting any payments due from Borrower under any Loan Document or with respect to the Properties or in connection with any refinancing or restructuring of the Loan in the nature of a "work-out", or any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. It is understood and agreed by Lender and Borrower, however, that Borrower shall not be responsible for the payment of costs and expenses in connection with the ordinary and ongoing administration of the Loan (including, without limitation, the Servicer's fees and expenses except as expressly stated to the contrary in Section 9.4). Any costs and expenses due and payable to Lender hereunder which are not paid by Borrower within ten (10) days after demand may be paid from any amounts in the Deposit Account, with notice thereof to Borrower. (b) Borrower shall indemnify and hold harmless Lender from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Lender in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not Lender shall be designated a party thereto), that may be imposed on, incurred by, or asserted against Lender (collectively, the "INDEMNIFIED LIABILITIES") in any manner, relating to or arising out of or by reason of (i) any breach by Borrower of their obligations under, or any material misrepresentation by Borrower contained in, any Loan Document; (ii) the use or intended use of the proceeds of the Loan; (iii) any information provided by or on behalf of Borrower, or contained in any documentation approved by Borrower; (iv) ownership of any Deed of Trust, the Properties or any interest therein, or receipt of any Rents; (v) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about any Property or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (vi) any use, nonuse or condition in, on or about any Property or on adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (vii) performance of any labor or services or the furnishing of any materials or other property in respect of any Property; (viii) the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release, or threatened release of any Hazardous Substance on, from or affecting any Property; (ix) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Substance; (x) any lawsuit brought or threatened, settlement reached, or government 56 order relating to such Hazardous Substance; (xi) any violation of the Environmental Laws, which is based upon or in any way related to such Hazardous Substance, including, without limitation, the costs and expenses of any Remedial Work, attorney and consultant fees and disbursements, investigation and laboratory fees, court costs, and litigation expenses; (xii) any failure of any Property to comply with any Legal Requirement; (xiii) any claim by brokers, finders or similar persons claiming to be entitled to a commission in connection with any Lease or other transaction involving any Property or any part thereof under any Legal Requirement, or any liability asserted against Lender with respect thereto; and (xiv) the claims of any lessee of any portion of any Property or any person acting through or under any lessee or otherwise arising under or as a consequence of any Lease; provided, however, that Borrower shall not have any obligation to Lender hereunder to the extent that such Indemnified Liabilities arise from the gross negligence, illegal acts, fraud or willful misconduct of Lender. To the extent that the undertaking to indemnify and hold harmless set forth in the preceding sentence may be unenforceable because it violates any law or public policy, Borrower shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Lender. Any amounts payable to Lender by reason of the application of this paragraph shall become immediately due and payable and shall bear interest at the Default Rate from the date loss or damage is sustained by Lender until paid. The obligations and liabilities of Borrower under this Section 10.13 shall survive the Term and the exercise by Lender of any of its rights or remedies under the Loan Documents, including the acquisition of any Property by foreclosure or a conveyance in lieu of foreclosure. X.14 PRIOR AGREEMENTS. This Agreement and the other Loan Documents ---------------- contain the entire agreement of the parties hereto and thereto in respect of the transactions contemplated hereby and thereby, and all prior agreements among or between such parties, whether oral or written, are superseded by the terms of this Agreement and the other Loan Documents. X.15 OFFSETS, COUNTERCLAIMS AND DEFENSES. Borrower hereby waives ----------------------------------- the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents, including Servicer. Any assignee of Lender's interest in and to the Loan Documents shall take the same free and clear of all offsets, counterclaims or defenses that are unrelated to the Loan Documents which Borrower may otherwise have against any assignor of such documents, and no such unrelated offset, counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents, and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower. X.16 PUBLICITY. All news releases, publicity or advertising by --------- Borrower or its Affiliates through any media intended to reach the general public, which refers to the Loan Documents, the Loan, Lender, Nomura, the Loan purchaser, the Servicer or the trustee in a Securitization (except for notices required by applicable law), shall be subject to the prior written approval of Lender, and all such news releases, publicity or advertising by Lender or its Affiliates referring to Borrower or the Properties (except for notices required by applicable law and customary "tombstone"-type advertisements) shall be subject to the prior written approval of Borrower. 57 X.17 CONTROLLING AGREEMENT. Borrower and Lender intend at all times --------------------- to comply with applicable state law or applicable United States federal law (to the extent that it permits Lender to contract for, charge, take, reserve or receive a greater amount of interest than under state law) and that this Section 10.17 shall control every other agreement in the Loan Documents. If the applicable law (state or federal) is ever judicially interpreted so as to render usurious any amount called for under the Note or any other Loan Document, or contracted for, charged, taken, reserved or received with respect to the Debt, or if Lender's exercise of the option to accelerate the maturity of the Loan of any prepayment by Borrower results in Borrower having paid any interest in excess of that permitted by applicable law, then it is Borrower's and Lender's express intent that all excess amounts theretofore collected by Lender shall be credited against the unpaid Principal and all other Debt (or, if the Debt has been or would thereby be paid in full, refunded to Borrower), and the provisions of the Loan Documents immediately be deemed reformed and the amounts thereafter collectible thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for thereunder. All sums paid or agreed to be paid to Lender for the use, forbearance or detention of the Loan shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Debt does not exceed the maximum lawful rate from time to time in effect and applicable to the Debt for so loan as the Debt is outstanding. Notwithstanding anything to the contrary contained in any Loan Document, it is not the intention of Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. X.18 CONFLICT; CONSTRUCTION OF DOCUMENTS. In the event of any ----------------------------------- conflict between the provisions of this Agreement and any of the other Loan Documents, the provisions of this Agreement shall control. The parties hereto acknowledge that they were represented by counsel in connection with the negotiation and drafting of the Loan Documents and that the Loan Documents shall not be subject to the principle of construing their meaning against the party that drafted them. X.19 BROKERS AND FINANCIAL ADVISORS. Borrower hereby represents ------------------------------ that it has dealt with no financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the Loan other than Preminger & Glazer, whose fee shall be paid by Borrower pursuant to a separate agreement. Borrower and Lender hereby agree to indemnify and hold the other harmless from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from a claim by any Person that such Person acted on behalf of the indemnifying party in connection with the transactions contemplated herein. The provisions of this Section 10.19 shall survive the expiration and termination of this Agreement and the repayment of the Debt. X.20 NO THIRD PARTY BENEFICIARIES. The Loan Documents are solely ---------------------------- for the benefit of Lender and Borrower and nothing contained in any Loan Document shall be deemed to confer upon anyone other than the Lender and Borrower any right to insist upon or to enforce the performance or observance of any of the obligations contained therein. 58 [Signature Page Follows] 59 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written. SAUL SUBSIDIARY I LIMITED PARTNERSHIP, a Maryland limited partnership By: Saul QRS, Inc., a Maryland corporation, its sole general partner By: --------------------------------------------- Name: Title: NOMURA ASSET CAPITAL CORPORATION, a Delaware corporation By: --------------------------------------------- Name: Title: 60 EX-10.Q 4 REVOLVING CREDIT AGREEMENT EXHIBIT 10(q) REVOLVING CREDIT AGREEMENT -------------------------- THIS REVOLVING CREDIT AGREEMENT is made and entered into as of the first day of October, 1997, by and between SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership and SAUL SUBSIDIARY II LIMITED PARTNERSHIP, a Maryland limited partnership (hereinafter collectively called "BORROWER"); and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("AGENT") as agent for itself and for the other financial institutions (collectively, the "LENDERS") which may in the future become parties to that certain Intercreditor Agreement with Agent in its capacity as Agent and Lender (the "INTERCREDITOR AGREEMENT"). WITNESSETH THAT, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: DEFINITIONS ----------- For the purposes of this Agreement, the following terms shall have the following respective meanings, unless the context hereof clearly requires otherwise: Acquisition Costs: All costs of acquiring Real Estate Assets, ----------------- including purchase price and reasonable and customary closing costs, as determined by Agent. Adjusted EBITDA: An amount equal to ninety seven percent (97%) of --------------- EBITDA. Adjusted EBITDA/Debt Service Coverage Ratio: The ratio obtained by ------------------------------------------- dividing Adjusted EBITDA by Debt Service. Adjusted Eurodollar Rate: With respect to each Interest Period ------------------------ applicable to a Eurodollar Rate Advance, the rate (rounded upward, if necessary, to the next one hundredth of one percent) determined by dividing the Eurodollar Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage. Advance: Any portion of the Loan advanced by a Lender to or for the ------- benefit of Borrower in accordance with the terms hereof and as to which Borrower has elected one (1) of the available interest rate options and, if applicable, an Interest Period. An Advance may be a Eurodollar Rate Advance or a Reference Rate Advance; provided, however, that if Borrower has made no election of an interest rate option with respect to any Advance, Borrower shall be deemed to have elected that it be a Reference Rate Advance. Advance Date: The date on which an Advance of Loan proceeds requested ------------ by Borrower hereunder is funded. Agreement: This Revolving Credit Agreement, including any amendments --------- hereof and supplements hereto executed by Borrower and Agent on behalf of Lenders. Applicable Margin: With respect to: ----------------- (a) Reference Rate Advances -- 0.00%. (b) Eurodollar Rate Advances -- shall vary as follows: (i) 1.375%, effective upon Agent's determination in its sole discretion, on the first day of each fiscal quarter for purposes of determining the Applicable Margin for such quarter, that the Leverage Ratio is not greater than fifty five percent (55%) and the Adjusted EBITDA/Debt Service Coverage Ratio is not less than 1.80 and continuing thereafter for so long as such tests are satisfied, as determined by Agent; and (ii) 1.500%, effective upon Agent's determination, in its sole discretion, on the first day of each fiscal quarter for purposes of determining the Applicable Margin for such quarter, that the Leverage Ratio is not greater than sixty percent (60%) and the Adjusted EBITDA/Debt Service Coverage Ratio is not less than 1.70 and continuing thereafter for so long as such tests are satisfied, as determined by Agent; and (iii) 1.625% at all other times. Approved Asset: An Unencumbered Asset which has been approved by -------------- Lenders pursuant to SECTION 2.B.2. Board: The Board of Governors of the Federal Reserve System or any ----- successor thereto. Borrower: As defined in the preamble to this Agreement. -------- Business Day: Any day, other than a Saturday, a Sunday, or a legal ------------ holiday in the State of Minnesota, on which national banks are permitted to be open. Calculation Date: The date upon which Borrower submits a Draw ---------------- Request, the date upon which Borrower requests that Agent issue a Letter of Credit, the date upon which Borrower requests the release of a Negative Pledge with respect to an Approved Asset, the date upon which a Capital Event occurs, or the date upon which there exists an Event of Default under the Loan, as applicable. Capital Event: The occurrence from time to time of an equity or debt ------------- offering by any Borrower (which shall specifically exclude stock issued in connection with a dividend reinvestment plan), a Disqualifying Environmental Event, or if an Encumbrance, Imposition or Lien arises against an Approved Asset. Capitalization Value: For any period of determination, an amount as -------------------- determined by Agent in its sole discretion, equal to the sum of (a) the aggregate Adjusted EBITDA for the previous four calendar quarters, divided by ten percent (10%) (provided that, with respect to Real Estate Assets which Borrower has owned for more than three (3) months but less than one (1) year, as of the Calculation Date, Adjusted EBITDA shall be annualized based upon the period of time Borrower has owned them); (b) 100% of the value of Unrestricted Cash and Cash Equivalents; (c) 100% of the aggregate costs incurred and paid to the Calculation Date by the Borrower with respect to Real Estate Assets Under Development, including those projects which have been operating for less than one year; provided, however, with respect to any Real Estate Asset Under Development which does not continue to meet the Minimum Lease Up Requirement, only 75% of the aggregate costs incurred and paid to the Calculation Date by the Borrower shall be taken in account in calculating Capitalization Value; and (d) 50% of the Acquisition Costs with respect to Real Estate Assets which, as of the date of calculation, Borrower has owned for less than three (3) months. Closing Date: The date of this Agreement. ------------ Code: The Internal Revenue Code of 1986, as amended. ---- Commitment Percentage: Each Lender's share of all right, title, and ---------------------- interest in the Loan and the Loan Documents, as set forth on Schedule 1 attached ---------- hereto, as amended and modified by unilateral action of Agent from time to time to reflect the sale or assignment of a portion or portions of the Loan. Debt Service: For any period of determination, the following amount ------------ incurred by Borrower during the previous four (4) fiscal quarters, as determined by Agent in its sole discretion: (a) Interest Expense plus (b) the aggregate ---- amount of scheduled principal payments of indebtedness of the Borrower (excluding optional prepayments but expressly including scheduled principal payments in respect of any indebtedness which is not amortized through equal periodic installments of principal and interest over the term of such indebtedness, including, without limitation, balloon payments at maturity that are not refinanced or paid off on or before the maturity date thereof) required to be made during such time period by the Borrower plus (c) the aggregate amount ---- of capitalized interest required in accordance with GAAP to be paid or accrued by the Borrower during such time period, plus (d) expenses attributable to ---- preferred stock or a similar type of investment. Default Rate: The Default Rate of interest specified in SECTION ------------ 1.2(C) hereof. Disqualifying Environmental Event: Any release or threatened release --------------------------------- of Hazardous Substances, any violation of Environmental Laws or any other similar environmental event with respect to a Real Estate Asset which is not cured within sixty (60) days or that would cause, in Agent's determination, such Real Estate Asset to no longer be financeable on a non-recourse (with customary exceptions) debt basis under the then generally accepted underwriting standards of national insurance company or pension fund real estate institutional lenders. In the event that such release or threatened release, violation or similar environmental event is susceptible of cure but is not cured within said sixty (60) days, so long as Borrower is diligently and continuously pursuing such cure, as evidenced to Agent's satisfaction, Agent shall permit Borrower an additional one hundred twenty (120) days to effectuate such cure; provided, however that such additional one hundred twenty (120) days shall not apply where such release or threatened release, violation or similar environmental event results, in Lender's judgment, in a matter which is of an emergency nature. Distribution. With respect to: ------------ (i) the Borrower, any distribution of cash or other cash equivalent, directly or indirectly, to the partners of the Borrower; or any other distribution on or in respect of any partnership interests of the Borrower excluding distributions reinvested pursuant to Borrower's distribution reinvestment program; and (ii) the Guarantor, the declaration or payment of any dividend on or in respect of any shares of any class of capital stock of Guarantor, excluding dividends payable solely in shares of common stock by Guarantor and dividends reinvested pursuant to Guarantor's dividend reinvestment program; the purchase, redemption, or other retirement of any shares of any class of capital stock of Guarantor, directly or indirectly through a subsidiary of Guarantor, or otherwise; the return of capital by Guarantor to its shareholders as such; or any other distribution on or in respect of any shares of any class of capital stock of Guarantor (except as excluded above). Draw Request: A written request by Borrower for an Advance of Loan ------------ proceeds under this Agreement, in the form and with the certifications included within Exhibit A attached hereto and hereby made a part hereof. --------- EBITDA: For any period of determination, an amount equal to ------ Borrower's earnings before interest, taxes, depreciation and amortization, all as calculated in accordance with GAAP, as determined by Agent. Encumbrance: As defined in SECTION 5.6. ----------- Environmental Law: Any judgment, decree, order, law, license, rule or ----------------- regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment. Eurodollar Business Day: A Business Day which is also a day for ----------------------- trading by and between banks in United States dollar deposits in the interbank Eurodollar market and a day on which banks are open for business in New York City. Eurodollar Rate: With respect to each Interest Period applicable to a --------------- Eurodollar Rate Advance, the interest rate per annum (rounded upward, if necessary, to the next one-one hundredth of one percent) as determined by Agent at which United States dollar deposits are offered in the interbank Eurodollar market two (2) Eurodollar Business Days prior to the first day of such Interest Period for delivery in Immediately Available Funds on the first day of such Interest Period and in an amount approximately equal to the Advance to which said Interest Period is to apply as determined by Agent and for a maturity comparable to the Interest Period; provided that, in lieu of determining the rate in the foregoing manner, Agent may substitute the per annum Eurodollar interest rate (LIBOR) for United States dollars displayed on the Reuters Screen LIBO page two (2) Eurodollar Business Days prior to the first day of such Interest Period (rounded upward, if necessary, to the next one-hundredth of one percent) then applicable to amounts approximately equal to the Advance to which such Interest Period is to apply for a maturity comparable to the Interest Period. "Reuters Screen LIBO page" means the display designated as page "LIBO" on the Reuters Monitor Money Rate Screen (or such other page as may replace the LIBO page on such service) for the purpose of displaying Reuters interbank offered rates of major banks for United States dollar deposits. Eurodollar Rate Advance: An Advance, in the minimum amount of ----------------------- $1,000,000.00 and in integral multiples of $100,000.00 in excess thereof, with respect to which the interest rate is determined by reference to the Adjusted Eurodollar Rate. Eurodollar Reserve Percentage: As of any day, that percentage ----------------------------- (expressed as a decimal) which is in effect on such day, as prescribed by the Board for determining the actual reserve requirement (including any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System, with deposits comparable in amount to those held by a Lender in respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of the Board. The rate of interest applicable to any outstanding Eurodollar Rate Advances shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. Event of Default: Any event set forth in SECTION 6.1. ---------------- Extension Period: As defined in SECTION 1.14. ---------------- Funds from Operations. Net income, computed in accordance with GAAP, --------------------- excluding minority interests, gains, or losses from debt restructuring and sales of property (inclusive of non-recurring items such as asset sales or property valuation adjustments), plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect Funds From Operations on the same basis. GAAP: Generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted, and all accounting determinations hereunder shall be made, in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred, unless Borrower and Agent on behalf of Lenders agree in writing on an adjustment to said computation or determination to account for such change in GAAP. Governmental Requirements: All laws, statutes, codes, ordinances, and ------------------------- governmental rules, regulations and requirements applicable to Borrower, Agent, any Lender and/or the Approved Assets. Guarantor: Saul Centers, Inc., a Maryland corporation. --------- Guaranty: That certain Guaranty of even date herewith executed by -------- Guarantor, including any amendments thereof and supplements thereto executed by Guarantor to Agent and Lenders. Hazardous Substances: Any hazardous waste, as defined by 42 U.S.C. -------------------- (S) 9601(5), any hazardous substances as defined by 42 U.S.C. (S) 9601(14), any pollutant or contaminant as defined by 42 U.S.C. (S)9601(33) or any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws. Immediately Available Funds: Funds with good value on the day and in --------------------------- the city in which payment is received. Imposition: As defined in SECTION 5.6. ---------- Intercreditor Agreement: As defined in the Preamble to this ----------------------- Agreement. Interest Expense: For any period of determination, an amount ---------------- determined by Agent in its sole discretion equal to the aggregate amount of interest required in accordance with GAAP to be paid or accrued (but excluding interest reserves funded from the proceeds of any construction loan) by the Borrower during such time period on: (i) all indebtedness of the Borrower (including the Loan and including original issue discount and amortization of prepaid interest, if any) (ii) all amounts available for borrowing, or for drawing under letters of credit, if any, issued for the account of the Borrower, but only if such interest was or is required to be reflected as an item of expense, excluding commitment fees, agency fees, facility fees, balance deficiency fees and similar fees and expenses in connection with the borrowing of money and (iii) preferred stock or a similar type of investment. Interest Period: With respect to each Eurodollar Rate Advance, the --------------- period commencing on the date of such Advance or on the last day of the immediately preceding Interest Period, if any, applicable to an outstanding Advance and ending on the numerically corresponding day one (1), two (2), three (3) or six (6) months thereafter, as Borrower may elect in the applicable notice or request of or for borrowing, continuation or conversion; provided that: ------------- (1) Any Interest Period that would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day, unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; and (2) Any Interest Period that begins on the last Eurodollar Business Day of a calendar month (or a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month. No Interest Period may end after the Maturity Date, and each Interest Period must end on a date such that no default exists under SECTION 1.3 hereof as a result of a failure by Borrower to prepay the Advance to which such Interest Period applies. Any payment of a Eurodollar Rate Advance on a date other than the last day of the Interest Period applicable thereto shall be accompanied by an additional payment in an amount computed in accordance with SECTION 1.12. Lenders: Each Lender that is a party to this Agreement and which ------- hereafter becomes party to the Intercreditor Agreement, collectively, and each of their respective permitted successors and assigns. Letter of Credit: An irrevocable letter of credit issued by Agent ---------------- pursuant to this Agreement for the account of Borrower. Letter of Credit Fee: As defined in SECTION 2.A.7. -------------------- Letter of Credit Participation: As defined in SECTION 2.A.9. ------------------------------ Leverage Ratio: The ratio of Total Adjusted Outstanding Indebtedness -------------- to Capitalization Value. Loan: The loan evidenced by the Note. ---- Loan Availability. That portion of the Revolving Commitment Amount ----------------- determined by Agent to be available to be advanced as more particularly described in SECTION 2.B.3. Loan Documents: The documents described in SECTION 2.B.1, which -------------- evidence, secure or otherwise relate to the Loan, including but not limited to the Note, this Agreement, the Letter of Credit applications, the Letters of Credit, and the Guaranty, the Negative Pledge Agreements, and including any amendments thereof and supplements thereto executed by Agent on behalf of the Lenders and Borrower (and/or any other party thereto). Major Asset: The Unencumbered Assets known as Beacon, Lexington and ----------- Southdale, and such other Approved Assets as Borrower and Lenders may agree to designate as a Major Asset from time to time. Majority Lenders: Lenders holding not less than fifty one percent ---------------- (51%) of the then aggregate outstanding unpaid principal amount of the Loan or, if no such principal amount is then outstanding, not less than fifty one percent (51%) of the Revolving Commitment. Maturity Date: September 30, 2000, unless extended pursuant to the ------------- terms of SECTION 1.14. Maximum Drawing Amount: The maximum aggregate amount that the ---------------------- beneficiaries may at any time draw under outstanding Letters of Credit, as such maximum aggregate amount may be reduced from time to time pursuant to the terms of the Letters of Credit. Minimum Equity Value: For any period of determination, an amount -------------------- equal to Capitalization Value less Total Adjusted Outstanding Indebtedness. Minimum Lease Up Requirement: Any Real Estate Asset that on any date ---------------------------- of determination has been improved with a building or buildings which have an aggregate average occupancy of all building(s) in such Real Estate Asset of not less than 50% for the fiscal quarter most recently ended, other than Cross Town Shopping Center in Tulsa, Oklahoma and except as otherwise approved by Agent. For purposes of this definition, a tenant shall be deemed to be in "occupancy" if such tenant or its subtenant(s) is in possession of the leased premises and such tenant is paying stipulated rent, if any; provided, however, when determining whether the Minimum Lease Up Requirement has been satisfied pursuant to SECTION 2.B.2 hereof, a tenant shall be deemed to be in occupancy if, within six (6) months prior to the date of determination, such tenant entered into a lease for space in the Real Estate Asset which such tenant previously did not occupy and there exists no default under such lease and no material contingencies to such tenant's occupancy under the lease other than completion of tenant improvement work. Net Equity Proceeds: The proceeds of a sale of an equity interest in ------------------- the Borrower or the Guarantor (including those attributable to a dividend reinvestment program), net of usual and customary closing costs and expenses. Note: The Unsecured Revolving Promissory Note(s) of even date ---- herewith executed and delivered by Borrower to Lenders in the maximum principal amount of Sixty Million and No/100ths Dollars ($60,000,000.00), to evidence the Loan, as the same may be amended, modified or replaced from time to time. Obligations: All indebtedness, obligations and liabilities of the ----------- Borrower to any of the Lenders and the Agent, individually or collectively, under this Agreement, any of the other Loan Documents, or in respect to the Loan, the Note or Reimbursement Obligations incurred or the Letter of Credit applications or the Letters of Credit or other instruments at any time evidencing any thereof, whether existing on the date of this Agreement or arising or incurred hereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise. Permanent Loan Estimate: For any period of determination, a ----------------------- determination by Agent of a hypothetical principal amount of indebtedness which Borrower could incur assuming (i) payments of annual debt service equal to Unencumbered Adjusted EBITDA measured with respect to the Approved Assets only divided by 1.50, (ii) an interest rate equal to two percent (2.0%) in excess of the then-current annual yield on ten-year United States Treasury obligations issued most recently prior to such date and (iii) a twenty five (25) year principal amortization schedule. Person: Any natural person, corporation, limited liability company, ------ partnership (general or limited), limited liability partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. Real Estate Assets: The fixed and tangible properties consisting of ------------------ land, buildings and/or other improvements owned or ground-leased by the Borrower at the relevant time of reference thereto. Real Estate Assets Under Development: Any Real Estate Assets for ------------------------------------- which the Borrower, is actively pursuing construction and for which construction is proceeding to completion without undue delay from permit denial, construction delays or otherwise, all pursuant to such Person's ordinary course of business; provided that such Real Estate Asset will no longer be considered a Real Estate Asset Under Development on the date which is six (6) months after the Borrower obtains the necessary governmental approvals to permit occupancy of the building. Notwithstanding the foregoing, tenant improvements to previously constructed and/or leased Real Estate Assets shall not be considered Real Estate Assets Under Development. Reference Rate: The rate of interest from time to time publicly -------------- announced by Agent as its "reference rate". Agent may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate hereunder or under any Loan Document which is based on the Reference Rate, such interest rate shall change as and when the Reference Rate shall change. Reference Rate Advance: An Advance with respect to which the interest ---------------------- rate is determined by reference to the Reference Rate. Regulatory Change: Any change after the date hereof in federal, state ----------------- or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requirements applying to a class of banks including such Lender under any federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. Reimbursement Obligations: The Borrower's obligation to reimburse the ------------------------- Lenders and the Agent on account of any drawing under any Letter of Credit as provided in SECTION 2.A.4. Notwithstanding the foregoing, unless Borrower shall notify Agent of its intention to repay the Reimbursement Obligations on the date of the related drawing under any Letter of Credit, as set forth in SECTION 2.A.4, such Reimbursement Obligation shall simultaneously with such drawing be converted to and become a Reference Rate Advance. Revolving Commitment: The obligation of the Lenders to make Advances -------------------- to Borrower and to participate in the issuance, extension and renewal of Letters of Credit and the obligation of Agent to issue, extend and renew Letters of Credit, in an aggregate principal amount at any time not to exceed the Revolving Commitment Amount upon the terms and subject to the conditions and limitations set forth in this Agreement. Revolving Commitment Amount: Sixty Million and No/100ths Dollars --------------------------- ($60,000,000.00). Termination Date: The earlier of (a) the Maturity Date, or (b) the ---------------- date on which the Note is declared to be immediately due and payable pursuant to the terms hereof or of the Note. Total Adjusted Outstanding Indebtedness: As of any date of --------------------------------------- determination, the sum as determined by Agent of all obligations, contingent and otherwise of the Borrower, whether secured or unsecured, that in accordance with GAAP should be classified upon the obligor's balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (a) all debt and similar monetary obligations, whether direct or indirect (excluding trade payables and other operating expenses paid by Borrower within sixty days); (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge, or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; (c) all guarantees for borrowed money, endorsements and other contingent obligations, whether direct or indirect, in respect of indebtedness or obligations of others, including any obligation to supply funds (including partnership obligations and capital requirements) to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit; and (d) preferred stock outstanding or a similar type of investment. Total Revolving Outstandings: As of any date of determination, the ---------------------------- aggregate unpaid principal balance of Advances outstanding on such date. Transferees: As defined in SECTION 7.7. ----------- Transferred Interest: As defined in SECTION 7.7. -------------------- Unencumbered Adjusted EBITDA: Adjusted EBITDA calculated only with ---------------------------- respect to the Approved Assets. Unencumbered Asset. Any Real Estate Asset that on any date of ------------------ determination: (a) is not subject to any material liens (including any such lien imposed by the organizational documents of the owner of such asset), (b) is not the subject of any matter that materially adversely affects the value of such Real Estate Asset, (c) is not the subject of a Disqualifying Environmental Event, (d) has been improved with a building or buildings which (1) have been issued a certificate of occupancy (where available) or is otherwise lawfully occupied for its intended use, and (2) are fully operational, (e) is wholly owned or ground-leased by the Borrower and (f) has not been designated by the Borrower in writing to the Agent as a Real Estate Asset that is not an Unencumbered Asset, which designation shall not be permitted during the continuance of an Event of Default and shall be accompanied by a compliance certificate in the form of Exhibit B-6 attached hereto. ----------- Uniform Customs: With respect to any Letter of Credit, the Uniform --------------- Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, or any successor version thereof adopted by the Agent in the ordinary course of its business as a letter of credit issuer and in effect at the time of issuance of such Letter of Credit. Unrestricted Cash and Cash Equivalents: As of any date of -------------------------------------- determination, the sum of (a) the aggregate amount of unrestricted cash then held by the Borrower and (b) the aggregate amount of unrestricted cash equivalents (valued at fair market value) then held by the Borrower. As used in this definition, (i) "unrestricted" means the specified asset is not subject to any liens in favor of any Person and (ii) "cash equivalents" includes overnight deposits and also means that such asset has a liquid, par value in cash and is convertible to cash on demand. Notwithstanding anything contained herein to the contrary, the term Unrestricted Cash and Cash Equivalents shall not include the commitments of the Lenders to make Advances under this Agreement or any other commitments from which the access to such cash or cash equivalents would create indebtedness or tenant security and other restricted deposits, until forfeited or otherwise entitled to be retained by the Borrower. ARTICLE I. LOAN ---- 1.1 - Principal Advances - ------------------------ Upon the terms and subject to the conditions set forth in this Agreement, each Lender severally agrees to lend to Borrower, through the Agent, an amount up to such Lender's Commitment Percentage of Advances on a revolving basis, at any time and from time to time, in accordance with the terms hereof, from the Closing Date to the Termination Date, during which period Borrower may borrow, repay and reborrow in accordance with the terms hereof, for the purpose of funding pre-development, development, acquisitions, renovations/expansions and working capital, distributions and principal amortization requirements of the Borrower; provided, however, that (A) at no time shall any Lender be obligated to lend to Borrower more than its Commitment Percentage of the total amount of proceeds of the Loan which Borrower has then qualified to receive hereunder, and (B) the amount of the Total Revolving Outstandings shall never exceed the lesser of (x) the Revolving Commitment Amount and (y) the Loan Availability. All Advances by each Lender shall be evidenced by a Note. Each Note executed by the Borrower shall be in the aggregate principal amount equal to such Lender's Commitment Percentage of the Revolving Commitment Amount. Each Lender shall enter in its ledgers and records the amount of each such Advance, the amount of each Advance made, and of each payment made upon the Loan, and each Lender is authorized by Borrower to enter on a schedule attached to the Note a record of such Advances and payments; provided, however, that the failure by any Lender to make any such entry or any error by such Lender in making such entry shall not limit or otherwise affect the obligations of Borrower hereunder and under the Note. Notwithstanding the express principal amount of the Note, Borrower shall not at any time be obligated to repay more or less than the total of all Advances made by each Lender pursuant hereto and to the other Loan Documents, together with interest thereon at the rates specified below and in the Note, computed on each Advance from the date it is so made by such Lender, and all other advances made by such Lender pursuant to the terms of the Loan Documents, with interest thereon as therein provided, less all payments of principal of and interest on the Note, and of such advances and interest thereon, made by Borrower. The entire unpaid principal amount of the Loan shall be due and payable on the Termination Date. 1.2 - Interest - -------------- Interest shall accrue and be payable on the Advances from the date made as follows: A. Each Eurodollar Rate Advance shall bear interest on the unpaid principal amount thereof during the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Adjusted Eurodollar Rate for such Interest Period, plus (ii) the Applicable Margin. (If Borrower has made no election of an interest rate option with respect to any Advance, said Advance shall be deemed to be a Reference Rate Advance.) Notwithstanding anything to the contrary herein set forth, the Adjusted Eurodollar Rate payable upon any Eurodollar Rate Advance shall not decrease during any Interest Period. B. Each Reference Rate Advance shall bear interest on the unpaid principal amount thereof at a varying rate per annum equal to the sum of (i) the Reference Rate, plus (ii) the Applicable Margin. C. Any Advance not paid when due, whether at the date scheduled therefor or earlier upon acceleration, shall bear interest until paid in full (i) during the balance of any Interest Period applicable to such Advance, at a rate per annum equal to the sum of the rate applicable to such Advance during such Interest Period plus four percent (4%), and (ii) otherwise, at a rate per annum equal to the sum of (x) the Reference Rate, plus (y) the Applicable Margin for Reference Rate Advances, plus (z) four percent (4%) (herein called the "DEFAULT RATE"). D. Interest shall be payable by Borrower (i) with respect to each Advance, on the first Business Day of each calendar month, commencing on the first Business Day of the next calendar month after the calendar month in which the first Advance is made; (ii) with respect to all Advances, upon any permitted prepayment (on the amount prepaid); and (iii) with respect to all Advances, on the Termination Date; provided that interest under SECTION 1.2(C) shall be payable on demand, at Lenders' option. Interest on the Loan shall be computed on the basis of actual days elapsed and a year of 360 days. E. In no event shall the Reference Rate or any applicable Adjusted Eurodollar Rate ever exceed the maximum rate permitted by applicable law (if any such maximum rate is established by applicable law), and such maximum rate shall change if and when applicable law changes to permit a higher maximum rate. Borrower and Lenders agree that no payment of interest or other consideration made or agreed to be made by Borrower to Lenders pursuant to the Note, this Agreement or any other instrument evidencing or securing the Loan shall, at any time, be deemed to have been computed at an interest rate in excess of the maximum rate of interest permissible by law, if any. In the event such payments of interest or other consideration provided for in the Note, this Agreement or any other instrument referring to or securing the Note shall result in payment of an effective rate of interest which, for any period of time, is in excess of the limit of the usury law or any other law applicable to the loan evidenced hereby, all sums in excess of those lawfully collectible as interest for the period in question shall, without further agreement or notice between or by any party or parties hereto, be applied to the principal balance immediately upon receipt of such monies by Lenders with the same force and effect as though Borrower had specifically designated, and Lenders had agreed to accept, such extra payments as a principal payment, without premium or penalty. If principal has been fully paid, any such excess amount shall be refunded to Borrower. This provision shall control over every other obligation of Borrower and Lenders under the Note, under this Agreement and under any instrument which secures the Note. F. In the event that any required payment of principal and/or interest under the Note or hereunder is not made on the due date thereof, Borrower shall pay to Agent on behalf of Lenders a late payment charge equal to five percent (5%) of the amount of the overdue payment, for the purpose of reimbursing Lenders for a portion of the expense incident to handling the overdue payment. 1.3 - Conversions and Continuations - ----------------------------------- On the terms and subject to the limitations hereof, Borrower shall have the option at any time and from time to time to convert all or any portion of the Advances into Reference Rate Advances or Eurodollar Rate Advances, or to continue a Eurodollar Rate Advance as such; provided, however that a Eurodollar Rate Advance may be converted or continued only on the last day of the Interest Period applicable thereto and no Advance may be converted to, or continued as, a Eurodollar Rate Advance if an Event of Default has occurred and is continuing on the proposed date of continuation or conversion. In addition, Advances may be converted to, or continued as, Eurodollar Rate Advances only in amounts of $1,000,000.00 and in integral multiples of $100,000.00 in excess thereof. Borrower shall give Agent on behalf of Lenders written notice of any continuation or conversion of any Advance, and such notice must be given not later than 10:00 A.M. (Minneapolis time) two (2) Eurodollar Business Days prior to the requested date of conversion or continuation in the case of the continuation of, or conversion to, a Eurodollar Rate Advance, and not later than 10:00 A.M. (Minneapolis time) one day prior to the date of the requested conversion to a Reference Rate Advance. Each such notice shall specify (A) the amount to be continued or converted, (B) the date for the continuation or conversion (which must be (i) the last day of the preceding Interest Period for any continuation as Eurodollar Rate Advances, (ii) a Eurodollar Business Day in the case of any conversion to Eurodollar Rate Advances, and (iii) a Business Day in the case of conversions to Reference Rate Advances), and (C) in the case of conversions to, or continuations as, Eurodollar Rate Advances, the Interest Period applicable thereto. Any notice given by Borrower under this Section shall be irrevocable. If Borrower shall fail to notify Agent on behalf of Lenders of the continuation of any Eurodollar Rate Advance within the time required by this Section, such Advance shall, on the last day of the Interest Period applicable thereto, automatically be converted into a Reference Rate Advance of the same principal amount. 1.4 - Prepayments. - ----------------- Borrower may prepay Reference Rate Advances, in whole or in part, at any time after one (1) Business Day's prior written notice of said prepayment from Borrower to Agent on behalf of Lenders, without premium or penalty. Any such prepayment must be accompanied by payment, in full, of all unpaid, accrued interest on the amount prepaid. Borrower may prepay Eurodollar Rate Advances only after three (3) Business Days' prior written notice of such prepayment from Borrower to Agent on behalf of Lenders and on the last day of the Interest Period applicable thereto, unless such prepayment (whether voluntary or mandatory upon an acceleration following an Event of Default) is accompanied by an additional payment in an amount computed pursuant to SECTION 1.12. Any such prepayment must be accompanied by payment, in full, of all unpaid, accrued interest on the amount prepaid. Notwithstanding the foregoing, Borrower may make partial prepayments pursuant to SECTION 2.B.3, without premium or penalty and without payment of such accrued interest, except the additional payment provided for above with respect to prepayment of Eurodollar Rate Advances. Any such partial prepayments shall be applied first to prepayment of Reference Rate Advances. 1.5 - Up-Front Fee - ------------------ In addition to any other fees set forth in this Agreement, Borrower shall pay to Agent on behalf of Lenders, in Immediately Available Funds an up-front fee in the amount of Three Hundred Thousand and No/100ths Dollars ($300,000.00), payable on the Closing Date. 1.6 - Non-Usage Fees - -------------------- In addition to any other fees set forth in this Agreement, Borrower shall pay to Agent on behalf of Lenders in Immediately Available Funds a non-usage fee of 0.30% per annum of the unadvanced Revolving Commitment Amount (after deducting the undrawn amount of any Letters of Credit outstanding hereunder), payable on the first day of each calendar quarter, calculated in arrears based on average daily balance of the unadvanced Revolving Commitment Amount during the prior calendar quarter; the first quarter for which the non-usage fee shall be payable shall commence on October 1, 1997 and the first payment of such fee shall be due and payable on January 1, 1998; provided, however such percentage shall be equal to 0.25% per annum if as of the last day of the previous quarter the Leverage Ratio is not greater than sixty percent (60%) and the Adjusted EBITDA/Debt Service Coverage Ratio is not less than 1.70; and provided, further, such percentage shall be equal to 0.20% per annum if as of the last day of the previous quarter the Leverage Ratio is not greater than fifty five percent (55%) and the Adjusted EBITDA/Debt Service Coverage Ratio is not less than 1.80. The non-usage fee shall be shared among the Lenders in accordance with the daily average Commitment Percentages of the Lenders during such calendar quarter. 1.7 - Payments. - -------------- The unpaid principal balance of, and all unpaid, accrued interest on, and other amounts due with respect to, the Loan shall be due and payable and paid in full by Borrower, on the Termination Date. Payments and prepayments of principal of, and interest on, the Note and all fees, expenses and other obligations under this Agreement payable to Agent and Lenders shall be made without setoff, deduction or counterclaim in Immediately Available Funds not later than 1:00 P.M. (Minneapolis time) on the dates called for under this Agreement and the Note to Agent at the Agent's main office in Minneapolis, Minnesota. Funds received after such time shall be deemed to have been received on the next Business Day. Whenever any payment to be made hereunder or on the Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment. All principal amounts paid or prepaid hereunder may be reborrowed in accordance with the provisions of this Agreement. 1.8 - Interest Rate Not Ascertainable, Etc. - ------------------------------------------ If, on or prior to the date for determining the Adjusted Eurodollar Rate in respect of the Interest Period for any Eurodollar Rate Advance, any Lender determines (which determination shall be conclusive and binding, absent error) that: (a) deposits in dollars (in the applicable amount) are not being made available to such Lender in the relevant market for such Interest Period, or (b) the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to such Lender of funding or maintaining Eurodollar Rate Advances for such Interest Period, then such Lender shall forthwith give notice to Borrower of such determination, whereupon the obligation of such Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Lender notifies Borrower that the circumstances giving rise to such suspension no longer exist. While any such suspension continues, all further Advances by such Lender shall be Reference Rate Advances. No such suspension shall affect the interest rate then in effect during the applicable Interest Period for any Eurodollar Rate Advance outstanding at the time such suspension is imposed. 1.9 - Increased Cost. - -------------------- If any Regulatory Change: A. shall subject any Lender to any tax, duty or other charge with respect to its Eurodollar Rate Advances, the Note, or its obligation to make Eurodollar Rate Advances or shall change the basis of taxation of payment to such Lender of the principal of or interest on Eurodollar Rate Advances or any other amounts due under this Agreement in respect of Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances (except for changes in the rate of tax on the overall net income of such Lender imposed by the jurisdiction in which such Lender's principal office is located); or B. shall impose, modify or deem applicable any reserve, special deposit, capital or similar requirement (including, without limitation, any such requirement imposed by the Board, but excluding with respect to any Eurodollar Rate Advance any such requirement to the extent included in calculating the applicable Adjusted Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, such Lender or shall impose on such Lender or on the interbank Eurodollar market any other condition affecting its Eurodollar Rate Advances, the Note or its obligation to make Eurodollar Rate Advances; and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining any Eurodollar Rate Advance, or to reduce the amount of any sum received or receivable by such Lender under this Agreement or under the Note, then, within thirty (30) days after demand by such Lender, Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. Such Lender will promptly notify Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle it to compensation pursuant to this Section. A certificate of any Lender claiming compensation under this Section, setting forth the additional amount or amounts to be paid to it hereunder and stating in reasonable detail the basis for the charge and the method of computation, shall be conclusive in the absence of error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable with respect to any Interest Period shall not constitute a waiver of such Lender's rights to demand compensation for any increased costs or reduction in amounts received or receivable in any subsequent Interest Period. 1.10 - Illegality - ----------------- If any Regulatory Change shall make it unlawful or impossible for any Lender to make, maintain or fund any Eurodollar Rate Advances, such Lender shall notify Borrower, whereupon the obligation of such Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Lender notifies Borrower that the circumstances giving rise to such suspension no longer exist. If any Lender determines that it may not lawfully continue to maintain any Eurodollar Rate Advances to the end of the applicable Interest Periods, all of the affected Advances shall be automatically converted to Reference Rate Advances as of the date of such Lender's notice, and upon such conversion Borrower shall compensate such Lender in accordance with SECTION 1.12. 1.11 - Capital Adequacy - ----------------------- In the event that any Regulatory Change reduces or shall have the effect of reducing the rate of return on any Lender's capital or the capital of its parent corporation (by an amount such Lender deems material) as a consequence of the Loan to a level below that which such Lender or its parent corporation could have achieved but for such Regulatory Change (taking into account such Lender's policies and the policies of its parent corporation with respect to capital adequacy), then Borrower shall, within ten (10) days after written notice and demand from such Lender, pay to such Lender additional amounts sufficient to compensate such Lender, or its parent corporation, for such reduction. Any determination by such Lender under this Section and any certificate as to the amount of such reduction given to Borrower by such Lender shall be final, conclusive and binding for all purposes, absent error. 1.12 - Funding Losses; Eurodollar Rate Advances - ----------------------------------------------- Borrower shall compensate any Lender, upon its written request, for all losses, expenses and liabilities (including any interest paid by such Lender to lenders of funds borrowed by it to make or carry Eurodollar Rate Advances to the extent not recovered by such Lender in connection with the re-employment of such funds, including loss of anticipated profits) and which such Lender may sustain: (A) if for any reason, other than a default by such Lender, a funding of a Eurodollar Rate Advance does not occur on the date specified therefor in the Borrower's request or notice as to such Advance hereunder, or (B) if, for whatever reason (including, but not limited to, acceleration of the maturity of Advances following an Event of Default), any repayment of a Eurodollar Rate Advance, or a conversion pursuant to SECTION 1.10, occurs on any day other than the last day of the Interest Period applicable thereto. Such Lender's request for compensation shall set forth in reasonable detail the basis for the amount requested and shall be final, conclusive and binding, absent error. 1.13 - Discretion of Lender as to Manner of Funding - --------------------------------------------------- Any Lender shall be entitled to fund and maintain its funding of Eurodollar Rate Advances in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under SECTION 1.12, but excluding determinations that such Lender may make from the Reuters screen LIBO page) shall be made as if such Lender had actually funded and maintained each Eurodollar Rate Advance during the Interest Period for such Advance through the purchase of deposits, having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. 1.14 - Extension of Maturity Date - --------------------------------- Borrower may elect to extend the Maturity Date for one (1) additional period of one (1) year (the "EXTENSION PERIOD") upon the written request of Borrower given to Agent not less than thirty (30) days nor more than one hundred twenty (120) days prior to the Maturity Date then existing, such extension being subject to satisfaction of all of the following conditions: A. Payment by Borrower on or before the first day of the Extension Period of an extension fee equal to One Hundred Fifty Thousand and No/100ths Dollars (0.25% of the Revolving Commitment Amount) in Immediately Available Funds; B. At the time of the extension request and on the first day of the Extension Period, there shall exist no uncured Event of Default or event which, with the giving of notice or passage of time, or both, could become an Event of Default; C. The delivery from Borrower to Agent on behalf of Lenders of all financial information relating to Borrower and Guarantor requested by Lenders and reflecting that no material adverse change, financial or otherwise, as determined by Agent in its sole discretion, shall have occurred with respect to any Borrower or Guarantor. Notwithstanding Borrower's right to extend the Maturity Date as set forth above, Borrower hereby agrees that Lenders shall have no commitment or obligation to extend the Maturity Date beyond September 30, 2000 unless each of the foregoing conditions shall have been satisfied. ARTICLE II.A. LETTERS OF CREDIT ----------------- 2.A. - Terms of the Letter of Credit Facility - --------------------------------------------- 2.A.1. Letters of Credit. Upon the terms and subject to the conditions ----------------- of this Agreement, Agent agrees, in its individual capacity, to issue, extend and renew Letters of Credit for the account of Borrower from time to time between the Closing Date and the Termination Date in such form as may be requested by Borrower and reasonably agreed to by Agent and in such amounts as the Borrower shall request up to an aggregate amount at any time outstanding not exceeding the Revolving Commitment Amount; provided, however, that, after giving -------- ------- effect to such issuance, (a) the Maximum Drawing Amount shall not exceed $10,000,000 at any one time, (b) the sum of (i) the Maximum Drawing Amount on all Letters of Credit and (ii) Total Revolving Outstandings shall not exceed the Loan Availability in effect at such time, and (c) the total number of Letters of Credit outstanding shall not exceed five (5). 2.A.2. Procedures for Letters of Credit. Each request for a Letter of -------------------------------- Credit shall be made by the Borrower, in writing, by telex, facsimile transmission or electronic conveyance received by the Agent by 2:00 p.m., Minneapolis time, on a Business Day which is not less than five (5) Business Days preceding the requested date of issuance (which shall also be a Business Day) and shall be accompanied by a certificate executed by the Borrower in the form of Exhibit B-7. Each request for a Letter of Credit shall specify (i) the ----------- date of issuance of the requested Letter of Credit, (ii) the amount of the requested Letter of Credit, (iii) the name of the account party on such Letter of Credit, and (iv) the beneficiary of such Letter of Credit. The Agent may require that such request be made on such letter of credit application and reimbursement agreement form as the Agent may from time to time specify, along with satisfactory evidence of the authority and incumbency of the representative of the Borrower making such request. Each request for a Letter of Credit shall be deemed a representation by the Borrower that on the date of issuance of such Letter of Credit and after giving effect thereto the applicable conditions specified in ARTICLE III have been and will be satisfied. Unless the Agent determines that any applicable condition specified in ARTICLE III has not been satisfied, the Agent will issue the requested Letter of Credit at its principal office in Minneapolis, Minnesota not later than 3:00 p.m. on the requested date of issuance. 2.A.3. Terms of Letters of Credit. Letters of Credit shall be issued in -------------------------- support of obligations of the Borrower. All Letters of Credit must expire not later than thirty (30) days prior to the Maturity Date. Each Letter of Credit so issued, extended or renewed shall be subject to the Uniform Customs. 2.A.4. Agreement to Repay Letter of Credit Drawing. If the Agent has ------------------------------------------- received documents purporting to draw under a Letter of Credit that the Agent believes conform to the requirements of the Letter of Credit, or if the Agent has decided that it will comply with the Borrower's written request or authorization to pay a drawing on any Letter of Credit that the Agent does not believe conforms to the requirements of the Letter of Credit, it will notify Borrower, of that fact. Except as contemplated in SECTION 2.A.10 below, the Borrower shall reimburse the Agent for the account of the Agent or (as the case may be) the Lenders by 9:30 a.m. (Minneapolis time) on the day on which such drawing is to be paid in Immediately Available Funds in an amount equal to the amount of such drawing. In addition, Borrower agrees to reimburse or pay to Agent for the account of the Agent or (as the case may be) the Lenders with respect to each Letter of Credit issued, extended or renewed by Agent hereunder: A. Upon reduction (but not termination) of the Revolving Commitment Amount to an amount less than the then Maximum Drawing Amount, an amount equal to such difference, which amount shall be held by the Agent in a non-interest bearing account as cash collateral for the benefit of Lenders and the Agent for all Reimbursement Obligations, and B. Upon the termination of the Revolving Commitment, or the acceleration of the Reimbursement Obligations with respect to all Letters of Credit in accordance with SECTION 6.2(C), an amount equal to the then Maximum Drawing Amount on all Letters of Credit, which amount shall be held by Agent in a non-interest bearing account as cash collateral for the benefit of Lenders and Agent for all Reimbursement Obligations. 2.A.5. Obligations Absolute. The obligation of the Borrower under -------------------- SECTION 2.A.4. to repay the Agent for any amount drawn on any Letter of Credit shall be absolute, unconditional and irrevocable, shall continue for so long as any Letter of Credit is outstanding, notwithstanding any termination of this Agreement, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: A. Any lack of validity or enforceability of any Letter of Credit; B. The existence of any claim, setoff, defense or other right which the Borrower may have or claim at any time against any beneficiary, transferee or holder of any Letter of Credit (or any Person for whom any such beneficiary, transferee or holder may be acting), the Agent or any other Person, whether in connection with a Letter of Credit, this Agreement, the transactions contemplated hereby, or any unrelated transaction; or C. Any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever. Neither the Agent nor its officers, directors or employees shall be liable or responsible for, and the obligations of the Borrower to the Agent shall not be impaired by: (i) The use which may be made of any Letter of Credit or any acts or omissions of any beneficiary, transferee or holder thereof in connection therewith; (ii) The validity, sufficiency or genuineness of documents, or of any endorsements thereon, even if such documents or endorsements should, in fact, prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) The acceptance by the Agent of documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; or (iv) Any other action of the Agent in making or failing to make payment under any Letter of Credit if in good faith and in conformity with U.S. or foreign laws, regulations or customs applicable thereto. 2.A.6. Increased Cost for Letters of Credit. If any Regulatory Change ------------------------------------ shall either (a) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against Letters of Credit issued by the Agent, or (b) shall impose on the Agent any other conditions affecting this Agreement or any Letter of Credit; and the result of any of the foregoing is to increase the cost to the Agent of issuing or maintaining any Letter of Credit, or reduce the amount of any sum received or receivable by the Agent hereunder, then, upon written demand (which demand shall be given by the Agent promptly after it determines such increased cost or reduction), the Borrower shall pay to the Agent the additional amount or amounts as will compensate the Agent for such actual or imputed increased cost or reduction. A certificate submitted to the Borrower by the Agent setting forth the basis for the determination of such additional amount or amounts necessary to compensate the Agent as aforesaid, and stating in reasonable detail the basis for the charge and the method of computation, shall be conclusive and binding on the Borrower absent error. 2.A.7. Letter of Credit Fees. For each Letter of Credit issued, the --------------------- Borrower shall pay to the Agent a fee (a "LETTER OF CREDIT FEE") in an amount equal to the 1.375% per annum of the face amount of each outstanding Letter of Credit, which fee (a) shall be payable quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter, with a final payment on the Maturity Date or any earlier date on which the Revolving Commitment shall terminate (which Letter of Credit Fee shall be pro-rated for any calendar quarter in which such Letter of Credit is issued, drawn upon or otherwise reduced or terminated) and (b) shall be for the account of the Agent and the Lenders as follows: (i) an amount equal to 0.125% per annum of the face amount of the Letter of Credit shall be for the account of the Agent as issuer and (ii) the remainder of the Letter of Credit Fee shall be for the account of the Lenders (including the Agent) pro rata in accordance with their respective Commitment Percentages. In addition to the Letter of Credit Fee, the Borrower shall pay to the Agent, on demand, all issuance, amendment, drawing and other fees regularly charged by the Agent to its letter of credit customers and all out-of-pocket expenses incurred by the Agent in connection with the issuance, amendment, administration or payment of any Letter of Credit. 2.A.8 Regulations U and X. No portion of any Letter of Credit is ------------------- to be obtained, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. 2.A.9 Letter of Credit Participation. Each Lender severally ------------------------------ agrees that it shall be absolutely liable, without regard to the occurrence of any default or Event of Default or any other condition precedent whatsoever, to the extent of such Lender's Commitment Percentage, to reimburse Agent on demand pursuant to SECTION 2.A.10 for the amount of each draft paid by Agent under each Letter of Credit to the extent that such amount is not reimbursed by the Borrower pursuant to SECTION 2.A.4 (such agreement for a Lender being called herein the "LETTER OF CREDIT PARTICIPATION" of such Lender). 2.A.10 Letter of Credit Payments; Advance of Loan. Notwithstanding ------------------------------------------ anything contained in SECTION 2.A.4 above to the contrary, unless Borrower shall have notified the Agent prior to 11:00 a.m. (Minneapolis time) on the Business Day immediately prior to the date of such drawing that Borrower intends to reimburse Agent for the amount of such drawing, Borrower shall be deemed to have requested a Reference Rate Advance on the date on which such drawing is honored and in an amount equal to the amount of such drawing. The Borrower may thereafter convert any such Reference Rate Advance to a Eurodollar Rate Advance in accordance with SECTION 1.3. Each Lender shall, in accordance with SECTION 1.1, make available such Lender's Commitment Percentage of such Advance to Agent, the proceeds of which shall be applied directly by Agent to reimburse Agent and/or Lenders for the amount of such draw. Agent is irrevocably authorized by the Borrower and each of the Lenders to honor draws on each Letter of Credit by the beneficiary thereof in accordance with the terms of the Letter of Credit. The responsibility of the Agent to the Borrower and the Lenders shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. ARTICLE II.B CONDITIONS OF BORROWING ----------------------- Lenders shall not be required to make any Advances hereunder until the pre- closing requirements, conditions and other requirements set forth below have been completed and fulfilled to the satisfaction of Lenders, with respect to said Advance, at Borrower's sole cost and expense. 2.B.1 - Prerequisites to Effectiveness of Agreement - --------------------------------------------------- The obligations of Lenders to make Advances and the effectiveness of this Agreement are subject to the following documents, certificates and opinions, each in form and substance acceptable to Lenders and its counsel, having been delivered to and approved by Lenders. It is agreed, however, that Lenders may, in their discretion, make such Advances prior to completion and fulfillment of any or all of such pre-closing requirements, conditions and other requirements, without waiving its right to require such completion and fulfillment before any additional Advances are made. A. This Agreement duly executed by Borrower, Agent and Lenders; the Note duly executed by Borrower; the Negative Pledge Agreements with respect to each Unencumbered Asset duly executed by the applicable Borrower and in recordable form and the Guaranty duly executed by Guarantor; B. Recordation of a Negative Pledge Agreement with respect to each Approved Asset among the land records in which each Approved Asset is located. C. A copy of the Certificate of Limited Partnership of each Borrower and all amendments thereto, and a Certificate of Good Standing for each Borrower, each currently certified by the Secretary of State of its state of organization; each Borrower's Agreement of Limited Partnership and Transaction Authorization, all currently certified by such Borrower's general partner, and upon which Agent and Lenders may rely until revoked by written notice to Agent and Lenders; D. A copy of the Articles of Incorporation of Guarantor and all amendments thereto, and a Certificate of Good Standing for Guarantor, each currently certified by the Secretary of State of its state of incorporation; Guarantor's By-Laws, Resolutions of Guarantor's Board of Directors authorizing the transactions described herein, and an incumbency certificate for Guarantor (including the names, titles and specimen signatures of officers thereof authorized to execute Loan Documents), all currently certified by Guarantor's corporate secretary or assistant secretary, as appropriate, and upon which Agent and Lenders may rely until revoked by written notice to Agent and Lenders; E. A Certificate from the general partner of each Borrower and from a duly authorized officer of Guarantor, setting forth the names, titles, specimen signatures and telephone numbers of all persons authorized to (i) sign Draw Requests and/or other documents, instruments, certificates and agreements to be delivered by any Borrower and/or Guarantor to Agent and/or any Lender hereunder, and/or (ii) to give instructions to Agent hereunder, each of which Certificates shall be deemed to be in full force and effect until forty-eight (48) hours after receipt by Agent of an amendment thereof duly executed by said duly authorized officer or Guarantor; F. A signed, written opinion from counsel to each Borrower and Guarantor, addressed to Agent and each Lender and currently dated, as to the due organization, existence, qualification and good standing of each Borrower and Guarantor; as to the due authorization, validity, legality, binding nature and enforceability of the Loan Documents listed in SECTION 2.B.1(A), without the consent or approval of any other Person; that, to such counsel's knowledge, the execution, delivery and performance by each Borrower and Guarantor of the Loan Documents to which each is a party will not violate any contracts or agreements of such Borrower or Guarantor or any applicable Governmental Requirements; as to the absence, to such counsel's knowledge, of litigation or governmental proceedings which could materially, adversely affect such Borrower or Guarantor; and such other matters as may be required by Agent on behalf of Lenders; G. The most current available annual financial statements for Borrower and Guarantor on a consolidated basis, as well as financial statements for each of the three (3) full fiscal years of each immediately preceding the time period covered by said current financial statements; and H. A sworn statement from and agreement by each Borrower and Guarantor listing all guarantees and contingent liabilities to which such Borrower and Guarantor is a party or for which such Borrower or Guarantor may be liable and agreeing to periodically update said listing, to which sworn statement shall be attached (or in which sworn statement shall be described) current financial statements of such Borrower and of Guarantor, which shall be, in such sworn statement, certified and sworn to by such Borrower and Guarantor as being true, correct, complete and not misleading in any material respect, and such Borrower and Guarantor shall also, in such sworn statement, certify that there has been no material change in the financial status of such Borrower or of Guarantor since the dates thereof. I. With respect to each Unencumbered Asset which is to become an Approved Asset on the Closing Date, (i) a written description of the Unencumbered Asset, including the size, legal description and location of the Unencumbered Asset; (ii) a title report, dated within thirty (30) days of the date on which such Unencumbered Asset is included as an Approved Asset, running in favor of the Agent on behalf of the Lenders , together with a copy of each document referred to therein (collectively "TITLE EVIDENCE"), evidencing that such Real Estate Asset is an Unencumbered Asset; (iii) a current, certified rent roll for such Unencumbered Asset; and (iv) pro forma operating and capital budgets. J. Receipt of a Closing Certificate and a Compliance Certificate in the form attached hereto as Exhibit B-1 (if Borrower has requested that an Advance ----------- be funded on the Closing Date). K The Borrower agrees that at the request of any Lender it will furnish all materials described in this SECTION 2.B.1 to such Lender after the Closing Date. L. All proceedings in connection with the transactions contemplated by this Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in form and substance to each of the Lenders and to the Agent's counsel, and the Agent, each of the Lenders and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may request. M. The Borrower shall have paid to the Agent, for the accounts of the Lenders or for its own account, as applicable, all of the fees and expenses that are due and payable as of the Closing Date in accordance with this Agreement. N. The obligation of the Agent to issue any Letter of Credit shall be subject to the fulfillment of the following conditions: (1) Representations and Warranties. The representations and ------------------------------ warranties contained in ARTICLE IV shall be true and correct on and as of the date upon which Borrower requests that Agent issue the Letter of Credit and on the date of issuance of each Letter of Credit with the same force and effect as if made on such date. (2) No Default. No default or Event of Default shall have occurred ---------- and be continuing on the date upon which Borrower requests that Agent issue the Letters of Credit and on the date of issuance of each Letter of Credit or will exist upon issuance of the Letter of Credit. (3) Notices and Requests. The Agent shall have received the --------------------- Borrower's application for such Letters of Credit specified under SECTION 2.A.2. (4) No Legal Impediment. No change shall have occurred in any law or ------------------- regulations thereunder or interpretations thereof that in the reasonable opinion of the Agent or Majority Lenders would make it illegal for such Lenders to participate in the issuance, extension or renewal of such Letter of Credit or, in the reasonable opinion of the Agent, would make it illegal to issue, extend or renew such Letter of Credit. Any Lender may advance to itself, pursuant to the provisions of SECTIONS 3.1 and 5.1, proceeds of the Loan sufficient to pay all reasonable costs and expenses incurred by such Lender in connection with preparation and negotiation of the Loan Documents and the review of the foregoing. 2.B.2 - Conditions Precedent to Approval of an Unencumbered Asset - ----------------------------------------------------------------- If and when Borrower wishes to have Lenders approve an Unencumbered Asset for inclusion as an Approved Asset, Borrower shall submit to Agent (with a copy to each Lender) a written request for such approval, together with a certificate, signed by Borrower in the form attached hereto as Exhibit B-3, that ----------- the proposed Unencumbered Asset complies with all of the terms, provisions and conditions of this Agreement, and the following conditions shall be satisfied in the sole discretion of Lenders: A. Borrower shall provide, at the time of its request for approval, (i) a written description of the Unencumbered Asset, including the size, legal description and location of the Unencumbered Asset; (ii) Title Evidence evidencing that such Real Estate Asset is an Unencumbered Asset; (iii) a current, certified rent roll for such Unencumbered Asset; (iv) operating statement covering the prior three (3) year period for such Unencumbered Asset; (v) pro forma operating and capital budgets; and (vi) evidence that such Unencumbered Asset meets the Minimum Lease Up Requirement. B. Agent shall have completed to its satisfaction, and at the Borrower's expense, an inspection of the Unencumbered Asset, if it elects to do so. C. All proceedings in connection with the transactions contemplated by this Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in form and substance to each of the Lender's and to the Agent's counsel, and the Agent, each of the Lenders and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may request. D. If Borrower requests Lenders' approval to add an Approved Asset or release an Approved Asset more than five times during any twelve month period, then with respect to each subsequent request for approval of an Unencumbered Asset during such twelve month period, Borrower shall pay a review fee of $2,500.00 to Agent who shall retain such fee for its own account. Upon receipt of the above-mentioned written request, certificate and other items ("APPROVAL PREREQUISITES"), Agent may, on behalf of the Lenders, engage legal counsel to review the deliveries, all at Borrower's sole cost and expense. If the Approval Prerequisites are satisfied as determined by Agent, whose approval shall not be unreasonably withheld, and if the proposed Unencumbered Asset complies with the terms, provisions, requirements and conditions of this Agreement, also in Agent's reasonable determination, Agent may, on behalf of the Lenders, approve the proposed Unencumbered Asset, in writing as an Approved Asset. Upon such approval, Borrower shall execute and deliver to Agent for recordation a Negative Pledge Agreement with respect to such Approved Asset. Nothing set forth herein or in any other Loan Document shall be read, deemed, construed or interpreted to impose any explicit or implicit obligation of any kind upon the Lenders to approve any Unencumbered Asset so that it is thereafter included as an Approved Asset, such approval to be, in each instance, subject to the sole, entire, unfettered and absolute discretion of the Lenders in all respects. 2.B.3 - Determination of Loan Availability - ------------------------------------------ Loan Availability shall be calculated by Agent on behalf of the Lenders on the first day of each calendar quarter and on each Calculation Date. For any period of determination, Loan Availability shall equal the lesser of the following amounts: A. Unencumbered Adjusted EBITDA for the previous four (4) quarters attributable to the Approved Assets multiplied by six (6); or B. The Permanent Loan Estimate (using Unencumbered Adjusted EBITDA for the previous four (4) quarters) for such Approved Assets. provided, however, Loan Availability shall be reduced on a dollar for dollar basis by (x) the face amount of any Letters of Credit issued by Agent and outstanding hereunder and (y) the amount of any Imposition, Lien or Encumbrance arising with respect to any Approved Asset until same is paid in full, discharged or bonded over to the satisfaction of the Lenders: In no event shall Lenders be obligated to make Advances which in the aggregate exceed Loan Availability as determined by Agent from time to time. If at any time Loan Availability is less than the Total Revolving Outstandings, Borrower shall, within thirty (30) days of such determination by Agent, either (i) cure the cause of such reduction in Loan Availability, or (ii) pay the excess to Agent on behalf of the Lenders. No additional Advances shall be made hereunder and no additional Letters of Credit shall be issued hereunder until such time as Agent determines that Loan Availability exceeds the Total Revolving Outstandings. It shall be an Event of Default if Borrower fails to cure the cause of the reduction in Loan Availability or make the required payment within such thirty (30) day period. 2.B.4 - Release from Negative Pledge - ------------------------------------ If and when Borrower wishes to have Lenders approve a release of a Negative Pledge with respect to a Major Asset, Borrower shall submit to Agent a written request for such approval, together with a certificate, signed by Borrower in the form attached hereto as Exhibit B-2 and the appropriate form of release to ----------- be executed by Agent on behalf of the Lenders. If and when Borrower wishes to have Agent release a Negative Pledge with respect to an Approved Asset which is not a Major Asset, Borrower shall submit to Agent a written request for such release, together with a certificate, signed by Borrower in the form attached hereto as Exhibit B-2 and the appropriate form of release to be executed by ----------- Agent on behalf of the Lenders. In addition, if Borrower requests that Lenders approve the addition of an Approved Asset or that Lenders release a Major Asset or other Approved Asset more than five (5) times during any twelve (12) month period, then with respect to each subsequent request therefor during such twelve (12) month period, Borrower shall pay a release fee of $2,500.00 to Agent who shall retain such fee for its own account. Upon receipt of the above-mentioned written request, certificate and other items ("RELEASE PREREQUISITES"), Agent may engage legal counsel to review the deliveries, all at Borrower's sole cost and expense. In connection with the requested release of an Approved Asset which is not a Major Asset, if the Release Prerequisites are satisfied as determined by Agent in its reasonable discretion, if there exists no default or Event of Default hereunder, and if the proposed release of the Approved Asset would not cause a default under the terms, provisions, requirements and conditions of this Agreement, also in Agent's reasonable determination, Agent shall approve the release of such Approved Asset, which approval shall not be unreasonably withheld. In the event the Approved Asset which is the subject of the requested release is a Major Asset, then the approval of the Lenders shall be required, which approval may be given or withheld by Lenders in their sole discretion. If a release of an Approved Asset is approved in accordance with the foregoing provisions, Agent shall thereupon recalculate Loan Availability taking into account such release. If necessary, Borrower shall make a payment as required pursuant to SECTION 2.B.3 if Loan Availability is then less than Total Revolving Outstandings. Following receipt of such payment, Agent shall execute and deliver to Borrower the release with respect to such Negative Pledge. ARTICLE III. ADVANCES OF LOAN PROCEEDS ------------------------- 3.1 - General - ------------- Subject to the limitations on Advances contained elsewhere in this Agreement, the Loan proceeds shall be advanced by each Lender, to or for the benefit of Borrower, in accordance with the terms and conditions set forth in this ARTICLE III. All monies advanced by each Lender (including amounts payable to such Lender and advanced by such Lender to itself pursuant to the terms hereof) shall constitute loans made to Borrower under this Agreement, evidenced by the Note and secured by the other Loan Documents, and interest shall be computed thereon as prescribed by this Agreement and the Note, from the date advanced to or for the benefit of Borrower. No Advance shall constitute a waiver of any condition precedent to the obligation of any Lender to make any further Advance or preclude such Lender from thereafter requiring Borrower to satisfy any such condition precedent with respect to any prior or further Advance. No Advance shall constitute a waiver of any default or Event of Default hereunder which may exist at the time of said Advance, whether or not the same is known to such Lender. All conditions precedent to the obligation of each Lender to make any Advance are imposed hereby solely for the benefit of such Lender, and no other party may require satisfaction of any such condition precedent or shall be entitled to assume that such Lender will make or refuse to make any Advance in the absence of strict compliance with such condition precedent. All requirements of this Agreement may be waived by each Lender, in whole or in part, at any time. Each Lender may, but shall not be obligated to, advance to itself, when due, from the proceeds of the Loan, without further order or request from Borrower, all interest payable to such Lender under the terms hereof or of the Note, and may, at such Lender's option, without any obligation to do so, advance to itself all other sums due or to become due to such Lender under this Agreement or under any of the other Loan Documents, including but not limited to its fees, administration fees, attorneys' fees, other consultants' fees and all out-of-pocket expenses incurred by such Lender in connection with this Agreement and with the Loan. Each Lender shall also have the right, but not the obligation, after the occurrence of an Event of Default, to advance and directly apply the proceeds of the Loan to the satisfaction of any of Borrower's other obligations hereunder or under any of the other Loan Documents. 3.2 - Inspections - ------------------- Agent shall have access to each Real Estate Asset at all reasonable times and shall have the right to enter each Real Estate Asset and to conduct such inspections thereof as it shall deem necessary or desirable for the protection of the Lender's interests; provided that Agent gives reasonable prior notice thereof to Borrower. Borrower may elect to accompany Agent on any such inspections. No Lender shall be obligated to conduct any inspection of any Real Estate Asset. Neither Borrower nor any third party shall have the right to use or rely upon any reports generated by Agent for any purpose whatsoever. Borrower shall be responsible for making its own inspections of each Approved Asset. 3.3 - Lender Responsibility - --------------------------- It is expressly understood and agreed that neither Agent nor any Lender assumes liability or responsibility for the any representations made by Borrower or for any acts on the part of Borrower. 3.4 - Procedure for Advances - ---------------------------- A. At the time of each Advance, there shall exist no default or Event of Default hereunder, and all representations and warranties made herein shall be true and correct on and as of each Advance Date with the same effect as if made on that date. Each Advance shall be made pursuant to a Draw Request submitted by Borrower to Agent on behalf of the Lenders. B. Not later than 10:00 A.M. (Minneapolis time) two (2) Eurodollar Business Days prior to the Advance Date if any portion of the requested Advance is desired by Borrower to be a Eurodollar Rate Advance, and one Business Day prior to the Advance Date if any portion of the requested Advance is to be a Reference Rate Advance, Borrower shall deliver to Agent (with a copy to each Lender) a request, in writing, designating the amount of such portion (in the minimum amount of $1,000,000.00 and in integral multiples of $100,000.00 in excess thereof) and designating the initial Interest Period applicable thereto. Notwithstanding anything herein set forth to the contrary, there may not be more than five (5) Eurodollar Rate Advances outstanding at any given time during the term of the Note. If no such request is made by Borrower with respect to any Advance, the entire Advance shall be deemed to be a Reference Rate Advance. C. On each Advance Date, if all the terms and conditions of this Agreement have been complied with by Borrower, to the satisfaction of Lenders, if no default or Event of Default exists hereunder, and if Lenders have approved the Draw Request, each Lender shall advance to Agent its Commitment Percentage of the principal amount of the requested Advance by delivering to Agent a wire transfer of funds. Agent shall then forward the Advance to Borrower. All Advances actually so made shall be deemed to be loans to Borrower, shall reduce the available amount of the Revolving Loan Commitment, and shall bear interest at the rates provided herein from the date so advanced. D. To the extent agreed upon by the Lenders, each Lender shall also have the right, but not the obligation, to advance and directly apply the proceeds of any Advance to the satisfaction of any of Borrower's obligations hereunder or under the other Loan Documents. Any Advance by a Lender for such purpose shall be part of the Loan and shall be evidenced and secured by the Loan Documents from the date made. Borrower hereby authorizes each Lender to hold, use, advance and apply Loan proceeds for the payment or performance of any obligation of Borrower hereunder, including but not limited to the obligation to pay interest on the Loan. E. In the event that a Lender shall determine, in its sole judgment, that proper documentation to support a requested Advance, as required by this Agreement, has not been furnished, it may withhold payment of such Advance, or of such portion of such Advance as shall not be so supported by proper documentation, and shall promptly notify Borrower of the discrepancy in or omission of such documentation. Until such time as such discrepancy or omission is corrected to the satisfaction of such Lender, it may withhold such funds. F. Borrower shall provide notice to Agent in the Draw Request of the proposed use of the requested Advance. If Borrower anticipates using the Advance for purposes of financing construction on a Real Estate Asset Under Development, Borrower shall provide evidence to Agent at the time of each such Draw Request that Borrower has entered into leases for not less than fifty percent (50%) of the rentable square footage of such Real Estate Asset Under Development. If Borrower fails to provide the foregoing evidence, Lenders shall have no obligation to make the requested Advance for such construction. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF BORROWER ------------------------------------------ Each Borrower represents and warrants to Agent and Lenders that: 4.1 - Legal Status of Borrower - ------------------------------ Such Borrower is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of Maryland and is duly authorized to transact business in the jurisdictions in which the Approved Assets owned by it are located, and has all power, authority, permits, consents, authorizations and licenses necessary to carry on its business, to acquire, develop, demolish, construct, renovate, expand, equip, own and operate each Approved Asset owned by such Borrower and to execute, deliver and perform this Agreement and the other Loan Documents; and this Agreement and the other Loan Documents executed to date by such Borrower have been duly authorized, executed and delivered by and on behalf of such Borrower so as to constitute this Agreement and said other Loan Documents the valid and binding obligations of such Borrower, enforceable in accordance with their terms. 4.2 - No Breach of Applicable Agreements or Laws - ------------------------------------------------ The consummation of the transactions contemplated hereby and the execution, delivery and/or performance of this Agreement and the other Loan Documents will not result in any breach of or constitute a default under the organizational documents of Borrower and Guarantor, any mortgage, deed of trust, lease, bank loan, credit agreement, guaranty or other instrument or violate any Governmental Requirements, to which such Borrower or Guarantor is a party, or by which such Borrower or Guarantor may be bound or affected. 4.3 - No Litigation or Defaults - ------------------------------- There are no actions, suits or proceedings pending or, to the knowledge of such Borrower, threatened, in writing, against or affecting such Borrower, Guarantor or the Approved Assets, in which an adverse result would have a material adverse effect upon such Borrower, Guarantor or the Approved Assets, except as listed on Schedule 4.3 attached hereto and hereby made a part hereof, ------------ or involving the validity or enforceability of the Loan Documents or the priority of the lien thereof, at law or in equity; and, to the best knowledge of Borrower and Guarantor, neither Borrower nor Guarantor is in default under any order, writ, injunction, decree or demand of any court or any administrative body having jurisdiction over such Borrower or Guarantor. 4.4 - Financial and Other Information - ------------------------------------- The financial statements of, and other financial and cash flow information for, Borrower and Guarantor on a consolidated basis previously or hereafter delivered to Lenders fairly and accurately present, or will, in all material respects, fairly and accurately present, the financial condition of Borrower and Guarantor on a consolidated basis as of the dates of such statements and information, and the cash flows of each Borrower and Guarantor for the periods covered by such information, and neither this Agreement nor any document, financial statement, financial, cash flow or credit information, certificate or statement referred to herein or furnished to Lenders by each Borrower and Guarantor contains, or will contain, any untrue statement of a material fact or omits, or will omit, a material fact, or is or will be misleading in any material respect. 4.5 - No Defaults under Loan Documents or Other Agreements - ---------------------------------------------------------- There is, and, until Agent and Lenders have been fully repaid the entire indebtedness evidenced or to be evidenced by the Note, there will be, no default or Event of Default on the part of Borrower under the Loan Documents and none of Borrower nor Guarantor is or will be in default under any instrument or agreement under and subject to which any recourse indebtedness in excess of $100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10 million in the aggregate for borrowed money has been issued or is secured, and no event has occurred, or will occur, which, with the lapse of time or the giving of notice or both, would constitute an Event of Default thereunder. 4.6 - Fiscal Years - ------------------ The fiscal year of each Borrower and of Guarantor ends on December 31. 4.7 - Guarantor - --------------- Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, and has all power, authority, permits, consents, authorizations and licenses necessary to carry on its business in the State of Maryland and to execute, deliver and perform the Guaranty and the other Loan Documents to which it is or will be a party, and all actions required to authorize the execution, delivery and performance by it of the Guaranty and such other Loan Documents have been duly taken and are in full force and effect; and the Guaranty and such other Loan Documents have been duly authorized, executed and delivered by and on behalf of Guarantor so as to constitute the Guaranty and such other Loan Documents, when executed by Guarantor, to be the valid and binding obligations of Guarantor, enforceable in accordance with their terms. 4.8 - No Brokers - ---------------- Borrower has not dealt with any brokers in connection with this Loan and no brokerage fees or commissions are payable by or to any person in connection with this Agreement or the Advances. Lenders shall not be responsible for the payment of any fees or commissions to any broker and Borrower shall indemnify, defend and hold Lenders harmless from and against any claims, liabilities, obligations, damages, costs and expenses (including attorneys' fees and disbursements) made against or incurred by Lenders as a result of claims made by any broker or person claiming by, through or under Borrower, Guarantor or their affiliates in connection with the Loan. 4.9 - No Violation of Usury Laws - -------------------------------- The undersigned represents and warrants that the Loan and this Note are made exclusively for business purposes in connection with holding, developing, and managing real estate for profit, within the meaning and intent of Maryland Code Annotated, Commercial Law Section 12-103(e), as amended, and that none of the proceeds of the Loan or the Note will be used for personal, family or household purposes of any person. 4.10 - Subsidiaries - ------------------- Except for Saul Subsidiary I Limited Partnership, Saul Subsidiary II Limited Partnership, Guarantor, Saul QRS, Inc. and SC Finance Corporation, there are no entities which are required under GAAP to be consolidated with Holdings for financial reporting purposes, except as otherwise disclosed to Agent in writing from time to time. 4.11 - Miscellaneous - -------------------- Borrower is not A. Engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board), and the value of all margin stock owned by Borrower does not constitute more than twenty-five percent (25%) of the value of the assets of Borrower. No portion of any Advance is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. B. An "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended. C. A "holding company" or a "subsidiary company" of a holding company or an "affiliate" of a holding company or a subsidiary company of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.12 - REIT Status. Guarantor has not taken any action that would prevent it - ------------------ from maintaining its existence as a qualified real estate investment trust within the meaning of the Internal Revenue Code; for its tax year ended December 31, 1997 or from maintaining such qualification at all times during the term of the Revolving Commitment and for so long as any Letter of Credit remains outstanding. 4.13 - Title to Properties. - -------------------------- The Borrower has good title as of the Closing Date (with respect to Approved Assets designated as such on the Closing Date) or the date of designation as an Approved Asset (with respect to Approved Assets acquired and/or designated as such after the Closing Date), and in each case to the best of its knowledge thereafter, the Borrower or Guarantor holds good and clear record and marketable fee simple title to, subject to no mortgages, conditional sales agreements, title retention agreements, liens or, except as otherwise set forth in the title reports delivered by Borrower, encumbrances. THE WARRANTIES AND REPRESENTATIONS IN THIS ARTICLE IV, AND ANY ADDITIONAL REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN AND IN THE OTHER LOAN DOCUMENTS, SHALL BE DEEMED TO HAVE BEEN RENEWED AND RESTATED BY BORROWER AND GUARANTOR AT THE TIME OF EACH REQUEST BY BORROWER FOR AN ADVANCE. ARTICLE V. COVENANTS OF BORROWER --------------------- While this Agreement is in effect, and until Agent and Lenders have been paid in full the principal of and interest on all Advances made by Lenders hereunder and all other amounts payable hereunder and under the other Loan Documents and so long as any Letter of Credit is outstanding: 5.1 - Paying Costs of Loan - -------------------------- Borrower shall pay all reasonable costs and expenses of Agent and all costs and expenses of Borrower in connection with each Approved Asset and the Loan, the preparation and review of the Loan Documents and the evaluation, making, closing, funding, administration, transfer and/or repayment of the Loan and the review of Unencumbered Assets, including but not limited to the attorneys' fees, consultants' fees, administration fees, and all other costs and expenses payable to third parties incurred by Agent or Borrower in connection with the Loan. Such costs and expenses shall be so paid by Borrower whether or not the Loan is fully advanced. 5.2 - Maintenance of Ownership Structure - ---------------------------------------- The current limited partners of Saul Holdings Limited Partnership, those Persons controlling, controlled by or under common control with such current limited partners, and such other persons or entities as the Agent may approve in writing upon the written request of Borrower, shall continue to own legally and beneficially, directly or indirectly, thirty percent (30%) or more, in the aggregate, of (x) the limited partnership units of Borrower and (y) the common stock of the Guarantor on a fully diluted basis. Borrower shall immediately give written notice of the violation of this covenant to Agent. 5.3 - Keeping of Records - ------------------------ Borrower shall set up and maintain accurate and complete books, accounts and records pertaining to each Approved Asset in a manner reasonably acceptable to Lenders. Borrower will permit representatives of Agent to have free access to and to inspect and copy all books, records and contracts of Borrower relating to each Approved Asset, and will permit representatives of Agent to have free access to and to inspect and copy all other books, records and contracts of Borrower at all reasonable times and upon reasonable prior notice to Borrower. Any such inspection shall be for the sole benefit and protection of Agent, and neither Agent nor any Lender shall have any obligation to disclose the results thereof to Borrower or to any third party. 5.4 - Providing Financial Information - ------------------------------------- Borrower shall furnish to Lenders such financial information concerning each Borrower and Guarantor, and each Borrower's and Guarantor's other assets and investments, as each Lender may reasonably request, and shall furnish to Agent, at Borrower's sole cost and expense the following: A. Fiscal Year. Not later than one hundred ten (110) days after the end ----------- of each fiscal year, a consolidated balance sheet, a consolidated statement of profit and loss and consolidated statement of cash flows, as of the end of such fiscal year, for the Guarantor and Saul Holdings Limited Partnership ("HOLDINGS"), on a consolidated basis certified by independent accountants satisfactory to Agent as being complete and correct and fairly presenting the financial condition and results of operations as of the end of such year and for that fiscal year for Guarantor and Holdings together with a statement from the chief financial officer for each of the Borrower and the Guarantor, in the forms attached hereto as Exhibits B-4 and B-5. ------------ --- B. Fiscal Quarter. -------------- (i) Not later than fifty (50) days after the end of each fiscal quarter, a balance sheet, statement of profit and loss and statement of cash flows for such fiscal quarter, for the Guarantor and its consolidated subsidiaries, to be prepared on an accrual basis and certified as complete and correct by the chief financial officer of such entities; and (ii) Not later than fifty (50) days after the end of each fiscal quarter, a statement from the chief financial officer for each of the Borrower and the Guarantor, in the forms attached hereto as Exhibits B-4 and B-5, ------------ --- together with documentation showing all calculations necessary to support such statement. C. Copies of all 8Ks, 10Ks and 10Qs filed with the U.S. Securities and Exchange Commission, the Maryland State Securities Commission, and any other state regulators regarding the Guarantor, which shall be delivered to Agent (with a copy to each Lender) as and when filed or distributed; and D. Budget. Not later than sixty (60) days after the end of each fiscal year, a copy of the pro forma operating and capital budgets for each of the Approved Assets for the succeeding fiscal year, which Budget shall be in form satisfactory to the Agent, in its reasonable discretion. E. Rent Rolls. Not later than forty-five (45) days after the end of each fiscal quarter, a copy of the rent roll for each of the Approved Assets as of the end of such quarter in form satisfactory to the Agent, and a tenant lease expiration summary, each certified as being true, correct and complete by the chief financial officer of the Borrower. F. Such other statements or reports as the Lenders may through Agent reasonably request in form and detail satisfactory to such Lenders. All such financial statements shall be in reasonable detail, shall be prepared in general accordance with GAAP (except that assets may be valued based on market value), or in accordance with another accounting method acceptable to Agent, and shall be certified as true, correct and complete by Borrower (by its chief financial officer) or Guarantor. In addition, Borrower shall permit Agent and each Lender to examine all of Borrower's and Guarantor's books and records pertaining thereto. 5.5 - Maintaining Insurance Coverage - ------------------------------------ Borrower shall, at all times until Agent and Lenders have been fully repaid all indebtedness evidenced by the Note, maintain, or cause to be maintained, in effect, adequate insurance with respect to each Approved Asset. 5.6 - Transferring, Conveying or Encumbering Approved Assets; Payment of - ------------------------------------------------------------------------ Impositions and Liens; Maintenance of Existence - ----------------------------------------------- Borrower shall not voluntarily or involuntarily agree to, cause, suffer or permit (A) any sale, transfer or conveyance of any interest of Borrower, legal or equitable, in any Approved Asset or any part or portion thereof; or (B) any mortgage, pledge, encumbrance or lien to be imposed or remain outstanding against any Approved Asset, or any security interest to exist therein (hereinafter each called an "ENCUMBRANCE"), except as created by the Loan Documents (if any), without, in each instance, complying with the provisions of SECTION 2.B.4 hereof. In the event that any Encumbrance arises against any Approved Asset, Borrower shall give written notice thereof to Agent within five (5) days after the imposition of such Encumbrance. Agent shall thereupon recalculate Loan Availability taking into account such Encumbrance. If necessary, Borrower shall make a payment as required pursuant to SECTION 2.B.3 if Loan Availability is then less than Total Revolving Outstandings. Borrower shall, before any penalty or interest attaches thereto because of delinquency in payment, pay and discharge, or cause to be paid and discharged, all taxes, assessments, levies and governmental charges imposed upon or against each Approved Asset or upon or against the Note or the indebtedness evidenced hereby (hereinafter referred to as "IMPOSITIONS"). In the event any Impositions are payable in installments, Borrower shall have the right to pay the same in such installments, even though such Impositions then bear interest, so long as Borrower pays each such installment prior to delinquency. Borrower shall not suffer to exist and shall promptly pay and discharge any mechanic's, statutory or other lien or Encumbrance on the Approved Asset or any part thereof (hereinafter collectively referred to as "LIENS"). In the event that any Imposition or Lien arises against any Approved Asset, Borrower shall give written notice thereof to Agent within five (5) days after the occurrence of such Imposition or Lien. Agent shall thereupon recalculate Loan Availability taking into account such Imposition or Lien. If necessary, Borrower shall make a payment as required pursuant to SECTION 2.B.3 if Loan Availability is then less than Total Revolving Outstandings. Each Borrower shall maintain its existence as a duly organized and qualified limited partnership, in good standing under the laws of the state of its formation and the laws of each state in which any Approved Asset is located, and neither Borrower nor Guarantor shall be dissolved, merged, wound-up or terminated. Borrower will cause Guarantor to do or cause to be done all things necessary to preserve and keep in full force and effect Guarantor's existence as a Maryland corporation. Borrower will cause Guarantor at all times to maintain its existence as a qualified real estate investment trust (a "REIT") within the meaning of the Internal Revenue Code and not to take any action which could lead to its disqualification as a REIT. Within thirty (30) days after request by Agent from time to time, Guarantor shall provide evidence that Guarantor continues to qualify as a REIT. 5.7 - Complying with the Loan Documents, Contracts and Laws - ----------------------------------------------------------- Borrower shall cause all of the representations, warranties and covenants herein to remain true and correct during the term of the Loan, shall comply with and perform all of its agreements and obligations under the Loan Documents, and shall comply with all requests by Lenders which are consistent with the terms thereof. Borrower shall promptly provide Agent with copies of any notices of default or deficiency received from any creditor under loans with a principal balance in excess of $100,000.00 and shall promptly cure the same. Borrower shall comply in all material respects with all applicable laws, rules, regulations, orders and directions of any governmental authority having jurisdiction over it or its business. 5.8 - Financial Covenants - ------------------------- Borrower hereby covenants and agrees that so long as the Revolving Commitment remains outstanding: A. Minimum Equity Value. As of the end of each fiscal quarter and any other Calculation Date, Borrower shall provide evidence to Agent that Borrower has Minimum Equity Value of not less than the sum of $150 million plus ninety percent (90%) of Net Equity Proceeds. B. Portfolio Loan to Value. As of the end of each fiscal quarter and any other Calculation Date, Borrower shall provide evidence to Agent that the ratio of Total Adjusted Outstanding Indebtedness to Capitalization Value does not exceed sixty five percent (65%). C. Interest Expense Coverage. As of the end of each fiscal quarter and any other Calculation Date, Borrower shall provide evidence to Agent that the ratio of Adjusted EBITDA to Interest Expense is not less than 1.90 to 1. D. Debt Service Coverage. As of the end of each fiscal quarter and any other Calculation Date, Borrower shall provide evidence to Agent that the ratio of Adjusted EBITDA to Debt Service is not less than 1.60 to 1. E. Minimum Fixed Rate Debt. Borrower covenants and agrees that not less than seventy five percent (75%) of Total Adjusted Outstanding Indebtedness shall (x) accrue interest at a fixed rate of interest and (y) have a term of not less than five (5) years. Absent Lenders' prior written approval, the Revolving Commitment shall constitute the only unsecured indebtedness incurred by Borrower which accrues interest at a floating rate of interest. In addition, Borrower hereby agrees that to the extent Borrower would like to incur secured indebtedness accruing interest at a floating rate of interest from time to time, Borrower shall provide prior written notice to Agent. In the event that at any time Borrower intends to receive advances under indebtedness accruing interest at a floating rate of interest (including the Revolving Commitment), which advances aggregate in excess of $60 million, then Borrower shall provide prior written notice thereof to Agent and the Lenders may thereupon require that the Borrower make interest rate protection arrangements satisfactory to Borrower and Lenders with respect to all advances of floating rate indebtedness (including the Revolving Commitment) exceeding in the aggregate $60 million. The Borrower shall thereafter maintain such arrangements in full force and effect, and shall not, without the approval of the Lenders, modify, terminate, or transfer such arrangements. F. Payout Ratio. For each of the following calendar years, Distributions shall not exceed the following percentage of Funds from Operations with respect to the Borrower and the Guarantor on a consolidated basis: Calendar Year Percentage ------------- ---------- 1997 96% 1998 94% 1999 92% 5.9 Miscellaneous - --- ------------- Each Borrower shall also: A. Maintain its qualification to transact business in its state of organization, in each state in which an Approved Asset is located, and in each jurisdiction where failure so to qualify would permanently preclude Borrower from enforcing its rights with respect to any material asset or would expose Borrower to any material liability. B. File all tax returns and reports which are required by law to be filed by it and pay before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it and all claims or demands of any kind which, if unpaid, might result in the creation of a lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings in accordance with the applicable terms of SECTION 5.6, and as long as Borrower's title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with, and adequate reserves with respect thereto have been set aside on Borrower's books in accordance with GAAP. The provisions of SECTION 5.6 shall control over the provisions of this Subsection if and to the extent such provisions are inconsistent. C. Give prompt written notice to Agent of (i) the breach of any representation, warranty or covenant contained in this Agreement or in any of the Loan Documents (which notice shall be accompanied by a certificate from Borrower in the form of Exhibit B-8 attached hereto); (ii) the creation of any ----------- Encumbrance, Lien or Imposition in excess of $50,000.00 against any Approved Asset; (iii) the occurrence of any Capital Event (which notice shall be accompanied by a certificate from Borrower in the form of Exhibit B-6 attached ----------- hereto) and any release or threatened release of Hazardous Substances, any violation of Environmental Laws or similar environmental event with respect to a Real Estate Asset that could become a Disqualifying Environmental Event; and (iv) the commencement of any action, suit or proceeding before any court or arbitrator or any governmental department, board, agency or other instrumentality affecting any Borrower or Guarantor or any property of any Borrower or Guarantor or to which any Borrower or Guarantor is a party in which an adverse determination or result could have a material adverse effect on the business, operations, property or condition (financial or otherwise) of any Borrower or Guarantor or on the ability of any of them to perform its respective obligations under this Agreement and the other Loan Documents, stating the nature and status of such action, suit or proceeding. The Borrower will and will cause the Guarantor to give notice to the Agent in form and detail reasonably satisfactory to the Agent, within ten (10) days of any judgment not covered by insurance, final or otherwise, against the Borrower the Guarantor in an amount in excess of $100,000. D. Maintain, preserve, protect and keep the Real Estate Assets in good repair, working order and condition and make all necessary and proper repairs, renewals and replacements, normal wear and tear excepted. ARTICLE VI. DEFAULTS -------- 6.1 - Events of Default - ----------------------- Each of the following events shall constitute an Event of Default under this Agreement: A. Borrower shall default in the payment of principal due according to the terms hereof or of the Note and shall fail to cure said default within five (5) days after the due date thereof, provided, however, in no event shall such grace period apply with respect to payments due on the Termination Date; B. Borrower shall default in the payment of interest on Advances made by Lenders, or in the payment of any fees, including any Letter of Credit Fee, or any other amounts payable hereunder, under the Note or under any of the other Loan Documents and shall fail to cure said default within five (5) days after the due date thereof; C. Borrower shall default in the performance of or fail to observe any of the covenants contained in Section 5.8 of this Agreement and such default, if ----------- curable, as determined by Agent, is not cured within ten (10) days; D. Borrower shall default in the performance or observance of any other agreement, covenant or condition required to be performed or observed by Borrower under the terms of this Agreement or the Loan Documents, which default, if curable, is not cured within thirty (30) days after Agent on behalf of Lenders gives Borrower written notice thereof; E. Any representation or warranty made by any Borrower or Guarantor in this Agreement or in any of the other Loan Documents, or in any certificate or document furnished under the terms of this Agreement or in connection with the Loan, shall be untrue or incomplete in any material respect; F. Any other event or occurrence herein expressly stated to be an Event of Default occurs or exists; G. Any Loan Document is not in full force and effect or a default has occurred and is continuing thereunder after giving effect to any cure or grace period in any such document; H. Any mortgaging, conveyance or other voluntary transfer or encumbrance of any of the Approved Assets or any portion thereof occurs without the prior consent of Agent; provided, however, the prior consent of the Lenders shall be required with respect to any mortgaging, conveyance or other voluntary transfer or encumbrance of any of the Major Assets or any portion thereof ; I. Borrower or Guarantor shall commit an act of bankruptcy, shall file a voluntary petition in a bankruptcy, reorganization, composition, readjustment, arrangement, insolvency, liquidation, dissolution or similar proceeding under any present or future statute, law or regulation, shall consent to voluntary or involuntary adjudication in bankruptcy or to reorganization, or shall be adjudicated bankrupt or insolvent under any applicable law or laws pursuant to a voluntary proceeding, or admits, in writing, to having become insolvent or to be unable to pay its debts as they become due, or becomes unable to pay its debts as they mature, or makes an assignment for the benefit of its creditors, or is dissolved, liquidated, terminated or merged, or if it applies for, or if it consents to, the appointment of a trustee, custodian or receiver for it or a substantial portion of its assets. J. A custodian, trustee or receiver is appointed for any portion of the assets of Borrower or Guarantor, or an involuntary petition in bankruptcy or insolvency is filed against Borrower or Guarantor and is not discharged within ninety (90) days after such appointment or filing; L. Borrower or Guarantor permits the attachment or judicial seizure of any of its assets with a value in excess of One Hundred Thousand and No/100ths Dollars ($100,000.00); M. Borrower or Guarantor shall be dissolved, liquidated, terminated or merged without Lenders' prior written consent; N. Guarantor shall be terminated, dissolved, liquidated or wound-up, or shall contest, repudiate or purport to revoke the Guaranty, or the Guaranty for any reason (except pursuant to the express terms thereof) shall cease to be in full force and effect as to Guarantor or shall be judicially declared unenforceable or null and void; O. Any entity comprising the Borrower or Guarantor is enjoined, restrained or in any way prevented by any court order or judgment or if a notice of lien, levy, or assessment is filed of record with respect to all or any part of the Approved Assets by any governmental department, office or agency which could materially adversely affect the performance of the obligations of such parties hereunder or under the Loan Documents, or if any proceeding is filed or commenced seeking to enjoin, restrain or in any way prevent the foregoing parties from conducting all or a substantial part of their respective business affairs and failure to vacate, stay, dismiss, set aside or remedy any of the foregoing within sixty (60) days after the occurrence thereof. P. The default (after the expiration of any notice or cure periods) under any recourse indebtedness in excess of $100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10 million in the aggregate of Borrower or Guarantor or the maturity of any recourse indebtedness in excess of $100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10 million in the aggregate of Borrower or Guarantor (other than indebtedness under this Agreement) shall be accelerated, or Borrower or Guarantor thereof shall fail to pay any such recourse indebtedness in excess of $100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10 million in the aggregate, in each case when due (after the lapse of any applicable grace period) or, in the case of such indebtedness payable on demand, when demanded (after the lapse of any applicable grace period), or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such indebtedness or any trustee or other person, party or entity acting on behalf of such holder to cause, such recourse indebtedness in excess of $100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10 million in the aggregate to become due prior to its stated maturity or to realize upon any collateral given as security therefor. Q. There shall occur a material adverse change of any kind, financial or otherwise with respect to any Borrower or Guarantor, as determined by Majority Lenders in their sole discretion. R. There shall occur any default or event which with the giving of notice, passage of time or both, would be a default under any other loans from one or more Lenders to Borrower or Guarantor; 6.2 - Rights and Remedies - ------------------------- Upon the occurrence of an Event of Default, unless such Event of Default is subsequently waived in writing by Agent on behalf of Lenders, Agent, acting on behalf of the Lenders, or Lenders, as the case may be, shall be entitled, at the option of Lenders, to exercise any or all of the following rights and remedies, consecutively or simultaneously, and in any order: A. Lenders may make one (1) or more further Advances, without liability to make any subsequent Advances. B. Lenders may suspend their obligation to make Advances under this Agreement, without notice to Borrower. C. Subject to the provisions of SECTIONS 2.A.9 and 2.A.10, Lenders may terminate their obligation to make Advances under this Agreement, and may declare the entire unpaid principal balance of the Advances made under this Agreement and all Reimbursement Obligations to be immediately due and payable, together with accrued and unpaid interest on such Advances, without notice to or demand on Borrower. D. Agent may terminate its obligation to issue, extend or renew Letters of Credit. E. Lenders may exercise any or all remedies specified herein and/or in the other Loan Documents, and/or any other remedies which they may have therefor at law, in equity or under statute. F. Agent, on behalf of Lenders, may cure the Event of Default on behalf of Borrower. G. Borrower hereby irrevocably authorizes Lenders to set off any sum due to or incurred by Lenders against all deposits and credits of Borrower with, and any and all claims of Borrower against, Lenders. Such right shall exist whether or not Lenders shall have made any demand hereunder or under any other Loan Document, whether or not said sums, or any part thereof, or deposits and credits held for the account of Borrower is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to Lenders. Lenders agree that, as promptly as is reasonably possible after the exercise of any such setoff right, Agent shall notify Borrower of the exercise by Lenders of such setoff right; provided, however, that the failure of Agent to provide such notice shall not affect the validity of the exercise of such setoff rights. Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on Lenders to all rights of banker's lien, setoff and counterclaim available pursuant to law. In addition, upon the occurrence of any event described in SECTION 6.1(F) hereof which will not become an Event of Default prior to the expiration of some period of time, Lenders may suspend their obligations to fund Advances hereunder immediately upon the occurrence of said event. ARTICLE VII. MISCELLANEOUS ------------- 7.1 - Binding Effect; Waivers; Cumulative Rights and Remedies - ------------------------------------------------------------- The provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, personal representatives, legal representatives, successors and assigns, subject to the provisions of SECTION 5.6; provided, however, that neither this Agreement nor the proceeds of the Loan may be assigned by Borrower voluntarily, by operation of law or otherwise, without the prior written consent of Agent on behalf of the Lenders. No delay on the part of Agent or Lenders in exercising any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder constitute such a waiver or exhaust the same, all of which shall be continuing. The rights and remedies of Lenders specified in this Agreement shall be in addition to, and not exclusive of, any other rights and remedies which Lenders would otherwise have at law, in equity or by statute, and all such rights and remedies, together with Lenders' rights and remedies under the other Loan Documents, are cumulative and may be exercised individually, concurrently, successively and in any order. 7.2 - Survival - -------------- All agreements, representations and warranties made in this Agreement shall survive the execution of this Agreement, the making of the Advances by Lenders, and the execution of the other Loan Documents, and shall continue until Lenders receive payment in full of all indebtedness of Borrower incurred under this Agreement and under the other Loan Documents and for so long as any Letter of Credit remains outstanding. 7.3 - Governing Law; Waiver of Jury Trial - ----------------------------------------- THIS AGREEMENT, THE RIGHTS OF THE PARTIES HEREUNDER, AND THE CONSTRUCTION, INTERPRETATION, VALIDITY AND ENFORCEABILITY HEREOF AND OF ALL OF THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF MARYLAND, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES RELATING TO NATIONAL BANKS. BORROWER, AGENT AND LENDERS HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THE LOAN, THE LOAN DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED THEREBY. AT THE OPTION OF LENDERS, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT SITTING IN THE STATE OF MARYLAND OR MARYLAND STATE COURT; AND BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUM IS NOT CONVENIENT. IN THE EVENT BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, LENDERS, AT THEIR OPTION, SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. 7.4 - Counterparts - ------------------ This Agreement may be executed in any number of counterparts, all of which shall constitute a single Agreement. 7.5 - Notices - ------------- Any notice required or permitted to be given by either party hereto to the other under the terms of this Agreement, or documents related hereto, shall be in writing and shall be sent by manual delivery, telegram, facsimile transmission, overnight courier, or United States registered or certified mail, return receipt requested (postage prepaid), addressed to such party at the address specified on the signature page hereof, or at such other address in the United States of America as such party shall have specified to the other party hereto in writing, at least ten (10) days prior to the effective date of said change of address. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four (4) days after the date of mailing if so mailed; provided, however, that any notice to Lenders designating, continuing or converting any Advance as or into a Eurodollar Rate Advance shall be deemed to have been given only when received by Lenders. 7.6 - No Third Party Reliance - ----------------------------- No third party shall be entitled to rely upon this Agreement or to have any of the benefits of any Lender's interest hereunder, unless such third party is an express assignee of all or a portion of Lenders' interest hereunder. 7.7 - Sale of Loan; Participations or Syndication - ------------------------------------------------- Any Lender may at any time sell, assign, transfer, syndicate, grant participations in or otherwise dispose of any portion of the Loan (each such interest so disposed of being herein called a "TRANSFERRED INTEREST") to banks, insurance companies or other financial institutions (hereinafter called "TRANSFEREES"), pursuant to such transfer agreements, co-lender agreements, participation agreements, and/or agency agreements into which such Lender and its Transferees may enter and by which Borrower shall agree in writing to abide. Borrower agrees that each Transferee shall be entitled to the benefits of this Agreement with respect to its Transferred Interest. In addition, Borrower hereby agrees that any Lender may, at any time and from time to time, in its ordinary course of business and in accordance with applicable law, (A) assign an undivided interest in the Loan to an affiliate of such Lender, or (B) pledge or assign the same to any Federal Reserve Bank in accordance with applicable law. At the request of any Lender, in the event of any such sale, assignment, transfer or syndication, Borrower shall execute separate new Notes to the assignor and its assignee, in the amounts of their respective interests in the Loan after said assignment, and shall deliver the same to the assignor and the assignee, in exchange for the assignor's existing Note. All such separate new Notes shall be entitled to all the rights and benefits accorded to the existing Note under the terms of the Loan Documents. No such assignment shall be binding upon Borrower until a Lender gives written notice thereof to Borrower. Agent and each Lender may divulge all information relating to Borrower, Guarantor or any Real Estate Asset which Agent or such Lender has to any actual or potential Transferee, and Borrower shall cooperate with Agent and each Lender in satisfying the requirements of any Transferee with respect to the transfer. Borrower agrees that each Transferee shall be entitled to the benefits hereof with respect to its Transferred Interest and that each Transferee may exercise any and all rights of banker's lien, setoff and counterclaim as if such Transferee were a direct lender to Borrower. If any Lender makes any assignment to a Transferee, then upon notice to Borrower such Transferee, to the extent of such assignment (unless otherwise provided therein), shall become a Lender hereunder and shall have all the rights and obligations of a Lender hereunder, and such Lender shall be released from its duties and obligations under this Agreement to the extent of such assignment. Borrower further acknowledges that notwithstanding the provisions of this Agreement which require the consent or approval of Agent, Majority Lenders or Lenders, the terms and provisions of the Intercreditor Agreement and any future Assignment and Assumption Agreement which any Lender(s) may execute from time to time in connection with a transfer of all or a portion of Loan may require that Agent or one or more Lenders obtain the consent or approval of another Person or Lender; provided, however in no event shall Agent obligate itself to obtain the approval of one or more Lenders with respect to the release of an Approved Asset which is not a Major Asset pursuant to SECTION 2.B.4. In the event of a conflict between the provisions of this Agreement relating to consent or approval and the provisions of the Intercreditor Agreement or any future Assignment and Assumption Agreement, the provisions of the Intercreditor Agreement and any future document shall control, whether or not Borrower is advised by Agent or any Lender of such conflict. Notwithstanding the foregoing, nothing contained herein shall require the Borrower to communicate directly with the Lenders in lieu of communicating with Agent on behalf of Lenders. While Agent may provide Borrower with a copy of the Intercreditor Agreement, as amended from time to time and any Assignment and Assumption Agreement executed from time to time and request that Borrower acknowledge the terms and provisions thereof, Borrower shall not have the right to approve or disapprove such agreements. 7.8 - Time of the Essence - ------------------------- Time is of the essence hereof with respect to the dates, terms and conditions of this Agreement. 7.9 - Entire Agreement; No Oral Modifications - --------------------------------------------- This Agreement, the Guaranty, the other Loan Documents and the other documents mentioned herein set forth the entire agreement of the parties with respect to the Loan and supersede all prior written or oral understandings and agreements between them with respect thereto. No modification or waiver of any provision of this Agreement shall be effective unless set forth in writing and signed by the parties hereto. 7.10 - Captions - --------------- The headings or captions of the Articles and Sections set forth herein are for convenience only, are not a part of this Agreement and are not to be considered in interpreting this Agreement. 7.11 - Borrower-Lender Relationship - ----------------------------------- The relationship between Borrower and Lenders created hereby and by the other Loan Documents shall be that of a borrower and a lender only, and in no event shall any Lender be deemed to be a partner of, or a joint venturer with, Borrower. 7.12 - Rules of Interpretation - ------------------------------ In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated, the word "from" means "from and including" and the word "to" or "until" each means "to but excluding". The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Subsections, Exhibits, schedules and like references are to this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or" where permitted by the context. 7.13 - Expenses - --------------- Borrower agrees to pay (a) the costs of producing and reproducing this Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) the reasonable fees, expenses and disbursements of the Agent's outside counsel or any local counsel to the Agent incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (c) the fees, expenses and disbursements of the Agent incurred by the Agent in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including, without limitation, the costs incurred by the Agent in connection with its inspection of the Unencumbered Assets, and the fees and disbursements of the Agent's counsel in preparing the documentation, (d) [intentionally omitted], (e) all expenses (including attorneys' fees and costs, which attorneys may be employees of any Lender or the Agent, and the fees and costs of appraisers, engineers, investment bankers, surveyors or other experts retained by the Lender or Agent in connection with any such enforcement proceedings) incurred by any Lender or the Agent in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrower or any of its Subsidiaries or any Guarantor or the administration thereof after the occurrence and during the continuance of an Event of Default (including, without limitation, expenses incurred in any restructuring and/or "workout" of the Loan), and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to any Lender's or the Agent's relationship with the Borrower or any of its Subsidiaries or any Guarantor, (f) all reasonable fees, expenses and disbursements of the Agent incurred in connection with title searches or releases of Negative Pledge Agreements, and (g) all costs incurred by the Agent in the future in connection with its inspection(s) of the Unencumbered Assets. The covenants of this Section shall survive payment or satisfaction of payment of amounts owing with respect to the Note. ARTICLE VIII. AGENT ----- 8.1 - Authorization - ------------------- The Borrower, without further inquiry or investigation, shall, and is hereby authorized by the Lenders to, assume that all actions taken by the Agent hereunder and in connection with or under the Loan Documents are duly authorized by the Lenders. The Lenders shall notify Borrower of any successor to Agent by a writing signed by Lenders. 8.2 - Employees and Agents - -------------------------- The Agent may exercise its powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Agreement and the other Loan Documents. The Agent may utilize the services of such Persons as the Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Borrower. 8.3 - No Liability - ------------------ Neither the Agent, nor any of its shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any agent or employee thereof, shall be liable for any waiver, consent or approval given or any action taken, or omitted to be taken, in good faith by it or them hereunder or under any of the other Loan Documents, or in connection herewith or therewith, or be responsible for the consequences of any oversight or error of judgment whatsoever, except that the Agent may be liable for losses due to its willful misconduct or gross negligence. 8.4 - Payments - -------------- A. A payment by the Borrower to the Agent hereunder or any of the other Loan Documents for the account of any Lender shall constitute a payment to such Lender. The Agent agrees to distribute to each Lender such Lender's pro rata --- ---- share of payments received by the Agent for the account of the Lenders, as provided herein or in any of the other Loan Documents. B. If in the reasonable opinion of the Agent the distribution of any amount received by it in such capacity hereunder, under the Note, under the Intercreditor Agreement or under any of the other Loan Documents might involve it in material liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction, provided that the Agent shall invest any such undistributed -------- amounts in overnight obligations on behalf of the Lenders and interest thereon shall be paid pro rata to the Lenders. If a court of competent jurisdiction --- ---- shall adjudge that any amount received and distributed by the Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. 8.5 - Agent as Lender - --------------------- In its individual capacity as a Lender, Agent shall have the same obligations and the same rights, powers and privileges in respect to the Advances made by it, and as the holder of any Note, as it would have were it not also the Agent. 8.6 - Successor Agent - --------------------- Agent, or any successor Agent, may resign as Agent at any time by giving written notice thereof to the Lenders and to the Borrower. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Agent, which is a Lender under this Agreement. If, in the case of a resignation by the Agent, no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint any one of the other Lenders as a successor Agent. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent, and the retiring or removed Agent shall be discharged from all further duties and obligations as Agent under this Agreement. After any Agent's resignation or removal hereunder as Agent, the provisions of this SECTION 8.6 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. The Agent agrees that it shall not assign any of its rights or duties as Agent to any other Person. IN WITNESS WHEREOF, each party has caused this Agreement to be duly executed and delivered as of the day and year first above set forth. WITNESS/ATTEST: SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership By: Saul Centers, Inc., a Maryland corporation, its sole general partner By: ------------------------------------------- B. Francis Saul II Its: WITNESS/ATTEST: SAUL SUBSIDIARY II LIMITED PARTNERSHIP, a Maryland limited partnership By: Saul Centers, Inc., a Maryland corporation, its sole general partner By: ------------------------------------------- B. Francis Saul II Its: Address: 8401 Connecticut Avenue Chevy Chase, Maryland 20814 U.S. BANK NATIONAL ASSOCIATION By: --------------------------------------------- Address: First Bank Place - MPFP0802 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Attn: Real Estate Banking Division Head EX-23 5 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in the Company's December 31, 1997 Form 10-K into the previously filed Registration Statement File No. 33-80291. Arthur Andersen LLP Washington, D.C. March 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE CONTAINED IN FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 OF SAUL CENTERS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 688 0 6,190 0 0 0 335,268 92,615 260,942 0 284,473 0 0 124 (38,178) 260,942 0 67,717 0 18,717 6,084 505 22,037 12,603 0 12,603 0 (3,197) 0 2,552 0.21 0.21
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