SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: June 30, 2002
Commission File No. 1-11530
Taubman Centers, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2033632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills, Michigan 48303-0200
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(Address of principal executive offices) (Zip Code)
(248) 258-6800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X . No .
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As of August 9, 2002, there were outstanding 51,148,135 shares of the Company's common stock, par value
$0.01 per share.
PART 1. FINANCIAL INFORMATION
This amendment to Form 10-Q for the period ended June 30, 2002 is being filed to update Note 9 of the Notes to
Consolidated Financial Statements with respect to a lawsuit that was received by the Company on the date the
Form 10-Q was filed. Also, a cross reference to Note 9 was made in Management's Discussion of Analysis of
Financial Condition and Results of Operations - Results of Operations - New Center Openings.
Item 1. Financial Statements.
The following consolidated financial statements of Taubman Centers, Inc. (the Company) are provided pursuant to
the requirements of this item.
Consolidated Balance Sheet as of June 30, 2002 and December 31, 2001...................................... 2
Consolidated Statement of Operations and Comprehensive Income for the three months ended
June 30, 2002 and 2001................................................................................. 3
Consolidated Statement of Operations and Comprehensive Income for the six months ended
June 30, 2002 and 2001................................................................................. 4
Consolidated Statement of Cash Flows for the six months ended June 30, 2002 and 2001 ..................... 5
Notes to Consolidated Financial Statements................................................................ 6
1
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
June 30 December 31
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2002 2001
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Assets:
Properties $ 2,156,166 $ 2,194,717
Accumulated depreciation and amortization (359,048) (337,567)
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$ 1,797,118 $ 1,857,150
Investment in Unconsolidated Joint Ventures (Note 6) 170,357 148,801
Cash and cash equivalents 72,658 27,789
Accounts and notes receivable, less allowance
for doubtful accounts of $5,729 and $5,345 in
2002 and 2001 28,709 35,734
Accounts and notes receivable from related parties 13,326 20,645
Deferred charges and other assets 42,705 51,320
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$ 2,124,873 $ 2,141,439
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Liabilities:
Notes payable $ 1,465,530 $ 1,423,241
Accounts payable and accrued liabilities 145,655 181,912
Dividends and distributions payable 19,435 12,937
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$ 1,630,620 $ 1,618,090
Commitments and Contingencies (Note 9)
Preferred Equity of TRG (Note 1) $ 97,275 $ 97,275
Partners' Equity of TRG allocable to minority partners (Note 1)
Shareowners' Equity:
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 8,000,000 shares authorized,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
June 30, 2002 and December 31, 2001 $ 80 $ 80
Series B Non-Participating Convertible Preferred Stock,
$0.001 par and liquidation value, 40,000,000 shares
authorized and 31,767,066 shares issued and
outstanding at June 30, 2002 and December 31, 2001 32 32
Series C Cumulative Redeemable Preferred Stock,
$0.01 par value, 2,000,000 shares authorized, $75 million
liquidation preference, none issued
Series D Cumulative Redeemable Preferred Stock,
$0.01 par value, 250,000 shares authorized, $25 million
liquidation preference, none issued
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 51,121,140 and 50,734,984 issued and
outstanding at June 30, 2002 and December 31, 2001 511 507
Additional paid-in capital 678,562 673,043
Accumulated other comprehensive income (Note 2) (9,102) (3,119)
Dividends in excess of net income (273,105) (244,469)
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$ 396,978 $ 426,074
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$ 2,124,873 $ 2,141,439
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See notes to consolidated financial statements.
2
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Three Months Ended June 30
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2002 2001
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Income:
Minimum rents $ 46,739 $ 38,178
Percentage rents 629 881
Expense recoveries 29,621 25,049
Revenues from management, leasing and
development services 5,735 6,086
Other 7,347 9,571
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$ 90,071 $ 79,765
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Operating Expenses:
Recoverable expenses $ 25,905 $ 21,604
Other operating 6,351 9,105
Charge related to technology investments (Note 5) 8,125
Management, leasing and development services 5,151 5,089
General and administrative 5,445 4,862
Interest expense 20,764 14,981
Depreciation and amortization 20,218 14,460
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$ 91,959 $ 70,101
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Income (loss) before equity in income of Unconsolidated
Joint Ventures, discontinued operations, and minority
and preferred interests $ (1,888) $ 9,664
Equity in income of Unconsolidated Joint Ventures (Note 6) 4,740 5,215
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Income before discontinued operations and minority and
preferred interests $ 2,852 $ 14,879
Discontinued operations (Note 3):
Income from operations 979 844
Gain on disposition of interest in center 9,975
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Income before minority and preferred interests $ 13,806 $ 15,723
Minority interest in consolidated joint ventures 435 181
Minority interest in TRG:
TRG income allocable to minority partners (4,997) (4,406)
Distributions in excess of earnings allocable to minority partners (3,148) (3,488)
TRG Series C and D preferred distributions (Note 1) (2,250) (2,250)
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Net income $ 3,846 $ 5,760
Series A preferred dividends (4,150) (4,150)
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Net income (loss) allocable to common shareowners $ (304) $ 1,610
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Net income $ 3,846 $ 5,760
Other comprehensive income (loss) (Note 2):
Unrealized gain (loss) on interest rate instruments (6,508) 2,683
Reclassification adjustment for amounts recognized in net income 176 106
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Comprehensive income (loss) $ (2,486) $ 8,549
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Basic income (loss) per common share (Note 10):
Income (loss) from continuing operations $ (0.11) $ 0.02
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Net income (loss) $ (0.01) $ 0.03
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Diluted income (loss) per common share (Note 10):
Income (loss) from continuing operations $ (0.11) $ 0.02
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Net income (loss) $ (0.01) $ 0.03
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Cash dividends declared per common share $ .255 $ .25
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Weighted average number of common shares outstanding 51,076,901 50,181,946
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See notes to consolidated financial statements.
3
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Six Months Ended June 30
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2002 2001
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Income:
Minimum rents $ 93,489 $ 76,691
Percentage rents 1,694 1,918
Expense recoveries 57,396 48,138
Revenues from management, leasing and
development services 10,863 12,457
Other 13,251 15,507
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$ 176,693 $ 154,756
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Operating Expenses:
Recoverable expenses $ 49,291 $ 41,078
Other operating 16,307 16,100
Charge related to technology investments (Note 5) 8,125
Management, leasing and development services 10,044 9,430
General and administrative 10,365 9,617
Interest expense 41,393 30,180
Depreciation and amortization 40,921 31,037
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$ 176,446 $ 137,442
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Income before equity in income of Unconsolidated
Joint Ventures, discontinued operations, cumulative effect of
change in accounting principle and minority and preferred interests $ 247 $ 17,314
Equity in income before cumulative effect of change in
accounting principle of Unconsolidated Joint Ventures (Note 6) 10,877 10,071
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Income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests $ 11,124 $ 27,385
Discontinued operations (Note 3):
Income from operations 2,723 2,074
Gain on disposition of interests in centers 12,024
Cumulative effect of change in accounting principle (Note 2) (8,404)
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Income before minority and preferred interests $ 25,871 $ 21,055
Minority interest in consolidated joint ventures 646 598
Minority interest in TRG:
TRG income allocable to minority partners (9,537) (4,889)
Distributions in excess of earnings allocable to minority partners (6,768) (11,003)
TRG Series C and D preferred distributions (Note 1) (4,500) (4,500)
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Net income $ 5,712 $ 1,261
Series A preferred dividends (8,300) (8,300)
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Net loss allocable to common shareowners $ (2,588) $ (7,039)
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Net income $ 5,712 $ 1,261
Other comprehensive income (loss) (Note 2):
Cumulative effect of change in accounting principle (779)
Unrealized gain (loss) on interest rate instruments (6,335) 1,594
Reclassification adjustment for amounts recognized in net income 352 205
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Comprehensive income (loss) $ (271) $ 2,281
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Basic loss per common share (Note 10):
Loss from continuing operations $ (0.17) $ (0.07)
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Net loss $ (0.05) $ (0.14)
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Diluted loss per common share (Note 10):
Loss from continuing operations $ (0.17) $ (0.07)
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Net loss $ (0.06) $ (0.14)
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Cash dividends declared per common share $ .51 $ .50
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Weighted average number of common shares outstanding 50,980,530 50,291,596
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See notes to consolidated financial statements.
4
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30
-------------------------
2002 2001
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Cash Flows from Operating Activities:
Income before minority and preferred interests $ 25,871 $ 21,055
Adjustments to reconcile income before
minority and preferred interests to net cash
provided by operating activities:
Depreciation and amortization of continuing operations 40,921 31,037
Depreciation and amortization of discontinued operations 461 1,436
Charge related to technology investments 8,125
Provision for losses on accounts receivable 1,768 1,208
Gains on sales of land (4,246) (2,750)
Gain on disposition of interests in centers (12,024)
Cumulative effect of change in accounting principle 8,404
Other 2,026 1,380
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets 2,702 (164)
Accounts payable and other liabilities (9,800) (12,245)
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Net Cash Provided By Operating Activities $ 55,804 $ 49,361
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Cash Flows from Investing Activities:
Additions to properties $ (62,410) $ (112,575)
Proceeds from sales of land 6,070 3,490
Investment in technology businesses (4,090) (2,890)
Net proceeds from dispositions of interests in centers 76,446
Acquisition of interests in Unconsolidated Joint Ventures (45,203)
Contributions to Unconsolidated Joint Ventures (28,679)
Distributions from Unconsolidated Joint Ventures
in excess of income before cumulative effect of change
in accounting principle 20,103 8,182
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Net Cash Used in Investing Activities $ (9,084) $ (132,472)
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Cash Flows from Financing Activities:
Debt proceeds $ 49,065 $ 143,597
Debt payments (6,776) (1,409)
Debt issuance costs (3,210)
Repurchases of common stock (11,159)
Distributions to minority and preferred interests (18,555) (18,142)
Issuance of stock pursuant to Continuing Offer 4,515 8,264
Cash dividends to Series A preferred shareowners (4,150) (4,150)
Cash dividends to common shareowners (25,950) (25,334)
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Net Cash Provided By (Used In) Financing Activities $ (1,851) $ 88,457
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Net Increase in Cash and Cash Equivalents $ 44,869 $ 5,346
Cash and Cash Equivalents at Beginning of Period 27,789 18,842
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Cash and Cash Equivalents at End of Period $ 72,658 $ 24,188
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See notes to consolidated financial statements.
5
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Statements
Taubman Centers, Inc. (the Company or TCO), a real estate investment trust, or REIT, is the managing general
partner of The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG). The Operating
Partnership is an operating subsidiary that engages in the ownership, management, leasing, acquisition,
development, and expansion of regional retail shopping centers and interests therein. The Operating
Partnership's portfolio as of June 30, 2002 included 19 urban and suburban shopping centers in nine states. Two
additional centers are under construction, one in Florida and one in Virginia.
The consolidated financial statements of the Company include all accounts of the Company, the Operating
Partnership and its consolidated subsidiaries, including The Taubman Company LLC (the Manager); all intercompany
balances have been eliminated. Investments in entities not unilaterally controlled by ownership or contractual
obligation (Unconsolidated Joint Ventures) are accounted for under the equity method.
At June 30, 2002, the Operating Partnership's equity included three classes of preferred equity (Series A, C,
and D) and the net equity of the partnership unitholders. Net income and distributions of the Operating
Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and
limited partners in the Operating Partnership in accordance with their percentage ownership. The Series A
Preferred Equity is owned by the Company and is eliminated in consolidation. The Series C and Series D Preferred
Equity are owned by institutional investors and have a fixed 9% coupon rate, no stated maturity, sinking fund, or
mandatory redemption requirements.
Because the net equity of the partnership unitholders is less than zero, the interest of the noncontrolling
unitholders is presented as a zero balance in the balance sheet as of June 30, 2002 and December 31, 2001. The
income allocated to the noncontrolling unitholders is equal to their share of distributions. The net equity of
the Operating Partnership is less than zero because of accumulated distributions in excess of net income and not
as a result of operating losses. Distributions to partners are usually greater than net income because net income
includes non-cash charges for depreciation and amortization.
The Company's ownership in the Operating Partnership at June 30, 2002 consisted of a 61.8% managing general
partnership interest, as well as the Series A Preferred Equity interest. The Company's average ownership
percentage in the Operating Partnership for the three months ended June 30, 2002 and 2001 was 61.8% and 61.4%,
respectively. During the six months ended June 30, 2002, the Company's ownership in the Operating Partnership
increased to 61.8% due to additional interests acquired in connection with the Continuing Offer (Note 9). At
June 30, 2002, the Operating Partnership had 82,888,206 units of partnership interest outstanding, of which the
Company owned 51,121,140. Included in the total units outstanding are 174,058 units issued in connection with
the 1999 acquisition of Lord Associates that currently do not receive allocations of income or distributions.
The unaudited interim financial statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In
the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim periods have been made. The results of interim periods
are not necessarily indicative of the results for a full year.
Certain prior year amounts have been reclassified to conform to 2002 classifications.
6
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 - Derivatives
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which
establish accounting and reporting standards for derivative instruments. The Company uses derivative instruments
primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company
routinely uses cap, swap, and treasury lock agreements to meet these objectives.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to Other Comprehensive
Income (OCI) of $0.8 million. These amounts represented the transition adjustments necessary to mark the
Company's share of interest rate agreements to fair value as of January 1, 2001.
In addition to the transition adjustment in first quarter 2001, the Company recognized in earnings its share
of net unrealized gains (losses) of $0.8 million and $(0.7) million during the three months ended June 30, 2002
and 2001, and $1.8 million and $(2.5) million during the six months ended June 30, 2002 and 2001, respectively,
due to changes in interest rates and the resulting changes in value of the Company's interest rate agreements.
Of these amounts, the changes in value of the Dolphin swap agreement were approximately $1.0 million and $(0.6)
million during the three months ended June 30, 2002 and 2001, and $2.0 million and $(2.1) million during the six
months ended June 30, 2002 and 2001. The remainders represent the changes in time value of other instruments.
In June 2002, the Company entered into swap agreements designated to hedge the Wellington Green construction
facility. Under the swaps, the LIBOR rate is swapped to a fixed rate of 2.5% from October 2002 through September
2003, 4.35% from October 2003 through September 2004, and 5.25% from October 2004 through April 2005 on a
notional amount of $100 million.
In May 2002, the Company entered into an agreement to swap LIBOR to a fixed rate of 4.125% on a notional
amount of $100 million designated to hedge the Willow Bend construction facility. The term of the agreement is
November 2002 through June 2004.
In March 2002, the Company entered into an agreement to swap LIBOR to a fixed rate of 4.3% on a notional
amount of $100 million designated to hedge the Company's $275 million line of credit. This one-year swap begins
in November 2002.
As of June 30, 2002, the Company has $9.1 million of net derivative losses included in Accumulated OCI as
follows:
Hedged Items OCI Amounts
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(in thousands)
2001 Regency Square financing $ 2,618
Dolphin construction facility 149
$275 million line of credit 1,455
The Shops at Willow Bend construction facility 1,124
Westfarms refinancing 3,756
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$ 9,102
===============
The realized loss on the Regency Square financing will be recognized as additional interest expense over the
ten-year term of the debt. The loss on the hedge of the Dolphin Mall construction facility will be recognized as
a reduction of earnings through its 2002 maturity date. Gains or losses on the swap designated to hedge the $275
million line of credit will be recognized as an adjustment to interest expense over the one-year effective
period of the swap agreement, beginning November 2002. Gains or losses on the swap designated to hedge The Shops
at Willow Bend construction facility will be recognized as adjustments to interest expense over the term of the
swap agreement, November 2002 through June 2004. A realized loss on the derivative used to hedge the refinancing
of the Westfarms loan (Note 12 - Subsequent Events) will be recognized as a reduction of earnings through its July
2012 maturity date. The Company expects that approximately $3.3 million will be reclassified from Accumulated
OCI and recognized as a reduction of earnings during the next twelve months.
7
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Acquisitions and Dispositions
In May 2002, the Operating Partnership acquired for $88 million a 50% general partnership interest in
SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in
Concord, California. The $88 million purchase price consists of $28 million of cash and $60 million of existing
debt that encumbers the property. The Company's interest in the secured debt consists of a $55 million primary
note bearing interest at LIBOR plus 0.92% and a $5 million note bearing interest at LIBOR plus 3.0%. The notes
mature in September 2003 and have two one-year extension options. The center is also subject to a ground lease
that expires in 2061. The Manager has managed the property since its development and will continue to do so.
Although the Operating Partnership purchased its interest in Sunvalley from an unrelated third party, the other
50% partner in the property is an entity owned and controlled by Mr. A. Alfred Taubman, the Company's largest
shareholder.
Also in May 2002, the Company purchased an additional interest in Arizona Mills for approximately $14 million
in cash plus the $19 million share of the debt that encumbers the property. The Company has a 50% interest in the
center as of June 30, 2002.
In March 2002, the Company sold its interest in La Cumbre Plaza for $28 million. In May 2002, the Company
sold its interest in Paseo Nuevo for $48 million. The centers were subject to ground leases and were unencumbered
by debt. The centers were purchased in 1996 for a total of $59 million. The Company's $2.0 million and $10.0
million gains on the sale of La Cumbre Plaza and Paseo Nuevo, respectively, differed from the $6.1 million and
$13.4 million gains recognized by the Operating Partnership due to the Company's $4.1 million and $3.4 million
additional bases in La Cumbre Plaza and Paseo Nuevo.
The Company used the net proceeds from the sales of Paseo Nuevo and La Cumbre Plaza to fund the acquisitions
of Sunvalley and Arizona Mills, and, in July 2002, to pay down borrowings under the Company's lines of credit.
Note 4 - Tax Elections
The Company's Taxable REIT Subsidiaries are subject to corporate level income taxes, which are provided for in
the Company's financial statements. The Company's deferred tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities for financial reporting purposes and the
bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a
valuation allowance to the amount where realization is more likely than not assured after considering all
available evidence. The Company's temporary differences primarily relate to deferred compensation and
depreciation. During the six months ended June 30, 2002, the Company's federal income tax expense was zero as a
result of a net operating loss incurred by its Taxable REIT Subsidiaries. As of June 30, 2002, the Company had a
net deferred tax asset of $4.4 million, after a valuation allowance of $7.9 million.
8
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Investments in Technology Businesses
The Company owns an approximately 6.8% interest in MerchantWired, LLC, a service company originally created to
provide internet and network infrastructure to shopping centers and retailers. During the six months ended June
30, 2002 and 2001, the Company recognized its $1.8 million and $0.7 million share of MerchantWired's operating
losses, respectively. In May 2002, the Company invested an additional $4.1 million to satisfy the Company's
guarantees of MerchantWired's obligations as required under a proposed sale of MerchantWired. In June 2002,
since the anticipated sale failed to close, MerchantWired's board of directors voted to cease operations
effective September 2002. As a result, the Company recorded a charge in the second quarter of 2002 to write-off
its remaining $5.8 million balance of its MerchantWired investment.
The Company has an investment in Fashionmall.com, Inc., an e-commerce company originally organized to market,
promote, advertise, and sell fashion apparel and related accessories and products over the internet. In 2001,
Fashionmall.com significantly scaled back its operations in response to decreasing revenues and e-commerce
development opportunities, leading its management to conclude that it should seek alternative uses of its
significant cash resources. In light of such developments, the Company agreed to convert its preferred stock
investment into 824,084 common shares in return for a commitment from Fashionmall's CEO and majority shareholder
that on or before December 31, 2002, Fashionmall will either consummate a transaction resulting in a value to its
stockholders in excess of the value deliverable to the stockholders upon its liquidation, consummate a plan of
liquidation, or consummate any other transaction that is reasonably acceptable to the Company and the majority
shareholder. Based upon the $3.92 trading price of the stock on the day the preferred investment was exchanged
for common shares, the Company recognized a $2.3 million loss on its investment during the second quarter. After
this charge, the Company's investment was $3.2 million at June 30, 2002. The $3.92 trading price reflected the
$3.75 per share dividend declared by Fashionmall.com, which was paid in August 2002. The receipt of this $3.1
million dividend has reduced the Company's investment to $0.1 million. In future periods, the Company will mark
this remaining investment in Fashionmall.com to market value.
9
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Investments in Unconsolidated Joint Ventures
Following are the Company's investments in Unconsolidated Joint Ventures. The Operating Partnership is the
managing general partner or managing member in these Unconsolidated Joint Ventures, except for those denoted with
an (*).
Ownership as of
Unconsolidated Joint Venture Shopping Center June 30, 2002
------------------------------ ---------------- ---------------
Arizona Mills, L.L.C. * Arizona Mills 50%
Dolphin Mall Associates Dolphin Mall 50
Limited Partnership
Fairfax Company of Virginia, L.L.C. Fair Oaks 50
Forbes Taubman Orlando, L.L.C. * The Mall at Millenia 50
(under construction)
Rich-Taubman Associates Stamford Town Center 50
SunValley Associates Sunvalley 50
Tampa Westshore Associates International Plaza 26
Limited Partnership
Taubman-Cherry Creek Cherry Creek 50
Limited Partnership
West Farms Associates Westfarms 79
Woodland Woodland 50
In September 2001, International Plaza, a 1.3 million square foot center, opened in Tampa, Florida. As of
June 30, 2002, the Operating Partnership has a preferred investment in International Plaza of $18 million, on
which an annual preferential return of 8.25% will accrue. In addition to the preferred return on its investment,
the Operating Partnership will receive a return of its preferred investment before any available cash will be
utilized for distributions to non-preferred partners.
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida. As
of June 30, 2002, the Operating Partnership has a preferred investment in Dolphin Mall of $26 million. The joint
venture partner in Dolphin Mall has exercised the buy/sell provision in the joint venture's partnership
agreement. The Company responded to the offer indicating its intent to be a purchaser rather than a seller,
although the transaction has significant contingencies, including reaching agreement with the banking group.
Assuming this transaction occurs as anticipated during the third quarter of 2002, it would result in the Company
acquiring the additional interest in Dolphin for approximately the joint venture partner's share of the
partnership debt and other obligations. The Company expects that its total investment in Dolphin Mall, at that
point, will be approximately $268 million (Note 9).
The Company is currently developing The Mall at Millenia in Orlando, Florida. This 1.2 million square foot
center will open in October 2002.
In May 2002, the Company acquired an additional 13% interest in Arizona Mills and a 50% interest in Sunvalley
(Note 3).
The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the
deficiency in assets reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the
Company's cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures
and (ii) the Operating Partnership's adjustments to the book basis, including intercompany profits on sales of
services that are capitalized by the Unconsolidated Joint Ventures. The Company's additional basis allocated to
depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership's differences
in bases are amortized over the useful lives of the related assets.
10
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Combined balance sheet and results of operations information are presented in the following table (in
thousands) for all Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in
the combined information. TRG's basis adjustments as of June 30, 2002 include $73 million and $11 million related
to the acquisitions of interests in Sunvalley and Arizona Mills (Note 3), respectively, representing the
differences between the acquisition prices and the book values of the ownership interests acquired. These
amounts will be depreciated over the remaining useful lives of the underlying assets. Beneficial interest is
calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.
June 30 December 31
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2002 2001
---- ----
Assets:
Properties $ 1,528,235 $ 1,367,082
Accumulated depreciation and amortization (279,064) (220,201)
------------- -------------
$ 1,249,171 $ 1,146,881
Cash and cash equivalents 28,946 30,664
Accounts and notes receivable 15,927 20,302
Deferred charges and other assets 29,505 29,290
------------- -------------
$ 1,323,549 $ 1,227,137
============= =============
Liabilities and partnership equity:
Notes payable $ 1,345,251 $ 1,154,141
Other liabilities 133,872 109,247
TRG's partnership equity (accumulated deficiency in assets) (60,749) 903
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (94,825) (37,154)
------------- -------------
$ 1,323,549 $ 1,227,137
============= =============
TRG's partnership equity (accumulated deficiency in
assets) (above) $ (60,749) $ 903
TRG basis adjustments, including elimination of intercompany
profit 107,339 22,612
TCO's additional basis 123,767 125,286
------------- -------------
Investment in Unconsolidated Joint Ventures $ 170,357 $ 148,801
============= =============
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 69,202 $ 54,375 $ 133,887 $ 108,430
----------- ----------- ----------- -----------
Recoverable and other operating expenses $ 27,754 $ 19,946 $ 50,155 $ 38,406
Interest expense 19,550 17,570 37,732 36,160
Depreciation and amortization 12,990 8,595 26,941 17,727
----------- ----------- ----------- -----------
Total operating costs $ 60,294 $ 46,111 $ 114,828 $ 92,293
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle $ 8,908 $ 8,264 $ 19,059 $ 16,137
Cumulative effect of change in accounting
principle 3,304
----------- ----------- ----------- -----------
Net income $ 8,908 $ 8,264 $ 19,059 $ 12,833
=========== =========== =========== ===========
Net income allocable to TRG $ 5,049 $ 4,496 $ 10,636 $ 6,890
Cumulative effect of change in accounting
principle allocable to TRG 1,612
Realized intercompany profit 450 1,478 1,759 3,087
Depreciation of TCO's additional basis (759) (759) (1,518) (1,518)
----------- ----------- ----------- -----------
Equity in income before cumulative effect of
change in accounting principle of
Unconsolidated Joint Ventures $ 4,740 $ 5,215 $ 10,877 $ 10,071
=========== =========== =========== ===========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 22,193 $ 19,653 $ 46,875 $ 39,705
Interest expense (9,771) (9,243) (18,794) (19,059)
Depreciation and amortization (7,682) (5,195) (17,204) (10,575)
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle $ 4,740 $ 5,215 $ 10,877 $ 10,071
=========== =========== =========== ===========
11
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Beneficial Interest in Debt and Interest Expense
In March 2002, the Company exercised its option to extend the maturity of the Great Lakes Crossing mortgage to
April 2003.
The Operating Partnership's beneficial interest in the debt, capital lease obligations, capitalized interest,
and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the
following table. The Operating Partnership's beneficial interest in consolidated subsidiaries excludes debt and
interest relating to the minority interests in Great Lakes Crossing, MacArthur Center, and The Mall at Wellington
Green.
At 100% At Beneficial Interest
------------------------------- ----------------------------------------------
Unconsolidated Unconsolidated
Consolidated Joint Consolidated Joint
Subsidiaries Ventures Subsidiaries Ventures Total
------------- ----------------- -------------- ----------------- -------------
(in thousands of dollars)
Debt as of:
June 30, 2002 1,465,530 1,345,251 1,386,439 673,969 2,060,408
December 31, 2001 1,423,241 1,154,141 1,345,086 562,811 1,907,897
Capital Lease Obligations:
June 30, 2002 256 -- 218 -- 218
December 31, 2001 304 64 259 40 299
Capitalized Interest:
Six months ended June 30, 2002 2,571 2,033 2,516 1,017 3,533
Six months ended June 30, 2001 16,396 9,662 16,300 3,940 20,240
Interest Expense:
Six months ended June 30, 2002 41,393 37,732 38,916 18,794 57,710
Six months ended June 30, 2001 30,180 36,160 27,597 19,059 46,656
Note 8 - Incentive Option Plan
The Operating Partnership has an incentive option plan for employees of the Manager. Incentive options
generally become exercisable to the extent of one-third of the units on each of the third, fourth, and fifth
anniversaries of the date of grant. Options expire ten years from the date of grant. The Operating Partnership's
units issued in connection with the incentive option plan are exchangeable for shares of the Company's common
stock under the Continuing Offer (Note 9). In December 2001, the Company amended the plan to allow vested unit
options to be exercised by tendering mature units with a market value equal to the exercise price of the unit
options.
In December 2001, the Company's chief executive officer executed a unit option deferral election with regard
to options for approximately three million units at an exercise price of $11.14 per unit due to expire in
November 2002. This election will allow him to defer the receipt of the net units he would receive upon exercise.
These deferred option units will remain in a deferred compensation account until Mr. Taubman's retirement or ten
years from the date of exercise. Beginning with the ten year anniversary of the date of exercise, the deferred
partnership units will be released in ten annual installments. In April 2002, Mr. Taubman exercised options for
1.5 million units by tendering 1.1 million mature units and deferring the receipt of 0.4 million units under the
unit option deferral election. As the Company declares distributions, the deferred option units receive their
proportionate share of the distributions in the form of cash payments.
Excluding the options exercised by Mr. Taubman, there were options for 386,156 units exercised during the six
months ended June 30, 2002 at an average exercise price of $11.69 per unit. During the six months ended June 30,
2001, options for 744,454 units were exercised at a weighted average price of $11.10 per unit. There were no
options granted or cancelled during the six months ended June 30, 2002 and 2001. As of June 30, 2002, there were
vested options for 4.1 million units with a weighted average exercise price of $11.48 per unit and outstanding
options (including unvested options) for a total of 4.2 million units with a weighted average exercise price of
$11.44 per unit.
12
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Currently, options for 5.4 million Operating Partnership units may be issued under the plan, 4.2 million of
which have been issued. When the holder of an option elects to pay the exercise price by surrendering
partnership units, only those units issued to the holder in excess of the number of units surrendered are counted
for purposes of determining the remaining number of units available for future grants under the plan.
For any future option grants, the Company intends to recognize compensation expense based on the fair value
method of FAS 123, "Accounting for Stock-Based Compensation".
Note 9 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of its partnership interest in the
Operating Partnership, the Company entered into an agreement (the Cash Tender Agreement) with A. Alfred Taubman,
who owns an interest in the Operating Partnership, whereby he has the annual right to tender to the Company units
of partnership interest in the Operating Partnership (provided that the aggregate value is at least $50 million)
and cause the Company to purchase the tendered interests at a purchase price based on a market valuation of the
Company on the trading date immediately preceding the date of the tender. The Company will have the option to
pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's
common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its
stock. The tendering partner will bear all market risk if the market price at closing is less than the purchase
price and will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for
the sole benefit of the Company. At A. Alfred Taubman's election, his family and certain others may participate
in tenders.
Based on a market value at June 30, 2002 of $15.25 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $376 million. The
purchase of these interests at June 30, 2002 would have resulted in the Company owning an additional 30% interest
in the Operating Partnership.
The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded
holders, including A. Alfred Taubman), assignees of all present holders, those future holders of partnership
interests in the Operating Partnership as the Company may, in its sole discretion, agree to include in the
continuing offer, and all existing and future optionees under the Operating Partnership's incentive option plan
to exchange shares of common stock for partnership interests in the Operating Partnership (the Continuing Offer).
Under the Continuing Offer agreement, one unit of partnership interest is exchangeable for one share of the
Company's common stock.
In April 2001, the Operating Partnership's $10 million investment in Swerdlow Real Estate Group, Inc.
(Swerdlow) was converted into a loan which bore interest at 12% and matured in December 2001. This loan is
currently delinquent. All interest due through the December maturity date was received. The Company has filed a
lawsuit seeking to recover the principal amount and all accrued and unpaid interest under the note due
from Swerdlow. Swerdlow has filed its answer which seeks a recision of the note and the return of
all amounts paid under or in connection with the note, which total approximately $2.5 million paid to the Company
through December 31, 2001. In the event the note was rescinded, the Company's original investment in Swerdlow
would be restored. While the Company believes that it will ultimately prevail in collecting all amounts due and
owing under the note, the lawsuit is in its preliminary stages and no predictions can be made as to the outcome
of the lawsuit.
On August 13, 2002, the Company received a complaint naming it as a defendant in a lawsuit brought by SREG
Dolphin Mall, Inc., the Company's Partner in Dolphin Mall, seeking damages in excess of $40 million for alleged
breaches by the Company of the Second Amended Partnership Agreement of Dolphin Mall Associates Limited
Partnership. The Company believes the allegations in the complaint are without merit and will vigorously defend
the lawsuit. Since the lawsuit is in its preliminary stages, no predictions can be made at this time as to its
ultimate outcome.
In addition, the Company is currently involved in certain litigation arising in the ordinary course of
business. Management believes that this litigation will not have a material adverse effect on the Company's
financial statements.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of June 30, 2002. All of the loan agreements provide for a reduction of the amounts guaranteed as
certain center performance and valuation criteria are met.
13
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 6/30/02 as of 6/30/02 as of 6/30/02 by TRG by TRG
------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 183.0 91.5 91.5 50% 100%
Great Lakes Crossing 149.7 127.2 149.7 100% 100%
International Plaza 187.1 49.6 93.6 50% (1) 50% (1)
The Mall at Millenia 92.1 46.1 23.0 25% 25%
The Mall at Wellington Green 137.7 123.9 137.7 100% 100%
The Shops at Willow Bend 197.8 197.8 197.8 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent of
25% of the amounts guaranteed.
The Company currently anticipates that a partial prepayment of principal will be necessary to extend the
October 2002 maturity date on the Dolphin Mall construction loan.
The Company has a $0.5 million investment in Constellation Real Technologies LLC (Constellation), a company
that forms and sponsors real estate related internet, e-commerce, and telecommunications enterprises. The
Company has a capital commitment for approximately $0.8 million in funding for Constellation although
any additional contributions would be restricted to a maximum of $0.2 million in 2002 and $0.3 million in 2003.
Note 10 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings available to common shareowners by the
average number of common shares outstanding during each period. For diluted earnings per common share, the
Company's ownership interest in the Operating Partnership (and therefore earnings) are adjusted assuming the
exercise of all options for units of partnership interest under the Operating Partnership's incentive option plan
having exercise prices less than the average market value of the units using the treasury stock method. Diluted
earnings per share of future periods also reflect the net units deferred under the unit option deferral election
(Note 8). For the three and six months ended June 30, 2001, options for 0.3 million and 1.1 million units of
partnership interest with average exercise prices of $13.56 per unit and $13.00 per unit, respectively, were
excluded from the computations of diluted earnings per unit because the exercise prices were greater than the
average market prices for the periods calculated. There were no options excluded from the computation of diluted
earnings per unit for the three or six months ended June 30, 2002.
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except share data)
Income (loss) from continuing operations allocable to
common shareowners (Numerator):
Net income (loss) allocable to common shareowners $ (304) $ 1,610 $ (2,588) $ (7,039)
Common shareowners' share of discontinued operations (5,477) (518) (6,252) (1,274)
Common shareowners' share of cumulative effect
of change in accounting principle 4,924
----------- ----------- ---------- ------------
Basic income (loss) from continuing operations $ (5,781) $ 1,092 $ (8,840) $ (3,389)
Effect of dilutive options (86) (42) (114)
----------- ----------- ---------- ------------
Diluted income (loss) from continuing operations $ (5,781) $ 1,006 $ (8,882) $ (3,503)
=========== =========== ========== ============
Shares (Denominator) - basic and diluted 51,076,901 50,181,946 50,980,530 50,291,596
=========== =========== ========== ============
Income (loss) from continuing operations per common
share - basic and diluted $ (.11) $ .02 $ (.17) $ (.07)
=========== =========== ========== =============
Per share effects of discontinued operations and
cumulative effect of change in accounting principle:
Discontinued operations per common share-basic $ .11 $ .01 $ .12 $ .03
=========== =========== ========== ============
Discontinued operations per common share-diluted $ .10 $ .01 $ .12 $ .02
=========== =========== ========== ============
Cumulative effect of change in accounting
principle per common share - basic and diluted $ (.10)
============
14
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11 - Cash Flow Disclosures and Noncash Investing and Financing Activities
Interest on mortgage notes and other loans paid during the six months ended June 30, 2002 and 2001, net of
amounts capitalized of $2.6 million and $16.4 million, was $38.2 million and $27.9 million, respectively. The
following non-cash investing and financing activities occurred during the six months ended June 30, 2002 and 2001:
Six Months ended June 30
------------------------
2002 2001
---- ----
(in thousands)
Non-cash additions to properties $ 8,473
Partnership units released $ 1,008 878
Non-cash contributions to Unconsolidated Joint Ventures 3,778
Non-cash additions to properties primarily represent accrued construction and tenant allowance costs of new
centers and development projects.
Note 12 - Subsequent Events
In July 2002, the Company closed on a $210 million ten-year mortgage on Westfarms at an all-in rate of 6.4%.
Proceeds were used to pay off the previous $155 million debt on Westfarms. The Operating Partnership used its
$37 million share of distributed excess proceeds to pay down its revolving credit facilities.
In August 2002, Stamford Town Center extended its $76 million loan to August 2004. Also in August, the Company
closed on a $105 million construction loan for Stony Point Fashion Park. This loan bears interest at LIBOR plus
1.85% and has an initial term of three years with two one-year extension options. The Operating Partnership
guarantees 100% of principal and interest on this loan; the amounts guaranteed will be reduced as certain center
performance and valuation criteria are met.
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains
various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent
the Company's expectations or beliefs concerning future events, including the following: statements regarding
future developments and joint ventures, rents and returns, statements regarding the continuation of trends, and
any statements regarding the sufficiency of the Company's cash balances and cash generated from operating and
financing activities for the Company's future liquidity and capital resource needs. The Company cautions that
although forward-looking statements reflect the Company's good faith beliefs and best judgment based upon current
information, these statements are qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including those risks, uncertainties, and factors
detailed from time to time in reports filed with the SEC, and in particular those set forth under the headings
"General Risks of the Company" and "Environmental Matters" in the Company's Annual Report on Form 10-K. The
following discussion should be read in conjunction with the accompanying Consolidated Financial Statements of
Taubman Centers, Inc. and the Notes thereto.
General Background and Performance Measurement
The Company owns a managing general partner's interest in The Taubman Realty Group Limited Partnership (the
Operating Partnership or TRG), through which the Company conducts all of its operations. The Operating
Partnership owns, develops, acquires, and operates regional shopping centers nationally. The Consolidated
Businesses consist of shopping centers that are controlled by ownership or contractual agreement, development
projects for future regional shopping centers, and The Taubman Company LLC (the Manager). Shopping centers that
are not controlled and that are owned through joint ventures with third parties (Unconsolidated Joint Ventures)
are accounted for under the equity method.
The operations of the shopping centers are best understood by measuring their performance as a whole, without
regard to the Company's ownership interest. Consequently, in addition to the discussion of the operations of the
Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are presented and discussed as a
whole.
During 2001, the Company opened four new shopping centers (Results of Operations - New Center Openings).
During 2002, the Company acquired an interest in Sunvalley and sold its interests in La Cumbre Plaza and Paseo
Nuevo (Results of Operations - Acquisitions and Dispositions). Additional 2002 and 2001 statistics that
exclude the new centers, Sunvalley, La Cumbre Plaza, and Paseo Nuevo are provided to present the performance of
comparable centers in the Company's continuing operations.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant sales highest in the fourth
quarter due to the Christmas season, and with lesser, though still significant, sales fluctuations associated
with the Easter holiday and back-to-school events. While minimum rents and recoveries are generally not subject
to seasonal factors, most leases are scheduled to expire in the first quarter, and the majority of new stores
open in the second half of the year in anticipation of the Christmas selling season. Additionally, most
percentage rents are recorded in the fourth quarter. Accordingly, revenues and occupancy levels are generally
highest in the fourth quarter.
16
The following table summarizes certain quarterly operating data for 2001 and the first and second quarters of
2002.
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
2001 2001 2001 2001 2001 2002 2002
------------- -------------- ------------- ------------- -------------- ------------- -------------
thousands)
(in
Mall tenant sales $570,223 $605,945 $617,805 $1,003,894 $2,797,867 $645,317 $669,448
Revenues 132,903 137,964 139,640 169,330 579,837 155,071 159,273
Occupancy:
Average 87.0% 85.5% 84.0% 83.7% 84.9% 83.3% 83.7%
Ending 85.1 85.6 83.0 84.0 84.0 83.3 84.2
Average-comparable (1) 88.2 87.7 87.3 88.3 87.9 87.2 87.4
Ending-comparable (1) 88.5 87.4 87.4 88.6 88.6 86.8 87.9
Leased space:
All centers 90.8 90.0 88.0 87.7 87.7 87.4 87.6
Comparable (1) 92.2 91.6 91.4 91.6 91.6 91.5 91.4
(1) Excludes centers that opened in 2001, La Cumbre Plaza, Paseo Nuevo, and Sunvalley.
Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries,
mall tenant occupancy costs (the sum of minimum rents, percentage rents and expense recoveries) relative to sales
are considerably higher in the first three quarters than they are in the fourth quarter. The following table
summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of sales for 2001 and the first
and second quarters of 2002:
1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Total Quarter Quarter
2001 2001 2001 2001 2001 2002 2002
------------- ------------ ------------ ------------ ------------ -------------- -----------
Minimum rents 11.2% 10.5% 11.2% 8.3% 10.0% 12.1% 11.9%
Percentage rents 0.3 0.1 0.1 0.4 0.2 0.3 0.0
Expense recoveries 5.0 5.1 4.8 3.6 4.5 5.4 5.7
---- ---- ---- ---- ---- ---- ----
Mall tenant occupancy costs 16.5% 15.7% 16.1% 12.3% 14.7% 17.8% 17.6%
==== ==== ==== ==== ==== ==== ====
Current Operating Trends
In 2001 and into 2002, the regional shopping center industry has been affected by the softening of the
national economic cycle. Economic pressures that affect consumer confidence, job growth, energy costs, and
income gains can affect retail sales growth and impact the Company's ability to lease vacancies and negotiate
rents at advantageous rates. A number of regional and national retailers have announced store closings or filed
for bankruptcy. During the first six months of 2002, 1.1% of the Company's tenants sought the protection of the
bankruptcy laws, compared to 3.4% in the comparable period of 2001. The impact of a soft economy on the Company's
current results of operations can be moderated by lease cancellation income, which tends to increase in
down-cycles of the economy.
In addition to overall economic pressures, the events of September 11 had a negative impact on tenant sales
subsequent to September. Tenant sales per square foot in the second quarter of 2002 decreased by 2.2% compared
to the same period in 2001, an improvement on the 3.8% and 3.9% year-over-year decreases experienced in fourth
quarter 2001 and first quarter 2002, respectively. Negative sales trends directly impact the amount of
percentage rents certain tenants and anchors pay. The effects of declines in sales experienced during 2001 and
2002 on the Company's operations are moderated by the relatively minor share of total rents (approximately three
percent) percentage rents represent. However, if lower levels of sales were to continue, the Company's ability
to lease vacancies and negotiate rents at advantageous rates could be adversely affected.
Occupancy trends showed some improvement in second quarter 2002, in which comparable center average occupancy
declined 0.3% from second quarter 2001, compared to the first quarter 2002 occupancy decline of 1.0%. Based on
the Company's expectations as to the timing of openings and closings of tenants, the Company anticipates
continuing modest improvement in comparable year over year average occupancy through the end of the year.
17
The tragic events of September 11 have also had an impact on the Company's insurance coverage. The Company had
coverage for terrorist acts in its policies that expired in April 2002. However, such coverage was excluded from
its standard property policies at renewal. The Company has obtained a separate policy although with lower limits
than the prior coverage for terrorist acts, see "Liquidity and Capital Resources-Covenants and Commitments".
The Company's premiums, including the cost of a separate terrorist policy, have increased by over 100% for
property coverage and over 25% for liability coverage. These increases will impact the Company's annual common
area maintenance rates paid by the Company's tenants by about 55 cents per square foot. Total occupancy costs
paid by tenants signing leases in the Company's traditional centers are on average about $70 per square foot.
Rental Rates
Annualized average base rent per square foot for all mall tenants at the Company's 14 comparable centers was
$41.96 for the three months ended June 30, 2002, compared to $41.12 for the three months ended June 30, 2001. As
leases have expired in the shopping centers, the Company has generally been able to rent the available space,
either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases.
In periods of increasing sales, rents on new leases will tend to rise as tenants' expectations of future growth
become more optimistic. In periods of slower growth or declining sales, such as the Company is currently
experiencing, rents on new leases will grow more slowly or may decline for the opposite reason. However, center
revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases
negotiated at current rental rates that are usually higher than the average rates for existing leases.
Average base rent per square foot on 259 thousand square feet of tenant space opened in the Company's 14
comparable centers was $43.59 for the three months ended June 30, 2002, compared to average base rent per square
foot of $39.30 on 183 thousand square feet of tenant space that closed during the same period, reflecting a
spread of $4.29 per square foot between the opening and closing average rent. This spread may not be indicative
of future periods, as this statistic can vary significantly from quarter to quarter depending on the total
amount, location, and average size of tenant space opening and closing in the period.
Generally, the annual rent spread between opening and closing stores has been in the Company's historic range
of $5.00 to $10.00 per square foot. This statistic is difficult to predict in part because the Company's leasing
policies and practices may result in early lease terminations with actual average closing rents per square foot
which may vary from the average rent per square foot of scheduled lease expirations.
Results of Operations
New Center Openings
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida.
Dolphin Mall is a 50% owned Unconsolidated Joint Venture and is accounted for under the equity method. As of
June 30, 2002, the Operating Partnership has a preferred investment in Dolphin Mall of $26 million. The joint
venture partner in Dolphin Mall has exercised the buy/sell provision in the joint venture's partnership
agreement. The Company responded to the offer indicating its intent to be a purchaser rather than a seller,
although the transaction has significant contingencies, including reaching agreement with the banking group.
Assuming this transaction occurs as anticipated during the third quarter of 2002, it would result in the Company
acquiring the additional interest in Dolphin for approximately the joint venture partner's share of the
partnership debt and other obligations. The Company expects that its total investment in Dolphin Mall, at that
point, will be approximately $268 million (Note 9 to Consolidated Financial Statements).
Dolphin Mall is subject to annual special tax assessments by a local community development district (CDD) for
certain infrastructure improvements on the property. In the first quarter of 2002, the CDD refinanced its
outstanding bonds to extend the term from 20 years to 30 years and to reduce the interest rate. In addition, the
first annual assessment begins in 2002 rather than in 2001, resulting in a reversal of $2.8 million previously
expensed. The annual assessments will be based on allocations of the cost of the infrastructure between the
properties that benefit. Presently, the total allocation of cost to Dolphin Mall is estimated to be approximately
$65.3 million with a first annual assessment of approximately $3.0 million. A portion of these assessments is
expected to be recovered from tenants.
The Shops at Willow Bend, a wholly owned 1.5 million square foot regional center, opened August 3, 2001 in
Plano, Texas.
18
International Plaza, a 1.25 million square foot regional center, opened September 14, 2001 in Tampa,
Florida. The Company has an approximately 26% ownership interest in the center and accounts for it under the
equity method. The Operating Partnership is entitled to a preferred return on approximately $18 million of
equity contributions as of June 2002, which were used to fund construction costs.
The Mall at Wellington Green, a 1.3 million square foot regional center, opened October 5, 2001 in Wellington,
Florida. The center is owned by a joint venture in which the Operating Partnership has a 90% controlling
interest.
The return for the three traditional centers is expected to be approximately 8% in 2002. The performance of
Dolphin Mall continues to be adversely affected by slower than expected lease up, rental concessions and lower
than expected expense recoveries. The Company expects the 2002 return on Dolphin Mall to be approximately 4.5%
on its investment including the additional interest that the Company anticipates acquiring in the
third quarter of 2002. However, considering the opportunities for growth, the Company anticipates that the returns
on Dolphin Mall will double over the next three to five years. Estimates regarding returns are forward-looking
statements and certain significant factors could cause the actual results to differ materially, including but not
limited to: 1) actual results of negotiations with tenants, 2) timing of tenant openings, and 3) early lease
terminations and bankruptcies.
Acquisitions and Dispositions
In May 2002, the Operating Partnership acquired for $88 million a 50% general partnership interest in
SunValley Associates, a California general partnership that owns the Sunvalley shopping center located in
Concord, California. The $88 million purchase price consisted of $28 million of cash and $60 million of existing
debt that encumbers the property. The Company's interest in the secured debt consisted of a $55 million primary
note bearing interest at LIBOR plus 0.92% and a $5 million note bearing interest at LIBOR plus 3.0%. The notes
mature in September 2003 and have two one-year extension options. The center is also subject to a ground lease
that expires in 2061. The Manager has managed the property since its development and is continuing to do so after
the acquisition. Although the Operating Partnership purchased its interest in Sunvalley from an unrelated third
party, the other 50% partner in the property is an entity owned and controlled by Mr. A. Alfred Taubman, the
Company's largest shareholder.
In May 2002, the Company purchased an additional interest in Arizona Mills for approximately $14 million in
cash plus the $19 million share of the debt that encumbers the property. The Company has a 50% interest in the
center as of June 30, 2002.
In March 2002, the Company sold its interest in La Cumbre Plaza for $28 million. In May 2002, the Company
sold its interest in Paseo Nuevo for $48 million. The centers were subject to ground leases and are unencumbered
by debt. The centers were purchased in 1996 for a total of $59 million. The Company's $2.0 million and $10.0
million gains on the sale of La Cumbre Plaza and Paseo Nuevo, respectively, differed from the $6.1 million and
$13.4 million gains recognized by the Operating Partnership due to the Company's $4.1 million and $3.4 million
additional bases in La Cumbre Plaza and Paseo Nuevo.
The Company used the net proceeds from the sales of Paseo Nuevo and La Cumbre Plaza to fund the acquisitions
of Sunvalley and Arizona Mills, and, in July 2002, to pay down borrowings under the Company's lines of credit.
The Company expects that these transactions will have a slightly accretive effect on Funds from Operations in
2002. This is a forward-looking statement and certain significant factors could cause the actual effect to
differ materially, including the actual operations of the centers.
Note Receivable
In April 2001, the Operating Partnership's $10 million investment in Swerdlow Real Estate Group, Inc.
(Swerdlow) was converted into a loan which bore interest at 12% and matured in December 2001. This loan is
currently delinquent. All interest due through the December maturity date was received. The Company has filed a
lawsuit seeking to recover the principal amount and all accrued and unpaid interest under the note. Swerdlow has
filed its answer which seeks a recision of the note and the return of all amounts paid under or in
connection with the note, which total approximately $2.5 million paid to the Company through December 31, 2001.
In the event the note was rescinded, the Company' original investment in Swerdlow would be restored. While the
Company believes that it will ultimately prevail in collecting all amounts due and owing under the note, the
lawsuit is in its preliminary stages and no predictions can be made as to the outcome of the lawsuit. An
affiliate of Swerdlow is a partner in the Dolphin Mall joint venture.
19
Investments in Technology Businesses
The Company owns an approximately 6.8% interest in MerchantWired, LLC, a service company originally created to
provide internet and network infrastructure to shopping centers and retailers. During the six months ended June
30, 2002 and 2001, the Company recognized its $1.8 million and $0.7 million share of MerchantWired's operating
losses, respectively. In May 2002, the Company invested an additional $4.1 million to satisfy the Company's
guarantees of MerchantWired's obligations as required under a proposed sale of MerchantWired. In June 2002,
since the anticipated sale failed to close, MerchantWired's board of directors voted to cease operations
effective September 2002. As a result, the Company recorded a charge in the second quarter of 2002 to write-off
its remaining $5.8 million balance of its MerchantWired investment.
The Company has an investment in Fashionmall.com, Inc., an e-commerce company originally organized to market,
promote, advertise, and sell fashion apparel and related accessories and products over the internet. In 2001,
Fashionmall.com significantly scaled back its operations in response to decreasing revenues and e-commerce
development opportunities, leading its management to conclude that it should seek alternative uses of its
significant cash resources. In light of such developments, the Company agreed to convert its preferred stock
investment into 824,084 common shares in return for a commitment from Fashionmall's CEO and majority shareholder
that on or before December 31, 2002, Fashionmall will either consummate a transaction resulting in a value to its
stockholders in excess of the value deliverable to the stockholders upon its liquidation, consummate a plan of
liquidation, or consummate any other transaction that is reasonably acceptable to the Company and the majority
shareholder. Based upon the $3.92 trading price of the stock on the day the preferred investment was exchanged
for common shares, the Company recognized a $2.3 million loss on its investment during the second quarter. After
this charge, the Company's investment was $3.2 million at June 30, 2002. The $3.92 trading price reflected the
$3.75 per share dividend declared by Fashionmall.com, which was paid in August 2002. The receipt of this $3.1
million dividend has reduced the Company's investment to $0.1 million. In future periods, the Company will mark
this remaining investment in Fashionmall.com to market value.
The Company has a $0.5 million investment in Constellation Real Technologies LLC (Constellation), a company
that forms and sponsors real estate related internet, e-commerce, and telecommunications enterprises. The
Company has also made an additional capital commitment of $0.8 million to Constellation, although any additional
contributions would be restricted to a maximum of $0.2 million in 2002 and $0.3 million in 2003.
Derivatives
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which
establish accounting and reporting standards for derivative instruments. The Company uses derivative instruments
primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company
routinely uses cap, swap, and treasury lock agreements to meet these objectives.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to OCI of $0.8 million.
These amounts represented the transition adjustments necessary to mark the Company's share of interest rate
agreements to fair value as of January 1, 2001.
In addition to the transition adjustment in first quarter 2001, the Company recognized in earnings its share
of net unrealized gains (losses) of $0.8 million and $(0.7) million during the three months ended June 30, 2002
and 2001, and $1.8 million and $(2.5) million during the six months ended June 30, 2002 and 2001, respectively,
due to changes in interest rates and the resulting changes in value of the Company's interest rate agreements.
Of these amounts, the changes in value of the Dolphin swap agreement were approximately $1.0 million and $(0.6)
million during the three months ended June 30, 2002 and 2001, and $2.0 million and $(2.1) million during the six
months ended June 30, 2002 and 2001. The remainders represent the changes in time value of other instruments.
20
As of June 30, 2002, the Company has $9.1 million of net derivative losses included in Accumulated OCI, as
follows:
Hedged Items OCI Amounts
------------ -----------
(in thousands)
2001 Regency Square financing $ 2,618
Dolphin Mall construction facility 149
$275 million line of credit 1,455
The Shops at Willow Bend construction facility 1,124
Westfarms refinancing 3,756
---------------
$ 9,102
===============
The realized loss on the Regency Square financing will be recognized as additional interest expense over the
ten-year term of the debt. The loss on the hedge of the Dolphin Mall construction facility will be recognized as
a reduction of earnings through its 2002 maturity date. Gains or losses on the swap designated to hedge the $275
million line of credit will be recognized as an adjustment to interest expense over the one-year effective period
of the swap agreement, beginning November 2002. Gains or losses on the swap designated to hedge The Shops at
Willow Bend construction facility will be recognized as adjustments to interest expense over the term of the swap
agreement, November 2002 through June 2004. A realized loss on the derivative used to hedge the refinancing
of the Westfarms loan (Subsequent Event) will be recognized as a reduction of earnings through the loan's July
2012 maturity date. The Company expects that approximately $3.3 million will be reclassified from Accumulated
OCI and recognized as a reduction of earnings during the next twelve months.
Comparable Center Operations
The performance of the Company's portfolio can be measured through comparisons of comparable centers'
operations. During the three months ended June 30, 2002, revenues (excluding land sales) less operating costs
(operating and recoverable expenses) of those centers owned and open for the entire period increased
approximately two percent in comparison to the same centers' results in the comparable period of 2001. This
growth was primarily due to increases in minimum rent and expense reductions. The Company expects that comparable
center operations will generally increase annually by an average of two to three percent. This is a
forward-looking statement and certain significant factors could cause the actual results to differ materially;
refer to the General Risks of the Company in the Company's annual report on Form 10-K for the year ended December
31, 2001.
Subsequent Event
In July 2002, the Company closed on a $210 million ten-year mortgage on Westfarms at an all-in rate of 6.4%.
Proceeds were used to pay off the previous $155 million debt on Westfarms. The Operating Partnership used its
$37 million share of distributed excess proceeds to pay down its revolving credit facilities.
Presentation of Operating Results
The following tables contain the combined operating results of the Company's Consolidated Businesses and the
Unconsolidated Joint Ventures. Income allocated to the minority partners in the Operating Partnership and
preferred interests is deducted to arrive at the results allocable to the Company's common shareowners. Because
the net equity of the Operating Partnership is less than zero, the income allocated to the minority partners is
equal to their share of distributions. The net equity of these minority partners is less than zero due to
accumulated distributions in excess of net income and not as a result of operating losses. Distributions to
partners are usually greater than net income because net income includes non-cash charges for depreciation and
amortization. Losses allocable to minority partners in certain consolidated joint ventures are added back to
arrive at the net results of the Company. The Company's average ownership percentage of the Operating Partnership
was approximately 61.8% and 61.7% during the three and six months ended June 30, 2002, respectively, and 61.4%
during the 2001 periods.
21
Comparison of the Three Months Ended June 30, 2002 to the Three Months Ended June 30, 2001
The following table sets forth operating results for the three months ended June 30, 2002 and June 30, 2001,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three months ended June 30, 2002 Three months ended June 30, 2001
-------------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
-------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 46.7 45.0 91.7 38.2 34.0 72.2
Percentage rents 0.6 (0.1) 0.5 0.9 0.2 1.1
Expense recoveries 29.6 22.3 51.9 25.0 16.5 41.5
Management, leasing and development 5.7 5.7 6.1 6.1
Other 7.3 2.0 9.4 9.6 3.6 13.2
---- ---- ----- ---- ---- -----
Total revenues 90.1 69.2 159.3 79.8 54.4 134.1
OPERATING COSTS:
Recoverable expenses 25.9 20.9 46.8 21.6 16.1 37.7
Other operating 6.4 5.8 12.1 9.1 2.8 11.9
Charge related to technology investments 8.1 8.1
Management, leasing and development 5.2 5.2 5.1 5.1
General and administrative 5.4 5.4 4.9 4.9
Interest expense 20.8 19.6 40.3 15.0 17.6 32.6
Depreciation and amortization (2) 20.2 13.5 33.7 14.5 8.4 22.9
---- ---- ----- ---- ---- -----
Total operating costs 92.0 59.7 151.7 70.1 44.8 114.9
---- ---- ----- ---- ---- -----
(1.9) 9.5 7.6 9.7 9.5 19.2
==== ==== ==== ====
Equity in income of
Unconsolidated Joint Ventures (2) 4.7 5.2
--- ---
Income before discontinued operations
and minority and preferred interests 2.9 14.9
Discontinued operations:
Gain on disposition of interest in 10.0
center
EBITDA (3) 1.0 1.6
Depreciation and amortization (0.8)
Minority and preferred interests:
TRG preferred distributions (2.3) (2.3)
Minority share of consolidated
joint ventures 0.4 0.2
Minority share of income of TRG (5.0) (4.4)
Distributions in excess of minority
share of income (3.1) (3.5)
---- ----
Net income 3.8 5.8
Series A preferred dividends (4.2) (4.2)
---- ----
Net income (loss) allocable to common
shareowners (0.3) 1.6
==== ===
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 48.2 42.5 90.7 40.7 35.5 76.3
EBITDA - outside partners' share (2.0) (20.3) (22.3) (2.1) (15.9) (18.0)
---- ---- ----- ---- ---- -----
EBITDA contribution 46.2 22.2 68.4 38.6 19.7 58.3
Beneficial Interest Expense (19.5) (9.8) (29.3) (13.7) (9.2) (23.0)
Non-real estate depreciation (0.7) (0.7) (0.7) (0.7)
Preferred dividends and distributions (6.4) (6.4) (6.4) (6.4)
---- ---- ----- ---- ---- -----
Funds from Operations contribution 19.6 12.4 32.0 17.8 10.4 28.2
==== ==== ==== ==== ==== =====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures
and are net of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for
measurement of their performance as a whole, without regard to the Company's ownership interest. In its consolidated
financial statements, the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) Amortization of the Company's additional basis in the Operating Partnership was $1.9 million in both 2002 and 2001. Of
this amount, $0.8 million was included in equity in income of Unconsolidated Joint Ventures, while $1.1 million was included
in depreciation and amortization.
(3) EBITDA represents earnings before interest and depreciation and amortization, excluding gains on dispositions of
depreciated operating properties. In 2002, an $8.1 million charge related to technology investments was also excluded.
Funds from Operations is defined and discussed in Liquidity and Capital Resources.
(4) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2001 amounts to conform
to 2002 classifications.
22
Consolidated Businesses
Total revenues for the three months ended June 30, 2002 were $90.1 million, a $10.3 million or 12.9% increase
over the comparable period in 2001. Minimum rents increased $8.5 million, of which $7.7 million was due to the
openings of The Shops at Willow Bend and The Mall at Wellington Green. Minimum rents also increased due to
tenant rollovers, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased primarily
due to Willow Bend and Wellington Green. Other revenue decreased by $2.3 million from 2001 due to decreases in
lease cancellation revenue and interest income, partially offset by increases in gains on sales of peripheral
land.
Total operating costs were $92.0 million, a $21.9 million or 31.2% increase over the comparable period in
2001. Recoverable expenses increased primarily due to Willow Bend and Wellington Green. Other operating expense
decreased primarily due to a decrease in the charge to operations for costs of pre-development activities, bad
debt, and MerchantWired losses, partially offset by increases due to the new centers. During 2002, the Company
recognized an $8.1 million charge relating to its investments in MerchantWired and Fashionmall.com. Interest
expense increased primarily due to a decrease in capitalized interest upon opening of Willow Bend and Wellington
Green, partially offset by decreases due to changes in rates on floating rate debt. Depreciation expense
increased primarily due to the new centers.
Unconsolidated Joint Ventures
Total revenues for the three months ended June 30, 2002 were $69.2 million, a $14.8 million or 27.2% increase
from the comparable period of 2001. Minimum rents increased $11.0 million, of which $10.2 million was due to the
openings of Dolphin Mall and International Plaza and the acquisition of the interest in Sunvalley. Expense
recoveries increased primarily due to Dolphin Mall, International Plaza, and Sunvalley. Other revenue decreased
primarily due to a decrease in lease cancellation revenue.
Total operating costs increased by $14.9 million to $59.7 million for the three months ended June 30, 2002.
Recoverable expenses increased primarily due to Dolphin Mall, International Plaza, and Sunvalley. Other operating
expense increased primarily due to the new centers, including greater levels of bad debt expense at Dolphin
Mall. Interest expense increased due to decreases in capitalized interest upon opening of Dolphin Mall and
International Plaza, partially offset by a decrease in the liability for the Dolphin Mall swap agreement and
changes in rates on floating rate debt. Depreciation expense increased primarily due to the opening of the new
centers, as well as the Sunvalley and Arizona Mills acquisitions.
As a result of the foregoing, income of the Unconsolidated Joint Ventures was consistent between periods. The
Company's equity in income of the Unconsolidated Joint Ventures was $4.7 million, a $0.5 million decrease from
the comparable period in 2001.
Net Income
As a result of the foregoing, the Company's income before discontinued operations and minority and preferred
interests decreased $12.0 million to $2.9 million for the three months ended June 30, 2002. The discontinued
operations of Paseo Nuevo and La Cumbre Plaza include a $10.0 million gain on the disposition of Paseo Nuevo in
2002. After allocation of income to minority and preferred interests, the net income (loss) allocable to common
shareowners for 2002 was $(0.3) million compared to $1.6 million in 2001.
23
Comparison of the Six Months Ended June 30, 2002 to the Six Months Ended June 30, 2001
The following table sets forth operating results for the six months ended June 30, 2002 and June 30, 2001,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Six months ended June 30, 2002 Six months ended June 30, 2001
-------------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
-------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 93.5 86.5 180.0 76.7 66.8 143.5
Percentage rents 1.7 0.5 2.2 1.9 0.8 2.7
Expense recoveries 57.4 42.9 100.3 48.2 32.8 81.0
Management, leasing and development 10.9 10.9 12.5 12.5
Other 13.3 4.0 17.3 15.5 8.0 23.5
----- ----- ----- ----- ----- -----
Total revenues 176.7 133.9 310.6 154.8 108.4 263.2
OPERATING COSTS:
Recoverable expenses 49.3 36.4 85.7 41.1 29.9 70.9
Other operating 16.3 11.0 27.3 16.1 6.2 22.3
Charge related to technology investments 8.1 8.1
Management, leasing and development 10.0 10.0 9.4 9.4
General and administrative 10.4 10.4 9.6 9.6
Interest expense 41.4 37.8 79.2 30.2 36.2 66.4
Depreciation and amortization (2) 40.9 27.6 68.5 31.0 17.3 48.3
----- ----- ----- ----- ----- -----
Total operating costs 176.4 112.8 289.2 137.4 89.5 226.9
----- ----- ----- ----- ----- -----
0.2 21.1 21.4 17.3 19.0 36.3
==== ==== ==== ====
Equity in income of
Unconsolidated Joint Ventures (2) 10.9 10.1
---- ----
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority and
preferred interests 11.1 27.4
Discontinued operations:
Gain on dispositions of interests in
centers 12.0
EBITDA (3) 3.2 3.5
Depreciation and amortization (0.5) (1.4)
Cumulative effect of change in
accounting principle (8.4)
Minority and preferred interests:
TRG preferred distributions (4.5) (4.5)
Minority share of consolidated
joint ventures 0.6 0.6
Minority share of income of TRG (9.5) (4.9)
Distributions in excess of minority
share of income (6.8) (11.0)
---- ----
Net income 5.7 1.3
Series A preferred dividends (8.3) (8.3)
---- ----
Net loss allocable to common
shareowners (2.6) (7.0)
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 93.9 86.5 180.3 82.0 72.3 154.4
EBITDA - outside partners' share (4.1) (39.6) (43.7) (4.0) (32.7) (36.7)
----- ----- ----- ----- ----- -----
EBITDA contribution 89.8 46.9 136.6 78.0 39.6 117.7
Beneficial Interest Expense (38.9) (18.8) (57.7) (27.6) (19.1) (46.7)
Non-real estate depreciation (1.4) (1.4) (1.4) (1.4)
Preferred dividends and distributions (12.8) (12.8) (12.8) (12.8)
----- ----- ----- ----- ----- -----
Funds from Operations contribution 36.6 28.1 64.7 36.2 20.6 56.9
===== ===== ===== ===== ===== =====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures and are
net of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement
of their performance as a whole, without regard to the Company's ownership interest. In its consolidated financial
statements, the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) Amortization of the Company's additional basis in the Operating Partnership was $3.8 million in both 2002 and 2001.
Of this amount, $1.5 million was included in equity in income of Unconsolidated Joint Ventures, while $2.3 million was
included in depreciation and amortization.
(3) EBITDA represents earnings before interest and depreciation and amortization, excluding gains on dispositions of
depreciated operating properties. In 2002, an $8.1 million charge related to technology investments was also excluded.
Funds from Operations is defined and discussed in Liquidity and Capital Resources.
(4) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2001 amounts to conform
to 2002 classifications.
24
Consolidated Businesses
Total revenues for the six months ended June 30, 2002 were $176.7 million, a $21.9 million or 14.1% increase
over the comparable period in 2001. Minimum rents increased $16.8 million, of which $15.6 million was due to the
openings of The Shops at Willow Bend and The Mall at Wellington Green. Minimum rents also increased due to
tenant rollovers, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased primarily
due to Willow Bend and Wellington Green. Management, leasing, and development revenue decreased primarily due to
the timing of leasing transactions and the completion of two short-term contracts. Other revenue decreased due to
decreases in lease cancellation revenue and interest income, partially offset by increases in gains on sales of
peripheral land.
Total operating costs were $176.4 million, a $39.0 million or 28.4% increase over the comparable period in
2001. Recoverable expenses increased primarily due to Willow Bend and Wellington Green. Other operating expense
increased primarily due to the new centers, partially offset by a decrease in the charge to operations for costs
of pre-development activities. During 2002, the Company recognized an $8.1 million charge relating to its
investments in MerchantWired and Fashionmall.com. Interest expense increased primarily due to a decrease in
capitalized interest upon opening of Willow Bend and Wellington Green, partially offset by decreases due to
changes in rates on floating rate debt. Depreciation expense increased primarily due to the new centers.
Unconsolidated Joint Ventures
Total revenues for the six months ended June 30, 2002 were $133.9 million, a $25.5 million or 23.5% increase
from the comparable period of 2001. Minimum rents increased $19.7 million, of which $19.6 million was due to the
openings of Dolphin Mall and International Plaza and the acquisition of the interest in Sunvalley. Expense
recoveries increased primarily due to Dolphin Mall, International Plaza, and Sunvalley. Other revenue decreased
primarily due to a decrease in lease cancellation revenue.
Total operating costs increased by $23.3 million to $112.8 million for the six months ended June 30, 2002.
Recoverable expenses increased primarily due to the new centers. Recoverable expenses in 2002 included the
reversal of a $2.8 million special assessment tax accrued during 2001. Other operating expense increased
primarily due to the new centers, including greater levels of bad debt expense at Dolphin Mall, partially offset
by decreases in bad debt expense at other centers. Interest expense increased due to decreases in capitalized
interest upon opening of Dolphin Mall and International Plaza, partially offset by a decrease in the liability
for the Dolphin Mall swap agreement and changes in rates on floating rate debt. Depreciation expense increased
primarily due to the new centers.
As a result of the foregoing, income of the Unconsolidated Joint Ventures increased by $2.1 million to $21.1
million. The Company's equity in income of the Unconsolidated Joint Ventures was $10.9 million, a $0.8 million
increase from the comparable period in 2001.
Net Income
As a result of the foregoing, the Company's income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests decreased $16.3 million to $11.1 million for the
six months ended June 30, 2002. The discontinued operations of Paseo Nuevo and La Cumbre Plaza include a $12.0
million gain on the dispositions of La Cumbre Plaza and Paseo Nuevo in 2002. In 2001, a cumulative effect of a
change in accounting principle of $8.4 million was recognized in connection with the Company's adoption of SFAS
133. After allocation of income to minority and preferred interests, the net loss allocable to common
shareowners for 2002 was $(2.6) million compared to $(7.0) million in 2001.
25
Liquidity and Capital Resources
In the following discussion, references to beneficial interest represent the Operating Partnership's share of
the results of its consolidated and unconsolidated businesses. The Company does not have and has not had any
parent company indebtedness; all debt discussed represents obligations of the Operating Partnership or its
subsidiaries and joint ventures.
The Company believes that its net cash provided by operating activities, distributions from its joint
ventures, the unutilized portion of its credit facilities, and its ability to access the capital markets assure
adequate liquidity to conduct its operations in accordance with its dividend and financing policies.
As of June 30, 2002, the Company had a consolidated cash balance of $72.7 million. Additionally, the Company
has a secured $275 million line of credit. This line had $230.0 million of borrowings as of June 30, 2002 and
expires in November 2004 with a one-year extension option. The Company also has available a second secured bank
line of credit of up to $40 million. The line had $9.2 million of borrowings as of June 30, 2002 and expires in
August 2002. The Company is currently negotiating to extend the expiration until November 2004.
In March 2002, the Company exercised its option to extend the maturity of the Great Lakes Crossing loan until
April 2003. In July 2002, the Company completed the refinancing of the Westfarms mortgage (see Results of
Operations - Subsequent Event). In August 2002, Stamford Town Center extended its $76 million loan to August
2004. Also in August, the Company closed on a $105 million construction loan for Stony Point Fashion Park. This
loan bears interest at LIBOR plus 1.85% and has an initial term of three years with two one-year extension
options. The Operating Partnership guarantees 100% of principal and interest on this loan; the amounts guaranteed
will be reduced as certain center performance and valuation criteria are met.
Summary of Investing Activities
Net cash used in investing activities was $9.1 million in 2002 compared to $132.5 million in 2001. Cash used
in investing activities was impacted by the timing of capital expenditures, with additions to properties in 2002
and 2001 for the construction of Stony Point Fashion Park, The Mall at Wellington Green, and The Shops at Willow
Bend as well as other development activities and other capital items. Investments in MerchantWired of $4.1
million and $2.9 million were made in 2002 and 2001, respectively. The Company received net proceeds of $76.4
million from the dispositions of La Cumbre Plaza and Paseo Nuevo and invested $45.2 million in acquiring the
interests in Sunvalley and Arizona Mills in 2002. Net proceeds from sales of peripheral land were $6.1 million,
an increase of $2.6 million from 2001. Contributions to Unconsolidated Joint Ventures of $28.7 million were made
in 2001, primarily representing funding for construction activities at Dolphin Mall. Distributions from
Unconsolidated Joint Ventures in 2002 increased from 2001 primarily due to International Plaza, Dolphin Mall, and
Sunvalley.
Summary of Financing Activities
Net cash used in financing activities was $1.9 million in 2002, compared to $88.5 million of cash provided by
financing activities in 2001. Debt proceeds, net of repayments and issuance costs, provided $42.3 million in
2002 and $139.0 million in 2001. Stock repurchases of $11.2 million were made in connection with the Company's
stock repurchase program in 2001. Issuance of stock pursuant to the Continuing Offer related to the exercise of
employee options contributed $4.5 million in 2002 and $8.3 million in 2001. Total dividends and distributions
paid were $48.7 million and $47.6 million in 2002 and 2001, respectively.
Beneficial Interest in Debt
At June 30, 2002, the Operating Partnership's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $2,060.4 million with an average interest rate of 5.70%,
excluding amortization of debt issuance costs and interest rate hedging costs. Debt issuance costs and interest
rate hedging costs are reported as interest expense in the results of operations. Amortization of debt issuance
costs added 0.37% to TRG's effective interest rate in the second quarter of 2002. Included in beneficial interest
in debt is debt used to fund development and expansion costs. Beneficial interest in assets on which interest is
being capitalized totaled $147.4 million as of June 30, 2002. Beneficial interest in capitalized interest was
$1.9 million and $3.5 million for the three and six months ended June 30, 2002, respectively. The following
table presents information about the Company's beneficial interest in debt as of June 30, 2002.
26
Beneficial Interest in Debt
------------------------------------
Amount Interest Rate
(in millions) at 6/30/02
------------- ----------
Total beneficial interest in fixed rate debt $1,041.2 7.51% (1)
Total beneficial interest in floating rate debt 1,019.2 3.85 (1)
-------
Total beneficial interest in debt $2,060.4 5.70 (1)
========
(1) Denotes weighted average interest rate before amortization of financing costs.
As provided for by certain debt agreements, the Company has currently locked in LIBOR rates on certain
floating rate debt. In addition, the Company has entered into swap agreements to hedge certain floating rate
debt in future periods.
Beneficial Interest in Debt
------------------------------------
Amount LIBOR
(in millions) Lock Rate
------------- ---------
Floating rate debt with LIBOR rate locks
as of June 30, 2002:
Through September 2002 $ 178.3 2.594%
Through October 2002 310.8 2.321
Through November 2002 5.0 2.659
Through March 2003 125.7 3.090
---------
Total $ 619.8 2.558
=========
Notional
Amount
(in millions) Swap Rate
------------- ---------
Floating rate debt hedged via forward
swap agreements:
November 2002 through October 2003 $ 100.0 4.298%
November 2002 through June 2004 100.0 4.125
October 2002 through September 2003 100.0 2.500
October 2003 through September 2004 100.0 4.350
October 2004 through April 2005 100.0 5.250
In addition, $537.6 million of the Company's beneficial interest in floating rate debt is covered under
interest rate cap agreements with LIBOR cap rates ranging from 7.0% to 8.75% with terms ending August 2002
through September 2003.
Sensitivity Analysis
The Company has exposure to interest rate risk on its debt obligations and interest rate instruments. Based
on the Operating Partnership's beneficial interest in floating rate debt in effect at June 30, 2002, excluding
debt fixed under long-term LIBOR rate contracts, a one percent increase or decrease in interest rates on this
floating rate debt would decrease or increase cash flows by approximately $4.9 million and, due to the effect of
capitalized interest, annual earnings by approximately $4.1 million. Based on the Company's consolidated debt
and interest rates in effect at June 30, 2002, a one percent increase in interest rates would decrease the fair
value of debt by approximately $39.9 million, while a one percent decrease in interest rates would increase the
fair value of debt by approximately $42.6 million.
27
Covenants and Commitments
Certain loan agreements contain various restrictive covenants, including minimum net worth requirements,
minimum debt service and fixed charges coverage ratios, a maximum payout ratio on distributions, and a minimum
debt yield ratio, the latter being the most restrictive. The Operating Partnership is in compliance with all of
its covenants.
The Company's secured credit facilities contain customary covenants requiring the maintenance of comprehensive
all-risk insurance on property securing each facility. As a result of exclusions in its insurance policies upon
renewal, the Company purchased a supplemental policy, which has an annual limit of $100 million, for terrorist
acts for its portfolio of centers. No assurances can be given that the coverage under this policy will be
adequate or that mortgagees will not require coverage for individual centers beyond that which is commercially
available at reasonable rates. The Company's inability to obtain such coverage or to do so only at greatly
increased costs may also negatively impact the availability and cost of future financing. In July 2002, the
Company was required to purchase a separate terrorism policy for Westfarms in order to close on its recent
financing.
Certain debt agreements contain performance and valuation criteria that must be met for the loans to be
extended at the full principal amounts; these agreements provide for partial prepayments of debt to facilitate
compliance with extension provisions. The Company currently anticipates that a partial prepayment of principal
will be necessary to extend the October 2002 maturity date on the Dolphin Mall construction loan.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of June 30, 2002. All of the loan agreements provide for a reduction of the amounts guaranteed as
certain center performance and valuation criteria are met.
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 6/30/02 as of 6/30/02 as of 6/30/02 by TRG by TRG
------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 183.0 91.5 91.5 50% 100%
Great Lakes Crossing 149.7 127.2 149.7 100% 100%
International Plaza 187.1 49.6 93.6 50% (1) 50% (1)
The Mall at Millenia 92.1 46.1 23.0 25% 25%
The Mall at Wellington Green 137.7 123.9 137.7 100% 100%
The Shops at Willow Bend 197.8 197.8 197.8 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of 25% of the amounts guaranteed.
Funds from Operations
A principal factor that the Company considers in determining dividends to shareowners is Funds from Operations
(FFO), which is defined as income before extraordinary items, cumulative effect of change in accounting
principle, real estate depreciation and amortization, and the allocation to the minority interest in the
Operating Partnership, less preferred dividends and distributions. Gains on dispositions of depreciated
operating properties are excluded from FFO. In 2002, an $8.1 million charge related to technology investments
was also excluded.
Funds from Operations does not represent cash flows from operations, as defined by generally accepted
accounting principles, and should not be considered to be an alternative to net income as an indicator of
operating performance or to cash flows from operations as a measure of liquidity. However, the National
Association of Real Estate Investment Trusts suggests that Funds from Operations is a useful supplemental measure
of operating performance for REITs. Funds from Operations as presented by the Company may not be comparable to
similarly titled measures of other companies.
28
Reconciliation of Income to Funds from Operations
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------- -----------------------------
(in millions of dollars)
Income before discontinued operations
and minority and preferred interests (1) (2) 2.9 14.9
Funds from operations of discontinued operations 1.0 1.6
Depreciation and amortization (3) 20.2 14.5
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 7.7 5.2
Charge related to technology investments 8.1
Non-real estate depreciation (0.7) (0.7)
Minority partners in consolidated joint ventures
share of funds from operations (0.7) (0.9)
Preferred dividends and distributions (6.4) (6.4)
---- ----
Funds from Operations - TRG 32.0 28.2
==== ====
Funds from Operations allocable to TCO 19.8 17.3
==== ====
(1) Includes gains on peripheral land sales of $2.3 million and $1.5 million for the three months ended June
30, 2002 and June 30, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.4
million and $0.1 million for the three months ended June 30, 2002 and June 30, 2001, respectively.
(3) Includes $0.8 million and $0.7 million of mall tenant allowance amortization for the three months ended
June 30, 2002 and June 30, 2001, respectively.
(4) Includes $0.6 million of mall tenant allowance amortization for both the three months ended June 30,
2002 and June 30, 2001.
(5) Amounts in this table may not add due to rounding.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------------- -----------------------------
(in millions of dollars)
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority and
preferred interests (1) (2) 11.1 27.4
Funds from operations of discontinued operations 3.2 3.5
Depreciation and amortization (3) 40.9 31.0
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 17.2 10.6
Charge related to technology investments 8.1
Non-real estate depreciation (1.4) (1.4)
Minority partners in consolidated joint ventures
share of funds from operations (1.6) (1.4)
Preferred dividends and distributions (12.8) (12.8)
----- -----
Funds from Operations - TRG 64.7 56.9
==== ====
Funds from Operations allocable to TCO 39.9 34.9
==== ====
(1) Includes gains on peripheral land sales of $4.2 million and $2.8 million for the six months ended June
30, 2002 and June 30, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $1.0
million and $0.2 million for the six months ended June 30, 2002 and June 30, 2001, respectively.
(3) Includes $1.5 million and $1.3 million of mall tenant allowance amortization for the six months ended
June 30, 2002 and June 30, 2001, respectively.
(4) Includes $1.1 million and $1.0 million of mall tenant allowance amortization for the six months ended
June 30, 2002 and June 30, 2001, respectively.
(5) Amounts in this table may not add due to rounding.
29
Reconciliation of Funds from Operations to Income
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------ -----------------------
(in millions of dollars)
Funds from Operations-TRG 32.0 28.2
Charge related to technology investments (8.1)
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (20.2) (14.5)
Minority partners in consolidated joint ventures
share of depreciation and amortization 1.2 1.1
Depreciation of TCO's additional basis 1.9 1.9
Non-real estate depreciation 0.7 0.7
Share of Unconsolidated Joint Ventures' depreciation and
amortization (7.7) (5.2)
Discontinued operations' funds from operations (1.0) (1.6)
---- ----
Income (loss) from continuing operations allocable to
TRG unitholders (1.3) 10.6
==== ====
TCO's ownership share of income (loss) of TRG (1) (0.8) 6.5
TCO basis differences-
Depreciation of TCO's additional basis (1.9) (1.9)
---- ----
Income (loss) before distributions in excess of earnings
allocable to minority interest - TCO (2.6) 4.5
Distributions in excess of earnings allocable to minority
interest (3.1) (3.5)
---- ----
Income (loss) from continuing operations allocable to TCO
common shareowners (5.8) 1.1
==== ====
(1) TCO's average ownership of TRG was approximately 61.8% and 61.4% during the three months ended June 30,
2002 and 2001.
(2) Amounts in this table may not add due to rounding.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------ -----------------------
(in millions of dollars)
Funds from Operations-TRG 64.7 56.9
Charge related to technology investments (8.1)
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (40.9) (31.0)
Minority partners in consolidated joint ventures
share of depreciation and amortization 2.3 2.0
Depreciation of TCO's additional basis 3.8 3.8
Non-real estate depreciation 1.4 1.4
Share of Unconsolidated Joint Ventures' depreciation and
amortization (17.2) (10.6)
Discontinued operations' funds from operations (3.2) (3.5)
---- ----
Income from continuing operations allocable to TRG unitholders 2.7 19.0
==== ====
TCO's ownership share of income of TRG (1) 1.7 11.4
TCO basis differences-
Depreciation of TCO's additional basis (3.8) (3.8)
---- ----
Income (loss) before distributions in excess of earnings
allocable to minority interest - TCO (2.1) 7.6
Distributions in excess of earnings allocable to minority
interest (6.8) (11.0)
---- ----
Loss from continuing operations allocable to TCO common
shareowners (8.8) (3.4)
==== ====
(1) TCO's average ownership of TRG was approximately 61.7% and 61.4% during the six months ended June 30,
2002 and 2001.
(2) Amounts in this table may not add due to rounding.
30
Dividends
The Company pays regular quarterly dividends to its common and Series A preferred shareowners. Dividends to
its common shareowners are at the discretion of the Board of Directors and depend on the cash available to the
Company, its financial condition, capital and other requirements, and such other factors as the Board of
Directors deems relevant. To qualify as a REIT, the Company must distribute at least 90% of its REIT taxable
income to its shareowners, as well as meet certain other requirements. Preferred dividends accrue regardless of
whether earnings, cash availability, or contractual obligations were to prohibit the current payment of
dividends. The preferred stock is callable in October 2002. The Company has no present intention to redeem the
preferred equity.
On May 30, 2002, the Company declared a quarterly dividend of $0.255 per common share payable July 22, 2002 to
shareowners of record on July 1, 2002. The Board of Directors also declared a quarterly dividend of $0.51875 per
share on the Company's 8.3% Series A Preferred Stock for the quarterly dividend period ended June 30, 2002, which
was paid on July 1, 2002 to shareowners of record on June 20, 2002.
The Company previously reported its estimate of the tax status of total 2002 common dividends declared and to
be declared, assuming continuation of a $0.255 per common share quarterly dividend, to be approximately 28%
return of capital and 72% of ordinary income. The tax status of total 2002 dividends to be paid on Series A
Preferred Stock was estimated to be 100% ordinary income. The effects on the tax status of dividends of the 2002
acquisitions and dispositions and other transactions are currently being determined. Certain significant factors
could cause actual results to differ materially, including: 1) the amount of dividends declared, 2) changes in
the Company's share of anticipated taxable income of the Operating Partnership due to the actual results of the
Operating Partnership, 3) changes in the number of the Company's outstanding shares, 4) property acquisitions or
dispositions, 5) financing transactions, including refinancing of existing debt, 6) changes in interest rates, 7)
amount and nature of development activities, and 8) changes in the tax laws or their application.
The annual determination of the Company's common dividends is based on anticipated Funds from Operations
available after preferred dividends, as well as financing considerations and other appropriate factors. Further,
the Company has decided that the growth in common dividends will be less than the growth in Funds from Operations
for the immediate future. Based on current tax laws and earnings projections, the Company expects that the
growth in common dividends will be less than the growth in Funds from Operations for at least three more years.
Any inability of the Operating Partnership or its Joint Ventures to obtain financing as required to fund
maturing debts, capital expenditures and changes in working capital, including development activities and
expansions, may require the utilization of cash to satisfy such obligations, thereby possibly reducing
distributions to partners of the Operating Partnership and funds available to the Company for the payment of
dividends.
31
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally recovered from tenants. The
following table summarizes capital spending through June 30, 2002 that is not recovered from tenants. The table
excludes acquisitions of interests in operating centers (see Results of Operations - Acquisitions and
Dispositions).
For the Six Months Ended June 30, 2002
-------------------------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
-------------------------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion:
Existing centers 3.5 (1.4) 2.8
New centers 26.7 (3) 34.7 (4) 44.4
Pre-construction development activities,
net of charge to operations 4.3 4.3
Mall tenant allowances (5) 2.4 2.3 3.4
Corporate office improvements
and equipment 1.4 1.4
Other 0.7 0.1 0.7
---- ---- ----
Total 39.0 35.7 57.0
==== ==== ====
(1) Costs are net of intercompany profits.
(2) Primarily includes the Operating Partnership's share of construction costs for Stony Point Fashion Park
and The Mall at Millenia (a 50% owned unconsolidated joint venture).
(3) Primarily includes costs related to Stony Point Fashion Park.
(4) Primarily includes costs related to The Mall at Millenia.
(5) Excludes tenant allowances for the new centers.
For the six months ended June 30, 2002, in addition to the costs above, the Company incurred its $4.0 million
share of capitalized leasing costs and its $1.4 million share of repair and asset replacement costs that will be
reimbursed by tenants. Also during this period, the Company was reimbursed by tenants for $2.9 million of
capitalizable expenditures of prior periods. The expenditures reimbursable by the tenants and the related
reimbursements are classified as recoverable expenses and expense recoveries, respectively, and both are included
in the Company's Funds from Operations.
The following table summarizes planned capital spending for the entire year of 2002 (including amounts
described in the table above) that is not recovered from tenants. The table excludes acquisitions of interests
in operating centers (see Results of Operations - Acquisitions and Dispositions).
2002
-------------------------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
-------------------------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion 49.6 (3) 99.3 (4) 99.3
Mall tenant allowances (5) 9.6 16.3 17.4
Pre-construction development and other 8.0 0.3 8.1
---- ----- -----
Total 67.2 115.9 124.8
==== ===== =====
(1) Costs are net of intercompany profits.
(2) Primarily includes the Operating Partnership's share of construction costs for The Mall at Millenia (a
50% owned unconsolidated joint venture) and Stony Point Fashion Park.
(3) Primarily includes costs related to Stony Point Fashion Park.
(4) Primarily includes costs related to The Mall at Millenia.
(5) Excludes tenant allowances for the new centers.
32
The Operating Partnership has entered into a 50%-owned joint venture to develop The Mall at Millenia currently
under construction in Orlando, Florida. This project is expected to cost approximately $200 million and open in
October 2002. The Mall at Millenia will be anchored by Bloomingdale's, Macy's, and Neiman Marcus. Currently
there are fully executed leases on over 80% of the tenant space and leases out for signature on over 15% of the
tenant space. The Company expects the center to be between 75% to 80% occupied at opening, with 90%
occupancy anticipated by the beginning of December 2002. The Company expects to achieve an 11% return of the
project at stabilization, which is anticipated to be in 2003.
Stony Point Fashion Park, a new 690,000 square foot open-air center under construction in Richmond, Virginia,
will be anchored by Dillard's, Saks, and Galyan's. The center, scheduled to open in September 2003, is expected
to cost approximately $115 million. Currently, 30% of the available tenant space has fully executed leases. An
additional 30% of tenant space is committed with leases out for signature and an additional 28% of tenant space
is under negotiation.
The Company's approximately $26 million balance of development pre-construction costs as of June 30, 2002
consists primarily of costs relating to its Oyster Bay project in Syosset, New York. Both Neiman Marcus and Lord
& Taylor have made announcements committing to the project. Although the Company still needs to obtain the
necessary zoning approvals to move forward with the project, the Company is encouraged by the New York State
Supreme Court's recent decision to annul the unfavorable zoning actions of the Oyster Bay Town Board. While the
Company expects continued success with ongoing litigation, the process may not be resolved in the near future. In
addition, if the litigation is unsuccessful, the Company would expect to recover substantially less than its cost
in this project under possible alternative uses for the site.
The Operating Partnership and The Mills Corporation have formed an alliance to develop value super-regional
projects in major metropolitan markets. The amended agreement, which expires in May 2008, calls for the two
companies to jointly develop and own at least four of these centers, each representing approximately $200 million
of capital investment. A number of locations across the nation are targeted for future initiatives.
The Operating Partnership anticipates that its share of costs for development projects scheduled to be
completed in 2003 will be as much as $80 million in 2003. Estimates of future capital spending include only
projects approved by the Company's Board of Directors and, consequently, estimates will change as new projects
are approved. Estimates regarding capital expenditures, occupancy, and returns on new developments presented
above are forward-looking statements and certain significant factors could cause the actual results to differ
materially, including but not limited to: 1) actual results of negotiations with anchors, tenants and
contractors, 2) changes in the scope and number of projects, 3) cost overruns, 4) timing of expenditures, 5)
financing considerations, 6) actual time to complete projects, 7) changes in economic climate, 8) competition
from others attracting tenants and customers, 9) increases in operating costs, 10) timing of tenant openings, and
11) early lease terminations and bankruptcies.
Cash Tender Agreement
A. Alfred Taubman has the annual right to tender to the Company units of partnership interest in the Operating
Partnership (provided that the aggregate value is at least $50 million) and cause the Company to purchase the
tendered interests at a purchase price based on a market valuation of the Company on the trading date immediately
preceding the date of the tender (the Cash Tender Agreement). At A. Alfred Taubman's election, his family and
certain others may participate in tenders. The Company will have the option to pay for these interests from
available cash, borrowed funds, or from the proceeds of an offering of the Company's common stock. Generally,
the Company expects to finance these purchases through the sale of new shares of its stock. The tendering
partner will bear all market risk if the market price at closing is less than the purchase price and will bear
the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of
the Company.
Based on a market value at June 30, 2002 of $15.25 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $376 million. The
purchase of these interests at June 30, 2002 would have resulted in the Company owning an additional 30% interest
in the Operating Partnership.
33
PART II
OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in this report at Item 2 under the caption "Liquidity and
Capital Resources - Sensitivity Analysis".
Item 4. Submission of Matters to a Vote of Security Holders
On May 30, 2002, the Company held its annual meeting of shareholders. The matters on which shareholders voted
were: the election of two directors to serve a three year term, and the ratification of the Board's selection of
Deloitte & Touche LLP as the Company's independent auditors for the year ended December 31, 2002. Robert S.
Taubman and Lisa A. Payne were re-elected at the meeting, and the six remaining incumbent directors continued to
hold office after the meeting. The shareholders ratified the selection of the independent auditors. The results
of the voting are shown below:
ELECTION OF DIRECTORS
NOMINEES VOTES FOR VOTES WITHHELD
Robert S. Taubman 54,792,572 17,460,754
Lisa A. Payne 72,176,216 77,110
In May 2002, Institutional Shareholder Services issued a report recommending shareholders withhold votes from
Robert S. Taubman for standing as an insider on the Nominating Committee of the Company's Board of Directors.
RATIFICATION OF AUDITORS
71,265,573 Votes were cast for ratification;
965,243 Votes were cast against ratification; and
22,510 Votes abstained (including broker non-votes).
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10 (a) -- Amended and Restated Agreement of Partnership of Sunvalley Associates, a
California general partnership.
10 (b) -- First Amendment to the Second Amendment and Restatement of Agreement of Limited
Partnership of the Taubman Realty Group Limited Partnership dated September 30,
1998.
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends and Distributions.
99 (a) -- Debt Maturity Schedule
99 (b) -- Debt Maturity Schedule
b) Current Reports on Form 8-K.
None
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: August 14, 2002 By: /s/ Lisa A. Payne
-------------------------------------
Lisa A. Payne
Executive Vice President,
Chief Financial and Administrative Officer,
and Director
35
AMENDED AND RESTATED AGREEMENT OF PARTNERSHIP
OF
SUNVALLEY ASSOCIATES
a California general partnership
TABLE OF CONTENTS
AMENDED AND RESTATED AGREEMENT OF PARTNERSHIP
OF
SUNVALLEY ASSOCIATES
a California general partnership
PAGE
I. CONTINUATION; NAME; PRINCIPAL PLACE OF BUSINESS;
FILING OF CERTIFICATE(S); TERM; TITLE TO
PARTNERSHIP PROPERTY; DEFINITIONS.
Section 1.1 Continuation..........................................................................2
Section 1.2 Name..................................................................................3
Section 1.3 Principal Office......................................................................3
Section 1.4 Filing of Certificate(s) as Required..................................................3
Section 1.5 Term..................................................................................3
Section 1.6 Title to Partnership Property.........................................................4
Section 1.7 Definitions...........................................................................4
II. PURPOSES AND POWERS; REPRESENTATIONS AND
WARRANTIES.
Section 2.1 Purposes.............................................................................11
Section 2.2 Powers...............................................................................12
Section 2.3 Representations and Warranties.......................................................12
Section 2.4 Authority and Liability of Partners..................................................14
III. PARTNERS' INITIAL CAPITAL CONTRIBUTIONS; ADDITIONAL FUNDS;
FINANCING; CAPITAL ACCOUNTS; PARTNERSHIP INTEREST;
PERCENTAGE INTERESTS.
Section 3.1 Partners' Initial Capital Contributions..............................................14
Section 3.2 Additional Funds; Anticipated Financing..............................................15
Section 3.3 No Interest on Capital Contributions or Capital Accounts.............................18
Section 3.4 Capital Accounts.....................................................................18
Section 3.5 Partnership Interest; Percentage Interests...........................................20
i
IV. ALLOCATIONS; PROFITS AND LOSSES; DISTRIBUTIONS;
BANK ACCOUNTS; BOOKS OF ACCOUNT; TAX RETURNS;
PARTNERSHIP FISCAL YEAR.
Section 4.1 Allocations..........................................................................21
Section 4.2 Distributions of Available Cash......................................................26
Section 4.3 Bank Accounts........................................................................27
Section 4.4 Books of Account and Reports.........................................................28
Section 4.5 Tax Returns..........................................................................29
Section 4.6 Partnership Fiscal Year..............................................................29
V. MANAGEMENT; EXECUTION OF LEGAL INSTRUMENTS;
OTHER VENTURES.
Section 5.1 Management; Authority of the Managing Partner;
Limitations on Authority.............................................................29
Section 5.2 Response of the Partners.............................................................35
Section 5.3 Compensation of Partners and Affiliates..............................................35
Section 5.4 Execution of Legal Instruments.......................................................37
Section 5.5 Other Ventures.......................................................................37
Section 5.6 Indemnity and Reimbursement..........................................................38
Section 5.7 Tax Matters Partner..................................................................38
Section 5.8 Specific Provisions Relating to Real Estate Investment
Trust Status.........................................................................40
VI. TRANSFERS OF PARTNERSHIP INTERESTS.
Section 6.1 General Restrictions on Dispositions.................................................42
Section 6.2 Substitution of Partners.............................................................43
Section 6.3 Transfers of Interests in Certain Partners...........................................44
Section 6.4 Right of First Refusal...............................................................45
Section 6.5 Buy-Sell.............................................................................47
Section 6.6 Sale of the Project..................................................................49
Section 6.7 Closings.............................................................................50
Section 6.8 Pledge of Partnership Interests......................................................52
VII. DISABLING EVENT IN RESPECT OF A PARTNER;
SUCCESSION OF INTERESTS.
Section 7.1 Disabling Event in Respect of a Partner..............................................53
Section 7.2 Single Representative to Act on Behalf of Successors.................................54
Section 7.3 Succession by Individuals to Partnership Interests of Partners.......................55
Section 7.4 References to "Partner" and "Partners" in the Event of Successors....................55
Section 7.5 Waiver of Dissolution if Transfer is in Full Compliance with
Agreement; Negation of Right to Dissolve Except as
Herein Provided; No Withdrawal.......................................................56
Section 7.6 Determination of Fair Market Value of Partnership Interests..........................57
ii
VIII. WINDING UP, LIQUIDATION, AND TERMINATION OF THE PARTNERSHIP.
Section 8.1 Liquidation of the Assets of the Partnership and Disposition
of the Proceeds Thereof..............................................................59
Section 8.2 Cancellation of Certificates.........................................................61
IX. MISCELLANEOUS.
Section 9.1 Exculpation..........................................................................62
Section 9.2 Notices..............................................................................62
Section 9.3 Applicable Law.......................................................................63
Section 9.4 Word Meanings; Gender................................................................63
Section 9.5 Section Titles.......................................................................63
Section 9.6 Entire Agreement.....................................................................64
Section 9.7 Waiver...............................................................................64
Section 9.8 Separability of Provisions...........................................................64
Section 9.9 Binding Agreement....................................................................64
Section 9.10 Equitable Remedies...................................................................64
Section 9.11 Partition............................................................................65
Section 9.12 Amendment............................................................................65
Section 9.13 No Third Party Rights Created Hereby.................................................66
Section 9.14 Liability of Partners................................................................66
Section 9.15 Additional Acts and Instruments......................................................66
Section 9.16 Organization Expenses................................................................66
Section 9.17 Agreement in Counterparts............................................................66
Section 9.18 Attorneys-in-Fact....................................................................67
Section 9.19 Consents, Approvals, Etc.............................................................67
Section 9.20 Separateness Covenants...............................................................67
Section 9.21 Bankruptcy-Related Covenants; Lender's Consent.......................................69
Section 9.22 Management of SunValley LLC..........................................................71
Exhibit A The Property
iii
AMENDED AND RESTATED AGREEMENT OF PARTNERSHIP
OF
SUNVALLEY ASSOCIATES
a California general partnership
THIS AMENDED AND RESTATED AGREEMENT OF PARTNERSHIP (hereinafter, as the same may be amended
and/or supplemented, referred to as this "Agreement") is dated as of the 14th day of May, 2002, and
is made by, between, and among TRG SUNVALLEY LLC ("TRG LLC"), a Delaware limited liability company, as general
partner, whose sole member is The Taubman Realty Group Limited Partnership ("TRG"), a Delaware limited
partnership, TAUBMAN SUNVALLEY ASSOCIATES LIMITED PARTNERSHIP ("TSA"), a Michigan limited partnership, as general
partner, composed of A.T. Associates, Inc., as its general partner, and A. Alfred Taubman, not individually but
as Trustee of the A. Alfred Taubman Restated Revocable Trust, as amended and restated in its entirety by
Instrument dated January 10, 1989 and subsequently by Instrument dated June 25, 1997, as the same may hereafter
be amended from time to time (the "AAT Trust"), as its limited partner, and A.T. SUNVALLEY ASSOCIATES LIIMTED
PARTNERSHIP ("ATSA"), a Michigan limited partnership, as general partner, composed of Taubman SunValley
Associates I, Inc., as its general partner, and the AAT Trust, as its limited partner. (TRG LLC, TSA, and ATSA
are hereinafter sometimes referred to, collectively, as "Partners" and, individually, as a "Partner".) (TSA and
ATSA are hereinafter sometimes referred to, collectively, as "Taubman".)
Recitals:
A. TSA, ATSA, and Sun GEPT Realty Associates Limited Partnership ("GEPTS"), a Delaware limited
partnership, were all of the partners in SunValley Associates (the "Partnership"), a California general
partnership, pursuant to a certain Agreement of Partnership of SunValley Associates, dated March 15, 1990 and as
amended by the First Amendment to Agreement of
1
Partnership of SunValley Associates, dated August 24, 2000 (the "Original Partnership Agreement").
B. The Partnership is the owner of one hundred percent (100%) of the membership interests in
SunValley Shopping Center LLC ("SunValley LLC"), a Delaware limited liability company, which owns the Property,
upon which is situated a first-class regional retail shopping center and certain other structures as more
particularly described on Exhibit A hereto. (The Property and the foregoing improvements are hereinafter
referred to as the "Shopping Center".)
C. On the date of this Agreement, GEPTS transferred all of its right, title, and interest in and
to the Partnership, such interest constituting a fifty percent (50%) interest in the Partnership, to TRG LLC.
D. Accordingly, TRG LLC, TSA, and ATSA now wish to amend and restate in its entirety the Original
Partnership Agreement to reflect the admission of TRG LLC as a partner of the Partnership, to provide for new
terms of the Partnership, and for certain other purposes.
Now, therefore, the parties hereto agree that the Original Partnership Agreement is hereby amended and
restated in its entirety to read as follows:
ARTICLE I.
CONTINUATION; NAME; PRINCIPAL PLACE OF BUSINESS;
FILING OF CERTIFICATE(S); TERM; TITLE TO
PARTNERSHIP PROPERTY; DEFINITIONS.
Section 1.1 Continuation.
The parties hereto hereby continue the Partnership as a California general partnership pursuant
to the laws of the State of California, including the Uniform Partnership Act as in effect in the State of
California, all as the same may be amended from time to time (all of such laws being hereinafter referred to as
the "Partnership Law"), upon the terms and conditions herein set forth.
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Section 1.2 Name.
The name of the Partnership is "SunValley Associates" or such other name as the Managing
Partner (as herein defined) shall select from time to time in compliance with the Partnership Law.
Section 1.3 Principal Office.
The principal office of the Partnership is located at 200 East Long Lake Road, Bloomfield
Hills, Michigan 48304. The Partnership shall have an office at such other address(es) as may be designated from
time to time by the Managing Partner with written notice thereof to the Non-Managing Partners (as herein
defined). The name and address of the registered agent for service of process on the Partnership in the State of
California is Corporation Service Company which will do business in California as CSC-Lawyers Incorporation
Service, at 2730 Gateway Oaks Drive, Suite 100, Sacramento, California 95833.
Section 1.4 Filing of Certificate(s) as Required.
The Partners shall cause the execution and filing of an appropriate partnership and/or assumed
or fictitious name certificate or certificates, or like instrument or instruments, at any time and from time to
time as required by law to permit the Partnership to conduct business as a legal entity in the State of
California or otherwise in connection with the existence of the Partnership and/or the use of a name, and all
amendments thereto of record. The Partners shall do all acts and things requisite for the continued formation,
perfection, and maintenance of the Partnership as a general partnership pursuant to the Partnership Law.
Section 1.5 Term.
The term of the Partnership shall end, and the Partnership shall dissolve, on the first to
occur of:
(i) the sale or other disposition of all, or substantially all, of the Partnership's
assets;
(ii) the unanimous written consent of the Partners agreeing to dissolve the Partnership; or
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(iii) the occurrence of any event which would, under the Partnership Law (notwithstanding
the provisions of this Agreement) or under the terms of this Agreement, result in the dissolution of the
Partnership; provided, however, that the term of the Partnership shall not end upon the occurrence of
such an event if the Partnership is reconstituted or otherwise continues as provided in this Agreement.
Section 1.6 Title to Partnership Property.
All property owned by the Partnership, whether real or personal, tangible or intangible, shall
be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of
such property. The Partnership may hold any of its assets in its own name or in the name of a nominee. If the
Partnership takes title to any property in the name of a trust, this Agreement shall act as an agreement among
the beneficiaries.
Section 1.7 Definitions.
Unless the context in which a term is used clearly indicates otherwise, the following terms
shall have the following respective meanings when used in this Agreement:
"AAT Trust" is defined in the Preamble to this Agreement.
"Accountant" is defined in Section 4.5 hereof.
"Adjustment Notice" is defined in Section 7.6 hereof.
"Adjustments" is defined in Section 7.6 hereof.
"Affiliate" means (i) with respect to any individual, any member of such individual's Immediate Family and/or a
Family Trust with respect to such individual, and any organization (x) in which such individual and/or his
Affiliate(s) own, directly or indirectly, more than twenty-five percent (25%) of any class of equity security or
of the aggregate Beneficial Interest of all beneficial owners, or (y) in which such individual or his Affiliate
is the sole general partner, or is the managing general partner, or which is Controlled By such individual and/or
his Affiliates, directly or indirectly; and (ii) with respect to any corporation, partnership, limited liability
company, trust, or other organization, whether or not considered to be a legal entity, any other corporation,
partnership, limited liability company, trust, or other organization, whether or not considered to be a legal
entity, which Controls, is Controlled By, or is Under Common Control With, the first-referenced corporation,
partnership, limited liability company, trust, or other organization, and any individual who is the sole general
partner or the managing general partner of, or who directly or indirectly Controls, the first-referenced
corporation, partnership, limited liability company, trust, or other organization.
"Agreement" is defined in the Preamble to this Agreement.
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"Annual Budget" is defined in Section 5.1(d) hereof.
"ATAI" is defined in Section 9.21 hereof.
"ATSA" is defined in the Preamble to this Agreement.
"Available Cash" means the excess of the Partnership's cash and cash equivalents over the amount of cash needed
by the Partnership, as reasonably determined by the Managing Partner, to (i) service the Partnership's debts and
obligations to Third Parties (including, without limitation, the Mezzanine Loan), (ii) to the extent not
prohibited by the Mezzanine Loan, service the Partnership's debts and obligations to the Partners or their
Affiliates as provided in this Agreement, (iii) maintain adequate capital and reserves for, by way of example and
not limitation, capital improvements, working capital, and reasonably foreseeable needs of the Partnership, and
(iv) conduct its business and carry out its purposes.
"Bankrupt" or "Bankruptcy" as to any Person means (i) applying for or consenting to the appointment of, or the
taking of possession by, a receiver, custodian, trustee, administrator, liquidator, or the like of itself or of
all or a substantial portion of its assets, (ii) admitting in writing its inability, or being generally unable or
deemed unable under any applicable law, to pay its debts as such debts become due, (iii) convening a meeting of
creditors for the purpose of consummating an out-of-court arrangement, or entering into a composition, extension,
or similar arrangement, with creditors in respect of all or a substantial portion of its debts, (iv) making a
general assignment for the benefit of its creditors, (v) placing itself or allowing itself to be placed
voluntarily under the protection of the law of any jurisdiction relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, (vi) taking any action for the purpose of
effecting any of the foregoing, or (vii) if a proceeding or case shall be commenced against such Person in any
court of competent jurisdiction, seeking (a) the liquidation, reorganization, dissolution, winding-up, or
composition or readjustment of debts, of such Person, (b) the appointment of a trustee, receiver, custodian,
administrator, liquidator, or the like of such Person or of all or a substantial portion of such Person's assets,
or (c) similar relief in respect of such Person under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed for a
period of ninety (90) Days, or an order, judgment, or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect for a period of sixty (60) Days, or an order for relief or other
legal instrument of similar effect against such Person shall be entered in an involuntary case under such law and
shall continue for a period of sixty (60) Days.
"Beneficial Interest" means an interest, whether as partner, member, joint venturer, cestui que trust, or
otherwise, a contract right or a legal or equitable position under or by which the possessor participates in the
economic or other results of the business organization to which such interest, contract right, or position
relates.
"Best Efforts" is defined to require that the obligated party make a diligent, commercially reasonable, and good
faith effort to accomplish the applicable objective. Such obligation, however, does not require the expenditure
of funds or the incurrence of any liability on the part of the obligated party, nor does it require that the
obligated party act in a manner which would otherwise be contrary to prudent business judgment or normal
commercial practices in order to accomplish the objective. The fact that the objective is not actually
accomplished is no indication that the obligated party did not in fact utilize its Best Efforts in attempting to
accomplish the objective.
"Board of Directors" means the Board of Directors of TCO.
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"Book Value" is defined in Section 3.4(b) hereof.
"Business Day" means any Day that is not a Saturday, Sunday, or legal holiday in San Francisco, California, and
on which commercial banks are open for business in San Francisco, California.
"Buyer" is defined in Section 6.4(a) hereof.
"Buy-Sell Offer" is defined in Section 6.5(a) hereof.
"Capital Account" is defined in Section 3.4(a) hereof.
"Change of Control Event" means (i) any loss of the right of A. Alfred Taubman, any member of his Immediate
Family, any heir of the foregoing, any trust for the benefit of the foregoing and any partnership or limited
liability company or corporation Controlled By some or all of the foregoing (for any reason other than a
voluntary sale of shares of TCO by one (1) or more of the foregoing Persons) to nominate at least three (3)
members of the Board of Directors, or (ii) the acquisition by any person or group or persons (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended, other than A. Alfred Taubman,
any members of his Immediate Family, any heir of the foregoing, any trust for the benefit of any of the
foregoing, any private charitable foundation, or any partnership, limited liability company or corporation owned
or Controlled By some or all of the foregoing, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended) of forty percent (40%) or more of the
outstanding voting capital stock of TCO.
"Code" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provision of
succeeding law).
"Communication" and "Communications" are defined in Section 9.2(a) hereof.
"Contribution Notice" is defined in Section 3.2(d) hereof.
"Control" (and its correlative terms "Controlled By" and "Under Common Control With") means with respect to any
corporation, partnership, limited liability company, trust, or other business organization, possession, directly
or indirectly, by the applicable individual or individuals of the power to direct or cause the direction of the
management and policies thereof, whether through the ownership of voting securities, by contract, or otherwise.
"Day" or "Days" means each calendar day, including Saturdays, Sundays, and legal holidays; provided, however,
that if the Day on which a period of time for consent or approval or other action ends is not a Business Day,
such period shall end on the next Business Day.
"Defaulting Partner" is defined in Section 3.2(e) hereof.
"Deficit Partner(s)" is defined in Section 3.2(b) hereof.
"Depreciation" means for each Fiscal Year of the Partnership or other period, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable under the Code with respect to an asset
for such year or other period, except that if the Book Value of an asset differs from its adjusted basis for
federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which
bears the same ratio to such beginning Book Value as the federal income tax depreciation, amortization, or other
cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided,
however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such
year
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is zero, Depreciation shall be determined with reference to such beginning Book Value using any reasonable method
selected by the Managing Partner.
"Disabled Partner" is defined in Section 7.1(a)(ii) hereof.
"Disabling Event" is defined in Section 7.1(a)(i) hereof.
"Equity Security" has the meaning ascribed to it in the Securities Exchange Act of 1934, as amended to the date
hereof, and the rules and regulations thereunder.
"Event of Withdrawal" is defined in Section 7.1(a)(iv) hereof.
"Excess Partner(s)" is defined in Section 3.2(b) hereof.
"Excess Payment(s)" is defined in Section 3.2(b) hereof.
"Exercise Notice" is defined in Section 6.4(a) hereof.
"Exercise Period" is defined in Section 6.4(a) hereof.
"Family Trust" means with respect to an individual, a trust for the benefit solely of such individual or for the
benefit of any member or members of his Immediate Family or for the benefit of such individual and any member or
members of such individual's Immediate Family (for the purpose of determining whether or not a trust is a Family
Trust, the fact that one or more of the beneficiaries (but not the sole beneficiary) of the trust includes a
Person or Persons, other than a member of such individual's Immediate Family, entitled to a principal
distribution if he, she, it, or they shall have survived the settlor of such trust, which distribution is to be
made of something other than a Partnership Interest and/or includes an organization or organizations exempt from
federal income tax pursuant to the provisions of Section 501(a) of the Code and described in Section 501(c)(3) of
the Code shall be disregarded); provided, however, that in respect of transfers by way of a testamentary or inter
vivos trust, the trustee or trustees shall be solely such individual, a member or members of such individual's
Immediate Family, a responsible financial institution, an attorney that is a member of the Bar of any State in
the United States, or an individual or individuals approved by that Partner or those Partners then holding an
aggregate Percentage Interest of at least eighty percent (80%).
"Fiscal Year" means (i) the period commencing on the effective date of this Agreement and ending on the following
December 31, (ii) any subsequent twelve (12) month period commencing on January 1 and ending on December 31, or
(iii) any portion of any period described in clause (ii) for which the Partnership is required to allocate
Profits, Losses, and other items of Partnership income, gain, loss or deduction pursuant to Section 4.1 hereof.
"GEPTS" is defined in Recital A.
"Gross Income" means the income of the Partnership and the net gain from sales of Partnership property before
deduction of items of expense or deduction.
"Guarantor" is defined in Section 3.2(b) hereof.
"Immediate Family" means with respect to any individual, such individual's spouse (past or then current),
descendants (natural or adoptive), grandparents, parents, siblings of the whole or half blood, and descendants of
parents of such individual's spouse (past or then current).
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"Initiating Partner" is defined in Section 6.5(a) hereof.
"Liquidator" is defined in Section 8.1(a) hereof.
"Losses" is defined in Section 4.1(a) hereof.
"Major Decision" is defined in Section 5.1(c) hereof.
"Management and Leasing Agreement" means that certain management and leasing agreement dated March 8, 1980
between TTC (as successor to The Taubman Company Limited Partnership) and the Partnership, as the same may be
amended, from time to time, as permitted by this Agreement.
"Managing Partner" is defined and designated in Section 5.1(a) hereof.
"Mezzanine Loan" means that certain mezzanine loan in the principal amount of Ten Million Dollars ($10,000,000)
made to the Partnership by Connecticut General Life Insurance Company or its affiliates but shall not include a
loan held by any unaffiliated successor lender (other than a securitization pool, trust formed for the purpose
of accomplishing a securitization, or trustee with respect thereto).
"Minimum Gain" means an amount determined in accordance with Regulations Section 1.704-2(b)(2), by computing with
respect to each nonrecourse liability (as defined in Regulations Section 1.704-2(b)(3)) of the Partnership, the
amount of gain (of whatever character), if any, that would be realized by the Partnership if (in a taxable
transaction) it disposed of property subject to such liability in full satisfaction thereof, and by then
aggregating the amounts so computed.
"Net Value" is defined in Section 7.6 hereof.
"Non-Defaulting Partner(s)" is defined in Section 3.2(e) hereof.
"Non-Initiating Partner" is defined in Section 6.5(a) hereof.
"Non-Managing Partners" means the Partner(s) that are not the Managing Partner.
"Non-Pledging Partner" is defined in Section 6.8(iii) hereof.
"Non-Triggering Partner" is defined in Section 6.6(a) hereof.
"Offer" is defined in Section 6.4(a) hereof.
"Original Partnership Agreement" is defined in Recital A.
"Partner" and "Partners" are defined in the Preamble to this Agreement.
"Partnership" is defined in Recital A.
"Partnership Interest" is defined in Section 3.5(a) hereof.
"Partnership Law" is defined in Section 1.1 hereof.
"Partnership Minimum Gain" is defined in Regulations Section 1.704-2(b)(2).
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"Partner Nonrecourse Debt" is defined in Regulations Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" is defined in Section 4.1(d)(3) hereof.
"Percentage Interest" is defined in Section 3.5(b) hereof.
"Person" means an individual, a partnership (general or limited), limited liability company, corporation, joint
venture, business trust, cooperative, association, or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos and testamentary), an estate of a deceased,
insane, or incompetent Person, a quasi-governmental entity, a government or any agency, authority, political
subdivision, or other instrumentality thereof, or any other entity.
"Pledge" means any pledge, encumbrance, hypothecation, or other assignment of a Partnership Interest or any
proceeds thereof as collateral for a loan to or for the benefit of the Partner whose Partnership Interest or the
proceeds thereof has been pledged.
"Pledge Documents" is defined in Section 6.8 hereof.
"Pledgee" is defined in Section 6.8(i) hereof.
"Pledgee Rights" means any of a Pledgee's rights under a loan or pledge agreement, including, without limitation,
foreclosure, a transfer in lieu of foreclosure, or sale pursuant to the applicable commercial code. "Pledgee
Right" means any one (1) of the Pledgee Rights.
"Pledging Partner" is defined in Section 6.8 hereof.
"Prime" means that rate of interest equal to the prime rate of interest announced as such from time to time by
the Partnership's principal bank, or if such bank ceases to announce such a rate, the average of the prime rates
prevailing from time to time at the two (2) national banks in the State of California having the largest deposits
for the calendar quarter immediately preceding the date that the prime rate is to be determined.
"Profits" is defined in Section 4.1(a) hereof.
"Property" means those certain leasehold and subleasehold estates and other property owned in fee by SunValley
LLC, located in Concord, California, and as more particularly described on Exhibit A attached hereto and made a
part hereof and, if the context so requires, any direct or indirect interests therein owned by the Partnership,
including, by way of example and not of limitation, the Subsidiary Company Membership Interest."
"Regulations" means the Income Tax Regulations promulgated under the Code as such regulations may be amended from
time to time (including corresponding provisions of succeeding regulations).
"Regulatory Allocations" is defined in Section 4.1(d)(6) hereof.
"REIT" means a real estate investment trust.
"REIT Partner" is defined in Section 5.8 hereof.
"Renewal Management and Leasing Agreement" is defined in Section 5.3(b) hereof.
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"Required Funds" is defined in Section 3.2(b) hereof.
"Return" means a variable return, recalculated and compounded monthly, equal to Prime plus one percent (1%).
"Sale Offer" is defined in Section 6.6(a) hereof.
"Seller" is defined in Section 6.4(a) hereof.
"Shopping Center" is defined in Recital B.
"Special Purpose General Partner" is defined in Section 9.21 hereof.
"Subject Interest" is defined in Section 6.4(a) hereof.
"Subsidiary Company Membership Interest" is defined in Section 2.1 hereof.
"Successor" is defined in Section 7.1(a)(iii) hereof.
"SunValley LLC" is defined in Recital B.
"SV" is defined in Section 2.1 hereof.
"Taubman" is defined in the Preamble to this Agreement.
"Tax Matters Partner" is defined in Section 5.7(a) hereof.
"TCO" means Taubman Centers, Inc., a Michigan corporation.
"Third Party" or "Third Parties" means a Person or Persons who is or are neither a Partner or Partners nor an
Affiliate or Affiliates of a Partner.
"Total Price" is defined in Section 6.5(a) hereof.
"Transfer" means any assignment, sale, transfer, conveyance, encumbrance, Pledge, granting of an option or proxy,
or other disposition or act of alienation.
"Triggering Partner" is defined in Section 6.6(a) hereof.
"Trigger Notice" is defined in Section 6.6(a) hereof.
"TRG" is defined in the Preamble to this Agreement.
"TRG Excess Contributions" is defined in Section 3.2(c) hereof.
"TRG LLC" is defined in the Preamble to this Agreement.
"TSA" is defined in the Preamble to this Agreement.
"TSVAI" is defined in Section 9.21 hereof.
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"TTC" means The Taubman Company LLC, a Delaware limited liability company, or any successor thereto.
"Valuation Date" is defined in Section 7.6 hereof.
ARTICLE II.
PURPOSES AND POWERS;
REPRESENTATIONS AND WARRANTIES.
Section 2.1 Purposes.
The Partnership has been organized, pursuant to the Partnership Law and in accordance with this
Agreement, for the purpose of (i) acquiring, in exchange for a capital contribution consisting of the Property,
and holding a membership interest (the "Subsidiary Company Membership Interest") in SunValley LLC, including,
without limitation, interests incidental to the Subsidiary Company Membership Interest such as, by way of example
and not limitation, any receivables due from SunValley LLC, with all of the rights and obligations of a member
therein, as well as, without limitation, any and all rights to acquire, sell, pledge and otherwise deal with the
Subsidiary Company Membership Interest and/or any of the assets of SunValley LLC, and to act in all respects as a
member therein pursuant to applicable law and any agreements; (ii) entering into any agreement in connection with
the business of SunValley LLC, including but not limited to, the operating agreement for SunValley LLC; (iii)
forming, owning, acquiring, transferring, disposing, pledging, or otherwise dealing with the capital stock of SV
Shopping Center, Inc. a Delaware corporation ("SV") which is serving as SunValley LLC's Springing Member (as such
term is defined in the operating agreement of SunValley LLC) and acting in all respects as a stockholder therein
pursuant to applicable law and any agreements; (iv) making capital contributions to SunValley LLC and SV; (v)
borrowing funds pursuant to the Mezzanine Loan; and (vi) engaging in any other activities determined by the
Partners that are permitted by the
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Partnership Agreement and the Partnership Law and that are incidental or related to the foregoing.
Section 2.2 Powers.
The Partnership shall have all such powers that are necessary or appropriate to carry out its
purposes as described in Section 2.1 hereof, including, without limitation, the right to contribute funds to and
take all actions and decisions in respect of or pertaining to SunValley LLC and SV, the right to be admitted to
SunValley LLC, the right to become a stockholder of SV, the right to enter into the operating agreement of
SunValley LLC and agree to any one or more amendments to (or the termination of) the operating agreement of
SunValley LLC, and the right to acquire, sell, assign, exchange, encumber, or otherwise dispose of the
Partnership's assets, including the Subsidiary Company Membership Interest and the capital stock of SV.
Section 2.3 Representations and Warranties.
(a) TRG LLC hereby represents and warrants to TSA and ATSA as follows:
(i) TRG LLC is a Delaware limited liability company, duly formed, validly existing and in
good standing under the laws of the State of Delaware.
(ii) This Agreement has been duly authorized, validly executed, and constitutes the binding
obligation of and is enforceable against TRG LLC in accordance with its terms. TRG LLC has full power,
authority, and capacity to enter into this Agreement and to carry out its obligations as described in
this Agreement.
(iii) No litigation or proceedings, including, without limitation arbitration proceedings,
are pending or, to the best knowledge of TRG LLC, threatened against TRG LLC which, if adversely
determined, could individually or in the aggregate have an adverse effect on the consummation and the
performance of this Agreement by TRG LLC.
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(iv) TRG LLC is not a "foreign person" within the meaning of the Foreign Investment in Real
Property Tax Act of 1980, as amended.
(v) TRG LLC is wholly owned by TRG.
(b) TSA hereby represents and warrants to TRG LLC as follows:
(i) TSA is a Michigan limited partnership, duly formed, validly existing and in good
standing under the laws of the State of Michigan.
(ii) This Agreement has been duly authorized, validly executed, and constitutes the binding
obligation of and is enforceable against TSA in accordance with its terms. TSA has full power,
authority, and capacity to enter into this Agreement, and to carry out its obligations as described in
this Agreement.
(iii) No litigation or proceedings, including, without limitation arbitration proceedings,
are pending or, to the best knowledge of TSA, threatened against TSA or any of its Affiliates which, if
adversely determined, could individually or in the aggregate have an adverse effect on the consummation
and the performance of this Agreement by TSA.
(iv) TSA is not a "foreign person" within the meaning of the Foreign Investment in Real
Property Tax Act of 1980, as amended.
(v) The sole partners of TSA are A.T. Associates, Inc., as general partner, and the AAT
Trust, as limited partner.
(c) ATSA hereby represents and warrants to TRG LLC as follows:
(i) ATSA is a Michigan limited partnership, duly formed, validly existing and in good
standing under the laws of the State of Michigan.
(ii) This Agreement has been duly authorized, validly executed, and constitutes the binding
obligation of and is enforceable against ATSA in accordance with its terms. ATSA has full power,
authority, and capacity to enter into this Agreement and to carry out its obligations as described in
this Agreement.
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(iii) No litigation or proceedings, including, without limitation arbitration proceedings,
are pending or, to the best knowledge of ATSA, threatened against ATSA or any of its Affiliates which,
if adversely determined, could individually or in the aggregate have an adverse effect on the
consummation and the performance of this Agreement by ATSA.
(iv) ATSA is not a "foreign person" within the meaning of the Foreign Investment in Real
Property Tax Act of 1980, as amended.
(v) The sole partners of ATSA are Taubman SunValley Associates, I, Inc., as general
partner, and the AAT Trust, as limited partner.
(d) The representations and warranties in this Section 2.3 shall survive the formation and the
termination of the Partnership.
Section 2.4 Authority and Liability of Partners.
Except as otherwise provided in this Agreement, no Partner shall have any authority to act for,
bind, commit, or assume any obligation or responsibility on behalf of the Partnership, its properties, or the
other Partners. No Partner, in its capacity as a Partner under this Agreement, shall be responsible or liable
for any indebtedness or obligation of the other Partners, nor shall the Partnership be responsible or liable for
any indebtedness or obligation of any Partner, incurred either before or after the execution and delivery of this
Agreement by such Partner, except as to those responsibilities, liabilities, indebtedness, or obligations
incurred pursuant to and as limited by the terms of the Original Partnership Agreement and this Agreement.
ARTICLE III.
PARTNERS' INITIAL CAPITAL CONTRIBUTIONS;
ADDITIONAL FUNDS; FINANCING; CAPITAL ACCOUNTS;
PARTNERSHIP INTEREST; PERCENTAGE INTERESTS.
Section 3.1 Partners' Initial Capital Contributions.
As of the date hereof, the Partners (or their predecessors-in-interest) have contributed to the
capital of the Partnership as set forth on the books and records of the
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Partnership. As of the date hereof, the Capital Account balances of the Partners are as set forth on the books and
records of the Partnership.
Section 3.2 Additional Funds; Anticipated Financing.
(a) In order to carry on the business of the Partnership, the Partners acknowledge that funds may
be required in addition to the capital contributions reflected in Section 3.1 hereof. All such additional funds
will be obtained as provided in this Section 3.2.
(b) It is the intent of the Partners to obtain, and the Managing Partner shall use its Best Efforts
to obtain, all funds required to pay for costs, expenses, and fees contained in an approved Annual Budget
("Required Funds") from the proceeds of loans from Third Parties, pursuant to such terms, provisions, and
conditions and in such manner (including the engagement of brokers and/or investment bankers to assist in
providing such financing) as the Managing Partner shall determine. The Managing Partner shall seek to obtain
Partnership financing on a basis which is without recourse to the Partners. Such financing may be secured by a
mortgage or mortgages on all or any portion of the Property and/or the Partnership's interest therein. In the
event that a Partner or its Affiliate (a "Guarantor") is required to make any payment under any guaranty or
indemnity executed by such Guarantor in connection with any Partnership financing, then in such event, (i) if
each Partner in the Partnership, or its Affiliate, is a Guarantor and if such payments are made by all Guarantors
and are in the same ratio as the respective Percentage Interests of their affiliated Partners, such payments
shall be treated as additional capital contributions by the Partners and shall be credited to their respective
Capital Accounts, and (ii) if any Partner, or its Affiliate, who is a Guarantor makes a payment that is greater
than its pro rata share of the aggregate amount of the total payments made by all Partners (or their Affiliates)
under, or in respect of, such guaranty or indemnity based upon its (or its affiliated Partner's) Percentage
Interest (the Partner(s) affiliated with such paying Guarantor being referred to herein as the "Excess
Partner(s)", and the amount of the disproportionate payment, the "Excess Payment(s)"); and within ten (10) Days
after receipt of notice from the Excess Partner(s), the Partner (or its Affiliate) that has made a payment that
is less than (including
15
making no payment at all) such Partner's pro rata share of such total payment based on its Percentage Interest
(the "Deficit Partner(s)") has not paid the Excess Partner(s) an amount (up to each Deficit Partner's pro
rata share) equal to the Excess Payment(s), the Excess Payments(s) shall be treated as additional capital
contributions by the Excess Partner(s) and shall be credited to its(their) Capital Account(s), and the Excess
Partner(s), as its(their) sole remedy, shall have the right to dilute the Percentage Interest of the Deficit
Partner(s) in accordance with Section 3.2(e) hereof. If a Deficit Partner(s) pays the Excess Partner(s) an
amount equal to the Excess Payment(s) within the prescribed ten (10) Day period, then the total payments made
by the Excess Partner(s) under the guaranty or indemnity (excluding an amount equal to the reimbursed Excess
Payment(s)), and the total payments made by the Deficit Partner(s) under such guaranty or indemnity as well as
any Excess Payment(s) made by the Deficit Partner to the Excess Partner(s), shall be treated as additional capital
contributions by the paying Partners and shall be credited to their respective Capital Accounts. Each Partner
hereby waives any and all rights it may have against the Partnership to recover any payment(s) made by such
Partner (or its Affiliate) as a Guarantor.
(c) To the extent Required Funds are not available from Third Parties as provided in Section 3.2(b)
hereof, the Managing Partner may elect to contribute the Required Funds to the capital of the Partnership. All
funds ("TRG Excess Contributions") contributed to the capital of the Partnership by the Managing Partner pursuant
to this Section 3.2(c) shall bear the Return from and after the date of contribution to the Partnership until
distributed in full to the Managing Partner pursuant to this Agreement.
(d) To the extent Required Funds are not available from Third Parties as provided in Section 3.2(b)
hereof, and the Managing Partner elects not to contribute the Required Funds to the capital of the Partnership
pursuant to Section 3.2(c) hereof, upon the request of the Managing Partner, the Partners shall contribute all
such Required Funds to the capital of the Partnership in proportion to their respective Percentage Interests.
The Managing Partner shall make any such request by written notice (a "Contribution Notice") to the Partners,
identifying the amount of the
16
Required Funds, each Partner's share of the Required Funds, and the date on which the Required Funds are to be
contributed, which date shall be not less than thirty (30) Days after the date of the Contribution Notice.
(e) In the event that any Partner (a "Defaulting Partner") fails to contribute timely its
proportionate share, determined in accordance with its Percentage Interest, of any Required Funds pursuant to
Section 3.2(d) hereof or reimburse timely an Excess Partner pursuant to Section 3.2(b) hereof, the other
Partner(s), or any one of them (the "Non-Defaulting Partner(s)") may give the Defaulting Partner written notice
of such default. The Defaulting Partner shall then have ten (10) Business Days after receipt of such notice to
cure its default. If the Defaulting Partner fails to cure its default within such ten (10) Business Day period,
such default shall constitute an event of default whereupon the Non-Defaulting Partner(s), or any one of them, as
its(their) sole and exclusive remedy, may reduce the Defaulting Partner's Percentage Interest to a percentage
equal to the ratio (expressed as a percentage) that the Defaulting Partner's total contributions to the capital
of the Partnership (excluding TRG Excess Contributions, if any) bears to the total contributions of all Partners
to the capital of the Partnership (excluding TRG Excess Contributions, if any). The amount of the reduction of
the Defaulting Partner's Percentage Interest shall be added to the Percentage Interest of the Non-Defaulting
Partner(s), and the adjustments shall become effective as of the last Day of the ten (10) Business Day period
referred to above.
Notwithstanding anything set forth in this Agreement to the contrary, if the Percentage
Interest of TRG LLC or Taubman (it being understood that the Percentage Interests of the members of Taubman shall
be aggregated for this purpose) falls below twenty-five percent (25%), TRG LLC or Taubman, as applicable, will
lose its consent rights with respect to Partnership decisions.
(f) The provisions of this Section 3.2 are intended to serve only for the benefit of the Partners,
inter se, and no Third Party shall have any right whatsoever to benefit from the provisions hereof. None of the
provisions of this Agreement shall be construed as existing for the
17
benefit of any creditor of the Partnership or of any creditor of any of the Partners, and none of such provisions
shall be enforceable by any Person who is not a Partner.
Section 3.3 No Interest on Capital Contributions or Capital Accounts.
Except as provided for in this Agreement with respect to the Return, no Partner shall receive
any interest or return in the nature of interest on its contributions to the capital of the Partnership, or on
the positive balance, if any, in its Capital Account.
Section 3.4 Capital Accounts.
(a) The Partnership shall establish and maintain a separate capital account ("Capital Account") for
each Partner, including a substituted partner, who shall pursuant to the provisions hereof acquire a Partnership
Interest, which Capital Account shall be:
(1) credited with the amount of cash and the then current Book Value (net of liabilities
secured by such contributed property that the Partnership assumes or takes subject to) of any other
property contributed by such Partner to the capital of the Partnership, such Partner's distributive
share of Profits, any items in the nature of income or gain that are specially allocated to such Partner
pursuant to Section 4.1 hereof, and the amount of any Partnership liabilities assumed by such Partner or
which are secured by any property distributed to such Partner; and
(2) debited with the amount of cash and the then current Book Value (net of liabilities
secured by such distributed property that such Partner assumes or takes subject to) of any Partnership
property distributed to such Partner pursuant to any provision of this Agreement, such Partner's
distributive share of Losses, items in the nature of expense or loss that are specially allocated to
such Partner pursuant to Section 4.1 hereof, and the amount of any liabilities of such Partner assumed
by the Partnership or which are secured by any property contributed by such Partner to the Partnership.
In the event that a Partner's Partnership Interest or a portion thereof is transferred in
accordance with the provisions of this Agreement, the transferee shall succeed to the Capital
18
Account of the transferor to the extent that it relates to the Partnership Interest or portion thereof so
transferred.
In the event that the Book Values of Partnership assets are adjusted as described below in
Section 3.4(b) hereof, the Capital Accounts of all Partners shall be adjusted simultaneously to reflect the
aggregate net adjustments as if the Partnership recognized gain or loss for federal income tax purposes equal to
the amount of such aggregate net adjustment.
The foregoing provisions and the other provisions of this Agreement relating to the maintenance
of Capital Accounts are intended to comply with Section 1.704-1(b) of the Regulations, and shall be interpreted
and applied as provided in the Regulations. In the event that the Managing Partner reasonably determines that
the manner in which the Capital Accounts, or any debits or credits thereto, are maintained or computed under the
Regulations should be further reflected in an amendment hereto, the Partners shall enter into an appropriate
amendment to this Agreement.
(b) For the purpose of this Agreement, the term "Book Value" means, with respect to any asset, such
asset's adjusted basis for federal income tax purposes, except:
(1) the initial Book Value of any asset contributed by a Partner to the Partnership shall
be the gross fair market value of such asset;
(2) the Book Value of all Partnership assets may be adjusted, as determined by the
Managing Partner to be necessary or appropriate to reflect the relative economic interests of the
Partners, to equal their respective gross fair market values as of the following times: (i) the
acquisition from the Partnership, in exchange for more than a de minimis capital contribution, of a
Partnership Interest by an additional partner or of an additional Partnership Interest by an existing
Partner; (ii) the distribution by the Partnership to a Partner of more than a de minimis amount of
Partnership property (including money) as consideration for an interest in the Partnership; and (iii)
the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g);
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(3) if the Book Value of an asset has been determined or adjusted as provided in Section
3.4(b)(1) or 3.4(b)(2) hereof, the Book Value of such asset shall thereafter be adjusted by the
Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses;
and
(4) the Book Value of any Partnership asset distributed to any Partner shall be the gross
fair market value of such asset on the date of distribution.
(c) In the event that any provision of this Article III requires the determination of the fair
market value of any asset, such fair market value shall be as determined by the Partners provided that (i) such
value is reasonably agreed to by the Partners in arm's-length negotiations, and (ii) the Partners have
sufficiently adverse interests as provided in Regulations Section 1.704-1(b)(2)(iv)(h). In the event that the
requirements of clauses (i) and (ii) of this Section 3.4(c) are not met, then the fair market value shall be
determined by an appraiser selected by the Managing Partner, and the cost of such appraisal shall be an expense
of the Partnership.
(d) Except as otherwise provided in this Agreement, no Partner shall (i) have the right to withdraw
any part of its Capital Account or to demand or receive the return of its capital contributions, or any part
thereof, or to receive any distributions from the Partnership, (ii) be entitled to make, or have any obligation
to make, any contribution to the capital of, or any loan to, the Partnership, or (iii) have any liability for the
return of any other Partner's Capital Account or contributions to the capital of the Partnership.
Section 3.5 Partnership Interest; Percentage Interests.
(a) For the purpose of this Agreement, the term "Partnership Interest" means, with respect to a
Partner, such Partner's right to the allocations (and each item thereof) specified in Section 4.1 hereof and
distributions from the Partnership, and all other rights and obligations of such Partner as provided in this
Agreement.
(b) For the purpose of this Agreement, the term "Percentage Interest" means, with respect to each
Partner, the percentage set forth opposite its name, as the same may be adjusted pursuant to Section 3.2(e)
hereof:
20
Percentage
Partner Interest
------- --------
TRG LLC 50.000%
TSA 23.333%
ATSA 26.667%
ARTICLE IV.
ALLOCATIONS; PROFITS AND LOSSES; DISTRIBUTIONS;
BANK ACCOUNTS; BOOKS OF ACCOUNT; TAX RETURNS;
PARTNERSHIP FISCAL YEAR.
Section 4.1 Allocations.
(a) For the purpose of this Agreement, the terms "Profits" and "Losses" mean, respectively, for
each fiscal year of the Partnership or other period, the Partnership's taxable income or loss for such fiscal
year or other period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of
income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall
be included in taxable income or loss), adjusted as follows:
(1) any income of the Partnership that is exempt from federal income tax and not otherwise
taken into account in computing Profits or Losses pursuant to this Section 4.1(a) shall be added to such
taxable income or loss;
(2) in lieu of the depreciation, amortization, and other cost recovery deductions taken
into account in computing such taxable income or loss, there shall be taken into account Depreciation
for such fiscal year or other period;
(3) any items that are specially allocated pursuant to Sections 4.1(d) hereof shall not be
taken into account in computing Profits or Losses.
(b) After giving effect to the special allocations set forth in Section 4.1(d) hereof, Profits (and
each item thereof) for each Fiscal Year of the Partnership shall be allocated as follows:
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(i) First, to the Partners until the aggregate amount of Profits allocated to the Partners
(or their respective predecessors-in-interest) pursuant to this Section 4.1(b)(i) (and Section 4.1 of
the Original Partnership Agreement) for such Fiscal Year and all prior Fiscal Years is equal to the
aggregate amount of Losses allocated to the Partners (or their respective predecessors-in-interest)
pursuant to Section 4.1(c)(iii) hereof (and Section 4.1 of the Original Partnership Agreement) for all
prior Fiscal Years (in proportion to such amounts);
(ii) Second, to the Partners in accordance with the ratio in which any Losses for prior
Fiscal Years were allocated pursuant to Section 4.1(c)(ii) hereof (and Section 4.1 of the Original
Partnership Agreement), until the aggregate amount of Profits allocated pursuant to this Section
4.1(b)(ii) (and Section 4.1 of the Original Partnership Agreement) for such Fiscal Year and all prior
Fiscal Years is equal to the aggregate amount of Losses allocated pursuant to Section 4.1(c)(ii) hereof
(and Section 4.1 of the Original Partnership Agreement) for all prior Fiscal Years;
(iii) Thereafter, to the Partners in accordance with their respective Percentage Interests.
(c) After giving effect to the special allocations set forth in Section 4.1(d) hereof, Losses (and
each item thereof) for each Fiscal Year of the Partnership shall be allocated as follows:
(i) First, to the Partners until the aggregate amount of Losses allocated pursuant to this
Section 4.1(c)(i) (and Section 4.1 of the Original Partnership Agreement) for such Fiscal Year and all
prior Fiscal Years is equal to the aggregate amount of Profits allocated to the Partners (or their
respective predecessors-in-interest) pursuant to Section 4.1(b)(iii) hereof (and Section 4.1 of the
Original Partnership Agreement) for all prior Fiscal Years (in proportion to such amounts);
(ii) Second, to those Partners with positive Capital Account balances (determined by (1)
taking into account the adjustments, allocations and distributions
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described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6), and (2) adding to such
balances each Partner's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain),
in proportion to, and to the extent of, such positive Capital Account balances; and
(iii) Thereafter, to the Partners in accordance with their respective Percentage Interests.
(d) The following special allocations shall be made solely for federal income tax purposes.
(1) Qualified Income Offset. In the event any Partner unexpectedly receives any
adjustments, allocations or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the
Regulations, items of Partnership income and gain shall be specially allocated to such Partner in an amount and
manner sufficient to eliminate, to the extent required by the Regulations, the Capital Account deficit of the
Partner as quickly as possible, provided that an allocation pursuant to this Section 4.1(d)(1) shall be made only
if and to the extent that the Partner would have a Capital Account deficit after all other allocations provided
for in this Section 4.1 have been tentatively made as if this Section 4.1(d)(1) were not in the Agreement.
(2) Minimum Gain Chargeback. If, for any Fiscal Year of the Partnership, there is a net
decrease in Partnership Minimum Gain (as that term is defined in Regulations Section 1.704-2(b)(2)), each Partner
who has previously been allocated any nonrecourse deductions or received distributions of proceeds attributable
to any nonrecourse borrowing of the Partnership in any Fiscal Year of the Partnership, shall be allocated items
of Partnership income and gain for the Fiscal Year in which there is a net decrease in Partnership Minimum Gain
in proportion to such prior allocations equal to that Partner's share of the net decrease in Partnership Minimum
Gain consistently with the requirements of Regulations Section 1.704-2. The items to be allocated pursuant to
this Section 4.1(d)(2) shall be determined in accordance with Regulations Section 1.704-2(f) and (j).
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(3) Partner Minimum Gain Chargeback. In the event that there is a net decrease in Minimum
Gain attributable to a Partner Nonrecourse Debt as defined in Regulations Section 1.704-2(b)(4) (such Minimum
Gain being hereinafter referred to as "Partner Nonrecourse Debt Minimum Gain") for a Partnership Fiscal Year,
then after taking into account allocations pursuant to Section 4.1(d)(2) hereof, but before any other allocations
are made for such Partnership Fiscal Year, and subject to the exceptions set forth in Regulations Section
1.704-2(i)(4), each Partner with a share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
Partnership Fiscal Year shall be allocated items of income and gain for such Partnership Fiscal Year (and, if
necessary, for subsequent Partnership Fiscal Years) equal to such Partner's share of the net decrease in Partner
Nonrecourse Debt Minimum Gain as determined in a manner consistent with the provisions of Regulations Section
1.704-2(g)(2). The items to be allocated pursuant to this Section 4.1(d)(3) shall be determined in accordance
with Regulations Section 1.704-2(i)(4) and (j).
(4) Excess Nonrecourse Liabilities. For the purpose of determining each Partner's share
of excess nonrecourse liabilities of the Partnership, and solely for such purpose, each Partner's interest in
Partnership profits shall be reasonably determined by the Managing Partner in accordance with Internal Revenue
Service authority interpreting Regulations Section 1.752-3(a)(3).
(5) Limitation on Deductions. No Partner shall receive an allocation of any Partnership
deduction or Loss that would cause the total allocations of Loss or items thereof to such Partner to exceed the
amount of its Capital Account balance increased by its share of Partnership Minimum Gain, Partner Nonrecourse
Debt Minimum Gain, and any other amount a Partner is unconditionally obligated to restore on liquidation of the
Partnership.
(6) Curative Allocations. The allocations set forth in Sections 4.1(d)(1), (2), (3), (4),
and (5) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the
Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be
offset either with other Regulatory Allocations or with special
24
allocations of other items of Partnership income, gain, loss or deduction pursuant to this Section 4.1(d)(6).
Therefore, notwithstanding any other provision of this Section 4.1(d) (other than the Regulatory Allocations),
the Managing Partner shall make such offsetting special allocations of Partnership income, gain, loss or
deduction in whatever manner it determines to be reasonably appropriate so that, after such offsetting
allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital
Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and
all Partnership items were allocated pursuant to Sections 4.1(b) and 4.1(c) hereof.
(7) Code Section 704(c). In accordance with Sections 704(b) and 704(c) of the Code and
the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the
capital of the Partnership shall, solely for federal income tax purposes, be allocated among the Partners so as
to take account of any variation between the adjusted basis of such property to the Partnership for federal
income tax purposes and the initial Book Value of such property. If the Book Value of any Partnership property
is adjusted pursuant to Section 3.4(b) hereof, subsequent allocations of income, gain, loss, and deduction with
respect to such asset shall take account of any variation between the adjusted basis of such asset for federal
income tax purposes and the Book Value of such asset in the manner prescribed under Sections 704(b) and 704(c) of
the Code and the Regulations thereunder.
(8) Section 754 Adjustments. In the event of a sale or exchange of a Partner's
Partnership Interest or a portion thereof or upon the death of a Partner, if the Partnership has not theretofore
elected, pursuant to Section 754 of the Code, to adjust the basis of Partnership property, the Managing Partner
shall cause the Partnership to elect, if the Person acquiring such Partnership Interest or portion thereof so
requests, pursuant to Section 754 of the Code, to adjust the basis of Partnership property. The Partners
acknowledge that the Managing Partner shall cause the Partnership to make the foregoing election in connection
with the transfer by GEPTS of its Partnership Interest to TRG LLC. In addition, in the event of a distribution
referred to in Section 734(b) of the Code, if the Partnership has not theretofore
25
elected, the Managing Partner may, in the exercise of its discretion, cause the Partnership to elect, pursuant
to Section 754 of the Code, to adjust the basis of Partnership property. Except as provided in Regulations Section
1.704-1(b)(2)(iv)(m), such adjustment shall not be reflected in the Partners' Capital Accounts and shall be
effective solely for federal and (if applicable) state and local income tax purposes. Each Partner hereby agrees
to provide the Partnership with all information necessary to give effect to such election.
(9) Miscellaneous. Except as provided in Sections 4.1(d)(7) and 4.1(d)(8) hereof, for
federal income tax purposes, each item of income, gain, loss, or deduction shall be allocated among the Partners
in the same manner as its correlative item of "book" income, gain, loss, or deduction has been allocated pursuant
to Sections 4.1(b), (c), and (d) hereof.
(10) Gross Income Allocation. For each Fiscal Year of the Partnership, Gross Income shall
be allocated (prior to any allocations pursuant to Sections 4.1(b) and 4.1(c) hereof, but after taking into
effect the special allocations in Section 4.1(d)(1)-(9)) to TRG LLC to the extent of the Return distributed to
TRG LLC pursuant to Section 4.2(a)(i) hereof for the current Fiscal Year of the Partnership and distributable to
TRG LLC pursuant to Section 8.1(a)(5) hereof if such Fiscal Year is the year in which the Partnership is to be
liquidated. In addition, to the extent that the cumulative amount of the Return distributed to TRG LLC for all
prior Fiscal Years of the Partnership exceeds the cumulative amount of Gross Income allocated to TRG LLC pursuant
to this Section 4.1(d)(10), then in the current Fiscal Year, Gross Income shall be allocated to TRG LLC to the
extent of the cumulative amount of the Return distributed to TRG LLC as to which TRG LLC did not receive Gross
Income allocations pursuant to this Section 4.1(d)(10).
Section 4.2 Distributions of Available Cash.
(a) Subject to the provisions of Sections 4.2(b) and 8.1(a) hereof, Available Cash shall be
distributed, as and when the Managing Partner shall determine, but not less frequently than quarterly, as follows:
26
(i) to TRG LLC in an amount equal to its accrued but undistributed Return on the TRG
Excess Contributions; and then
(ii) to TRG LLC in an amount equal to the TRG Excess Contributions to the extent not
previously distributed to TRG LLC pursuant to this clause (ii); and then
(iii) to the Partners in accordance with their respective Percentage Interests.
(b) Immediately after repayment in full of the Mezzanine Loan, or sooner if the Partnership obtains
the lender's consent, the following provisions shall apply: Notwithstanding Section 4.2(a) hereof and
irrespective of the order of priorities therein set forth and subject to the provisions of Section 8.1(a) hereof,
to the extent that for any Fiscal Year of the Partnership while all or any portion of TRG's Excess Contributions
remain outstanding, TSA or ATSA receives an allocation of net taxable income from the Partnership without a
concomitant distribution of Available Cash (taking into account the cumulative distributions of Available Cash
previously made to such Partner pursuant to the provisions of Section 4.2(a)(iii) hereof, and by taking into
account on a cumulative basis any losses (of the same character) of the Partnership for prior Fiscal Years of the
Partnership), the Partnership shall, within ninety (90) Days after the end of such Fiscal Year, make a
distribution of Available Cash to TSA and/or ATSA, in proportion to their respective Percentage Interests, such
that such Partners are distributed an amount equal to the combined federal and state tax liability of each such
Partner determined by multiplying the Partnership's taxable income by the highest marginal federal and State of
Michigan income tax rates applicable to individuals in effect for such Fiscal Year. The amount of any
distribution pursuant to this Section 4.2(b) shall be credited, on a cumulative basis, against any other
distributions of Available Cash to be made to such Partner pursuant to Section 4.2(a)(1)(iii) and/or Section
8.1(a)(7) hereof.
Section 4.3 Bank Accounts.
One or more accounts in the name of the Partnership shall be maintained in such bank or banks
as the Managing Partner may from time to time select. Any checks of the
27
Partnership may be signed by any Person(s) designated, from time to time, by the Managing Partner.
Section 4.4 Books of Account and Reports.
(a) The Partnership shall maintain at its principal office and in accordance with generally
accepted accounting principles, complete and accurate books of account and records of its operations showing the
assets, liabilities, costs, expenditures, receipts, profits, and losses of the Partnership and of SunValley LLC,
and which shall include provision for separate Capital Accounts for the Partners and shall provide for such other
matters and information as a Partner shall reasonably request, together with copies of all documents executed on
behalf of the Partnership. Each Partner and its representatives, duly authorized in writing, shall have the
right to inspect and examine, at all reasonable times, at the principal office of the Partnership, all such books
of account, records, and documents.
(b) The Managing Partner shall deliver, or cause to be delivered, to the Non-Managing Partners
within ninety (90) Days after the end of each Fiscal Year of the Partnership, audited financial statements
prepared in accordance with generally accepted accounting principles.
(c) The Managing Partner shall deliver, or cause to be delivered, to the Non-Managing Partners
within forty-five (45) Days after the end of each calendar quarter, unaudited financial statements prepared in
accordance with accounting principles consistently applied on an historical basis and with such additional
details reasonably requested by the Non-Managing Partners to convert such financial statements into ones
consistent with generally accepted accounting principles.
(d) The Managing Partner shall also prepare, or cause to be prepared, on behalf of the Partnership,
such financial statements, reports, and other information as may be required by any Third Party lender of the
Partnership.
(e) The cost of all reporting provided for or authorized in this Section 4.4 shall be paid by the
Partnership. Any Partner may, at any time, and at its sole expense, cause an audit of the Partnership's books to
be made by a certified public accountant of such Partner's own selection.
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Section 4.5 Tax Returns.
The initial accountant for the Partnership (the "Accountant") shall be Deloitte & Touche LLP.
The Accountant shall annually audit the Partnership's books and records and prepare all applicable tax returns,
including any schedules or additional information reasonably required by any Partner in order to file its tax
returns, all of the foregoing at the expense of the Partnership. The Managing Partner shall provide the
Accountant such information as is reasonably necessary to permit the Accountant to prepare such tax returns
within ninety (90) Days after the end of each Fiscal Year of the Partnership, and the Managing Partner shall
timely file such tax returns, subject to its right to file an extension.
Section 4.6 Partnership Fiscal Year.
The Partnership's fiscal and taxable year shall be the calendar year.
ARTICLE V.
MANAGEMENT;
EXECUTION OF LEGAL INSTRUMENTS;
OTHER VENTURES.
Section 5.1 Management; Authority of the Managing Partner; Limitations on Authority.
(a) Except as otherwise provided herein regarding Major Decisions, the Partnership shall be managed
solely and exclusively by the managing Partner (the "Managing Partner"). TRG LLC is hereby designated as the
Managing Partner. The Managing Partner shall use its Best Efforts to carry out the purposes of the Partnership
and shall have, in respect of its management of the Partnership, all of the powers of the Partnership and shall
devote such time and attention to the Partnership as is reasonably necessary for the proper management of the
Partnership and its properties; it being acknowledged however that the Managing Partner shall not be required to
devote its time exclusively to the operation of the Partnership. Except as otherwise provided herein regarding
Major Decisions, all actions, decisions, determinations, designations, directions, appointments, consents,
approvals, selections, and the like, to be taken, made, or given by and/or with respect to the Partnership and/or
SunValley LLC, their respective businesses and properties as well as management of all Partnership affairs, shall
in each and every case be made by, and
29
only by, the Managing Partner, and all such actions, decisions, determinations, designations, directions,
appointments, consents, approvals, selections, and the like shall be controlling and binding upon the Partnership
and the Partners.
Accordingly, the Managing Partner shall have the exclusive right, power, and authority, on
behalf of the Partnership, subject only to the limitations set forth in this Agreement, including Section 5.1(c)
hereof, and subject to carrying out the purposes of the Partnership, to negotiate, enter into, perform, amend,
and take all actions in respect of any and all agreements, instruments, and documents; to cause SunValley LLC to
repair, renovate, rehabilitate, and expand the Shopping Center; to acquire and cause SunValley LLC to acquire,
assets of any nature; to borrow and cause SunValley LLC to borrow money, incur and repay debts and liabilities
and obligations, issue evidences of indebtedness, and secure such indebtedness by granting mortgage(s), liens, or
charges upon any property of the Partnership or of SunValley LLC; to cause the Managing Partner, in the event
that it decides to contribute Required Funds to the capital of the Partnership pursuant to Section 3.2(c) hereof,
to receive the Return thereon; to cause SunValley LLC to operate, maintain, manage, and lease the Shopping
Center; to cause SunValley LLC to enter into leases, subleases, and similar related and ancillary documents in
respect of the Shopping Center; to retain Third Parties on behalf of the Partnership and on behalf of SunValley
LLC, including, without limitation, architects, engineers, auditors, attorneys, consultants, and brokers; to
maintain and cause SunValley LLC to maintain, insurance; to obtain, through contract or otherwise, goods and
services; and to perform all acts that a Partner may legally do pursuant to the Partnership Law that are
consistent with the terms of this Agreement.
(b) The Managing Partner shall consult with and inform the Non-Managing Partners from time to time
as shall be reasonably requested by the Non-Managing Partners. The Non-Managing Partners shall have no right or
authority to act on behalf of or bind the Partnership in any manner except as may otherwise be agreed to by the
Managing Partner in writing.
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(c) Notwithstanding Sections 5.1(a) and 5.1(b) hereof, without the prior written consent of the
Non-Managing Partners, the Managing Partner shall not have the power to bind the Partnership in connection with
any of the following (each a "Major Decision"):
(i) other than as expressly approved in an Annual Budget and except with respect to any
renovation or expansion (x) required by law, (y) required by applicable insurance requirements, or (c)
made pursuant to leases entered into in the ordinary course of business, but in no event to exceed Two
Hundred Fifty Thousand Dollars ($250,000) in the aggregate per annum, the decision to renovate or expand
the Shopping Center;
(ii) except for any financing to obtain Required Funds, which financing does not require a
guaranty by TSA and/or ATSA (and/or any of their respective Affiliates), unless such guaranteed
financing (and guaranty) had been expressly approved in the Annual Budget, the financing or refinancing
of the Shopping Center, including the mortgaging or the placing or suffering of any other encumbrance on
the Shopping Center or any portion thereof or the guaranty of any such financing or refinancing;
(iii) the sale or other transfer of the Partnership's membership interest in SunValley LLC
or SunValley LLC's interest in the Property or the Shopping Center (or any portion thereof) other than
in accordance with Section 6.6 hereof and other than the leasing of the Shopping Center (or any
portion(s) thereof) in the ordinary course of business;
(iv) other than as provided in Section 1.5 hereof, the dissolution and liquidation of the
Partnership or of SunValley LLC;
(v) the approval of an Annual Budget for the Partnership and any material amendments
thereto;
(vi) other than in accordance with Article 6 hereof, the admission of additional Partners
to the Partnership or members to SunValley LLC;
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(vii) the selection of the manager of the Shopping Center (except as provided in Section
5.3(b) hereof regarding TTC) or the removal of the manager of the Shopping Center (including the removal
of TTC);
(viii) the entering into of contracts or agreements with any Partner or any Affiliate of a
Partner on behalf of the Partnership or of SunValley LLC other than the Management and Leasing Agreement
or any Renewal Management and Leasing Agreement as provided in Section 5.3(b) hereof or any other
contract or agreement expressly provided for and authorized in Section 5.3(b) hereof and the material
amendment of any such contracts or agreements;
(ix) the acquisition of any real property or interest therein including any interest in any
Person owning real property other than the Partnership's interest in SunValley LLC or the expansion of
the purposes of the Partnership beyond those specified in Section 2.1 hereof;
(x) the making of any investment in, or any advance to, any Person other than SunValley
LLC;
(xi) other than as to Required Funds expressly approved in an Annual Budget, the decision
to call for capital from the Partners;
(xii) the filing of any request or suit or the entering into of any agreement of extension
requiring the consent of the Partners pursuant to Section 5.7 hereof;
(xiii) the conduct of Partnership operations in a manner inconsistent with the provisions of
Section 5.8 hereof;
(xiv) the confession of any judgment against the Partnership or SunValley LLC;
(xv) the execution and delivery of any assignment for the benefit of creditors of the
Partnership or of SunValley LLC;
(xvi) the filing of any petition seeking reorganization, readjustment, arrangement,
composition, or similar relief for the Partnership or for SunValley LLC under the federal bankruptcy
laws or any similar law;
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(xvii) the merger or other business combination or division of the Partnership or of
SunValley LLC; and
(xviii) the amendment of this Agreement.
(d) The Managing Partner shall, prior to November 1st of each year, prepare and present to the
Non-Managing Partners, an operating budget for the Partnership and SunValley LLC, which shall include a capital
expenditure budget (the "Annual Budget") for the next Fiscal Year. The Annual Budget shall identify, in general
terms, the source of funding for each item contained therein, i.e., whether capital contributions from the
Partners or Third Party financing, and the proposed material terms (including whether guaranties will be
required) of any such Third Party financing. The Partners agree that the Annual Budget must provide for amounts
sufficient to maintain the Shopping Center as a first-class regional retail shopping center. The Annual Budget
shall be subject to the approval of the Non-Managing Partners. If a Non-Managing Partner objects to an Annual
Budget, such Partner shall submit to the Managing Partner, no later than November 30, a writing setting forth in
reasonable detail the reasons for its objection. If a Non-Managing Partner fails to timely submit the requisite
written objection, the Annual Budget shall be deemed approved by such Non-Managing Partner. If a Non-Managing
Partner timely submits its written objection and the Partners are not able to agree by December 31st on an Annual
Budget for the ensuing Fiscal Year, the last approved Annual Budget shall remain in effect for such ensuing
Fiscal Year, except that (i) nonrecurring items included in the previous Annual Budget shall not be included in
the carried over Annual Budget, and (ii) customary and reasonable increases in recurring expenses, in the
Managing Partner's reasonable judgment, will be permitted. The Managing Partner shall advise the Non-Managing
Partners on a timely basis of any material deviations from any budgets delivered by the Managing Partner to the
Non-Managing Partners as provided for above in this Section 5.1(d).
(e) TRG LLC shall serve as the Managing Partner for the Partnership unless and until its Percentage
Interest is reduced to less than twenty-five percent (25%), or it has suffered a Disabling Event or an Event of
Withdrawal. In the event that TRG LLC's Percentage Interest is
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reduced to less than twenty-five percent (25%), or it has suffered a Disabling Event or an Event of Withdrawal,
Taubman (provided that Taubman's Percentage Interest has not been reduced to less than twenty-five percent
(25%), and no Partner comprising Taubman has suffered a Disabling Event or an Event of Withdrawal), may notify
TRG LLC in writing that Taubman (or either Partner thereof) will assume all rights and all obligations of the
Managing Partner under this Agreement. If Taubman (or either Partner thereof) assumes the rights and obligations
of the Managing Partner pursuant to this Section 5.1(e) and thereafter Taubman's Percentage Interest is reduced
to less than twenty-five percent (25%), or either Partner comprising Taubman suffers a Disabling Event or an Event
of Withdrawal, the Managing Partner shall be that Partner designated by Partners holding in excess of fifty percent
(50%) of the Percentage Interests.
(f) The Partners, by their execution and delivery of this Agreement, irrevocably authorize the
Managing Partner to do any act that the Managing Partner has the right, power, and authority to do under the
provisions of this Agreement and under the Partnership Law (but only to the extent not inconsistent with the
terms of this Agreement), without any other or subsequent authorizations or consents of any kind. Except in the
case of a Major Decision, no Person dealing with the Partnership shall be required to investigate or inquire as
to the authority of the Managing Partner to exercise the rights, powers, and authority herein conferred upon it.
Any Person dealing with the Partnership shall, except in the case of a Major Decision, be entitled to rely upon
any action taken and/or any document or instrument executed and delivered by the Managing Partner or a Person
designated by the Managing Partner, and the Partnership shall be bound thereby. Except in the case of a Major
Decision, no purchaser of any property or interest owned by the Partnership, or lender, shall be required to
determine the sole and exclusive authority of the Managing Partner to execute and deliver on behalf of the
Partnership any such instrument of transfer or security, or to see to the application or distribution of revenues
or proceeds paid or credited in connection therewith.
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Section 5.2 Response of the Partners.
Unless otherwise specifically provided in this Agreement, whenever any Partner is requested by
any other Partner to cast a vote, grant an approval, or execute a consent of any nature whatsoever in connection
with the Partnership, such request shall be made in writing to the other Partner at its address set forth herein
and such Partner shall respond to such request with reasonable promptness by means of a written response signed
by such Partner and sent to the requesting Partner, which shall be binding on the responding Partner (and any
affiliated Partner), and in any event not more than ten (10) Business Days after the receipt of the request,
unless such request identifies an emergency situation, in which event not more than three (3) Business Days after
the receipt of the request. The response shall indicate any reasons for withholding consent. The failure of a
Partner to respond in writing within the applicable time period shall constitute a ratification and approval by
such Partner (unless an affiliated Partner has so responded) of the matter requested.
Section 5.3 Compensation of Partners and Affiliates.
(a) The Managing Partner shall not be entitled to any fees to act as Managing Partner hereunder.
The Managing Partner shall be entitled to reimbursement for any reasonable or necessary expenses incurred or
expenditures made by it (to the extent not otherwise reimbursed) for or on behalf of the Partnership (e.g.,
including, without limitation, travel).
(b) In accordance with the Management and Leasing Agreement, TTC shall continue to provide
management, administration, leasing, and other services as may be required from time to time in respect of the
Shopping Center. The Managing Partner is hereby authorized to, and shall, amend the Management and Leasing
Agreement as reasonably necessary (i) to take into account GEPTS' withdrawal as a partner of the Partnership, and
(ii) to provide that, in connection with the occurrence of a Change of Control Event, the Management and Leasing
Agreement may not be assigned and may be terminated in the event of a Change of Control Event. Any other
amendment or modification to the Management and Leasing Agreement shall, except as
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hereinafter permitted, require the Non-Managing Partners' prior written approval. The Managing Partner, on behalf
of the Partnership, shall have the right to (and so long as TRG LLC remains a Partner and no Change of Control
Event has occurred, shall) renew the term of the Management and Leasing Agreement (and to renew any renewals
thereof) (such renewed Management and Leasing Agreement and any renewals thereof are hereinafter referred to as
the "Renewal Management and Leasing Agreement"), provided that the Renewal Management and Leasing Agreement
contains the same terms and conditions as the Management and Leasing Agreement (except that the compensation under
any Renewal Management and Leasing Agreement may increase so as to be consistent with the compensation then
generally being paid pursuant to management agreements negotiated within the prior twenty-four (24) month
period in respect of other shopping centers in which TRG has an ownership interest together with Persons unrelated
to TRG). Any other amendment or modification to the Renewal Management and Leasing Agreement shall require the
Non-Managing Partners' prior written approval. In addition, the Managing Partner shall also have the right to
(and so long as TRG LLC remains a Partner and no Change of Control Event has occurred, shall) engage TTC to provide
services (including, without limitation, development services) in respect of the expansion, redevelopment,
or other such major change in the Shopping Center provided that (i) the terms and conditions of such engagement
are consistent with those generally negotiated in respect of other shopping centers in which TRG has an ownership
interest together with Persons unrelated to TRG, and (ii) the compensation for such engagement is computed on the
basis of the formula provided in the Management and Leasing Agreement (or the applicable Renewal Management
and Leasing Agreement) for compensation relative to "Optional Services" (as defined in the Management and
Leasing Agreement or the applicable Renewal Management and Leasing Agreement), or the then-current equivalent
thereof. During all periods when TTC shall be employed as the manager of the Shopping Center, the Managing Partner
shall cause TTC to perform its obligations under the Management and Leasing Agreement or any Renewal
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Management and Leasing Agreement, and any and all rights accorded the Partnership under the Management and Leasing
Agreement or any Renewal Management and Leasing Agreement shall be exercised and enforced solely by, the Managing
Partner. Notwithstanding anything to the contrary contained herein, in the event of a Change of Control Event,
the Partnership shall solicit bona fide, arm's-length proposals from Persons other than TTC that have management
experience and a reputation comparable to TTC's, to provide the management, administrative, leasing, and other
services in respect of the Shopping Center then provided by TTC. In the event that the terms of any such proposal
are more favorable to the Partnership than the terms of the current Management and Leasing Agreement or Renewal
Management and Leasing Agreement, as applicable, then unless TTC agrees to provide the required services
upon the same terms and conditions as are contained in the proposal, the Partnership shall terminate the Management
and Leasing Agreement or Renewal Management and Leasing Agreement, as applicable, and shall enter into a new
management and leasing agreement with such other Person for the provision of such services. In the event that
the terms of any such proposal are not more favorable to the Partnership than the terms of the current Management
and Leasing Agreement or Renewal Management and Leasing Agreement, then the Partnership shall retain TTC as the
manager.
Section 5.4 Execution of Legal Instruments.
All legal instruments affecting the Partnership, SunValley LLC, or Partnership or SunValley LLC
property need be executed by, and only by, the Managing Partner or that Person or those Persons (who need not be
Partners) designated in writing by the Managing Partner, and such designated Person's(s') signature(s) shall be
sufficient to bind the Partnership and its properties.
Section 5.5 Other Ventures.
The Partners acknowledge that each of them and their Affiliates may have interests in other
present or future ventures, including ventures that are competitive with the Partnership and/or SunValley LLC,
and that, notwithstanding its status as a Partner in the Partnership, a Partner and its Affiliates shall be
entitled to obtain and/or continue their respective individual participation in all such ventures without (i)
accounting to the Partnership or the other
37
Partners for any profits with respect thereto, (ii) any obligation to advise the other Partners of business
opportunities for the Partnership and/or SunValley LLC which may come to its or its Affiliate's attention as a
result of its or its Affiliate's participation in such other ventures or in the Partnership, and (iii) being
subject to any claims whatsoever on account of such participation.
Section 5.6 Indemnity and Reimbursement.
Without any duplication of amounts reimbursed to a Partner pursuant to Section 5.3(a) hereof,
the Partnership shall indemnify, defend, and hold harmless each Partner from any claim, demand, or liability, and
from any loss, cost, or expense, including, without limitation, attorneys' fees and court costs, which may be
asserted against, imposed upon, or suffered by a Partner by reason of any act performed for or on behalf of the
Partnership, or in furtherance of the Partnership business, to the extent authorized hereby, or by reason of any
omission, except for acts or omissions that constitute fraud, wilful misconduct, gross negligence, or a material
breach of this Agreement. Except for acts or omissions constituting fraud, wilful misconduct, gross negligence,
or a material breach of this Agreement, a Partner shall not be liable to the Partnership or to the other Partners
(and the interest of each Partner in the Partnership, and in its property and assets, shall be free of any claims
by the Partnership or the other Partners) by reason of any act performed for or on behalf of the Partnership, or
in furtherance of the Partnership business, or by reason of any omission. Any indemnity under this Section 5.6
shall be provided out of and to the extent of Partnership assets only, and no Partner shall have any personal
liability on account thereof. The indemnity provided in this Section 5.6 shall survive the dissolution and
termination of the Partnership and the termination of this Agreement.
Section 5.7 Tax Matters Partner.
(a) As used in this Agreement, "Tax Matters Partner" has the meaning set forth in Section
6231(a)(7) of the Code. The Managing Partner is hereby designated Tax Matters Partner for the Partnership. The
Tax Matters Partner shall comply with the requirements of Sections 6221 through 6232 of the Code applicable to a
Tax Matters Partner.
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(b) The Tax Matters Partner shall have a continuing obligation to provide the Internal Revenue
Service with sufficient information so that proper notice can be mailed to each Partner as provided in Section
6223 of the Code, provided that each Partner shall furnish the Tax Matters Partner with all such information
(including information specified in Section 6230(e) of the Code) as is required with respect to such Partner for
such purpose.
(c) The Tax Matters Partner shall keep the other Partners reasonably informed of all administrative
and/or judicial proceedings for the adjustment of "partnership items" (as defined in Section 6231(a)(3) of the
Code) at the Partnership level. Without limiting the generality of the foregoing sentence, within fifteen (15)
Days after receiving any written or oral notice of the time and place of a meeting or other administrative or
judicial proceeding from the Internal Revenue Service regarding a proceeding (and in any event, within a
reasonable time prior to such meeting or proceeding), the Tax Matters Partner shall furnish a copy of such
written communication or notice to the other Partners, or inform the other Partners of, the substance of any such
oral communication. This obligation of the Tax Matters Partner to inform the other Partners shall not extend to
routine and minor events.
(d) Each Partner shall promptly notify the Tax Matters Partner (who shall notify any unaffiliated
Partner) of its treatment of any Partnership item on its federal income tax return which is or may be
inconsistent with the treatment of that item on the Partnership's return. In addition, if any Partner intends to
file a request for administrative adjustment with the Internal Revenue Service, such Partner shall notify the Tax
Matters Partner (who shall notify any unaffiliated Partner) of such fact and its terms at least thirty (30) Days
prior to such filing.
(e) If any Partner intends to enter into a settlement agreement with the Secretary of the Treasury
(or his authorized delegate) with respect to any Partnership item, such Partner shall notify the Tax Matters
Partner (who shall notify any unaffiliated Partner) of such fact and its terms at least twenty (20) Days prior to
such settlement agreement and shall notify the Tax Matters Partner (who shall notify any unaffiliated Partner) of
any such settlement agreement and its terms within thirty (30) Days after the date of settlement.
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(f) If the Tax Matters Partner elects not to file suit under Section 6226 or Section 6228 of the
Code concerning an administrative adjustment or request for administrative adjustment and any other Partner
elects to file such a suit, such Partner shall notify the Tax Matters Partner (who shall notify any unaffiliated
Partner) of such intention, and the forum or forums in which such suit shall be filed shall be determined by
such Partner.
(g) Without the approval of the other Partners, the Tax Matters Partner shall not extend the
statute of limitations with respect to the Partners, file a request for administrative adjustment, file suit
concerning any tax refund or deficiency relating to any Partnership administrative adjustment, enter into any
settlement agreement relating to any Partnership adjustment, or enter into any settlement agreement relating to
any item of income, gain, loss, deduction or credit for any Fiscal Year of the Partnership.
(h) Each Partner shall be entitled to participate in all administrative proceedings with the
Internal Revenue Service, as provided in Section 6224(a) of the Code.
(i) The obligations imposed on the Tax Matters Partner and the participation rights afforded the
other Partners by this Section 5.7 and the Code may not be restricted or limited in any fashion by the Tax
Matters Partner without the written consent of the other Partners.
(j) The Tax Matters Partner shall be responsible for representing the Partnership in all dealings
with any state, local, or foreign tax authority, subject to the requirement that the provisions of this Section
5.7 shall apply with equal force to all dealings with any such tax authority.
Section 5.8 Specific Provisions Relating to Real Estate Investment Trust Status.
Anything herein to the contrary notwithstanding, so long as any Partner is, or is owned,
directly or indirectly, to the extent of at least fifty-one (51%) percent by a Person who is a REIT (hereinafter
each a "REIT Partner"), the Managing Partner shall cause the Partnership and SunValley LLC to conduct operations
in a manner consistent with the following provisions and any variance from the following shall require the
written consent of all of the REIT Partners:
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(a) To the extent required for any rents from all or any part of the Property or the Shopping
Center to qualify as "rents from real property" within the meaning of Section 856 of the Code and the Regulations
thereunder, any Person rendering services to a lessee or sublessee of all or any part of the Property or the
Shopping Center shall be a taxable REIT subsidiary within the meaning of Section 856(l) of the Code and any
Regulations thereunder or an "independent contractor" within the meaning of Section 856(d)(3) of the Code and the
Regulations thereunder from whom the Partnership and SunValley LLC do not derive or receive any income, except as
permitted by Section 856(d)(2)(C) of the Code;
(b) To the extent required for any rents from all or any part of the Property or the Shopping
Center to qualify as "rents from real property" within the meaning of Section 856 of the Code and the Regulations
thereunder, any manager or advisor to the Partnership or SunValley LLC shall be a taxable REIT subsidiary (or an
entity principally owned by a taxable REIT subsidiary) within the meaning of Section 856(l) of the Code and any
Regulations thereunder or an "independent contractor" within the meaning of Section 856(d)(3) of the Code and the
Regulations thereunder;
(c) To the extent required for any rents from all or any part of the Property or the Shopping
Center to qualify as "rents from real property" within the meaning of Section 856 of the Code and the Regulations
thereunder, neither the Partnership nor SunValley LLC shall manage or operate the Shopping Center other than
through a taxable REIT subsidiary (or an entity principally owned by a taxable REIT subsidiary) within the
meaning of Section 856(l) of the Code and any Regulations thereunder or an "independent contractor" within the
meaning of Section 856(d)(3) of the Code and the Regulations thereunder;
(d) Neither the Partnership nor SunValley LLC shall enter into any lease with any Person who is
directly or indirectly related (within the meaning of Section 856(d)(2)(B) of the Code) to any real estate
investment trust which is a partner or Affiliate of any member of any Partner;
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(e) Neither the Partnership nor SunValley LLC shall form an association taxable as a corporation or
acquire securities in any issuer, except for the acquisition of government securities;
(f) No lease or sublease of all or any part of the Property or the Shopping Center shall provide
for any rents that are contingent, in whole or in part, on the net income or profits derived by the lessee or
sublessee;
(g) Neither the Partnership nor SunValley LLC shall enter into any lease of personal property,
under or in connection with the lease of real property, if the rent attributable to such personal property
exceeds ten percent (10%) of the total rent for the taxable year attributable to both the real and personal
property leased under or in connection with such lease;
(h) Neither the Partnership nor SunValley LLC shall enter into any lending transaction if any
amount received or accrued, directly or indirectly, therewith by the Partnership or SunValley LLC, depends in
whole or in part on the income or profits of any Person; and
(i) Neither the Partnership nor SunValley LLC shall engage in any "prohibited transaction" within
the meaning of Section 857(b)(6) of the Code (for purposes hereof, the determination of whether a transaction
constitutes a "prohibited transaction" shall not take into account the provisions of Section 857(b)(6)(C) of the
Code).
Any attempted action that violates any of the foregoing shall be null and void and ineffective
for all purposes; provided, however, that any such attempted action shall constitute a material breach of this
Agreement.
ARTICLE VI.
TRANSFERS OF PARTNERSHIP INTERESTS.
Section 6.1 General Restrictions on Dispositions.
Except as expressly provided in this Article VI or Section 7.3 hereof, no Partner may Transfer
all or any part of its Partnership Interest (including the right to distributions) without the prior written
consent of the other Partners, provided that no Partner may, under any circumstances, Transfer all or any part of
its Partnership Interest if such Transfer would
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constitute a default under any indebtedness or other Third-Party
obligations or agreements of the Partnership. An assignment of all or a part of a Partnership Interest occurring
by operation of law (e.g., bankruptcy, attachment, etc.) shall not entitle the successor to participate in the
management and affairs of the Partnership or to exercise any rights of a Partner, including the right to vote on
or consent to any matter requiring a vote or a consent of the Partners, unless and until such transferee is
admitted as a Partner in accordance with Section 6.2 below. In the event of an assignment occurring by operation
of law, the assignor Partner shall be entitled to continue to exercise the rights of a Partner under this
Agreement, and such assignor Partner and its transferee shall be jointly and severally liable to the Partnership
for such Partner's obligations to the Partnership under this Agreement or under the Partnership Law. For
purposes of this Agreement, any Transfer of any direct or indirect membership interest, partnership interest,
stock or other equity interest in any Partner shall be deemed to be a Transfer by such Partner of its Partnership
Interest in the Partnership except for any direct or indirect Transfer of direct or indirect interests in TRG.
Section 6.2 Substitution of Partners.
Regardless of compliance with any of the provisions hereof (including, without limitation, the
provisions of Article VII hereof) permitting a Transfer or a Pledge of a Partnership Interest, no Transfer or
Pledge of a Partnership Interest shall be recognized by or be binding upon the Partnership unless:
(i) such instruments as may be required by the Partnership Law or other applicable law or
to effect the continuation of the Partnership and the Partnership's ownership of its
properties are executed and delivered and/or filed;
(ii) the instrument of assignment binds the assignee to all of the terms and conditions of
this Agreement as if the assignee were a signatory party hereto and does not release
the assignor from any liability or obligation, accruing prior to the date of the
Transfer, of or in respect of the Partnership Interest which is the subject of the
Transfer;
(iii) the instrument of assignment is manually signed by the assignee and assignor and is
otherwise reasonably acceptable in form and substance to the non-transferring
Partner(s);
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(iv) if there is more than a single assignee (or successor in interest), the assignees or
successors shall have complied with the provisions of Section 7.2 hereof;
(v) such Transfer or Pledge shall not be prohibited by, or cause a breach of, or cause
events, including, without limitation, by reason of the nature of the transferee or
pledgee (e.g., tax-exempt status), that are unacceptable to the non-transferring or
non-pledging Partner(s) in the exercise of its(their) reasonable discretion to occur
pursuant to, any agreement, obligation, or understanding by which the assignor or the
assignee or any properties of the Partnership or the Partnership itself is bound or
affected;
(vi) the non-transferring Partner(s) shall receive such evidence (including opinions of
counsel) of the due authorization, execution and delivery of instruments by, and the
validity and enforceability of such instruments against, such transferee as the
non-transferring Partner(s) shall reasonably request;
(vii) any required consent of the mortgagee or beneficiary under any mortgage or deed of
trust or lease of the Shopping Center to such Transfer and substitution or Pledge
shall have been obtained;
(viii) the assignee shall pay all expenses incurred by the Partnership in admitting the assignee
as a Partner; and
(ix) in the event of a Pledge of a Partner's Partnership Interest, the provisions of Section
6.8 hereof are complied with.
An assignee of a Partnership Interest pursuant to a Transfer permitted in this Agreement who is
admitted as a partner in the Partnership in the place and stead of the assignor Partner in respect of the
Partnership Interest acquired from the assignor Partner shall have all of the rights, powers, obligations, and
liabilities, and be subject to all of the restrictions, of the assignor Partner, including, without limitation,
but without release of the assignor Partner, the liability of the assignor Partner for any existing unperformed
obligations of the assignor Partner. Each of the Partners, on behalf of itself and its permitted successors and
assigns, HEREBY AGREES AND CONSENTS to the admission of any such additional partners as herein provided.
Section 6.3 Transfers of Interests in Certain Partners.
Direct and/or indirect ownership interests in TSA and/or ATSA may be Transferred so long as at
all times after any such Transfer at least fifty-one percent (51%) of the direct and indirect ownership interests
in TSA or ATSA, as applicable, are owned by, and TSA or ATSA, as
44
applicable, is solely Controlled By, A. Alfred Taubman and/or members of his Immediate Family and/or their
respective estates and/or a Family Trust in respect of any of the foregoing.
Section 6.4 Right of First Refusal.
(a) If any Partner (it being understood that the Partners comprising Taubman shall act jointly for
purposes of this Section 6.4) desires to Transfer all or any portion of its Partnership Interest (a "Subject
Interest"), to any Person (other than pursuant to a Pledge), and such Transfer is not otherwise permitted by
Sections 6.1 or 6.3(a) hereof, then, such Partner (the "Seller") shall submit to any non-Seller Partner (the
"Buyer") a true copy of a bona fide written offer to purchase the Subject Interest (the "Offer"), which Offer
shall in any event (i) provide for (x) an all cash at closing purchase price that provides for no contingent
payments, participation features or other payments other than as are customary to a Transfer for an all cash at
closing purchase price, or (y) a purchase price that can be paid with cash, marketable securities, and/or units
in an operating partnership which are convertible into marketable securities, and that can, strictly for purposes
of this provision and the calculation hereinafter referenced, be converted to an all cash at closing purchase
price equivalent, and (ii) disclose the price and terms of such proposed sale and the name, address, and
beneficial ownership of the proposed purchaser. The Buyer shall have the absolute right to purchase the Subject
Interest upon the terms and conditions set forth in the Offer, or if such Offer provides for a purchase price to
be paid in other than all cash at the closing, the Buyer may purchase the Subject Interest for an all cash at
closing purchase equivalent; provided, however, that, regardless of such terms and conditions, the date, time,
and place for the consummation of such purchase shall be as designated by the Buyer, provided that the date so
designated shall be a Business Day within seventy-five (75) Days after the Exercise Notice (as defined below)
with at least ten (10) Days' advance written notice thereof to the Seller. The Buyer shall, within forty-five
(45) Days after receipt of the Offer (the "Exercise Period"), specify in a notice (an "Exercise Notice") to the
Seller whether or not it desires to purchase the Subject Interest. Such Exercise Notice shall be accompanied by
a cash earnest money deposit equal to five percent (5%) of the purchase price if the Buyer elects to purchase the
Subject Interest. If the
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Buyer fails to give an Exercise Notice (and deposit) within the Exercise Period as to the Subject Interest, such
failure shall constitute an election to reject the Offer. The closing of a purchase by a Buyer shall be held in
accordance with the provisions of Section 6.7 hereof. At the closing, the Buyer's earnest money deposit,
together with interest thereon, shall be credited against the purchase price for the Subject Interest (or
returned in the event that the purchase price is to be paid in other than cash); provided, however, that if the
closing shall fail to occur because of a default by the Buyer, the Buyer may not submit an Offer, a Buy-Sell
Notice, or a Sale Notice, for a period of twelve (12) months after the scheduled closing date, and the Seller
shall have the right, as its exclusive remedy, to retain the Buyer's deposit, together with interest thereon,
as liquidated damages, it being agreed that in such instance, the Seller's damages would be difficult, if not
impossible, to ascertain.
(b) The Seller may sell the Subject Interest, if the Offer was not so accepted, to the proposed
purchaser whose name and address were disclosed in the Offer but only (i) upon the same terms and conditions set
forth therein (except that the purchase price for the Subject Interest may be ninety-five percent (95%) or more
of the purchase price for the Subject Interest as set forth in the Offer), (ii) within seventy-five (75) Days
after the expiration of the Exercise Period, and (iii) after the Seller has obtained any Third Party consents
necessary to effectuate the sale; otherwise, any such sale shall be null and void and of no force or effect
whatsoever.
Notwithstanding anything to the contrary contained herein, a Partner(s) may not submit an Offer in
accordance with this Section 6.4 if (i) a Partner(s) has given a Buy-Sell Offer in accordance with Section 6.5
hereof or a Sale Offer in accordance with Section 6.6 hereof, in either case, that is outstanding or pursuant to
which a purchase has not yet been consummated, or (ii) a Partner(s) is(are) marketing the Partnership's
membership interest in SunValley LLC or the Shopping Center as provided in Section 6.6 hereof.
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Section 6.5 Buy-Sell.
(a) TRG LLC or Taubman (it being understood that the Partners comprising Taubman shall act jointly
for purposes of this Section 6.5) (the "Initiating Partner") shall have the right, at any time, to initiate a
termination of the Partnership in accordance with this Section 6.5. The Initiating Partner shall deliver to
whichever of TRG LLC or Taubman is not the Initiating Partner (the "Non-Initiating Partner") an offer (a
"Buy-Sell Offer") in writing stating a cash purchase price (the "Total Price") attributable to one hundred percent
(100%) of the Partnership's assets. The Non-Initiating Partner then shall have the option either:
(i) to purchase the Partnership Interest(s) of the Initiating Partner in the Partnership
for cash at a price equal to the amount that the Initiating Partner would receive under Section 8.1(a)
hereof, if the Partnership's assets were sold for the Total Price and all of the liabilities of the
Partnership were satisfied; or
(ii) to sell to the Initiating Partner the Partnership Interest(s) of the Non-Initiating
Partner in the Partnership for cash at a price equal to the amount that the Non-Initiating Partner would
receive under Section 8.1(a) hereof if the Partnership's assets were sold for the Total Price and all of
the liabilities of the Partnership were satisfied.
The Non-Initiating Partner shall give written notice of such election to the Initiating Partner
within forty-five (45) Days after receipt of the Buy-Sell Offer. Such notice shall be accompanied by a cash
earnest money deposit equal to five percent (5%) of the purchase price if the
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Non-Initiating Partner elects to purchase the Partnership Interest of the Initiating Partner. Failure of the
Non-Initiating Partner to give the Initiating Partner notice that the Non-Initiating Partner has elected under
Section 6.5(a)(i) hereof (and to deliver the required deposit) within the foregoing forty-five (45) Day period
shall be conclusively deemed to be an election to sell under Section 6.5(a)(ii) hereof. In the event that the
Non-Initiating Partner does not elect to purchase the Partnership Interest of the Initiating Partner, the
Initiating Partner shall give the Non-Initiating Partner, a cash earnest money deposit equal to five percent
(5%) of the purchase price of the Non-Initiating Partner's Partnership Interest, within ten (10) Days after (i)
the receipt of the Non-Initiating Partner's election to sell under Section 6.5(a)(i) hereof, or (ii) if no
election is made by the Non-Initiating Partner, the expiration of the forty-five (45) Day period within which the
Non-Initiating Partner could have sent its election, as applicable.
(b) The closing of a purchase pursuant to Section 6.5(a) hereof shall be held in accordance with
the provisions of Section 6.7 hereof at the principal office of the Partnership on a Business Day agreed to by
the Initiating Partner and the Non-Initiating Partner that is not more than seventy-five (75) Days after receipt
of the written notice of the election of the Non-Initiating Partner or not more than one hundred five (105) Days
after receipt of the Buy-Sell Offer if the Non-Initiating Partner fails to give such notice. At the closing, the
Initiating Partner's or Non-Initiating Partner's, as applicable, earnest money deposit, together with interest
thereon, shall be credited against the purchase price of the Partnership Interest being purchased; provided,
however, that if the closing shall fail to occur because of a default by the purchasing Partner, the purchasing
Partner may not submit a Buy-Sell Offer, an Offer, or a Sale Offer, for a period of twelve (12) months after the
scheduled closing date, and the selling Partner shall have the right, as its exclusive remedies, to (i) retain
the purchasing Partner's earnest money deposit, together with interest thereon, as liquidated damages, it being
agreed that in such instance, the selling Partner's damages would be difficult, if not impossible, to ascertain,
and/or (ii) elect, within sixty (60) Days after such default, to purchase the purchasing Partner's Partnership
Interest for a cash purchase price equal to the amount that such purchasing Partner would receive under clause
(i) or clause (ii) of Section 6.5(a) hereof, as applicable, provided that such Partner includes a cash earnest
money deposit equal to five percent (5%) of such purchase price with its election. Notwithstanding anything to
the contrary contained herein, a Partner(s) may not submit a Buy-Sell Offer in accordance with this Section 6.5
if (i) a Partner(s) has given an Offer in accordance with Section 6.4 hereof or a Sale Offer in accordance with
Section 6.6 hereof, in either case, that is outstanding or pursuant to which a purchase has not yet been
consummated, or (ii) a Partner(s)
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is(are) marketing the Partnership's membership interest in SunValley LLC or the Shopping Center as provided in
Section 6.6 hereof.
Section 6.6 Sale of the Project.
(a) If TRG LLC or Taubman (it being understood that the Partners comprising Taubman shall act
jointly for purposes of this Section 6.6) desires to market and sell either (i) the Partnership's membership
interest in SunValley LLC or (ii) the Shopping Center on behalf of SunValley LLC to a Third Party, TRG LLC or
Taubman, as applicable (the "Triggering Partner") shall deliver to whichever of TRG LLC and Taubman is not the
Triggering Partner (the "Non-Triggering Partner") an irrevocable offer (the "Sale Offer") in writing stating a
cash purchase price attributable to one hundred percent (100%) of the Partnership's assets. The Non-Triggering
Partner shall then have the option to purchase the Partnership Interest(s) of the Triggering Partner for cash at
a price equal to the amount (the "Sale Price") that the Triggering Partner would receive under Section 8.1(a)
hereof, if the Partnership's assets were sold for the purchase price set forth in the Sale Offer and all of the
liabilities of the Partnership were satisfied.
The Non-Triggering Partner shall specify in a notice (a "Trigger Notice") to the Triggering
Partner, within forty-five (45) Days after receipt of the Sale Offer, whether or not it(they) desires to accept
the Sale Offer and purchase the Partnership Interest(s) of the Triggering Partner for the Sale Price. Such
Trigger Notice shall be accompanied by a cash earnest money deposit equal to five percent (5%) of the purchase
price of the Triggering Partner's Partnership Interest if the Non-Triggering Partner has elected to purchase the
Triggering Partner's Partnership Interest(s). Failure to give a Trigger Notice that the Non-Triggering Partner
has elected to purchase the Partnership Interest(s) of the Triggering Partner (and to deliver the required
deposit) within such forty-five (45) Day period, shall constitute an election to reject the Sale Offer.
If the Sale Offer was not so accepted by the Non-Triggering Partner, the Triggering Partner may
sell either (i) the Partnership's membership interest in SunValley LLC, or (ii) the Shopping Center, as the case
may be, and all other assets of the Partnership to a Third Party for an all cash at closing purchase price that
is equal to (or greater than) ninety-five (95%) of the
49
purchase price for one hundred percent (100%) of the Partnership's assets as set forth in the Sale Offer and that
provides for no contingent payments, participation features or other payments other than are customary to a
Transfer for an all cash at closing purchase price. The closing of any such sale to a Third Party shall occur
within two hundred ten (210) Days after the expiration of the forty-five (45) Day period within which the
Non-Triggering Partner could have sent the Trigger Notice; otherwise, any such sale shall be null and void and
of no force or effect whatsoever.
(b) The closing of a sale by a Triggering Partner to a Non-Triggering Partner pursuant to Section
6.6(a) hereof shall be held in accordance with the provisions of Section 6.7 hereof at the principal office of
the Partnership on a Business Day agreed to by the Triggering Partner and the Non-Triggering Partner that is not
more than one hundred five (105) Days after receipt of a Trigger Notice. At the closing, the Non-Triggering
Partner's earnest money deposit, together with interest thereon, shall be credited against the purchase price of
the Triggering Partner's Partnership Interest; provided, however, that if the closing shall fail to occur because
of a default by the Non-Triggering Partner, the Non-Triggering Partner may not submit a Sale Offer, an Offer, or
a Buy-Sell Offer, for a period of twelve (12) months after the scheduled closing date, and the Triggering Partner
shall have the right, as its exclusive remedy, to retain the Non-Triggering Partner's earnest money deposit,
together with interest thereon, as liquidated damages, it being agreed that in such instance, the Triggering
Partner's damages would be difficult, if not impossible, to ascertain. Notwithstanding anything to the contrary
contained herein, a Partner(s) may not submit a Sale Offer in the event that a Partner(s) has given an Offer in
accordance with Section 6.4 hereof or a Buy-Sell Offer in accordance with Section 6.5 hereof, in either case,
that is outstanding or pursuant to which a purchase has not yet been consummated.
Section 6.7 Closings.
At the closing of the purchase of a Partner's Partnership Interest pursuant to this Agreement,
the selling Partner(s) shall transfer to the purchasing Partner(s) such Partnership Interest(s) (including,
without limitation, any rights of the selling Partner(s) to receive (i) repayment of any loans (other than those
secured by the Shopping Center) made by it(them) to the
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Partnership, with any accrued and unpaid interest thereon, (ii) repayment of such Partner's(s') capital
contributions, if any, including, in the case of TRG LLC, the TRG LLC Excess Contributions and any accrued but
unpaid Return thereon, (iii) distributions of Available Cash, and (iv) distributions on termination or
dissolution), free and clear of all liens, security interests, and claims of others, and shall deliver to the
purchasing Partner(s) such instruments of transfer with respect to the assets of the Partnership and such evidence
of due authorization, execution and delivery, and of the absence of any liens, security interests, or claims
of others as the purchasing Partner(s) shall reasonably request. The instruments of transfer shall be without
representations or warranties except as to the absence of any liens, security interests or claims of others.
The selling Partner(s) shall be responsible for any stamp, recording, transfer, and similar transactional
taxes (including any state or local taxes measured by the gain to such selling Partner(s)) payable upon such
transfer.
At such closing, the purchasing Partner(s) shall pay the purchase price payable by it(them), at
the option of the purchasing Partner(s), by good certified or official bank check payable to the order of the
selling Partner(s) or by Fedwire transfer of immediately available funds. The purchasing Partner(s) shall be
responsible for obtaining all Third Party consents necessary to effectuate the purchase and shall also deliver or
cause to be delivered to the selling Partner(s) a release or releases from all recourse obligations and
liabilities of the Partnership. Notwithstanding anything to the contrary contained herein, in the event that the
purchasing Partner(s) is unable to obtain Third Party consents necessary to effectuate a sale hereunder (having
used its(their) Best Efforts to do so), it shall send written notice thereof to the selling Partner(s) who may
then seek to obtain such Third Party consents. In the event that one or more Third Party consents necessary to
effectuate the sale has not been obtained by the date of the closing, any such sale shall be null and void and of
no force of effect. The selling Partner(s) shall be entitled to Available Cash allocable to its(their)
Partnership Interest(s) through the date of closing.
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Section 6.8 Pledge of Partnership Interests.
Each Partner (each being hereinafter referred to as a "Pledging Partner") may Pledge all or any
portion of its Partnership Interest or any of the proceeds thereof, at any time subject to the following
conditions:
(i) the Person (the "Pledgee") to whom the Pledging Partner's Partnership Interest or the
proceeds thereof have been pledged in accordance with the provisions of this Section 6.8 shall not have
the right to become a substitute Partner in the Partnership;
(ii) in the event that the Pledgee begins to effect any of its Pledgee Rights under the
loan and/or pledge agreement, including, without limitation, foreclosure or sale pursuant to the
applicable commercial code, the Pledging Partner shall no longer have any management, approval, or
consent rights provided in this Agreement;
(iii) the documents governing the Pledge of all or any portion of the Pledging Partner's
Partnership Interest pursuant to this Section 6.8 (the "Pledge Documents") shall contain a provision
reasonably acceptable to the other Partner (the "Non-Pledging Partner") (i.e., if the Pledging Partner
is TRG LLC, the Non-Pledging Partner shall be Taubman, and if the Pledging Partner is either of the
Partners comprising Taubman, the Non-Pledging Partner shall be TRG LLC) providing that upon the exercise
of any of its Pledgee Rights, in no event shall the Pledgee be entitled to realize an amount in excess
of an amount approved by the Non-Pledging Partner (in its sole discretion) as set forth in the Pledge
Documents; and
(iv) the Pledge Documents, shall contain a provision reasonably acceptable to the
Non-Pledging Partner acknowledging and providing that, notwithstanding anything in this Agreement or in
the Pledge Documents to the contrary, upon a Transfer of the
52
Pledging Partner's Partnership Interest pursuant to the exercise of any of the Pledgee Rights, the
right of first refusal in respect of the Pledging Partner's Partnership Interest provided to the Buyer
in Section 6.4 hereof shall apply. In the event that the Pledgee Right effected by the Pledgee does
not entail a cash sale of the Pledging Partner's Partnership Interest, the purchase price of the
Pledging Partner's Partnership Interest pursuant to Section 6.4 shall equal the outstanding principal
amount of the Pledging Partner's indebtedness to the Pledgee and any other amounts owed to the Pledgee
with respect thereto, including, without limitation, any and all accrued but unpaid interest thereon.
In the event that the Non-Pledging Partner exercises its right of first refusal, upon payment of the
purchase price, the Pledgee (or any other Person acquiring the Pledging Partner's Partnership
Interest as a result of the exercise of the Pledgee Rights) shall Transfer the pledged Partnership
Interest to the Non-Pledging Partner, free and clear of any lien, pledge, or other encumbrance
associated with the Pledge or the Pledging Partner's obligation secured thereby. The Pledgee, the
Pledging Partner, and the Non-Pledging Partner shall have executed an agreement, in form and substance
reasonably satisfactory to the Non-Pledging Partner, in order to implement the provisions of this
Section 6.8. Any Pledge of a Pledging Partner's Partnership Interest that violates the requirements of
this Section 6.8 shall be null and void ab initio.
ARTICLE VII.
DISABLING EVENT IN RESPECT OF A PARTNER;
SUCCESSION OF INTERESTS.
Section 7.1 Disabling Event in Respect of a Partner.
(a) For purposes hereof:
(i) a "Disabling Event" means, with respect to a Partner, such Partner's (A) in the case
of a Partner that is a natural Person, death, (B) Bankruptcy, (C) in the case of a
Partner who is a natural Person, the entry by a court of competent jurisdiction
adjudicating him incompetent to manage his Person
53
or his property, (D) in the case of a Partner who is acting as a Partner by virtue
of being a trustee of a trust, the termination of the trust (but not merely the
substitution of a new trustee), (E) in the case of a Partner that is a separate
partnership, the dissolution and commencement of winding up of the separate partnership,
or (F) in the case of a Partner that is a corporation, the filing of a certificate of
dissolution, or its equivalent, for the corporation or the revocation of its charter
and the expiration of ninety (90) Days after the date of notice to the corporation of
revocation without a reinstatement of its charter;
(ii) a "Disabled Partner" shall be a Partner who has suffered a Disabling Event or an Event
of Withdrawal; and
(iii) a "Successor" shall be, with respect to a Disabled Partner, such Disabled Partner's
successor(s) in interest, personal representative(s), heirs at law, legatee(s), or
estate; and
(iv) "Event of Withdrawal" means, with respect to a Partner, such Partner's retirement,
resignation, other withdrawal from the Partnership pursuant to the Partnership Law or
any other event (which is not a Disabling Event) that causes a Partner to cease to be
a partner under the Partnership Law.
(b) Upon the occurrence of a Disabling Event or an Event of Withdrawal in respect of a Partner, the
Partnership shall not be dissolved, but shall be continued and the Successor to such Disabled Partner, subject to
Section 6.2 hereof, shall have the rights of such Disabled Partner in the Partnership subject to the terms and
provisions of this Agreement.
Section 7.2 Single Representative to Act on Behalf of Successors.
In the event that TRG LLC's, TSA's, or ATSA's Partnership Interest is, at any time during the
term of this Agreement (including any period of dissolution and winding up of the Partnership), held by more than
one Person, then all of the Persons holding TRG LLC's, TSA's, or ATSA's, as the case may be, original Partnership
Interest shall forthwith, but in any event within
54
thirty (30) Days after the date on which the Partnership Interest of such Partner is held by more than a
single Person, designate one or more individuals as their collective authorized representative(s) for
purposes of Section 5.2 hereof, who shall each have the power and authority, acting alone, to represent and
bind and act on behalf of all of the Partners so joined together and represented (i.e., all of the successors
to the Partnership Interest of TRG LLC, TSA, or ATSA, as the case may be) in connection with all matters relating
to this Agreement or the Partnership. An authorized representative designated as required herein shall act at the
direction of that Partner or those Partners, represented by such authorized representative, who at the relevant
time holds or collectively hold, as the case may be, a Percentage Interest which is in excess of fifty percent
(50%) of the total Percentage Interest held by all the Partners represented by such authorized representative.
Section 7.3 Succession by Individuals to Partnership Interests of Partners.
In the event that any individual succeeds to the interest of any Partner in accordance with the
terms of this Agreement, then the interest of such individual Partner in the Partnership, subject to the
provisions of Section 7.2 hereof, may be:
(i) Transferred or disposed of by will or intestacy to or for the benefit of any member or
members of the deceased Partner's Immediate Family; or
(ii) Transferred during his lifetime or at his death to a Family Trust for such individual.
Section 7.4 References to "Partner" and "Partners" in the Event of Successors.
In the event that TRG LLC's, TSA's, or ATSA's Partnership Interest is held by one or more
successors to such Partner, references in this Agreement to "Partner" and "Partners" shall refer, as applicable
and except as otherwise provided herein, to the collective Partnership Interests of all successors to the
Partnership Interest of TRG LLC, TSA, or ATSA, as the case may be; and all decisions, consents, approvals,
determinations, actions, and selections of the Partners (to the extent any such decisions, consents, approvals,
determinations, actions, and selections of the Partners are provided for in this Agreement) and the Partnership
shall, as herein provided
55
but subject to the provisions of Article VII hereof, require the decision, consent, approval, determination,
action, or selection of TRG LLC or an authorized representative of all of the successors to the
Partnership Interest of TRG LLC (acting in the manner provided in Section 7.2 hereof) and/or TSA or an
authorized representative of all of the successors to the Partnership Interest of TSA (acting in the manner
provided in Section 7.2 hereof) and/or ATSA or an authorized representative of all of the successors to
the Partnership Interest of ATSA (acting in the manner provided in Section 7.2 hereof), as provided for in this
Agreement.
Section 7.5 Waiver of Dissolution if Transfer is in Full Compliance with Agreement; Negation of Right to
Dissolve Except as Herein Provided; No Withdrawal.
(a) Each of the Partners hereby waives its right to terminate or cause the dissolution of the
Partnership (as such right is provided under the Partnership Law) upon the Transfer of any Partner's Partnership
Interest, provided that any such Transfer is permitted by and completed fully in accordance with the terms of
this Agreement.
(b) Except as provided in this Agreement, no Partner shall have the right to terminate this
Agreement or dissolve the Partnership by such Partner's express will.
(c) No Partner shall have any right to retire, resign, or otherwise withdraw from the Partnership
and have the value of such Partner's Partnership Interest ascertained and receive an amount equal to the value of
such Partnership Interest.
(d) In the event that a Partner withdraws from the Partnership in breach of this Agreement but
pursuant to such Partner's statutory rights under the Partnership Law, to the extent that such rights exist in
the face of a prohibition against withdrawal in this Agreement, then the value of such Partner's Partnership
Interest shall be ascertained in accordance with Section 7.6 hereof and the Partnership Law, and such Partner
shall receive from the Partnership in exchange for the relinquishment of such Partner's Partnership Interest an
amount equal to the value of such Partner's Partnership Interest as so determined less twenty-five percent (25%)
of such value as liquidated damages and not as a penalty. In no event shall a Partner be considered to have
56
withdrawn from the Partnership solely as a result of such Partner having suffered a Disabling Event.
Section 7.6 Determination of Fair Market Value of Partnership Interests.
Solely for purposes of Section 7.5(d) hereof, if it shall be necessary to determine the fair
market value of a Partner's Partnership Interest, fair market value shall be equal to the amount, determined as
hereinafter set forth in this Section 7.6, that would be distributed to such Partner pursuant to Section 8.1(a)
hereof, assuming no reserves have been established by the Managing Partner and that there are no costs attendant
upon such liquidation, but taking into account any and all allocations pursuant to Section 4.1 hereof and
distributions pursuant to Section 4.2 hereof through the date of such determination, if all of the assets of the
Partnership were sold for their fair market value; provided, however, that (i) the fair market value of such
Partnership Interest shall be reduced by the amount of any distributions made to the Partner whose Partnership
Interest is being sold subsequent to the date of the balance sheet to be prepared pursuant to this Section 7.6,
(ii) the fair market value of such Partnership Interest shall be further reduced by the fees of the Accountants
and appraisers for the services rendered by them in accordance with this Section 7.6, and (iii) any indebtedness
to the Partnership of the Partner whose Partnership Interest is to be sold at the date of the consummation of the
purchase shall be paid to the Partnership in repayment of such indebtedness (such repayment to be treated as
having occurred immediately prior to the sale). To determine the fair market value of the Partnership's assets,
the Accountants shall prepare a balance sheet for the Partnership as of the last Day of the month preceding the
date of the event giving rise to the necessity to determine fair market value (the "Valuation Date"). Such
balance sheet shall be prepared in the manner in which prior balance sheets of the Partnership have been
consistently prepared. The Accountants shall then determine the excess of the total assets of the Partnership
over the total liabilities of the Partnership (the "Net Value"). Net Value shall be adjusted to reflect (1) the
actual value of any negotiable securities included in the Partnership's assets on the Valuation Date, and (2) the
fair market value of all the Partnership's real property (taking into account any participation features of
57
any debt encumbering such property), including all improvements thereon and thereto, and other assets of the
Partnership based upon an appraisal of the Partnership's real property by a member of the American Institute of
Real Estate Appraisers and an appraisal of the other assets of the Partnership by a qualified appraiser, each
such appraiser to be selected jointly by TRG LLC, on the one hand, and Taubman, on the other hand. If TRG LLC
and Taubman are unable to agree upon an appraiser, then TRG LLC and Taubman shall each appoint an appraiser. The
appraisals shall be averaged to calculate the appraised fair market value of the Partnership's property, unless
such appraisals differ by more than five percent (5%) of the lower appraisal, in which event, the two (2)
appraisers shall select a third appraiser who shall independently appraise the Partnership's property. The
appraised fair market value of the Partnership's property shall then be the average of those appraisals which
differ from the middle appraisal by less than five percent (5%) of the lowest appraisal. If none of the
appraisals differ from the middle appraisal by less than five percent (5%) of the lowest appraisal, then the
value of the middle appraisal shall be the appraised fair market value of the Partnership's property. The fee of
each of the appraisers shall be borne by the selling Partner.
Ninety (90) Days after the preparation of any such balance sheet, the Accountants shall prepare
an adjusted balance sheet, in the manner set forth above, for the Partnership, to reflect disputed and/or unknown
operating income and expense items and real estate tax increases for the current year if actual real estate taxes
are unknown at the time the initial balance sheet is prepared (the "Adjustments"). The Managing Partner shall
provide the Non-Managing Partners with written notice (an "Adjustment Notice") of the Adjustments within ten (10)
Days after the Accountants' determination thereof. The fair market value of the Partnership's assets and the
fair market value of a Partner's Partnership Interest shall be adjusted to reflect the Adjustments. The selling
Partner or the acquiring Partner, as the case may be, shall pay to the other, within ten (10) Days after the
receipt of the Adjustment Notice, the net amount due such Partner, based upon the Adjustments. The provisions of
this Section 7.6 shall survive the dissolution and termination of the Partnership.
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ARTICLE VIII.
WINDING UP, LIQUIDATION, AND
TERMINATION OF THE PARTNERSHIP.
Section 8.1 Liquidation of the Assets of the Partnership and Disposition of the Proceeds Thereof.
(a) Upon the dissolution of the Partnership, the Managing Partner (unless the Managing Partner
shall have suffered a Disabling Event in which event the Non-Managing Partners) (herein referred to as the
"Liquidator") shall proceed to wind up the affairs of the Partnership, liquidate the property and assets of the
Partnership, and terminate the Partnership, and the proceeds of such liquidation shall be applied and distributed
in the following order of priority:
(1) to the expenses of liquidation; and then
(2) to the payment of the debts and liabilities of the Partnership owing to Persons other
than Partners and their Affiliates; and then
(3) to the establishment of any reserves that the Liquidator deems necessary or
appropriate to provide for any contingent or unforeseen liabilities or obligations of the Partnership
(other than those owing to Partners) or of the Partners arising out of or in connection with the
Partnership (which reserves may be held by a liquidating trust established for the benefit of the
Partners for the purpose of liquidating Partnership assets, collecting amounts owed to the Partnership,
and paying any contingent or unforeseen liabilities of the Partnership); provided, however, that after
the expiration of a one year period, any excess reserves remaining shall be distributed in the manner
hereinafter provided in this Section 8.1(a); and then
(4) to the satisfaction of any obligations of the Partnership to Partners and/or their
Affiliates not otherwise provided for in this Section 8.1(a); and then
(5) to TRG LLC in an amount equal to the sum of the accrued but unpaid Return on the TRG
Excess Contributions; and then
59
(6) to TRG LLC in an amount equal to the TRG Excess Contributions to the extent that the
TRG Excess Contributions have not been previously distributed to TRG LLC; and then
(7) to the Partners in proportion to and to the extent of their positive Capital Account
balances. For this purpose, the determination of the Partners' Capital Account balances shall be made
after adjustment to reflect the allocation of all Profits, Losses, and items in the nature of income,
gain, expense, or loss under Section 4.1 hereof and distributions pursuant to Section 4.2 hereof and
clauses (5) and (6) of this Section 8.1(a) through the Fiscal Year of liquidation of the Partnership.
Subject to the provisions of clause (3) of this Section 8.1(a), all distributions pursuant to this
Section 8.1 shall be made by the end of the fiscal year of liquidation (or, if later, within ninety (90)
Days after the date of such liquidation).
(b) Subject to the requirements of Regulations Section 1.704-1(b)(2)(ii)(b)(2), a reasonable time
shall be allowed for the orderly liquidation of the property and assets of the Partnership and the payment of the
debts and liabilities of the Partnership in order to minimize the losses normally attendant upon a liquidation.
(c) Each Partner hereby appoints the Liquidator as its true and lawful attorney-in-fact to hold,
collect, and disburse, in accordance with this Agreement, the applicable requirements of Regulations Section
1.704-1(b), and the terms of any receivables existing at the time of the termination of the Partnership and the
proceeds of the collection of such receivables, including those arising from the sale of Partnership property and
assets. Notwithstanding anything to the contrary in this Agreement, the foregoing power of attorney shall
terminate upon the distribution of the proceeds of all such receivables in accordance with the provisions of this
Agreement.
(d) Notwithstanding anything to the contrary contained in this Section 8.1, but subject to Section
5.1(c) hereof, if the Liquidator shall determine not to liquidate the property and assets of the Partnership
because the property and assets are not assignable to other
60
than the Partners or because a complete liquidation of all of the property and assets of the Partnership would
involve substantial losses or be impractical under the circumstances or for any other reason or for no given
reason, the Liquidator shall liquidate that portion of the assets of the Partnership sufficient to pay the
expenses of liquidation and the debts and liabilities of the Partnership (excluding the debts and liabilities
of the Partnership to the extent that they are adequately secured by mortgages on, or security interests in,
assets of the Partnership or to the extent adequate provision is made for such debts and liabilities), and the
remaining assets shall be distributed to the Partners as tenants-in-common or partitioned in accordance with
applicable statutes or apportioned in accordance with the provisions of Section 8.1(a) hereof, or distributed in
such other reasonable manner, not inconsistent with the economic effect of Section 8.1(a) hereof and applicable
requirements of Regulations Section 1.704-1(b) and within the time period therein set forth, as shall be reasonably
determined by the Liquidator. The distribution of such remaining assets to the Partners shall be made subject to
any mortgages or security interests encumbering such assets.
Section 8.2 Cancellation of Certificates.
After the affairs of the Partnership have been wound up, the property and assets of the
Partnership have been liquidated, and the proceeds thereof have been applied and distributed as provided in
Section 8.1(a) hereof (and/or, if applicable, there has been a distribution of property and assets, as provided
in Section 8.1(d) hereof), and the Partnership has been terminated, the Partners shall execute, deliver, and file
a certificate of dissolution or cancellation of the Certificate of Partnership and/or assumed or fictitious name
certificate (or a similar writing) to effect the cancellation, of record, of the certificate(s) of partnership of
the Partnership (or similar writing).
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ARTICLE IX.
MISCELLANEOUS.
Section 9.1 Exculpation.
Except in the case of fraud, wilful misconduct, gross negligence, or a material breach of this
Agreement, the doing of any act or the failure to do any act by a Partner, the effect of which may cause or
result in loss or damage to the Partnership, if done in good faith to promote the interests of the Partnership
and if not done in material violation of the provisions of this Agreement, shall not subject such Partner to any
personal liability.
Section 9.2 Notices.
(a) Any and all notices, consents, offers, elections, and other communications (hereinafter
referred to collectively as the "Communications" and individually as a "Communication") required or permitted
under this Agreement shall be deemed adequately given only if in writing.
(b) All Communications to be sent hereunder shall be given or served only if addressed to a Partner
at its address set forth in the records of the Partnership, and if delivered by hand (with delivery receipt
required) or delivered by certified mail, return receipt requested, or Federal Express or similar expedited
overnight commercial carrier. All such notices, demands, and requests shall be deemed to have been properly
given or served, if delivered in hand, or mailed, on the date of receipt or of refusal to accept shown on the
delivery receipt or return receipt, and, if delivered by Federal Express or similar expedited overnight
commercial carrier, on the date that is one Day after the date upon which the same shall have been delivered to
Federal Express or similar expedited overnight commercial carrier, addressed to the recipient, with all shipping
charges prepaid, provided that the same is actually received (or refused) by the recipient in the ordinary
course. The time to respond to any Communication given pursuant to this Agreement shall run from the date of
receipt or confirmed delivery.
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(c) All Communications shall be addressed:
If to TRG LLC, to:
The Taubman Company
200 East Long Lake Road
Bloomfield Hills, Michigan 48304
Attn: Executive Vice President/Chief Financial Officer and Secretary
If to TSA or ATSA, to:
200 East Long Lake Road
Bloomfield Hills, Michigan 48304
Attn: Robert S. Taubman and William S. Taubman
(d) By giving to the other parties written notice thereof, the parties hereto and their respective
successors and assigns shall have the right from time to time and at any time during the term of this Agreement
to change the Person(s) to receive notice and their respective addresses effective upon receipt by the other
parties of such notice and each shall have the right to specify as its address any other address within the
United States of America.
Section 9.3 Applicable Law.
This Agreement shall be governed by, and construed in accordance with, the laws (other than the
law governing choice of law) of the State of California. In the event of a conflict between any provision of
this Agreement and any non-mandatory provision of the Partnership Law, the provision of this Agreement shall
control and take precedence.
Section 9.4 Word Meanings; Gender.
The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as
a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The
singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa,
unless the context otherwise requires.
Section 9.5 Section Titles.
Section titles are for descriptive purposes only and shall not control or alter the meaning of
this Agreement as set forth in the text.
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Section 9.6 Entire Agreement.
This Agreement contains the entire agreement between the parties hereto relative to the
Partnership.
Section 9.7 Waiver.
No consent or waiver, express or implied, by a Partner to or of any breach or default by
another Partner in the performance by such other Partner of its obligations hereunder shall be deemed or
construed to be a consent or waiver to or of any other breach or default in the performance by such other Partner
of the same or any other obligation of such Partner hereunder. Failure on the part of a Partner to object to any
act or failure to act of another Partner or to declare another Partner in default, irrespective of how long such
failure continues, shall not constitute a waiver by such Partner of its rights hereunder.
Section 9.8 Separability of Provisions.
Each provision of this Agreement shall be considered separable and if for any reason any
provision or provisions herein are determined to be invalid, unenforceable, or illegal under any existing or
future law, such invalidity, unenforceability, or illegality shall not impair the operation of or affect those
portions of this Agreement that are valid, enforceable, and legal.
Section 9.9 Binding Agreement.
Subject to the restrictions on Transfers set forth herein, this Agreement shall inure to the
benefit of and be binding upon the undersigned Partners and their respective successors and assigns. Whenever,
in this instrument, a reference to any party or Partner is made, such reference shall be deemed to include a
reference to the permitted successors and assigns of such party or Partner.
Section 9.10 Equitable Remedies.
Except as otherwise provided in this Agreement, the rights and remedies of the Partners
hereunder shall not be mutually exclusive, i.e., the exercise of a right or remedy under any given provision
hereof shall not preclude or impair exercise of any other right or remedy
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hereunder. Each of the Partners confirms that damages at law may not always be an adequate remedy for a breach
or threatened breach of this Agreement and agrees that, in the event of a breach or threatened breach of any
provision hereof, the respective rights and obligations hereunder shall be enforceable by specific performance,
injunction, or other equitable remedy, but nothing herein contained is intended to, nor shall it, limit
or affect any rights at law or by statute or otherwise of any party aggrieved as against the other for a
breach or threatened breach of any provision hereof.
Section 9.11 Partition.
No Partner nor any successor-in-interest to a Partner shall have the right while this Agreement
remains in effect to have any property of the Partnership partitioned, or to file a complaint or institute any
proceeding at law or in equity to have such property of the Partnership partitioned, and each Partner, on behalf
of itself and its successors and assigns, hereby waives any such right. It is the intention of the Partners that
the rights of the parties hereto and their successors-in-interest to Partnership property, as among themselves,
shall be governed by the terms of this Agreement, and that the rights of the Partners and their
successors-in-interest to Transfer any interest in the Partnership shall be subject to the limitations and
restrictions set forth in this Agreement.
Section 9.12 Amendment.
Except as provided in Section 3.4(a) hereof, a proposed amendment to this Agreement may be
adopted and effective as an amendment hereto only upon the written agreement of all of the Partners.
Notwithstanding anything contained herein, there shall be no amendment of the definitions of "Mezzanine Loan" or
"Property" in Section 1.7 or of Sections 2.1, 2.2, 9.20, 9.21 or 9.22 (except that an amendment of Section 9.22
which would not alter the rights or obligations of SunValley LLC's Independent Managers (as defined in SunValley
LLC's operating agreement) shall be permitted) of this Agreement unless such amendment is adopted in compliance
with Section 9.21 of this Agreement.
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Section 9.13 No Third Party Rights Created Hereby.
The provisions of this Agreement are solely for the purpose of defining the interests of the
Partners, inter se; and no other Person, firm, or entity (i.e., a party who is not a signatory hereto or a
permitted successor to such signatory hereto) shall have any right, power, title, or interest by way of
subrogation or otherwise, in and to the rights, powers, titles, and provisions of this Agreement.
Section 9.14 Liability of Partners.
Except as otherwise provided in this Agreement, any liability or debt of the Partnership shall
first be satisfied out of the assets of the Partnership, including the proceeds of any liability insurance which
the Partnership may recover, and thereafter, in accordance with the applicable provisions of the Partnership Law.
Section 9.15 Additional Acts and Instruments.
Each Partner hereby agrees to do such further acts and things and to execute any and all
instruments necessary or desirable and as reasonably required in the future to carry out the full intent and
purpose of this Agreement.
Section 9.16 Organization Expenses.
The Partnership shall elect, pursuant to Section 709(b) of the Code, to treat all amounts paid
or incurred to organize the Partnership as deferred expenses to be deducted ratably over a period of sixty (60)
months beginning with the month in which the Partnership began business.
Section 9.17 Agreement in Counterparts.
This Agreement may be executed in two (2) or more counterparts, all of which as so executed
shall constitute one Agreement, binding on all of the parties hereto, notwithstanding that all the parties are
not signatory to the original or the same counterpart; provided, however, that no provision of this Agreement
shall become effective and binding unless and until all parties hereto have duly executed this Agreement, at
which time this Agreement shall then become effective and binding as of the date first above written. Any
executed counterpart of this
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Agreement that is delivered by facsimile transmission shall be deemed to have been fully and properly executed
and delivered, for all purposes of this Agreement.
Section 9.18 Attorneys-in-Fact.
Any Partner may execute a document or instrument or take any action required or permitted to be
executed or taken under the terms of this Agreement by and through an attorney-in-fact duly appointed for such
purpose (or for purposes including such purpose) under the terms of a written power of attorney (including any
power of attorney granted herein).
Section 9.19 Consents, Approval, Etc.
Whenever the consent or approval of a Partner is required under any provision of this Agreement
or a matter is subject to the satisfaction of a Partner, then, except as otherwise specifically provided in this
Agreement, such Partner shall not unreasonably withhold or delay such consent or approval and shall not be
unreasonable or delay in deciding whether such matter is satisfactory.
Section 9.20 Separateness Covenants.
(a) Notwithstanding any other provisions contained in this Agreement, so long as the Mezzanine Loan
is outstanding, the Partnership shall:
(i) maintain books and records separate from any other individual or entity;
(ii) maintain its bank accounts separate from any other individual or entity;
(iii) conduct its business in its own name;
(iv) maintain separate financial statements;
(v) pay its own liabilities out of its own funds;
(vi) observe all partnership formalities;
(vii) maintain an arm's-length relationship with its Affiliates and enter into transactions
with Affiliates only on a commercially reasonable basis;
(viii) pay the salaries of its own employees, if any;
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(ix) allocate fairly and reasonably any overhead for shared office space;
(x) use separate stationery, invoices, and checks;
(xi) hold itself out as a separate entity;
(xii) file its tax returns separate from those of any other individual or entity (except
for SunValley LLC) and not file a consolidated federal income tax return with any other individual or entity
(except for SunValley LLC);
(xiii) maintain a sufficient number of employees (if any) in light of its contemplated
business;
(xiv) correct any known misunderstanding regarding its separate identity; and
(xv) maintain adequate capital in light of its contemplated business operations.
(b) Notwithstanding any other provisions contained in this Agreement, so long as the Mezzanine Loan is
outstanding, the Partnership shall not:
(i) commingle its assets with those of any other individual or entity;
(ii) guarantee or become obligated for the debts of any other individual or entity or hold
out its credit as being available to satisfy the obligations of any other individual or entity;
(iii) not acquire the obligations or securities of its Partners or Affiliates;
(iv) make loans to any other individual or entity or buy or hold evidences of indebtedness
issued by any other individual or entity (other than cash and investment-grade securities);
(v) identify itself as a division of any other individual or entity;
(vi) engage in any business or activities other than (A) owning, holding, selling,
transferring, and exchanging the Subsidiary Company Membership Interest, (B)
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owning, holding, selling transferring, and exchanging the capital stock of SV, and (C) transacting any and all
lawful business for which a partnership may be organized under California law that is incident, necessary and
appropriate to accomplish the foregoing;
(vii) incur indebtedness other than the Mezzanine Loan;
(viii) allow any transfer of a direct or indirect ownership interest in the Partnership
such that the transferee owns, in the aggregate with the ownership interests of its affiliates and family
members in the Partnership, more than a 49% interest in the Partnership, unless such transfer is conditioned
upon the delivery of an acceptable non-consolidation opinion to the holder of the Mezzanine Loan concerning, as
applicable, the Partnership, the new transferee and/or their respective owners;
(ix) except with respect to the Mezzanine Loan or the Mortgage Loan (as such term is defined
in the operating agreement of SunValley LLC), pledge its assets for the benefit of another entity;
(x) form, hold or acquire any subsidiaries, other than the Subsidiary Company Membership
Interest or the capital stock of SV; and
(xi) dissolve, liquidate, consolidate, merge or except as permitted by the documents
governing the Mezzanine Loan or in connection with a prepayment of the Mezzanine Loan, sell all or substantially
all of its assets.
Section 9.21 Bankruptcy-Related Covenants; Lender's Consent.
So long as the Mezzanine Loan is outstanding, the board of directors of A.T. Associates, Inc.,
a Michigan corporation ("ATAI") which is the general partner of TSA, and Taubman SunValley Associates I, Inc., a
Michigan corporation ("TSVAI"), which is the general partner of ATSA, shall each have at least two (2)
"Independent Directors" as such term is defined in the respective Amended and Restated Articles of Incorporation
of ATAI and TSVAI. Notwithstanding any other provisions contained in this Agreement, so long as
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the Mezzanine Loan is outstanding, the following actions and decisions of the Partnership shall be taken
only upon the unanimous consent of the Partners, which consent shall require the affirmative vote of both
Independent Directors of ATAI and both Independent Directors of TSVAI:
(i) the filing of a petition or a consent to a petition seeking reorganization, liquidation,
or relief under any applicable federal or state law relating to bankruptcy, or consent to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Partnership, or a
substantial part of any of its property, or make any assignment for the benefit of creditors, or, except as
required by law, admit in writing its inability to pay any of its debts generally as they become due, or declare
or effect a moratorium on any of its debt or take any Partnership action in furtherance of such action;
(ii) a dissolution, liquidation, consolidation, or merger, or a sale of all or
substantially all of the assets of the Partnership, except as otherwise permitted by that certain Pledge Agreement
securing the Mezzanine Loan, unless there is a pre-payment of the Mezzanine Loan in connection with such sale; and
(iii) the amendment of Section 9.20 hereof or this Section 9.21.
Additionally, so long as the Mezzanine Loan is outstanding, notwithstanding any other provision
of this Agreement, the Partnership shall not amend the definitions of "Mezzanine Loan" or "Property" in Section
1.7, or Section 2.1, Section 2.2, Section 9.20, this Section 9.21, or Section 9.22 (except that an amendment of
Section 9.22 which would not alter the rights or obligations of SunValley LLC's Independent Managers shall be
permitted) hereof unless the Partnership receives the approval of the holder of the Mezzanine Loan.
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For so long as the Mezzanine Loan is outstanding, the Partnership shall have at least two (2)
partners each owning at least a one-half of one percent (.5%) interest in the Partnership which are
bankruptcy-remote special purpose entities (each, a "Special Purpose General Partner") that have provisions and
covenants in their organizational documents regarding their separateness which are substantially similar to
Sections 10.20 and 10.21 of the Agreement of Limited Partnership, as amended, for Taubman SunValley Associates
Limited Partnership, as of the date hereof.
Upon the dissociation or withdrawal of a Special Purpose General Partner from the Partnership
or the bankruptcy, insolvency or liquidation of a Special Purpose General Partner, the Partnership shall (i)
appoint a new Special Purpose General Partner, and (ii) deliver an acceptable non-consolidation opinion to the
holder of the Mezzanine Loan concerning, as applicable, the Partnership, the new Special Purpose General Partner,
and its owners.
Notwithstanding any provision to the contrary in this Agreement, the Partnership shall continue
its existence (and not dissolve) for so long as a solvent partner, and at least two (2) partners in the
aggregate, exist.
Section 9.22 Management of SunValley LLC.
Each of the Partners acknowledges that the Partnership is the sole member of SunValley LLC and
recognizes that, pursuant to the provisions of the Operating Agreement of SunValley LLC, the Partnership has the
right and power to manage the operations and activities of SunValley LLC in its sole discretion, except with
respect to certain actions and decisions requiring the affirmative consent of both of SunValley LLC's Independent
Managers. The Partners agree that the Partnership shall manage the operations and activities of SunValley LLC in
a manner consistent with the management and governance
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provisions contained in this Agreement, including, by way of example and not of limitation, that the Managing
Partner shall only cause the Partnership to take those actions with respect to SunValley LLC which the Managing
Partner would be permitted to take without further authorization under this Agreement with respect to the
Partnership. All other actions with respect to SunValley LLC shall be taken by the Managing Partner on behalf of
the Partnership only upon the consent of the Non-Managing Partners.
[SIGNATURES BEGIN ON NEXT PAGE]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written.
TRG SUNVALLEY LLC, a Delaware limited liability company
By: The Taubman Realty Group Limited Partnership, a
Delaware limited partnership
By: /s/ Lisa A. Payne
____________________________
Its: Authorized Signatory
TAUBMAN SUNVALLEY ASSOCIATES LIMITED PARTNERSHIP, a Michigan
limited partnership
By: A.T. Associates, Inc.
By: /s/ William S. Taubman
_____________________________
Its: Vice President
_____________________________
A.T. SUNVALLEY ASSOCIATES LIMITED PARTNERSHIP, a Michigan
limited partnership
By: Taubman SunValley Associates I, Inc.
By: /s/ William S. Taubman
_____________________________
Its: Vice President
_____________________________
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