Document/Exhibit Description Pages Size
1: 8-K/A Amendment to Current Report HTML 16K
2: EX-3.1 Second Amended and Restated Agreement 43 164K
3: EX-10.1 Registration Rights Agreement 16 59K
4: EX-10.2 Registration Rights Agreement 21 91K
5: EX-10.3 Tax Reporting and Protection Agmt. 35 135K
6: EX-23.1 Report of Accountants HTML 7K
7: EX-99.1 Charles E. Smith Financials 23 98K
8: EX-99.2 Vornado Financials 6 38K
Exhibit 10.3
TAX REPORTING AND PROTECTION AGREEMENT
BY AND AMONG
VORNADO REALTY TRUST,
VORNADO REALTY L.P.,
CHARLES E. SMITH COMMERCIAL REALTY L.P.,
AND
CHARLES E. SMITH COMMERCIAL REALTY, L.L.C.,
as Representative of, and for the Benefit of,
the Holders of Units of Partnership Interest in
Charles E. Smith Commercial Realty L.P.
Dated as of
December 31, 2001
TAX REPORTING AND PROTECTION AGREEMENT
THIS TAX REPORTING AND PROTECTION AGREEMENT (this "Agreement") is
entered into as of December 31, 2001, by and among VORNADO REALTY TRUST
("Vornado REIT"), a Maryland real estate investment trust and the sole general
partner of Vornado Realty L.P.; VORNADO REALTY L.P., a Delaware limited
partnership ("Vornado OP"); CHARLES E. SMITH COMMERCIAL REALTY L.P., a Delaware
limited partnership ("SCR"); and CHARLES E. SMITH COMMERCIAL REALTY, L.L.C., a
Delaware limited liability company and the sole general partner of SCR ("SCR
GP"), as representative of the current holders of partnership interests in SCR
(other than Vornado CESCR LLC and Vornado CESCR II LLC) (the "SCR Unitholders").
SCR GP is entering into this Agreement in its capacity as a general partner of
SCR, in the capacity as representative of, and for the benefit of, each SCR
Unitholder, and for its own account. Vornado REIT and Vornado OP hereby agree
that each of the SCR Unitholders is a third party beneficiary of this agreement
with all of the rights and privileges set forth herein.
WHEREAS, Vornado REIT, Vornado OP, Vornado Merger Sub L.P. ("Vornado
Merger Sub"), SCR, Robert H. Smith, and Robert P. Kogod have entered into that
certain Agreement and Plan of Merger dated as of October 18, 2001 (the "SCR
Merger Agreement") whereby Vornado REIT and Vornado OP will acquire SCR through
a merger of Vornado Merger Sub with and into SCR, with the existing units of
limited partnership interest in SCR (other than those held by Vornado CESCR LLC
and Vornado CESCR II LLC) (the "Old SCR Units") being converted into units of
limited partnership interest in Vornado OP (the "Vornado OP Units") and the
partners of Vornado Merger Sub becoming the sole interest holders in SCR (the
"Merger");
WHEREAS, (i) Vornado Merger Sub, which is owned entirely by Vornado OP
and an entity that is owned entirely by Vornado OP and disregarded for federal
income tax purposes, is disregarded as an entity for federal income tax purposes
under Treasury Regulation ss. 301.7701-3, and (ii) following the merger, SCR
will be owned entirely by Vornado OP and another entity that is owned entirely
by Vornado OP and that is disregarded for federal income tax purposes under
Treasury Regulation ss. 301.7701-3, with the result that SCR will be disregarded
as an entity for federal income tax purposes following the Merger, and Vornado
OP will be treated as owning directly all of the assets of SCR, it is intended
for federal income tax purposes that the Merger, regardless of form, be treated
as a contribution by SCR of all of its assets, subject to all of its
liabilities, to Vornado OP in exchange for partnership interests in Vornado OP
under Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"),
followed by a distribution by SCR of those partnership interests in Vornado OP
to the current holders of partnership units in SCR (other than Vornado CESCR LLC
and Vornado CESCR II LLC) in accordance with their respective interests in SCR
in liquidation of SCR; and
WHEREAS, in accordance with Section 4.2 of the SCR Merger Agreement and
in consideration for the agreement of SCR to consummate the Merger, the parties
desire to enter into this Agreement regarding certain tax matters associated
with the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein and in
the SCR Merger Agreement, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
To the extent not otherwise defined herein, capitalized terms used in
this Agreement have the meanings ascribed to them in the Second Amended and
Restated Agreement of Limited Partnership of Vornado Realty L.P. dated October
20, 1997, as amended to the date hereof, a copy of which is attached hereto as
Exhibit A (the "Vornado OP Partnership Agreement").
704(c) Value: Means the fair market value of each of the Protected
Properties as agreed to by Vornado OP and SCR and as set forth in Schedule 3
hereto.
Ceiling Rule Disparity: As defined in Section 7(a).
Cumulative Net Ceiling Rule Disparity: As defined in Section 7(a).
Curative Allocation: Means, (i) for the Fiscal Year ending December 31,
2002, an amount of income per Non-Rock Spring Protected Unit equal to $1.2613
(which amount shall be prorated for 2002 if the Merger occurs after January 1,
2002, based upon the number of days in 2002 following the Merger divided by
365), (ii) for the Fiscal Year ending December 31, 2003, an amount of income per
Non-Rock Spring Protected Unit equal to $1.4781 and (iii) for each Fiscal Year
following 2003 through and including 2041, an amount of income per Non-Rock
Spring Protected Unit equal to $1.6423 (which amount per Non-Rock Spring
Protected Unit shall be pro rated between the transferor and transferee with
respect to a Non-Rock Spring Protected Unit that is transferred during any
Fiscal Year, based upon the number of days in such Fiscal Year prior to the day
on which such Non-Rock Spring Protected Unit was transferred and the number of
days remaining in such Fiscal Year). If any taxable year of Vornado OP is less
than 365 days, then the Curative Allocation shall be pro rated based upon the
ratio of the number of days in such "short taxable year" to 365.
Existing Nonrecourse Debt: Means all of the outstanding indebtedness of
SCR and its Subsidiaries at the time of the closing of the Merger that is
treated as a Nonrecourse Liability and that is secured by any of the Protected
Properties (or is treated for purposes of Treasury Regulation ss. 1.752-3(a)(2)
as secured by any of the Protected Properties). The Existing Nonrecourse Debt
and the Protected Properties secured thereby are set forth on Schedule 4
hereto).
Existing SCR Indebtedness: As defined in Section 2(d)(1).
Extended Tax Protected Period: As defined in the definition of
Protected Period.
Guaranteed Amount: Means the aggregate amount of each Guaranteed Debt
that is guaranteed at any time by SCR Partner Guarantors. The Guaranteed Amount
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with respect to each Guaranteed Debt as of the date hereof is set forth on
Schedule 8 hereto.
Guaranteed Debt: Means each of the loans listed on Schedule 8 hereto
that is guaranteed by SCR Partner Guarantors on the date hereof, and any other
loans incurred (or assumed) by Vornado OP or any of its Subsidiaries that are
guaranteed by SCR Partner Guarantors at any time hereafter pursuant to Article 3
hereof.
Initial Guarantee Shortfall: Means, as to each SCR Partner Guarantor,
the excess of the amount of indebtedness that such SCR Partner Guarantor has
committed to guarantee at the time of the Merger, which amount as to each SCR
Partner Guarantor is set forth on Schedule 9 hereto, over the Scheduled
Guarantee Amount for such SCR Partner Guarantor. The Initial Guarantee Shortfall
for each SCR partner Guarantor as of the date hereof is set forth on Schedule 9
hereto. The Initial Guarantee Shortfall with respect to an SCR Partner Guarantor
shall be reduced as set forth in Section 3(b).
Lock-up Agreement: Means as to each SCR Unitholder who enters into the
a Lock-Up Agreement in the form of Schedule 6 hereto, such Lock-up Agreement
that such SCR Unitholder has entered into.
Nonrecourse Liability: Means a "nonrecourse liability" as defined in
Treasury Regulations ss. 1.752-1(a)(2).
Non-Rock Spring Protected Units: Means all Protected Units other than
the Protected Units issued in the Merger with respect to SCR Units that
previously were issued to the former partners of First Rock Spring Limited
Partnership in connection with the contribution of their interests in First Rock
Spring Limited Partnership to SCR on or about January 31, 2000.
Other Qualified Indebtedness: As defined in Section 2(d)(1).
Protected Units: Means those Vornado OP Units issued to the SCR
Unitholders in connection with the Merger, or any partnership interests in
Vornado OP (or any other entity that is treated as a partnership for federal
income tax purposes) thereafter issued by Vornado OP to the SCR Unitholders in
exchange for such Protected Units or with respect to such Protected Units. The
term Protected Units shall not include any other Vornado OP Units hereafter
acquired by an SCR Unitholder, whether from Vornado OP (except as described in
the immediately preceding sentence) or otherwise.
Protected Properties: Means, except as otherwise specifically provided
herein, those properties and assets set forth on Schedule 2 hereto 1/ and any
other
----------
1/ The Protected Properties will include all buildings and land in which SCR
owns a direct or indirect interest at the time of the Merger, all partnership or
LLC interests owned directly or indirectly by SCR at the time of the Merger, the
management business conducted by SCR and all stock or securities of any
corporate entity to which all or any
[Footnote continued]
3
properties or assets hereafter acquired by Vornado OP or any direct or indirect
Subsidiary of Vornado OP that are treated as "substituted basis property" as
defined in Section 7701(a)(42) of the Code with respect to such Protected
Properties.
Protected Period: Means with respect to each SCR Unitholder, the period
ending at 12:01 A.M. on January 1, 2012 (the "Initial Ten-Year Period"),
provided, however, that the Protected Period with respect to each SCR Unitholder
who enters into a Lock-Up Agreement in the form of Schedule 6 hereto shall be
extended for an additional 10-year period, which shall end at 12:01 A.M. on
January 1, 2022 (the additional 10-year period is referred to as the "Extended
Tax Protected Period"), provided further that in the event of the death of all
of Robert H. Smith, Robert P. Kogod, Clarice R. Smith and Arlene R. Kogod (a)
during the Initial Ten-Year Period, no SCR Unitholder shall have an Extended Tax
Protected Period beyond the Initial Ten-Year Period or (b) after the Initial
Ten-Year Period, the Extended Tax Protected Period shall terminate with respect
to each SCR Unitholder on the date of death of the last to survive of Robert H.
Smith, Clarice R. Smith, Robert P. Kogod, or Arlene R. Kogod. In addition, the
Extended Tax Protected Period shall be subject to early termination as set forth
in Article 12 below.
Qualified Guarantee: As defined in Section 3(b).
Qualified Guarantee Indebtedness: As defined in Section 3(b).
Qualified Replacement Indebtedness:As defined in Section 2(d)(1).
SCR Merger Closing Date: Means December 31, 2001.
SCR Partner Guarantors: Means those SCR Unitholders who, as of the time
of the determination, have guaranteed any portion of any of the Guaranteed Debt.
The SCR Partner Guarantors as of the date hereof, the aggregate amount of all
Guaranteed Debt that each such SCR Partner has guaranteed as of the date hereof,
and each SCR Partner Guarantor's dollar amount share of the Guaranteed Amount
with respect to each Guaranteed Debt as of the date hereof are set forth on
Schedules 8 and 9 hereto.
SCR Unitholders: Means the SCR Unitholders set forth on Schedule 1
hereto,2/ and any Person who holds Protected Units who acquires such Protected
Units from an SCR Unitholder in a transaction in which gain or loss is not
recognized in whole or in part for federal income tax purposes and in which such
transferee's adjusted basis, as
----------
[Footnote continued]
portion of such management business is transferred in connection with or
following the Merger and in which Vornado OP owns a direct or indirect interest.
2/ The term SCR Unitholders shall include each SCR Unitholder that receives
Vornado OP Units in the Merger.
4
determined for federal income tax purposes, is determined in whole or in part by
reference to the adjusted basis of the SCR Unitholder in such Protected Units.
Scheduled Guarantee Amount: Means, as to each SCR Partner Guarantor,
the aggregate amount of all Guaranteed Debt that, as of the SCR Merger Closing
Date, such SCR Partner Guarantor shall have guaranteed. The Scheduled Guarantee
Amount for each such SCR Partner Guarantor is set forth on Schedule 9 to this
Agreement. The Scheduled Guarantee Amount for an SCR Partner Guarantor shall be
increased by the amount of any Qualified Guarantee Indebtedness guaranteed by
such SCR Partner Guarantor pursuant to Section 3(b). The Scheduled Guarantee
Amount for an SCR Partner Guarantor shall be reduced only if (i) such SCR
Partner Guarantor notifies Vornado OP in writing that the Scheduled Guarantee
Amount is thereafter to be reduced (which notice shall not affect any guarantees
then existing by the SCR Partner Guarantor but, as to the dollar amount of the
reduction specified in such notice, shall relieve Vornado OP of its obligation
under this Agreement to maintain the Guaranteed Debt with respect to such SCR
Partner Guarantor or to offer replacement debt to be guaranteed by the SCR
Partner Guarantor), or (ii) in the event that any Guaranteed Debt is to be
repaid or refinanced and Vornado OP offers in writing to the SCR Partner
Guarantor the opportunity to enter into a Qualified Guarantee with respect to
other Qualified Guarantee Indebtedness that meets all of the conditions set
forth in Section 3(e) and the other applicable provisions of Article 3, the SCR
Partner Guarantor fails, within 30 days after receipt of such offer from Vornado
OP, to execute a guarantee with respect to such replacement Guaranteed Debt
(provided that the amount of the reduction in the Scheduled Guarantee Amount
with respect to such SCR Partner Guarantor shall not exceed the lesser of the
dollar amount of the guarantee offered by Vornado and not accepted by the SCR
Partner Guarantor or such SCR Partner Guarantor's share of the Guaranteed Amount
with respect to the Guaranteed Debt being repaid or refinanced).
Subsidiary: Means any partnership, limited liability company, trust or
other entity either (a) whose disposition of a Protected Property or any direct
or indirect interest in a Protected Property or (b) a direct or indirect
disposition of an interest in which by Vornado OP would result in the allocation
of taxable gain to one or more SCR Unitholders pursuant to Section 704(c) of the
Code and the Treasury Regulations thereunder.
Successor Partnership: As defined in Section 2(b).
Taxes: Means all federal, state, local and foreign taxes (including,
without limitation, income, profit, franchise, sales, use, real property,
personal property, ad valorem, excise, employment, social security and wage
withholding taxes) and installments and estimated taxes, assessments,
deficiencies, levies, imposts, duties, withholdings, or other similar charges of
every kind, character or description imposed by any governmental authorities,
and any interest, penalties or additions to tax imposed thereon or in connection
therewith.
5
ARTICLE 2
RESTRICTIONS ON DISPOSITIONS OF PROTECTED PROPERTIES
(a) General Prohibition on Disposition. Vornado OP agrees for the
benefit of each SCR Unitholder, for the term of the Protected Period applicable
to such SCR Unitholder, not to directly or indirectly sell, exchange, transfer,
or otherwise dispose of any Protected Property or any interest therein (without
regard to whether such disposition is voluntary or involuntary). Without
limiting the foregoing, the term "sale, exchange, transfer or disposition" by
Vornado OP shall be deemed to include, and the prohibition shall extend to:
(i) any direct or indirect disposition by any direct or indirect
Subsidiary (including SCR) of any Protected Property or any
interest therein;
(ii) any direct or indirect disposition by Vornado OP of all or any
portion of its interest in SCR;
(iii) any direct or indirect disposition by Vornado OP or any
Subsidiary of Vornado OP of all or any portion of its interest
in any entity that (A) was a Subsidiary of SCR or (B) is a
Subsidiary of Vornado and owns a direct or indirect interest
in a Protected Property (which prohibition shall include,
without limitation, any transaction involving a distribution
or deemed distribution by a Subsidiary to Vornado OP under
Section 731 of the Code);
(iv) any direct or indirect distribution by Vornado OP of any
Protected Property (or any direct or indirect interest
therein) that is subject to Section 704(c)(1)(B) of the Code
and the Treasury Regulations thereunder; and
(v) any distribution by Vornado OP to an SCR Unitholder that is
subject to Section 737 of the Code and the Treasury
Regulations thereunder (except as, and to the extent,
permitted under Section 2(f) below);
Without limiting the foregoing, a disposition shall include any transfer,
voluntary or involuntary, in a foreclosure proceeding, pursuant to a deed in
lieu of foreclosure, or in a bankruptcy proceeding, except as set forth in
Section 2(d) below. This Section 2(a) shall not be violated by an actual or
deemed distribution of money (within the meaning of Section 731 of the Code) by
Vornado OP that results in the recognition of gain solely by reason of Section
731 of the Code.
(b) Exceptions Where No Gain Recognized. Notwithstanding the
restriction set forth in Section 2(a), Vornado OP or any Subsidiary (including
SCR) may dispose of a Protected Property (or an interest therein) if such
disposition qualifies as a like-kind exchange under Section 1031 of the Code, or
an involuntary conversion under Section 1033 of the Code, or other transaction
(including, but not limited to, a contribution of property to any entity that
qualifies for the nonrecognition of gain under Section 721 or Section 351 of the
Code, or a merger or consolidation of Vornado OP (or SCR, as applicable) with or
into another entity that qualifies for taxation as a "partnership" for federal
income tax purposes (a "Successor Partnership")) that, as to each of the
foregoing, does not result in the recognition of any taxable income or gain to
any SCR Unitholder with respect to any of
6
the Protected Units; provided, however, that:
(1) in the event of a disposition under Section 1031 or Section 1033
of the Code, any property that is acquired in exchange for or as
a replacement for a Protected Property shall thereafter be
considered a Protected Property;
(2) in the case of a Section 1031 like-kind exchange, if such
exchange is with a "related party" within the meaning of Section
1031(f)(3) of the Code, any direct or indirect disposition by
such related party of the Protected Property or any other
transaction prior to the expiration of the two (2) year period
following such exchange that would cause Section 1031(f)(1) to
apply with respect to the Protected Property (including by reason
of the application of Section 1031(f)(4)) shall be considered a
violation of Section 2(a) by Vornado OP;
(3) if the Protected Property is transferred to another entity in a
transaction in which gain or loss is not recognized, the direct
and indirect interest of Vornado OP in such entity shall
thereafter be considered a Protected Property, and if the
acquiring entity's disposition of the Protected Property would
cause an SCR Unitholder to recognize gain or loss as a result
thereof, the transferred Protected Property still shall be
considered a Protected Property;
(4) if Vornado OP directly or indirectly receives any property that
is in whole or in part a "substituted basis property" as defined
in Section 7701(a)(42) of the Code with respect to a Protected
Property (including, without limitation, a Protected Property by
reason of clause (3) above), such substituted basis property
shall thereafter be considered a Protected Property;
(5) in the event that at the time of the exchange or other
disposition the Protected Property is secured, directly or
indirectly, by indebtedness that is guaranteed by an SCR
Unitholder (or for which an SCR Unitholder otherwise has personal
liability) and that is not then in default and the transferee is
not a Subsidiary of Vornado OP that both is more than 50% owned,
directly or indirectly by Vornado OP and is and will continue to
be under the legal control of Vornado OP (which shall include a
partnership or limited liability company in which Vornado OP or a
wholly owned subsidiary of Vornado OP is the sole managing
general partner or sole managing member, as applicable), (a)
either (I) such indebtedness shall be repaid in full or (II)
Vornado shall obtain from the lenders with respect to such
indebtedness a full and complete release of liability for each of
the SCR Unitholders that has guaranteed, or otherwise has
liability for, such indebtedness, and (b) if such indebtedness is
a Guaranteed Debt and the Protected Period of the SCR Partner
Guarantors with respect to such Guaranteed Debt shall not have
expired, Vornado OP shall comply with its covenants set forth in
Article 3 below with respect to such Guaranteed Debt and the SCR
Partner Guarantors that are considered to have
7
liability for such Guaranteed Debt (determined under Section
3(d), treating such events as a repayment of the Guaranteed
Debt); and
(6) in the event of a merger or consolidation involving Vornado OP
(or any Subsidiary) and a Successor Partnership, the Successor
Partnership shall have agreed in writing for the benefit of the
SCR Unitholders that all of the restrictions of this Article 2
shall continue to apply with respect to the Protected Properties.
(c) Mergers. Any merger or consolidation involving Vornado OP or any
Subsidiary of Vornado OP, whether or not Vornado OP is the surviving entity in
such merger or consolidation, that results in an SCR Unitholder being required
to recognize part or all of the gain that would have been recognized for federal
income tax purposes upon a fully taxable disposition of one or more Protected
Properties at the time of the Merger shall be deemed to be a disposition of the
Protected Properties for purposes of Section 2(a).
(d) Exceptions for Certain Foreclosures, Bankruptcies and Involuntary
Transfers. Notwithstanding the restriction set forth in Section 2(a), and in
addition to the exceptions set forth in Section 2(b), Vornado OP or any
Subsidiary (including SCR) may dispose of a Protected Property (or an interest
therein), without such disposition being considered to be a violation of Article
2 or Vornado OP incurring any liability under Article 5 as a result of this
Article 2, as follows:
(1) pursuant to the foreclosure of a loan secured, directly or
indirectly, by a Protected Property, or in connection with the
bankruptcy of an entity owning a direct or indirect interest in
the Protected Property if all of the following conditions are
satisfied (A) if a foreclosure, the foreclosure (I) is of
indebtedness that was incurred by SCR prior to the time of the
Merger and was in place at the time of the Merger ("Existing SCR
Indebtedness"), (II) is of indebtedness incurred to refinance
Existing SCR Indebtedness and the amount of such replacement
indebtedness at the time it was incurred did not exceed the sum
of the then outstanding Existing SCR Indebtedness being
refinanced, plus all costs (including prepayment fees, "breakage"
payments and similar costs) incurred in connection with such
refinancing and such replacement indebtedness was provided by an
institutional lender in connection with its business of lending
money ("Qualified Replacement Indebtedness"), or (III) is of
indebtedness that, at the time incurred, did not exceed (taking
into account all other indebtedness then outstanding and either
secured by the Protected Property or owed by the entity incurring
such indebtedness and its direct or indirect subsidiaries)
seventy percent (70%) of the fair market value of the Protected
Property at such time (as determined in good faith by Vornado OP)
("Other Qualified Indebtedness"); (B) if a bankruptcy, the only
indebtedness of the entity in bankruptcy for borrowed money
(other than obligations to trade creditors incurred in the
ordinary course of business) is Existing SCR Indebtedness,
Qualified Replacement Indebtedness and/or Other Qualified
Indebtedness; (C) at all times from the time of the Merger to the
time of the foreclosure or bankruptcy, as applicable, the direct
or indirect percentage ownership interest of
8
Vornado OP in the Protected Property was not less than the lesser
of fifty-one percent (51%) or the percentage interest of SCR in
such Protected Property at the time of the Merger; (D) Vornado OP
at all times since the Merger shall have had and shall have
exercised the legal right to control the operations of the
Protected Property (and any entities through which Vornado OP
owns a direct or indirect interest therein); (E) if such Existing
SCR Indebtedness, Qualified Replacement Indebtedness, or Other
Qualified Indebtedness shall have matured, Vornado OP shall have
used commercially reasonable efforts commencing a commercially
reasonable period prior to the stated maturity of such
indebtedness to cause such indebtedness to be refinanced,
provided that such refinancing can be obtained on commercially
reasonable terms; and (F) Vornado OP shall have used commercially
reasonable efforts (considering its own best interests) to
prevent such foreclosure or bankruptcy (provided that such
required efforts shall not include contributing capital or
otherwise providing funds to repay such indebtedness);
(2) an event (other than a foreclosure or bankruptcy, unless such
foreclosure satisfies clause (1) above) described in Section 1033
of the Code, other than a disposition resulting from or made in
connection with the mere threat or imminence of a requisition or
condemnation; provided that Vornado OP agrees to cause any real
property purchases that it and/or its Subsidiaries undertake and
complete after the occurrence of the event described in this
Section 2(d)(2) and prior to the expiration of the applicable
replacement period under Section 1033 (determined taking into
account Section 1033(g) of the Code) and that otherwise would
qualify as replacement property for purposes of Section 1033 of
the Code with respect to the Protected Property to be treated as
replacement acquisitions for the purposes of this Section 2(d)(2)
(other than acquisitions made with Vornado OP Units, acquisitions
made as part of a Section 1031 exchange and acquisitions made as
part of another Section 1033 transaction.
(e) Issuances of Additional Equity Interests. Notwithstanding Section
2(a), the issuance of additional partnership interests in Vornado OP pursuant to
the Vornado Partnership Agreement shall not be considered to be prohibited by
this Section 2 unless such partnership interests are in a form that either their
issuance, or any exercise by a holders of any rights thereunder, would be
considered to result in a direct or indirect taxable disposition by Vornado OP
or any Subsidiary of one or more of the Protected Properties or any interest
therein (determined taking into account, without limitation, Sections
704(c)(1)(B), 707(a), and 737 of the Code and the Treasury Regulations
thereunder).
(f) Limited Exception for Certain Distributions by Vornado OP. Section
2(a)(v) shall not be construed to prohibit any distribution of property (such
as, but not limited to, debt securities and equity securities in a corporation,
a limited liability company, or another partnership) made by Vornado OP with
respect to Vornado OP Units so long as all of the following conditions are
satisfied:
(i) the distributed property received by each holder of Protected
Units is registered under the Securities Exchange Act of 1934, is
listed for trading
9
on the New York Stock Exchange, the NASDAQ National Market
System, or another comparable national exchange or market system,
and is freely transferable by the recipient thereof under the
applicable federal and state securities laws; and
(ii) any gain required to be recognized by a holder of Protected Units
by reason of such distribution does not exceed the fair market
value of the distributed property at the time of such
distribution.
ARTICLE 3
GUARANTEES OF DEBT AND RESTRICTIONS
ON REFINANCING OF GUARANTEED DEBT
(a) Initial Guaranteed Debt. Either in connection with the Merger or in
connection with prior debt financings undertaken by SCR, the SCR Partner
Guarantors have entered into those certain guarantee agreements whereby the SCR
Partner Guarantors have guaranteed the Guaranteed Debt in an aggregate amount
equal to the Guaranteed Amount. Schedule 8 hereto sets forth, as of the date
hereof, the amount of all Guaranteed Debt and each SCR Partner Guarantor's share
of the Guaranteed Amount with respect to each Guaranteed Debt.
(b) Requirement to Offer Additional Guaranteed Debt. Not later than
December 31, 2004, Vornado OP shall offer to each SCR Partner Guarantor in
writing the opportunity to guarantee other Vornado OP indebtedness (which other
indebtedness may be, but is not required to be, indebtedness of SCR or one of
its Subsidiaries) in an amount equal to the Initial Guarantee Shortfall for such
SCR Partner Guarantor. In order for the offer of Vornado OP to satisfy the
requirements of this Section 3(b), (i) the indebtedness to be guaranteed, and
the terms of the guaranty must satisfy all of the conditions set forth in
Section 3(e) (indebtedness satisfying all such conditions is referred to as
"Qualified Guarantee Indebtedness"); (ii) the guarantee by the SCR Partner
Guarantors must be pursuant to a Guaranty Agreement substantially in the form
attached hereto as Schedule 7 that satisfies the conditions set forth in
Sections 3(e)(i) and (iii) (a "Qualified Guarantee"); (iii) the amount required
to be guaranteed by each SCR Partner Guarantor cannot exceed such SCR Partner
Guarantor's then existing Initial Guarantee Shortfall; and (iv) the offer of
Vornado OP to such SCR Partner Guarantors pursuant hereto must be in writing and
the SCR Partner Guarantors must have not less than thirty (30) days to elect to
enter into such guarantees. If, and to the extent that, an SCR Partner Guarantor
elects to guarantee Qualified Guarantee Indebtedness pursuant to an offer made
in accordance with this Section 3(b), such indebtedness thereafter shall being
considered a Guaranteed Debt and subject to all of this Article 3, and the
Initial Guarantee Shortfall of such SCR Partner Guarantor shall be reduced by
the amount of such guarantee. If an offer is made by Vornado OP to an SCR
Partner Guarantor pursuant to this Section 3(b) that complies with all of the
requirements of this Section 3(b) and such SCR Partner Guarantor does not join
in the guarantee pursuant to such offer (or joins in the guarantee for less than
lesser of the amount offered or its then remaining Initial Guarantee Shortfall),
Vornado OP thereafter shall have no obligation to such SCR Partner Guarantor
with respect to that portion of such SCR Partner Guarantor's Initial Guarantee
Shortfall that corresponds to the amount of the indebtedness that the SCR
Partner Guarantor elected not to guarantee (and such SCR
10
Partner Guarantor's Initial Guarantee Shortfall shall be considered to have been
reduced accordingly).
(c) Covenant With Respect to Guaranteed Debt Collateral. Vornado OP
covenants with the SCR Partner Guarantors with respect to the Guaranteed Debt
that (A) it will comply with the requirements set forth in Section 2(b)(5) upon
any disposition of any collateral for a Guaranteed Debt, whether during or
following the applicable Protected Period, and (B) it will not at any time,
whether during or following the applicable Protected Period, pledge the
collateral with respect to a Guaranteed Debt to secure any other indebtedness
(unless such other indebtedness is, by its terms, subordinate in all respects to
the Guaranteed Debt for which such collateral is security) or otherwise
voluntarily dispose of or reduce the amount of such collateral unless either (i)
after giving effect thereto the conditions in Section 3(e)(ii) would continue to
be satisfied with respect to the Guaranteed Debt and the Guaranteed Debt
otherwise would continue to be Qualified Guarantee Indebtedness, or (ii) Vornado
OP (A) obtains from the lender with respect to the original Guaranteed Debt a
full and complete release of any SCR Partner Guarantor unless the SCR Partner
Guarantor expressly requests that it not be released, and (B) if the applicable
Protected Period has not expired as to all SCR Partner Guarantors with respect
to such original Guaranteed Debt, offers to each SCR Partner Guarantor with
respect to such original Guaranteed Debt as to whom the Protected Period has not
expired, not less than 30 days prior to such pledge or disposition, the
opportunity to enter into a Qualified Guarantee of other Vornado OP indebtedness
that constitutes Qualified Guarantee Indebtedness (with such replacement
indebtedness thereafter being considered a Guaranteed Debt and subject to this
Article 3) in an amount equal to the amount of such original Guaranteed Debt
that was guaranteed by such SCR Partner Guarantor.
(d) Repayment or Refinancing of Guaranteed Debt. Vornado OP shall not,
at any time during the Protected Period applicable to an SCR Partner Guarantor,
repay or refinance all or any portion of any Guaranteed Debt unless (i) after
taking into account such repayment, each SCR Partner Guarantor would be
entitled, pursuant to Treasury Regulation ss. 1.752-2 (and not Treasury
Regulation ss. 1.752-3), to include in its basis for its Protected Units an
amount of Guaranteed Debt equal to its Scheduled Guarantee Amount, or (ii)
alternatively, Vornado OP, not less than 30 days prior to such repayment or
refinancing, offers to the applicable SCR Partner Guarantors the opportunity to
enter into a Qualified Guarantee with respect to other Qualified Guarantee
Indebtedness in an amount sufficient so that, taking into account such
guarantees of such other Qualified Guarantee Indebtedness, each SCR Partner
Guarantor who elects to guarantee such other Qualified Guarantee Indebtedness in
the amount specified by Vornado OP would be entitled, pursuant to Treasury
Regulation ss. 1.752-2 (and not Treasury Regulation ss. 1.752-3), to include in
its adjusted tax basis for its Protected Units debt equal to the Scheduled
Guarantee Amount for such SCR Partner Guarantor.
(e) Criteria for Indebtedness to be Guaranteed and Guarantees. The
Guaranteed Debt (and any additional or replacement Guaranteed Debt offered
pursuant to Sections 3(b), 3(c), 3(d), and 3(g) hereof) and the guarantees with
respect thereto shall at all times meet the following conditions:
(i) each such guarantee shall be a "bottom dollar guarantee" in that
the lender for the Guaranteed Debt is required to pursue
11
all other collateral and security for the Guaranteed Debt (other than any
"bottom dollar guarantees" permitted pursuant to this clause (i) and/or
Section 3(f) below) prior to seeking to collect on such a guarantee, and
the lender shall have recourse against the guarantee only if, and solely to
the extent that, the total amount recovered by the lender with respect to
the Guaranteed Debt after the lender has exhausted its remedies as set
forth above is less than the aggregate of the Scheduled Guarantee Amounts
with respect to such Guaranteed Debt (plus the aggregate amounts of any
other guarantees (x) that are in effect with respect to such Guaranteed
Debt at the time the guarantees pursuant to this Section 3 are entered
into, or (y) that are entered into after the date the guarantees pursuant
to this Section 3 are entered into with respect to such Guaranteed Debt and
that comply with Section 3(f) below, but only to the extent that, in either
case, such guarantees are "bottom dollar guarantees" with respect to the
Guaranteed Debt), and the aggregate liability of each SCR Partner Guarantor
for all Guaranteed Debt shall be limited to the amount actually guaranteed
by such SCR Partner Guarantor;
(ii) the fair market value of the collateral against which the lender
has recourse pursuant to the Guaranteed Debt, determined as of the time the
guaranty is entered into (an independent appraisal relied upon by the
lender in making the loan shall be conclusive evidence of such fair market
value when the guarantee is being entered into in connection with the
closing of such loan), shall not be less than 3.333 times the sum of (x)
the aggregate of the Scheduled Guarantee Amounts with respect to such
Guaranteed Debt plus (y) the dollar amount of any other indebtedness that
is senior to or pari pasu with the Guaranteed Debt and as to which the
lender thereunder has recourse against property that is collateral for the
Guaranteed Debt, plus (z) the aggregate amounts of any other guarantees (A)
that are in effect with respect to such Guaranteed Debt at the time the
guarantees pursuant to this Section 3 are entered into, or (B) that are
entered into after the date the guarantees pursuant to this Section 3 are
entered into with respect to such Guaranteed Debt and that comply with
Section 3(f) below, but only to the extent that in either case, such
guarantees are "bottom dollar guarantees" with respect to the Guaranteed
Debt);
(iii) (A) the executed guarantee must be delivered to the lender and
(B) the execution of the guarantee by the SCR Partner Guarantors must be
acknowledged by the lender as an inducement to it to make a new loan, to
continue an existing loan (which continuation is not otherwise required),
or to grant of a material consent under an existing loan (which consent is
not otherwise required to be granted) or, alternatively, the guarantee must
be with respect to a loan that, under the terms thereof, (I) is governed by
New York law and either the loan is secured by property located in New
York, the lender has a significant place of business in New York (with any
bona fide branch or office of the lender through which the loan is made,
negotiated, or administered being deemed a "significant place of business"
for the purposes hereof), or the lender obtained in connection with such
loan an opinion of counsel to the effect that such provisions regarding New
York law
12
are enforceable, or (II) is governed by the laws of another state that has
a statutory provision or applicable controlling judicial decisions that are
comparable to Section 5-1401 of the New York General Obligations Law and
the conditions set forth in clause (I) with respect to New York would be
satisfied with respect to such other state;
(iv) the aggregate amount of guarantees, indemnities, and other
similar undertakings with respect to such debt must not exceed the face
amount of the debt;
(v) as to each SCR Partner Guarantor that is executing a guarantee
pursuant hereto, there must be no other Person that would be considered to
"bear the economic risk of loss," within the meaning of Treasury Regulation
ss. 1.752-2, or would be considered to be "at risk" for purposes of Section
465(b) with respect to that portion of such debt for which such SCR Partner
Guarantor is being made liable for purposes of satisfying Vornado OP's
obligations to such SCR Partner Guarantor under this Article 3; provided
that so long as the initial lender is not Vornado REIT or a person
considered to be a partner in Vornado OP or related to such a partner
(determined excluding persons qualifying for the de minimis exception set
forth in Treasury Regulation ss. 1.752-2(d)(1)), Vornado OP will not be
considered to have violated this limitation by reason of actions of persons
(other than Vornado REIT and its subsidiaries and their officers and
directors) that are neither consented to in writing nor facilitated by
Vornado OP or Vornado REIT (except that the foregoing proviso shall not
apply to other similar "bottom dollar guarantees" existing and permitted
pursuant to Section 3(e)(i) and/or added pursuant to Section 3(f));
(vi) the obligor with respect to the debt to be guaranteed is Vornado
OP or a Subsidiary of Vornado OP in which Vornado OP owns, directly and
indirectly, not less than 51% of the economic interests and which is and
will continue to be under the legal control of Vornado OP (which shall
include a partnership or limited liability company in which Vornado OP or a
wholly owned subsidiary of Vornado OP is the sole managing general partner
or sole managing member, as applicable).
(f) Limitation on Additional Guarantees With Respect to Debt Secured by
Collateral for Guaranteed Debt. Vornado OP shall not offer the opportunity or
make available a guaranty of any Guaranteed Debt or other debt that is secured,
directly or indirectly, by any collateral for Guaranteed Debt unless (i) such
debt by its terms is subordinate in all respects to the Guaranteed Debt or, if
such others guarantees are of the Guaranteed Debt itself, such guarantees by
their terms must be paid in full before the lender can have recourse to the SCR
Partner Guarantors (i.e., the first dollar amount of recovery by the applicable
lenders must be applied to the Guaranteed Amount); provided that the foregoing
shall not apply with respect to additional guarantees of Guaranteed Debt so long
as the conditions set forth in Sections 3(e)(ii) and (v) would be satisfied
immediately after the implementation of such additional guarantee (determined in
the case of Section 3(e)(ii), based upon the fair market value of the collateral
for such Guaranteed Debt at the time the additional guarantee is entered into
and adding the amount of such additional
13
guarantee(s) to the sum of the applicable Scheduled Guarantee Amounts with
respect to such Guaranteed Debt plus any other preexisting "bottom dollar
guarantee" previously permitted pursuant to this Section 3(f) or Sections
3(e)(i) and (ii) above, for purposes of making the computation provided for in
Section 3(e)(ii)), and (ii) such other guarantees do not have the effect of
reducing the amount of the Guaranteed Debt that is includible by any SCR Partner
Guarantor in its adjusted tax basis for its SCR Partnership Units pursuant to
Treasury Regulation ss. 1.752-2.
(g) Amortization of Guaranteed Debt. In the event that the principal
amount of a Guaranteed Debt is decreased as a result of amortization of such
Guaranteed Debt such that the principal amount of the Guaranteed Debt (reduced
by the amount of any other guarantees, indemnities or similar arrangements that
apply with respect to such debt) is less than the Scheduled Guarantee Amount
with respect to such Guaranteed Debt, then Vornado OP shall make available to
the applicable SCR Partner Guarantors the opportunity to guarantee other
Qualified Guarantee Indebtedness in an amount equal to the Scheduled Guarantee
Amounts with respect to such debt (pursuant to a Qualified Guaranty that
satisfies the conditions set forth in Section 3(e) above), with such replacement
indebtedness thereafter being subject to this Article 3. Vornado OP shall have
the right, but not the obligation, to offer to one or more SCR Partner
Guarantors the opportunity to enter into a Qualified Guarantee with respect to
Qualified Guarantee Indebtedness in an amount up to (but not in excess of) the
projected reductions in such SCR Partner Guarantor's "share" of an amortizing
Guaranteed Debt below such SCR Partner Guarantor's Scheduled Guarantee Amount
with respect thereto during the next three years (or if less, the balance of
such SCR Partner Guarantor's Protected Period) (an "Advance Replacement
Guarantee Offer"). If Vornado OP makes an Advance Replacement Guarantee Offer in
writing to an SCR Partner Guarantor and such SCR Partner Guarantor does not
enter into the Qualified Guarantee offered in connection therewith, this Section
3(g) shall not be considered to have been violated with respect to such SCR
Partner Guarantor by reason of amortization of the Guaranteed Debt with respect
to which the Advance Replacement Guarantee Offer was made, up to the amount for
which such Advance Replacement Guarantee Offer was made and not accepted.
(h) Process. Whenever Vornado OP is required under this Article 3 to
offer to one or more of the SCR Partner Guarantors an opportunity to guarantee
Qualified Guarantee Indebtedness, Vornado OP shall be considered to have
satisfied its obligation if the other conditions in this Article 3 are satisfied
and, not less than thirty (30) days prior to the date that such guarantee would
be required to be executed in order to satisfy this Article 3, Vornado OP sends
by first class mail, return receipt requested, to the last known address of each
such SCR Partner Guarantor (as reflected in the records of Vornado OP) the
Guaranty Agreement to be executed (which shall be substantially in the form of
the Schedule 7 hereto, with such changes thereto as are necessary to reflect the
relevant facts) and a brief letter explaining the relevant circumstances
(including that the offer is being made pursuant to this Article 3, the
circumstances giving rise to the offer, a brief summary of the terms of the
Qualified Guarantee Indebtedness to be guaranteed, a brief description of the
collateral for the Qualified Guarantee Indebtedness, a statement of the amount
to be guaranteed, the address to which the executed Guaranty Agreement must be
sent and the date by which it must be received, and a statement to the effect
that, if the SCR Partner the fails to execute and return the Guaranty Agreement
within the time period specified, the SCR Partner Guarantor thereafter would
lose its rights under this Article 3 with respect to
14
the amount of debt that Vornado OP is required to offer to be guaranteed and for
which the guarantee is being offered, and depending upon the SCR Partner
Guarantor's circumstances and other circumstances related to Vornado OP, the SCR
Partner could be required to recognize taxable gain as a result thereof, either
currently or prior to the expiration of the applicable Protected Period, that
otherwise would have been deferred). If a notice is properly sent in accordance
with this procedure, Vornado OP shall have not responsibility as a result of the
failure of an SCR Partner Guarantor either to receive such notice or to have
responded thereto within the specified time period. 3/
(i) Reduction in Obligations of SCR Guarantor Partners. If an offer to
guarantee debt is made by Vornado OP to an SCR Partner Guarantor pursuant to
this Section 3 that complies with all of the applicable requirements of this
Section 3, an SCR Partner Guarantor may elect not to join in a guarantee at all,
or to join in a guarantee for less than the full amount offered, but if such SCR
Partner Guarantor does not join in the guarantee pursuant to such offer (or
joins in the guarantee for less than the amount offered (provided that the
amount offered does not exceed its then remaining Initial Guarantee Shortfall
and the portion of Scheduled Guarantee Amount for which a replacement guarantee
is being offered)), Vornado OP thereafter shall have no obligation to such SCR
Partner Guarantor with respect to that portion of such SCR Partner Guarantor's
Initial Guarantee Shortfall and/or Scheduled Guarantee Amount that corresponds
to the amount of the indebtedness that the SCR Partner Guarantor elected not to
guarantee (and such SCR Partner Guarantor's Initial Guarantee Shortfall or
Scheduled Guarantee Amount, as applicable, shall be considered to have been
reduced accordingly).
(j) Limitation on Liability. So long as Vornado OP shall have complied
with all of the applicable provisions of this Section 3 and Section 8(a)(i),
neither Vornado OP nor Vornado REIT shall have any liability to an SCR Partner
Guarantor under this Section 3 by reason of a successful assertion by the
Internal Revenue Service that guarantees of Guaranteed Debt, whether entered
into prior to the Merger or subsequent to the Merger and pursuant to this
Section 3, are not effective to cause the affected SCR Partner Guarantors to be
allocated debt pursuant to Treasury Regulation 1.752-2 or considered to be "at
risk" for purposes of Section 465(b).
(k) Presumption as to Schedule 7. The form of the Guaranty Agreement
attached hereto as Schedule 7 shall be conclusively presumed to satisfy the
conditions set forth in Section 3(e)(i) and to have caused the Guaranteed Debt
to be considered allocable to the SCR Guarantor Partner who enters into such
Guaranty Agreement pursuant to Treasury Regulation ss. 1.752-2 so long as all of
the following conditions are met with respect such Guaranteed Debt:
(i) there are no other guarantees in effect with respect to such
Guaranteed Debt (other than the guarantees contemporaneously
----------
3/ Prior to the closing of the Merger, the parties may agree to an approved form
of a notice pursuant hereto, which if agreed upon shall be added as a Schedule
to this Agreement.
15
being entered into by the SCR Partner Guarantors pursuant to
this Article 3);
(ii) the collateral securing such Guaranteed Debt is not, and shall
not thereafter become, collateral for any other indebtedness
that is senior to or pari pasu with such Guaranteed Debt;
(iii) no additional guarantees with respect to such Guaranteed Debt
will be entered into during the applicable Protected Period
pursuant to the proviso set forth in Section 3(f);
(iv) the lender with respect to such Guaranteed Debt is not Vornado
OP, any Subsidiary or other entity in which Vornado OP owns a
direct or indirect interest, Vornado REIT, any other partner in
Vornado OP, or any person related to any partner in Vornado OP
as determined for purposes of Treasury Regulation ss. 1.752-2;
and
(v) none of Vornado REIT, nor any other partner in Vornado OP, nor
any person related to any partner in Vornado OP as determined
for purposes of Treasury Regulation ss. 1.752-2 shall have
provided, or shall thereafter provide, collateral for, or
otherwise shall have entered into, or shall thereafter enter
into, a relationship that would cause such person or entity to
be considered to bear the risk of loss with respect to such
Guaranteed Debt, as determined for purposes of Treasury
Regulationss. 1.752-2.
(l) Exception for Certain Foreclosures and Involuntary Transfers. If a
Guaranteed Debt is repaid or extinguished in connection with a foreclosure,
bankruptcy, or involuntary transfer that satisfies the conditions set forth in
Section 2(d), Vornado OP shall not be considered to have violated Section 3(d)
so long as Vornado OP undertakes commercially reasonable efforts to make
available to the affected SCR Partner Guarantors as soon as reasonably
practicable under the circumstances other Qualified Guarantee Indebtedness to
guarantee pursuant to Qualifying Guarantees, including any new or additional
indebtedness thereafter incurred by Vornado OP and its Subsidiaries, provided
that Vornado OP shall not be obligated to incur new or additional indebtedness
in order to satisfy such undertaking.
16
ARTICLE 4
LIMITATION ON REPAYMENT OR PREPAYMENT OF EXISTING NONRECOURSE DEBT
(a) Obligation to Retain Existing Nonrecourse Debt. Unless and until
Vornado OP has satisfied its obligations to an SCR Partner Guarantor under
Section 3(b) above (or if sooner, the expiration of the Protected Period
applicable to such SCR Partner Guarantor), Vornado OP shall not, directly or
indirectly, cause or permit Vornado OP or any Subsidiary to repay or prepay any
of the Existing Nonrecourse Debt if, after giving effect to such payment, such
SCR Partner Guarantor would be allocated at any time prior to the expiration of
the Protected Period applicable to such Guarantor Partner pursuant to Treasury
Regulation ss. 1.752-3(a) an amount of Existing Nonrecourse Debt and/or other
indebtedness of Vornado OP that qualifies as a Nonrecourse Liability that is
less than such SCR Partner Guarantor's then remaining Initial Guarantee
Shortfall. If, and to the extent, that Vornado OP relies on other Nonrecourse
Liabilities of Vornado OP for purposes of this Section 4(a), such other
Nonrecourse Liabilities shall be subject to this Article 4. This Section 4(a)
shall have no application with respect to any SCR Unitholder who is not an SCR
Partner Guarantor, or with respect to any SCR Partner Guarantor either who has
no Initial Guarantee Shortfall, or whose Initial Guarantee Shortfall has been
reduced to zero pursuant to Section 3(b) (including, without limitation, by
reason of the last sentence thereof). AT SUCH TIME AS VORNADO OP HAS SATISFIED
ALL OF ITS OBLIGATIONS TO ALL SCR PARTNER GUARANTORS UNDER SECTION 3(B) ABOVE,
THIS ARTICLE 4 SHALL CEASE TO HAVE ANY APPLICATION.
(b) Exceptions for Principal Amortization and Certain Refinancings. The
requirements in Section 4(a) above shall not apply in the case of:
(i) a payment or repayment that consists solely of a required
principal amortization payment made with respect to an Existing Nonrecourse Debt
or Replacement Debt (as defined in clause (ii) below) in accordance with the
principal amortization schedules in effect at the effective time of the Merger
with respect to such Existing Nonrecourse Debt (or in the case of Replacement
Debt, a principal amortization schedule that meets the conditions set forth in
subclause (z) of clause (ii) below); provided that a required payment of
principal at the scheduled maturity of any indebtedness shall not be considered
within the scope of this clause (i) (and, accordingly, Vornado OP shall be
required to refinance such maturing indebtedness with debt that would be
considered qualifying Replacement Debt under clause (ii) below); or
(ii) a payment of principal made from proceeds of new indebtedness
incurred to refinance Existing Nonrecourse Debt (such new indebtedness incurred
pursuant to the refinancing that meets the conditions set forth below in this
clause (ii) is referred to in this Agreement as "Replacement Debt"), provided
that (x) such refinancing is made on a basis that the Replacement Debt would be
considered a Nonrecourse Liability that is allocable for purposes of Treasury
Regulations ss. 1.752-3(a) as the Existing Nonrecourse Debt being refinanced;
(y) that the principal amount of the Replacement Debt is at least equal to the
principal amount of the Existing Nonrecourse Debt on the date of such
refinancing; and (z) provides either for "interest-only" payments or for level
payments of principal and interest that would not result in amortization of the
remaining principal balance over a period shorter than the lesser of twenty-five
years or the scheduled amortization of the Existing Nonrecourse Debt.
17
(c) Deemed Refinancings. For the purposes of this Article 4, any
transaction or other event, including, without limitation, any modification of
indebtedness, which in each case was either facilitated by, or consented in
writing to, by Vornado OP or Vornado REIT, in which any partner in Vornado OP or
any affiliate of any such partner in Vornado OP would become personally liable
for, or would bear or incur, directly or indirectly, the "risk of loss" with
respect to any Existing Nonrecourse Debt or any Replacement Debt that would
cause such Debt either not to be considered a Nonrecourse Liability or not to
qualify as "qualified nonrecourse financing" for purposes of Section
465(b)(6)(B) of the Code shall be considered a refinancing of such Debt and
shall be subject to the requirements set forth in this Article 4.
(d) Deemed Repayment. For the purposes of this Article 4, any sale,
exchange or other disposition (including, without limitation, an exchange to
which Section 1031 or 1033 of the Code applies, any transfer that is subject to
either Section 2(b)(5) or Section 2(b)(6), and any disposition, voluntary or
involuntary, pursuant to a foreclosure proceeding, a deed in lieu of foreclosure
or a bankruptcy proceeding) of either a property that is subject to an Existing
Nonrecourse Debt or Replacement Debt or a direct or indirect interest in an
entity that is the obligor with respect to Existing Nonrecourse Debt or
Replacement Debt shall be considered a repayment of such Debt for purposes of
Section 4(a); provided that the foregoing shall not apply with respect to any
foreclosure, bankruptcy or involuntary transfer that satisfies the conditions
set forth in Section 2(d).
ARTICLE 5
REMEDIES FOR BREACH
(a) Monetary Damages. In the event that Vornado OP breaches its
obligations set forth in Article 2, Article 3, Article 4, Article 7, Article 8
or Article 10 with respect to an SCR Unitholder during the Protected Period, the
SCR Unitholder's sole right shall be to receive from Vornado OP, and Vornado OP
shall pay to such SCR Unitholder as damages, an amount equal to the lesser of:
(i) the aggregate federal, state and local income taxes incurred
by the SCR Unitholder as a result of the income or gain allocated to,
or otherwise recognized by, such SCR Unitholder with respect to its
Protected Units by reason of such breach, or
(ii) in the case of a violation of Article 2, the aggregate
federal state, and local income taxes that would have been payable by
such SCR Unitholder (or its predecessor in interest) if the relevant
Protected Property has been sold on the SCR Merger Closing Date for
its 704(c) Value (computed based upon tax rates in effect for the
period during which the event giving rise to the computation hereunder
has occurred), reduced to reflect:
(A) reductions prior to such disposition in the "book-tax
disparity" with respect to such Protected Property (but only if
and to the extent that such reduction is matched dollar for
dollar by a reduction in the gain allocable to the SCR Unitholder
by reason of such sale or other disposition pursuant to Section
704(c) of the Code,
18
determined for this purpose taking into account any required
"curative allocation" that would result pursuant to the
penultimate sentence of Section 7(d)), and
(B) with respect to a SCR Unitholder who acquired Protected
Units subsequent to the SCR Merger Closing Date, the reduction in
gain that results from such holder's having a special inside
basis under Section 743 of the Code in the relevant Protected
Property (by treating the special inside basis as the basis for
determining gain on the deemed sale described in clause (ii)),
plus in the case of either (i) or (ii), an amount equal to the
aggregate federal, state, and local income taxes payable by the SCR Unitholder
as a result of the receipt of any payment required under this Section 5(a).
For purposes of computing the amount of federal, state, and local
income taxes required to be paid by an SCR Unitholder, (i) any deduction
actually allowed in computing federal income taxes for state income taxes
payable as a result thereof shall be taken into account, and (ii) an SCR
Unitholder's tax liability shall be computed using the highest federal, state
and local marginal income tax rates that would be applicable to such SCR
Unitholder's taxable income (taking into account the character of such income or
gain) for the year with respect to which the taxes must be paid, without regard
to any deductions, losses or credits that may be available to such SCR
Unitholder that would reduce or offset its actual taxable income or actual tax
liability if such deductions, losses or credits could be utilized by the SCR
Unitholder to offset other income, gain or taxes of the SCR Unitholder, either
in the current year, in earlier years, or in later years). In the event that an
SCR Unitholder shall acquire any additional Vornado OP Units subsequent to the
Merger by reason of a contribution of additional money or property to Vornado
OP, the income and gain that shall be taken into account for purposes of
computing the damages payable under this Section 5(a) would not exceed the gain
that such SCR Unitholder would have recognized by reason of Vornado OP's breach
of its obligation set forth in Article 2, Article 3, Article 4, Article 7,
Article 8 or Article 10, as applicable, had such SCR Unitholder not acquired
such additional Vornado OP Units.
(b) Limitation on Remedies; Process for Determining Damages.
Notwithstanding any provision of this Agreement, the sole and exclusive rights
and remedies of any SCR Unitholder for a breach or violation of the covenants
set forth in Article 2, Article 3 or Article 4 shall be a claim for damages
against Vornado OP, computed as set forth in Section 5(a) (and to the extent
applicable, Section 5(e)), and no SCR Unitholder shall be entitled to pursue a
claim for specific performance of the covenants set forth in Article 2, Article
3 and Article 4, or bring a claim against any Person that acquires a Protected
Property from Vornado OP in violation of Article 2 (other than a Successor
Partnership that has agreed in writing to be bound by the terms of this
Agreement or that has otherwise succeeded to all of the assets and all of the
liabilities of Vornado OP, but then only for damages computed as set forth in
Section 5(a)). If Vornado OP has breached or violated any of the covenants set
forth in Article 2, Article 3, Article 4, Article 7, Article 8 or Article 10 (or
an SCR Unitholder asserts that Vornado OP has breached or violated any of the
covenants set forth in Article 2, Article 3, Article 7, Article 8, or Article
10, Vornado OP and the SCR Unitholder agree to negotiate in good faith to
resolve any disagreements
19
regarding any such breach or violation and the amount of damages, if any,
payable to such SCR Unitholder under Section 5(a) (and to the extent applicable,
Section 5(e)). If any such disagreement cannot be resolved by Vornado OP and
such SCR Unitholder within sixty (60) days after the receipt of notice from
Vornado OP of such breach and the amount of income to be recognized by reason
thereof, Vornado OP and the SCR Unitholder shall jointly retain a nationally
recognized independent public accounting firm ("an Accounting Firm") to act as
an arbitrator to resolve as expeditiously as possible all points of any such
disagreement (including, without limitation, whether a breach of any of the
covenants set forth Article 2, Article 3, Article 4, Article 7, Article 8, or
Article 10 has occurred and, if so, the amount of damages to which the SCR
Unitholder is entitled as a result thereof, determined as set forth in Section
5(a) (and to the extent applicable, Section 5(e))). All determinations made by
the Accounting Firm with respect to the resolution of any breach or violation of
any of the covenants set forth in Article 2, Article 3, Article 4, Article 7,
Article 8, or Article 10 and the amount of damages payable to the SCR Unitholder
under Section 5(a) (and to the extent applicable, Section 5(e)) shall be final,
conclusive and binding on Vornado OP and the SCR Unitholder. The fees and
expenses of any Accounting Firm incurred in connection with any such
determination shall be shared equally by Vornado OP and the SCR Unitholder,
provided that if the amount determined by the Accounting Firm to be owed by
Vornado OP to the SCR Unitholder is more than ten percent (10%) higher than the
amount proposed by Vornado OP to be owed to such SCR Unitholder prior to the
submission of the matter to the Accounting Firm, then all of the fees and
expenses of any Accounting Firm incurred in connection with any such
determination shall be paid by Vornado OP.
(c) Damages for Flow-Through Entities. For purposes of this Article 5,
if any SCR Unitholder is, for federal income tax purposes, a partnership, an S
corporation, "real estate investment trust" or a trust, then all computations of
amounts of taxes required to be paid by the SCR Unitholder and the payments due
from Vornado OP as a result thereof shall be made by computing the taxes
required to be paid by the partners, shareholders or beneficiaries of such
partnership, S corporation, "real estate investment trust" or trust (or to the
extent that any partner, shareholder or beneficiary of such partnership S
corporation or trust is itself a partnership, S corporation or trust, the same
principles shall apply in determining the taxes required to be paid by such
partner, shareholder or beneficiary).
(d) Required Notices; Time for Payment. In the event that there has
been a breach of Article 2, Article 3, Article 4, Article 7, or Article 8,
Vornado OP shall provide to the SCR Unitholder notice of the transaction or
event giving rise to such breach not later than at such time as Vornado OP
provides to the SCR Unitholders the Schedule K-1's to Vornado OP's federal
income tax return as required in accordance with Section 10(d) below. All
payments required under this Article 5 to any SCR Unitholder shall be made to
such SCR Unitholder not later than thirty (30) days after receipt by Vornado OP
of a written claim from such SCR Unitholder therefor, unless Vornado OP
disagrees with the computation of the amount required to be paid in respect of
such breach, in which event the procedures in Section 5(b) shall apply and the
payment shall be due within thirty (30) days after the earlier of a
determination by the Accounting Firm or an agreement between Vornado OP and the
SCR Unitholder as to the amount required to be paid, with interest accruing on
the aggregate amount required to be paid from the date that is thirty (30) days
after receipt by Vornado OP of a claim from such SCR Unitholder to the date of
actual payment at a rate equal to the "prime rate" of interest, as published in
the Wall Street
20
Journal (or if no longer published there, as announced by Citibank) effective as
of the date the payment is required to be made.
(e) Additional Damages for Breaches of Section 2(b)(5), Section 3(c)
and/or Section 3(e). Notwithstanding any of the foregoing in this Article 5, in
the event that Vornado OP should breach any of its covenants set forth in
Section 2(b)(5), Section 3(c) and/or Sections 3(e)(i), (ii) and/or (iv) and an
SCR Unitholder is required to make a payment in respect of such indebtedness
that it would not have had to make if such breach had not occurred (an "Excess
Payment"), then, in addition to the damages provided for in the other Sections
of this Article 5, Vornado OP shall pay to such SCR Unitholder an amount equal
to the sum of (i) the Excess Payment plus (ii) the aggregate federal, state and
local income taxes, if any, computed or set forth in Section 5(a), required to
be paid by such SCR Unitholder by reason of Section 5(e) becoming operative (for
example, because the breach by Vornado OP and this Section 5(e) caused all or
any portion of the indebtedness in question no longer to be considered debt
includible in basis by the affected SCR Unitholder pursuant to Treasury
Regulations ss. 1.752-2(a)), plus (iii) an amount equal to the aggregate
federal, state and local income taxes required to be paid by the SCR Unitholder
(computed as set forth in Section 5(a)) as a result of any payment required
under this Section 5(e).
21
ARTICLE 6
ADDITIONAL OPPORTUNITY FOR SCR PARTNERS TO ENTER INTO
DEFICIT RESTORATION OBLIGATIONS AND GUARANTEES
Without limiting any of the obligations of Vornado OP under this
Agreement, Vornado OP shall consider in good faith a request by an SCR
Unitholder to enter into an agreement with Vornado OP to bear the economic risk
of loss as to a portion of Vornado OP's recourse indebtedness by undertaking an
obligation to restore a portion of its negative capital account balance upon
liquidation of such SCR Unitholder's interest in Vornado OP and/or to bear
financial liability under a Guarantee Agreement substantially in the form of
Schedule 7 hereto for indebtedness that would be considered Qualifying Guarantee
Indebtedness under Section 3(b) hereof, if such SCR Unitholder shall provide
information from its professional tax advisor satisfactory to Vornado OP showing
that, in the absence of such agreement, such SCR Unitholder likely would not be
allocated from Vornado OP sufficient indebtedness under Section 752 of the Code
and the at-risk provisions under Section 465 of the Code to avoid the
recognition of gain (other than gain required to be recognized by reason of
actual cash distributions from Vornado OP). Vornado OP and its professional tax
advisors shall cooperate in good faith with such SCR Unitholder and its
professional tax advisors to provide such information regarding the allocation
of Vornado OP liabilities and the nature of such liabilities as is reasonably
necessary in order to determine the SCR Unitholder's adjusted tax basis in its
Units and at-risk amount. In deciding whether or not to grant such a request,
Vornado OP shall be entitled to take into account all factors related to Vornado
OP, including, without limitation, the existing and anticipated debt structure
of Vornado OP, the tax situations of all other partners in Vornado OP, including
Vornado REIT (individually and as a group), and the effect that granting such a
request might have on their tax situation, the restrictions set forth in Article
3, and the anticipated long-term business needs of Vornado OP. Vornado OP's only
obligation with respect to any such request from an SCR Unitholder pursuant to
this Article 6 shall be to act in good faith, as determined in Vornado's sole
discretion. If Vornado OP permits an SCR Unitholder to enter into an agreement
under this Article 6, Vornado OP shall be under no further obligation with
respect thereto, and Vornado OP shall not be required to indemnify such SCR
Unitholder for any damage incurred, in connection with or as a result of such
agreement or the indebtedness, including without limitation a refinancing or
prepayment thereof.
22
ARTICLE 7
SECTION 704(C) METHOD AND ALLOCATIONS
(a) Application of "Traditional Method." Notwithstanding any provision
of the Vornado OP Partnership Agreement, Vornado OP shall use the "traditional
method" under Regulations ss. 1.704-3(b) for purposes of making all allocations
under Section 704(c) of the Code (with no "curative allocations" to offset the
effect of a "Ceiling Rule Disparity," as described in Section 7(b) below, except
as set forth in Sections 7(c) and 7(d) below) with respect to (i) each of the
assets acquired by Vornado OP from SCR in the Merger (including, without
limitation, all assets owned by SCR or any direct or indirect Subsidiary of SCR
that is treated either as a partnership or as a disregarded entity for federal
income tax purposes), except to the extent that Vornado OP expressly would be
required to use a different method under an SCR Tax Protection Agreement assumed
by Vornado OP pursuant to the Merger Agreement and the affected SCR Partner has
not executed an agreement to waive its right to such different method following
the Merger. The 704(c) Values of the Protected Properties shall be as determined
by agreement between SCR and Vornado OP prior to the effective time of the
Merger, or in the absence of such agreement, as determined by Vornado REIT, in
its capacity as general partner of Vornado OP, in good faith for purposes of
preparing the financial statements of Vornado and Vornado OP reflecting the
results of the Merger so long as the outside accountants of Vornado and Vornado
OP have approved such financial statements as being in accordance with general
accepted accounting procedures. 4/
(b) "Ceiling Rule Disparities." For purposes of Section 7(a), Section
7(c) and Section 7(d), the term "Ceiling Rule Disparity" shall mean, with
respect to each Protected Property for each Fiscal Year, the excess, if any, of
(i) the amount of Depreciation with respect to such asset allocated to the
"non-contributing partners" (that is, the holders of Units who are not subject
to Section 704(c) of the Code and Treasury Regulations ss. 1.704-3 with respect
to such asset), over (ii) the actual amount of depreciation deductions with
respect to such asset allocated to the "non-contributing partners" for federal
income tax purposes for such Fiscal Year. It is agreed that Vornado OP and any
partners in Vornado OP other than the SCR Unitholders shall be treated as
"non-contributing partners" for this purpose. The term "Cumulative Net Ceiling
Rule Disparity" with respect to a Protected Property, as that term is used in
Section 7(d), means the sum of the Ceiling Rule Disparities for such Protected
Property for all Fiscal Years through the date of determination, reduced by all
Curative Allocations considered attributable to such Protected Property for
prior Fiscal Years, determined as set forth in Section 7(d) below.
(c) Annual Curative Allocations. In order to offset the effect of
Ceiling Rule Disparities, Vornado OP shall make the Curative Allocation with
respect to each Non-Rock Spring Protected Unit each Fiscal Year, provided that
no Curative Allocation shall be made with respect to any Non-Rock Spring
Protected Units acquired by Vornado OP or
----------
4/ SCR and Vornado OP agree to negotiate in good faith to agree upon these
amounts prior to the closing of the Merger.
23
Vornado REIT from SRC Unitholders as a result of the exercise of their
redemption right under Section 8.6 of the Vornado Partnership Agreement), with
respect to any Fiscal Year (or portion thereof) following such acquisition.
(d) Additional Curative Allocations Upon Disposition. The Ceiling Rule
Disparity, as described in Section 7(b), with respect to each Protected Property
(other than the Democracy I property) shall be reduced by the amount of the
Curative Allocation that is considered attributable to that Protected Property.
For this purpose, the Curative Allocation for each Fiscal Year shall be
considered allocable among the Protected Properties (other than the Democracy I
property) based upon ratio of the Ceiling Rule Disparity for each Protected
Property (other than the Democracy I property) for the Fiscal Year in question
to the aggregate Ceiling Rule Disparity for all of the Protected Properties
(other than the Democracy I property) for such Fiscal Year, provided that if the
Curative Allocation for a particular Fiscal Year exceeds the aggregate Ceiling
Rule Disparity for all of the Protected Properties (other than the Democracy I
property) for the Fiscal Year in question, the excess amount of the Curative
Allocation shall be allocated to reduce the Cumulative Net Ceiling Rule
Disparities with respect to prior years for each of the Protected Properties
(other than the Democracy I property) (based upon the relative amounts of such
Cumulative Net Ceiling Rule Disparities for all Protected Properties). To the
extent that the cumulative Curative Allocations provided for herein are not
sufficient to eliminate the effect of the Cumulative Net Ceiling Rule Disparity
with respect to a particular Protected Property, Vornado OP shall make an
additional "curative allocation" upon a disposition of that particular Protected
Property (including the Democracy I property) to offset the remaining balance,
if any, of the remaining Cumulative Net Ceiling Rule Disparity with respect to
that particular Protected Property, with such "curative allocation" to be
comprised of income and gain of such character (e.g., ordinary income, long-term
capital gain, and "unrecaptured Section 1250 gain") as the character of the
income and recognized by Vornado OP in connection with such disposition, in the
same proportion as the aggregate amounts thereof recognized by Vornado OP. For
example, if fifty percent of the gain recognized by Vornado OP is "unrecaptured
Section 1250 gain" and fifty percent is long-term capital gain, then 50% of the
curative allocation would be comprised of "unrecaptured Section 1250 gain" and
fifty percent would be comprised of long-term capital gain.
(e) 1750 Pennsylvania Avenue. In the event that (i) any SCR Unitholder
who holds Protected Units that were issued in the Merger with respect to SCR
Units that previously were issued by SCR in connection with the acquisition by
SCR of Penn Associates L.P. (which Protected Units are referred to as "1750 Penn
Units") should successfully assert that Vornado OP is required to use the
"remedial method" under Treasury Regulation ss. 1.704-3(d) with respect to the
1750 Pennsylvania Avenue property and (ii) the cumulative "remedial allocations"
of income for any Fiscal Year and all prior Fiscal Years subsequent to the SCR
Merger Closing Date with respect to the 1750 Penn Units, on a per unit basis, is
less than the cumulative Curative Allocations for such period with respect to
the 1750 Penn Units, on a per unit basis (a "Curative Allocation Shortfall"),
then an amount of income equal to the aggregate Curative Allocation Shortfall
for all then outstanding 1750 Penn Units shall be specially allocated to the
holders of the then outstanding Non-Rock Spring Protected Units (excluding any
1750 Penn Units), with an equal amount of the aggregate Curative Allocation
Shortfall being allocated to each such
24
then outstanding Non-Rock Spring Unit that is not a 1750 Penn Unit. The
principles underlying the procedures set forth in Section 10(c) shall apply in
the event that any holder of 1750 Penn Units should make an assertion that, if
successful, would cause this Section 7(e) to apply.
ARTICLE 8
ALLOCATIONS OF LIABILITIES PURSUANT TO REGULATIONS UNDER SECTION 752
(a) Allocation Methods to be Followed. All tax returns prepared by
Vornado OP during the Protected Period that allocate liabilities of Vornado OP
for purposes of Section 752 and the Treasury Regulations thereunder shall treat
each SCR Partner Guarantor as being allocated for federal income tax purposes an
amount of recourse debt (in addition to any nonrecourse debt otherwise allocable
to such SCR Partner Guarantor in accordance with the Vornado OP Partnership
Agreement, Treasury Regulations ss. 1.752-3, and this Agreement) pursuant to
Treasury Regulation ss. 1.752-2 equal to such SCR Partner Guarantor's Scheduled
Guarantee Amount, as set forth on Schedule 9 hereto, and Vornado OP and Vornado
REIT shall not, during or with respect to the Protected Period, take any
contrary or inconsistent position in any federal or state income tax returns
(including, without limitation, information returns, such as Forms K-1, provided
to partners in Vornado OP and returns of Subsidiaries of Vornado OP) or any
dealings involving the Internal Revenue Service (including, without limitation,
any audit, administrative appeal or any judicial proceeding involving the income
tax returns of Vornado OP or the tax treatment of any holder of partnership
interests Vornado OP).
(b) Exception to Required Allocation Method. Notwithstanding the
provisions of this Tax Reporting and Protection Agreement, Vornado OP shall not
be required to make allocations of Guaranteed Debt to the SCR Unitholders as set
forth in this Agreement if and to the extent that Vornado OP determines in good
faith that there may not be "substantial authority" (within the meaning of
Section 6662(d)(2)(B)(i)) of the Code for such allocation; provided that Vornado
OP shall provide to Mr. Robert H. Smith and Mr. Robert P. Kogod (or in the event
of their death or disability, their executor, guardian or custodian, as
applicable), notice of such determination and if, within forty five (45) days
after the receipt thereof, Vornado OP is provided an opinion of Hogan & Hartson
LLP or Arthur Andersen LLP (or another comparable firm of attorneys or
accountants) to the effect that there is "substantial authority" (within the
meaning of Section 6662(d)(2)(B)(i) of the Code) for such allocations, Vornado
OP shall continue to make allocations of Guaranteed Debt to the SCR Unitholders
as set forth in this Agreement; provided further that if there shall have been a
judicial determination in a proceeding to which Vornado OP is a party and as to
which the SCR GP has been allowed to participate as and to the extent
contemplated in Section 10 to the effect that such allocations are not correct,
Section 8(a) shall not apply unless the matter is being appealed to an
applicable court of appeals, the requirements of Sections 10(c)(i) and
10(c)(iii) shall have been satisfied in connection therewith, and the opinion
described above from counsel or accountants engaged by Messrs. Smith and Kogod
shall have been provided, except that such opinion shall be to the effect that
it is more likely than not that such allocations will be respected. In no event
shall this Section 8(b) be construed to relieve Vornado OP for liability arising
from a failure by Vornado OP to comply with one or more of the provisions of
Article 3 of this Agreement.
25
(c) Cooperation in the Event of a Change. If a change in Vornado OP's
allocations of Guaranteed Debt to the SCR Unitholders is required by reason of
circumstances described in the Section 8(b), Vornado OP and its professional tax
advisors shall cooperate in good faith with Messrs. Robert H. Smith and Robert
P. Kogod (or in the event of their death or disability, their executor, guardian
or custodian, as applicable) and their professional tax advisors to develop
alternative allocation arrangements and/or other mechanisms that protect the
federal income tax positions of the SCR Unitholders in the manner contemplated
by the allocations of Guaranteed Debt to the SCR Unitholders as set forth in
this Agreement.
ARTICLE 9
OTHER AGREEMENTS WITH SCR UNITHOLDERS
Pursuant to the Merger Agreement, Vornado, Vornado OP, SCR GP, and SCR
Partnership shall enter into an Assignment and Assumption Agreement, dated as of
[the date of closing], pursuant to which Vornado OP shall assume all obligations
of SCR GP and SCR pursuant to certain tax protection agreements (the "SCR Tax
Protection Agreements"). A list of the SCR Tax Protection Agreements is set
forth on Schedule 5 hereto.
ARTICLE 10
TAX TREATMENT AND REPORTING; TAX PROCEEDINGS
(a) Tax Treatment of Merger. Each of the parties hereto shall treat the
Merger for federal income tax purposes as a contribution by SCR of all of its
assets to Vornado OP in exchange for Vornado OP Units under Section 721 of the
Code, with those Vornado OP Units distributed by SCR to the SCR Unitholders in
accordance with their respective interests in SCR in liquidation of SCR, in a
transaction in which no gain is recognized by any of the SCR Unitholders under
any of Section 721, Section 707, Section 731, Section 737, or any other
provision of the Code. Each of the parties agrees (i) to treat the Merger,
pursuant to Treasury Regulation ss. 1.708-1(c)(3), as an "assets over" form of
merger, with the consequences set forth in Treasury Regulation ss.
1.708-1(c)(3)(i) and (ii) that, in addition, if and to the extent that any
transaction entered into pursuant to the Merger Agreement or otherwise deemed
undertaken in connection with the transactions contemplated by the Merger
Agreement is treated for federal income tax purposes as a direct or indirect
transfer of cash from Vornado OP to a holder of SCR Units that would be
characterized as a sale for federal income tax purposes (including, without
limitation, purchases of SCR Units pursuant to Section 4.7(a) of the Merger
Agreement and payments to holders of SCR options pursuant to Section 1.10 of the
Merger Agreement), pursuant to Treasury Regulation ss. 1.708-1(c)(4) such sale
shall be treated as a sale of such SCR Units by the former holder of SCR Units
receiving (or deemed to receive) such cash directly to Vornado OP and as a
direct purchase by Vornado OP of such SCR Units from such former holder of SCR
Units immediately prior to the Merger (and not as a transfer of cash from
Vornado OP to SCR as part of the Merger). The parties agree and acknowledge (and
will not take any position inconsistent therewith) that no consideration
(whether actual consideration or deemed consideration under Section 707(a) of
the Code or otherwise) other than Vornado OP Units has been or will be given by
Vornado OP or Vornado REIT to the SCR or the SCR Unitholders in connection with
the Merger (other than cash paid by SCR directly to certain holders of
partnership interests in SCR who agreed to sell such partnership interests back
to SCR prior to the closing of the Merger). Without limiting the
26
foregoing, the parties agree to treat all liabilities of SCR and its
Subsidiaries as "qualified liabilities" within the meaning of Treasury
Regulation ss. 1.707-5a)(6). SCR represents to Vornado OP and Vornado REIT for
this purpose that, to the best of its knowledge, all liabilities of SCR and its
Subsidiaries outstanding at the time of the Merger constitute "qualified
liabilities" within the meaning of Treasury Regulation ss. 1.707-5a)(6). Vornado
OP and Vornado REIT shall not, at any time during or with respect to the
Protected Period, take any contrary or inconsistent position in any federal or
state income tax returns (including, without limitation, information returns,
such as Forms K-1, provided to partners in Vornado OP and returns of
Subsidiaries of Vornado OP) or any dealings involving the Internal Revenue
Service (including, without limitation, any audit, administrative appeal or any
judicial proceeding involving the income tax returns of Vornado OP or the tax
treatment of any holder of partnership interests Vornado OP), except as
permitted pursuant to Section 10(c) below.
(b) Notice of Tax Audits. If any claim, demand, assessment (including a
notice of proposed assessment) or other assertion is made with respect to Taxes
against SCR or Vornado OP the calculation of which involves a matter covered in
this Agreement ("Tax Claim") or if Vornado REIT, Vornado OP or SCR receives any
notice from any jurisdiction with respect to any current or future audit,
examination, investigation or other proceeding ("Proceeding") involving SCR or
Vornado OP or that otherwise could involve a matter covered in this Agreement
and could directly or indirectly affect the SCR Unitholders (adversely or
otherwise), then Vornado REIT, Vornado OP or SCR, as applicable shall promptly
notify SCR GP, as representative of the SCR Unitholders of such Tax Claim or Tax
Proceeding.
(c) Control of Tax Proceedings. Vornado REIT, as the general partner of
Vornado OP shall have the right to control the defense, settlement or compromise
of any Proceeding or Tax Claim; provided, however, that Vornado REIT shall not
consent to the entry of any judgment or enter into any settlement with respect
to such Tax Claim or Tax Proceeding without the prior written consent of SCR GP,
as representative of the SCR Unitholders (unless, and only to the extent, that
any Taxes required to be paid by the SCR Unitholders who are Protected
Unitholders as a result thereof would be required to be reimbursed by Vornado OP
and Vornado REIT under Article 5 and Vornado OP and Vornado REIT agree in
connection with such settlement or consent, to make such required payments);
provided further that Vornado OP shall keep SCR GP duly informed of the progress
thereof to the extent that such Proceeding or Tax Claim could directly or
indirectly affect (adversely or otherwise) the SCR Unitholders and that SCR GP
shall have the right to review and comment on any and all submissions made to
the to Internal Revenue Service ("IRS"), a court, or other governmental body
with respect to such Tax Claim or Tax Proceeding and that Vornado OP will
consider such comments in good faith. As a condition to withholding its consent
to a settlement pursuant to the preceding sentence, the SCR GP (i) must have a
reasonable basis to believe that such settlement would have a material adverse
impact on one or more SCR Unitholders with respect to a matter covered by this
Agreement and that such impact would be different from the impact that would
result for other holders of Vornado OP Units who are not SCR Unitholders (which
the SCR GP, upon request from Vornado OP, shall describe in reasonable detail in
writing), (ii) the SCR GP must believe, based upon the advice of Hogan & Hartson
L.L.P. or Arthur Andersen LLP (or another comparable firm of attorneys or
accountants), that it is more likely than not that the position asserted by the
SCR GP would prevail if it were to be asserted in a judicial
27
proceeding (and upon request of Vornado OP, the SCR GP shall provide to Vornado
OP a letter from such counsel or accountants confirming such advice), and (iii)
the SCR GP shall offer to assume the subsequent costs of defending and asserting
the position asserted by the SCR GP (but not any other costs associated with
such proceeding or any other issues involved therein); provided that the
foregoing shall not apply with respect to, or otherwise restrict or limit or
restrict in any matter, the exercise by the SCR GP or any of the SCR Unitholders
of any rights or privileges provided for in Sections 6221-6234 of the Code and
the Treasury Regulations thereunder or in the Vornado OP Partnership Agreement
in connection with any examination of federal or state income tax matters
related to SCR or Vornado OP.
(d) Timing of Tax Returns; Periodic Tax Information. Vornado OP shall
cause to be delivered to the SCR Unitholders, no later than July 15 of each year
(beginning in 2003), the Forms K-1 that Vornado OP is required to deliver to
such SCR Unitholders with respect to the prior taxable year. In the case of the
Forms K-1 relating to taxable year 2001 of SCR, Vornado shall engage Arthur
Andersen and cause Arthur Andersen to prepare such Forms K-1 to be delivered to
the SCR Unitholders no later than March 31, 2002. In addition, Vornado OP agrees
to provide to Messrs. Robert Smith and Robert Kogod, upon request, an estimate
of the taxable income expected to be allocable for a specified taxable year from
Vornado OP to the Smith and Kogod families and the entities that they control,
provided that such estimates shall not be required to be provided more
frequently than once each calendar quarter.
ARTICLE 11
AMENDMENT OF THIS AGREEMENT
This Agreement may not be amended, directly or indirectly (including by
reason of a merger between Vornado OP and another entity) except by a written
instrument signed by Vornado, as general partner of Vornado OP, and approved by
(i) the SCR Partners holding seventy-six percent (76%) of the then outstanding
Protected Units and (ii) if any of Robert H. Smith, Robert P. Kogod, Clarice
Smith or Arlene Kogod is then living, the consent of each such person then
living; provided, however, that any amendment that would permit a sale of a
Protected Property or other action in violation of Article 2 or the refinancing
of debt or any other action with respect to debt in violation of Article 3 or
Article 4, shall not be permitted without the written approval of holders of
seventy-six percent (76%) of the then outstanding Protected Units held by SCR
Partners that would be adversely affected by such actions.
ARTICLE 12
EARLY TERMINATION OF EXTENDED
TAX PROTECTED PERIOD
The Extended Tax Protected Period shall terminate prior to the
expiration thereof at 12:01 AM on January 1, 2022 (or if earlier, upon the date
of death of the last to survive of Robert H. Smith, Clarice R. Smith, Robert P.
Kogod, or Arlene R. Kogod) as follows:
(i) the Extended Tax Protected Period as to any SCR Unitholder shall
terminate only as to that SCR Unitholder upon a Transfer (as defined in the
28
Lock-up Agreement) of Vornado Securities (as defined in the Lock-up
Agreement) originally issued to such SCR Unitholder in the Merger in
violation of the Lock-up Agreement applicable to such SCR Unitholder; and
(ii) the Extended Tax Protected Period shall terminate as to all SCR
Unitholders that have entered into Lock-up Agreements in connection with
the closing of the Merger (to the extent not earlier terminated pursuant to
clause (i) hereof) upon a Transfer by a member of the Smith Family or the
Kogod Family or any of their Permitted Transferees (as such terms are
defined in the Merger Agreement) as a result of which the Smith Family, the
Kogod Family, and their Permitted Transferees no longer Beneficially Own,
after giving effect to such Transfer, at least (x) 50% of the original
aggregate number of VNOP Units (or Vornado Common Shares issued in
redemption thereof) issued to members of the Smith Family and the Kogod
Family in the Merger or (ii) 100% of the original aggregate value of VNOP
Units (or Vornado Common Shares issued in redemption thereof) issued to
members of the Smith Family and the Kogod Family in the Merger (which value
of the retained Vornado Securities shall be measured only at the time of
the applicable Transfer based on the closing price of a Vornado Common
Share on the NYSE after closing of trading on the date immediately
preceding the date of the applicable Transfer, which value shall be
compared to the original value of the VNOP Units issued to the undersigned
in the Merger (based on an assumed price of $41.00 per VNOP Unit)). In
determining whether a Transfer described in this paragraph (ii) has
occurred, the two provisos in Section 2(a)(iii) of the Lock-up Agreement
and the provisions of Sections 2(b), (c), (d), and (e) of the Lock-up
Agreement shall be applied. Except as otherwise indicated, capitalized
terms used in this subparagraph (ii) that are not otherwise defined in this
Agreement shall have the meanings ascribed to them in the Lock-Up
Agreement.
If Vornado OP believes an SCR Unitholder or, if applicable, a Permitted
Transferee of such SCR Unitholder has made a Transfer (as defined in the Lock-up
Agreement) in violation of the applicable Lock-Up Agreement that has resulted in
a termination of the Extended Tax Protected Period under clause (i) or (ii),
Vornado will notify such SCR Unitholder of such determination and the SCR
Unitholder shall have the opportunity to contest such determination (and no
Extended Tax Protected Period shall terminate as a result thereof unless and
until such contest is resolved and such resolution results in a determination
that a Transfer (as defined in the Lock-up Agreement) in violation of the
applicable Lock-Up Agreement in fact occurred. Vornado shall promptly provide
all SCR Unitholders who have the benefit of an Extended Tax Protected Period
notice in the event of a termination of the Extended Tax Protected Period under
clause (ii).
ARTICLE 13
MISCELLANEOUS
(a) Additional Actions and Documents. Each of the parties hereto hereby
agrees to take or cause to be taken such further actions, to execute, deliver,
and file or cause to be executed, delivered and filed such further documents,
and will obtain such
29
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
(b) Assignment. No party hereto shall assign its or his rights or
obligations under this Agreement, in whole or in part, except by operation of
law, without the prior written consent of the other parties hereto, and any such
assignment contrary to the terms hereof shall be null and void and of no force
and effect.
(c) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Protected Unitholders (through SCR GP, as
representative of the SCR Unitholders) and their respective successors and
permitted assigns, whether so expressed or not. This Agreement shall be binding
upon Vornado REIT, Vornado OP, and any entity that is a direct or indirect
successor, whether by merger, transfer, spin-off or otherwise, to all or
substantially all of the assets of either Vornado REIT or Vornado OP (or any
prior successor thereto as set forth in the preceding portion of this sentence),
provided that none of the foregoing shall result in the release of liability of
Vornado REIT and Vornado OP hereunder. Vornado REIT and Vornado OP covenant with
and for the benefit of the SCR Unitholders not to undertake any transfer of all
or substantially all of the assets of either entity (whether by merger,
transfer, spin-off or otherwise) unless the transferee has in writing
acknowledged and agreed to be bound by this Agreement, provided that the
foregoing shall not be deemed to permit any transaction otherwise prohibited by
this Agreement.
(d) Modification; Waiver. No failure or delay on the part of any party
hereto in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the parties hereunder are cumulative
and not exclusive of any rights or remedies which they would otherwise have. No
modification or waiver of any provision of this Agreement, nor consent to any
departure by any party therefrom, shall in any event be effective unless the
same shall be in writing, and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to
or demand on any party in any case shall entitle such party to any other or
further notice or demand in similar or other circumstances.
(e) Representations and Warranties Regarding Authority;
Noncontravention.
(i) Representations and Warranties of Vornado REIT and Vornado OP.
Each of Vornado REIT and Vornado OP has the requisite corporate or other
(as the case may be) power and authority to enter into this Agreement and
to perform is respective obligations hereunder. The execution and delivery
of this Agreement by each of Vornado REIT and Vornado OP and the
performance of each of its respective obligations hereunder have been duly
authorized by all necessary trust, partnership, or other (as the case may
be) action on the part of each of Vornado REIT and Vornado OP. This
Agreement has been duly executed and delivered by each of Vornado REIT and
Vornado OP and constitutes a valid and binding obligation of each of
Vornado REIT and Vornado OP, enforceable against each of Vornado REIT and
Vornado OP in accordance with its terms, notwithstanding Sections
30
7.1.E, 7.8.B, 10.1, 10.2, and 10.3 of the Partnership Agreement, except as
such enforcement may be limited by (i) applicable bankruptcy or insolvency
laws (or other laws affecting creditors' rights generally) or (ii) general
principles of equity. The execution and delivery of this Agreement by each
of Vornado REIT and Vornado OP do not, and the performance by each of its
respective obligations hereunder will not, conflict with, or result in any
violation of (i) the Vornado OP Partnership Agreement or (ii) any other
agreement applicable to Vornado REIT and/or Vornado OP, other than, in the
case of clause (ii), any such conflicts or violations that would not
materially adversely affect the performance by Vornado OP and Vornado REIT
of their obligations hereunder.
(ii) Representations and Warranties of SCR and SCR GP. Each of SCR and
SCR GP has the requisite corporate or other (as the case may be) power and
authority to enter into this Agreement and to perform is respective
obligations hereunder. The execution and delivery of this Agreement by each
of SCR and SCR GP and the performance of each of its respective obligations
hereunder have been duly authorized by all necessary trust, partnership, or
other (as the case may be) action on the part of each of SCR and SCR GP.
This Agreement has been duly executed and delivered by each of SCR and SCR
GP and constitutes a valid and binding obligation of each of SCR and SCR
GP, enforceable against each of SCR and SCR GP in accordance with its
terms, except as such enforcement may be limited by (i) applicable
bankruptcy or insolvency laws (or other laws affecting creditors' rights
generally) or (ii) general principles of equity. The execution and delivery
of this Agreement by each of SCR and SCR GP do not, and the performance by
each of its respective obligations hereunder will not, conflict with, or
result in any violation of (i) the SCR Partnership Agreement or (ii) any
other agreement applicable to SCR and SCR GP, other than, in the case of
clause (ii), any such conflicts or violations that would not materially
adversely affect the performance by SCR and SCR GP of their obligations
hereunder.
(f) Captions. The Article and Section headings contained in this
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
(g) Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered, mailed or transmitted, and shall be effective
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
31
(i) if to SCR GP, as representative of the SCR Unitholders, to:
Charles E. Smith Commercial Realty, LLC
2345 Crystal Drive
Crystal City
Arlington, Virginia 22202
Attention: Robert H. Smith
Robert P. Kogod
Robert D. Zimet
Facsimile: (703) 769-1305
(ii) if to Vornado OP or Vornado REIT, to:
Vornado Realty Trust
Vornado Realty L.P.
888 Seventh Avenue, 44th Floor
New York, New York 10019
Attention: Steven Roth
Michael D. Fascitelli
Facsimile: (212) 894-7000
and
Vornado Realty Trust
Vornado Realty L.P.
210 Route 4 East
Paramus, New Jersey 07652
Attention: Joseph Macnow
Facsimile: (201) 587-1000
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be hand delivered,
sent, mailed, telecopied or telexed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent, received or delivered for all purposes at such time as it is
delivered to the addressee (with the return receipt, the delivery receipt, or
(with respect to a telecopy or telex) the answerback being deemed conclusive,
but not exclusive, evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
(h) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
(i) Governing Law. The interpretation and construction of this
Agreement, and all matters relating thereto, shall be governed by the laws of
the State of Delaware, without regard to the choice of law provisions thereof.
32
(j) Consent to Jurisdiction; Enforceability.
(i) This Agreement and the duties and obligations of the parties
hereunder shall be enforceable against any of the parties in the courts of the
State of Delaware. For such purpose, each party hereto hereby irrevocably
submits to the nonexclusive jurisdiction of such courts and agrees that all
claims in respect of this Agreement may be heard and determined in any of such
courts.
(ii) Each party hereto hereby irrevocably agrees that a final
judgment of any of the courts specified above in any action or proceeding
relating to this Agreement shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(k) Severability. If any part of any provision of this Agreement shall
be invalid or unenforceable in any respect, such part shall be ineffective to
the extent of such invalidity or unenforceability only, without in any way
affecting the remaining parts of such provision or the remaining provisions of
this Agreement.
(l) Costs of Disputes. Except as otherwise expressly set forth in this
Agreement, the nonprevailing party in any dispute arising hereunder shall bear
and pay the costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) incurred by the prevailing party or parties in
connection with resolving such dispute.
33
IN WITNESS WHEREOF, Vornado REIT, Vornado OP, SCR and SCR GP
have caused this Agreement to be signed by their respective officers (or general
partners) thereunto duly authorized all as of the date first written above.
VORNADO REALTY TRUST
By: /s/ JOSEPH MACNOW
-------------------------------------
Name: Joseph Macnow
-----------------------------------
Title: Executive Vice President -
Finance and Administration and
Chief Executive Officer
----------------------------------
VORNADO REALTY L.P.
By: Vornado Realty Trust, its sole
general partner
By: /s/ JOSEPH MACNOW
--------------------------------
Name: Joseph Macnow
------------------------------
Title: Executive Vice President -
Finance and Administration
and Chief Executive Officer
-----------------------------
CHARLES E. SMITH COMMERCIAL REALTY L.P.
By: Charles E. Smith Realty, L.L.C.,
its sole general partner
By: /s/ PAUL F. LARNER
--------------------------------
Name: Paul F. Larner
------------------------------
Title: Chief Financial Officer
-----------------------------
CHARLES E. SMITH REALTY, L.L.C., for
itself and as representative of each
holder of partnership interests in
Charles E. Smith Commercial Realty L.P.
(other than Vornado CESCR LLC and
Vornado CESCR II LLC), each of which
holder is a third party beneficiary of
this Agreement
By: /s/ PAUL F. LARNER
--------------------------------
Name: Paul F. Larner
------------------------------
Title: Chief Financial Officer
-----------------------------
Dates Referenced Herein and Documents Incorporated by Reference
6 Subsequent Filings that Reference this Filing
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