UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


 

 

[Mark One]

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2007

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ______________ to ______________

Commission File Number: 000-50256

 

 

 

(WHITESTONE REIT LOGO)

(Exact Name of Registrant as Specified in Its Charter)


 

 

Maryland

76-0594970

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

 

2600 South Gessner, Suite 500 Houston, Texas

77063

 

 

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 827-9595

 

Securities registered pursuant to section 12(b) of the Act:       None

 

Securities registered pursuant to section 12(g) of the Act:

Common Shares of Beneficial Interest, par value $0.001 per share

          Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o      No x

          Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o      No x

          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 o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best or Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

          Large accelerated filer o                     Accelerated filer o                     Non-accelerated filer x

          Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No x

          The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of June 30, 2007 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $100,012,690 assuming a market value of $10 per share.

As of March 31, 2008, the Registrant had 10,001,269 common shares of beneficial interest outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: We incorporate by reference into Part III portions of our proxy statement for the 2008 Annual Meeting of Shareholders.



WHITESTONE REIT
FORM 10-K
Year Ended December 31, 2007

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

PART I

 

1

Item 1.

Business

1

Item 1A.

Risk Factors

4

Item 1B.

Unresolved Staff Comments

12

Item 2.

Properties

13

Item 3.

Legal Proceedings

17

Item 4.

Submission of Matters to a Vote of Security Holders

18

 

 

 

PART II

 

18

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

Selected Financial Data

20

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 8.

Consolidated financial Statements and Supplementary Data

35

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

35

Item 9T.

Controls and Procedures

35

Item 9B.

Other Information

36

 

 

 

PART III

 

37

Item 10.

Trust Managers, Executive Officers and Corporate Governance

37

Item 11.

Executive Compensation

37

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

37

Item 13.

Certain Relationships and Related Transactions, and Director Independence

37

Item 14.

Principal Accounting Fees and Services

37

 

 

 

PART IV

 

38

Item 15.

Exhibits and Financial Statement Schedules

38



           Unless the context otherwise requires, all references in this report to “we,” “us” or “our” are to Whitestone REIT and its subsidiaries.

Forward-Looking Statements

          This Form 10-K contains forward-looking statements, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

          Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Form 10-K include:

 

 

 

 

changes in general economic conditions;

 

 

 

 

changes in real estate conditions;

 

 

 

 

construction costs that may exceed estimates;

 

 

 

 

construction delays;

 

 

 

 

increases in interest rates;

 

 

 

 

litigation risks;

 

 

 

 

lease-up risks;

 

 

 

 

inability to obtain new tenants upon the expiration of existing leases; and

 

 

 

 

the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.

The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sections of this Form 10-K and our Registration Statement on Form S-11, as amended, as previously filed with the Securities and Exchange Commission.


PART I

Item 1. Business.

General

          We are a Maryland real estate investment trust (“REIT”) engaged in owning and operating income-producing real properties. We invest in and operate retail, office and warehouse properties located in the Houston, Dallas, San Antonio and Phoenix metropolitan areas.

          We own a real estate portfolio of 37 properties containing approximately 3.1 million square feet of leasable space, located in Texas and Arizona. The portfolio has a gross book value of approximately $182 million and book equity, including minority interest, of approximately $81 million at December 31, 2007. We currently own one property, located in Phoenix, Arizona, which is under development and is expected to be leasable by mid –year 2008.

          We were organized in December 2003 for the purpose of merging with Hartman Commercial Properties REIT, a Texas real estate investment trust organized in August 1998. We are the surviving entity resulting from the merger, which was consummated on July 28, 2004. We have elected to be taxed as a REIT trust under federal income tax laws.

          Our common shares are currently not traded on a stock exchange. Our offices are located at 2600 South Gessner, Suite 500, Houston, Texas 77063. Our telephone number is (713) 827-9595 and we maintain an internet site at www.whitestonereit.com.

Our Strategy

          Our primary business objective is to increase shareholder value by employing a “value-add” strategy. We seek well-located small properties in major cities that are income producing with renovation potential or other upside potential, and add-value through our management and leasing expertise. The key elements of our strategy include:

 

 

 

 

Maximize value in current properties through operational focus and redevelopment.

 

 

 

 

Grow through strategic acquisitions of commercial properties in high potential markets, including properties outside of Texas.

 

 

 

 

Selectively dispose of properties that have little or no growth potential and reinvest the capital into properties having potential for greater returns.

 

 

 

 

Pare down from three current product lines (retail, office and warehouse) and focus on one or possible two product lines.

 

 

 

 

Raise capital using a combination of the private and public equity and debt markets, as well as joint ventures.

 

 

 

 

Bring liquidity to our stock by listing on a national stock exchange.

          We believe that our people are the heart of our company, our strategy and our structure. We are focused on developing a team of people that display at all times a high degree of character and competence. We believe that our people are key to our ability to generate long term shareholder value.

Our Structure

          Substantially all of our business is conducted through Whitestone REIT Operating Partnership, L.P., a Delaware limited partnership organized in 1998 (the “Operating Partnership”). We are the sole general partner of the Operating Partnership. As of December 31, 2007, we owned a 62.4% interest in the Operating Partnership.


          As of December 31, 2007, we owned a real estate portfolio consisting of 37 properties located in two states. Leased to national, regional and local tenants, our retail, office and warehouse properties are primarily located throughout Texas. As of December 31, 2007, the occupancy rate at our operating properties was 86.2% based on leasable square footage compared to 83.3% as of December 31, 2006.

          We invest in commercial properties with upside potential, where our leasing and operating strategies can improve the existing properties’ value while providing superior current economic returns. We believe that investment in and operation of commercial retail real estate is a local business and we focus our investments in areas where we have strong knowledge of the local markets. The areas where a majority of our properties are located are densely populated areas in and around Houston, Dallas, San Antonio and Phoenix. We plan to further expand into markets outside of Texas and will continue to maintain our hands-on management philosophy. We look for markets with strong demographic characteristics similar to that of Houston.

          Our retail properties are primarily strip centers whose tenants consist of national, regional and local retailers. Our properties generally attract tenants who provide basic staples and convenience items to local customers. We believe sales of these items are less sensitive to fluctuations in the business cycle than higher priced retail items. No single retail tenant represented more than 2.0% of total revenues for the year ended December 31, 2007.

          During 2007 we acquired one property, a 33,400 square ft garden office property located in Phoenix, Arizona. This property was under development as of December 31, 2007. We take a very hands-on approach to ownership, and directly manage the operations and leasing of our properties. Substantially all of our revenues consist of base rents received under long-term leases. For the year ended December 31, 2007, our total revenues were approximately $31.0 million. Approximately 72.2% of our existing leases contain “step up” rental clauses that provide for increases in the base rental payments.

          As of December 31, 2007, we have no assets that accounted for more that 10% of our year end consolidated total assets. 33 of our 37 properties are located in the Houston, Texas metropolitan area. See “Location of Properties” in Item 2 for further discussion regarding Houston’s economy.

Economic Factors

          The national economy softened in 2007. The residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages and declining residential housing prices nationwide. This “credit crisis” spread to the broader commercial credit markets and has generally reduced the availability of financing and widened spreads. These factors, coupled with a slowing economy, may negatively impact the volume of real estate transactions and cap rates, which could negatively impact the value of public real estate companies, including ours. While the housing market and energy prices may affect consumer spending, the vast majority of our retail properties are located in densely populated metropolitan areas and are anchored by supermarkets and discount stores, which generally provide basic necessity-type items and tend to be less affected by economic changes. Furthermore, our portfolio is primarily positioned in metropolitan areas in Texas which are forecasted to exceed the national average according to many economic measures. Our operating areas continue to show strong employment growth as compared to other large metropolitan areas. However, if these economic conditions persist in 2008 and beyond, our real estate portfolio may experience lower occupancy and effective rents, which would result in a corresponding decrease in net income, funds from operations and cash flows.

Competition

          All of our properties are located in areas that include competing properties. The amount of competition in a particular area could impact our ability to acquire additional real estate, sell current real estate, lease space and the amount of rent we are able to charge. We may be competing with owners, including but not limited to, other REITs, insurance companies and pension funds, with access to greater resources than those available to us.

2


Compliance with Governmental Regulations

          Under various federal and state environmental laws and regulations, as an owner or operator of real estate, we may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at our properties. We may also be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by those parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contaminations at any of our properties may adversely affect our ability to sell or lease the properties or to borrow using the properties as collateral. We could also be liable under common law to third parties for damages and injuries resulting from environmental contamination coming from our properties.

          We will not purchase any property unless and until we obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel and performing a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, groundwater or building materials from the property. Certain properties that we have acquired contain, or contained, dry-cleaning establishments utilizing solvents. Where believed to be warranted, samplings of building materials or subsurface investigations were undertaken with respect to these and other properties. To date, the costs associated with these investigations and any subsequent remedial measures taken have not been material to us.

          We believe that our properties are in compliance in all material respects with all federal, state and local ordinances and regulations regarding the handling, discharge and emission of hazardous or toxic substances. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our present or former properties. We have not recorded in our financial statements any material liability in connection with environmental matters. Nevertheless, it is possible that the environmental assessments we have obtained or reviewed have not revealed all potential environmental liabilities. It is also possible that subsequent environmental assessments or investigations will identify material contamination, that adverse environmental conditions have arisen subsequent to the performance of the environmental assessments, or that there are material environmental liabilities of which our management is unaware.

Employees

          As of December 31, 2007, we had 46 employees.

Materials Available on Our Website

          Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as Reports on Forms 3, 4 and 5 regarding our officers, trust managers or 10% beneficial owners, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934 are available free of charge through our website ( www.whitestonereit.com ) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission (“SEC”). We have also made available on our website copies of our Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter, Insider Trading Compliance Policy, and Code of Business Conduct and Ethics Policy. In the event of any changes to these charters or the code or guidelines, changed copies will also be made available on our website. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Materials on our website are not part of our Annual Report on Form 10-K.

3


Financial Information

          Additional financial information related to Whitestone REIT is included in Item 8 ‘Consolidated Financial Statements and Supplementary Data.”

Item 1A. Risk Factors.

          In addition to the other information contained in this Form 10-K the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note additional risks not presently known to us or which we currently consider immaterial may also impair our business and operations.

Risks Associated with Real Estate

Real estate property investments are illiquid, and therefore we may not be able to dispose of properties when appropriate or on favorable terms.

          Real estate property investments generally cannot be disposed of quickly. In addition, the federal tax code imposes restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which could cause us to incur extended losses and reduce our cash flows and adversely affect distributions to shareholders.

Turmoil in capital markets could adversely impact acquisition activities and pricing of real estate assets.

          Volatility in capital markets could adversely affect acquisition activities by impacting certain factors including the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold collateralized mortgage backed securities in the market. These factors directly affect a lender’s ability to provide debt financing as well as increase the cost of available debt financing. As a result, we may not be able to obtain favorable debt financing in the future or at all. This may result in future acquisitions generating lower overall economic returns, which may adversely affect our results of operations and distributions to shareholders. Furthermore, any turmoil in the capital markets could adversely impact the overall amount of capital available to invest in real estate, which may result in price or value decreases of real estate assets.

The value of investments in our common shares will be directly affected by general economic and regulatory factors we cannot control or predict.

          We only own commercial real estate. Investments in real estate typically involve a high level of risk as the result of factors we cannot control or predict. One of the risks of investing in real estate is the possibility that our properties will not generate income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at rates lower than those anticipated or available through investments in comparable real estate or other investments. The following factors may affect income from properties and yields from investments in properties and are generally outside of our control:

 

 

 

 

conditions in financial markets;

 

 

 

 

over-building in our markets;

 

 

 

 

a reduction in rental income as the result of the inability to maintain occupancy levels;

 

 

 

 

adverse changes in applicable tax, real estate, environmental or zoning laws;

 

 

 

 

changes in general economic conditions;

4


 

 

 

 

a taking of any of our properties by eminent domain;

 

 

 

 

adverse local conditions (such as changes in real estate zoning laws that may reduce the desirability of real estate in the area);

 

 

 

 

acts of God, such as earthquakes or floods and other uninsured losses;

 

 

 

 

changes in supply of or demand for similar or competing properties in an area;

 

 

 

 

changes in interest rates and availability of permanent mortgage funds, which may render the sale of a property difficult or unattractive; and

 

 

 

 

periods of high interest rates and tight money supply.

          Some or all of these factors may affect our properties, which could adversely affect our operations and ability to pay dividends to shareholders.

Compliance or failure to comply with laws requiring access to our properties by disabled persons could result in substantial cost.

          The Americans with Disabilities Act (“ADA”) and other federal, state and local laws generally require public accommodations be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the government or the award of damages to private litigants. These laws may require us to modify our existing properties. These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require us to add other structural features which increase our construction costs. Legislation or regulations adopted in the future may impose further burdens or restrictions on us with respect to improved access by disabled persons. We may incur unanticipated expenses that may be material to our financial condition or results of operations to comply with ADA and other federal, state and local laws, or in connection with lawsuits brought by private litigants.

Competition could limit our ability to lease our properties or increase or maintain rental income.

          There are numerous alternatives which compete with our properties in attracting tenants. Our properties compete directly with other commercial properties which are available for rent or purchase in the markets in which our properties are located. This competitive environment could have a material adverse effect on our ability to lease our properties or any newly developed or acquired property, as well as on the rents charged.

Risks Associated with Our Operations

There can be no assurance that we will be able to pay or maintain cash dividends or that dividends will increase over time.

          There are many factors that can affect the availability and timing of cash dividends to shareholders. Dividends will be based principally on cash available from our properties, real estate securities, mortgage loans and other investments. The amount of cash available for dividends will be affected by many factors, such as our ability to buy properties, the yields on securities of other real estate programs that we invest in, and our operating expense levels, as well as many other variables. We can give no assurance that we will be able to pay or maintain dividends or that dividends will increase over time. In addition, we can give no assurance that rents from the properties will increase, that the securities we buy will increase in value or provide constant or increased dividends over time, or that future acquisitions of real properties, mortgage loans or our investments in securities will increase our cash available for dividends to shareholders. Our actual results may differ significantly from the assumptions used by our Board in establishing the dividend rate to shareholders.

5


If we experience decreased cash flows, we may need to use other sources of cash to fund dividends or we may be unable to pay dividends.

          Actual cash available for dividends may vary substantially from estimates. If our cash dividends exceed the amount of cash available for dividends, we may need to fund the shortage out of working capital, borrowings under our lines of credit or by obtaining other debt, which would reduce the amount of proceeds available for real estate investments. During the year ended December 31, 2007, our cash provided from operating activities was $4.6 million and our total distributions were $9.5 million. Therefore we had distributions in excess of cash flow for operations of approximately $4.9 million. Our primary funding for paying dividends in excess of cash flow from operations was borrowing from our credit facility and the increase in the debt on our Windsor Park Centre mortgage loan.

Because of the lack of geographic diversification of our portfolio, an economic downturn in the Texas metropolitan areas could adversely impact our operations and ability to pay dividends to our shareholders.

          The majority of our assets and revenues are currently derived from properties located in Texas metropolitan areas. Our results of operations are directly contingent on our ability to attract financially sound commercial tenants. If Texas experiences a significant economic downturn, our ability to locate and retain financially sound tenants may be adversely impacted. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Consequently, because of the lack of geographic diversity among our current assets, if Texas experiences an economic downturn, our operations and ability to pay dividends to our shareholders could be adversely impacted.

Our Properties have significant deferred maintanence which will affect our ability to lease the properties, the types of tenants we are able to attract, and cash flow available for dividends

          In 2007 we had property condition assessments (“PCA’s”) performed on 20 of our properties. The PCA’s were performed as a result of the litigation with our former External Manager and were to determine the amount of deferred maintanence that existed on the properties as of October 2006. The PCA’s indicated that approximately $25 million in deferred maintanence existed on our properties as of October 2006. The majority of these repairs relate to roofing ($10.3 million), parking lots ($3.6 million), structural ($3.3 million) and HVAC ($2.6 million). The significance of the deferred maintanence affects our ability to lease the vacant spaces and the types of tenants we are able to attract. During 2007 we began to address these needed repairs and spent approximately $1 million more on repairs than in 2006. Although we intend to judicially address the needed repairs over the next several years, they will have a significant affect on our cash available to pay dividends.

Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect our returns.

          We will attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. In some instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for these losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by these uninsured losses. In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any sources of funding will be available to us for this purpose in the future. Also, to the extent we must pay unexpectedly large insurance premiums, we could suffer reduced earnings that would result in less cash dividends to be distributed to shareholders.

6


Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.

          Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in its property. The costs of removal or remediation could be substantial. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos containing materials into the air. In addition, third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for payments of dividends to our shareholders.

There is no public trading market for our shares of common stock, making it difficult for shareholders to sell their shares.

          There is no current public market for our common shares of beneficial interest. If you are able to find a buyer for your shares, you may not sell your shares to that buyer unless the buyer meets the suitability standards applicable to him or her, including any suitability standards imposed by the potential purchaser’s state of residence. Our declaration of trust also imposes restrictions on the ownership of common shares that will apply to potential transferees that may restrict your ability to sell your shares. In addition, our Board has delayed the implementation of our share redemption program. Even if this program is implemented in the future, our Board may reject any request for redemption of shares or amend, suspend or terminate the program at any time. Therefore, it will be difficult for you to sell your shares promptly or at all. You may not be able to sell your shares in the event of an emergency, and, if you are able to sell your shares, you may have to sell them at a substantial discount.

We have acquired a majority of our properties, on a non “arms-length” basis, from entities controlled by the previous advisor and CEO, Allen R. Hartman.

          We acquired 27 of the 37 properties we owned as of December 31, 2007, from entities controlled by Mr. Hartman. We acquired these properties by paying cash or issuing our commons shares of beneficial interest or units of the Operating Partnership that are convertible into our common shares. No third parties were retained to represent or advise these selling entities or us, and the transactions were not conducted on an “arm’s-length” basis.

          Mr. Hartman had interests that differed from, and in certain cases conflicted with, his co-investors in these entities. Mr. Hartman received the following as a result of these transactions:

 

 

 

 

897,117.19 units of the Operating Partnership that are convertible into our common shares, as adjusted to reflect the recapitalization, in consideration of Mr. Hartman’s general partner interest in the selling entities;

 

 

 

 

the ability to limit his future exposure to general partner liability as a result of Mr. Hartman no longer serving as the general partner to certain of the selling entities; and

 

 

 

 

the repayment of debt encumbering several of our properties that was personally guaranteed by Mr. Hartman.

          Mr. Hartman might not have been able to negotiate all of these benefits if the transactions were negotiated at arm’s length. Further, Mr. Hartman did not make any representations or warranties in regard to the properties or the selling entities (neither personally nor in his capacity as a general partner) in the documents evidencing the

7


transactions. Consequently, we essentially acquired the properties on an “as is” basis. Therefore, we will bear the risk associated with any characteristics of or deficiencies in these properties unknown at the closing of the acquisitions that may affect their valuation or revenue potential.

Approximately 38% of our gross leasable area is subject to leases that expire prior to December 31, 2010.

          As of December 31, 2007, approximately 38% of the aggregate gross leasable area of our properties is subject to leases that expire prior to December 31, 2010. We are subject to the risk that:

 

 

 

 

tenants may choose not to renew these leases;

 

 

 

 

we may not be able to re-lease the space subject to these leases; and

 

 

 

 

the terms of any renewal or re-lease may be less favorable than the terms of the current leases.

          If any of these risks materialize, our cash flow and ability to pay dividends could be adversely affected.

Litigation with Allen R. Hartman and Hartman Management.

          We are currently involved in litigation with our former Chief Executive Officer, Allen R. Hartman, and manager and advisor, Hartman Management, L.P. While we intend to vigorously defend against claims brought by Mr. Hartman and Hartman Management and vigorously prosecute our claims against Mr. Hartman and Hartman Management, there can be no assurances that we will ultimately prevail. Even if we do ultimately prevail in these lawsuits, we may continue to incur significant legal costs to do so. For more discussion, see Legal Proceedings and Management’s Discussion and Analysis of Financial Condition and Results of Operations – Commitments and Contingencies.

Defending an adversarial shareholder campaign could be costly to shareholders, take managements attention from day to day business operations and interfere with the execution of our strategic plan.

          Our former Chief Executive Officer, Allen R. Hartman owns approximately 2.9% of the voting shares of the REIT. If Mr. Hartman were to convert his ownership interests in the Operating Partnership into REIT common shares, Mr. Hartman would own approximately 12.3% of the REIT’s voting shares. Mr. Hartman is also the general partner of a partnership which owns 1.2 million OP units which are convertible into REIT common shares. Mr. Hartman has mounted an adversarial shareholder campaign with our shareholders and has attempted to replace our current executive management and board of trustees. Defending this campaign could be costly to shareholders, take managements attention from day to day business operations and interfere with the execution of our strategic plan.

Loss of our key personnel could adversely affect the value of our common shares of beneficial interest and operations.

          We are dependent on the efforts of our key executive personnel. Although we believe qualified replacements could be found for these key executives, the loss of their services could adversely affect the value of our common shares of beneficial interest and operations.

Risks Associated with Our Indebtedness and Financing

Our debt agreements impose limits on our operations and our ability to make distributions to our shareholders.

          The agreements relating to the debt we incur contain financial and operating covenants that may limit our ability to make distributions or other payments to our shareholders. Our existing credit facilities contain financial and operating covenants, including:

 

 

 

 

debt service coverage of at least 1.4 to 1.0;

8



 

 

 

 

loan-to-value ratio of a borrowing base pool to total funded loan balance of at least 1.67 to 1.00;

 

 

 

 

total debt not to exceed 60% of fair market value of our real estate assets;

 

 

 

 

the ratio of secured debt to fair market value of our real estate assets not to exceed 40%;

 

 

 

 

interest coverage ratio of at least 1.55 to 1.0;

 

 

 

 

we must hedge certain amounts of variable interest rate debt;

 

 

 

 

maintenance of specific levels of insurance; and

 

 

 

 

limitations on our ability to make distributions or other payments to our shareholders, sell assets or engage in mergers, consolidation or make certain acquisitions.

          Failure to comply with these covenants could result from, among other things, changes in our results of operations, incurrence of debt or changes in general economic conditions. These covenants may restrict our ability to fund our operations and conduct our business. Failure to comply with any of these covenants could result in a default under our credit agreement or other debt agreements we may enter into in the future. A default could cause one or more of our lenders to accelerate the timing of payments which could force us to dispose of one or more of our properties, possibly on disadvantageous terms. For more discussion, see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources

We may incur losses on interest rate hedging arrangements.

          Periodically, we have entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness which is hedged, we may be exposed to losses to the extent which the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject us to increased credit risks.

We may incur mortgage indebtedness and other borrowings, which may increase our business risks.

          If it is determined to be in our best interests, we may, in some instances, acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur or increase our current mortgage debt to obtain funds to acquire additional real properties. We may also borrow funds if necessary to satisfy the REIT distribution requirement described above, or otherwise as may be necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

We may incur mortgage debt on a particular piece of real property if we believe the property’s projected cash flow is sufficient to service the mortgage debt. If there is a shortfall in cash flow, however, the amount available for dividends to shareholders may be affected. In addition, incurring mortgage debt increases the risk of loss because defaults on such indebtedness may result in loss of property in foreclosure actions initiated by lenders. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We may give lenders full or partial guarantees for mortgage debt incurred by the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by that entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default. If any of our properties are foreclosed upon due to a default, our ability to pay cash dividends to our shareholders will be adversely affected.

9


If we are unable to retain key personnel, our revolving credit facility could be in default and immediately due.

          In the event that James C. Mastandrea, for any reason, ceases to retain the title of Chief Executive Officer of the Trust and to perform the functions typically performed under such office and to be actively involved in strategic planning and decision-making for the Trust, unless within six months after such failure, the Board of Directors or Board of Trustees has duly elected or appointed a qualified substitute to replace such individual who is acceptable to our bank in its sole discretion, our bank may declare our loan in default and all amounts immediately due.

In the event we have a change of control, our revolving credit facility could be in default and immediately due.

          If we have the occurrence of any transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of voting rights applicable to the Trust ordinarily entitled to vote in the election of directors or trustees, empowering such “person” or “group” to elect a majority of the Board of Directors or Board of Trustees of the Trust, who did not have such power before such transaction, our bank could declare our loan in default and all amounts immediately due.

10


          Risks Associated with Income Tax Laws

If we fail to qualify as a REIT, our operations and dividends to shareholders would be adversely impacted.

          We intend to continue to operate so as to qualify as a REIT under the Internal Revenue Code. A REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of qualification.

          If we were to fail to qualify as a REIT in any taxable year:

 

 

 

 

we would not be allowed to deduct our distributions to shareholders when computing our taxable income;

 

 

we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

 

 

we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;

 

 

our cash available for dividends would be reduced and we would have less cash to pay dividends to shareholders; and

 

 

we may be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of our disqualification.

We may need to incur additional borrowings to meet REIT minimum distribution requirements.

          In order to maintain our qualification as a REIT, we are required to distribute to our shareholders at least 90% of our annual net taxable income (excluding any net capital gain). In addition, the Internal Revenue Code will subject us to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our net capital gain for that year and (iii) 100% of our undistributed taxable income from prior years. Although we intend to pay dividends to our shareholders in a manner that allows us to meet the distribution requirement and avoid this 4% excise tax, we cannot assure you that we will always be able to do so.

          Our income consists almost solely of our share of the Operating Partnership’s income, and the cash available for distribution by us to our shareholders consists of our share of cash distributions made by the Operating Partnership. Because we are the sole general partner of the Operating Partnership, our Board determines the amount of any distributions made by it. Our Board may consider a number of factors in making distributions, including:

 

 

 

 

the amount of the cash available for distribution;

 

 

 

 

the Operating Partnership’s financial condition;

 

 

 

 

the Operating Partnership’s capital expenditure requirements; and

 

 

 

 

our annual distribution requirements necessary to maintain our qualification as a REIT.

11


          Differences in timing between the actual receipt of income and actual payment of deductible expenses and the inclusion of income and deduction of expenses when determining our taxable income, as well as the effect of nondeductible capital expenditures and the creation of reserves or required debt amortization payments could require us to borrow funds on a short-term or long-term basis to meet the REIT distribution requirement and to avoid the 4% excise tax described above. In these circumstances, we may need to borrow funds to avoid adverse tax consequences even if our management believes that the then prevailing market conditions generally are not favorable for borrowings or that borrowings would not be advisable in the absence of the tax consideration.

Changes in the tax law may adversely affect our REIT status

          The discussions of the federal income tax considerations are based on current tax laws. Changes in the tax laws could result in tax treatment that differs materially and adversely from that described herein.

I tem 1B. Unresolved Staff Comments

          None.

12


Item 2. Properties.

General

          At December 31, 2007, we owned 37 commercial properties located in two states. We own 33 properties located in the Houston, Texas, two properties located in Dallas, Texas, one property located in San Antonio, Texas and one property in Phoenix, Arizona. Our properties consist of 19 retail centers with approximately 1,293,000 square feet of gross leasable area, 11 warehouse properties with approximately 1,202,000 square feet of gross leasable area and seven office buildings with approximately 599,000 square feet of gross leasable area and 33,000 square feet under development. We expect the Arizona property, which is under development, to be leaseable by mid 2008. Each property is designed to meet the needs of surrounding local communities. As of December 31, 2007, our properties contain approximately 3,093,000 square feet of gross leasable area. As of December 31, 2007, our retail, warehouse and office properties were approximately 83.2%, 89.1% and 87.1% leased, respectively.

          As of December 31, 2007, we had one property that accounted for more than 10% of total gross revenue. Uptown Tower is an office building located in Dallas, Texas that was acquired during 2005 and accounts for 11.4% of our total revenue and 9.7% of real estate assets, net of accumulated depreciation.

Location of Properties

          Of our 37 properties, 36 are located in Texas, with 33 being located in the greater Houston metropolitan statistical area. These 33 represent 78% of our rental income for the year ended December 31, 2007.

          We believe that the Houston real estate market and economy are strong, boasting excellent long-term growth prospects. The Houston workforce is concentrated in energy, chemicals, information technology, aerospace sciences and medical sciences. The Houston area ranked first in Texas for employment growth in 2006, with a growth rate of 4.1%. The most recent job growth data indicates that the Houston area gained approximately 100,000 new jobs in 2007, ranking the metro area first in the country in job growth

Houston Highlights

 

 

Houston is the largest city in Texas and the 4th largest city in the U.S.

 

 

Houston ranks 4 th among U.S. metro areas in number of corporate headquarters for Fortune 500 companies.

 

 

Houston is a key center for international finance with 21 foreign banks from 10 different nations.

 

 

The Houston metro area’s population base grew by 797,700 people from 2000 to 2006, ranking the area third in population growth during the period.

 

 

The Houston metro area grew by 127,500 people during 2007.

13


General Physical Attributes

          The following table lists, for all properties owned by us on December 31, 2007, the year each property was developed or significantly renovated, the total leasable area of each property and the purchase price we paid for each property.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property Name

 

Location

 

Year Developed/
Renovated

 

Total Leasable Area (Sq. Ft.)

 

Purchase Price
(in thousands)

 

 

 

 

 

 

 

 

 

Retail Properties:

 

 

 

 

 

 

 

 

 

Bellnott Square

 

Houston

 

1982

 

73,930

 

 

$

5,792

 

Bissonnet/Beltway

 

Houston

 

1978

 

29,205

 

 

 

2,361

 

Centre South

 

Houston

 

1974

 

44,543

 

 

 

2,077

 

Garden Oaks

 

Houston

 

1954

 

95,046

 

 

 

6,578

 

Greens Road

 

Houston

 

1979

 

20,507

 

 

 

1,637

 

Holly Knight

 

Houston

 

1984

 

20,015

 

 

 

1,613

 

Kempwood Plaza

 

Houston

 

1974

 

112,359

 

 

 

2,532

 

Lion Square

 

Houston

 

1980

 

119,621

 

 

 

5,835

 

Northeast Square

 

Houston

 

1984

 

40,525

 

 

 

2,573

 

Providence

 

Houston

 

1980

 

90,327

 

 

 

4,594

 

South Richey

 

Houston

 

1980

 

69,928

 

 

 

3,362

 

South Shaver

 

Houston

 

1978

 

21,926

 

 

 

817

 

SugarPark Plaza

 

Houston

 

1974

 

95,032

 

 

 

8,906

 

Sunridge

 

Houston

 

1979

 

49,359

 

 

 

1,462

 

Torrey Square

 

Houston

 

1983

 

105,766

 

 

 

4,952

 

Town Park

 

Houston

 

1978

 

43,526

 

 

 

3,761

 

Webster Point

 

Houston

 

1984

 

26,060

 

 

 

1,870

 

Westchase

 

Houston

 

1978

 

42,924

 

 

 

2,173

 

Windsor Park

 

San Antonio

 

1992

 

 

192,458

 

 

 

 

13,103

 

 

 

 

 

 

 

 

   

 

 

   

 

 

 

 

 

 

 

 

1,293,057

 

 

 

$

75,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse Properties:

 

 

 

 

 

 

 

 

 

 

Brookhill

 

Houston

 

1979

 

74,757

 

 

 

973

 

Corporate Park Northwest

 

Houston

 

1981

 

185,627

 

 

 

7,840

 

Corporate Park West

 

Houston

 

1999

 

175,665

 

 

 

12,822

 

Corporate Park Woodland

 

Houston

 

2000

 

99,937

 

 

 

5,982

 

Dairy Ashford

 

Houston

 

1981

 

42,902

 

 

 

1,437

 

Holly Hall

 

Houston

 

1980

 

90,000

 

 

 

3,123

 

Interstate 10

 

Houston

 

1980

 

151,000

 

 

 

3,908

 

Main Park

 

Houston

 

1982

 

113,410

 

 

 

4,049

 

Plaza Park

 

Houston

 

1982

 

105,530

 

 

 

4,195

 

Westbelt Plaza

 

Houston

 

1978

 

65,619

 

 

 

2,733

 

Westgate

 

Houston

 

1984

 

97,225

 

 

 

3,448

 

 

 

 

 

 

 

 

   

 

 

   

 

 

 

 

 

 

 

1,201,672

 

 

$

50,510

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Properties:

 

 

 

 

 

 

 

 

 

 

 

9101 LBJ Freeway

 

Dallas

 

1985

 

125,874

 

 

 

8,093

 

Featherwood

 

Houston

 

1983

 

49,670

 

 

 

2,959

 

Pima Norte

 

Phoenix

 

2007

 

Under Development

 

 

8,248

 

Royal Crest

 

Houston

 

1984

 

24,900

 

 

 

1,864

 

Uptown Tower

 

Dallas

 

1982

 

253,981

 

 

 

17,171

 

Woodlake Plaza

 

Houston

 

1974

 

106,169

 

 

 

5,533

 

Zeta Building

 

Houston

 

1982

 

37,740

 

 

 

2,457

 

 

 

 

 

 

 

 

   

 

 

   

 

 

 

 

 

 

 

598,334

 

 

$

46,326

 

 

 

 

 

 

 

 

   

 

 

   

 

 

 

 

Grand Totals

 

 

 

 

 

3,093,063

 

 

$

172,834

 

 

 

 

 

 

 

 

   

 

 

   

 

14


General Economic Attributes

          The following table lists certain information that relates to the rents generated by each property, the anchor or largest tenant at the property and the date the anchor or largest tenant’s leases expires. All of the information contained in this table is current as of December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property Name

 

Percent
Leased

 

Total Annualized
Base Rent
(in thousands)

 

Effective Net
Rent
Per Sq. Ft.

 

Anchor or Largest Tenant

 

Lease
Expiration
Date

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bellnott Square

 

 

43.0

%

 

$

637

 

 

$

8.61

 

 

American Audio

 

 

6/30/10

 

Bissonnet/Beltway

 

 

71.7

%

 

 

425

 

 

 

14.56

 

 

Lydia & Ajibade Owoyemi

 

 

9/30/09

 

Centre South

 

 

63.4

%

 

 

370

 

 

 

8.31

 

 

Carlos Alvarez

 

 

12/31/16

 

Garden Oaks

 

 

70.9

%

 

 

969

 

 

 

10.19

 

 

Bally Total Fitness

 

 

12/31/12

 

Greens Road

 

 

100.0

%

 

 

372

 

 

 

18.15

 

 

Celaya Meat Market

 

 

3/31/12

 

Holly Knight

 

 

100.0

%

 

 

426

 

 

 

21.27

 

 

Quick Wash Laundry

 

 

9/30/09

 

Kempwood Plaza

 

 

65.5

%

 

 

928

 

 

 

8.26

 

 

Dollar General

 

 

1/31/09

 

Lion Square

 

 

98.7

%

 

 

1,370

 

 

 

11.45

 

 

Asian Supermarket

 

 

4/30/23

 

Northeast Square

 

 

84.9

%

 

 

437

 

 

 

10.79

 

 

Sultan Allana / 99 Cents Only

 

 

11/30/08

 

Providence

 

 

98.4

%

 

 

998

 

 

 

11.17

 

 

99 Cents Only

 

 

1/31/09

 

South Richey

 

 

100.0

%

 

 

663

 

 

 

9.48

 

 

Kroger Food Store # 303

 

 

2/28/11

 

South Shaver

 

 

86.9

%

 

 

276

 

 

 

12.60

 

 

EZ Pawn

 

 

11/30/12

 

SugarPark Plaza

 

 

100.0

%

 

 

1,354

 

 

 

14.25

 

 

Marshall’s

 

 

1/31/13

 

Sunridge

 

 

85.4

%

 

 

505

 

 

 

10.22

 

 

Crece, Inc.

 

 

2/28/18

 

Torrey Square

 

 

85.4

%

 

 

916

 

 

 

8.66

 

 

99 Cents Only Stores Texas

 

 

9/14/08

 

Town Park

 

 

100.0

%

 

 

889

 

 

 

20.46

 

 

Raphael & Elvira Ortega

 

 

12/31/13

 

Webster Point

 

 

68.0

%

 

 

240

 

 

 

9.22

 

 

Straus Frank Enterprises

 

 

11/30/12

 

Westchase

 

 

85.5

%

 

 

521

 

 

 

12.13

 

 

Apolinar & Leticia

 

 

11/30/11

 

Windsor Park

 

 

82.3

%

 

 

1,986

 

 

 

10.32

 

 

Sports Authority

 

 

8/31/15

 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

 

 

83.2

%

 

$

14,282

 

 

$

11.05

 

 

 

 

 

 

 

 

Warehouse Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brookhill

 

 

100.0

%

 

 

411

 

 

 

5.50

 

 

Umer Ahmad

 

 

7/31/09

 

Corporate Park Northwest

 

 

84.8

%

 

 

1,606

 

 

 

8.65

 

 

Region IV Education

 

 

1/31/11

 

Corporate Park West

 

 

92.1

%

 

 

1,798

 

 

 

10.24

 

 

LTC Pharmacy Services

 

 

5/31/09

 

Corporate Park Woodland

 

 

100.0

%

 

 

1,192

 

 

 

11.93

 

 

Carrier Sales & Distribution

 

 

7/31/08

 

Dairy Ashford

 

 

98.8

%

 

 

198

 

 

 

4.61

 

 

Houston Fellowship Church

 

 

11/30/14

 

Holly Hall

 

 

100.0

%

 

 

646

 

 

 

7.18

 

 

The Methodist Hospital

 

 

12/31/11

 

Interstate 10

 

 

81.3

%

 

 

785

 

 

 

5.20

 

 

River Oaks L-M, Inc.

 

 

12/31/08

 

Main Park

 

 

96.7

%

 

 

769

 

 

 

6.78

 

 

Transport Sales Associates

 

 

8/31/08

 

Plaza Park

 

 

82.1

%

 

 

893

 

 

 

8.46

 

 

American Medical

 

 

5/31/11

 

Westbelt Plaza

 

 

83.6

%

 

 

484

 

 

 

7.38

 

 

Hartman Management, L.P.

 

 

M-to-M

 

Westgate

 

 

72.1

%

 

 

446

 

 

 

4.59

 

 

TVI, Inc.

 

 

6/30/12

 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

 

 

89.1

%

 

$

9,228

 

 

$

7.68

 

 

 

 

 

 

 

 

Office Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9101 LBJ Freeway

 

 

81.1

%

 

 

2,139

 

 

 

16.98

 

 

Compass Insurance

 

 

1/31/11

 

Featherwood

 

 

85.7

%

 

 

793

 

 

 

15.97

 

 

Sage Environmental

 

 

4/30/10

 

Royal Crest

 

 

75.0

%

 

 

227

 

 

 

9.07

 

 

Emerald Environmental Service

 

 

12/31/09

 

Uptown Tower

 

 

89.9

%

 

 

3,664

 

 

 

14.35

 

 

Brockett Davis Drake, Inc.

 

 

4/30/11

 

Woodlake Plaza

 

 

85.5

%

 

 

1,439

 

 

 

13.56

 

 

Rock Solid Images

 

 

7/31/09

 

Zeta Building

 

 

99.0

%

 

 

607

 

 

 

16.07

 

 

Texas Retirement & Tax Advisors

 

 

5/30/11

 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

 

 

87.1

%

 

$

8,869

 

 

$

14.82

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Totals/Averages

 

 

86.2

%

 

$

32,379

 

 

$

10.47

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties Under Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pima Norte

 

 

n/a

 

 

 

n/a

 

 

 

n/a

 

 

n/a

 

 

n/a

 

15


Lease Expirations

          The following table lists, on an aggregate basis, all of our scheduled lease expirations over the next 10 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Leasable Area

 

Annualized Base Rent
as of December 31, 2007

 

 

 

 

 

 

 

 

 

 

Year

 

Number of
Leases

 

Approximate
Square Feet

 

Percent of Total
Leasable Area

 

Amount
(in thousands)

 

Percent of the Total
Annualized Base Rent

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

146

 

 

426,120

 

 

 

13.8

%

 

$

3,736

 

 

14.8

%

 

2009

 

 

168

 

 

487,452

 

 

 

15.8

 

 

 

5,186

 

 

20.5

 

 

2010

 

 

106

 

 

260,754

 

 

 

8.4

 

 

 

3,133

 

 

12.4

 

 

2011

 

 

115

 

 

408,380

 

 

 

13.2

 

 

 

4,482

 

 

17.7

 

 

2012

 

 

98

 

 

309,255

 

 

 

10.0

 

 

 

3,443

 

 

13.6

 

 

2013

 

 

46

 

 

228,696

 

 

 

7.4

 

 

 

2,387

 

 

9.5

 

 

2014

 

 

16

 

 

90,552

 

 

 

2.9

 

 

 

879

 

 

3.5

 

 

2015

 

 

22

 

 

122,599

 

 

 

4.0

 

 

 

933

 

 

3.7

 

 

2016

 

 

5

 

 

39,851

 

 

 

1.3

 

 

 

297

 

 

1.2

 

 

2017

 

 

3

 

 

18,460

 

 

 

0.6

 

 

 

153

 

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

Total

 

 

725

 

 

2,392,119

 

 

 

77.3

%

 

$

24,629

 

 

97.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

Insurance

          We believe that we have property and liability insurance with reputable, commercially rated companies. We also believe that our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount that we believe to be adequate.

Regulations

          Our properties, as well as any other properties that we may acquire in the future, are subject to various federal, state and local laws, ordinances and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our properties.

16


Item 3. Legal Proceedings.

The nature of our business exposes us to the risk of lawsuits for damages or penalties relating to, among other things, breach of contract and employment disputes. We are currently involved in the following litigation:

Hartman Commercial Properties REIT and Hartman REIT Operating Partnership, L.P. v. Allen R. Hartman and Hartman Management, L.P., in the 333 rd Judicial District Court of Harris County, Texas

In October 2006, we terminated our Chief Executive Officer, Allen R. Hartman, and our former manager and advisor, Hartman Management, L.P. The same day, we filed this lawsuit seeking damages for breach of contract, fraudulent inducement, and breach of fiduciary duties. Our new management approached Mr. Hartman about cooperatively turning over operations of the company but Mr. Hartman ousted them from his offices. We then sought an emergency court order requiring Mr. Hartman to turn over control to new management. Mr. Hartman opposed this legal relief. The court issued an order requiring him to turn over control of the company.

As part of the change from Mr. Hartman to new management, the company asked Mr. Hartman to agree to a timeline for turning over specific operations and bank accounts. Mr. Hartman refused, so we had to file another request with the court to require Mr. Hartman’s compliance. Only after we filed the request with the court did Mr. Hartman relent and agree to a turnover timeline. During the turnover process, however, Mr. Hartman denied the company access to its own books and records and we had to go back to court to enforce the previously entered order that turned over the company to present management.

In November 2006, Mr. Hartman and Hartman Management filed a counterclaim against us, the individual members of our Board, our Chief Operating Officer, John J. Dee, and our prior outside law firm and one of its partners. The counterclaims claimed that we had breached our contracts with Mr. Hartman and Hartman Managment and committed tortious interference with contract, intentional infliction of emotional distress, and conspiracy. We prepared defenses to these counterclaims.

Subsequent to our preparations, Mr. Hartman and Hartman Management retained new attorneys. The new attorneys filed amended counterclaims on behalf of Mr. Hartman and Hartman Management and dropped the claims against the individual members of our Board, with the exception of our Chairman, James C. Mastandrea. The amended counterclaims now also alleged negligence, fraud, and breach of fiduciary duty. We proceeded to prepare defenses in response to these amended counterclaims.

Mr. Hartman then hired a different set of attorneys and amended the counterclaims again to drop all of the claims against our prior outside law firm and its partner, many of the claims against us, and all of the claims, without prejudice, against Mr. Mastandrea and Mr. Dee. The amended counterclaim now asserts claims against us only for breach of contract and alleges that we owe Mr. Hartman and Hartman Management a fee for the termination of an advisory agreement. In communications to shareholders, Mr. Hartman represented that the termination fee, as calculated by him, could be in excess of $20 million.

We filed a motion for summary judgment on Mr. Hartman’s and Hartman Management’s claims that we breached our contracts with Hartman Management. On March 25, 2008, the court granted our motion, in part, and stated that the termination fee allegedly due under the advisory agreement was subject to the cap on total operating expenses described in Section IV.D.1 of the North American Securities Administrators Association’s Statement of Policy on Real Estate Investment Trusts.

The parties have each submitted reports of experts as to the amount of the fee due for the termination of the advisory agreement, other fees and expense reimbursements, and damages. Discovery is being conducted for this case, which has a court date of May 19, 2008. Before the court’s March 25, 2008 ruling that capped the advisory agreement termination fee, Mr. Hartman and Hartman Management claimed damages of either $4.8 million or $6.4 million plus prejudgment interest and attorneys’ fees; Whitestone maintains that no amounts are due for fees, expenses and damages and we intend to vigorously defend against those claims and vigorously prosecute our affirmative claims.

Hartman Commercial Properties REIT v. Allen R. Hartman, et al; in the United States District Court for the Southern District of Texas

In November 2006, we learned that Mr. Hartman was soliciting written consents from shareholders and had sought approval from the SEC to distribute a consent solicitation to replace our Board. We asked Mr. Hartman to refrain from distributing the consent solicitation until the false and misleading information was removed. He refused, so we initiated this lawsuit and sought a Temporary Injunction to stop Mr. Hartman from distributing the consent solicitation.

Mr. Hartman and Hartman Management filed a counterclaim, alleging that certain changes to our bylaws and declaration of trust were invalid and that their enactment was a breach of fiduciary duty. Mr. Hartman sought a Temporary Injunction to prevent these changes from taking effect. These changes, among other things, staggered the terms of our Board members over three years, required a two-thirds vote of the outstanding common shares to remove a Board member and provided that our secretary may call a special meeting of shareholders only on the written request of a majority of outstanding common shares.

With Mr. Hartman's encouragement, a group of shareholders filed a motion to intervene and bring claims against us in this lawsuit. The interveners’ claims were similar to the counterclaims filed by Mr. Hartman and Hartman Management. The shareholders eventually dismissed their request to intervene with prejudice, though not before we were required to prepare defenses to their claims and move to block their intervention.

The court ordered Mr. Hartman to refrain from distributing the consent solicitation while the parties exchanged discovery and took depositions in preparation for a full hearing on the competing requests for Temporary Injunctions. On April 6, 2007, the court ruled in our favor and Mr. Hartman was ordered not to distribute the consent solicitation. Also on April 6, 2007, the court denied Mr. Hartman’s request for a Temporary Injunction challenging the changes to our bylaws and declaration of trust and the court upheld the changes to our bylaws and declaration of trust as valid exercises of the Board’s powers. The court also granted our Motion to Dismiss, dismissing many of Mr. Hartman’s and Hartman Management’s remaining claims against us.

Mr. Hartman appealed the court’s April 6, 2007 rulings to the Fifth Circuit Court of Appeals. After considering the parties’ written briefs and oral arguments held in New Orleans, the Fifth Circuit upheld the lower court’s rulings. We still have securities law claims against Mr. Hartman and Hartman Management and his remaining counterclaims are still pending against us, though no monetary damages are being sought by either side. Trial is currently set for November 2008.

Other

          We are a participant in various other legal proceedings and claims that arise in the ordinary course of our business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, we believe that the final outcome of these matters will not have a material effect on our financial position, results of operations or cash flows.

17


I tem 4. Submission of Matters to a Vote of Security Holders.

None.

P ART II

 

 

I tem 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Market Information

          There is no established trading market for our common shares of beneficial interest. As of March 31, 2008, we had 10,001,269 common shares of beneficial interest outstanding held by a total of approximately 1,423 shareholders.

Public Offering Proceeds

          On September 15, 2004, our Registration Statement on Form S-11, with respect to our public offering of up to 10,000,000 common shares of beneficial interest at a price of $10.00 per share, was declared effective under the Securities Act of 1933. The Registration Statement also covers up to 1,000,000 shares available pursuant to our dividend reinvestment plan to be offered at a price of $9.50 per share. The shares are offered to investors on a best efforts basis. Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006, respectively.

          Our Board of Trustees terminated our public offering on October 2, 2006. Through December 31, 2007, approximately 2.8 million shares had been issued pursuant to our public offering with gross offering proceeds received of $28.3 million. An additional 165,000 shares had been issued pursuant to the dividend reinvestment plan in lieu of dividends totaling $1.6 million. Shareholders that received shares pursuant to our dividend reinvestment plan on or after October 2, 2006, may have recission rights as described in “ Dividend Reinvestment Plan ” below.

          The application of our gross offering proceeds from the offering are as follows (in thousands):

 

 

 

 

 

 

 

Description of Use of Offering Proceeds

 

Amount of Proceeds
Utilized

 

 

 

 

 

 

 

 

 

 

Selling Commissions paid to broker/dealers not affiliated with D.H. Hill Securities, LLP

 

 

$

1,644

 

 

Selling Discounts

 

 

 

71

 

 

Dealer Manager Fee paid to Hartman Management

 

 

 

705

 

 

Offering expense reimbursements paid to the Hartman Management

 

 

 

708

 

 

Acquisition Fees paid to Hartman Management

 

 

 

566

 

 

 

 

 

   

 

 

Total Offering Expenses

 

 

$

3,694

 

 

 

 

 

 

 

 

 

Net Offering Proceeds

 

 

$

26,185

 

 

 

 

 

 

 

 

 

Repayment of Lines of Credit

 

 

$

18,300

 

 

Used for Working Capital

 

 

$

7,885

 

 

          We initially used approximately $18.3 million and $7.9 million of our net proceeds from the offering to repay our lines of credit and for working capital, respectively. We subsequently purchased real estate assets by redrawing on our lines of credit and using working capital. Therefore, the ultimate use of our net offering proceeds was the acquisition of real estate assets.

18


Dividend Reinvestment Plan

          Our dividend reinvestment plan allowed our shareholders to elect to have dividends from our common shares reinvested in additional common shares. The purchase price per share under our dividend reinvestment plan was $9.50. On March 27, 2007, we gave the required ten day notice to participants informing them that we intend to terminate our dividend reinvestment plan. As a result, our dividend reinvestment plan terminated on April 6, 2007. Shares issued under our dividend reinvestment plan were registered on our Registration Statement on Form S-11. We did not amend or supplement our Registration Statement following our change in management on October 2, 2006, and the events that occurred thereafter. As a result, shareholders that received approximately 64,000 shares issued under our dividend reinvestment plan on or after that date could be entitled to recission rights. These rights would entitle these shareholders to recovery of their purchase price less any income received on their shares.

Issuer Repurchases

          We did not repurchase any of our equity securities during 2007. Our Board has approved (but delayed the implementation of) a share redemption program that would enable shareholders to sell shares to us after holding them for at least one year under limited circumstances. Our Board could choose to amend the provisions of the share redemption program without shareholder approval. Our Board has chosen not to implement the share redemption program at this time.

Dividends

          In order to remain qualified as a REIT, we are required to distribute at least 90% of our annual taxable income to our shareholders. We currently accrue dividends quarterly and pay dividends in three monthly installments following the end of the quarter. We intend to continue paying dividends in this manner. For a discussion of our cash flow as compared to dividends, see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.

          The following table reflects the total dividends we have paid (including the total amount paid and the amount paid per share) in each indicated quarter. The amounts provided give effect to our reorganization as a Maryland real estate investment trust and the concurrent recapitalization of our common shares on July 28, 2004.

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Paid

 

Total Amount of
Dividends Paid
(in thousands)

 

Dividends per
Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

03/31/2006

 

 

$

1,526

 

 

 

$

0.1768

 

 

06/30/2006

 

 

 

1,632

 

 

 

 

0.1768

 

 

09/30/2006

 

 

 

1,443

 

 

 

 

0.1500

 

 

12/31/2006

 

 

 

1,477

 

 

 

 

0.1500

 

 

03/31/2007

 

 

 

1,522

 

 

 

 

0.1500

 

 

06/30/2007

 

 

 

1,500

 

 

 

 

0.1500

 

 

09/30/2007

 

 

 

1,500

 

 

 

 

0.1500

 

 

12/31/2007

 

 

 

1,500

 

 

 

 

0.1500

 

 

03/31/2008

 

 

$

1,500

 

 

 

$

0.1500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Per Quarter

 

 

 

 

 

 

 

$

0.1560

 

 

19


Equity Compensation Plan Information

          Please refer to Item 12 of this report on Form 10-K for information concerning securities authorized under our incentive share plan.

I tem 6. Selected Financial Data.

          The following table sets forth our selected consolidated financial information and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the notes thereto, both of which appear elsewhere in this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

30,982

 

$

29,840

 

$

24,919

 

$

23,279

 

$

20,897

 

Operating expenses (excluding depreciation and amortization) (1)

 

 

19,674

 

 

15,832

 

 

11,012

 

 

9,183

 

 

8,383

 

Depreciation and amortization

 

 

6,343

 

 

6,476

 

 

6,099

 

 

5,223

 

 

4,758

 

 

 

   

 

   

 

   

 

   

 

   

 

Operating income

 

 

4,965

 

 

7,532

 

 

7,808

 

 

8,873

 

 

7,756

 

Interest expense

 

 

(5,402

)

 

(5,296

)

 

(3,770

)

 

(2,664

)

 

(1,323

)

Interest income and other

 

 

314

 

 

613

 

 

301

 

 

205

 

 

76

 

 

 

   

 

   

 

   

 

   

 

   

 

Income (loss) before minority interests

 

 

(123

)

 

2,849

 

 

4,339

 

 

6,414

 

 

6,509

 

Minority interest in (income) loss

 

 

46

 

 

(1,068

)

 

(1,891

)

 

(2,990

)

 

(3,035

)

 

 

   

 

   

 

   

 

   

 

   

 

Net income (loss)

 

$

(77

)

$

1,781

 

$

2,448

 

$

3,424

 

$

3,474

 

Net income (loss) per common share

 

$

(0.008

)

$

0.185

 

$

0.310

 

$

0.488

 

$

0.496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate (net)

 

$

154,392

 

$

149,488

 

$

153,965

 

$

126,547

 

$

120,256

 

Other assets

 

 

20,752

 

 

17,488

 

 

17,497

 

 

16,070

 

 

13,810

 

 

 

   

 

   

 

   

 

   

 

   

 

Total assets

 

$

175,144

 

$

167,087

 

$

171,462

 

$

142,617

 

$

134,066

 

 

 

   

 

   

 

   

 

   

 

   

 

Liabilities

 

$

94,262

 

$

76,464

 

$

83,462

 

$

66,299

 

$

55,183

 

Minority interests in Operating Partnership

 

 

28,039

 

 

31,709

 

 

34,272

 

 

36,489

 

 

37,567

 

Shareholders’ equity

 

 

52,843

 

 

58,914

 

 

53,728

 

 

39,829

 

 

41,316

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

$

175,144

 

$

167,087

 

$

171,462

 

$

142,617

 

$

134,066

 

 

 

   

 

   

 

   

 

   

 

   

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

$

260

 

$

9,453

 

$

17,035

 

$

1,472

 

$

 

Additions to real estate

 

$

10,234

 

$

2,055

 

$

31,792

 

$

10,277

 

$

8,242

 

Dividends per share (2)

 

$

0.600

 

$

0.625

 

$

0.701

 

$

0.701

 

$

0.700

 

Funds from operations (3)

 

$

6,001

 

$

8,993

 

$

9,851

 

$

11,138

 

$

10,825

 

Occupancy at year end

 

 

86

%

 

83

%

 

82

%

 

86

%

 

88

%

(1) Operating expenses for the years ended December 31, 2007 and 2006 include approximately $2.2 million and $0.9 million, respectively, of legal costs resulting from litigation with Allen Hartman and Hartman Management, LP.

(2) The dividends per share represent total cash payments divided by weighted average common shares.

(3) We believe that Funds From Operations (“FFO”) is an appropriate supplemental measure of operating performance because it helps our investors compare our operating performance relative to other REITs. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) available to common shareholders computed in accordance with GAAP, excluding gains or losses from sales of operating properties and extraordinary items, plus depreciation and amortization of real estate assets, including our share of unconsolidated partnerships and joint ventures. We calculate FFO in a manner consistent with the NAREIT definition.

20


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

          You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the notes thereto included in this annual report. For more detailed information regarding the basis of presentation for the following information, you should read the notes to our audited consolidated financial statements included in this annual report.

Overview

          We are a real estate investment trust (“REIT”) engaged in owning and operating income-producing real properties. Our investments include retail, office and warehouse properties located in the Houston, Dallas, San Antonio and Phoenix metropolitan areas. Our properties consist of:

 

 

 

 

19 retail properties containing approximately 1.3 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $67.0 million.

 

 

 

 

Six office properties containing approximately 0.6 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $36.2 million.

 

 

 

 

11 office/warehouse properties containing approximately 1.2 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $42.8 million.

 

 

 

 

One office property under development having a total carrying amount of $8.4 million, which will contain approximately 0.03 million square feet of leasable space upon completion.

          Our primary source of income and cash is rents associated with commercial leases. Our business objective is to increase shareholder value by employing a value-add investment strategy. This strategy is focused on owning and renovating commercial real estate assets in markets with positive demographic trends, achieving diversification by property type and location, and acquiring properties within our targeted returns.

          As of December 31, 2007, we had 720 total tenants. We have a diversified tenant base with our largest tenant compromising only 1.8% of our total revenues for 2007. Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants. Our leases generally include minimum monthly lease payments and tenant reimbursements for payment of taxes, insurance and maintenance.

          We are a self-managed REIT, employing 46 full-time employees as of December 31, 2007. As a self-managed REIT, we bear our own expenses of operations, including the salaries, benefits and other compensation of our employees, office expenses, legal, accounting and investor relations expenses and other overhead.

          Prior to November 14, 2006, our properties and day-to-day operations were externally managed by Hartman Management, LP (“the External Manager”) under an advisory agreement and a management agreement. Under this arrangement we were charged fees based on percentages of gross revenues, asset values, capital raised, and expenses submitted for reimbursement. Our advisory agreement expired at the end of September 2006 and our Board terminated our property management agreement in October 2006. The External Manager turned over all property management functions to us on November 14, 2006.

          We believe that one of the most key measures of our performance is property occupancy. Occupancy for the total portfolio was 86.2% at December 31, 2007, compared to 83.3% at December 31, 2006. We completed 256 new and renewal leases during 2007 totaling 0.9 million square feet and $42.0 million in total lease value.

          In the fourth quarter of 2006, our Board approved our five year business plan. The key elements of the plan are as follows:

 

 

 

 

Maximize value in current properties through operational focus and redevelopment

21



 

 

 

 

Grow through strategic acquisitions of commercial properties in high potential markets, including properties outside of Texas

 

 

 

 

Dispose of non-core properties and reinvest the capital in redevelopment of existing properties or acquisition of core properties in high potential markets

 

 

 

 

Pare down from three current product lines (retail, office and warehouse) and focus on one or possible two product lines.

 

 

 

 

Raise capital using a combination of the private and public equity and debt markets, as well as joint ventures

 

 

 

 

Bring liquidity to our stock by listing on a national stock exchange

          During 2007, we have begun progress on the execution of this five year plan as described in the following sections on redevelopment, acquisitions and dispositions.

Redevelopment

          We began redevelopment in late 2007 to add 5,000 square feet of office space and upgrade the Westchase Plaza Retail and Office Center located in Houston, Texas. The total redevelopment of this center is projected to cost approximately $1.7 million and be completed by late 2008.

Acquisitions

          In October of 2007, we acquired a 33,400 square foot commercial property in Carefree, Arizona which is adjacent to North Scottsdale, for approximately $8.3 million. The property, Pima Norte, is a newly constructed one and two story class “A” executive medical office building. The property is currently under development and is expected to be leasable by mid 2008. We expect to invest approximately $2.0 million to complete the construction.

Dispositions

          On July 26, 2007, we sold a 2.4 acre parcel of vacant land next to our South Shaver retail property located in Houston, Texas for a sales price of $0.3 million.

          On December 1, 2006, we sold Northwest Place II, a 27,974 square foot office/warehouse building located in Houston, Texas for a sales price of $1.2 million.

Summary of Critical Accounting Policies

          Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. We prepared these financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements required us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Our results may differ from these estimates. Currently, we believe that our accounting policies do not require us to make estimates using assumptions about matters that are highly uncertain. You should read Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations .

22


          We have described below the critical accounting policies that we believe could impact our consolidated financial statements most significantly.

          Revenue Recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We have established an allowance for doubtful accounts against the portion of tenant accounts receivable which is estimated to be uncollectible.

          Development Properties. Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction, are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. The Company capitalizes acquisition costs once the acquisition of the property becomes probable. Prior to that time, we expense these costs as acquisition expense. During the year ended December 31, 2007, interest in the amount of $0.1 was capitalized on properties under development. No such amounts were capitalized in 2006 or 2005.

          Acquired Properties and Acquired Lease Intangibles. We account for real estate acquisitions pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations . Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.

          Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of five to 39 years for the buildings and improvements. Tenant improvements are depreciated using the straight-line method over the life of the lease.

          Impairment. We review our properties for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2007.

          Accrued Rent and Accounts Receivable. Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and

23


current economic trends. As of December 31, 2007 and 2006, we had an allowance for uncollectible accounts of $1.1 million and $0.6 million, respectively. During 2007, 2006 and 2005, we recorded bad debt expense in the amount of $0.6 million, $0.4 million and $0.1 million, respectively, related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness. Bad debt expenses and any related recoveries are included in property operation and maintenance expense.

          Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized using the straight-line method over the terms of the related lease agreements. Loan costs are amortized on the straight-line method over the terms of the loans, which approximates the interest method. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases.

          Federal Income Taxes. We are qualified as a real estate investment trust under the Internal Revenue Code of 1986 and are therefore not subject to Federal income taxes provided we meet all conditions specified by the Internal Revenue Code for retaining our REIT status. We believe we have continuously met these conditions since reaching 100 shareholders in 1999 (see Note 11 to the consolidated financial statements).

          Derivative Instruments. We have initiated a program designed to manage exposure to interest rate fluctuations by entering into financial derivative instruments. The primary objective of this program is to comply with debt covenants on a credit facility. We have entered into an interest rate swap agreement with respect to amounts borrowed under certain of our credit facilities, which effectively exchanges existing obligations to pay interest based on floating rates for obligations to pay interest based on fixed LIBOR rates.

          We have adopted SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities ,” as subsequently amended by SFAS No. 138, “ Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which require for items appropriately classified as cash flow hedges that changes in the market value of the instrument and in the market value of the hedged item be recorded as other comprehensive income with the exception of the portion of the hedged items that are considered ineffective. The derivative instruments are reported at fair value as other assets or other liabilities as applicable. As of December 31, 2007, we have a $70.0 million dollar interest rate swap which has been designated as a cash flow hedge. The fair value of this interest rate swap is approximately ($0.4) million and is included in accounts payable and accrued expenses in the consolidated balance sheet. Additionally, for a previous interest rate swap which was not designated as a cash flow hedge, approximately ($0.03) million and $0.03 million are included in other expense and other income on the consolidated statement of income for the year ended December 31, 2007 and 2006, respectively.

New Accounting Pronouncements

          In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “ Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 .” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. There are also several disclosure requirements. We adopted this interpretation during the first quarter of 2007, and it had no effect on our consolidated financial statements.

          In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurements ” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles and requires enhanced disclosures about fair value measurements. It does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect this pronouncement to have a material effect on our consolidated results of operation or financial position.

24


          In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We currently do not plan to measure any eligible financial assets and liabilities at fair value under the provisions of SFAS No. 159.

          In September 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 07-6, “ Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause,” which clarifies that a buy-sell clause, in and of itself, does not constitute a prohibited form of continuing involvement that would preclude partial sale treatment under Statement 66. EITF 07-6 applies prospectively to new arrangements entered into in fiscal years beginning after December 15, 2007.

          In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which replaces SFAS No. 141,
“ Business Combinations,” which, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles) and any noncontrolling interests in the acquired entity. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

          In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating what impact our adoption of SFAS No. 160 will have on our financial statements.

Liquidity and Capital Resources

          Our primary liquidity demands are distributions to the holders of our common shares and holders of units of limited partnership interest in the Operating Partnership (“OP Units”), capital improvements and repairs and maintenance for our properties, acquisition of additional properties, tenant improvements and debt repayments.

          Primary sources of capital for funding our acquisitions and redevelopment programs are our $75 million revolving credit facility, cash generated from sales of properties that no longer meet investment criteria, cash flow generated from operating activities and bank debt.

          Our capital structure also includes non-recourse secured debt that we assumed or originated on certain properties. We hedge the future cash flows of certain debt transactions principally through interest rate swaps with major financial institutions.

          During the year ended December 31, 2007, our cash provided from operating activities was $4.6 million and our total distributions were $9.5 million. Therefore we had distributions in excess of cash flow from operations of approximately $4.9 million. Our primary funding for paying dividends in excess of cash flow from operations was borrowing from our credit facility and the increase in the debt on our Windsor Park Centre mortgage loan.

          During the year ended December 31, 2007, we incurred approximately $2.2 million in legal costs as a result of the ongoing litigation with Mr. Hartman and Hartman Management, LP. For a full discussion of the litigation with Mr. Hartman and Hartman Management see Item 3 – Legal Proceedings. We do not know when this litigation will be fully resolved. The continued legal cost associated with this litigation may have a significant impact on our cash flow. We anticipate that cash flows from operating activities and our borrowing capacity will provide

25


adequate capital for our working capital requirements, anticipated capital expenditures, litigation costs and scheduled debt payments during the next 12 months. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT.

           Cash and Cash Equivalents

          We had cash and cash equivalents of $10.8 million at December 31, 2007, as compared to $8.3 million on December 31, 2006. The increase of $2.5 million was primarily the result of the following:

                     Sources of Cash

 

 

 

 

Cash flow from operations of $4.6 million for the year ended December 31, 2007.

 

 

 

 

Net proceeds of $17.1 million from our credit facility and refinancing of our Windsor Park Centre property.

 

 

 

 

Repayment of note receivable of $0.6 million. We originally issued this note receivable in 2003 in conjunction with the sale of a property.

 

 

 

 

 

Uses of Cash

 

 

 

 

Payment of dividends and distributions to common shareholders and OP Unit holders of $9.5 million.

 

 

 

 

Additions to real estate of $10.2 million.

          We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.

           Debt

          As of December 31, 2007, we had two active loans:

           Revolving Credit Facility

          We have a revolving credit facility with a consortium of banks. The credit facility is secured by a pledge of the partnership interests in Whitestone REIT Operating Partnership III, L.P. (“WROP III”), a wholly owned subsidiary of the Operating Partnership that was formed to hold title to the properties comprising the borrowing base pool for the facility. At December 31, 2007, WROP III owned 35 properties.

          As of December 31, 2007 and December 31, 2006, the balance outstanding under the credit facility was $73.5 million and $61.2 million, respectively, and the availability to draw was $1.5 million and $13.8 million, respectively.

           Mortgage Loan on Windsor Park Centre

          On March 1, 2007, we obtained a $10.0 million loan to pay off the loan obtained upon the acquisition of the Windsor Park property and to provide funds for future acquisitions. The mortgage loan is secured by the Windsor Park property which is owned by Whitestone REIT Operating Company IV, LLC (“WROC IV”), a wholly owned subsidiary of the Operating Partnership that was formed to hold title to the Windsor Park property. On March 1, 2007, we conveyed ownership of the Windsor Park property from the Operating Partnership to WROC IV in order to secure the $10.0 million mortgage loan.

26


          The note is payable in equal monthly installments of principal and interest of $60,212, with interest at the rate of 6.04% per annum. The balance of the note is payable in full on March 1, 2014. The loan balance is approximately $9.9 million at December 31, 2007.

          For further discussion regarding specific terms of our debt, see Note 9 of the Consolidated Financial Statements.

           Capital Expenditures

          We continually evaluate our properties performance and value. We may determine it is best to invest capital in properties we believe have potential for increasing value. We also may have unexpected capital expenditures or improvements for our existing assets. Additionally, we intend to invest in similar properties outside of Texas in cities with exceptional demographics to diversify market risk, and we may incur significant capital expenditures or make improvements in connection with any properties we may acquire.

           Contractual Obligations

          As of December 31, 2007, we had the following contractual debt obligations (see Note 9 of the Consolidated Financial Statements for further discussion regarding the specific terms of our debt) (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment due by period

 

 

 

 

 

 

 

 

 

Contractual Obligations

 

 

Total

 

Less than
1 Year

 

1 to 3
Years

 

3 to 5
Years

 

More than
5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt Obligations

 

$

83,461

 

$

73,562

 

$

 

$

 

$

9,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Lease Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

83,461

 

$

73,562

 

$

 

$

 

$

9,899

 

 

 

   

 

   

 

   

 

   

 

   

 

27


Distributions

          During 2007, we paid dividends to our common shareholders and distributions to our OP Unit holders of $9.5 million, compared to $9.8 million in 2006. Common shareholders and OP Unit holders receive monthly dividends and distributions, respectively. Payments of dividends and distributions are declared quarterly and paid monthly. The dividends paid to common shareholders and distributions paid to OP Unit holders follow (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Shareholders

 

Minority Interest
OP Unit
Holders

 

 

 

       

 

       

 

2007

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

 

$

1,500

 

 

 

$

871

 

 

Third Quarter

 

 

 

1,500

 

 

 

 

871

 

 

Second Quarter

 

 

 

1,500

 

 

 

 

871

 

 

First Quarter

 

 

 

1,522

 

 

 

 

871

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

 

 

1,477

 

 

 

 

871

 

 

Third Quarter

 

 

 

1,443

 

 

 

 

871

 

 

Second Quarter

 

 

 

1,632

 

 

 

 

1,005

 

 

First Quarter

 

 

$

1,526

 

 

 

$

1,006

 

 

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

          The following table provides a general comparison of our results of operations for the years ended December 31, 2007 and December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

 

December 31, 2006

 

 

 

       

 

       

 

Number of properties owned and operated

 

 

 

37

 

 

 

 

36

 

 

Aggregate gross leasable area (sq. ft.)

 

 

 

3,093,063

 

 

 

 

3,093,063

 

 

Ending occupancy rate

 

 

 

86

%

 

 

 

83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

Total revenues

 

 

$

30,982

 

 

 

$

29,840

 

 

Total operating expenses

 

 

 

26,017

 

 

 

 

22,308

 

 

Operating income

 

 

 

4,965

 

 

 

 

7,532

 

 

Other income (expense), net

 

 

 

(5,088

)

 

 

 

(4,683

)

 

Income (loss) before minority interests

 

 

 

(123

)

 

 

 

2,849

 

 

Minority interests in the Operating Partnership

 

 

 

46

 

 

 

 

(1,068

)

 

Net income (loss)

 

 

$

(77

)

 

 

$

1,781

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from operations (1)

 

 

$

6,001

 

 

 

$

8,993

 

 

Dividends paid on common shares and OP Units

 

 

 

9,507

 

 

 

 

9,831

 

 

Per common share and OP unit

 

 

$

0.60

 

 

 

$

0.63

 

 

Dividends paid as a % of FFO

 

 

 

158

%

 

 

 

109

%

 


 

 

 

(1) In accordance with Regulation G, “reconciliation of non-GAAP measures,” see “Funds From Operations” following.

28


           Revenues

          Substantially all of our revenue is derived from rents received from leases at our properties . We had rental income and tenant reimbursements of approximately $31.0 million for the year ended December 31, 2007, as compared to $29.8 million for the year ended December 31, 2006, an increase of $1.2 million or 4%. Our year end occupancy rate in 2007 was 86%, as compared to 83% at year end 2006. The majority of the increase in occupancy occurred near the end of the year in 2007 and did not have a material impact on revenue in 2007. We expect revenue to increase in 2008 as a result of this increase in occupancy. Our average gross leaseable area was approximately 3,093,000 in 2007 versus 3,127,000 in 2006. Our average annualized revenue was $10.02 per square foot in 2007, as compared to our average annualized revenue of $9.56 per square foot in 2006.

           Operating Expenses

          Our total operating expenses were $26.0 million for the year ended December 31, 2007, as compared to $22.3 million for the year ended December 31, 2006, an increase of $3.7 million, or 16.6%. The primary components of total operating expense are detailed in the table below (in thousands):

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operation and maintanence

 

$

9,165

 

$

8,101

 

Real estate taxes

 

 

3,788

 

 

3,950

 

Property management and asset management fees to an affiliate

 

 

 

 

1,482

 

General and administrative

 

 

6,721

 

 

2,299

 

Depreciation and amortization

 

 

6,343

 

 

6,476

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

26,017

 

$

22,308

 

 

 

   

 

   

 

           Property operation and maintenance

          The increase in property operation and maintenance expenses for the year ended December 31, 2007, as compared to the year ended December 31, 2006, is primarily the result of increased repair and maintenance costs for our properties. The majority of these costs relate to work that had been deferred prior to our managing our own properties. While these costs decreased our earnings for the year ended December 31, 2007, we believe that they will ultimately result in higher tenant satisfaction, lower tenant attrition and higher occupancy levels.

           Property management and asset management fees paid to an affiliate

          On September 30, 2006, our advisory agreement with our External Manager expired. On November 14, 2006, all property management functions were transferred to us from our external manager. As such, no external management fees were charged after November 13, 2006.

           General and Administrative Expense

          Prior to October 2, 2006, we were externally managed, which makes a comparison of costs difficult given the different nature of the expenses incurred by an externally-managed REIT versus an internally-managed one. As an externally-managed REIT, we were charged fees based on percentages of gross revenues, asset values, capital raised, and expenses submitted for reimbursement. Generally accepted accounting principles allowed for many of theses fees to be capitalized as an asset or accounted for as a reduction in equity.

29


          Subsequent to October 2, 2006, we operated as an internally-managed REIT and many of the costs that were previously capitalized or recorded as a reduction in equity are now charged to general and administrative expense and reflected in the Consolidated Statement of Operations.

          During the years ended December 31, 2007 and 2006, we executed new and renewal leases with a total lease value of $42.0 million and $20.0 million, respectively. Prior to October 2, 2006 we paid our former management company 6.0% of the total value of new leases and 4.0% of the total value of renewal leases. If we had executed the same volume of leases in 2006, we estimate that we would have paid an additional $1.1 million in leasing commission cost to our External Manager in 2006. Additionally, significant legal expense has been incurred in 2007 related to the ongoing litigation with our former External Manager. For a detailed discussion of the litigation, please refer to Item 3, Legal Proceedings.

          The chart below is a comparison of the total costs incurred for general and administrative services in the years ended December 31, 2007 and 2006. In order to be a meaningful comparison, the chart contains a pro forma adjustment to 2006 to show the increased lease commission cost assuming the same volume of leasing activity as 2007. Excluding legal costs related to the litigation with our former External Manager and adjusting for the incremental leasing commission that would have been paid in 2006, costs for general and administrative services in 2007 were slightly lower than in 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized in
Balance Sheet

 

Charged to
Statement of Operations

 

Pro Forma (1)

 

Total, including Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

2006

 

2007

 

2006 (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel Cost

 

$

 

$

 

$

2,799

 

$

 

$

 

$

2,799

 

$

 

Office Expense

 

 

 

 

 

 

860

 

 

 

 

 

 

860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional Fees (Acctg, etc.)

 

 

 

 

 

 

855

 

 

1,396

 

 

 

 

855

 

 

1,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering Costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling Commissions

 

 

 

 

378

 

 

 

 

 

 

 

 

 

 

378

 

Discounts

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

15

 

Dealer Manager Fee

 

 

 

 

139

 

 

 

 

 

 

 

 

 

 

139

 

Expense Reimbursements

 

 

 

 

139

 

 

 

 

 

 

 

 

 

 

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Fees

 

 

 

 

111

 

 

 

 

 

 

 

 

 

 

111

 

Leasing Fees

 

 

1,197

 

 

983

 

 

 

 

 

 

1,116

 

 

1,197

 

 

2,099

 

Property Management Fees

 

 

 

 

 

 

 

 

1,482

 

 

 

 

 

 

1,482

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total, excluding litigation cost

 

$

1,197

 

$

1,765

 

$

4,514

 

$

2,878

 

$

1,116

 

$

5,711

 

$

5,759

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Litigation Cost (2)

 

 

 

 

 

 

2,207

 

 

903

 

 

 

 

 

2,207

 

 

903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total, including litigation cost

 

$

1,197

 

$

1,765

 

$

6,721

 

$

3,781

 

$

1,116

 

$

7,918

 

$

6,662

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

(1) In order to be comparable, a pro forma adjustment is made to the 2006 lease fees to relect the additional fees that would have been paid to the former management company if they had executed the same volume of leases, as defined by total lease value, in 2006 as we executed in 2007 with our internal leasing staff.

(2) Litigation cost represent fees paid as a result of our litigation with Allen R. Hartman and Hartman Managment L.P. For further discussion regarding our ongoing litigation please refer to Item 3. Legal Proceedings.

30


           Operating Income

          Operating income was $5.0 million for the year ended December 31, 2007, as compared to $7.5 million for the year ended December 31, 2006, a decrease of $2.5 million or 33%. The primary reasons for the decrease are detailed above in Revenues and Operating Expenses .

           Other Income (Expense)

          Other expense increased by $0.4 million primarily as a result of the Texas Margin Tax which was enacted in 2007.

           Net Income (Loss)

          Income before minority interest was a loss of ($0.1) million for the year ended December 31, 2007, as compared to $2.8 million for the year ended December 31, 2006, a decrease of $2.9 million. Net income for the year ended December 31, 2007, was a loss of ($0.08) million, as compared to $1.8 million for the year ended December 31, 2006, a decrease of $1.9 million. These decreases are a result of the items discussed above.

Result of Operations

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

          The following table provides a general comparison of our results of operations for the years ended December 31, 2006 and December 31, 2005 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

December 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Number of properties owned and operated

 

 

36

 

 

37

 

Aggregate gross leasable area (sq. ft.)

 

 

3,093,063

 

 

3,121,037

 

Ending Occupancy rate

 

 

83

%

 

82

%

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

Total revenues

 

$

29,840

 

$

24,919

 

Total operating expenses

 

 

22,308

 

 

17,111

 

Operating income

 

 

7,532

 

 

7,808

 

Other income (expense)

 

 

(4,683

)

 

(3,469

)

Income before minority interests

 

 

2,849

 

 

4,339

 

Minority interests in the Operating Partnership

 

 

(1,068

)

 

(1,891

)

Net income

 

$

1,781

 

$

2,448

 

 

 

 

 

 

 

 

 

Funds from operations (1)

 

$

8,993

 

$

9,851

 

Dividends paid on common shares and OP Units

 

 

9,831

 

 

9,389

 

Per common share and OP unit

 

$

0.63

 

$

0.71

 

Dividends paid as a % of FFO

 

 

109

%

 

95

%


 

 

 

(1) In accordance with Regulation G, “reconciliation of non-GAAP measures,” see “Funds From Operations” following.

           Revenues

          Substantially all of our revenue is derived from rents received for leases at our properties . We had rental income and tenant reimbursements of approximately $29.8 million for the year ended December 31, 2006, as compared to $24.9 million for the year ended December 31, 2005, an increase of $4.9 million or 20%. Of this increase, $4.4 million or 90% was from receiving a full year of revenue on the three properties acquired during 2005. The remaining increase resulted from an increase in rental rates charged. Our average occupancy rate in

31


2006 was 83%, as compared to 84% in 2005, and our average annualized revenue was $9.56 per square foot in 2006, as compared to our average annualized revenue of $8.91 per square foot in 2005.

           Operating Expenses

          Our total operating expenses were $22.3 million for the year ended December 31, 2006, as compared to $17.1 million for the year ended December 31, 2005, an increase of $5.2 million, or 30%. Of this increase, $2.9 million or 56% was from having a full year of operating expenses for the three properties acquired during 2005. The primary components of operating expense are detailed in the table below (in thousands):

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Properties acquired in 2005

 

$

4,828

 

$

1,461

 

 

 

 

 

 

 

 

 

Other Properties

 

 

 

 

 

 

 

Property operations and maintanence

 

 

5,229

 

 

4,584

 

Real estate taxes

 

 

2,993

 

 

2,774

 

Property management and asset management fees to an affiliate

 

 

1,266

 

 

1,354

 

General and administrative

 

 

2,299

 

 

1,128

 

Depreciation and amortizaton

 

 

5,693

 

 

5,810

 

 

 

   

 

   

 

 

 

$

17,480

 

$

15,650

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

22,308

 

$

17,111

 

 

 

   

 

   

 

           Properties acquired in 2005

          During 2005, we acquired from unrelated parties three multi-tenant office buildings comprising approximately 0.4 million square feet of gross leasable area. The properties were acquired for cash for approximately $30.8 million. As these properties were acquired during the year, only a partial year of operating expense is included in 2005. The increase is primarily a result of a full year of operating expense in 2006 compared to a partial year in 2005.

           Real Estate Taxes

          The increase in taxes of $0.2 million is primarily a result of an approximate 8% increase in overall property values by local appraisal districts.

           Property management and asset management fees paid to an affiliate

          On September 30, 2006, our advisory agreement with the External Manager expired. On November 14, 2006, all property management functions were transferred to us from the External Manager. As such, no fees were paid to the External Manager after November 13, 2006. The property management and asset management fees paid to by the External Manager through November 13, 2006 and September 30, 2006, respectively, were $0.3 million or 24% higher than the same period in 2005.

           General and Administrative

          The increase in our general and administrative expenses of $1.2 million is primarily due to legal fees incurred in the fourth quarter of 2006 resulting from the termination of the management and advisory agreements, the termination of Mr. Hartman as our President, Secretary and Chief Executive Officer and the litigation with Mr. Hartman and Hartman Management.

32


           Operating Income

          Operating income was $7.5 million for the year ended December 31, 2006, as compared to $7.8 million for the year ended December 31, 2005, a decrease of $0.3 million or 4%. The primary reasons for the decrease are detailed above in Revenues and Operating Expenses .

           Other Income (Expense)

          Other expense was $4.7 million for the year ended December 31, 2006, as compared to $3.5 million for the year ended December 31, 2005, an increase of $1.2 million or 34%. The primary reason for the increase was a $1.5 million increase in interest expense as a result of higher variable interest rates in 2006, as compared to 2005, offset by a gain of $0.2 million recorded in 2006 from the sale of Northwest Place II.

           Net Income

          Income before minority interest was $2.8 million for the year ended December 31, 2006, as compared to $4.3 million for the year ended December 31, 2005, a decrease of $1.5 million or 35%. Net income for the year ended December 31, 2006, was $1.8 million, as compared to $2.4 million for the year ended December 31, 2005, a decrease of $0.6 million, or 25%. These decreases are a result of the items discussed above.

33


Funds From Operations

          The National Association of Real Estate Investment Trusts defines funds from operations (“FFO”) as net income (loss) available to common shareholders computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses from sales of operating real estate assets and extraordinary items, plus depreciation and amortization of operating properties, including our share of unconsolidated real estate joint ventures and partnerships. We calculate FFO in a manner consistent with the NAREIT definition.

          Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income by itself as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that uses historical cost accounting is insufficient by itself. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs.

          FFO should not be considered as an alternative to net income or other measurements under GAAP as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness.

          Below is the calculation of FFO and the reconciliation to net income, which we believe is the most comparable GAAP financial measure (in thousands):

Reconciliation of Non-GAAP Financial Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(77

)

$

1,781

 

$

2,448

 

Minority interest in income (loss) of operating partnership

 

 

(46

)

 

1,068

 

 

1,891

 

Depreciation and amortization of real estate assets

 

 

6,108

 

 

6,341

 

 

5,512

 

(Gain) loss on sale or disposal of assets

 

 

16

 

 

(197

)

 

 

 

 

   

 

   

 

   

 

FFO

 

$

6,001

 

$

8,993

 

$

9,851

 

 

 

   

 

   

 

   

 

Taxes

          We elected to be taxed as a REIT under the Internal Revenue Code beginning with our taxable year ended December 31, 1999. As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We believe that we are organized and operate in such a manner as to qualify to be taxed as a REIT, and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.

34


Inflation

          We anticipate that the majority of our leases will continue to be triple-net leases or otherwise provide that tenants pay for increases in operating expenses and will contain provisions that we believe will mitigate the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon our operating results.

Off-Balance Sheet Arrangements

          We have no significant off-balance sheet arrangements as of December 31, 2007.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

          Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. Based upon the nature of our operations, we are not subject to foreign exchange or commodity risk. We will be exposed to changes in interest rates as a result of our credit facilities that have floating interest rates. As of December 31, 2007, we had $3.5 million of indebtedness outstanding under facilities with floating interest rates. The impact of a 1% increase in interest rates on our debt would result in an increase in interest expense and a decrease in income before minority interests of approximately $0.04 million annually.

Item 8. Financial Statements and Supplementary Data.

          The information required by this Item 8 is incorporated by reference to our Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

          None.

Item 9T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

          In connection with the preparation of this Form 10-K, as of December 31, 2007, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported on a timely basis.

          During the audit of the year ended December 31, 2006, our independent registered public accounting firm brought to management’s attention two material weaknesses in internal controls: (1) Inadequate controls and procedures in place to effectively monitor and record non-routine transactions and (2) Inadequate controls and procedures in place to effectively manage certain spreadsheets that support the financial reporting process. A material weakness in internal control is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected on a timely basis by the Company. The Company implemented controls and procedures designed to remediate these material weaknesses. These controls and procedures included the automation of many of the processes that previously were performed in spreadsheets and further review of non-routine transactions. Management has ensured that these new controls and procedures are operating effectively and fully address the

35


risks giving rise to the material weakness. Accordingly, management believes that these material weaknesses have been fully remediated as of December 31, 2007.

Management’s Annual Report on Internal Control Over Financial Reporting and Attestation Report of the Independent Registered Public Accounting Firm

          Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

          The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 is not subject to attestation pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report and therefore has not been audited by our independent registered public accounting firm.

Changes in Internal Control Over Financial Reporting

          Except as discussed above, there have been no other changes during the Company’s quarter ended December 31, 2007, in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financing reporting.

Item 9B. Other Information.

None.

36


PART III

Item 10. Trust Managers, Executive Officers and Corporate Governance

          The information required by Item 10 of Form 10-K is incorporated herein by reference to such information as set forth in the proxy statement for our 2008 annual meeting.

Item 11. Executive Compensation.

          The information required by Item 11 of Form 10-K is incorporated herein by reference to such information as set forth in the proxy statement for our 2008 annual meeting.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

          The information required by Item 12 of Form 10-K is incorporated herein by reference to such information as set forth in the proxy statement for our 2008 annual meeting.

Item 13. Certain Relationships and Related Transactions, and Director Independence

          The information required by Item 13 of Form 10-K is incorporated herein by reference to such information as set forth in the proxy statement for our 2008 annual meeting.

Item 14. Principal Accounting Fees and Services.

          The information required by Item 14 of Form 10-K is incorporated herein by reference to such information as set forth in the proxy statement for our 2008 annual meeting.

37


PART IV

Item 15. Exhibits and Financial Statement Schedules.

 

 

1.

Financial Statements . The list of our financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.

 

 

2.

Financial Statement Schedules .


 

 

 

 

a.

Schedule II – Valuation and Qualifying Amounts

 

 

 

 

b.

Schedule III – Real Estate and Accumulated Depreciation


 

 

 

All other financial statement schedules have been omitted because the required information of such schedules is not present, is not present in amounts sufficient to require a schedule or is included in the consolidated financial statements.

 

 

3.

Exhibits . The list of exhibits filed as part of this Annual Report on Form 10-K in response to Item 601 of Regulation S-K is submitted on the Exhibit Index attached hereto.

38


SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

WHITESTONE REIT

 

 

 

Dated: March 31, 2008

 

/s/ James C. Mastandrea

 

 

 

 

 

James C. Mastandrea, Chairman and CEO

POWER OF ATTORNEY

          KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints James C. Mastandrea and David K. Holeman, and each of them, acting individually, as his attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

 

 

March 31, 2008

 

/s/ James C. Mastandrea

 

 

 

 

 

James C. Mastandrea, Chairman and CEO

 

 

(Principal Executive Officer)

 

 

 

March 31, 2008

 

/s/ David K. Holeman

 

 

 

 

 

David K. Holeman, Chief Financial Officer

 

 

(Principal Financial and Principal Accounting Officer)

 

 

 

March 31, 2008

 

/s/ Donald F. Keating

 

 

 

 

 

Donald F. Keating, Trustee

 

 

 

March 31, 2008

 

/s/ Jack L. Mahaffey

 

 

 

 

 

Jack L. Mahaffey, Trustee

 

 

 

March 31, 2008

 

/s/ Chris A. Minton

 

 

 

 

 

Chris A. Minton, Trustee

 

 

 

 

 

 

39


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

Page

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-2

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2007 and 2006

 

F-3

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2006 and 2005

 

F-4

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005

 

F-5

 

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005

 

F-6

 

 

 

 

 

Notes to Consolidated Financial Statements

 

F-7

 

 

 

 

 

Schedule II – Valuation and Qualifying Accounts

 

F-25

 

 

 

 

 

Schedule III – Real Estate and Accumulated Depreciation

 

F-26

 

          All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

F-1


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Whitestone REIT

          We have audited the accompanying consolidated balance sheets of Whitestone REIT and subsidiary (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity and cash flows, for each of the three years in the period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

          We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Whitestone REIT and subsidiary as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ PANNELL KERR FORSTER OF TEXAS, P.C.

Houston, Texas
March 31, 2008

F-2



Whitestone REIT and Subsidiary
CONSOLIDATED BALANCE SHEETS
( in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

$

181,809

 

$

173,747

 

Accumulated depreciation

 

 

(27,417

)

 

(24,259

)

 

 

   

 

   

 

Property, net

 

 

154,392

 

 

149,488

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

10,811

 

 

8,298

 

Escrows and acquisition deposits

 

 

486

 

 

382

 

Note receivable

 

 

 

 

604

 

Accrued rent and accounts receivable, net of allowance for doubtful accounts

 

 

5,611

 

 

4,762

 

Unamortized lease commissions and loan costs

 

 

2,958

 

 

2,890

 

Prepaid expenses and other assets

 

 

886

 

 

663

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

175,144

 

$

167,087

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable

 

$

83,461

 

$

66,363

 

Accounts payable and accrued expenses

 

 

6,734

 

 

6,246

 

Tenants’ security deposits

 

 

1,664

 

 

1,455

 

Dividends and distributions payable

 

 

2,403

 

 

2,400

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

94,262

 

 

76,464

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Minority interests of unit holders in Operating Partnership; 5,808,337 units at December 31, 2007 and 2006

 

 

28,039

 

 

31,709

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding at December 31, 2007 and 2006

 

 

 

 

 

Common shares, $0.001 par value per share; 400,000,000 shares authorized; 10,001,269 and 9,974,362 issued and oustanding at December 31, 2007 and 2006, respectively

 

 

10

 

 

10

 

Additional paid-in capital

 

 

72,273

 

 

72,012

 

Accumulated deficit

 

 

(19,210

)

 

(13,108

)

Accumulated other comprehensive loss

 

 

(230

)

 

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

52,843

 

 

58,914

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

175,144

 

$

167,087

 

 

 

   

 

   

 

See notes to consolidated financial statements.

F-3


Whitestone REIT and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

24,950

 

$

24,644

 

$

20,073

 

Tenants’ reimbursements

 

 

5,858

 

 

5,002

 

 

4,635

 

Other income

 

 

174

 

 

194

 

 

211

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

30,982

 

 

29,840

 

 

24,919

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Property operation and maintenance

 

 

9,165

 

 

8,101

 

 

5,939

 

Real estate taxes

 

 

3,788

 

 

3,950

 

 

3,100

 

 

 

 

 

 

 

 

 

 

 

 

Property management and asset
management fees to an affiliate

 

 

 

 

1,482

 

 

1,406

 

General and administrative

 

 

6,721

 

 

2,299

 

 

567

 

Depreciation and amortization

 

 

6,343

 

 

6,476

 

 

6,099

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

26,017

 

 

22,308

 

 

17,111

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

4,965

 

 

7,532

 

 

7,808

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

577

 

 

386

 

 

301

 

Interest expense

 

 

(5,402

)

 

(5,296

)

 

(3,770

)

Provision for income taxes

 

 

(217

)

 

 

 

 

Gain (loss) on sale or disposal of assets

 

 

(16

)

 

197

 

 

 

Change in fair value of derivative instrument

 

 

(30

)

 

30

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before minority interests

 

 

(123

)

 

2,849

 

 

4,339

 

 

 

 

 

 

 

 

 

 

 

 

Minority interests in Operating Partnership

 

 

46

 

 

(1,068

)

 

(1,891

)

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(77

)

$

1,781

 

$

2,448

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share - basic and diluted

 

$

(0.008

)

$

0.185

 

$

0.310

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(77

)

$

1,781

 

$

2,448

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivatives

 

 

(230

)

 

 

 

 

 

 

   

 

   

 

   

 

Other comprehensive loss

 

 

(230

)

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(307

)

$

1,781

 

$

2,448

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

9,999

 

 

9,652

 

 

7,888

 

 

 

   

 

   

 

   

 

See notes to consolidated financial statements.

F-4


Whitestone REIT and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

Additional
Paid-in
Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Deficit

 

 

 

 

 

 

 

Shares

 

Amount

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

 

7,010

 

$

7

 

 

$

45,527

 

 

$

(5,705

)

 

$

 

 

$

39,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for
cash, net of offering costs

 

 

1,866

 

 

2

 

 

 

16,672

 

 

 

 

 

 

 

 

 

16,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares under dividend
reinvestment plan at $9.50 per share

 

 

38

 

 

 

 

 

361

 

 

 

 

 

 

 

 

 

361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

2,448

 

 

 

 

 

 

2,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

(5,584

)

 

 

 

 

 

(5,584

)

 

 

   

 

   

 

     

 

 

   

 

     

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

 

8,914

 

$

9

 

 

$

62,560

 

 

$

(8,841

)

 

$

 

 

$

53,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for
cash, net of offering costs

 

 

960

 

 

1

 

 

 

8,501

 

 

 

 

 

 

 

 

 

8,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares under dividend
reinvestment plan at $9.50 per share

 

 

100

 

 

 

 

 

951

 

 

 

 

 

 

 

 

 

951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

1,781

 

 

 

 

 

 

1,781

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

(6,048

)

 

 

 

 

 

(6,048

)

 

 

   

 

   

 

     

 

 

   

 

     

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

 

 

9,974

 

$

10

 

 

$

72,012

 

 

$

(13,108

)

 

$

 

 

$

58,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares under dividend
reinvestment plan at $9.50 per share

 

 

27

 

 

 

 

 

261

 

 

 

 

 

 

 

 

 

261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

 

 

 

(77

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on change in fair
value of cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(230

)

 

 

(230

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

(6,025

)

 

 

 

 

 

(6,025

)

 

 

   

 

   

 

     

 

 

   

 

     

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

 

10,001

 

$

10

 

 

$

72,273

 

 

$

(19,210

)

 

$

(230

)

 

$

52,843

 

 

 

   

 

   

 

     

 

 

   

 

     

 

 

   

 

See notes to consolidated financial statements.

F-5


Whitestone REIT and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(77

)

$

1,781

 

$

2,448

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,343

 

 

6,476

 

 

6,099

 

Minority interests in Operating Partnership

 

 

(46

)

 

1,068

 

 

1,891

 

(Gain) loss on sale or disposal of assets

 

 

16

 

 

(197

)

 

 

Bad debt expense

 

 

623

 

 

388

 

 

130

 

Change in fair value of derivative instrument

 

 

30

 

 

(30

)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Escrows and acquisition deposits

 

 

(104

)

 

4,956

 

 

(329

)

Receivables

 

 

(1,472

)

 

(1,308

)

 

(369

)

Due from affiliates

 

 

 

 

2,933

 

 

(205

)

Deferred costs

 

 

(1,215

)

 

(977

)

 

(1,588

)

Prepaid expenses and other assets

 

 

205

 

 

21

 

 

(591

)

Accounts payable and accrued expenses

 

 

31

 

 

1,335

 

 

709

 

Tenants’ security deposits

 

 

209

 

 

14

 

 

374

 

Prepaid rent

 

 

88

 

 

275

 

 

215

 

 

 

   

 

   

 

   

Net cash provided by operating activities

 

 

4,631

 

 

16,735

 

 

8,784

 

 

 

   

 

   

 

   

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Additions to real estate

 

 

(10,234

)

 

(1,944

)

 

(31,792

)

Proceeds from sale of real estate

 

 

265

 

 

1,065

 

 

 

Proceeds from legal settlement

 

 

 

 

 

288

 

 

 

Distributions received from real estate partnership

 

 

 

 

 

 

10

 

Repayment of note receivable

 

 

604

 

 

25

 

 

26

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(9,365

)

 

(566

)

 

(31,756

)

 

 

   

 

   

 

   

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

(6,022

)

 

(6,078

)

 

(5,289

)

Distributions paid to OP unit holders

 

 

(3,485

)

 

(3,753

)

 

(4,100

)

Proceeds from issuance of common shares

 

 

261

 

 

9,453

 

 

17,035

 

Increase (decrease) in stock offering proceeds escrowed

 

 

 

 

(1,560

)

 

88

 

Proceeds from notes payable

 

 

22,392

 

 

35,281

 

 

46,725

 

Repayments of notes payable

 

 

(5,752

)

 

(41,943

)

 

(30,926

)

Payments of loan origination costs

 

 

(147

)

 

(120

)

 

(344

)

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

7,247

 

 

(8,720

)

 

23,189

 

 

 

   

 

   

 

   

 

Net increase in cash and cash equivalents

 

 

2,513

 

 

7,449

 

 

217

 

Cash and cash equivalents at beginning of period

 

 

8,298

 

 

849

 

 

632

 

 

 

   

 

   

 

   

 

Cash and cash equivalents at end of period

 

$

10,811

 

$

8,298

 

$

849

 

 

 

   

 

   

 

   

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

Disposal of fully depreciated real estate

 

$

1,844

 

$

570

 

$

 

Cash paid for interest

 

$

5,344

 

$

4,981

 

$

3,788

 

Financed insurance premiums

 

$

458

 

$

491

 

$

398

 

See notes to consolidated financial statements.

F-6


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

          Whitestone REIT (“Whitestone”) was formed as a real estate investment trust, pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, Whitestone changed its state of organization from Texas to Maryland pursuant to a merger of Whitestone directly with and into a Maryland real estate investment trust formed for the sole purpose of the reorganization and the conversion of each outstanding common share of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity. Whitestone serves as the general partner of Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership” or “WROP” or “OP”), formerly known as Hartman REIT Operating Partnership L.P., which was formed on December 31, 1998 as a Delaware limited partnership. Whitestone currently conducts substantially all of its operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, Whitestone has the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions. As of December 31, 2007, 2006 and 2005 we owned and operated 37, 36, and 37 retail, warehouse and office properties in and around Houston, Dallas, San Antonio and Phoenix.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           Basis of Consolidation

          We are the sole general partner of the Operating Partnership and possess full legal control and authority over the operations of the Operating Partnership. As of December 31, 2007, 2006 and 2005, we owned a majority of the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements include the accounts of the Operating Partnership. All significant inter-company balances have been eliminated. Minority interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than us. Net income or loss is allocated to minority interests based on the weighted-average percentage ownership of the Operating Partnership during the year. Issuance of additional common shares of beneficial interest in Whitestone (“common shares”) and units of limited partnership interest in the Operating Partnership that are convertible into common shares on a one for one basis (“OP Units”) changes the ownership interests of both the minority interests and Whitestone.

           Basis of Accounting

          Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.

           Use of Estimates

           The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that we use include the estimated useful lives for depreciable and amortizable assets and costs, the estimated allowance for doubtful accounts, and the estimated fair value of interest rate swaps. Actual results could differ from those estimates.

           Reclassifications

          We have reclassified certain prior fiscal year amounts in the accompanying consolidated financial statements in order to be consistent with the current fiscal year presentation. These reclassifications had no effect on net income or shareholders’ equity.

F-7


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

          Revenue Recognition

          All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We have established an allowance for doubtful accounts against the portion of tenant accounts receivable which is estimated to be uncollectible.

          Cash and Cash Equivalents

          We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at December 31, 2007 and 2006 consist of demand deposits at commercial banks and money market funds.

          Real Estate

          Development Properties. Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction, are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. The Company capitalizes acquisition costs once the acquisition of the property becomes probable. Prior to that time, we expense these costs as acquisition expense. During the year ended December 31, 2007, interest in the amount of $0.1 million was capitalized on properties under development. No such amounts were capitalized in 2006 or 2005.

          Acquired Properties and Acquired Lease Intangibles. We account for real estate acquisitions pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “ Business Combinations .” Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.

          Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for the buildings and improvements. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter.

          Impairment. We review our properties for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the

F-8


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2007.

          Accrued Rent and Accounts Receivable

          Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. As of December 31, 2007 and 2006, we had an allowance for uncollectible accounts of $1.1 million and $0.6 million respectively. During 2007, 2006 and 2005, we recorded bad debt expense in the amount of $0.6 million, $0.4 million and $0.1 million respectively, related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of the tenant’s credit-worthiness. Bad debt expenses and any related recoveries are included in property operation and maintenance expense in the consolidated statements of operations.

          Unamortized Lease Commissions and Loan Costs

          Leasing commissions are amortized using the straight-line method over the terms of the related lease agreements. Loan costs are amortized on the straight-line method over the terms of the loans, which approximates the interest method. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases.

          Prepaids and Other Assets

          Prepaids and other assets include escrows established pursuant to certain mortgage financing arrangements for real estate taxes and insurance and acquisition deposits which include earnest money deposits on future acquisitions.

          Income Taxes

          Federal - We are qualified as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 and are therefore not subject to Federal income taxes provided we meet all conditions specified by the Internal Revenue Code for retaining our REIT status. We believe we have continuously met these conditions since reaching 100 shareholders in 1999 (see Note 11).

          State - In May 2006, the State of Texas adopted House Bill 3, which modified the state’s franchise tax structure, replacing the previous tax based on capital or earned surplus with one based on margin (often referred to as the “Texas Margin Tax”) effective with franchise tax reports filed on or after January 1, 2008. The Texas Margin Tax is computed by applying the applicable tax rate (1% for us) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. Although House Bill 3 states that the Texas Margin Tax is not an income tax, SFAS No. 109, “ Accounting for Income Taxes,” applies to the Texas Margin Tax. We have recorded a margin tax provision of $0.2 million for the Texas Margin Tax for the Year Ended December 31, 2007.

          Derivative Instruments

          We have initiated a program designed to manage exposure to interest rate fluctuations by entering into financial derivative instruments. The primary objective of this program is to comply with debt covenants on a credit facility. We entered into an interest rate swap agreement with respect to amounts borrowed under certain of our credit facilities, which effectively exchanges existing obligations to pay interest based on floating rates for obligations to pay interest based on fixed LIBOR rates.

          We have adopted SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities ,” as subsequently amended by SFAS No. 138, “ Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which

F-9


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

require for items appropriately classified as cash flow hedges that changes in the market value of the instrument and in the market value of the hedged item be recorded as other comprehensive income or loss with the exception of the portion of the hedged items that are considered ineffective. The derivative instruments are reported at fair value as other assets or other liabilities as applicable. As of December 31, 2007, we have a $70 million dollar interest rate swap which has been designated as a cash flow hedge. The fair value of this interest rate swap is approximately ($0.4) million and is included in accounts payable and accrued expenses in the consolidated balance sheets. Additionally for a previous interest rate swap which was not designated as a cash flow hedge, approximately ($0.03) million and $0.03 million are included in other expense and other income on the consolidated statements of operations for the years ended December 31, 2007 and 2006, respectively.

          Fair Value of Financial Instruments

          Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, derivative instruments, accounts and notes payable. The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to the short-term nature of these instruments. The fair value of our debt obligations is representative of its carrying value based upon current rates offered for similar types of borrowing arrangements. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the financial institution would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the swap counterparties.

          Concentration of Risk

          Substantially all of our revenues are obtained from office, warehouse and retail locations in the Houston, Dallas and San Antonio, Texas metropolitan areas. We maintain cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts occasionally exceed the federally insured limits, although no losses have been incurred in connection with these deposits.

          Comprehensive Loss

          We follow SFAS No. 130, “ Reporting Comprehensive Income, ” which establishes standards for reporting and display of comprehensive income and its components. In October 2007 we entered into an interest rate swap which was designated as a cash flow hedge. The fair value of this cash flow hedge was ($0.4) million at December 31, 2007. This amount has been recorded as a reduction to minority interest and to other comprehensive loss.

          New Accounting Pronouncements

          In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “ Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. There are also several disclosure requirements. We adopted this interpretation during the first quarter of 2007, and it had no effect on our consolidated financial statements.

          In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurements. ” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles and requires enhanced disclosures about fair value measurements. It does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect this pronouncement to have a material effect on our consolidated results of operation or financial position.

          In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” . SFAS No. 159 permits entities to choose to measure

F-10


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We currently do not plan to measure any eligible financial assets and liabilities at fair value under the provisions of SFAS No. 159.

          In September 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-6, “ Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause,” which clarifies that a buy-sell clause, in and of itself, does not constitute a prohibited form of continuing involvement that would preclude partial sale treatment under SFAS No. 66. EITF No. 07-6 applies prospectively to new arrangements entered into in fiscal years beginning after December 15, 2007.

          In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which replaces SFAS No. 141,
“ Business Combinations,” which, among other things, establishes principles and requirements for how an acquiring entity recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles) and any noncontrolling interests in the acquired entity. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

          In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating what impact our adoption of SFAS No. 160 will have on our consolidated financial statements.

3. DERIVATIVES AND HEDGING

          On September 28, 2007, we entered into an interest rate swap transaction which we have designated as a cash flow hedge. The effective date of the swap transaction is October 1, 2007, has a total notional amount of $70 million, and fixes the swap rate at 4.77% plus the LIBOR margin (see Note 9) through October 1, 2008. The purpose of this swap is to mitigate the risk of future fluctuations in interest rates on our variable rate debt. We have determined that this swap is highly effective in offsetting future variable interest cash flows on variable rate debt.

          As of December 31, 2007, the balance in Accumulated Other Comprehensive Loss relating to derivatives was $0.2 million. Within the next 12 months the balance in Accumulated Other Comprehensive Loss is expected to be amortized to Interest Expense.

          On September 28, 2007, in conjunction with the execution of the $70 million interest rate swap transaction, we terminated an interest rate swap transaction that was initiated on March 16, 2006. This swap transaction had a total notional amount of $30 million, was at a fixed rate of 5.09% plus the LIBOR margin (see Note 9) and was set to mature on March 11, 2008. As a result of this termination ($0.03) million is included in other income in our consolidated statements of operations.

4. REAL ESTATE

          During 2005, we acquired from an unrelated party one multi-tenant office building comprising approximately 106,169 square feet of gross leasable area. The property was acquired for cash in the amount of approximately $5.5 million plus closing costs.

F-11


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

          During 2005, we acquired from an unrelated party one multi-tenant office building comprising approximately 125,874 square feet of gross leasable area. The property was acquired for cash in the amount of approximately $8.0 million plus closing costs.

          During 2005, we acquired from an unrelated party one multi-tenant office building comprising approximately 253,981 square feet of gross leasable area. The property was acquired for cash in the amount of approximately $17.0 million plus closing costs.

          During 2006, we sold Northwest Place II, a 27,974 square foot office/warehouse building located in Houston, Texas for a sales price of $1.2 million. A gain of $0.2 million was generated from this sale, which is reflected in our consolidated financial statements for the year ended December 31, 2006. It is anticipated that the funds received from this sale will be used for future acquisitions and/or capital improvements to existing properties. It was determined that “discontinued operations” classification was not required due to the immateriality of this property to our overall results.

          During 2007, we sold a 2.4 acre parcel of vacant land adjacent to our South Shaver retail property located in Houston, Texas for a sales price of $0.3 million. A gain of $0.1 million was generated from this sale, which is reflected in our consolidated financial statements for the three and nine months ended September 30, 2007. It is anticipated that the funds received from this sale will be used for future acquisitions and/or capital improvements to existing properties

          During 2007, we acquired from an unrelated party one office building under development. The property was acquired for cash in the amount of approximately $8.2 million plus closing costs. Upon completion we expect to have invested approximately $10.0 million in the building which will contain approximately 33,400 square feet of gross leaseable area.

          At December 31, 2007, we owned 37 commercial properties in the Houston, Dallas, San Antonio and Phoenix comprising approximately 3.1 million square feet of gross leasable area.

5. NOTE RECEIVABLE

          In January 2003, we partially financed the sale of a property we had previously sold and for which we had taken a note receivable of $0.4 million as part of the consideration. We advanced $0.3 million and renewed and extended the balance of $0.4 million still due from the original sale.

          The original principal amount of the note receivable, dated January 10, 2003, is $0.7 million. The note had monthly installments of $6,382, including interest at 7% per annum, for the first two years, and thereafter monthly installments of $7,489 with interest at 10% per annum until maturity on January 10, 2018.

          This note was paid in full on August 30, 2007.

F-12


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

6. ACCRUED RENT AND ACCOUNTS RECEIVABLE, NET

          Accrued rent and accounts receivable, net, consists of amounts accrued, billed and due from tenants, amounts due from insurance claims, allowance for doubtful accounts and other receivables as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant receivables

 

$

2,517

 

$

1,941

 

Accrued rent

 

 

3,319

 

 

3,035

 

Allowance for doubtful accounts

 

 

(1,094

)

 

(641

)

Insurance claim receivables

 

 

550

 

 

427

 

Other receivables

 

 

319

 

 

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Totals

 

$

5,611

 

$

4,762

 

 

 

   

 

   

 

7. UNAMORTIZED LEASING COMMISSIONS AND LOAN COSTS

          Costs which have been deferred consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing commissions

 

$

4,733

 

$

6,904

 

Deferred financing costs

 

 

2,096

 

 

1,949

 

 

 

   

 

   

 

 

 

 

6,829

 

 

8,853

 

 

 

 

 

 

 

 

 

Less: accumulated amortization

 

 

(3,871

)

 

(5,963

)

 

 

   

 

   

 

Totals

 

$

2,958

 

$

2,890

 

 

 

   

 

   

 

          A summary of expected future amortization of deferred costs is as follows (in thousands):

 

 

 

 

 

 

Years Ended
December 31,

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

$

805

 

2009

 

 

 

613

 

2010

 

 

 

491

 

2011

 

 

 

368

 

2012

 

 

 

254

 

Thereafter

 

 

 

427

 

 

 

 

   

 

Total

 

 

$

2,958

 

 

 

 

   

 

F-13


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

8. FUTURE MINIMUM LEASE INCOME

          We lease the majority of our office and retail properties under noncancelable operating leases which provide for minimum base rentals plus, in some instances, contingent rentals based upon a percentage of the tenants’ gross receipts.

          A summary of minimum future rentals to be received (exclusive of renewals, tenant reimbursements, and contingent rentals) under noncancelable operating leases in existence at December 31, 2007 is as follows (in thousands):

 

 

 

 

 

Years Ended
December 31,

 

 

 

 

 

 

 

 

2008

 

$

24,758

 

2009

 

 

21,078

 

2010

 

 

16,807

 

2011

 

 

12,731

 

2012

 

 

9,185

 

Thereafter

 

 

8,600

 

 

 

   

 

Total

 

$

93,159

 

 

 

   

 

9. DEBT

     Notes payable

          Notes payable consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Mortgages and other notes payable

 

$

9,936

 

$

5,138

 

Revolving loan secured by properties

 

 

73,525

 

 

61,225

 

 

 

   

 

   

 

Totals

 

$

83,461

 

$

66,363

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

          As of December 31, 2007, we have two active loans which are described below:

     Revolving Credit Facility

          We have a revolving credit facility with a consortium of banks. The credit facility is secured by a pledge of the partnership interests in Whitestone REIT Operating Partnership III LP (“WROP III”), a wholly owned subsidiary of the Operating Partnership that was formed to hold title to the properties comprising the borrowing base pool for the facility. At December 31, 2007, WROP III owns 35 properties.

          As of December 31, 2007 and December 31, 2006, the balance outstanding under the credit facility was $73.5 million and $61.2 million, respectively, and the availability to draw was $1.5 million and $13.8 million, respectively.

          Outstanding amounts under the credit facility accrue interest computed (at our option) at either the LIBOR or the Alternative Base Rate on the basis of a 360 day year, plus the applicable margin as determined from the following table:

F-14


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

Total Leverage Ratio

 

LIBOR Margin

 

Applicable Base
Rate Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 60% but greater than or equal to 50%

 

 

 

2.40

%

 

 

 

1.150

%

 

Less than 50% but greater than or equal to 45%

 

 

 

2.15

%

 

 

 

1.025

%

 

Less than 45%

 

 

 

1.90

%

 

 

 

1.000

%

 

          The Alternative Base Rate is a floating rate equal to the higher of the bank’s base rate or the Federal Funds Rate plus0.5%. LIBOR Rate loans will be available in one, two, three or six month periods, with a maximum of nine contracts at any time. The effective interest rate as of December 31, 2007 was 7.03% per annum.

          Interest only is payable monthly under the loan with the total amount of principal due at maturity on March 11, 2008. The loan may be prepaid at any time in part or in whole, provided that the credit facility is not in default. If LIBOR pricing is elected, there is a prepayment penalty based on a “make-whole” calculation for all costs associated with prepaying a LIBOR borrowing.

          The revolving credit facility is supported by a pool of eligible properties referred to as the borrowing base pool. The borrowing base pool must meet the following criteria:

 

 

 

 

We will provide a negative pledge on the borrowing base pool and may not provide a negative pledge of the borrowing base pool to any other lender.

 

 

 

 

The properties must be free of all liens, unless otherwise permitted.

 

 

 

 

All eligible properties must be retail, warehouse, or office properties, must be free and clear of material environmental concerns and must be in good repair.

 

 

 

 

The aggregate physical occupancy of the borrowing base pool must remain above 80% at all times.

 

 

 

 

No property may comprise more than 15% of the value of the borrowing base pool with the exception of Corporate Park Northwest, which is allowed into the borrowing base pool.

 

 

 

 

The borrowing base pool must at all times be comprised of at least ten properties.

 

 

 

 

The borrowing base pool properties may not contain development or redevelopment projects.

          Properties can be added to and removed from the borrowing base pool at any time provided no defaults would occur as a result of the removal. If a property does not meet the criteria of an eligible property and we want to include it in the borrowing base pool, a majority vote of the bank consortium is required for inclusion in the borrowing base pool.

          Covenants, tested quarterly, relative to the borrowing base pool are as follows:

 

 

 

 

We will not permit any liens on the properties in the borrowing base pool unless otherwise permitted.

 

 

 

 

The ratio of aggregate net operating income from the borrowing base pool to debt service shall at all times exceed 1.5 to 1.0. For any quarter, debt service shall be equal to the average loan balance for the past quarter times an interest rate which is the greater of (a) the then current annual yield on ten year United States Treasury notes over 25 years plus 2%; (b) a 6.5% constant; or (c) the actual interest rate for the facility.

 

 

 

 

The ratio of the value of the borrowing base pool to total funded loan balance must always exceed 1.67 to 1.00. The value of the borrowing base pool is defined as aggregate net operating income for the preceding four quarters, less a $0.15 per square foot per annum capital expenditure reserve, divided by a 9.25% capitalization rate.

          Other covenants, tested quarterly, relative to us are as follows:

 

 

 

 

We will not permit our total indebtedness to exceed 60% of the fair market value of our real estate assets at the end of any quarter. Total indebtedness is defined as all our liabilities, including this

F-15


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

 

 

 

 

 

facility and all other secured and unsecured debt, including letters of credit and guarantees. Fair market value of real estate assets is defined as aggregate net operating income for the preceding four quarters, less a $0.15 per square foot per annum capital expenditure reserve, divided by a 9.25% capitalization rate.

 

 

 

 

The ratio of consolidated rolling four-quarter earnings before interest, income tax, depreciation and amortization expenses to total interest expense, including capitalized interest, shall not be less than 2.0 to 1.0.

 

 

 

 

The ratio of consolidated earnings before interest, income tax, depreciation and amortization expenses to total interest expense, including capitalized interest, principal amortization, capital expenditures and preferred stock dividends shall not be less than 1.5 to 1.0. Capital expenditures shall be deemed to be $0.15 per square foot per annum.

 

 

 

 

The ratio of secured debt to fair market value of real estate assets shall not be greater than 40%.

 

 

 

 

The ratio of declared dividends to funds from operations shall not be greater than 95%. This has been amended to 105% through March 11, 2008,

 

 

 

 

The ratio of development assets to fair market value of real estate assets shall not be greater than 20%.

 

 

 

 

We must maintain our status as a REIT for income tax purposes.

 

 

 

 

Total other investments shall not exceed 30% of total asset value. Other investments shall include investments in joint ventures, unimproved land, marketable securities and mortgage notes receivable. Additionally, the preceding investment categories shall not comprise greater than 30%, 15%, 10% and 20%, respectively, of total other investments.

 

 

 

 

We must maintain a consolidated tangible net worth of not less than $30 million plus 75% of the value of stock and OP units issued in conjunction with an offering or with the acquisition of an asset or stock. Consolidated tangible net worth is defined as shareholders equity less intangible assets.

          On March 11, 2008, we amended our Revolving Credit Facility and extended the maturity through October 1, 2008. The amendment is filed with this Form 10-K as exhibit 10.28. The key amendments were:

 

 

 

The minimum ratio of consolidated rolling four-quarter earnings before interest, income tax, depreciation and amortization expenses to total interest expense, including capitalized interest, was reduced from a ratio of 2.0 to 1.0 to a ratio of 1.55 to 1.0.

 

 

 

The minimum ratio of consolidated earnings before interest, income tax, depreciation and amortization expenses to total interest expense, including capitalized interest, principal amortization, capital expenditures and preferred stock dividends was lowered from a ratio of 1.50 to 1.0 to a ratio of 1.40 to 1.0.

 

 

 

Declared or subsequently paid dividends will not be allowed to increase above the fourth quarter 2007 level. If the number of shares issued and outstanding decrease, then the dividend payout must decrease proportionately.

 

 

 

Outstanding amounts under the credit facility accrue interest (at our option) at either the LIBOR or the Applicable Base Rate on the basis of a 360 day year, plus the applicable margin as shown below:


 

 

 

 

 

LIBOR Margin

2.625%

 

Applicable Base Margin

1.625%

Mortgage Loan on Windsor Park Centre

          On March 1, 2007, we obtained a $10 million loan to pay off the loan obtained upon the acquisition of the Windsor Park property and to provide funds for future acquisitions. The mortgage loan is secured by the Windsor Park property which is owned by Whitestone REIT Operating Company IV LLC (“WROC IV”), a wholly owned subsidiary of the Operating Partnership that was formed to hold title to the Windsor Park property. On March 1, 2007, we conveyed

F-16


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

ownership of the Windsor Park property from the Operating Partnership to WROC IV in order to secure the $10 million mortgage loan.

          The note is payable in equal monthly installments of principal and interest of $60,212, with interest at the rate of 6.04% per annum. The balance of the note is payable in full on March 1, 2014. The loan balance is approximately $9.9 million at December 31, 2007.

Other

          On January 25, 2008 we entered into a $6.4 million term loan agreement with KeyBank. The term loan is secured by a pledge of the partnership interests in WROP III, and Whitestone Pima Norte LLC (“WPN”), a wholly owned subsidiary of the Operating Partnership that was formed to hold title to our Pima Norte property that was purchased in October 2007. At December 31, 2007, WROP III owns 35 properties and WPN owns 1 property.

          Outstanding amounts under the term loan accrue interest computed at the LIBOR Rate on the basis of a 360 day year, plus 2%. Interest only is payable monthly under the loan with the total amount of principal due at maturity in July, 2009. The covenants of this agreement mirror those in our $75 million revolving credit agreement and are described above. This term loan agreement is filed with this Form 10-K as exhibit 10.29.

           We expect that we will have substantially leased this property by end of 2008 and plan to obtain long term financing on this property at the maturity of the revolving credit facility.

          Annual maturities of notes payable as of December 31, 2007, including the revolving loan, are as follows (in thousands):

 

 

 

 

 

 

Year Ended
December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

$

73,562

 

2014

 

 

 

9,899

 

 

 

 

     

Total

 

 

$

83,461

 

 

 

 

     

10. EARNINGS PER SHARE

          Basic earnings per share is computed using net income to common shareholders and the weighted average number of common shares outstanding. Diluted earnings per share reflects common shares issuable from the assumed conversion of OP Units convertible into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share. Accordingly, excluded from the earnings per share calculation for each of the years ended December 31, 2007, 2006 and 2005, are 5,808,337 OP units as their inclusion would be anti-dilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

 

$

(77

)

$

1,781

 

$

2,448

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

 

$

(0.008

)

$

0.185

 

$

0.310

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (in thousands)

 

 

9,999

 

 

9,652

 

 

7,888

 

F-17


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

11. FEDERAL INCOME TAXES

          Federal income taxes are not provided because we intend to and believe we qualify as a REIT under the provisions of the Internal Revenue Code. Our shareholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of its ordinary taxable income to our shareholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.

          Taxable income differs from net income for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.

          For Federal income tax purposes, the cash dividends distributed to shareholders are characterized as follows for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary income (unaudited)

 

 

15.0

%

 

36.2

%

 

62.6

%

 

 

Return of capital (unaudited)

 

 

84.1

%

 

59.9

%

 

37.4

%

 

 

Capital gain distributions (unaudited)

 

 

0.9

%

 

3.9

%

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

100.0

%

 

100.0

%

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12. RELATED PARTY TRANSACTIONS

          Prior to October 2006, our day-to-day operations and portfolio of properties were managed by our former External Manager through property management and advisory agreements. Mr. Hartman, our former President, Secretary, Chief Executive Officer, and Chairman of the Board, is the sole limited partner of our former External Manager, as well as the President, Secretary, sole trustee and sole shareholder of the general partner of the External Manager.

          Mr. Hartman was removed by our Board as our President, Secretary, and Chief Executive Officer on October 2, 2006, and he resigned from our Board on October 27, 2006.

          In October 2006, our Board terminated for cause our property management agreement with our former External Manager. Our former External Manager turned over all property management functions to us on November 14, 2006.

          In addition, our Board elected not to renew our advisory agreement, dated August 31, 2004, with our former External Manager. This agreement had been extended on a month-to-month basis and ultimately expired on September 30, 2006.

          Transactions between us, our former External Manager, and Mr. Hartman are considered related party transactions and are discussed in the following paragraphs.

          In January 1999, we entered into a property management agreement with our former External Manager. Effective September 1, 2004, this agreement was amended and restated. Prior to September 1, 2004, in consideration for supervising the management and performing various day-to-day affairs, we paid our former External Manager a management fee of 5% and a partnership management fee of 1% based on effective gross revenues from the properties, as defined in the agreement. After September 1, 2004, we paid our former External Manager property management fees in an amount not to exceed the fees customarily charged in arm’s length transactions by others rendering similar services in the same geographic area, as determined by a survey of brokers and agents in that area. These fees have ranged between approximately 2% and 4% of gross revenues (as defined in the amended and restated agreement) for the management of office buildings and approximately 5% of gross revenues for the management of retail and warehouse properties.

F-18


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

          Effective September 1, 2004, we entered into an advisory agreement with our former External Manager which provided that we pay our former External Manager a quarterly fee of one-fourth of .25% of gross asset value (as defined in the advisory agreement) for asset management services. In addition, the advisory agreement provided for the payment of a deferred performance fee, payable in certain events, including termination of the advisory agreement, based upon appreciation in the value of certain of our real estate assets. The advisory agreement expired by its terms on September 30, 2006.

          We incurred total management, partnership and asset management fees of $1.5 million and $1.4 million, under the advisory and management agreements for the years ended December 31, 2006 and 2005, respectively. We incurred no such fee for the year ended December 31, 2007. No management fees were payable at December 31, 2007 or 2006. We have not accrued any deferred performance fees, as we believe the amount of these fees, if any are owing, cannot be determined with reasonable certainty at this time.

          In consideration of leasing the properties, we historically paid our former External Manager leasing commissions for leases originated by our former External Manager and for expansions and renewals of existing leases. We incurred total leasing commissions to our former External Manager of $0.9 million and $1.6 million for the years ended December 31, 2006 and 2005, respectively. No such fees were incurred for the year ended December 31, 2007. No such amounts were payable at December 31, 2007 or 2006.

          In connection with our public offering described in Note 13, we have reimbursed our former External Manager up to 2.5% of the gross selling price of all common shares sold for organization and offering expenses (excluding selling commissions and a dealer manager fee) incurred by our former External Manager on our behalf. We have paid our dealer manager, through our former External Manager by agreement between them, a fee of up to 2.5% of the gross selling price of all common shares sold in the offering. We incurred total fees of $0.5 million and $0.9 million for the years ended December 31, 2006 and 2005, respectively. No such fees were incurred for the year ended December 31, 2007. These fees have been treated as offering costs and netted against the proceeds from the sale of common shares. On October 2, 2006, our Board elected to terminate the public offering described in Note 13.

          Also in connection with our public offering described in Note 13, our former External Manager has historically received an acquisition fee equal to 2% of the gross selling price of all common shares sold for services in connection with the selection, purchase, development or construction of properties for us. The advisory agreement expired by its terms on September 30, 2006. On September 30, 2006, $0.2 million of acquisition fees paid to our former External Manager had been capitalized and not yet allocated to the purchase price of a property. In accordance with the advisory agreement, our former External Manager is obligated to reimburse us for any acquisition fee that has not been allocated to the purchase price of our properties as provided for in our declaration of trust. A letter demanding payment was sent to our former External Manager on December 21, 2006, and $0.2 million is included in accrued rent and accounts receivables on our consolidated balance sheet at December 31, 2007 as reclassified from December 31, 2006 as described in Note 2 – Reclassification.

          We incurred total acquisition fees to our former External Manager of $0.2 million and $0.4 million for the years ended December 31, 2006 and 2005, respectively. No such fees were incurred for the year ended December 31, 2007. No such amounts were payable at December 31, 2007 or December 31, 2006.

          Our former External Manager was billed $0.1 million, $0.2 million and $0.1 million for office space for the years ended December 2007, 2006 and 2005, respectively. These amounts are included in rental income in our consolidated statements of operations.

          Mr. Hartman our former President, Secretary, Chief Executive Officer, and Chairman was owed $0.04 million in dividends payable on his common shares at December 31, 2007 and December 31, 2006. Mr. Hartman owned 2.9% of our issued and outstanding common shares as of December 31, 2007 and December 31, 2006.

F-19


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

13. SHAREHOLDERS’ EQUITY

          Under our declaration of trust, we have authority to issue 400 million common shares of beneficial interest, $0.001 par value per share, and 50 million preferred shares of beneficial interest, $0.001 par value per share.

          On September 15, 2004, our Registration Statement on Form S-11, with respect to our public offering of up to 10 million common shares of beneficial interest offered at a price of $10 per share was declared effective under the Securities Act of 1933. The Registration Statement also covered up to 1 million shares available pursuant to our dividend reinvestment plan offered at a price of $9.50 per share. The shares were offered to investors on a best efforts basis. Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006, respectively.

          On October 2, 2006, our Board terminated the public offering. On March 27, 2007, we gave the required ten day notice to participants informing them that we intend to terminate our dividend reinvestment plan. As a result, our dividend reinvestment plan terminated on April 6, 2007.

          As of December 31, 2007, 2.8 million shares had been issued pursuant to our public offering with net offering proceeds received of $24.6 million. An additional 165,000 shares had been issued pursuant to the dividend reinvestment plan in lieu of dividends totaling $1.6 million. Shareholders that received shares pursuant to our dividend reinvestment plan on or after October 2, 2006 may have rescission rights.

          All net proceeds of our public offering were contributed to the Operating Partnership in exchange for OP Units. The Operating Partnership used the proceeds to acquire additional properties and for general working capital. In accordance with the Operating Partnership’s Agreement of Limited Partnership, in exchange for the contribution of net proceeds from sales of stock, we received an equivalent number of OP Units as shares of stock that are sold.

          At December 31, 2007 and December 31, 2006, Mr. Hartman owned 2.9% of our outstanding shares. At December 31, 2007 and December 31, 2006, our Board collectively owned 2.6% of our outstanding shares.

           Operating Partnership Units

          Substantially all of our business is conducted through the Operating Partnership. We are the sole general partner of the Operating Partnership. As of December 31, 2007, we owned a 62.4% interest in the Operating Partnership.

          Limited partners in the Operating Partnership holding OP Units have the right to convert their OP Units into common shares at a ratio of one OP Unit for one common share. Distributions to OP Unit holders are paid at the same rate per unit as dividends per share of Whitestone. Subject to certain restrictions, OP Units are not convertible into common shares until the later of one year after acquisition or an initial public offering of the common shares. As of December 31, 2007 and December 31, 2006, there were 15,448,118 and 15,421,212 OP Units outstanding, respectively. We owned 9,639,781 and 9,612,875 OP Units as of December 31, 2007 and December 31, 2006, respectively. The balance of the OP Units is owned by third parties, including Mr. Hartman and certain trustees. Our weighted-average share ownership in the Operating Partnership was approximately 62.40%, 61.53% and 56.44% for the years ended December 31, 2007, 2006 and 2005, respectively. At December 31, 2007 and December 31, 2006, Mr. Hartman owned 6.9% of the Operating Partnership’s outstanding units. At December 31, 2007 and December 31, 2006, our Board collectively owned 0.4% of the Operating Partnership’s outstanding units.

F-20


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

           Dividends and distributions

          The following tables summarize the cash dividends/distributions paid to holders of common shares and holders of OP Units (after giving effect to the recapitalization) during the years ended December 31, 2007 and 2006 and the quarter ended March 31, 2008.

 

 

 

 

 

 

 

 

Whitestone Shareholders

 

 

 

Dividend
per Common Share

 

Date Dividend
Paid

 

Total Amount
Paid (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1768

 

 

Qtr ended 03/31/06

 

 

1,526

 

0.1768

 

 

Qtr ended 06/30/06

 

 

1,632

 

0.1500

 

 

Qtr ended 09/30/06

 

 

1,443

 

0.1500

 

 

Qtr ended 12/31/06

 

 

1,477

 

0.1500

 

 

Qtr ended 03/31/07

 

 

1,522

 

0.1500

 

 

Qtr ended 06/30/07

 

 

1,500

 

0.1500

 

 

Qtr ended 09/30/07

 

 

1,500

 

0.1500

 

 

Qtr ended 12/31/07

 

 

1,500

 

0.1500

 

 

Qtr ended 03/31/08

 

 

1,500

 


 

 

 

 

 

 

 

 

OP Unit Holders Including Minority Unit Holders

 

 

 

Distribution
per OP Unit

 

Date Distribution
Paid

 

Total Amount
Paid (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1768

 

 

Qtr ended 03/31/06

 

 

2,488

 

0.1768

 

 

Qtr ended 06/30/06

 

 

2,594

 

0.1500

 

 

Qtr ended 09/30/06

 

 

2,260

 

0.1500

 

 

Qtr ended 12/31/06

 

 

2,294

 

0.1500

 

 

Qtr ended 03/31/07

 

 

2,314

 

0.1500

 

 

Qtr ended 06/30/07

 

 

2,317

 

0.1500

 

 

Qtr ended 09/30/07

 

 

2,317

 

0.1500

 

 

Qtr ended 12/31/07

 

 

2,317

 

0.1500

 

 

Qtr ended 03/31/08

 

 

2,317

 

14. INCENTIVE SHARE PLAN

          We have no incentive share plans in effect as of December 31, 2007.

 

15. COMMITMENTS AND CONTINGENCIES

The nature of our business exposes us to the risk of lawsuits for damages or penalties relating to, among other things, breach of contract and employment disputes. We are currently involved in the following litigation:

Hartman Commercial Properties REIT and Hartman REIT Operating Partnership, L.P. v. Allen R. Hartman and Hartman Management, L.P., in the 333 rd Judicial District Court of Harris County, Texas

In October 2006, we terminated our Chief Executive Officer, Allen R. Hartman, and our former manager and advisor, Hartman Management, L.P. The same day, we filed this lawsuit seeking damages for breach of contract, fraudulent inducement, and breach of fiduciary duties. Our new management approached Mr. Hartman about cooperatively turning over operations of the company but Mr. Hartman ousted them from his offices. We then sought an emergency court order requiring Mr. Hartman to turn over control to new management. Mr. Hartman opposed this legal relief. The court issued an order requiring him to turn over control of the company.

As part of the change from Mr. Hartman to new management, the company asked Mr. Hartman to agree to a timeline for turning over specific operations and bank accounts. Mr. Hartman refused, so we had to file another request with the court to require Mr. Hartman’s compliance. Only after we filed the request with the court did Mr. Hartman relent and agree to a turnover timeline. During the turnover process, however, Mr. Hartman denied the company access to its own books and records and we had to go back to court to enforce the previously entered order that turned over the company to present management.

In November 2006, Mr. Hartman and Hartman Management filed a counterclaim against us, the individual members of our Board, our Chief Operating Officer, John J. Dee, and our prior outside law firm and one of its partners. The counterclaims claimed that we had breached our contracts with Mr. Hartman and Hartman Managment and committed tortious interference with contract, intentional infliction of emotional distress, and conspiracy. We prepared defenses to these counterclaims.

Subsequent to our preparations, Mr. Hartman and Hartman Management retained new attorneys. The new attorneys filed amended counterclaims on behalf of Mr. Hartman and Hartman Management and dropped the claims against the individual members of our Board, with the exception of our Chairman, James C. Mastandrea. The amended counterclaims now also alleged negligence, fraud, and breach of fiduciary duty. We proceeded to prepare defenses in response to these amended counterclaims.

Mr. Hartman then hired a different set of attorneys and amended the counterclaims again to drop all of the claims against our prior outside law firm and its partner, many of the claims against us, and all of the claims, without prejudice, against Mr. Mastandrea and Mr. Dee. The amended counterclaim now asserts claims against us only for breach of contract and alleges that we owe Mr. Hartman and Hartman Management a fee for the termination of an advisory agreement. In communications to shareholders, Mr. Hartman represented that the termination fee, as calculated by him, could be in excess of $20 million.

We filed a motion for summary judgment on Mr. Hartman’s and Hartman Management’s claims that we breached our contracts with Hartman Management. On March 25, 2008, the court granted our motion, in part, and stated that the termination fee allegedly due under the advisory agreement was subject to the cap on total operating expenses described in Section IV.D.1 of the North American Securities Administrators Association’s Statement of Policy on Real Estate Investment Trusts.

The parties have each submitted reports of experts as to the amount of the fee due for the termination of the advisory agreement, other fees and expense reimbursements, and damages. Discovery is being conducted for this case, which has a court date of May 19, 2008. Before the court’s March 25, 2008 ruling that capped the advisory agreement termination fee, Mr. Hartman and Hartman Management claimed damages of either $4.8 million or $6.4 million plus prejudgment interest and attorneys’ fees; Whitestone maintains that no amounts are due for fees, expenses and damages and we intend to vigorously defend against those claims and vigorously prosecute our affirmative claims.

 

F-21


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

Hartman Commercial Properties REIT v. Allen R. Hartman, et al; in the United States District Court for the Southern District of Texas

In November 2006, we learned that Mr. Hartman was soliciting written consents from shareholders and had sought approval from the SEC to distribute a consent solicitation to replace our Board. We asked Mr. Hartman to refrain from distributing the consent solicitation until the false and misleading information was removed. He refused, so we initiated this lawsuit and sought a Temporary Injunction to stop Mr. Hartman from distributing the consent solicitation.

Mr. Hartman and Hartman Management filed a counterclaim, alleging that certain changes to our bylaws and declaration of trust were invalid and that their enactment was a breach of fiduciary duty. Mr. Hartman sought a Temporary Injunction to prevent these changes from taking effect. These changes, among other things, staggered the terms of our Board members over three years, required a two-thirds vote of the outstanding common shares to remove a Board member and provided that our secretary may call a special meeting of shareholders only on the written request of a majority of outstanding common shares.

With Mr. Hartman's encouragement, a group of shareholders filed a motion to intervene and bring claims against us in this lawsuit. The interveners’ claims were similar to the counterclaims filed by Mr. Hartman and Hartman Management. The shareholders eventually dismissed their request to intervene with prejudice, though not before we were required to prepare defenses to their claims and move to block their intervention.

The court ordered Mr. Hartman to refrain from distributing the consent solicitation while the parties exchanged discovery and took depositions in preparation for a full hearing on the competing requests for Temporary Injunctions. On April 6, 2007, the court ruled in our favor and Mr. Hartman was ordered not to distribute the consent solicitation. Also on April 6, 2007, the court denied Mr. Hartman’s request for a Temporary Injunction challenging the changes to our bylaws and declaration of trust and the court upheld the changes to our bylaws and declaration of trust as valid exercises of the Board’s powers. The court also granted our Motion to Dismiss, dismissing many of Mr. Hartman’s and Hartman Management’s remaining claims against us.

Mr. Hartman appealed the court’s April 6, 2007 rulings to the Fifth Circuit Court of Appeals. After considering the parties’ written briefs and oral arguments held in New Orleans, the Fifth Circuit upheld the lower court’s rulings. We still have securities law claims against Mr. Hartman and Hartman Management and his remaining counterclaims are still pending against us, though no monetary damages are being sought by either side. Trial is currently set for November 2008.

           Other

          We are a participant in various other legal proceedings and claims that arise in the ordinary course of our business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, we believe that the final outcome of these matters will not have a material effect on our financial position, results of operations, or cash flows.

16. SEGMENT INFORMATION

          Our management historically has not differentiated by property types and therefore does not present segment information.

F-22


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

17. SELECT QUARTERLY FINANCIAL DATA (unaudited)

          The following is a summary of our unaudited quarterly financial information for the years ended December 31, 2007 and 2006 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

7,545

 

$

7,568

 

$

7,805

 

$

8,064

 

Income (loss) before minority interests

 

 

(222

)

 

214

 

 

276

 

 

(391

)

Minority interest in income (loss)

 

 

84

 

 

(81

)

 

(104

)

 

147

 

Net income (loss)

 

 

(138

)

 

133

 

 

172

 

 

(244

)

Basic and diluted earnings (loss) per share

 

$

(0.014

)

$

0.013

 

$

0.017

 

$

(0.024

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

7,414

 

$

7,689

 

$

7,416

 

$

7,321

 

Income (loss) before minority interests

 

 

937

 

 

1,403

 

 

974

 

 

(465

)

Minority interest in income (loss)

 

 

(372

)

 

(545

)

 

(371

)

 

220

 

Net income (loss)

 

 

565

 

 

858

 

 

603

 

 

(245

)

Basic and diluted earnings (loss) per share

 

$

0.061

 

$

0.089

 

$

0.061

 

$

(0.026

)

18. SUBSEQUENT EVENTS

           Pima Norte Loan

          On January 25, 2008 we entered into a $6.4 million term loan agreement with KeyBank. The term loan is secured by a pledge of the partnership interests in WROP III, and Whitestone Pima Norte LLC (“WPN”), a wholly owned subsidiary of the Operating Partnership that was formed to hold title to our Pima Norte property that was purchased in October 2007. At December 31, 2007, WROP III owns 35 properties and WPN owns one property.

          Outstanding amounts under the term loan accrue interest computed at the LIBOR Rate on the basis of a 360 day year, plus 2%. Interest only is payable monthly under the loan with the total amount of principal due at maturity in July, 2009. The covenants of this agreement mirror those in our $75 million revolving credit agreement and are described in Note 9. This term loan agreement is filed with this Form 10-K as exhibit 10.29.

          We expect that we will have substantially leased this property by end of 2008 and plan to obtain long term financing on this property at the maturity of the revolving credit facility.

F-23


WHITESTONE REIT AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2007

           Extension of Maturity Date of our Revolving Credit Facility

          On March 11, 2008, we amended our Revolving Credit Facility and extended the maturity through October 1, 2008. The amendment is filed with this Form 10-K as exhibit 10.28. The key amendments were:

 

 

 

 

The minimum ratio of consolidated rolling four-quarter earnings before interest, income tax, depreciation and amortization expenses to total interest expense, including capitalized interest, was reduced from a ratio of 2.0 to 1.0 to a ratio of 1.55 to 1.0.

 

 

 

 

The minimum ratio of consolidated earnings before interest, income tax, depreciation and amortization expenses to total interest expense, including capitalized interest, principal amortization, capital expenditures and preferred stock dividends was lowered from a ratio of 1.50 to 1.0 to a ratio of 1.40 to 1.0.

 

 

 

 

Declared or subsequently paid dividends will not be allowed to increase above the fourth quarter 2007 level. If the number of shares issued and outstanding decrease, then the dividend payout must decrease proportionately.

 

 

 

 

Outstanding amounts under the credit facility accrue interest (at our option) at either the LIBOR or the Applicable Base Rate on the basis of a 360 day year, plus the applicable margin as shown below:


 

 

 

LIBOR Margin

2.625%

Applicable Base Margin

1.625%

F-24


Whitestone REIT and Subsidiary

Schedule II - Valuation and Qualifying Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Description

 

Balance at
Beginning
of Period

 

Charged
(credited)
to Income

 

Deductions
from
Reserves

 

Balance at
End of
Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2007

 

 

$

641

 

 

 

$

624

 

 

 

$

(171

)

 

 

$

1,094

 

 

Year ended December 31, 2006

 

 

 

473

 

 

 

 

388

 

 

 

 

(220

)

 

 

 

641

 

 

Year ended December 31, 2005

 

 

 

343

 

 

 

 

130

 

 

 

 

 

 

 

 

473

 

 

F-25


Whitestone REIT and Subsidiary

Schedule III - Real Estate and Accumulated Depreciation

December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost (in thousands)

 

Costs Capitalized Subsequent
to Acquisition (in thousands)

 

Gross Amount at which Carried at
End of Period (In thousands) (1) (2)

 

 

 

 

 

 

 

 

 

Property Name

 

Land

 

Building and
Improvements

 

Improvements
(net)

 

Carrying
Costs

 

Land

 

Building and
Improvements

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bellnot Square

 

$

1,154

 

 

$

4,638

 

 

 

$

107

 

 

 

$

 

 

$

1,154

 

 

$

4,745

 

 

$

5,899

 

Bissonnet Beltway

 

 

415

 

 

 

1,947

 

 

 

 

177

 

 

 

 

 

 

 

415

 

 

 

2,124

 

 

 

2,539

 

Centre South

 

 

481

 

 

 

1,596

 

 

 

 

260

 

 

 

 

 

 

 

481

 

 

 

1,856

 

 

 

2,337

 

Garden Oaks

 

 

1,285

 

 

 

5,293

 

 

 

 

162

 

 

 

 

 

 

 

1,285

 

 

 

5,455

 

 

 

6,740

 

Greens Road

 

 

354

 

 

 

1,284

 

 

 

 

107

 

 

 

 

 

 

 

354

 

 

 

1,391

 

 

 

1,745

 

Holly Knight

 

 

320

 

 

 

1,293

 

 

 

 

67

 

 

 

 

 

 

 

320

 

 

 

1,360

 

 

 

1,680

 

Kempwood Plaza

 

 

733

 

 

 

1,798

 

 

 

 

810

 

 

 

 

 

 

 

733

 

 

 

2,608

 

 

 

3,341

 

Lion Square

 

 

1,546

 

 

 

4,289

 

 

 

 

249

 

 

 

 

 

 

 

1,546

 

 

 

4,538

 

 

 

6,084

 

Northeast Square

 

 

565

 

 

 

2,008

 

 

 

 

289

 

 

 

 

 

 

 

565

 

 

 

2,297

 

 

 

2,862

 

Providence

 

 

918

 

 

 

3,675

 

 

 

 

508

 

 

 

 

 

 

 

918

 

 

 

4,183

 

 

 

5,101

 

South Richey

 

 

778

 

 

 

2,584

 

 

 

 

194

 

 

 

 

 

 

 

778

 

 

 

2,778

 

 

 

3,556

 

South Shaver

 

 

184

 

 

 

633

 

 

 

 

60

 

 

 

 

 

 

 

71

 

 

 

693

 

 

 

764

 

SugarPark Plaza

 

 

1,781

 

 

 

7,125

 

 

 

 

25

 

 

 

 

 

 

 

1,781

 

 

 

7,150

 

 

 

8,931

 

Sunridge

 

 

276

 

 

 

1,186

 

 

 

 

57

 

 

 

 

 

 

 

276

 

 

 

1,243

 

 

 

1,519

 

Torrey Square

 

 

1,981

 

 

 

2,971

 

 

 

 

544

 

 

 

 

 

 

 

1,981

 

 

 

3,515

 

 

 

5,496

 

Town Park

 

 

850

 

 

 

2,911

 

 

 

 

175

 

 

 

 

 

 

 

850

 

 

 

3,086

 

 

 

3,936

 

Webster Point

 

 

720

 

 

 

1,150

 

 

 

 

40

 

 

 

 

 

 

 

720

 

 

 

1,190

 

 

 

1,910

 

Westchase

 

 

423

 

 

 

1,751

 

 

 

 

269

 

 

 

 

 

 

 

423

 

 

 

2,020

 

 

 

2,443

 

Windsor Park

 

 

2,621

 

 

 

10,482

 

 

 

 

 

 

 

 

 

 

 

2,621

 

 

 

10,482

 

 

 

13,103

 

 

 

   

 

 

   

 

 

 

   

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

$

17,385

 

 

$

58,614

 

 

 

$

4,100

 

 

 

$

 

 

$

17,272

 

 

$

62,714

 

 

$

79,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brookhill

 

 

186

 

 

 

788

 

 

 

 

159

 

 

 

$

 

 

 

186

 

 

 

947

 

 

 

1,133

 

Corporate Park Northwest

 

 

1,534

 

 

 

6,306

 

 

 

 

581

 

 

 

 

 

 

 

1,534

 

 

 

6,887

 

 

 

8,421

 

Corporate Park West

 

 

2,555

 

 

 

10,267

 

 

 

 

467

 

 

 

 

 

 

 

2,555

 

 

 

10,734

 

 

 

13,289

 

Corporate Park Woodland

 

 

652

 

 

 

5,330

 

 

 

 

444

 

 

 

 

 

 

 

652

 

 

 

5,774

 

 

 

6,426

 

Dairy Ashford

 

 

226

 

 

 

1,211

 

 

 

 

90

 

 

 

 

 

 

 

226

 

 

 

1,301

 

 

 

1,527

 

Holly Hall

 

 

608

 

 

 

2,516

 

 

 

 

18

 

 

 

 

 

 

 

608

 

 

 

2,534

 

 

 

3,142

 

Interstate 10

 

 

208

 

 

 

3,700

 

 

 

 

277

 

 

 

 

 

 

 

208

 

 

 

3,977

 

 

 

4,185

 

Main Park

 

 

1,328

 

 

 

2,721

 

 

 

 

420

 

 

 

 

 

 

 

1,328

 

 

 

3,141

 

 

 

4,469

 

Plaza Park

 

 

902

 

 

 

3,294

 

 

 

 

375

 

 

 

 

 

 

 

902

 

 

 

3,669

 

 

 

4,571

 

West Belt Plaza

 

 

568

 

 

 

2,165

 

 

 

 

212

 

 

 

 

 

 

 

568

 

 

 

2,377

 

 

 

2,945

 

Westgate

 

 

672

 

 

 

2,776

 

 

 

 

113

 

 

 

 

 

 

 

672

 

 

 

2,889

 

 

 

3,561

 

 

 

   

 

 

   

 

 

 

   

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

$

9,439

 

 

$

41,074

 

 

 

$

3,156

 

 

 

$

 

 

$

9,439

 

 

$

44,230

 

 

$

53,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9101 LBJ Freeway

 

$

1,597

 

 

$

6,078

 

 

 

$

347

 

 

 

$

 

 

$

1,597

 

 

$

6,425

 

 

$

8,022

 

Featherwood

 

 

368

 

 

 

2,591

 

 

 

 

408

 

 

 

 

 

 

 

368

 

 

 

2,999

 

 

 

3,367

 

Pima Norte

 

 

1,086

 

 

 

7,162

 

 

 

 

 

 

 

 

144

 

 

 

1,086

 

 

 

7,306

 

 

 

8,392

 

Royal Crest

 

 

509

 

 

 

1,355

 

 

 

 

90

 

 

 

 

 

 

 

509

 

 

 

1,445

 

 

 

1,954

 

Uptown Tower

 

 

1,621

 

 

 

15,551

 

 

 

 

551

 

 

 

 

 

 

 

1,621

 

 

 

16,102

 

 

 

17,723

 

Woodlake Plaza

 

 

1,107

 

 

 

4,426

 

 

 

 

527

 

 

 

 

 

 

 

1,107

 

 

 

4,953

 

 

 

6,060

 

Zeta Building

 

 

636

 

 

 

1,819

 

 

 

 

181

 

 

 

 

 

 

 

636

 

 

 

2,000

 

 

 

2,636

 

 

 

   

 

 

   

 

 

 

   

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

$

6,924

 

 

$

38,982

 

 

 

$

2,104

 

 

 

$

144

 

 

$

6,924

 

 

$

41,230

 

 

$

48,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Totals

 

$

33,748

 

 

$

138,670

 

 

 

$

9,360

 

 

 

$

144

 

 

$

33,635

 

 

$

148,174

 

 

$

181,809

 

 

 

   

 

 

   

 

 

 

   

 

 

 

   

 

 

   

 

 

   

 

 

   

 

F-26


Whitestone REIT and Subsidiary

Schedule III - Real Estate and Accumulated Depreciation

December 31, 2007

(Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property Name

 

Accumulated Depreciation
(in thousands)

 

Date of
Construction

 

Date Acquired

 

Depreciation Life

 

 

 

 

 

 

 

 

 

 

 

Retail Properties:

 

 

 

 

 

 

 

 

 

 

Bellnot Square

 

 

$

753

 

 

 

 

1/1/2002

 

 

5-39 years

 

Bissonnet Beltway

 

 

 

749

 

 

 

 

1/1/1999

 

 

5-39 years

 

Centre South

 

 

 

543

 

 

 

 

1/1/2000

 

 

5-39 years

 

Garden Oaks

 

 

 

1,064

 

 

 

 

1/1/2002

 

 

5-39 years

 

Greens Road

 

 

 

479

 

 

 

 

1/1/1999

 

 

5-39 years

 

Holly Knight

 

 

 

447

 

 

 

 

8/1/2000

 

 

5-39 years

 

Kempwood Plaza

 

 

 

982

 

 

 

 

2/2/1999

 

 

5-39 years

 

Lion Square

 

 

 

1,091

 

 

 

 

1/1/2000

 

 

5-39 years

 

Northeast Square

 

 

 

660

 

 

 

 

1/1/1999

 

 

5-39 years

 

Providence

 

 

 

832

 

 

 

 

3/30/2001

 

 

5-39 years

 

South Richey

 

 

 

655

 

 

 

 

8/25/1999

 

 

5-39 years

 

South Shaver

 

 

 

173

 

 

 

 

12/17/1999

 

 

5-39 years

 

SugarPark Plaza

 

 

 

618

 

 

 

 

9/8/2004

 

 

5-39 years

 

Sunridge

 

 

 

264

 

 

 

 

1/1/2002

 

 

5-39 years

 

Torrey Square

 

 

 

923

 

 

 

 

1/1/2000

 

 

5-39 years

 

Town Park

 

 

 

976

 

 

 

 

1/1/1999

 

 

5-39 years

 

Webster Point

 

 

 

324

 

 

 

 

1/1/2000

 

 

5-39 years

 

Westchase

 

 

 

434

 

 

 

 

1/1/2002

 

 

5-39 years

 

Windsor Park

 

 

 

1,078

 

 

 

 

12/16/2003

 

 

5-39 years

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

$

13,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

Brookhill

 

 

$

295

 

 

 

 

1/1/2002

 

 

5-39 years

 

Corporate Park Northwest

 

 

 

1,328

 

 

 

 

1/1/2002

 

 

5-39 years

 

Corporate Park West

 

 

 

2,061

 

 

 

 

1/1/2002

 

 

5-39 years

 

Corporate Park Woodlands

 

 

 

1,600

 

 

11/1/2000

 

 

 

 

5-39 years

 

Dairy Ashford

 

 

 

360

 

 

 

 

1/1/1999

 

 

5-39 years

 

Holly Hall

 

 

 

468

 

 

 

 

1/1/2002

 

 

5-39 years

 

Interstate 10

 

 

 

1,398

 

 

 

 

1/1/1999

 

 

5-39 years

 

Main Park

 

 

 

991

 

 

 

 

1/1/1999

 

 

5-39 years

 

Plaza Park

 

 

 

979

 

 

 

 

1/1/2000

 

 

5-39 years

 

West Belt Plaza

 

 

 

828

 

 

 

 

1/1/1999

 

 

5-39 years

 

Westgate

 

 

 

528

 

 

 

 

1/1/2002

 

 

5-39 years

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

$

10,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

9101 LBJ Freeway

 

 

$

461

 

 

 

 

8/10/2005

 

 

5-39 years

 

Featherwood

 

 

 

824

 

 

 

 

1/1/2000

 

 

5-39 years

 

Pima Norte

 

 

 

 

 

 

 

10/4/2007

 

 

5-39 years

 

Royal Crest

 

 

 

352

 

 

 

 

1/1/2000

 

 

5-39 years

 

Uptown Tower

 

 

 

973

 

 

 

 

11/22/2005

 

 

5-39 years

 

Woodlake Plaza

 

 

 

439

 

 

 

 

3/14/2005

 

 

5-39 years

 

Zeta Building

 

 

 

487

 

 

 

 

1/1/2000

 

 

5-39 years

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

$

3,536

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

Grand Total

 

 

$

27,417

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

F-27


(1) Reconciliations of total real estate carrying value for the three years ended December 31 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

173,747

 

$

173,789

 

$

141,997

 

Additions during the period:

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

 

8,248

 

 

 

 

30,379

 

Improvements

 

 

1,986

 

 

1,944

 

 

1,413

 

 

 

   

 

   

 

   

 

 

 

 

10,234

 

 

1,944

 

 

31,792

 

Deductions - cost of real estate sold or retired

 

 

(2,172

)

 

(1,986

)

 

 

 

 

   

 

   

 

   

 

Balance at close of period

 

$

181,809

 

$

173,747

 

$

173,789

 

 

 

   

 

   

 

   

 

(2) The aggregate cost of real estate (in thousands) for federal income tax purposes is $145,531

F-28


Whitestone REIT and Subsidiary

Index to Exhibits

 

 

 

 

 

Exhibit No.

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Declaration of Trust of Whitestone REIT, a Maryland real estate investment trust (previously filed as and incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-11/A, Commission File No. 333-111674, filed on May 24, 2004)

 

 

 

 

 

3.2

 

Articles of Amendment and Restatement of Declaration of Trust of Whitestone REIT (previously filed as and incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11/A, Commission File No. 333-111674, filed on July 29, 2004)

 

 

 

 

 

3.3

 

Articles Supplementary (previously filed as and incorporated by reference to Exhibit 3(i).1 to the Registrant’s Current Report on Form 8-K, Commission File No. 000-50256, filed on December 6, 2006)

 

 

 

 

 

3.4

 

Bylaws (previously filed as and incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)

 

 

 

 

 

3.5

 

First Amendment to Bylaws (previously filed as and incorporated by reference to Exhibit 3(ii).1 to the Registrant’s Current Report on Form 8-K, Commission File No. 000-50256, filed on December 6, 2006)

 

 

 

 

 

4.1

 

Specimen certificate for common shares of beneficial interest, par value $.001 (previously filed as and incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)

 

 

 

 

 

10.1

 

Agreement of Limited Partnership of Hartman REIT Operating Partnership, L.P. (previously filed as and incorporated by reference to Exhibit 10.1 to the Registrant’s General Form for Registration of Securities on Form 10, filed on April 30, 2003)

 

 

 

 

 

10.2

 

Amended and Restated Property Management Agreement (previously filed and incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2004, filed on March 31, 2005) (terminated on October 2, 2006)

 

 

 

 

 

10.3

 

Advisory Agreement (previously filed and incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 31, 2005) (terminated on September 30, 2006)

 

 

 

 

 

10.4

 

Certificate of Formation of Hartman REIT Operating Partnership II GP, LLC (previously filed as and incorporated by reference to Exhibit 10.3 to the Registrant’s General Form for Registration of Securities on Form 10, filed on April 30, 2003)

 

 

 

 

 

10.5

 

Limited Liability Company Agreement of Hartman REIT Operating Partnership II GP, LLC (previously filed as and incorporated by reference to Exhibit 10.4 to the Registrant’s General Form for Registration of Securities on Form 10, filed on April 30, 2003)

 

 

 

 

 

10.6

 

Agreement of Limited Partnership of Hartman REIT Operating Partnership II, L.P. (previously filed as and incorporated by reference to Exhibit 10.6 to the Registrant’s General Form for Registration of Securities on Form 10, filed on April 30, 2003)




 

 

 

 

 

Exhibit No.

 

Description

 

 

 

 

 

 

 

 

 

 

10.7

 

Promissory Note, dated December 20, 2002, between Hartman REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously filed as and incorporated by reference to Exhibit 10.7 to the Registrant’s General Form for Registration of Securities on Form 10, filed on April 30, 2003)

 

 

 

 

 

10.8

 

Deed of Trust and Security Agreement, dated December 20, 2002, between Hartman REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously filed as and incorporated by reference to Exhibit 10.8 to the Registrant’s General Form for Registration of Securities on Form 10, filed on April 30, 2003)

 

 

 

 

 

10.9

 

Loan Agreement between Hartman REIT Operating Partnership, L.P. and Union Planter’s Bank, N.A. (previously filed as and incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Registrant’s General Form for Registration of Securities on Form 10, filed on August 6, 2003)

 

 

 

 

 

10.11+

 

Summary Description of Whitestone REIT Trustee Compensation Arrangements (previously filed and incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 31, 2005)

 

 

 

 

 

10.12

 

Form of Agreement and Plan of Merger and Reorganization (previously filed as and incorporated by reference to the Registrant’s Proxy Statement, filed on April 29, 2004)

 

 

 

 

 

10.13

 

Dealer Manager Agreement (previously filed and as incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, Commission File No. 000-50256, Central Index Key No. 0001175535, filed on March 31, 2005)

 

 

 

 

 

10.14

 

Escrow Agreement (previously filed as and incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 31, 2005)

 

 

 

 

 

10.15

 

Form of Amendment to the Agreement of Limited Partnership of Hartman REIT Operating Partnership, L.P. (previously filed in and incorporated by reference to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)

 

 

 

 

 

10.16

 

Revolving Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association (together with other participating lenders), dated June 2, 2005 (previously filed as and incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)

 

 

 

 

 

10.17

 

Form of Revolving Credit Note under Revolving Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association (together with other participating lenders) (previously filed as and incorporated by reference to Exhibit 10.14 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)




 

 

 

 

 

Exhibit No.

 

Description

 

 

 

 

 

 

 

 

 

 

10.18

 

Guaranty under Revolving Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association (together with other participating lenders) (previously filed as and incorporated by reference to Exhibit 10.15 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)

 

 

 

 

 

10.19

 

Form of Negative Pledge Agreement under Revolving Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association (together with other participating lenders) (previously filed as and incorporated by reference to Exhibit 10.16 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)

 

 

 

 

 

10.20

 

Form of Collateral Assignment of Partnership Interests under Revolving Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association (together with other participating lenders) (previously filed as and incorporated by reference to Exhibit 10.17 to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)

 

 

 

 

 

10.21

 

Modification Agreement, dated as of February 28, 2006, between Hartman REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously filed and incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed March 3, 2006)

 

 

 

 

 

10.22

 

Interest Rate Swap Agreement dated as of March 16, 2006, between Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association (previously filed as and incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 31, 2006)

 

 

 

 

 

10.23

 

Waiver and Amendment No. 1, dated May 8, 2006, between Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National Association, as agent for the consortium of lenders (previously filed and incorporated by reference to Exhibit 10.23 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 12, 2006)

 

 

 

 

 

10.24

 

Amendment No. 2, dated May 19, 2006, between Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National Association, as agent for the consortium of lenders (previously filed and incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on March 30, 2007)

 

 

 

 

 

10.25

 

Promissory Note between HCP REIT Operating Company IV LLC and MidFirst Bank, dated March 1, 2007 (previously filed and incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on March 30, 2007)

 

 

 

 

 

10.26

 

Amendment No. 3, dated March 26, 2007, between Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National Association, as agent for the consortium of lenders (previously filed and incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on March 30, 2007)




 

 

 

 

 

Exhibit No.

 

Description

 

 

 

 

 

 

 

 

 

 

10.27

 

Amendment No. 5, dated October 31, 2007, between Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III, L.P., and KeyBank National Association, as agent for the consortium of lenders (previously filed and incorporated by reference to Exhibit 10.27 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 14, 2007)

 

 

 

 

 

10.28*

 

Amendment No.6, dated March 11, 2008, between Whitestone REIT Operating Partnership, L.P., Whitestone REIT Operating Partnership III, L.P., and KeyBank National Association, as agent for the consortium of lenders

 

 

 

 

 

10.29*

 

Term Loan Agreement among Whitestone REIT Operating Partnership, L.P., Whitestone Pima Norte LLC, and KeyBank National Association, dated January 25, 2008

 

 

 

 

 

14.1

 

Code of Business Conduct and Ethics effective May 14, 2007 (previously filed and incorporated by reference to Exhibit 14.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 14, 2007)

 

 

 

 

 

99.1

 

Insider Trading Compliance Policy effective May 14, 2007 (previously filed and incorporated by reference to Exhibit 99.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 14, 2007)

 

 

 

 

 

99.2

 

Nominating and Governance Committee Charter effective May 14, 2007 (previously filed and incorporated by reference to Exhibit 99.2 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 14, 2007)

 

 

 

 

 

99.3

 

Audit Committee Charter effective May 14, 2007 (previously filed and incorporated by reference to Exhibit 99.3 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 14, 2007)

 

 

 

 

 

99.4

 

Compensation Committee Charter effective May 14, 2007 (previously filed and incorporated by reference to Exhibit 99.4 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 14, 2007)

 

 

 

 

 

21.1

 

List of subsidiaries of Whitestone REIT (previously filed as and incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 31, 2005)

 

 

 

 

 

24.1

 

Power of Attorney (included on the Signatures page hereto)

 

 

 

 

 

31.1*

 

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

31.2*

 

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

32.1*

 

Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

32.2*

 

Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


 

 

 

 

 

 

 

 

*

Filed herewith.

 

 

 

+

Denotes management contract or compensatory plan or arrangement.



EXHIBIT 10.28

 

AMENDMENT NO. 6 TO REVOLVING CREDIT AGREEMENT

 

This Amendment No. 6 to Revolving Credit Agreement (this “Amendment No. 6”) is made and entered into and has an effective date as of the 11th day of March, 2008, by and among WHITESTONE REIT OPERATING PARTNERSHIP, LP f/k/a HARTMAN REIT OPERATING PARTNERSHIP, LP (“Whitestone OP”), WHITESTONE REIT OPERATING PARTNERSHIP III, L.P. f/k/a HARTMAN REIT OPERATING PARTNERSHIP III, L.P. (“Whitestone III”) and the Subsidiaries of Whitestone OP and/or Whitestone III which are listed on Schedule 1 (as such Schedule 1 may be amended from time to time) (Whitestone OP, Whitestone III and any such Subsidiary being hereinafter referred to collectively as the “Borrower” unless referred to in their individual capacities) to a certain Revolving Credit Agreement, dated as of March 11, 2005 (as amended, the “Credit Agreement”), each having its principal place of business at 2600 South Gessner, Suite 500, Houston, Texas 77063, KEYBANK NATIONAL ASSOCIATION (“KeyBank”), having a principal place of business at 127 Public Square, Cleveland, Ohio 44114, and certain other lenders individually and in certain agent capacities (collectively with KeyBank, the “Lenders”) and KeyBank, as administrative agent for itself and each other Lender (the “Agent”).

 

WHEREAS, the Borrower has requested certain amendments to the Credit Agreement, including an extension of the maturity date, as set forth herein.

 

NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good and valuable consideration by each of the parties hereto, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:

 

 

1.

Capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Credit Agreement.

 

2.

References to the Borrower and Guarantor in the Loan Documents .

 

(a)

All references in the Loan Documents to Hartman REIT Operating Partnership, LP shall be deemed to refer to Whitestone REIT Operating Partnership, LP.

 

(b)

All references in the Loan Documents to Hartman REIT Operating Partnership III, L.P. shall be deemed to refer to Whitestone REIT Operating Partnership III, L.P.

 

(c)

All references in the Loan Documents to Hartman REIT Operating Partnership III GP LLC shall be deemed to refer to Whitestone REIT Operating Partnership III GP LLC.

 

-1-

 


 

 

(d)

All references in the Loan Documents to Hartman Commercial Properties REIT shall be deemed to refer to Whitestone REIT.

 

3.

Amendments to Credit Agreement . Effective from and after March 11, 2008:

 

(a)

The term Loan Documents shall include this Amendment No. 6 to Revolving Credit Agreement, dated as of March 11, 2008, among the Borrower, the Lenders and the Agent.

 

(b)

The definition of “Applicable Base Rate Margin” is amended to read in its entirety as follows:

Applicable Base Rate Margin . The Applicable Base Rate Margin is 1.625%.”

 

(c)

The definition of “Applicable Libor Margin” is amended to read in its entirety as follows:

Applicable Libor Margin . The Applicable Libor Margin is 2.625%.”

 

(d)

Clause (iv) contained in the definition of “Eligible Unencumbered Property(ies)” is amended to read in its entirety as follows:

“(iv) is wholly-owned in fee simple by Whitestone III”.

 

(e)

Clause (vi) contained in the definition of “Eligible Unencumbered Property(ies)” is amended to read in its entirety as follows:

“(vi) does not comprise more than 15% of total Borrowing Base Asset Value (except that one, but not more than one, Eligible Unencumbered Property may comprise up to 20% of total Borrowing Base Asset Value)”.

 

(f)

The definition of “Financial Statement Date” is amended to read in its entirety as follows:

Financial Statement Date . September 30, 2007.”

 

(g)

The definition of “Maturity Date” is amended to read in its entirety as follows:

Maturity Date . October 1, 2008, or such earlier date on which the Revolving Credit Loans shall become due and payable pursuant to the terms hereof.”

 

-2-

 


 

 

(h)

The definition of “Mortgage Constant” is amended to read in its entirety as follows:

Mortgage Constant . As at any date of determination, a ratio that represents the payment of principal and interest on an amortizing mortgage loan based on (i) an interest rate equal to the greater of (a) the actual weighted average interest rate on the Loans, (b) the then 10-year treasury rate plus 2.25% and based on a 25-year mortgage-style amortization schedule and (c) 7.25%.”

 

(i)

The definition of “Revolving Credit Notes” is amended by deleting the reference to “$50,000,000” contained therein and by replacing it with the following: “$75,000,000”.

 

(j)

The second sentence of the definition of “Total Commitment” is amended to read in its entirety as follows:

“As of the Sixth Amendment Date, the Total Commitment is $75,000,000.”

 

(k)

Section 1.1 of the Credit Agreement is amended by inserting, in the appropriate alphabetical order, the following new definitions:

Sixth Amendment . Amendment No. 6 to Revolving Credit Agreement, dated as of March 11, 2008, among the Borrower, the Lenders and the Agent.”

Sixth Amendment Date . March 11, 2008.”

 

(l)

Section 2.3(c) of the Credit Agreement is deleted in its entirety.

 

(m)

Section 2.3(e) of the Credit Agreement is amended to read in its entirety as follows:

“The Borrower agrees to pay to the Agent, for the accounts of the Lenders in accordance with their respective Commitment Percentages, from the Closing Date through the Maturity Date, a facility fee (the “Facility Fee”) calculated at the rate of (i) for any day when the outstanding principal balance of the Loans is less than or equal to 50% of the Total Commitment, 0.30% per annum, and (ii) for any day when the outstanding principal balance of the Loans is greater than 50% of the Total Commitment, 0.15% per annum, in each case calculated on the average daily amount, during each fiscal quarter or portion thereof, of the unborrowed portion of the Total Commitment. The Facility Fee shall be payable quarterly in arrears on the first Business Day of each calendar quarter for the immediately preceding calendar quarter commencing on the first

 

-3-

 

 


 

such date following the Closing Date through the Maturity Date, with a final payment on the Maturity Date.”

 

(n)

Clause (a) of Section 7.3 of the Credit Agreement is amended by deleting the reference to “The Borrower” contained therein and be replacing it with the following: “Whitestone III”.

 

(o)

Section 7.4 of the Credit Agreement is amended by deleting the reference to “December 31, 2003” and by replacing it with “December 31, 2006” and by deleting the reference to “September 30, 2004 and by replacing it with the “September 30, 2007”.

 

(p)

Section 7.21 of the Credit Agreement is amended by inserting, immediately following the reference to “December 31, 2004” contained therein, the following: “or December 31, 2005, December 31, 2006 or December 31, 2007”.

 

(q)

Section 9.1(i) of the Credit Agreement is amended by deleting the first parenthetical contained therein and replacing it with the following parenthetical: “(but not any other Borrower)”.

 

(r)

Section 9.4(b) of the Credit Agreement is amended to insert the following new sentence at the end thereof:

“Notwithstanding the foregoing or any other provision of this Agreement, in the event that the Borrower sells, transfers otherwise disposes of any Eligible Unencumbered Property, or obtains financing for any Eligible Unencumbered Property, and as a result of any thereof, removes such Eligible Unencumbered Property from the Borrowing Base Pool, the Borrower shall retain and/or reinvest in Whitestone III, [within 120 days after receipt thereof], the proceeds of such sale, transfer, disposition or refinancing (net of customary fees and expenses).”

 

(s)

Sections 9.6(a) and 9.6(b) of the Credit Agreement are amended to read in its entirety as follows:

“(a) The Borrower will not declare (nor will the Borrower at a subsequent date make) (i) quarterly Distributions in an amount in excess of the amount of quarterly Distributions declared and made with respect to the fiscal quarter ended December 31, 2007, provided that in the event that the number of shares of the Trust issued and outstanding as of the Sixth Amendment Date is reduced, the amount of permitted Distributions shall be reduced by the amount of such Distributions that would be attributable to the shares that are no longer outstanding; or (ii) any Distributions

 

-4-

 

 


 

during any period after any Event of Default has occurred; provided , however , that (a) unless an Event of Default under Section 14.1(g) or (h) has occurred or the Lenders have not been paid in full in cash on the Maturity Date (or otherwise refinanced in a manner acceptable to the Agent and the Lenders in their sole discretion), the Borrower may at all times (including while any other Event of Default not described above is continuing) make Distributions to the minimum extent (after taking into account all available funds of the Trust from all other sources) required in order to enable the Trust to continue to qualify as a REIT.”

“(b) The Trust will not, during any period when any Event of Default has occurred and is continuing, make any Distributions in excess of the minimum Distributions (after taking into account all available funds of the Trust from all other sources) required to be made by the Trust in order to maintain its status as a REIT, provided that in the event of an Event of Default under Section 14.1(g) or (h) or the Lenders have not been paid in full in cash on the Maturity Date (or otherwise refinanced in a manner acceptable to the Agent and the Lenders in their sole discretion), the Trust will not declare or make any Distributions.”

 

(t)

Section 10.2 of the Credit Agreement is amended by deleting the reference to “2.00 to 1.0” contained therein and by replacing it with the following: “1.55 to 1.0”.

 

(u)

Section 10.3 of the Credit Agreement is amended by deleting the reference to “1.50 to 1.0” contained therein and by replacing it with the following: “1.40 to 1.0”.

 

(v)

Section 10.7 of the Credit Agreement is amended by deleting the reference to “ten (10)” contained therein and by replacing it with the following: “fifteen (15)”.

 

(w)

Section 10.8 of the Credit Agreement is amended to read in its entirety as follows:

Consolidated Tangible Net Worth . As at the end of any fiscal quarter or any other date of measurement, the Consolidated Tangible Net Worth of the Borrower shall not be less than the sum of (i) 75% of the Consolidated Tangible Net Worth of the Borrower reflected in the audited financial statements of the Borrower for the fiscal year ending December 31, 2007, plus (ii) 75% of the aggregate proceeds received by the Trust (net of fees and expenses customarily incurred in transactions of such type) in connection with any offering of stock in the Trust, plus (iii) 75% of

 

-5-

 


the aggregate value of operating units issued by the Borrower in connection with asset or stock acquisitions (valued at the time of issuance by reference to the terms of the agreement pursuant to which such units are issued), provided that issuances of operating units to the Trust in connection with additional capital contributions made by the Trust in the Borrower shall be excluded from this clause (iii), in each case after May 18, 2006 and on or prior to the date such determination of Consolidated Tangible Net Worth is made, plus (iv) 50% of the net income of the Borrower for such period.”

 

4.

The Borrower hereby represents and warrants as follows:

 

(a)

Representations in Credit Agreement . Both before and after giving effect to this Amendment No. 6, each of the representations and warranties made by or on behalf of the Borrower, the Trust or any of their respective Subsidiaries contained in the Credit Agreement or any of the other Loan Documents, was true when made and is true on and as of the date hereof with the same full force and effect as if each of such representations and warranties had been made on the date hereof and in this Amendment No. 6, except to the extent that such representations and warranties relate expressly to an earlier date.

 

(b)

No Events of Default . No Default or Event of Default exists on the date hereof (both before and after giving effect to this Amendment No. 6).

 

(c)

Binding Effect of Documents . This Amendment No. 6 has been duly executed and delivered by the Borrower and the Trust and is in full force and effect as of the date hereof, and the agreements and obligations of the Borrower contained herein constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms.

 

5.

Conditions Precedent to Effectiveness . This Amendment No. 6 shall become effective when each of the following conditions is met to the satisfaction of the Agent:

 

(a)

receipt by the Agent of this Amendment No. 6 duly and properly authorized, executed and delivered by each of the Borrowers and the Lenders;

 

(b)

receipt by the Agent of a Compliance Certificate demonstrating compliance with the financial covenants contained in Section 10 of the Credit Agreement as of December 31, 2007;

 

-6-

 


 

 

(c)

receipt by the Agent of an officers’ or manager’s certificate dated as of the date hereof signed by an officer or manager, as applicable, of each Borrower certifying as to such matters as the Agent shall require and attaching authorizing resolutions with respect to this Amendment No. 6;

 

(d)

receipt by the Agent of title reports as of a recent date on each of the Eligible Unencumbered Properties evidencing no Liens thereon and evidencing a recorded Negative Pledge Agreement in favor of the Agent with respect to each such Eligible Unencumbered Property;

 

(e)

receipt by the Agent of each of the items set forth on the Closing Agenda attached hereto as Annex 1 ;

 

(f)

receipt by the Agent of payment of the extension fees payable for the benefit of the Lenders signatory hereto, which fee shall be fully-earned upon the effectiveness hereof and shall be non-refundable for any reason;

 

(g)

receipt by the Agent of payment of any other fees due to the Agent, including all of the Agent’s reasonable legal fees and expenses incurred in the connection with the preparation and negotiation of this Amendment No. 6 or otherwise outstanding; and

 

(h)

receipt by the Agent of any other documents, agreements, certificates or other items requested by the Agent in connection with this Amendment No. 6.

 

6.

Provisions of General Application .

 

(a)

No Other Changes . Except as otherwise expressly provided by this Amendment No. 6, all of the terms, conditions and provisions of the Credit Agreement and each of the other Loan Documents remain unaltered. The Credit Agreement and this Amendment No. 6 shall be read and construed as one agreement.

 

(b)

Governing Law . This Amendment No. 6 is intended to take effect as a sealed instrument and shall be deemed to be a contract under the laws of the State of New York. This Amendment No. 6 and the rights and obligations of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of New York (excluding the laws applicable to conflicts or choice of law).

 

-7-

 


 

 

(c)

Binding Effect; Assignment . This Amendment No. 6 shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors in title and assigns.

 

(d)

Counterparts . This Amendment No. 6 may be executed in any number of counterparts, but all such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment No. 5, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto.

 

(e)

Conflict with Other Agreements . If any of the terms of this Amendment No. 6 shall conflict in any respect with any of the terms of any of the Credit Agreement or any other Loan Document, the terms of this Amendment No. 6 shall be controlling.

 

-8-

 


 

WITNESS the execution hereof, under seal, as of the day and year first written above

 

KEYBANK NATIONAL ASSOCIATION ,

as Agent and as a Lender

 

 

 

By:

____________________________

 

Name:
Title:

 

RBS CITIZENS, NATIONAL ASSOCIATION ,

as a Lender

 

 

 

By:

____________________________

 

Name:
Title:

 

TRUSTMARK NATIONAL BANK ,

as a Lender

 

 

 

By:

____________________________

 

Name:
Title:

 

MERCANTIL COMMERCE BANK, N.A. ,

as a Lender

 

 

 

By:

____________________________

 

Name:
Title:

 

(Signatures continued on next page)

 

-9-

 

 


 

WHITESTONE REIT OPERATING PARTNERSHIP, LP

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole general partner

 

 

 

By:

____________________________

James C. Mastandrea, CEO

 

WHITESTONE REIT OPERATING PARTNERSHIP III, L.P.

 

 

By:

Whitestone REIT Operating Partnership III GP LLC, a Texas limited liability company, its sole general partner

 

 

By:

Whitestone REIT Operating Partnership, LP, a Delaware limited partnership, its sole member

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole member

 

 

 

By:

_________________________

 

James C. Mastandrea, CEO

 

 

WHITESTONE REIT OPERATING PARTNERSHIP III GP LLC , a Texas limited liability company

 

 

By:

Whitestone REIT Operating Partnership, LP, a Delaware limited partnership, its sole member

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole member

 

 

 

By:

____________________________

James C. Mastandrea, CEO

 

 

-10-

 

 


 

HARTMAN REIT OPERATING PARTNERSHIP III LP LTD , a Texas limited partnership

 

 

By:

Whitestone REIT Operating Partnership III GP LLC, a Texas limited liability company, its sole general partner

 

 

By:

Whitestone REIT Operating Partnership, LP, a Delaware limited partnership, its sole member

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole general partner

 

 

By:

_________________________

 

James C. Mastandrea, CEO

 

 

-11-

 

 


 

Each Guarantor hereby acknowledges receipt of this Amendment No. 6, affirms its obligations under the Guaranty, dated as of March 11, 2005, and agrees that all “Obligations”, as defined in the Credit Agreement and after giving effect to this Amendment No. 6, are Obligations under the Guaranty.

 

WHITESTONE REIT , a Maryland real estate investment trust, Guarantor

 

 

 

By:

_________________________________

James C. Mastandrea, CEO

 

WHITESTONE REIT OPERATING PARTNERSHIP III GP LLC , a Texas limited liability company, Guarantor

 

 

By:

Whitestone REIT Operating Partnership, LP, a Delaware limited partnership, its sole member

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole member

 

 

 

By:

____________________________

James C. Mastandrea, CEO

 

HARTMAN REIT OPERATING PARTNERSHIP III LP LTD , a Texas limited partnership, Guarantor

 

 

By:

Whitestone REIT Operating Partnership III GP LLC, a Texas limited liability company, its sole general partner

 

 

By:

Whitestone REIT Operating Partnership, LP, a Delaware limited partnership, its sole member

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole general partner

 

 

By:

_________________________

 

James C. Mastandrea, CEO

 

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Exhibit 10.29

TERM LOAN AGREEMENT

among

WHITESTONE REIT OPERATING PARTNERSHIP, L.P., WHITESTONE PIMA
NORTE LLC, WHITESTONE REIT OPERATING PARTNERSHIP III LP,
WHITESTONE REIT OPERATING PARTNERSHIP III GP LLC and HARTMAN REIT
OPERATING PARTNERSHIP III LP LTD

and

KEYBANK NATIONAL ASSOCIATION

and

OTHER LENDERS WHICH MAY BECOME PARTIES TO THIS AGREEMENT

and

KEYBANK NATIONAL ASSOCIATION,
AS ADMINISTRATIVE AGENT

Dated as of January __, 2008


TABLE OF CONTENTS

 

 

 

 

 

 

§1.

 

DEFINITIONS AND RULES OF INTERPRETATION

 

2

 

 

 

 

 

 

 

§1.1.

Definitions

 

2

 

 

 

 

 

 

 

 

§1.2.

Rules of Interpretation

 

18

 

 

 

 

 

 

§2.

 

THE TERM LOAN

 

19

 

 

 

 

 

 

 

§2.1.

Commitment to Lend

 

19

 

 

 

 

 

 

 

 

§2.2.

The Term Notes

 

19

 

 

 

 

 

 

 

 

§2.3.

Interest on Term Loan; Fees

 

19

 

 

 

 

 

 

 

 

§2.4.

Request for the Term Loan

 

20

 

 

 

 

 

 

 

 

§2.5.

Conversion Options

 

20

 

 

 

 

 

 

 

 

§2.6.

Funds for the Term Loan

 

21

 

 

 

 

 

 

 

 

§2.7.

Extension of Maturity Date

 

22

 

 

 

 

 

 

§3.

 

REPAYMENT OF THE TERM LOAN

 

22

 

 

 

 

 

 

 

§3.1.

Maturity

 

22

 

 

 

 

 

 

 

 

§3.2.

Optional Repayments of the Term Loan

 

23

 

 

 

 

 

 

§4.

 

CERTAIN GENERAL PROVISIONS

 

23

 

 

 

 

 

 

 

§4.1.

Funds for Payments

 

23

 

 

 

 

 

 

 

 

§4.2.

Computations

 

24

 

 

 

 

 

 

 

 

§4.3.

Inability to Determine Libor Rate

 

24

 

 

 

 

 

 

 

 

§4.4.

Illegality

 

24

 

 

 

 

 

 

 

 

§4.5.

Additional Costs, Etc.

 

25

 

 

 

 

 

 

 

 

§4.6.

Capital Adequacy

 

26

-i-



 

 

 

 

 

 

 

 

§4.7.

Certificate; Limitations

 

26

 

 

 

 

 

 

 

 

§4.8.

Indemnity

 

26

 

 

 

 

 

 

 

 

§4.9.

Interest on Overdue Amounts; Late Charge

 

27

 

 

 

 

 

 

§5.

 

RESERVED

 

27

 

 

 

 

 

§6.

 

RECOURSE OBLIGATIONS

 

27

 

 

 

 

 

§7.

 

REPRESENTATIONS AND WARRANTIES

 

27

 

 

 

 

 

 

 

§7.1.

Authority, Etc.

 

27

 

 

 

 

 

 

 

 

§7.2.

Governmental Approvals

 

29

 

 

 

 

 

 

 

 

§7.3.

Title to Properties; Leases

 

30

 

 

 

 

 

 

 

 

§7.4.

Financial Statements

 

30

 

 

 

 

 

 

 

 

§7.5.

No Material Changes, Etc.

 

30

 

 

 

 

 

 

 

 

§7.6.

Franchises, Patents, Copyrights, Etc.

 

30

 

 

 

 

 

 

 

 

§7.7.

Litigation

 

31

 

 

 

 

 

 

 

 

§7.8.

No Materially Adverse Contracts, Etc.

 

31

 

 

 

 

 

 

 

 

§7.9.

Compliance With Other Instruments, Laws, Etc.

 

31

 

 

 

 

 

 

 

 

§7.10.

Tax Status

 

32

 

 

 

 

 

 

 

 

§7.11

No Event of Default

 

32

 

 

 

 

 

 

 

 

§7.12.

Investment Company Acts

 

32

 

 

 

 

 

 

 

 

§7.13.

Name; Jurisdiction of Organization; Absence of UCC Financing Statements, Etc.

 

32

 

 

 

 

 

 

 

 

§7.14.

Absence of Liens

 

32

 

 

 

 

 

 

 

 

§7.15.

Certain Transactions

 

32

 

 

 

 

 

 

 

 

§7.16.

Employee Benefit Plans; Multiemployer Plans; Guaranteed Pension Plans

 

33

 

 

 

 

 

 

 

 

§7.17.

Regulations U and X

 

33

-ii-



 

 

 

 

 

 

 

 

§7.18.

Environmental Compliance

 

33

 

 

 

 

 

 

 

 

§7.19.

Subsidiaries

 

34

 

 

 

 

 

 

 

 

§7.20.

Loan Documents

 

35

 

 

 

 

 

 

 

 

§7.21.

REIT Status

 

35

 

 

 

 

 

 

 

 

§7.22.

No Condemnation

 

35

 

 

 

 

 

 

 

 

§7.23.

Utilities

 

35

 

 

 

 

 

 

 

 

§7.24.

Brokerage Fees

 

35

 

 

 

 

 

 

 

 

§7.25.

Independent Parcel

 

35

 

 

 

 

 

 

 

 

§7.26.

Major Lease

 

35

 

 

 

 

 

 

 

 

§7.27.

No Encroachment

 

36

 

 

 

 

 

 

 

 

§7.28.

Federal Tax Identification Numbers

 

36

 

 

 

 

 

 

§8.

 

AFFIRMATIVE COVENANTS OF THE BORROWER AND THE TRUST

 

36

 

 

 

 

 

 

 

§8.1.

Punctual Payment

 

36

 

 

 

 

 

 

 

 

§8.2.

Maintenance of Office; Jurisdiction of Organization, Etc.

 

36

 

 

 

 

 

 

 

 

§8.3.

Records and Accounts

 

36

 

 

 

 

 

 

 

 

§8.4.

Financial Statements, Certificates and Information

 

36

 

 

 

 

 

 

 

 

§8.5.

Notices

 

39

 

 

 

 

 

 

 

 

§8.6.

Existence of Borrower; Maintenance of the Project

 

41

 

 

 

 

 

 

 

 

§8.7.

Existence of the Trust; Maintenance of REIT Status of the Trust; Maintenance of Properties; Etc.

 

41

 

 

 

 

 

 

 

 

§8.8.

Insurance

 

42

 

 

 

 

 

 

 

 

§8.9.

Taxes

 

42

 

 

 

 

 

 

 

 

§8.10.

Inspection of Properties and Books

 

42

 

 

 

 

 

 

 

 

§8.11.

Compliance with Laws, Contracts, Licenses, and Permits

 

43

 

 

 

 

 

 

 

 

§8.12.

Use of Proceeds

 

44

-iii-



 

 

 

 

 

 

 

 

§8.13.

Solvency of Borrower and Trust

 

44

 

 

 

 

 

 

 

 

§8.14.

Further Assurances

 

44

 

 

 

 

 

 

 

 

§8.15.

Reserved.

 

44

 

 

 

 

 

 

 

 

§8.16.

Environmental Indemnification

 

44

 

 

 

 

 

 

 

 

§8.17.

Response Actions

 

44

 

 

 

 

 

 

 

 

§8.18.

Environmental Assessments

 

45

 

 

 

 

 

 

 

 

§8.19.

Employee Benefit Plans

 

45

 

 

 

 

 

 

 

 

§8.20.

No Amendments to Certain Documents

 

46

 

 

 

 

 

 

 

 

§8.21.

Personal Property

 

46

 

 

 

 

 

 

 

 

§8.22.

Leases

 

46

 

 

 

 

 

 

§9.

 

CERTAIN NEGATIVE COVENANTS OF THE BORROWER AND THE TRUST

 

46

 

 

 

 

 

 

 

§9.1.

Restrictions on Indebtedness

 

46

 

 

 

 

 

 

 

 

§9.2.

Restrictions on Liens, Etc.

 

48

 

 

 

 

 

 

 

 

§9.3.

Restrictions on Investments

 

49

 

 

 

 

 

 

 

 

§9.4.

Merger, Consolidation and Disposition of Assets; Assets of the Trust

 

51

 

 

 

 

 

 

 

 

§9.5.

Compliance with Environmental Laws

 

52

 

 

 

 

 

 

 

 

§9.6.

Distributions

 

52

 

 

 

 

 

 

 

 

§9.7.

Reserved

 

52

 

 

 

 

 

 

 

 

§9.8.

Default Under Leases

 

53

 

 

 

 

 

 

§10.

 

FINANCIAL COVENANTS

 

53

 

 

 

 

 

 

 

§10.1.

Consolidated Total Leverage Ratio

 

53

 

 

 

 

 

 

 

 

§10.2.

Interest Coverage Ratio

 

53

 

 

 

 

 

 

 

 

§10.3.

Fixed Charge Coverage Ratio

 

53

 

 

 

 

 

 

 

 

§10.4.

Secured Debt Leverage

 

53

-iv-



 

 

 

 

 

 

 

 

§10.5.

Reserved

 

53

 

 

 

 

 

 

 

 

§10.6.

Reserved

 

53

 

 

 

 

 

 

 

 

§10.7.

Reserved

 

53

 

 

 

 

 

 

 

 

§10.8.

Consolidated Tangible Net Worth

 

53

 

 

 

 

 

 

§11.

 

RESERVED

 

54

 

 

 

 

 

§12.

 

CONDITIONS TO THE TERM LOAN

 

54

 

 

 

 

 

 

 

§12.1.

Loan Documents

 

54

 

 

 

 

 

 

 

 

§12.2.

Certified Copies of Organization Documents

 

54

 

 

 

 

 

 

 

 

§12.3.

Resolutions

 

55

 

 

 

 

 

 

 

 

§12.4.

Incumbency Certificate: Authorized Signers

 

55

 

 

 

 

 

 

 

 

§12.5.

Title Policy

 

55

 

 

 

 

 

 

 

 

§12.6.

Certificates of Insurance

 

55

 

 

 

 

 

 

 

 

§12.7.

Environmental Reports

 

55

 

 

 

 

 

 

 

 

§12.8.

Opinion of Counsel Concerning Organization and Loan Documents

 

56

 

 

 

 

 

 

 

 

§12.9.

Structural Inspection Reports

 

56

 

 

 

 

 

 

 

 

§12.10.

Inspection of the Project

 

56

 

 

 

 

 

 

 

 

§12.11.

Certifications from Government Officials; UCC-11 Reports

 

56

 

 

 

 

 

 

 

 

§12.13.

Proceedings and Documents; Adverse Changes

 

56

 

 

 

 

 

 

 

 

§12.14.

Fees

 

56

 

 

 

 

 

 

 

 

§12.15.

Closing Certificate

 

57

 

 

 

 

 

 

 

 

§12.16.

Patriot Act, Etc.

 

57

 

 

 

 

 

 

 

 

§12.17.

Governmental Regulation

 

57

 

 

 

 

 

 

 

 

§12.18.

Property Financial Analysis

 

57

 

 

 

 

 

 

 

 

§12.19.

Appraisal

 

57

-v-



 

 

 

 

 

 

§13.

 

CONDITIONS TO ALL BORROWINGS

 

57

 

 

 

 

 

 

 

§13.1.

Representations True; No Event of Default; Compliance Certificate

 

57

 

 

 

 

 

 

 

 

§13.2.

No Legal Impediment

 

57

 

 

 

 

 

 

 

 

§13.3.

Governmental Regulation

 

57

 

 

 

 

 

 

§14.

 

EVENTS OF DEFAULT; ACCELERATION; ETC.

 

58

 

 

 

 

 

 

 

§14.1.

Events of Default and Acceleration

 

58

 

 

 

 

 

 

 

 

§14.2.

Reserved

 

61

 

 

 

 

 

 

 

 

§14.3.

Remedies

 

61

 

 

 

 

 

 

15.

 

SECURITY INTEREST AND SET-OFF

 

61

 

 

 

 

 

 

 

15.1

Security Interest

 

61

 

 

 

 

 

 

 

 

15.2

Set-Off and Debit

 

62

 

 

 

 

 

 

 

 

15.3

Right to Freeze

 

63

 

 

 

 

 

 

 

 

15.4

Additional Rights

 

63

 

 

 

 

 

 

§16.

 

THE AGENT

63

 

 

 

 

 

 

 

 

§16.1.

Authorization

 

63

 

 

 

 

 

 

 

 

§16.2.

Employees and Agents

 

63

 

 

 

 

 

 

 

 

§16.3.

No Liability

 

63

 

 

 

 

 

 

 

 

§16.4.

No Representations

 

64

 

 

 

 

 

 

 

 

§16.5.

Payments

 

64

 

 

 

 

 

 

 

 

§16.6.

Holders of Notes

 

65

 

 

 

 

 

 

 

 

§16.7.

Indemnity

 

65

 

 

 

 

 

 

 

 

§16.8.

Agent as Lender

 

65

 

 

 

 

 

 

 

 

§16.9.

Notification of Defaults and Events of Default

 

65

 

 

 

 

 

 

 

 

§16.10.

Duties in Case of Enforcement

 

66

-vi-



 

 

 

 

 

 

 

 

§16.11.

Successor Agent

 

66

 

 

 

 

 

 

 

 

§16.12.

Notices

 

67

 

 

 

 

 

 

 

 

§16.13.

Reserved

 

67

 

 

 

 

 

 

§17.

 

EXPENSES

 

67

 

 

 

 

 

§18.

 

INDEMNIFICATION

 

68

 

 

 

 

 

§19.

 

SURVIVAL OF COVENANTS, ETC.

 

68

 

 

 

 

 

§20.

 

ASSIGNMENT; PARTICIPATIONS; ETC.

 

69

 

 

 

 

 

 

 

§20.1.

Conditions to Assignment by Lenders.

 

69

 

 

 

 

 

 

 

 

§20.2.

Certain Representations and Warranties; Limitations; Covenants

 

69

 

 

 

 

 

 

 

 

§20.3.

Register

 

70

 

 

 

 

 

 

 

 

§20.4.

New Notes

 

70

 

 

 

 

 

 

 

 

§20.5.

Participations

 

71

 

 

 

 

 

 

 

 

§20.6.

Pledge by Lender

 

71

 

 

 

 

 

 

 

 

§20.7.

No Assignment by Borrower

 

71

 

 

 

 

 

 

 

 

§20.8.

Disclosure

 

71

 

 

 

 

 

 

 

 

§20.9.

Syndication

 

72

 

 

 

 

 

 

§21.

 

NOTICES, ETC.

 

72

 

 

 

 

 

§22.

 

WHITESTONE OP AS AGENT FOR THE BORROWER

 

73

 

 

 

 

 

§23.

 

GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE

 

73

 

 

 

 

 

§24.

 

HEADINGS

 

74

 

 

 

 

 

§25.

 

COUNTERPARTS

 

74

 

 

 

 

 

§26.

 

ENTIRE AGREEMENT, ETC.

 

74

-vii-



 

 

 

 

 

§27.

 

WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS

 

74

 

 

 

 

 

§28.

 

CONSENTS, AMENDMENTS, WAIVERS, ETC.

 

74

 

 

 

 

 

§29.

 

SEVERABILITY

 

76

 

 

 

 

 

§30.

 

INTEREST RATE LIMITATION

 

76

-viii-


Exhibits to Term Loan Agreement

Exhibit A – Form of Term Note

Exhibit B – Form of Completed Loan Request

Exhibit C – Form of Compliance Certificate

Exhibit D – Form of Assignment and Assumption

-ix-



 

 

             Schedules to Term Agreement

 

 

Schedule 1

Lender’s Commitments

 

 

Schedule 7.1(b)

Capitalization

 

 

Schedule 7.7

Litigation

 

 

Schedule 7.15

Affiliate Transactions

 

 

Schedule 7.16

Employee Benefit Plans

 

 

Schedule 7.18

Environmental Matters

 

 

Schedule 7.19

Subsidiaries

 

 

Schedule 7.26

Major Leases

 

 

Schedule 8.19

Employee Benefit Plans

 

 

Schedule 9.1(g)

Contingent Liabilities

 

 

Schedule 9.1(f)

Secured Term Loan Indebtedness

-x-


TERM LOAN AGREEMENT

          This TERM LOAN AGREEMENT is made as of the ____ day of January, 2008, by and among WHITESTONE REIT OPERATING PARTNERSHIP, L.P., a Delaware limited a partnership (“Whitestone OP”), WHITESTONE PIMA NORTE LLC, a Texas limited liability company (“Pima Norte”), WHITESTONE REIT OPERATING PARTNERSHIP III LP, a Texas limited partnership (“Whitestone III”), HARTMAN REIT OPERATING PARTNERSHIP III LP LTD, a Texas limited partnership (“Whitestone III LP LTD”) and WHITESTONE REIT OPERATING PARTNERSHIP III GP LLC, a Texas limited liability company (“Whitestone III GP LLC” and, collectively with Whitestone OP, Pima Norte, Whitestone III and Whitestone III LP LTD, the “Borrower”), each having its principal place of business at 2600 South Gessner, Suite 500, Houston, Texas 77063; KEYBANK NATIONAL ASSOCIATION (“KeyBank”), having a principal place of business at 127 Public Square, Cleveland, Ohio 44114, and the other lending institutions which may become parties hereto pursuant to §20 (individually, a “Lender” and collectively, the “Lenders”); and KEYBANK NATIONAL ASSOCIATION, as administrative agent for itself and each other Lender (the “Agent”).

RECITALS

          A. The Borrower is primarily engaged in the business of owning, acquiring, developing, renovating and operating retail, office or mixed office/warehouse properties.

          B. Pima Norte owns approximately 33,405 square feet in the Pima Norte Office Condominium Project located at 36600 North Pima Road in the town of Carefree, County of Maricopa, State of Arizona.

          C. Whitestone REIT, a Maryland real estate investment trust (the “Trust”), is the sole general partner of Whitestone OP, holds in excess of 62% of the partnership interests in Whitestone OP as of the date of this Agreement, is qualified to elect REIT status for income tax purposes and has agreed to guaranty the obligations of the Borrower hereunder and under the other Loan Documents (as defined below).

          D. Whitestone OP is the 100% owner and sole member of Pima Norte.

          E. Whitestone OP is the 100% owner and sole member of Whitestone III GP LLC, which limited liability company is the sole general partner of Whitestone III and of Whitestone III LP LTD, the sole limited partner of Whitestone III.

          F. The Borrower and the Trust have requested, and the Lenders have agreed to provide, a secured term loan to the Borrower pursuant to the terms and conditions hereof.

1


          NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

          §1. DEFINITIONS AND RULES OF INTERPRETATION .

          §1.1. Definitions. The following terms shall have the meanings set forth in this §1 or elsewhere in the provisions of this Agreement referred to below:

           Accountants . In each case, independent certified public accountants reasonably acceptable to the Majority Lenders. The Lenders hereby acknowledge that the Accountants may include Pannell Kerr Forster of Texas PC and any so-called “big-four” accounting firm.

           Accounts Payable . Accounts payable of the Borrower, the Trust and their respective Subsidiaries, as determined in accordance with GAAP.

           Affiliate . With reference to any Person, (i) any director, officer, general partner, trustee or managing member (or the equivalent thereof) of that Person, (ii) any other Person controlling, controlled by or under direct or indirect common control of that Person, (iii) any other Person directly or indirectly holding five percent (5%) or more of any class of the capital stock or other equity interests (including options, warrants, convertible securities and similar rights) of that Person, (iv) any other Person five percent (5%) or more of any class of whose capital stock or other equity interests (including options, warrants, convertible securities and similar rights) is held directly or indirectly by that Person, and (v) any Person directly or indirectly controlling that Person, whether through a management agreement, voting agreement, other contract or otherwise.

           Agent . See the preamble to this Agreement. The Agent shall include any successor agent, as permitted by §16.

           Agent’s Head Office . The Agent’s office located at 127 Public Square, Cleveland, Ohio 44114, or at such other location as the Agent may designate from time to time, or the office of any successor agent permitted under §16.

           Agreement . This Term Loan Agreement, including the Schedules and Exhibits hereto, as the same may be from time to time amended, restated, modified and/or supplemented and in effect.

           Agreement of Limited Partnership of the Borrower . Collectively, (i) the Amended and Restated Agreement of Limited Partnership of Whitestone OP, dated December 31, 1998, among the Trust and the limited partners named therein, (ii) the Agreement of Limited Partnership of Whitestone III, dated March 4, 2005, (iii) the Agreement of Limited Partnership of Whitestone III LP LTD, dated March 2, 2005, and (iv) the Operating Agreement of Whitestone III GP LLC, dated March 1, 2005, and (v) the

2


Operating Agreement of Pima Norte, dated December 11, 2007, in each case as amended through the date hereof and as the same may be further amended from time to time as permitted by §8.20.

           Anti-Terrorism Order . Executive Order No. 13,224 66 Fed Reg. 49,079 (2001) issued by the President of the United States of America (Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism).

           Applicable Libor Margin . Two percent (2%).

           Assignment and Assumption . See §20.1.

           Base Rate . The higher of (i) the variable per annum rate of interest announced from time to time by KeyBank as its “base rate” and (ii) one half of one percent (1/2%) plus the Federal Funds Rate. The Base Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. Any change in the Base Rate during an Interest Period shall be effective and result in a corresponding change on the same day in the rate of interest accruing from and after such day on the unpaid balance of principal of the Base Rate Loans, if any, effective on the day of such change in the Base Rate, without notice or demand of any kind.

           Base Rate Loan(s) . Those portions of the Term Loan bearing interest calculated by reference to the Base Rate.

           Borrower . See the preamble hereto.

           Building(s) . Individually and collectively, the buildings, structures and improvements now or hereafter located on the Real Estate Assets.

           Business Day . For all purposes other than as covered by clause (ii) below, any day other than a Saturday, Sunday or legal holiday on which banks in Cleveland, Ohio are open for the conduct of a substantial part of their commercial banking business; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Libor Rate Loans, any day that is a Business Day described in clause (i) and that is also a Libor Business Day.

           Capital Expenditures . Any expenditure for any item that would be treated or defined as a capital expenditure under GAAP.

           Capital Reserve . For any period, a capital reserve equal to the weighted average square feet of the Real Estate Assets during the applicable period, multiplied by $0.15 per annum.

           Capitalization Rate . The Capitalization Rate shall be 9.25%.

3


           Capitalized Leases . Leases under which the Borrower or any of its Subsidiaries or any Partially-Owned Entity is the lessee or obligor, the discounted future rental obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with GAAP.

           Cash and Cash Equivalents . As of any date of determination, the sum of (a) the aggregate amount of unrestricted cash then actually held by the Borrower or any of its Subsidiaries (excluding without limitation, until forfeited or otherwise entitled to be retained by the Borrower or any of its Subsidiaries, tenant security and other restricted deposits), and (b) the aggregate amount of unrestricted cash equivalents (valued at fair market value) then held by the Borrower or any of its Subsidiaries. As used in this definition, (i) “unrestricted” means the specified asset is not subject to any Liens in favor of any Person, and (ii) “cash equivalents” means that such asset has a liquid, par value in cash and is convertible to cash on demand. Notwithstanding anything contained herein to the contrary, the term Cash and Cash Equivalents shall not include the commitments of the lenders to make revolving loans or any other extension of credit under the Revolving Credit Agreement.

           CERCLA . See §7.18.

           Closing Date . January __, 2008.

           Code . The Internal Revenue Code of 1986, as amended and in effect from time to time.

           Commitment . With respect to each Lender, the amount set forth from time to time on Schedule 1 hereto as the amount of such Lender’s Commitment to make the Term Loan, as such Schedule 1 may be updated by the Agent from time to time.

           Commitment Percentage . With respect to each Lender, the percentage set forth on Schedule 1 hereto as such Lender’s percentage of the Term Loan Commitment, as such Schedule 1 may be updated by the Agent from time to time.

           Completed Loan Request . A loan request accompanied by all information required to be supplied under the applicable provisions of §2.4.

           Consolidated or consolidated . With reference to any term defined herein, shall mean that term as applied to the accounts of the Borrower, the Trust and their respective Subsidiaries, consolidated in accordance with GAAP in accordance with the terms of this Agreement.

           Consolidated EBITDA . In relation to the Borrower, the Trust and their respective Subsidiaries for any applicable period, an amount equal to, without double-counting, the net income or loss of the Borrower, the Trust and their respective Subsidiaries determined

4


in accordance with GAAP (before minority interests and excluding losses attributable to the sale or other disposition of assets and adjusted to eliminate the straight-lining of rents) for such period, plus (x) the following to the extent deducted in computing such Consolidated net income for such period: (i) Consolidated Total Interest Expense for such period, (ii) real estate depreciation and amortization for such period, and (iii) other non-cash charges for such period; and minus (y) all gains attributable to the sale or other disposition of assets or debt restructurings in such period, in each case adjusted to include the Borrower’s, the Trust’s or any Subsidiary’s pro rata share of EBITDA (and the items comprising EBITDA) from any Partially-Owned Entity in such period, based on its percentage ownership interest in such Partially-Owned Entity (or such other amount to which the Borrower, the Trust or such Subsidiary is entitled or for which the Borrower, the Trust or such Subsidiary is obligated based on an arm’s length agreement), provided that for purposes of calculating the Interest Coverage Ratio (§10.2) and the Fixed Charge Coverage Ratio (§10.3), Consolidated EBITDA shall only include EBITDA from a Partially-Owned Entity to the extent cash income is actually received in the applicable period by the Borrower, the Trust or such Subsidiary in the form of dividends or similar distributions.

           Consolidated Fixed Charges . For any applicable period, an amount equal to (i) Consolidated Total Interest Expense (including, in any event, capitalized interest) for such period plus (ii) the aggregate amount of scheduled principal payments of Indebtedness (excluding balloon payments at maturity) required to be made during such period by the Borrower, the Trust and their respective Subsidiaries on a Consolidated basis plus (iii) the Capital Reserve applicable to such period plus (iv) the dividends and distributions, if any, paid or required to be paid during such period on the Preferred Equity, if any, of the Borrower, the Trust and their respective Subsidiaries (other than dividends paid in the form of capital stock).

           Consolidated Tangible Net Worth . As of any date of determination, an amount equal to the total shareholders’ equity of the Borrower and its Subsidiaries, as determined in accordance with GAAP, as reported on the Borrower’s Consolidated balance sheet, less all assets that are considered to be intangible assets under GAAP, including, without limitation, customer lists, goodwill, computer software, copyrights, trade names trademarks, patents, franchises, licenses, unamortized deferred charges, unamortized debt discount and capitalized research and development costs.

           Consolidated Total Indebtedness . As of any date of determination, Consolidated Total Indebtedness means for the Borrower, the Trust and their respective Subsidiaries, all obligations, contingent or otherwise, which should be classified on the obligor’s balance sheet as liabilities, or to which reference should be made by footnotes thereto, all in accordance with GAAP, including, in any event, the sum of (without double-counting), all Indebtedness outstanding on such date, in each case whether Recourse, Without Recourse or contingent, provided , however , that amounts not drawn under the Revolving Credit Agreement on such date shall not be included in calculating Consolidated Total Indebtedness, and provided , further , that (without double-counting), each of the following

5


shall be included in Consolidated Total Indebtedness: (a) all amounts of guarantees, indemnities for borrowed money, stop-loss agreements and the like provided by the Borrower, the Trust and their respective Subsidiaries, in each case in connection with and guarantying repayment of amounts outstanding under any other Indebtedness; (b) all amounts for which a letter of credit has been issued for the account of the Borrower, the Trust or any of their respective Subsidiaries; (c) all amounts of bonds posted by the Borrower, the Trust or any of their respective Subsidiaries guaranteeing performance or payment obligations; (d) all lease obligations (including under Capital Leases) and (e) all liabilities of the Borrower, the Trust or any of their respective Subsidiaries as partners, members or the like for liabilities (whether such liabilities are Recourse, Without Recourse or contingent obligations of the applicable partnership or other Person) of partnerships or other Persons in which any of them have an equity interest, which liabilities are for borrowed money or any of the matters listed in clauses (a), (b), (c) or (d) above. Without limitation of the foregoing (without double counting), with respect to any Partially-Owned Entity, (x) to the extent that the Borrower, the Trust or any of their respective Subsidiaries or such Partially-Owned Entity is providing a completion guaranty in connection with a construction loan entered into by a Partially-Owned Entity, Consolidated Total Indebtedness shall include the Borrower’s, the Trust’s or such Subsidiary’s pro rata liability under the Indebtedness relating to such completion guaranty (or, if greater, the Borrower’s, the Trust’s or such Subsidiary’s potential liability under such completion guaranty) and (y) in connection with the liabilities described in clauses (a) and (d) above (other than completion guarantees, which are referred to in clause (x)), the Consolidated Total Indebtedness shall include the portion of the liabilities of such Partially-Owned Entity which are attributable to the Borrower’s, the Trust’s or such Subsidiary’s percentage equity interest in such Partially-Owned Entity or such greater amount of such liabilities for which the Borrower, the Trust or their respective Subsidiaries are, or have agreed to be, liable by way of guaranty, indemnity for borrowed money, stop-loss agreement or the like, it being agreed that, in any case, Indebtedness of a Partially-Owned Entity shall not be excluded from Consolidated Total Indebtedness by virtue of the liability of such Partially-Owned Entity being Without Recourse. For purposes hereof, the amount of borrowed money shall equal the sum of (1) the amount of borrowed money as determined in accordance with GAAP plus (2) the amount of those contingent liabilities for borrowed money set forth in subsections (a) through (e) above, but shall exclude any adjustment for so-called “straight-line interest accounting”.

           Consolidated Total Interest Expense . For any applicable period, the aggregate amount of interest required in accordance with GAAP to be paid, accrued, expensed or, to the extent it could be a cash expense in the applicable period, capitalized, without double-counting, by the Borrower, the Trust and their respective Subsidiaries during such period on: (i) all Indebtedness of the Borrower, the Trust and their respective Subsidiaries (including the Loans, obligations under Capital Leases (to the extent Consolidated EBITDA has not been reduced by such Capital Lease obligations in the applicable period) and any Subordinated Indebtedness and including original issue discount and amortization of prepaid interest, if any, but excluding any Distribution on Preferred Equity), (ii) all amounts available for borrowing, or for drawing under letters of credit, if

6


any, issued for the account of the Borrower, the Trust or any of their respective Subsidiaries, but only if such interest was or is required to be reflected as an item of expense, and (iii) all commitment fees, agency fees, facility fees, balance deficiency fees and similar fees and expenses in connection with the borrowing of money.

           Conversion Request . A notice given by the Borrower to the Agent of its election to convert or continue a Loan in accordance with §2.5.

           Deed of Trust . The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of the date hereof, made by Pima Norte in favor of the Agent.

           Default . When used with reference to this Agreement or any other Loan Document, an event or condition specified in §14.1 that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default.

           Delinquent Lender . See §16.5(c).

           Disqualifying Environmental Event . Any Release or threatened Release of Hazardous Substances, any violation of Environmental Laws or any other similar environmental event with respect to the Project that will, in the Agent’s reasonable opinion, cost in excess of $50,000 to remediate.

           Disqualifying Structural Event . Any structural issue with respect to the Project that will, in the Agent’s reasonable opinion, cost in excess of $50,000 to remediate.

           Distribution . With respect to:

 

 

 

          (i) the Borrower, any distribution of cash or other cash equivalent, directly or indirectly, to the partners of the Borrower; or any other distribution on or in respect of any partnership interests of the Borrower; and

 

 

 

          (ii) the Trust, the declaration or payment of any dividend on or in respect of any shares of any class of capital stock or other equity of the Trust, other than dividends payable solely in shares of common stock by the Trust; the purchase, redemption, or other retirement of any shares of any class of capital stock or other equity of the Trust, directly or indirectly through a Subsidiary of the Trust or otherwise; the return of capital by the Trust to its shareholders as such; or any other distribution on or in respect of any shares of any class of capital stock or other equity of the Trust.

           Dollars or $ . Lawful currency of the United States of America.

7


           Drawdown Date . The date on which any portion of the Term Loan is converted or continued in accordance with §2.5.

           Eligible Assignee . Any of (a) a commercial bank (or similar financial institution) organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $500,000,000; (b) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with GAAP; and (c) a commercial bank (or similar financial institution) organized under the laws of any other country (including the central bank of such country) which is a member of the Organization for Economic Cooperation and Development (the “OECD”), or a political subdivision of any such country, and having total assets in excess of $500,000,000, provided that such bank (or similar financial institution) is acting through a branch or agency located in the United States of America. In no event will the Borrower or any Affiliate of the Borrower be an Eligible Assignee.

           Employee Benefit Plan . Any employee benefit plan within the meaning of §3(3) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate, other than a Multiemployer Plan.

           Environmental Indemnity Agreement . Environmental and Hazardous Substances Indemnity Agreement, dated as of the date hereof, between Pima Norte and the Agent.

           Environmental Laws . See §7.18(a).

           Environmental Reports . See §7.18

           ERISA . The Employee Retirement Income Security Act of 1974, as amended and in effect from time to time.

           ERISA Affiliate . Any Person which is treated as a single employer with the Borrower under §414 of the Code.

           ERISA Reportable Event . A reportable event with respect to a Guaranteed Pension Plan within the meaning of §4043 of ERISA and the regulations promulgated thereunder.

           Event of Default . See §14.1.

           Excluded Litigation Fees . The legal fees and disbursements paid by the Borrower during the applicable period in connection with litigation among Allen R. Hartman, Hartman Management L.P. and the Trust, provided that “Excluded Litigation Fees” shall not include any legal fees and disbursements incurred by the Borrower in defending any litigation commenced by the Trust’s shareholders (including, without limitation, Allen R. Hartman) in their capacity as such (other than in connection with litigation commenced

8


by and/or involving solely Allen R. Hartman (and not by and/or involving any other shareholder(s)) in his capacity as a shareholder).

           Extension . See §2.7.

           Extension Fee . See §2.7.

           Facility Fee . See §2.3(e).

           Fair Market Value of Real Estate Assets . As of any date of determination, an amount equal to (i) Consolidated Net Operating Income for the most recent four (4) consecutive complete fiscal quarters less (ii) the Capital Reserve applicable to such period; with the product thereof being divided by (iii) the Capitalization Rate. Notwithstanding the foregoing, (i) with respect to any Real Estate Asset acquired during the applicable period, Fair Market Value of Real Estate Assets shall be calculated as follows: (x) from acquisition through the first two complete fiscal quarters after such acquisition, the Net Operating Income from such Real Estate Asset shall be excluded and it shall be included in Fair Market Value of Real Estate Assets at its cost basis plus the cost of improvements made during the applicable period (but in no event shall such aggregate cost value exceed the “as stabilized” appraised value of such Real Estate Asset, as reasonably determined by the Agent) ; (y) once the acquired Real Estate Asset has been owned by the Borrower for three complete fiscal quarters, such Real Estate Asset shall no longer be valued at its cost basis but shall be valued based upon its Net Operating Income for such three fiscal quarters, annualized, less a capital reserve equal to the total number of square feet of such Real Estate Asset multiplied by $0.15, with the sum thereof being divided by the Capitalization Rate; and (z) once the acquired Real Estate Asset has been owned by the Borrower for four complete fiscal quarters, such Real Estate Asset shall no longer be valued at its cost basis but shall be valued based upon its Net Operating Income for such four fiscal quarters in the manner set forth in the first sentence above, and (ii) Net Operating Income from Real Estate Assets removed sold or otherwise disposed of during the applicable period shall be excluded.

           Federal Funds Rate . For any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three (3) federal funds brokers of recognized standing selected by the Agent.

           Financial Statement Date . September 30, 2007.

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          “ funds from operations” .  As defined in accordance with resolutions adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, as in effect at the applicable date of determination.

           GAAP .  Generally accepted accounting principles, consistently applied.

           G and A Expenses .  All payroll and other employment-related expenses incurred by the Trust in connection with becoming a self-managed REIT.

           Governmental Authority . Any federal, state, county or municipal government, or political subdivision thereof, any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality, or public body, or any court, administrative tribunal, or public utility.

           Guaranteed Pension Plan . Any employee pension benefit plan within the meaning of §3(2) of ERISA maintained or contributed to by the Borrower or the Trust, as the case may be, or any ERISA Affiliate of any of them the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan.

           Guaranty . The Unlimited Guaranty, dated as of the date hereof, made by the Trust and certain other parties in favor of the Agent and the Lenders pursuant to which the Trust and such other parties guarantee to the Agent and the Lenders the unconditional payment and performance of the Obligations.

           Hazardous Substances . See §7.18(b).

           Indebtedness . All obligations, contingent and otherwise, that in accordance with GAAP should be classified upon the obligor’s balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (a) all debt and similar monetary obligations, whether direct or indirect, including, without limitation, all Obligations and all obligations under any hedge, swap or other interest rate protection arrangement, any forward purchase contract or any put; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge, or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; (c) all reimbursement obligations under letters of credit; and (d) all guarantees for borrowed money, endorsements and other contingent obligations, whether direct or indirect, in respect of indebtedness or obligations of others, including any obligation to supply funds (including partnership obligations and capital requirements) to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise.

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           Interest Payment Date . As to any Base Rate Loan and any Libor Rate Loan, the tenth day of any calendar month in which such Loan is outstanding, and with respect to any Libor Rate Loan, also on the last day of the applicable Interest Period, but no less frequently than quarterly.

           Interest Period . With respect to all or any portion of the Term Loan, as applicable, but without duplication of any other Interest Period, (a) initially, the period commencing on the Drawdown Date of such Loan and ending (as selected by the Borrower in a Completed Loan Request): (i) for any Base Rate Loan, the first occurring tenth day of a calendar month after such Base Rate Loan is made (whether by borrowing or by conversion from a Libor Rate Loan), and (ii) for any Libor Rate Loan, 30, 60, 90 or 180 days after the Drawdown Date of such Loan; and (b) thereafter, each period commencing at the end of the last day of the immediately preceding Interest Period applicable to such Loan and ending on the last day of the applicable period set forth in (a)(i) and (ii) above (as selected by the Borrower in a Conversion Request); provided that all of the foregoing provisions relating to Interest Periods are subject to the following:

 

 

 

          (A) if any Interest Period with respect to a LIBOR Rate Loan would otherwise end on a day that is not a LIBOR Business Day, such Interest Period shall end on the next succeeding LIBOR Business Day, unless such next succeeding LIBOR Business Day occurs in the next calendar month, in which case such Interest Period shall end on the next preceding LIBOR Business Day, as determined conclusively by the Agent in accordance with the then current bank practice in London;

 

 

 

          (B) any Interest Period pertaining to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month;

 

 

 

          (C) if the Borrower shall fail to give notice of conversion or continuation as provided in §2.5, the Borrower shall be deemed to have requested a conversion of the affected Libor Rate Loan to a Base Rate Loan on the last day of the then current Interest Period with respect thereto;

 

 

 

          (D) any Interest Period relating to any Libor Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to subparagraph (E) below, end on the last Business Day of a calendar month; and

 

 

 

          (E) no Interest Period may extend beyond the Maturity Date.

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           Investments . All expenditures made and all liabilities incurred (contingently or otherwise, but without double-counting): (i) for the acquisition of stock, partnership or other equity interests or for the acquisition of Indebtedness of, or for loans, advances, capital contributions or transfers of property to, any Person; (ii) in connection with Real Estate Assets Under Development; and (iii) for the acquisition of any other obligations of any Person. In determining the aggregate amount of Investments outstanding at any particular time: (a) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution); (b) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise; and (c) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof.

           Land . An undeveloped Real Estate Asset owned in fee by the Borrower.

           Leases . Leases, licenses and agreements whether written or oral, relating to the use or occupation of space in or on the Buildings or on the Project by persons other than the Borrower or any other member of the Whitestone Group.

           Lenders . Collectively, KeyBank and each other lending institution which may become a party to this Agreement, and any other Person who becomes an assignee of any rights of a Lender pursuant to §20 or a Person who acquires all or substantially all of the stock or assets of a Lender.

           Libor Business Day . Any day on which commercial banks are open for international business (including dealings in Dollar deposits) in London, England.

           Libor Breakage Costs . With respect to any Libor Rate Loan to be prepaid prior to the end of the applicable Interest Period or not borrowed, converted or continued (“drawn” and, with correlative meaning, “draw”) after elected, a prepayment “breakage” fee in an amount required to compensate the Lenders for any and all additional losses, costs or expenses that such Lenders incur as a result of such prepayment or failure to borrow, convert or continue a Libor Rate Loan, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits of other funds acquired by any Lender to fund or maintain such Libor Rate Loan.

           Libor Rate . For any LIBOR Rate Loan for any Interest Period, the average rate (rounded upwards to the nearest 1/16th) as shown in Dow Jones Markets (formerly Telerate) (Page 3750) at which deposits in U.S. dollars are offered by first class banks in the London Interbank Market at approximately 11:00 a.m. (London time) on the day that is one (1) LIBOR Business Day prior to the first day of such Interest Period with a maturity approximately equal to such Interest Period and in an amount approximately equal to the amount to which such Interest Period relates, adjusted for reserves and taxes if required by future regulations. If Dow Jones Markets no longer reports such rate or

12


Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Agent in the London Interbank Market, Agent may select a replacement index. For any period during which a Reserve Percentage shall apply, the LIBOR Rate with respect to LIBOR Rate Loans shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Percentage.

           Libor Rate Loan(s) . Loans bearing interest calculated by reference to the Libor Rate.

           Lien . See §9.2.

           Loan . All or any portion of the Term Loan, as the context may require.

           Loan Documents . Collectively, this Agreement, the Guaranty, the Notes, the Deed of Trust, the Environmental Indemnity Agreement and any and all other agreements, instruments, documents or certificates now or hereafter evidencing or otherwise relating to the Term Loan and executed and delivered by or on behalf of the Borrower or the Trust or its Subsidiaries in connection with or in any way relating to the Term Loan or the transactions contemplated by this Agreement, and all schedules, exhibits and annexes hereto or thereto, as any of the same may from time to time be amended and in effect.

           M&M Liens . Mechanic’s and materialmen’s liens.

           Majority Lenders . As of any date, any two or more Lenders whose aggregate outstanding Term Loans constitute more than fifty percent (50%) of the total aggregate outstanding principal amount of the Term Loan on such date.

           Maturity Date . July __, 2009, as such date may be extended pursuant to §2.7, or such earlier date on which the Term Loan shall become due and payable pursuant to the terms hereof.

           Mortgage Note(s) . A mortgage note, in which the Borrower holds a direct interest as payee, for real estate that is developed, so long as at the relevant date of determination, such Mortgage Note is not in default.

           Multiemployer Plan . Any multiemployer plan within the meaning of §3(37) of ERISA maintained or contributed to by the Borrower or the Trust, as the case may be, or any ERISA Affiliate.

           Net Operating Income . For any period, an amount equal to (i) the aggregate rental and other income from the operation of the applicable Real Estate Assets during such period; minus (ii) all expenses and other proper charges incurred in connection with the operation of such Real Estate Assets (including, without limitation, real estate taxes, management fees, payments under ground leases and bad debt expenses) during such

13


period; but, in any case, before payment of or provision for debt service charges for such period, income taxes for such period, capital expenses for such period, and depreciation, amortization, and other non-cash expenses for such period, all as determined in accordance with GAAP ( provided that, except for purposes of calculating the covenants set forth in §§10.1 and 10.4, any rent leveling adjustments shall be excluded from rental income).

           Note Record . A Record with respect to any Note.

           Notes . The Term Notes.

           Obligations . All indebtedness, obligations and liabilities of the Borrower to any of the Lenders or the Agent, individually or collectively (but without double-counting), under this Agreement and each of the other Loan Documents and in respect of the Term Loan and the Notes and other instruments at any time evidencing any thereof, whether existing on the date of this Agreement or arising or incurred hereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, and including any indebtedness, obligations and liabilities of the Borrower under any Protected Interest Rate Agreement entered into with any Lender in connection with the Term Loan.

           Organizational Documents . Collectively, (i) the Agreement of Limited Partnership of the Borrower, (ii) the Certificate of Limited Partnership of the Borrower, (iii) the Amended and Restated Declaration of Trust of the Trust, (iv) the Amended and Restated By-Laws of the Trust, (v) the Certificate of Formation of Pima Norte, (vi) the Operating Agreement of Pima Norte and (vii) all of the other agreements, certificates or other documents relating to the formation, organization or governance of the Borrower or Trust, in each case as any of the foregoing may be amended in accordance with §8.20.

           Partially-Owned Entity(ies) . Any of the partnerships, associations, corporations, limited liability companies, trusts, joint ventures or other business entities or Persons in which the Borrower or the Trust, directly, or indirectly through its full or partial ownership of another entity, own an equity interest, but which is not required in accordance with GAAP to be consolidated with the Borrower or the Trust for financial reporting purposes.

           Patriot Act . Title III of Public Law 107-56 of the United States of America, United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001.

           PBGC . The Pension Benefit Guaranty Corporation created by §4002 of ERISA and any successor entity or entities having similar responsibilities.

           Permits . All governmental permits, licenses, and approvals necessary for the lawful operation and maintenance of the Real Estate Assets.

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           Permitted Exceptions . Those matters listed on Exhibit E-1 hereto to which title to the Project may be subject on the Closing Date and thereafter such other title exceptions as the Agent may reasonably approve in writing.

           Permitted Liens . Liens permitted by §9.2.

           Permitted Property . A property which is a retail, office or mixed office/warehouse property.

           Person . Any individual, corporation, general partnership, limited partnership, trust, limited liability company, limited liability partnership, unincorporated association, business, or other legal entity, and any government (or any governmental agency or political subdivision thereof).

           Preferred Equity . Any preferred stock, preferred partnership interests, preferred member interests or other preferred equity interests issued by the Borrower, the Trust or any of their respective Subsidiaries.

           Project . The collective reference to (i) the Property, (ii) all rights, privileges, easements and hereditaments relating or appertaining thereto, and (iii) all personal property, fixtures and equipment required or beneficial for the operation thereof.

           Property . Approximately 33,405 square feet in the Pima Norte Office Condominium Project located at 36600 North Pima Road in the town of Carefree, County of Maricopa, State of Arizona.

           Protected Interest Rate Agreement . An agreement which evidences any interest protection arrangements entered into by the Borrower and any Lender in connection with the Term Loan, and all extensions, renewals, modifications, amendments, substitutions and replacements thereof.

           Rate Period . The period beginning on the first day of any fiscal month following delivery to the Agent of the annual or quarterly financial statements required to be delivered pursuant to §8.4(a) or §8.4(b) and ending on the last day of the fiscal month in which the next such annual or quarterly financial statements are delivered to the Agent.

           RCRA . See §7.18.

           Real Estate Assets . The fixed and tangible properties consisting of Land and/or Buildings owned in fee simple by the Borrower or any of its Subsidiaries at the relevant time of reference thereto, including, without limitation, the Project.

           Real Estate Assets Under Development . Any Real Estate Assets (including raw land) for which the Borrower or any of its Subsidiaries is actively pursuing (or intends to

15


actively pursue) construction of one or more Buildings or other improvements and for which construction, if commenced, is proceeding to completion without undue delay from Permit denial, construction delays or otherwise, all pursuant to such Person’s ordinary course of business, provided that any such Real Estate Asset (or, if applicable, any Building comprising a portion of any such Real Estate Asset) will no longer be considered a Real Estate Asset Under Development when a certificate of occupancy has issued for such Real Estate Asset (or Building) or such Real Estate Asset (or Building) may otherwise be lawfully occupied for its intended use unless it becomes the subject of a redevelopment of any significant portion thereof.

           Record . The grid attached to any Note, or the continuation of such grid, or any other similar record, including computer records, maintained by any Lender with respect to its Term Loan.

           Recourse . With reference to any obligation or liability, any liability or obligation that is not Without Recourse to the obligor thereunder, directly or indirectly. For purposes hereof, a Person shall not be deemed to be “indirectly” liable for the liabilities or obligations of an obligor solely by reason of the fact that such Person has an ownership interest in such obligor, provided that such Person is not otherwise legally liable, directly or indirectly, for such obligor’s liabilities or obligations (e.g., without limitation, by reason of a guaranty or contribution obligation, by operation of law or by reason of such Person being a general partner of such obligor).

           REIT . A “real estate investment trust”, as such term is defined in Section 856 of the Code.

           Release . See §7.18(c)(iii).

           Revolving Credit Agreement . That certain Revolving Credit Agreement, dated as of March 11, 2005, by Whitestone OP and certain of its Subsidiaries, KeyBank National Association, individually and as administrative agent, and certain other parties, as amended, amended and restated, or supplemented from time to time.

           Reserve Percentage . The maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed on member banks of the Federal Reserve System against Euro-currency Liabilities as defined in Regulation D.

           SARA . See §7.18.

           SEC . The Securities and Exchange Commission, or any successor thereto.

           SEC Filings . Collectively, (i) each Form 10-K, 10-Q and Form 8-K filed by the Trust with the SEC from time to time and (ii) each of the other public forms and reports filed by the Trust with the SEC from time to time.

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           Subsidiary . Any corporation, association, partnership, limited liability company, trust, joint venture or other business entity or Person which is required to be consolidated with the Borrower or the Trust in accordance with GAAP.

           Term Loan . The term loan made by the Lenders to the Borrower pursuant to §2.

           Term Notes . Collectively, the separate promissory notes of the Borrower in favor of each Lender in substantially the form of Exhibit A hereto, in an aggregate principal amount equal to $6,400,000, dated as of the date hereof or as of such later date as any Person becomes a Lender under this Agreement, and completed with appropriate insertions, as each of such notes may be amended, replaced, substituted and/or restated from time to time.

           Title Insurer : Chicago Title Company, or such other title insurance company licensed in the State of Arizona as may be approved in writing by the Agent.

           Title Policy . See §12.5.

           Trust . See preamble.

           Type . As to any portion of the Term Loan, its nature as a Base Rate Loan or a Libor Rate Loan.

           Unanimous Lender Approval . The written consent of each Lender that is a party to this Agreement at the time of reference.

           Unencumbered Asset . Any Real Estate Asset that on any date of determination is not subject to any Liens (except for Permitted Liens).

           Unsecured Consolidated Total Indebtedness . As of any date of determination, the aggregate principal amount of Consolidated Total Indebtedness outstanding at such date (including all Obligations), that is not secured by a lien evidenced by a mortgage, deed of trust, negative pledge, assignment of partnership interests or other security interest.

           Whitestone Group . Collectively, (i) Whitestone OP, (ii) Pima Norte, (iii) Whitestone III, (iv) Whitestone III LP LTD, (v) Whitestone III GP LLC, (vi) the Trust, (vii) the respective Subsidiaries of the Borrower, Whitestone III and the Trust and (viii) the Partially-Owned Entities.

           Wholly-owned Subsidiary . Any single purpose entity that is a Subsidiary of the Borrower and of which the Borrower at all times owns directly or indirectly (through a Subsidiary or Subsidiaries) 100% of the outstanding voting or controlling interests and of the economic interests.

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           “ Without Recourse ” or “ without recourse ”. With reference to any obligation or liability, any obligation or liability for which the obligor thereunder is not liable or obligated other than as to its interest in a designated Real Estate Asset or other specifically identified asset only, subject to such limited exceptions to the non-recourse nature of such obligation or liability, such as fraud, misappropriation and misapplication indemnities, as are usual and customary in like transactions involving institutional lenders at the time of the incurrence of such obligation or liability, and to usual and customary environmental indemnification obligations in connection with such designated Real Estate Asset.

          §1.2. Rules of Interpretation .

 

 

 

           (i) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms or the terms of this Agreement.

 

 

 

           (ii) The singular includes the plural and the plural includes the singular.

 

 

 

           (iii) A reference to any law includes any amendment or modification to such law.

 

 

 

           (iv) A reference to any Person includes its permitted successors and permitted assigns.

 

 

 

           (v) Accounting terms not otherwise defined herein have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer.

 

 

 

           (vi) The words “include”, “includes” and “including” are not limiting.

 

 

 

           (vii) All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the Uniform Commercial Code as in effect in Massachusetts, have the meanings assigned to them therein.

 

 

 

           (viii) Reference to a particular “§” refers to that section of this Agreement unless otherwise indicated.

 

 

 

           (ix) The words “herein”, “hereof”, “hereunder” and words of like import shall refer to this Agreement as a whole and not to any particular section or subdivision of this Agreement.

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           §2. THE TERM LOAN .

          §2.1 Commitment to Lend . Subject to the provisions of §2.4 and the other terms and conditions set forth in this Agreement, each of the Lenders severally agrees to lend to the Borrower on the Closing Date, and the Borrower agrees to borrow on such date and repay in accordance with §3, an amount equal to $6,400,000, provided , that at the time the Borrower requests the Term Loan and after giving effect to the making thereof, (i) all of the conditions in §12 and §13 have been met at the time of such request, and (ii) there has not occurred and is not continuing (or will not occur by reason thereof) any Default or Event of Default.

          The Term Loan shall be made pro rata in accordance with each Lender’s Commitment Percentage. The request for the Term Loan made pursuant to §2.4 shall constitute a representation and warranty by the Borrower that the conditions set forth in §12 and §13 have been satisfied as of the Closing Date, provided that the making of such representation and warranty by the Borrower shall not limit the right of any Lender not to lend if such conditions have not been met. No portion of the Term Loan shall be required to be made by any Lender unless all of the conditions contained in §12 and §13 have been satisfied as of the Closing Date.

          §2.2. The Term Notes . The Term Loan shall be evidenced by the Term Notes. A Term Note shall be payable to the order of each Lender in an aggregate principal amount equal to such Lender’s Commitment. The Borrower irrevocably authorizes each Lender to make or cause to be made, on the Closing Date and at the time of receipt of any payment of principal on such Lender’s Term Note, an appropriate notation on such Lender’s applicable Note Record reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loan set forth on such applicable Note Record shall be prima facie evidence of the principal amount of the Term Loan owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Note Record shall not limit or otherwise affect the rights and obligations of the Borrower hereunder or under any Term Note to make payments of principal of or interest on any Term Note when due.

          §2.3. Interest on Term Loan; Fees .

                    (a) Each Base Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto (unless earlier paid in accordance with §3.2) at a rate equal to the Base Rate.

                    (b) Each Libor Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto (unless earlier paid in accordance with §3.2) at a rate equal to the Libor Rate determined for such Interest Period plus the Applicable Libor Margin.

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                    (c) Reserved.

                    (d) The Borrower unconditionally promises to pay interest on the Term Loan in arrears on each Interest Payment Date with respect thereto, and when the principal of such Term Loan is due (whether at maturity, by reason of acceleration or otherwise).

          §2.4. Request for the Term Loan .

          The following provisions shall apply to the request by the Borrower for the Term Loan:

                    (a) The Borrower shall submit a Completed Loan Request to the Agent, together with a duplicate copy of such Completed Loan Request for each Lender which is then a party to this Agreement at the time such loan request is made. The Completed Loan Request shall be irrevocable and binding on the Borrower and shall obligate the Borrower to accept the Term Loan requested from the Lenders on the Closing Date.

                    (b) The Completed Loan Request shall include a completed certificate in the form of Exhibit B hereto specifying: (1) the principal amount of the Term Loan requested, (2) the Interest Period applicable to the Term Loan, and (3) the Type of Loan being requested, and certifying that, both before and after giving effect to the making of the Term Loan, no Default or Event of Default exists or will exist under this Agreement or any other Loan Document.

                    (c) No Lender shall be obligated to fund the Term Loan unless:

 

 

 

                    (i) a Completed Loan Request has been received by the Agent as provided in clause (a) above; and

 

 

 

                    (ii) both before and after giving effect to the Term Loan to be made pursuant to the Completed Loan Request, all of the conditions contained in §12 and §13 shall have been satisfied as of the Closing Date.

                    (d) The Agent will promptly notify each Lender of the Completed Loan Request and will cause a copy thereof to be delivered to each Lender on the Closing Date.

          §2.5. Conversion Options .

                    (a) The Borrower may elect from time to time to convert any portion of the outstanding Term Loan to a Loan of another Type, provided that (i) subject to the further proviso at the end of this §2.5(a) and subject to §2.5(b) and §2.5(d), with respect to any conversion of a Base Rate Loan to a Libor Rate Loan (or a continuation of a Libor Rate Loan, as provided in §2.5(b)), the Borrower shall give the Agent (with copies to the

20


Agent for each Lender) at least three (3) Business Days’ prior written notice of such election, which such notice must be received by the Agent by 10:00 a.m. on any Business Day; and (ii) no Loan may be converted into a Libor Rate Loan when any Default or Event of Default has occurred and is continuing. All or any part of outstanding Term Loan of any Type may be converted as provided herein, provided that each Conversion Request relating to the conversion of a Base Rate Loan to a Libor Rate Loan shall be for an amount equal to $1,000,000 or an integral multiple of $100,000 in excess thereof and shall be irrevocable by the Borrower.

                    (b) Any portion of the Term Loan of any Type may be continued as such upon the expiration of the Interest Period with respect thereto (i) in the case of Base Rate Loans, automatically and (ii) in the case of Libor Rate Loans by compliance by the Borrower with the notice provisions contained in §2.5(a)(i); provided that no Libor Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default. The Borrower shall notify the Agent promptly when any such automatic conversion contemplated by this §2.5(b) is scheduled to occur.

                    (c) In the event that the Borrower does not notify the Agent of its election hereunder with respect to any portion of the Term Loan in accordance with the terms hereof, such Loan shall be automatically converted to a Base Rate Loan at the end of the applicable Interest Period.

                    (d) The Borrower may not request or elect a Libor Rate Loan pursuant to §2.4, elect to convert a Base Rate Loan to a Libor Rate Loan pursuant to §2.5(a) or elect to continue a Libor Rate Loan pursuant to §2.5(b) if, after giving effect thereto, there would be greater than six (6) Libor Rate Loans then outstanding. Any Conversion Request for a Libor Rate Loan that would create greater than six (6) Libor Rate Loans outstanding shall be deemed to be a Conversion Request for a Base Rate Loan. By way of explanation of the foregoing, in the event that the Borrower wishes to convert or continue two or more Loans into one Libor Rate Loan on the same day and for identical Interest Periods, such Libor Rate Loan shall constitute one single Libor Rate Loan for purposes of this clause (d).

          §2.6. Funds for the Term Loan .

                    (a) Subject to the other provisions of this §2, on the Closing Date, each of the Lenders will make available to the Agent, at the Agent’s Head Office, in immediately available funds, the amount of such Lender’s Commitment Percentage of the Term Loan. Upon receipt from each Lender of such amount, the Agent will make available to the Borrower the aggregate amount of such Term Loan made available to the Agent by the Lenders. The failure or refusal of any Lender to make available to the Agent at the aforesaid time and place on the Closing Date the amount of its Commitment Percentage of the Term Loan shall not relieve any other Lender from its several obligation

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hereunder to make available to the Agent the amount of its Commitment Percentage of any Term Loan but in no event shall the Agent (in its capacity as Agent) have any obligation to make any funding or shall any Lender be obligated to fund more than its Commitment Percentage of the Term Loan or to increase its Commitment Percentage on account of such failure or otherwise.

                    (b) The Agent may, unless notified to the contrary by any Lender prior to the Closing Date, assume that such Lender has made available to the Agent on the Closing Date the amount of such Lender’s Commitment Percentage of the Term Loan, and the Agent may (but it shall not be required to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If any Lender makes available to the Agent such amount after the Closing Date, such Lender shall pay to the Agent on demand an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Agent for federal funds acquired by the Agent during each day included in such period, multiplied by (ii) the amount of such Lender’s Commitment Percentage of the Term Loan, multiplied by (iii) a fraction, the numerator of which is the number of days that elapsed from and including the Closing Date to the date on which the amount of such Lender’s Commitment Percentage of the Term Loan shall become immediately available to the Agent, and the denominator of which is 365. A statement of the Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be prima facie evidence of the amount due and owing to the Agent by such Lender.

          §2.7. Extension of Maturity Date . At least forty-five (45) days but in no event more than ninety (90) days prior to July __, 2009, the Borrower, by written notice to the Agent (with copies for each Lender), may request an extension of the Maturity Date by a period of six (6) months from the Maturity Date then in effect (the “Extension”). The Extension shall become effective on July __, 2009 so long as (i) the Borrower has paid to the Agent on such date, for the ratable accounts of the Lenders, an extension fee in an amount equal to 12.5 basis points on the Term Loan in effect on such date (“Extension Fee”), (ii) no Default or Event of Default has occurred and is continuing on such date and all representations and warranties contained in the Loan Documents shall be true and correct as of such date (except to the extent that such representations and warranties relate expressly to an earlier date), (iii) the Borrower shall be in compliance with all Financial Covenants on such date and (iv) the Borrower shall have completed all necessary build-out with respect to the Project in a manner satisfactory to the Agent. The notice referred to in the first sentence of this §2.7 shall constitute and shall be deemed to be a certification by the Borrower as to the truth and accuracy of the statements contained in clauses (ii) and (iii) of the preceding sentence.

          §3. REPAYMENT OF THE TERM LOAN .

          §3.1. Maturity . The Borrower promises to pay on the Maturity Date, and there shall become absolutely due and payable on the Maturity Date, all unpaid principal of the Term Loan outstanding on such date, together with any and all accrued and unpaid

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interest thereon and any and all other unpaid amounts due under this Agreement, the Notes or any other of the Loan Documents.

          §3.2. Optional Repayments of the Term Loan . The Borrower shall have the right, at its election, to prepay the outstanding amount of the Term Loan, in whole or in part, at any time without penalty or premium; provided that the outstanding amount of any Libor Rate Loans may not be prepaid on a date other than the last day of an Interest Period unless the Borrower pays the Libor Breakage Costs for each Libor Rate Loan so prepaid at the time of such prepayment. The Borrower shall give the Agent (with copies to the Agent for each Lender), no later than 10:00 a.m., Cleveland, Ohio time, at least two (2) Business Days’ prior written notice of any prepayment pursuant to this §3.2 of any Base Rate Loans, and at least four (4) Business Days’ notice of any proposed prepayment pursuant to this §3.2 of Libor Rate Loans, specifying the proposed date of prepayment and the principal amount to be prepaid. Each such partial prepayment of the Term Loan shall be in an amount equal to $1,000,000 or an integral multiple of $1,000,000 in excess thereof or, if less, the outstanding balance of the Term Loan then being repaid, shall be accompanied by the payment of all charges, if any, outstanding on the Term Loan so prepaid and of all accrued interest on the principal prepaid to the date of payment, and shall be applied, in the absence of instruction by the Borrower, first to the principal of Base Rate Loans and then to the principal of Libor Rate Loans.

          §4. CERTAIN GENERAL PROVISIONS .

          §4.1. Funds for Payments .

                    (a) All payments of principal, interest, fees, and any other amounts due hereunder or under any of the other Loan Documents shall be made to the Agent, for the respective accounts of the Lenders or (as the case may be) the Agent, at the Agent’s Head Office, in each case in Dollars and in immediately available funds. The Borrower shall make each payment of principal of and interest on the Term Loan and of fees hereunder or thereunder not later than 12:00 p.m. (Cleveland, Ohio time) on the due date thereof.

                    (b) All payments by the Borrower hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory liens, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrower is compelled by law to make such deduction or withholding. If the Borrower is compelled by law to make any such deduction or withholding with respect to any amount payable by it hereunder or under any of the other Loan Documents (except with respect to taxes on the income or profits of the Agent or any Lender), the Borrower shall pay to the Agent, for the account of the Lenders or (as the case may be) the Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders to receive the same net amount which the Lenders would

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have received on such due date had no such deduction or withholding obligation been imposed upon the Borrower. The Borrower will deliver promptly to the Agent (with copies to the Agent for each Lender) certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrower hereunder or under such other Loan Document.

          §4.2. Computations . All computations of interest on the Term Loan and of fees to the extent applicable shall be based on a 360-day year, in each case paid for the actual number of days elapsed. Except as otherwise provided in the definition of the term “Interest Period” with respect to Libor Rate Loans, whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. The outstanding amount of the Loans as reflected on the Note Records or record attached to any other Note from time to time shall constitute prima facie evidence of the principal amount thereof.

          §4.3. Inability to Determine Libor Rate . In the event, prior to the commencement of any Interest Period relating to any Libor Rate Loan, the Agent shall determine that adequate and reasonable methods do not exist for ascertaining the Libor Rate that would otherwise determine the rate of interest to be applicable to any Libor Rate Loan during any Interest Period, the Agent shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrower) to the Borrower and the Lenders. In such event (a) each Libor Rate Loan will automatically, on the last day of the then current Interest Period applicable thereto, become a Base Rate Loan, and (b) the obligations of the Lenders to make Libor Rate Loans shall be suspended, in each case unless and until the Agent determines that the circumstances giving rise to such suspension no longer exist, whereupon the Agent shall so notify the Borrower and the Lenders.

          §4.4. Illegality . Notwithstanding any other provisions herein, if any present or future law, regulation, treaty or directive or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Libor Rate Loans, such Lender shall forthwith give notice of such circumstances to the Agent and the Borrower and thereupon (a) the Commitment of such Lender to make Libor Rate Loans or convert Base Rate Loans to Libor Rate Loans shall forthwith be suspended and (b) such Lender’s Commitment Percentage of Libor Rate Loans then outstanding shall be converted automatically to Base Rate Loans on the last day of each Interest Period applicable to such Libor Rate Loans or within such earlier period as may be required by law, all until such time as it is no longer unlawful for such Lender to make or maintain Libor Rate Loans. The Borrower hereby agrees promptly to pay the Agent for the account of such Lender, upon demand, any additional amounts necessary to compensate such Lender for Libor Breakage Costs incurred by such Lender in making any conversion required by this §4.4 prior to the last day of an Interest Period.

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          §4.5. Additional Costs, Etc . If any present or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to any Lender or the Agent by any central bank or other fiscal, monetary or other authority (whether or not having the force of law, but if not having the force of law, then generally applied by the Lenders or the Agent with respect to similar loans), shall:

                    (a) subject any Lender or the Agent to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement, the other Loan Documents, such Lender’s Commitment or the Term Loan (other than taxes based upon or measured by the income or profits of such Lender or the Agent), or

                    (b) change the basis of taxation (except for changes in taxes on income or profits) of payments to any Lender of the principal of or the interest on the Term Loan or any other amounts payable to the Agent or any Lender under this Agreement or the other Loan Documents, or

                    (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or letters of credit issued by, or commitments of an office of any Lender, or

                    (d) impose on any Lender or the Agent any other conditions or requirements with respect to this Agreement, the other Loan Documents, the Term Loan, such Lender’s Commitment, or any class of loans or commitments of which any portion of the Term Loan or such Lender’s Commitment forms a part;

and the result of any of the foregoing is

 

 

 

          (i) to increase the cost to any Lender of making, funding, issuing, renewing, extending or maintaining any of the Term Loan or such Lender’s Commitment, or

 

 

 

          (ii) to reduce the amount of principal, interest or other amount payable to such Lender or the Agent hereunder on account of such Lender’s Commitment or the Term Loan, or

 

 

 

          (iii) to require such Lender or the Agent to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference

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to the gross amount of any sum receivable or deemed received by such Lender or the Agent from the Borrower hereunder,

then, and in each such case, the Borrower will, upon demand made by the Agent or such Lender (such demand to be made promptly by the Agent or such Lender upon the making of any such determination), at any time and from time to time and as often as the occasion therefor may arise, pay to such Lender or the Agent such additional amounts as such Lender or the Agent shall determine in good faith to be sufficient to compensate such Lender or the Agent for such additional cost, reduction, payment or foregone interest or other sum, provided that such Lender or the Agent is generally imposing similar charges on its other similarly situated borrowers. The Agent shall provide the Borrower with a calculation, in reasonable detail, of such amounts in accordance with its customary practices.

           §4.6. Capital Adequacy . If any future law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law, but if not having the force of law, then generally applied by the Lenders with respect to similar loans) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction affects the amount of capital required or expected to be maintained by banks or bank holding companies and any Lender or the Agent determines that the amount of capital required to be maintained by it is increased by or based upon the existence of the Term Loan made pursuant hereto, then such Lender or the Agent may notify the Borrower of such fact, and the Borrower shall pay to such Lender or the Agent from time to time, upon demand made by the Agent or such Lender (such demand to be made promptly by the Agent or such Lender upon the making of any such determination), as an additional fee payable hereunder, such amount as such Lender or the Agent shall determine reasonably and in good faith and certify in a notice to the Borrower to be an amount that will adequately compensate such Lender in light of these circumstances for its increased costs of maintaining such capital. Each Lender and the Agent shall allocate such cost increases among its customers in good faith and on an equitable basis, and will not charge the Borrower unless it is generally imposing a similar charge on its other similarly situated borrowers. The Agent shall provide the Borrower with a calculation, in reasonable detail, of such amounts in accordance with its customary practices.

          §4.7. Certificate; Limitations . A certificate setting forth any additional amounts payable pursuant to §§4.5 or 4.6 and a brief explanation of such amounts which are due, submitted by any Lender or the Agent to the Borrower, shall be prima facie evidence that such amounts are due and owing. Notwithstanding anything to the contrary contained in this Article 5, to the extent reasonably possible, each Lender shall designate an alternate lending office in the continental United States to make the Loans in order to reduce any liability of Borrower to such Lender under §§4.4, 4.5 or 4.6 or to avoid the unavailability of a Libor Rate Loan, so long as such designation is not disadvantageous to such Lender.

          §4.8. Indemnity . In addition to the other provisions of this Agreement regarding such matters, the Borrower agrees to indemnify the Agent and each Lender and to hold

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the Agent and each Lender harmless from and against any loss, cost or expense (including loss of anticipated profits) that the Agent or such Lender may sustain or incur as a consequence of (a) a default by the Borrower in the payment of any principal amount of or any interest on any Libor Rate Loans as and when due and payable, including any such loss or expense arising from interest or fees payable by the Agent or such Lender to lenders of funds obtained by it in order to maintain its Libor Rate Loans, (b) the failure by the Borrower to make a borrowing or conversion after the Borrower has given a Completed Loan Request for a Libor Rate Loan or a Conversion Request for a Libor Rate Loan, and (c) the making of any payment of a Libor Rate Loan or the making of any conversion of any such Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by the Agent or a Lender to lenders of funds obtained by it in order to maintain any such Libor Rate Loans.

          §4.9. Interest on Overdue Amounts; Late Charge . Notwithstanding anything to the contrary stated herein, upon the occurrence and during the continuance of an Event of Default, at the option of the Majority Lenders, to the extent permitted by applicable law, the unpaid balance of all Obligations shall bear interest at the rate otherwise applicable thereto plus 2%, compounded daily until such Event of Default is cured or waived to the satisfaction of the Agent and the required Lenders. In addition, the Borrower shall pay a late charge equal to five percent (5%) of any amount of interest charges on the Term Loan which is not paid within ten (10) days of the date when due.

          §5. RESERVED .

          §6. RECOURSE OBLIGATIONS . The Obligations are full recourse obligations of the Borrower, and all of the respective assets and properties of the Borrower shall be available for the payment in full in cash and performance of the Obligations. The obligations of the Trust under the Guaranty are full recourse obligations of the Trust, and all of the respective assets and properties of the Trust shall be available for the payment in full in cash and performance thereof.

          §7. REPRESENTATIONS AND WARRANTIES . The Borrower and the Trust, on their own behalf and on behalf of their respective Subsidiaries, jointly and severally represent and warrant to the Agent and the Lenders all of the statements contained in this §7.

          §7.1. Authority, Etc .

                    (a) Organization: Good Standing .

 

 

 

          (i) Each of Whitestone OP, Pima Norte, Whitestone III, Whitestone III GP LLC and Whitestone III LP LTD is a limited partnership or limited liability company, as applicable, duly organized, validly existing and in good standing under the laws of its state of

 

 

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organization; each of Whitestone OP, Pima Norte, Whitestone III, Whitestone III GP LLC and Whitestone III LP LTD has all requisite limited partnership or limited liability company power to own its properties and conduct its business as now conducted and as presently contemplated; and each of Whitestone OP, Pima Norte, Whitestone III, Whitestone III GP LLC and Whitestone III LP LTD is in good standing as a foreign entity and is duly authorized to do business in the jurisdiction where the Project is located and in each other jurisdiction where such qualification is necessary except where a failure to be so qualified would not have a materially adverse effect on its business, operations, assets, condition (financial or otherwise) or properties.

 

 

 

          (ii) the Trust is a real estate investment trust duly organized, validly existing and in good standing under the laws of the State of Maryland; each Subsidiary of the Trust is duly organized, validly existing and in good standing as a corporation, nominee trust, limited liability company, limited partnership or general partnership, as the case may be, under the laws of the state of its organization; the Trust and each of its Subsidiaries has all requisite corporate, trust, limited liability company, limited partnership or general partnership, as the case may be, power to own its respective properties and conduct its respective business as now conducted and as presently contemplated; and the Trust is in good standing as a foreign entity and is duly authorized to do business in the jurisdictions where such qualification is necessary, except where a failure to be so qualified in such other would not have a materially adverse effect on the business, operations, assets, condition (financial or otherwise) or properties of the Trust or any such Subsidiary.

                    (b) Capitalization . The outstanding equity of Whitestone OP is comprised of a general partner interest and limited partner interests, all of which have been duly issued and are outstanding and fully paid and non-assessable. All of the issued and outstanding general partner interests of Whitestone OP are owned and held of record by the Trust. As of the Closing Date, all of the issued and outstanding limited partner interests of Whitestone OP are owned and held of record as set forth on Schedule 7.1(b) . There are no outstanding securities or agreements exchangeable for or convertible into or carrying any rights to acquire a general partner interest in Whitestone OP. There are no outstanding commitments, options, warrants, calls or other agreements (whether written or oral) binding on Whitestone OP or the Trust which require or could require Whitestone OP or the Trust to sell, grant, transfer, assign, mortgage, pledge or otherwise dispose of any general partner interest in Whitestone OP. No general partner interests of Whitestone OP is subject to any restrictions on transfer or any partner agreements, voting agreements, trust deeds, irrevocable proxies; or any other similar agreements or interests (whether written or oral). Whitestone OP owns, directly or indirectly, 100% (by number of votes or controlling interests) of the outstanding voting interests and of the economic interests in Pima Norte, Whitestone III, Whitestone III GP LLC and Whitestone III LP LTD and all

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of such equity interests have been duly issued and are outstanding and fully paid and non-assessable. There are no outstanding securities or agreements exchangeable for or convertible into or carrying any rights to acquire any equity interests in any Borrower (other than Whitestone OP). There are no outstanding commitments, options, warrants, calls or other agreements (whether written or oral) binding on any Borrower (other than Whitestone OP) which require or could require any Borrower (other than Whitestone OP) to sell, grant, transfer, assign, mortgage, pledge or otherwise dispose of any equity interest in such Borrower. Except as set forth on Schedule 7.1(b) , no equity interests of the Borrower are subject to any restrictions on transfer or any partner agreements, voting agreements, trust deeds, irrevocable proxies or any other similar agreements or interests (whether written or oral). All of the Preferred Equity which exists as of the date of this Agreement, and each of the agreements or other documents entered into and/or setting forth the terms, rights and restrictions applicable to any such Preferred Equity, are listed and described on Schedule 7.1(b) attached hereto. All of the agreements and other documents relating to the Preferred Equity in effect on the Closing Date have been furnished to the Agent.

                    (c) Due Authorization . The execution, delivery and performance of this Agreement and the other Loan Documents to which the Borrower or the Trust is or is to become a party and the transactions contemplated hereby and thereby (i) are within the authority of the Borrower and the Trust, (ii) have been duly authorized by all necessary proceedings on the part of the Borrower or the Trust and any general partner or member thereof, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower or the Trust is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower or the Trust, (iv) do not conflict with any provision of the Organizational Documents of the Borrower or the Trust or any general partner thereof, and (v) do not contravene any provisions of, or constitute Default or Event of Default hereunder or a failure to comply with any term, condition or provision of any other agreement, instrument, judgment, order, decree, permit, license or undertaking binding upon or applicable to the Borrower or the Trust or any of the Borrower’s or the Trust’s properties (except for any such failure to comply under any such other agreement, instrument, judgment, order, decree, permit, license, or undertaking as would not materially and adversely affect the business, operations, assets, condition (financial or otherwise) or properties of the Trust the Borrower) or result in the creation of any mortgage, pledge, security interest, lien, encumbrance or charge upon any of the properties or assets of the Borrower or the Trust.

                    (d) Enforceability . Each of the Loan Documents to which the Borrower or the Trust is a party has been duly executed and delivered and constitutes the legal, valid and binding obligations of the Borrower and the Trust, as the case may be, subject only to applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights.

          §7.2. Governmental Approvals . The execution, delivery and performance by the Borrower and the Trust of this Agreement and the other Loan Documents to which the

29


Borrower or the Trust is or is to become a party and the transactions contemplated hereby and thereby do not require (i) the approval or consent of any governmental agency or authority other than those already obtained and delivered to the Agent, or (ii) filing with any governmental agency or authority, other than filings which will be made with the SEC when and as required by law or deemed appropriate by the Trust.

          §7.3. Title to Properties; Leases .

          The Borrower and the Trust each has good fee title to all of its respective properties, assets and rights of every name and nature purported to be owned by it, including, without limitation, that:

                    (a) Pima Norte holds good and clear record and marketable fee simple title to the Project and all assets or properties relating thereto, subject to no Liens other than Permitted Liens.

                    (b) The Borrower and the Trust will, as of the Closing Date, own all of the assets as reflected in the financial statements of the Borrower and the Trust described in §7.4, or acquired since the date of such financial statements (except property and assets sold or otherwise disposed of in the ordinary course of business since that date).

          §7.4. Financial Statements . The Borrower has furnished to each of the Lenders the audited Consolidated balance sheet of the Trust and its Subsidiaries as of December 31, 2006 (together with the unaudited Consolidated balance sheet of the Trust and its Subsidiaries as of September 30, 2007 and the related Consolidated Statements of Income, changes in shareholders’ equity and cash flows for the fiscal year or other period then ended, as applicable (collectively, the “Initial Financials”). Such Initial Financials have been prepared in accordance with GAAP and, in the case of the December 31, 2006 financial statements, accompanied by an auditors’ report prepared without qualification by the Accountants. The Initial Financials fairly present the financial condition of the Trust and its Subsidiaries as at the close of business on the date thereof and the results of operations for the fiscal year then ended. There are no contingent liabilities of the Trust or any of its Subsidiaries as of such date known to the officers of the Trust or any of its Subsidiaries not disclosed in the Initial Financials.

          §7.5 No Material Changes, Etc . Since the Financial Statement Date, there has occurred no materially adverse change in the business, operations, assets, condition (financial or otherwise) or properties of the Trust, the Borrower or the Project.

          §7.6. Franchises, Patents, Copyrights, Etc . The Borrower, the Trust and each of their respective Subsidiaries possess all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of their respective businesses substantially as now conducted without known conflict with any rights of others, except where the failure to so possess could not reasonably be expected to have a material adverse effect on the business, operations,

30


assets, condition (financial or otherwise) or properties of the Trust or the Borrower. The Borrower possesses all Permits relating to the Project.

          §7.7 Litigation . Except as disclosed on Schedule 7.7 , there are no actions, suits, proceedings or investigations of any kind pending or, to the Borrower’s or the Trust’s knowledge, threatened against the Borrower, the Trust or any of their respective Subsidiaries or the Project before any court, tribunal or administrative agency or board that, if adversely determined, could reasonably be expected to, either individually or in the aggregate, materially adversely affect the business, operations, assets, condition (financial or otherwise) or properties of the Trust or the Borrower, or materially impair the right of the Trust or the Borrower to carry on its businesses substantially as now conducted by it, or result in any substantial liability not fully covered by insurance, or for which adequate reserves are not maintained, as reflected in the applicable consolidated financial statements or SEC Filings of the Borrower and the Trust, or which question the validity of this Agreement or any of the other Loan Documents, or any action taken or to be taken pursuant hereto or thereto.

          §7.8. No Materially Adverse Contracts, Etc . Neither the Borrower, the Trust nor any of their respective Subsidiaries is subject to any charter, corporate, partnership, limited liability company or other legal restriction, or any judgment, decree, order, rule or regulation that has or could reasonably expected in the future to have a materially adverse effect on the business, operations, assets, condition (financial or otherwise) or properties of the Trust, the Borrower or the Project. None of the Borrower, the Trust or any of their respective Subsidiaries is a party to any contract or agreement that has had, or could reasonably be expected to have, any materially adverse effect on the business, operations, assets, condition (financial or otherwise) or properties of the Trust, the Borrower or the Project.

          §7.9. Compliance With Other Instruments, Laws, Etc . Neither the Borrower, the Trust nor any of their respective Subsidiaries is in violation of any provision of its partnership agreement, operating agreement, charter or other Organizational Document, as the case may be, or any agreement or instrument to which it may be subject or by which it or any of its properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could reasonably be expected to result, individually or in the aggregate, in the imposition of substantial penalties or materially and adversely affect the business, operations, assets, condition (financial or otherwise) or properties of the Trust, the Borrower or the Project. Without limitation of the foregoing, the Borrower is in compliance with, and neither the entering into of the Loan Documents or the use of the proceeds of the Loans will violate: any law, rule or regulation relating to anti-terrorism or money laundering, including the Anti-Terrorism Order, the Patriot Act, the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.

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          §7.10. Tax Status . (i) Each of the Borrower, the Trust and their respective Subsidiaries (a) has made or filed all federal, state and local income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (b) has paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings, and (c) has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply, and (ii) there are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction, and the respective officers of the Borrower and the Trust and their respective Subsidiaries know of no basis for any such claim.

          §7.11 No Event of Default . No Default or Event of Default has occurred and is continuing.

          §7.12. Investment Company Acts . None of the Borrower, the Trust or any of their respective Subsidiaries is an “investment company”, or an “affiliated company” or a “principal underwriter” of an “investment company”, as such terms are defined in the Investment Company Act of 1940.

          §7.13. Name; Jurisdiction of Organization; Absence of UCC Financing Statements, Etc . The exact legal name of the Borrower and the Trust, and their respective jurisdictions of organization and tax identification numbers, are set forth on Schedule 7.13 attached hereto. Except for Permitted Liens, there is no financing statement, security agreement, chattel mortgage, real estate mortgage, equipment lease, financing lease, option, encumbrance or other document filed or recorded with any filing records, registry, or other public office, that purports to cover, affect or give notice of any present or possible future lien or encumbrance on, or security interest in, the Project or the member interests of Pima Norte. Except in favor of the Agent, neither the Borrower nor the Trust has pledged or granted any lien on or security interest in or otherwise encumbered or transferred any of their respective interests in any Subsidiary (including in the case of the Trust, its interests in Whitestone OP).

          §7.14. Absence of Liens . Pima Norte is the owner of the Project free from any Lien, except for Permitted Liens.

          §7.15. Certain Transactions . Except as set forth on Schedule 7.15 , none of the officers, partners, directors, or employees of the Trust, the Borrower or any of their Subsidiaries is presently a party to any transaction with the Borrower, the Trust or any of their respective Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, partner, member, director or such employee or, to the knowledge of the Borrower or the Trust, any corporation, partnership, limited liability company, trust or other entity in which any officer, partner, director, or any such employee or natural Person related to such officer, partner, director or employee or other

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Person in which such officer, partner, member, director or employee has a direct or indirect beneficial interest has a substantial interest or is an officer, director, member, trustee or partner.

          §7.16. Employee Benefit Plans; Multiemployer Plans; Guaranteed Pension Plans . Except as disclosed in the SEC Filings or on Schedule 7.16 , none of the Borrower, the Trust nor any ERISA Affiliate maintains or contributes to any Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan.

          §7.17. Regulations U and X . No portion of the Term Loan is to be used for the purpose of purchasing or carrying any “margin security” or “margin stock” as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224.

          §7.18. Environmental Compliance . The Borrower has caused Phase I and other environmental assessments or similar assessments (collectively, the “Environmental Reports”) to be conducted to investigate the past and present environmental condition and usage of the Project, true and complete copies of which have been delivered to the Agent. To the Borrower’s knowledge, except as otherwise expressly disclosed on Schedule 7.18 , the Borrower makes the following representations and warranties:

                    (a) None of the Borrower, its Subsidiaries, the Trust or any operator of the Project or any portion thereof, or any operations thereon is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986 (“SARA”), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter “Environmental Laws”), which violation or alleged violation has, or its remediation would have, by itself or when aggregated with all such other violations or alleged violations, a material adverse effect on the business, operations, assets, condition (financial or otherwise), properties or prospects of the Trust or the Borrower, or constitutes a Disqualifying Environmental Event.

                    (b) None of the Borrower, the Trust or any of their respective Subsidiaries has received written notice from any third party, including, without limitation, any federal, state or local governmental authority, (i) that it has been identified by the United States Environmental Protection Agency (“EPA”) as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986), (ii) that any hazardous waste, as defined by 42 U.S.C. § 9601(5), any hazardous substances as defined by 42 U.S.C. § 9601(14), any pollutant or contaminant as defined by 42 U.S.C. §9601(33) or any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental

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Laws (“Hazardous Substances”) which it has generated, transported or disposed of have been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that the Borrower, the Trust or any of their respective Subsidiaries conduct a remedial investigation, removal or other response action pursuant to any Environmental Law, or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party’s incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances, which event described in any such notice would have a material adverse effect on the business, operations, assets, condition (financial or otherwise), properties or prospects of the Trust or the Borrower, or constitutes a Disqualifying Environmental Event.

                    (c) (i) No portion of the Project has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on any portion of the Project except in accordance with applicable Environmental Laws, (ii) in the course of any activities conducted by the Borrower, the Trust, their respective Subsidiaries or the operators of the Project or any ground or space tenants on the Project, no Hazardous Substances have been generated or are being used on the Project except in accordance with applicable Environmental Laws, (iii) there has been no present or past releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping (a “Release”) or threatened Release of Hazardous Substances on, upon, into or from the Project in violation of applicable Environmental Laws, (iv) there have been no Releases in violation of applicable Environmental Laws upon, from or into any real property in the vicinity of the Project which, through soil or groundwater contamination, may have come to be located on the Project, and (v) to the best of Borrower’s Knowledge, any Hazardous Substances that have been generated on the Project during ownership thereof by the Borrower, the Trust, their respective Subsidiaries or the operations of the Project have been transported off-site only in compliance with all applicable Environmental Laws; any of which events described in clauses (i) through (v) above would have a material adverse effect on the business, operations, assets, condition (financial or otherwise), properties or prospects of the Trust or the Borrower, or constitutes a Disqualifying Environmental Event.

                    (d) None of the Borrower, the Trust or the Project is subject to any applicable Environmental Law requiring the performance of Hazardous Substances site assessments, or the removal or remediation of Hazardous Substances, or the giving of notice to any governmental agency or the recording or delivery to other Persons of an environmental disclosure document or statement, by virtue of the transactions set forth herein and contemplated hereby, or as a condition to the effectiveness of any other transactions contemplated hereby.

          §7.19. Subsidiaries . Schedule 7.19 sets forth, as of the Closing Date, all of the respective Subsidiaries of the Trust and the Borrower.

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          §7.20. Loan Documents . All of the representations and warranties by or on behalf of the Borrower and the Trust and their respective Subsidiaries made in this Agreement and in the other Loan Documents or any document or instrument delivered to the Agent or the Lenders pursuant to or in connection with any of such Loan Documents are true and correct in all material respects and do not include any untrue statement of a material fact or omit to state a material fact required to be stated or necessary to make such representations and warranties not materially misleading.

          §7.21. REIT Status The Trust is qualified as a REIT and has not taken any action that would prevent it from maintaining its qualification as a REIT for its tax years ending December 31, 2005 or December 31, 2006, or from maintaining such qualification at all times during the term of this Agreement.

          §7.22. No Condemnation . (i) No condemnation of any material portion of the Project, (ii) no condemnation or relocation of any roadways abutting the Project which are material to the Project, and (iii) no proceeding to deny access to the Project from any point or planned point of access to the Project which is material to the Project, has commenced or, to the best of Borrower’s knowledge, is contemplated by any Governmental Authority.

          §7.23. Utilities . The Project will have adequate water, gas and electrical supply, storm and sanitary sewerage facilities, other required public utilities, fire and police protection, and means of access between the Project and public highways; none of the foregoing will be foreseeably delayed or impeded by virtue of any requirements under any applicable Laws.

          §7.24. Brokerage Fees . No brokerage fees or commissions are payable by or to any person in connection with this Agreement or the Loan to be disbursed hereunder.

          §7.25. Independent Parcel . The Project is taxed separately without regard to any other property and for all purposes the Project may be mortgaged, conveyed and otherwise dealt with as an independent parcel.

          §7.26. Major Lease . The Borrower and its agents have not entered into any Major Lease, subleases under a Major Lease or other arrangements for occupancy of more than 10,000 square feet of net leasable space within the Project other than as listed on Schedule 7.26 . True, correct and complete copies of all Major Leases, as amended, have been delivered to Lender and, at Lender’s request, Borrower will deliver true, correct and complete copies of any or all other Leases, as amended, to Lender. All Major Leases are in full force and effect. Borrower is not in default under any Major Lease and Borrower has disclosed to Lender in writing any material default by the tenant under any Major Lease.

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          §7.27. No Encroachment . No building or other improvement related to the Project encroached in any material respect upon any property line, building line, setback line, side yard line or any recorded or visible easement (or other easement of which the Borrower is aware or has reason to believe may exist) with respect to the Project unless permitted by easement or other agreement for purposes of granting an easement.

          §7.28. Federal Tax Identification Numbers . Each Borrower has obtained a Federal Tax Identification Number as set forth in Schedule 7.19 .

          §8. AFFIRMATIVE COVENANTS OF THE BORROWER AND THE TRUST . The Borrower and the Trust, on their own behalf and on behalf of their respective Subsidiaries, jointly and severally covenant and agree that:

          §8.1. Punctual Payment . The Borrower will duly and punctually pay or cause to be paid the principal and interest on the Term Loan and all interest, fees, charges and other amounts and Obligations provided for in this Agreement and the other Loan Documents, all in accordance with the terms of this Agreement, the Notes and the other Loan Documents.

          §8.2. Maintenance of Office; Jurisdiction of Organization, Etc. . Each of the Borrower and the Trust will maintain its chief executive office in Houston, Texas, or at such other place in the United States of America as each of them shall designate by written notice to the Agent to be delivered at least thirty (30) days prior to any change of chief executive office, where, subject to §21, notices, presentations and demands to or upon the Borrower and the Trust in respect of the Loan Documents may be given or made. Neither the Trust nor the Borrower will change its jurisdiction of organization, name or corporate structure without giving the Agent at least thirty (30) days prior written notice of such change, and, in the case of a change in corporate structure, without the prior written consent of the Agent, which consent may not be unreasonably withheld.

          §8.3. Records and Accounts . Each of the Borrower and the Trust will (a) keep, and cause each of its Subsidiaries to keep, true and accurate records and books of account in which full, true and correct entries will be made in accordance with GAAP and (b) maintain adequate accounts and reserves for all taxes (including income taxes), contingencies, depreciation and amortization of its properties and the properties of its Subsidiaries.

          §8.4. Financial Statements, Certificates and Information . The Borrower and the Trust will deliver to the Agent (with copies to the Agent for each Lender):

                    (a) as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year of the Trust, the audited consolidated balance sheet of the Trust and its Subsidiaries at the end of such year, and the related audited consolidated statements of income, changes in shareholder’s equity (or the equivalent thereof) and cash flows for the year then ended, in each case, setting forth in comparative

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form the figures as of the end of and for the previous fiscal year and all such statements to be in reasonable detail, prepared in accordance with GAAP, and, in each case, accompanied by an auditor’s report prepared without qualification by the Accountants; together with, at the Agent’s request, a written statement from such Accountants to the effect that they have read a copy of this Agreement, and that, in making the examination necessary to said certification, they have obtained no knowledge of any Default or Event of Default under §10 or otherwise under the provisions of this Agreement relating to the financial condition of the Trust or any of its Subsidiaries, or of any facts or circumstances that would cause the Trust not to continue to qualify as a REIT for federal income tax purposes, or, if such Accountants shall have obtained knowledge of any then existing Default, Event of Default or such facts or circumstances, they shall make disclosure thereof in such statement;

                    (b) as soon as practicable, but in any event not later than forty-five (45) days after the end of each of its March 31, June 30 and September 30 fiscal quarters, copies of the unaudited consolidated balance sheet of the Trust and its Subsidiaries, as at the end of such quarter, and the related unaudited consolidated statements of income, changes in shareholders’ equity and cash flows for the portion of the Trust’s fiscal year then elapsed, all in reasonable detail and prepared in accordance with GAAP (which may be provided by inclusion in the Form 10-Q of the Trust filed with the SEC for such period provided pursuant to clause (i) below), together with a certification by the principal financial or accounting officer of the Borrower and the Trust that the information contained in such financial statements fairly presents the financial position of the Trust and its Subsidiaries on the date thereof (subject to year-end adjustments none of which shall be materially adverse and the absence of footnotes);

                    (c) as soon as practicable, but in any event not later than ninety (90) days after the end of each of its fiscal years, statements of Net Operating Income and outstanding Indebtedness as at the end of such fiscal year and for the fiscal year then ended in respect of the Project, each prepared in accordance with GAAP consistent with the definitions of Net Operating Income and outstanding Indebtedness used in this Agreement and a rent roll and operating statement in respect of the Project, in each case certified by the chief financial or accounting officer of the Borrower as true and correct;

                    (d) as soon as practicable, but in any event not later than forty-five (45) days after the end of each of the fiscal quarters of the Borrower, (i) copies of the unaudited statements of Net Operating Income and outstanding Indebtedness as at the end of such quarter and for the portion of the fiscal year then elapsed in respect of the Project, prepared in accordance with GAAP consistent with the definitions of Net Operating Income and outstanding Indebtedness used in this Agreement, and a rent roll and operating statement in respect of the Project, certified by the chief financial or accounting officer of the Borrower to present fairly the Net Operating Income and outstanding Indebtedness and rent roll in respect of the Project, (ii) an occupancy analysis in respect of the Project certified by the chief financial officer of the Borrower to be true and complete, (iii) a schedule of revenues and expenses for the Project, and (iv) an updated

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build-out budget for the Project and an update on the status of the intended tenant improvements on the Property and conformity of expenditures to budget for such tenant improvements;

                    (e) simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, a statement in the form of Exhibit C hereto signed by the chief financial or accounting officer of the Borrower, and setting forth in reasonable detail computations evidencing compliance with the covenants contained in §10;

                    (f) promptly as they become available, a copy of each report submitted to the Borrower, the Trust or any of their respective subsidiaries by the Accountants in connection with each annual audit of the books of the Borrower, the Trust or such Subsidiary by such Accountants or in connection with any interim audit thereof pertaining to any phase of the business of the Borrower, the Trust or any such Subsidiary;

                    (g) contemporaneously with (or promptly after) the filing or mailing thereof, copies of all material of a financial nature sent to the holders of any Indebtedness of the Trust or any of its Subsidiaries (other than the Term Loan) for borrowed money, to the extent that the information or disclosure contained in such material refers to or could reasonably be expected to have a material adverse effect on the business, operations, assets, condition (financial or otherwise) or properties of the Trust, the Borrower or any other member of the Whitestone Group;

                    (h) contemporaneously with the filing or mailing thereof, copies of all material of a financial nature filed with the SEC or sent to the equityholders of the Trust;

                    (i) as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year of the Trust, copies of the Form 10-K statement filed by the Trust with the SEC for such fiscal year, and as soon as practicable, but in any event not later than fifty (50) days after the end of each fiscal quarter of the Trust copies of the Form 10-Q statement filed by the Trust with the SEC for such fiscal quarter;

                    (j) in the case of the Borrower and the Trust, as soon as practicable, but in any event not later than thirty (30) days prior to the end of each of their respective fiscal years, a business plan for the next fiscal year (including pro forma projections for such period);

                    (k) together with the financial statements delivered pursuant to §8.4(a), a certification by the chief financial or accounting officer of the Borrower of the state and federal taxable income of the Trust and its Subsidiaries as of the end of the applicable fiscal year;

                    (l) in the event that the definition of “funds from operations” is revised by the Board of Governors of the National Association of Real Estate Investment

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Trusts, a report, certified by the chief financial or accounting officer of the Borrower, of the “funds from operations” of the Borrower based on the definition as in effect on the date of this Agreement and based on the definition as so revised from time to time, which such report shall be delivered to the Agent (with copies to the Agent for each Lender) with the financial statements required to be delivered pursuant to §8.4(a) or §8.4(b) above, as applicable;

                    (m) simultaneously with the delivery of the financial statements referred to in clauses (a) and (b) above, updated title searches with respect to the Project and evidence of the Agent’s continued first priority lien on the Property, or such other evidence of its priority lien as the Agent may require; and

                    (m) from time to time such other financial data and other information about the Borrower, the Trust, their respective Subsidiaries and the Project as the Agent or any Lender (through the Agent) may reasonably request, including, without limitation, evidence of adequate funds held by the Borrower to complete all build-out contemplated in connection with the Project.

          Notwithstanding the foregoing, the Borrower shall be deemed to have complied with this covenant (other than with respect to items relating to the Project or the Property, or otherwise requested pursuant to clause (m) above) so long as Whitestone OP delivers the financial statements required to be delivered under §8.4 of the Revolving Credit Agreement in accordance with the terms thereof, so long as such Revolving Credit Agreement remains in effect.

          §8.5. Notices .

                    (a) Defaults . The Borrower and the Trust will, promptly after obtaining knowledge of the same, notify the Agent in writing (with copies to the Agent for each Lender) of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of (x) a claimed Default (whether or not constituting an Event of Default) under this Agreement or (y) a claimed failure by the Borrower, the Trust or any of their respective Subsidiaries, as applicable, to comply with any term, condition or provision of or under any note, evidence of Indebtedness, indenture or other obligation (i) in excess of $5,000,000, individually or in the aggregate, in respect of Indebtedness that is Without Recourse and (ii) in excess of $1,000,000, individually or in the aggregate, in respect of Indebtedness that is Recourse, to which or with respect to which any of them is a party or obligor, whether as principal obligor, guarantor or surety, and such failure to comply would permit the holder of such note or obligation or other evidence of Indebtedness to accelerate the maturity thereof, the Borrower shall forthwith give written notice thereof to the Agent and each of the Lenders, describing the notice or action and the nature of the claimed failure to comply.

                    (b) Environmental Events . The Borrower and the Trust will promptly give notice in writing to the Agent (with copies to the Agent for each Lender) (i) upon

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Borrower’s or the Trust’s obtaining knowledge of any material violation (as determined by the Borrower or the Trust in the exercise of its reasonable discretion) of any Environmental Law regarding the Project or Borrower’s or the Trust’s operations, (ii) upon Borrower’s or the Trust’s obtaining knowledge of any known Release of any Hazardous Substance at, from, or into the Project which it reports in writing or is reportable by it in writing to any governmental authority and which is material in amount or nature or which could materially affect the value of the Project, (iii) upon Borrower’s or the Trust’s receipt of any notice of material violation of any Environmental Laws or of any material Release of Hazardous Substances in violation of any Environmental Laws or any matter that may be a Disqualifying Environmental Event with respect to the Project, including a notice or claim of liability or potential responsibility from any third party (including without limitation any federal, state or local governmental officials) and including notice of any formal inquiry, proceeding, demand, investigation or other action with regard to (A) Borrower’s or the Trust’s or any other Person’s operation of the Project, (B) contamination on, from or into the Project, or (C) investigation or remediation of off-site locations at which Borrower or the Trust or any of its predecessors are alleged to have directly or indirectly disposed of Hazardous Substances, or (iv) upon Borrower’s or the Trust’s obtaining knowledge that any expense or loss has been incurred by such governmental authority in connection with the assessment, containment, removal or remediation of any Hazardous Substances with respect to which Borrower or the Trust may be liable or for which a lien may be imposed on the Project.

                    (c) Notification of Claims against the Project . The Borrower will, and will cause each Subsidiary to, promptly upon becoming aware thereof, notify the Agent in writing (with copies to the Agent for each Lender) of any setoff, claims, withholdings or other defenses to which the Project is subject, which (i) could reasonably be expected to have a material adverse effect on (x) the business, operations, assets, condition (financial or otherwise), properties or prospects of the Trust or the Borrower, or (y) the value of the Project, or (ii) with respect to the Project, constitute a Disqualifying Environmental Event, a Disqualifying Structural Event or a Lien.

                    (d) Notice of Litigation and Judgments . The Borrower and the Trust will give notice to the Agent in writing (with copies to the Agent for each Lender) within three (3) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings an adverse determination in which could materially adversely affect the Borrower, the Trust, or the Project, or to which the Borrower, the Trust or any of their respective Subsidiaries is or is to become a party involving a claim against the Borrower, the Trust or any of their respective Subsidiaries that could reasonably be expected to have a materially adverse effect on the respective business, operations, assets, condition (financial or otherwise) or properties of the Trust, the Borrower or on the value or operation of the Project and stating the nature and status of such litigation or proceedings. The Borrower and the Trust will give notice to the Agent and each of the Lenders, in writing, in form and detail reasonably satisfactory to the Agent, within three (3) days of any judgment not covered by insurance, final or

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otherwise, against the Borrower, the Trust or any of such Subsidiaries in an amount in excess of $1,000,000.

          §8.6. Existence of Borrower; Maintenance of the Project . The Borrower and the Trust will do or cause to be done all things necessary to, and shall, preserve and keep in full force and effect its respective existence in its jurisdiction of organization and will do or cause to be done all things necessary to preserve and keep in full force all of its respective rights and franchises and those of its respective Subsidiaries which may be necessary to properly and advantageously conduct the businesses conducted by it. The Borrower (a) will cause all necessary repairs, renewals, replacements, betterments and improvements to be made to the Project, all as in the judgment of the Borrower may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and in any event, will keep all of the Project in a condition consistent with the Real Estate Assets currently owned or controlled by the Borrower or its Subsidiaries, (b) will cause all of its other properties and those of its Subsidiaries used or useful in the conduct of its business or the business of its Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, (c) will not permit the Trust to directly own or lease the Project, and (d) will, and will cause each of its Subsidiaries to continue to engage primarily in the businesses now conducted by it.

          §8.7. Existence of the Trust; Maintenance of REIT Status of the Trust; Maintenance of Properties; Etc .

          (a) The Trust will do or cause to be done all things necessary to preserve and keep in full force and effect the Trust’s existence as a Maryland real estate investment trust. The Trust will at all times (i) maintain its status as a REIT and not take any action which could lead to its disqualification as a REIT and (ii) continue to operate as a self-directed and self-administered REIT and make public reports and filings as though it were listed on a nationally-recognized stock exchange. The Trust will not engage in any business other than the business of acting as a REIT and serving as the general partner and limited partner of the Borrower and matters directly relating thereto, and shall (x) conduct all or substantially all of its business operations through the Borrower or through subsidiary partnerships or other entities in which the Borrower owns 100% of the legal and economic interests and (y) own no real property or material personal property other than through its ownership interests in the Borrower. The Trust will (a) cause all of its properties and those of its Subsidiaries used or useful in the conduct of its business or the business of its Subsidiaries to be maintained and kept in good condition, repair and working order, and supplied with all necessary equipment, (b) cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Trust may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times and (c) cause each of its Subsidiaries to continue to engage primarily in the businesses now conducted by it.

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          (b) No Borrower will enter into any transactions after the Closing Date that, if in effect on the Closing Date, would have required disclosure on Schedule 7.15 without the consent of the Agent.

          (c) Neither of Whitestone III LP LTD and Whitestone III GP LLC will engage in any business other than the business of serving as the general partner or limited partner, as the case may be, of Whitestone III and matters directly relating thereto and shall not own any real property or material personal property other than through its ownership interests in Whitestone III.

          §8.8. Insurance . The Borrower and the Trust will maintain with respect to the Project and their other properties, and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to such properties and its business against such casualties and contingencies as shall be in accordance with the general practices of businesses engaged in similar activities in similar geographic areas and in amounts, containing such terms, in such forms and for such periods as may be reasonable and prudent and as otherwise required pursuant to Section 1.4 of the Deed of Trust.

          §8.9. Taxes . The Borrower will, and will cause the Trust and each of their respective Subsidiaries to, pay or cause to be paid real estate taxes, other taxes, assessments and other governmental charges against the Project before the same become delinquent and will duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon its sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon the Project; provided that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if the Borrower or the Trust shall have set aside on its books adequate reserves with respect thereto; and provided , further , that the Borrower or the Trust will pay all such taxes, assessments, charges, levies or claims forthwith prior to the attachment of any lien as security therefor. Promptly upon request by the Agent if required for bank regulatory compliance purposes or similar bank purposes, the Borrower will provide evidence of the payment of real estate taxes, other taxes, assessments and other governmental charges against the Project in the form of receipted tax bills or other form reasonably acceptable to the Agent, or evidence of the existence of applicable contests as contemplated herein.

          §8.10. Inspection of Properties and Books . (a) The Borrower and the Trust will permit the Agent or any of its designated representatives upon reasonable notice (which notice may be given orally or in writing and provided that no notice shall be required if a Default or Event of Default has occurred and is continuing), to visit and inspect any of the properties of the Borrower, the Trust or any of their respective Subsidiaries to examine the books of account of the Borrower, the Trust and their respective Subsidiaries and Whitestone Management (and to make copies thereof and extracts therefrom) and to

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discuss the affairs, finances and accounts of the Borrower, the Trust and their respective Subsidiaries and the Project with, and to be advised as to the same by, its officers, all at such reasonable times and intervals as the Agent may reasonably request.

          (b) The Borrower hereby agrees that each of the Lenders and the Agent (and each of their respective, and their respective affiliates’, employees, officers, directors, agents and advisors (collectively, “Representatives”) is, and has been from the commencement of discussions with respect to the facility established by the Agreement (the “Facility”), permitted to disclose to any and all Persons, without limitation of any kind, the structure and tax aspects (as such terms are used in Code sections 6011 and 6111) of the Facility, and all materials of any kind (including opinions or other tax analyses) that are or have been provided to such Lender or the Agent related to such structure and tax aspects. In this regard, the Lenders and the Agent intend that this transaction will not be a “confidential transaction” under Code sections 6011, 6111 or 6112, and the regulations promulgated thereunder. Neither the Borrower, the Trust, nor any Subsidiary of any of the foregoing intends to treat the Term Loan or the transactions contemplated by this Agreement and the other Loan Documents as being a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4). If the Borrower or the Trust determines to take any action inconsistent with such intention, the Borrower will promptly notify the Agent thereof. If the Borrower so notifies the Agent, the Borrower acknowledges that the Agent may treat the Term Loan as part of a transaction that is subject to Treasury Regulation Section 301.6112-1, and the Agent will maintain the lists and other records, including the identity of the applicable party to the Term Loan as required by such Treasury Regulation.

          §8.11. Compliance with Laws, Contracts, Licenses, and Permits . The Borrower and the Trust will comply with, and will cause each of their respective Subsidiaries to comply with (a) all applicable laws and regulations now or hereafter in effect wherever its business is conducted that are material in any respect to the operation of their respective businesses in the ordinary course and consistent with past practices, including, without limitation, all such Environmental Laws and all such applicable federal and state securities laws, (b) the provisions of its partnership agreement, trust agreement, operating agreement or corporate charter and other Organizational Documents, as applicable, (c) all material agreements and instruments to which it is a party or by which it or any of its properties may be bound (including the Project and the Leases) and (d) all applicable decrees, orders, and judgments. If at any time while the Term Loan or Note or other Obligations is outstanding, any Permit shall become necessary or required in order that the Borrower may fulfill any of its obligations hereunder, the Borrower and the Trust and their respective Subsidiaries will immediately take or cause to be taken all reasonable steps within the power of the Borrower or the Trust, as applicable, to obtain such Permit and furnish the Agent with evidence thereof. Without limitation of the foregoing, the Borrower will continue to comply with all laws, rules and regulations relating to anti-terrorism or money laundering, including the Anti-Terrorism Order, the Patriot Act, the Trading with the Enemy Act, as amended, and the foreign assets control regulations of the

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United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) and the enabling legislation or executive orders relating thereto.

          §8.12. Use of Proceeds . Subject at all times to the other provisions of this Agreement, including without limitation §7.17, the Borrower will use the proceeds of the Term Loan solely to repay certain of its obligations under the Revolving Credit Agreement.

          §8.13. Solvency of Borrower and Trust . The Borrower and the Trust shall remain solvent at all times.

          §8.14. Further Assurances . The Borrower and the Trust will cooperate with the Agent and the Lenders and execute such further instruments and documents as the Lenders or the Agent shall reasonably request to carry out to their satisfaction the transactions contemplated by this Agreement and the other Loan Documents.

          §8.15. Reserved .

          §8.16. Environmental Indemnification . The Borrower and the Trust each covenants and agrees that it will indemnify and hold the Agent and each Lender, and each of their respective Affiliates, harmless from and against any and all claims, expense, damage, loss or liability incurred by the Agent or any Lender (including all reasonable costs of legal representation incurred by the Agent or any Lender, but excluding, as applicable, for the Agent or a Lender any claim, expense, damage, loss or liability as a result of the gross negligence or willful misconduct of the Agent or such Lender or any of their respective Affiliates) relating to (a) any Release or threatened Release of Hazardous Substances on the Project; (b) any violation of any Environmental Laws with respect to conditions at the Project or the operations conducted thereon; (c) the investigation or remediation of off-site locations at which the Borrower, the Trust or any of their respective Subsidiaries or their predecessors are alleged to have directly or indirectly disposed of Hazardous Substances; or (d) any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances relating to the Project (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property). It is expressly acknowledged by the Borrower that, notwithstanding the introductory paragraph of this §8, this covenant of indemnification shall survive the repayment of the amounts owing under the Notes and this Agreement and the termination of this Agreement and the obligations of the Lenders hereunder and shall inure to the benefit of the Agent and the Lenders and their respective Affiliates, their respective successors, and their respective assigns under the Loan Documents permitted under this Agreement. The environmental indemnity provided herein shall be in addition to that provided in the Environmental Indemnity Agreement.

          §8.17. Response Actions . The Borrower covenants and agrees that if any Release or disposal of Hazardous Substances shall occur or shall have occurred on the Project, in violation of applicable Environmental Laws, the Borrower will cause the prompt

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containment and removal of such Hazardous Substances and remediation of the Project as necessary to comply with all Environmental Laws and to preserve the value of the Project.

          §8.18. Environmental Assessments . Without limitation of any other provision herein or in any other Loan Document, if the Agent reasonably believes, after discussion with the Borrower and review of any environmental reports provided by the Borrower, that a Disqualifying Environmental Event has occurred with respect to the Property, whether or not a Default or an Event of Default shall have occurred, the Agent may, from time to time, for the purpose of assessing and determining whether a Disqualifying Environmental Event has in fact occurred, cause the Borrower to obtain one or more environmental assessments or audits of the Property prepared by a hydrogeologist, an independent engineer or other qualified consultant or expert approved by the Agent to evaluate or confirm (i) whether any Hazardous Substances are present in the soil or water at the Property and (ii) whether the use and operation of the Property complies with all Environmental Laws. Environmental assessments may include without limitation detailed visual inspections of the Property including, without limitation, any and all storage areas, storage tanks, drains, dry wells and leaching areas, and, if and to the extent reasonable, appropriate and required pursuant to applicable Environmental Laws, the taking of soil samples, surface water samples and ground water samples, as well as such other investigations or analyses as the Agent deems appropriate. All such environmental assessments shall be at the sole cost and expense of the Borrower.

          §8.19. Employee Benefit Plans .

                    (a) Notice . The Borrower and the Trust will notify the Agent (with copies to the Agent for each Lender) at least thirty (30) days prior to the establishment of any Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan by any of them or any of their respective ERISA Affiliates other than those disclosed on Schedule 7.16 or disclosed in the SEC Filings, and neither the Borrower nor the Trust will establish any Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan which could reasonably be expected to have a material adverse effect on the Borrower or the Trust.

                    (b) In General . Each Employee Benefit Plan maintained by the Borrower, the Trust or any of their respective ERISA Affiliates will be operated in compliance with the provisions of ERISA and, to the extent applicable, the Code, including but not limited to the provisions thereunder respecting prohibited transactions.

                    (c) Terminability of Welfare Plans . With respect to each Employee Benefit Plan maintained by the Borrower, the Trust or any of their respective ERISA Affiliates which is an employee welfare benefit plan within the meaning of §3(l) or §3(2)(B) of ERISA, the Borrower, the Trust, or any of their respective ERISA Affiliates, as the case may be, shall have the right to terminate each such plan at any time (or at any time subsequent to the expiration of any applicable bargaining agreement) without liability other than liability to pay claims incurred prior to the date of termination.

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                    (d) Unfunded or Underfunded Liabilities . The Borrower and the Trust will not at any time have accruing or accrued unfunded or underfunded liabilities with respect to any Employee Benefit Plan, Guaranteed Pension Plan or Multiemployer Plan, or permit any condition to exist under any Multiemployer Plan that would create a withdrawal liability.

          §8.20. No Amendments to Certain Documents . The Borrower and the Trust will not at any time cause or permit its certificate of limited partnership, agreement of limited partnership (including without limitation the Agreement of Limited Partnership of the Borrower), articles of incorporation, by-laws, operating agreement, trust agreement or other Organizational Documents, as the case may be, to be modified, amended or supplemented in any respect whatever, without (in each case) the express prior written consent or approval of the Agent, if such changes could affect the Trust’s REIT status or otherwise adversely affect the rights of the Agent and the Lenders hereunder or under any other Loan Document. Any such modification, amendment or supplement shall, in any event, be subject to the other terms and provisions of this Agreement and the other Loan Documents.

          §8.21. Personal Property . All of the Borrower’s personal property, fixtures, attachments and equipment delivered upon, attached to or used in connection with the operation of the Project shall always be located at the Project and shall be kept free and clear of all Liens, encumbrances and security interests, except those in favor of the Agent and except for Permitted Liens.

          §8.22. Leases . Borrower shall provide the Agent and the Lenders with a copy of the fully executed original of all Leases promptly following their execution.

          §9. CERTAIN NEGATIVE COVENANTS OF THE BORROWER AND THE TRUST . The Borrower and the Trust, on their own behalf and on behalf of their respective Subsidiaries, jointly and severally covenant and agree that neither the Borrower nor the Trust will:

          §9.1. Restrictions on Indebtedness . Create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness other than:

                    (a) Indebtedness to the Agent and the Lenders (and their respective Affiliates) arising under any of the Loan Documents;

                    (b) Indebtedness arising under the Revolving Credit Agreement;

                    (c) current liabilities of the Borrower incurred in the ordinary course of business other than through (i) the borrowing of money, or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services;

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                    (d) Indebtedness of Whitestone OP (other than relating to the Project) in an aggregate amount not in excess of $500,000 in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of §8.9 (but including, in any event, any Indebtedness secured by an M&M Lien);

                    (e) Indebtedness of Whitestone OP (other than relating to the Project) in an aggregate amount not in excess of $1,000,000 in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which, at the time, a good faith appeal or proceeding for review is being prosecuted, and in respect of which a stay of execution shall have been obtained pending such appeal or review;

                    (f) endorsements for collection, deposit or negotiation incurred in the ordinary course of business;

                    (g) Secured term loan Indebtedness of Whitestone OP and its Subsidiaries (but not Pima Norte) disclosed on Schedule 9.1(f) or incurred after the Closing Date, provided that: (i) such Indebtedness is Without Recourse to the Borrower or the Trust and is Without Recourse to any of the respective assets of any of the Borrower or the Trust other than to the specific Real Estate Asset or Assets acquired, refinanced or rehabilitated with the proceeds of such Indebtedness, and (ii) at the time any such Indebtedness is incurred and after giving effect thereto, there exists no Default or Event of Default hereunder;

                    (h) contingent liabilities of Whitestone OP disclosed in the financial statements referred to in §7.4 or on Schedule 9.1(g) hereto, and such other contingent liabilities of the Borrower having a combined aggregate potential liability of not more than $1,000,000 at any time;

                    (i) Indebtedness of Whitestone OP for the purchase price of capital assets (other than Real Estate Assets but including Indebtedness in respect of Capitalized Leases) incurred in the ordinary course of business, provided that the aggregate principal amount of Indebtedness permitted by this clause (i) shall not exceed $500,000 at any time outstanding; and

                    (j) Recourse Indebtedness of Whitestone OP incurred after the Closing Date (other than Indebtedness relating to or affecting the Project) in connection with the purchase of or the construction of or renovation of improvements on any Real Estate Asset, provided that (i) the aggregate principal amount of Indebtedness permitted by this clause (i) shall not exceed $40,000,000 at any time outstanding, and (ii) at the time any such Indebtedness is incurred and after giving effect thereto, there exists no Default or Event of Default hereunder.

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          Notwithstanding the foregoing, in no event shall the Borrower, the Trust or any of their respective Subsidiaries incur or have outstanding (i) unhedged variable rate Indebtedness in excess of fifty percent (50%) of Consolidated Total Indebtedness, or (ii) any other revolving credit facility, whether secured or unsecured, or any unsecured Indebtedness for borrowed money.

          It is understood and agreed that the provisions of this §9.1 shall not apply to Indebtedness of any Partially-Owned Entity that is Without Recourse to the Borrower or the Trust, or any of their respective assets. The terms and provisions of this §9.1 are in addition to, and not in limitation of, the covenants set forth in §10.

          §9.2. Restrictions on Liens, Etc . (a) Create or incur or suffer to be created or incurred or to exist any lien, mortgage, pledge, attachment, security interest or other rights of third parties of any kind upon the Project or on the member interests of Pima Norte, whether now owned or hereafter acquired, or upon the income or profits therefrom; (b) acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement in connection with the operation of the Project; (c) suffer to exist with respect to the Project, any taxes, assessments, governmental charges and claims for labor, materials and supplies for which payment thereof is not being contested or for which payment notwithstanding a contest is required to be made in accordance with the provisions of §8.9 and has not been timely made; or (d) sell, assign, pledge or otherwise transfer for security any accounts, contract rights, general intangibles, chattel paper or instruments, with or without recourse, relating to the Project (the foregoing types of liens and encumbrances described in clauses (a) through (d) being sometimes referred to herein collectively as “Liens”), provided that the Borrower may create or incur or suffer to be created or incurred or to exist the following (“Permitted Liens”):

                    (i) Liens securing taxes, assessments, governmental charges or levies which are not yet due and payable or which are not yet required to be paid under §8.9;

                    (ii) Liens arising out of deposits or pledges made in connection with, or to secure payment of, worker’s compensation, unemployment insurance, old age pensions or other social security obligations; and deposits with utility companies and other similar deposits made in the ordinary course of business;

                    (iii) Liens (other than affecting the Project or the equity interests of any Borrower or the Trust) in respect of judgments or award, the Indebtedness with respect to which is not prohibited by §9.1(e);

                    (iv) Encumbrances on properties (other than the Project) consisting of easements, rights of way, covenants, zoning and other land-use restrictions, building restrictions, restrictions on the use of real property and defects and irregularities in the title thereto; landlord’s or lessor’s Liens under Leases to which the Borrower is a party or

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bound; purchase options granted at a price not less than the market value of such property; and other minor Liens or encumbrances on properties, none of which interferes materially with the use of the property affected in the ordinary conduct of the business of the Borrower, and which matters (x) do not individually or in the aggregate have a material adverse effect on the business of the Borrower or the Trust and (y) do not make title to such property unmarketable by the conveyancing standards in effect where such property is located;

                    (v) any Leases entered into in the ordinary course of business;

                    (vii) Liens affecting the Project (but not the equity interests of the Borrower or the Trust) in respect of judgments or awards not in excess of $50,000 that are under appeal or have been in force for less than the applicable period for taking an appeal, so long as execution is not levied thereunder or in respect of which, at the time, a good faith appeal or proceeding for review is being diligently prosecuted, and in respect of which a stay of execution shall have been obtained pending such appeal or review; provided that the Borrower shall have obtained a bond or insurance or made other arrangements with respect thereto, in each case reasonably satisfactory to the Agent;

                    (viii) Liens securing Indebtedness for the purchase price of capital assets (other than Real Estate Assets but including Indebtedness in respect of Capitalized Leases for equipment and other equipment leases) to the extent not otherwise prohibited by §9.1;

                    (ix) M&M Liens securing an aggregate amount not in excess of $500,000 at any time, so long as each such M&M Lien is bonded within thirty (30) days of attachment; and

                    (x) other Liens (other than Liens affecting the Project or the equity interests of the Borrower or the Trust) in connection with any Indebtedness permitted under §9.1.

                    Nothing contained in this §9.2 shall restrict or limit the Borrower or any of their respective Wholly-owned Subsidiaries from creating a Lien in connection with any Real Estate Asset which is not an Eligible Unencumbered Property (as defined in the Revolving Credit Agreement) and otherwise in compliance with the other terms of this Agreement, provided that in no event will the Borrower, the Trust or any of their respective Subsidiaries create, incur or suffer to be created or incurred or to exist any Lien, other than in favor of the Agent, on the equity interests of the Borrower or the Trust. Without limitation of the foregoing, the Trust shall not create or incur or suffer to be created or incurred any Lien on any of its directly-owned properties or assets, including, in any event, its general partner interests and limited partner interests in the Borrower.

          §9.3. Restrictions on Investments . Make or permit to exist or to remain outstanding any Investment except, with respect to the Borrower and its Subsidiaries only, Investments in:

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                    (a) (i) marketable direct or guaranteed obligations of the United States of America that mature within one (1) year from the date of purchase (including investments in securities guaranteed by the United States of America such as securities in so-called “overseas private investment corporations”) and (ii) demand deposits, certificates of deposit, bankers acceptances and time deposits of United States banks having total assets in excess of $1,000,000,000;

                    (b) (i) preferred stock or public bonds issued by companies listed on a nationally recognized exchange and having a rating of at least AAA, and (ii) shares in public REITs so long as such REIT is listed on a nationally recognized exchange and has a rating of at least AAA, provided that the aggregate investments in all such items described in clauses (i) and (ii) above will not at any time exceed five percent (5%) of the Fair Market Value of Real Estate Assets, and provided , further , that no such investment shall be outstanding for longer than ninety (90) days;

                    (c) securities commonly known as “commercial paper” issued by a corporation organized and existing under the laws of the United States of America or any state thereof that at the time of purchase have been rated and the ratings for which are not less than “P 1” if rated by Moody’s, and not less than “A 1” if rated by S&P;

                    (d) Investments existing on the Closing Date and listed in the financial statements referred to in §7.4;

                    (e) other Investments hereafter in connection with the acquisition and development of Permitted Properties by the Borrower or any Wholly-owned Subsidiary of the Borrower, provided that the aggregate amounts actually invested by Borrower (or if not invested directly by the Borrower, actually invested by an Affiliate of the Borrower for which the Borrower has any funding obligation) and such Wholly-owned Subsidiary at any time in Real Estate Assets under Development (including all development costs) will not exceed twenty percent (20%) of the Fair Market Value of Real Estate Assets at the time of any such Investment, and provided , further , that Investments in unimproved Land may at no time exceed fifteen percent (15%) of the Fair Market Value of Real Estate Assets;

                    (f) (i) any Investments now or hereafter made in any Wholly-owned Subsidiary; and (ii) Investments now or hereafter made in any Partially-Owned Entity (or other Person for which the Borrower has any funding obligation) so long as such Investment is made in connection with Permitted Properties and provided that the aggregate amounts actually invested by Borrower (or if not invested directly by Borrower, actually invested by an Affiliate of the Borrower for which the Borrower has any funding obligation) and such Wholly-owned Subsidiary at any time in any Partially-Owned Entity (or other such Person) will not exceed thirty percent (30%) of the Fair Market Value of Real Estate Assets at the time of any such Investment; and

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                    (g) Investments in respect of (1) equipment, inventory and other tangible personal property acquired in the ordinary course of business, (2) current trade and customer accounts receivable for services rendered in the ordinary course of business and payable in accordance with customary trade terms, (3) advances in the ordinary course of business to employees for travel expenses, drawing accounts and similar expenditures, (4) prepaid expenses made in the ordinary course of business.

                    (h) Investments by the Borrower in Mortgage Notes, provided that the aggregate investment in such Mortgage Notes will not exceed twenty percent (20%) of the Fair Market Value of Real Estate Assets at the time of any such Investment.

          In no event shall the aggregate of Investments (1) made pursuant to subclauses (a), (b) or (c) above (or otherwise in marketable securities to the extent permitted under this §9.3) exceed ten percent (10%) of the Fair Market Value of Real Estate Assets, and (2) made pursuant to subclauses (a), (b), (c), (d) to the extent relating to any of the types of Investments otherwise described in this clause (2), (e) to the extent relating to Real Estate Assets Under Development, (f)(ii), or (h) exceed thirty percent (30%) of the Fair Market Value of Real Estate Assets at any time.

          Notwithstanding the foregoing, the Trust shall be permitted to make and maintain Investments in the Borrower and the Trust shall contribute to the Borrower, promptly upon, and in any event within three (3) Business Days of, the Trust’s receipt thereof, 100% of the aggregate proceeds received by the Trust in connection with any offering of stock or debt in the Trust (net of fees and expenses customarily incurred in such offerings).

          §9.4. Merger and Consolidation .

                    (a) Become a party to any merger, consolidation, spin-off or other material business change without the prior written approval of the Majority Lenders (other than the merger or consolidation of a Borrower with and into Whitestone OP (with Whitestone OP being the surviving entity) so long as no Default or Event of Default has occurred and is continuing, or would occur and be continuing after giving effect to such merger or consolidation); or

                    (b) sell, transfer or otherwise dispose of any Real Estate Assets or other property, including any equity interest in any Person, except for (i) the sale, transfer or other disposition of obsolete or worn out property in the ordinary course of business, (ii) the sale or issuance of equity interests of the Trust and Whitestone OP in the ordinary course of business, (iii) the sale of Permitted Investments in the ordinary course of business and (iv) the sale, transfer or other disposition of property (other than the Project), provided that (A) such sale, transfer or disposition is at fair market value, (B) such sale, transfer or disposition will not result in a Material Adverse Effect and (C) in connection with the sale of any material Real Estate Asset, the Borrower shall have provided to the Agent a compliance certificate in the form of Exhibit C-2 , hereto signed

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by the chief financial officer or chief accounting officer of the Borrower, setting forth in reasonable detail computations evidencing compliance with the covenants contained in §10 hereof and certifying that no Default or Event of Default would exist or occur and be continuing after giving effect to all such proposed such sale, transfer or disposition.

          §9.5. Compliance with Environmental Laws . (a) Use the Project or any portion thereof as a facility for the handling, processing, storage or disposal of Hazardous Substances except for quantities of Hazardous Substances used in the ordinary course of business and in compliance with all applicable Environmental Laws, (b) cause or permit to be located on the Project any underground tank or other underground storage receptacle for Hazardous Substances except in compliance with Environmental Laws, (c) generate any Hazardous Substances on the Project except in compliance with Environmental Laws, or (d) conduct any activity at the Project or use the Project in any manner so as to cause a Release in violation of applicable Environmental Laws.

          §9.6. Distributions .

                    (a) The Borrower will not declare or make (i) annual Distributions in excess of (x) 105% of “funds from operations” for the fiscal quarters ended March 31, 2007, June 30, 2007, September 30, 2007, December 31, 2007 and March 31, 2008 or (y) 95% of “funds from operations” for any fiscal quarter thereafter; or (ii) any Distributions during any period after any Event of Default has occurred; provided , however , (a) that the Borrower may at all times (including while an Event of Default is continuing) make Distributions to the extent (after taking into account all available funds of the Trust from all other sources) required in order to enable the Trust to continue to qualify as a REIT and (b) in the event that the Borrower cures any such Event of Default in clause (ii) above and the Agent has accepted such cure prior to accelerating the Loan, the limitation of clause (ii) above shall cease to apply with respect to such Event of Default.

                    (b) The Trust will not, during any period when any Event of Default has occurred and is continuing, make any Distributions in excess of the minimum Distributions required to be made by the Trust in order to maintain its status as a REIT.

                    (c) Notwithstanding the definition of “funds from operations” by the Board of Governors of the National Association of Real Estate Investment Trusts, for purposes of determining the Distributions permitted to be declared under Section 9.6(a)(i), (i) for any fiscal period ending on or after December 31, 2006 through December 31, 2007, Excluded Litigation Fees shall not reduce “funds from operations” and (ii) for all fiscal periods ending prior to March 11, 2008, “funds from operations” shall be calculated in a manner consistent with its calculation prior to the Trust becoming a self-managed fund and shall not be reduced by G and A Expenses.

          §9.7. Reserved .

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          §9.8. Default Under Leases . The Borrower will not suffer or permit any breach or default to occur in any of the Borrower’s material obligations under any of the Major Leases nor suffer or permit the same to terminate by reason of any failure of the Borrower to meet any requirement of any Major Lease including those with respect to any time limitation within which any of the Borrower’s work is to be done or the space is to be available for occupancy by the lessee to the extent any of the foregoing could reasonably be expected to result in a no material adverse change to the Net Operating Income of the Project. The Borrower shall notify Lender promptly in writing of any termination by any party of a Major Lease.

          §10. FINANCIAL COVENANTS . The Borrower and the Trust, on their own behalf and on behalf of their respective Subsidiaries, jointly and severally covenant and agree that:

          §10.1. Consolidated Total Leverage Ratio . At any time, (i) Consolidated Total Indebtedness as at the last day of any fiscal quarter shall not exceed sixty percent (60%) of (ii) the Fair Market Value of Real Estate Assets.

          §10.2. Interest Coverage Ratio . As at the end of any fiscal quarter, the ratio of (i) Consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of such fiscal quarter to (ii) Consolidated Total Interest Expense for the four consecutive fiscal quarters ending on the last day of such fiscal quarter must exceed 2.00 to 1.00.

          §10.3. Fixed Charge Coverage Ratio . As at the end of any fiscal quarter, the ratio of (i) Consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of such fiscal quarter to (ii) Consolidated Fixed Charges for the four consecutive fiscal quarters ending on the last day of such fiscal quarter must exceed 1.50 to 1.00.

          §10.4. Secured Debt Leverage . At any time, (i) Consolidated Total Indebtedness (less any Unsecured Consolidated Total Indebtedness) as at the last day of any fiscal quarter shall not exceed forty percent (40%) of (ii) the Fair Market Value of Real Estate Assets.

          §10.5. Reserved .

          §10.6. Reserved .

          §10.7. Reserved .

          §10.8. Consolidated Tangible Net Worth . As at the end of any fiscal quarter or any other date of measurement, the Consolidated Tangible Net Worth of the Borrower and its Subsidiaries shall not be less than the sum of (i) $30,000,000 plus (ii) 75% of the aggregate proceeds received by the Trust (net of fees and expenses customarily incurred in transactions of such type) in connection with any offering of stock in the Trust, plus (iii) 75% of the aggregate value of operating units issued by the Borrower in connection

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with asset or stock acquisitions (valued at the time of issuance by reference to the terms of the agreement pursuant to which such units are issued), provided that issuances of operating units to the Trust in connection with additional capital contributions made by the Trust in the Borrower shall be excluded from this clause (iii) on or prior to the date such determination of Consolidated Tangible Net Worth is made.

          §11. Reserved .

          §12. CONDITIONS TO THE TERM LOAN . The obligations of any Lender to make and maintain the Term Loan shall be subject to the satisfaction of the following conditions precedent on or prior to the Closing Date with, in each instance, the Agent having approved in its sole discretion each matter submitted to it in compliance with such conditions:

          §12.1. Loan Documents . Each of the Loan Documents shall have been duly executed and delivered by the respective parties thereto and shall be in full force and effect.

          §12.2. Certified Copies of Organization Documents . The Agent shall have received (i) from the Whitestone OP a copy, certified as of a recent date by a duly authorized officer of the Trust, in its capacity as general partner of the Borrower, to be true and complete, of the Agreement of Limited Partnership of Whitestone OP and any other Organizational Document or other agreement governing the rights of the partners or other equity owners of Whitestone OP, (ii) from Pima Norte a copy, certified as of a recent date by a duly authorized officer of Whitestone OP, in its capacity as sole member of Pima Norte, to be true and complete, of the Agreement of Limited Partnership of Pima Norte and any other Organizational Document or other agreement governing the rights of the members or other equity owners of Pima Norte, (iii) from Whitestone III a copy, certified as of a recent date by a duly authorized officer of Whitestone OP, in its capacity as sole member of Whitestone III GP LLC, general partner of Whitestone III, to be true and complete, of the Agreement of Limited Partnership of Whitestone III and any other Organizational Document or other agreement governing the rights of the partners or other equity owners of Whitestone III, (iv) from Whitestone III GP LLC, a copy, certified as of a recent date by a duly authorized officer of Whitestone OP, in its capacity as sole member of Whitestone III GP LLC, to be true and complete, of the Agreement of Limited Partnership of Whitestone III GP LLC and any other Organizational Document or other agreement governing the rights of the members of Whitestone III GP LLC, (v) from Whitestone III LP LTD a copy, certified as of a recent date by a duly authorized officer of Whitestone OP, in its capacity as general partner of Whitestone III GP LLC, sole general partner of Whitestone III LP LTD, to be true and complete, of the Agreement of Limited Partnership of Whitestone III LP LTD and any other Organizational Document or other agreement governing the rights of the partners or other equity owners of Whitestone III LP LTD, and (vi) from the Trust a copy, certified as of a recent date by the appropriate officer of the State of Maryland to be true and correct, of the trust agreement of the Trust, in each case along with any other organization documents of the Borrower or the Trust

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and their respective general partners, as the case may be, and each as in effect on the date of such certification.

          §12.3. Resolutions . All action on the part of the Borrower and the Trust necessary for the valid execution, delivery and performance by the Borrower and the Trust of this Agreement and the other Loan Documents to which any of them is or is to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Agent shall have been provided to the Agent. The Agent shall have received from the Trust and the Borrower true copies of the resolutions adopted by its board of directors or trustees authorizing the transactions described herein and evidencing the due authorization, execution and delivery of the Loan Documents to which the Trust and/or the Borrower is a party, each certified by the secretary as of a recent date to be true and complete.

          §12.4. Incumbency Certificate: Authorized Signers . The Agent shall have received from the Trust and the Borrower an incumbency certificate, dated as of the Closing Date, signed by a duly authorized officer of the Trust and the Borrower, as applicable, and giving the name of each individual who shall be authorized: (a) to sign, in the name and on behalf of the Borrower and the Trust, as the case may be, each of the Loan Documents to which the Borrower or the Trust is or is to become a party; (b) to make Loan and Conversion Requests on behalf of the Borrower and (c) to give notices and to take other action on behalf of the Borrower or the Trust, as applicable, under the Loan Documents.

          §12.5. Title Policy . The Agent shall have received from the Borrower an ALTA Loan Title Insurance Policy acceptable to Lender in its sole discretion, insuring the Loan, issued by the Title Insurer, insuring the lien of the Deed of Trust as a valid first, prior and paramount lien upon the Project and all appurtenant easements, and subject to no exceptions other than the Permitted Exceptions (the “ Title Policy ”). The Title Policy shall satisfy the requirements of Exhibit E-2 , including, without limitation, a zoning endorsement;

          §12.6. Certificates of Insurance . The Agent shall have received (a) certificates of insurance as to all of the insurance maintained by Borrower on the Project (including flood insurance if necessary) from the insurer or an independent insurance broker identifying insurers, types of insurance, insurance limits, and policy terms in each case naming the Agent as loss payee, additional insured and mortgagee and in form and substance satisfactory to the Agent and the Lenders; and (b) such further information and certificates from Borrower, its insurers and insurance brokers as the Agent may reasonably request.

          §12.7. Environmental Reports . The Agent shall have received satisfactory Environmental Reports with respect to the Project, prepared at the Borrower’s expense by environmental engineers acceptable to the Agent. Such Environmental Reports shall be in form and substance satisfactory to the Agent and shall indicate that the Project is free

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of all Hazardous Substances. The Agent shall have the right to obtain third-party review of the Environmental Reports at the Borrower’s expense.

          §12.8. Opinion of Counsel Concerning Organization and Loan Documents . The Agent shall have received favorable opinions addressed to the Lenders and the Agent in form and substance reasonably satisfactory to the Agent from counsel to the Borrower and the Trust and, if any, state specific local counsel who are reasonably satisfactory to Agent, each as counsel to the Borrower, the Trust and their respective Subsidiaries, with respect to applicable law.

          §12.9. Structural Inspection Reports . At the Agent’s request, the Borrower shall deliver to the Agent a structural inspection report with respect to the Project prepared at the Borrower’s expense by structural engineers acceptable to the Agent. Such report shall be in form and substance satisfactory to the Agent. The Agent shall have the right to obtain third-party review of such report at the Borrower’s expense.

          §12.10. Inspection of the Project . The Agent shall have completed to its satisfaction an inspection of the Project at the Borrower’s expense.

          §12.11. Certifications from Government Officials; UCC-11 Reports .

          The Agent shall have received (i) long-form certifications from government officials evidencing the legal existence, good standing and foreign qualification of the Borrower and the Trust, along with a certified copy of the certificate of limited partnership, formation or trust, as applicable, of the Borrower, all as of the most recent practicable date; (ii) UCC-11 search results from the appropriate jurisdictions for the Borrower and the Trust; and (iii) full coverage title search results with respect to the Project.

          §12.13. Proceedings and Documents; Adverse Changes . All proceedings in connection with the transactions contemplated by this Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in form and substance to the Agent’s counsel, and the Agent and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. There shall have occurred no material adverse change in government regulations or policies affecting the Borrower, the Agent or any Lender. No disruption or material adverse change in the financial or capital markets in general that could reasonably be expected to have a material adverse effect on the market for loan syndications.

          §12.14. Fees . The Borrower shall have paid to the Agent, for the accounts of the Lenders or for its own account, as applicable, all of the fees and expenses that are due and payable as of the Closing Date in accordance with this Agreement or any separate fee letter entered into by the Borrower and the Trust and the Agent.

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          §12.15. Closing Certificate . The Borrower and the Trust shall have delivered a Closing Certificate to the Agent, in form and substance satisfactory to the Agent.

          §12.16. Patriot Act, Etc. The Borrower and the Trust shall have delivered to the Agent, sufficiently in advance of the Closing Date, all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation, the Patriot Act.

          §12.17. Governmental Regulation . Each Lender shall be satisfied that the making of the Term Loan is in compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System.

          §12.18. Property Financial Analysis . Each Lender shall have received such financial information regarding the Project as set forth in §8.4(d) and as further required by the Lenders calculated on a pro forma basis and dated as of the Closing Date.

          §12.19. Appraisal . The Agent shall, at the Borrower’s expense, order, receive and review an appraisal of the Project prepared by a member of the Appraisal Institute. The appraisal and the determination of the Project’s value is subject to the Agent’s appraisal department’s review, approval, and revision or adjustment in the Agent’s discretion.

          §13. CONDITIONS TO ALL BORROWINGS . The obligations of any Lender to make its Term Loan on the Closing Date shall also be subject to the satisfaction of the following conditions precedent:

          §13.1. Representations True; No Event of Default; Compliance Certificate . Each of the representations and warranties made by or on behalf of the Borrower, the Trust or any of their respective Subsidiaries contained in this Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Agreement shall be true and correct in all respects; and no Default or Event of Default under this Agreement shall have occurred and be continuing on such date.

          §13.2. No Legal Impediment . No change shall have occurred any law or regulations thereunder or interpretations thereof that in the reasonable opinion of the Agent or any Lender would make it illegal for any Lender to make the Term Loan on the Closing Date. No disruption or material adverse change in the financial or capital markets in general that could reasonably be expected to have a material adverse effect on the market for loan syndications.

          §13.3. Governmental Regulation . Each Lender shall be satisfied that the making of the Term Loan is in compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System.

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          §14. EVENTS OF DEFAULT; ACCELERATION; ETC .

          §14.1. Events of Default and Acceleration . If any of the following events (“Events of Default”) shall occur:

                    (a) the Borrower shall fail to pay any principal of any portion of the Term Loan when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment);

                    (b) the Borrower shall fail to pay any interest on any portion of the Term Loan or any other sums due hereunder or under any of the other Loan Documents or any fee letter (including, without limitation, amounts due under §8.16) when the same shall become due and payable, and such failure continues for three (3) days;

                    (c) the Borrower, the Trust or any of their respective Subsidiaries shall fail to comply, or to cause the Trust to comply, as the case may be, with any of the respective covenants contained in the following: §8.1 (except with respect to principal, interest and other sums covered by clauses (a) or (b) above); §8.2; §§8.4 through §8.10, inclusive; §8.12; §8.13; §8.19; §8.20; §9 and §11;

                    (d) the Borrower, the Trust or any of their respective Subsidiaries shall fail to perform any other term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this §14) and such failure continues for thirty (30) days;

                    (e) any representation or warranty made by or on behalf of the Borrower, the Trust or any of their respective Subsidiaries in this Agreement or any of the other Loan Documents shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated;

                    (f) the Borrower, the Trust or any of its Subsidiaries or, to the extent of Recourse to the Borrower, the Trust or such Subsidiaries thereunder, any Partially-Owned Entity or other of their respective Affiliates, shall fail to pay when due, or within any applicable period of grace, any Consolidated Total Indebtedness which is in excess of (i) $5,000,000, either individually or in the aggregate, if such Indebtedness is without Recourse and (ii) $1,000,000, either individually or in the aggregate, if such Indebtedness is Recourse, or fail to observe or perform any material term, covenant, condition or agreement contained in any agreement, document or instrument by which it is bound evidencing, securing or otherwise relating to such Consolidated Total Indebtedness for such period of time (after the giving of appropriate notice if required) as would permit the holder or holders thereof or of any obligations issued thereunder in excess of (i) $5,000,000, either individually or in the aggregate, if such Indebtedness is without Recourse and (ii) $1,000,000, either individually or in the aggregate, if such Indebtedness is Recourse, to accelerate the maturity thereof;

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                    (g) any of the Borrower, the Trust or any of their respective Subsidiaries shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of any of the Borrower, the Trust or any of their respective Subsidiaries or of any substantial part of the properties or assets of any of such parties or shall commence any case or other proceeding relating to any of the Borrower, the Trust or any of their respective Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against any of the Borrower, the Trust or any of their respective Subsidiaries and (i) any of the Borrower, the Trust or any of their respective Subsidiaries shall indicate its approval thereof, consent thereto or acquiescence therein or (ii) any such petition, application, case or other proceeding shall continue undismissed, or unstayed and in effect, for a period of forty-five (45) days;

                    (h) a decree or order is entered appointing any trustee, custodian, liquidator or receiver or adjudicating any of the Borrower, the Trust or any of their respective Subsidiaries bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of any of the Borrower, the Trust or any of their respective Subsidiaries in an involuntary case under federal bankruptcy laws as now or hereafter constituted;

                    (i) there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty (30) days, whether or not consecutive, any final judgment that is not fully insured against any of the Borrower, the Trust or any of their respective Subsidiaries that, with other outstanding uninsured final judgments, undischarged, unsatisfied and unstayed, against any of such parties exceeds in the aggregate $1,000,000;

                    (j) any of the Loan Documents or any provision of any Loan Document shall be canceled, terminated, revoked or rescinded otherwise than in accordance with the terms thereof (other than the Guaranty, which may not be terminated without the prior consent of the Agent) or with the express prior written agreement, consent or approval of the Agent, or any action at law, suit or in equity or other legal proceeding to make unenforceable, cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of the Borrower or any of its Subsidiaries or the Trust or any of its Subsidiaries, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable as to any material terms thereof; the Guaranty shall be terminated, revoked or rescinded; or the Agent shall at any time fail to have a perfected, first-priority security interest in the Project;

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                    (k) any “Event of Default” or default (after notice and expiration of any period of grace, to the extent provided), as defined or provided in any of the other Loan Documents, shall occur and be continuing;

                    (l) with respect to any Guaranteed Pension Plan, an ERISA Reportable Event shall have occurred and the Agent shall have determined in their reasonable discretion that such event reasonably could be expected to result in liability of the Borrower or any of its Subsidiaries or the Trust or any of its Subsidiaries to the PBGC or such Guaranteed Pension Plan in an aggregate amount exceeding $1,000,000 and such event in the circumstances occurring reasonably could constitute grounds for the termination of such Guaranteed Pension Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Guaranteed Pension Plan; or a trustee shall have been appointed by the United States District Court to administer such Plan; or the PBGC shall have instituted proceedings to terminate such Guaranteed Pension Plan;

                    (m) Reserved;

                    (n) the failure of James C. Mastandrea, for any reason, to cease to retain the title of President of the Trust and to perform the functions typically performed under such office and to be actively involved in strategic planning and decision-making for the Trust, unless within six (6) months after such failure, the board of directors or board of trustees has duly elected or appointed a qualified substitute to replace such individual who is acceptable to the Agent in its sole discretion (as notified to the Borrower by the Agent in writing); or the occurrence of any transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of voting rights applicable to the Trust ordinarily entitled to vote in the election of directors or trustees, empowering such “person” or “group” to elect a majority of the board of directors or board of trustees of the Trust, who did not have such power before such transaction; or during any twelve-month period on or after the Closing Date, individuals who at the beginning of such period constituted the board of trustees of the Trust (together with any new Trustees whose election by the board of trustees or whose nomination for election by the shareholders of the Trust was approved by a vote of at least a majority of the members of the board of trustees then in office who either were members of the board of trustees at the beginning of such period or whose election or nomination for election was previously so approved) ceased for any reason to constitute a majority of the members of the board of trustees of the Trust then in office;

                    (o) without limitation of the other provisions of this §14.1, (i) the Trust shall at any time fail to be the sole general partner of Whitestone OP or shall at any time be in contravention of any of the requirements contained in the last paragraph of §9.2, (ii) Whitestone OP shall fail at any time to be the sole member of Pima Norte, or (iii) the Borrower or the Trust shall at any time fail to be self-managed;

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                    (p) any Event of Default under (and as defined in) the Revolving Credit Agreement; or

                    (q) any Disqualifying Environmental Event or Disqualifying Structural Event shall have occurred;

                    then, and in any such event, so long as the same may be continuing, the Agent may, and upon the request of the Majority Lenders shall, declare all amounts owing with respect to this Agreement, the Notes and the other Loan Documents to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower, the Trust and each of their respective Subsidiaries; provided that in the event of any Event of Default specified in §14.1(g) or 14.1(h), all such amounts shall become immediately due and payable automatically and without any requirement of notice from any of the Lenders or the Agent or action by the Lenders or the Agent. Without limitation of the foregoing, upon the occurrence of an Event of Default and/or the acceleration of the Loans or other enforcement action under any Loan Document, the Agent shall have the right to terminate the Management Agreement, effective on the date of such termination (or such later date as the Agent may elect).

          §14.2. Reserved .

          §14.3. Remedies . In the event that one or more Events of Default shall have occurred and be continuing, whether or not the Lenders shall have accelerated the maturity of the Loans pursuant to §14.1, the Majority Lenders may direct the Agent to proceed to protect and enforce the rights and remedies of the Agent and the Lenders under this Agreement, the Notes, any or all of the other Loan Documents or under applicable law by suit in equity, action at law or other appropriate proceeding (including for the specific performance of any covenant or agreement contained in this Agreement or the other Loan Documents or any instrument pursuant to which the Obligations are evidenced and, to the full extent permitted by applicable law, the obtaining of the ex parte appointment of a receiver), and, if any amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right or remedy of the Agent and the Lenders under the Loan Documents or applicable law. No remedy herein conferred upon the Lenders or the Agent or the holder of any Note is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or under any of the other Loan Documents or now or hereafter existing at law or in equity or by statute or any other provision of law.

          §15. SECURITY INTEREST AND SET-OFF .

          §15.1 Security Interest . Borrower hereby grants to the Agent, on behalf of and for the benefit of the Lenders, and to each Lender, a lien, security interest and right of

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setoff as security for all liabilities and obligations to the Lenders, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of the Agent or any Lender or any entity under the control of KeyCorp. and its successors and assigns, or in transit to any of them.

          §15.2 Set-Off and Debit . (i) If any Event of Default or other event which would entitle the Agent to accelerate the Loans occurs, or (ii) at any time, whether or not any Default or Event of Default exists, in the event any attachment, trustee process, garnishment, or other levy or lien is, or is sought to be, imposed on any property of the Borrower; then, in any such event, any such deposits, balances or other sums credited by or due from the Agent or any Lender, or from any such affiliate of the Agent or any Lender, to the Borrower may to the fullest extent not prohibited by applicable law at any time or from time to time, without regard to the existence, sufficiency or adequacy of any other collateral, and without notice or compliance with any other condition precedent now or hereafter imposed by statute, rule of law or otherwise, all of which are hereby waived, be set off, debited and appropriated, and applied by the Agent or any Lender, as the case may be, against any or all of the Obligations irrespective of whether demand shall have been made and although such Obligations may be unmatured, in such manner as the Agent or the applicable Lender in its sole and absolute discretion may determine. Within five (5) Business Days of making any such set off, debit or appropriation and application, the Agent agrees to endeavor to notify the Borrower thereof, provided that the failure to give such notice shall not affect the validity of such set off, debit or appropriation and application. ANY AND ALL RIGHTS TO REQUIRE THE AGENT OR ANY LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOANS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. Each of the Lenders agrees with each other Lender that (a) if an amount to be set off is to be applied to indebtedness of the Borrower to such Lender, other than the obligations evidenced by the Note held by such Lender, such amount shall be applied ratably to such other indebtedness and to the obligations evidenced by the Note held by such Lender, and (b) if such Lender shall receive from the Borrower, whether by voluntary payment, exercise of the right of setoff, counterclaim, cross action, enforcement of the claim evidenced by the Note held by such Lender by proceedings against the Borrower at law or in equity or by proof thereof in bankruptcy, reorganization liquidation, receivership or similar proceedings, or otherwise, and shall retain and apply to the payment of the Note held by such Lender any amount in excess of its ratable portion of the payments received by all of the Lenders with respect to the Note held by all of the Lenders, such Lender will make such disposition and arrangements with the other Lenders with respect to such excess, either by way of distribution, pro tanto assignment of claims, subrogation or otherwise as shall result in each Lender receiving in respect of the Note held by it its proportionate payment as contemplated by this Agreement; provided that if all or any part of such excess payment is thereafter recovered

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from such Lender, such disposition and arrangements shall be rescinded and the amount restored to the extent of such recovery, but without interest.

          §15.3 Right to Freeze . The Agent and each of the Lenders shall also have the right, at its option, upon the occurrence of any event which would entitle the Agent or any Lender to set off or debit as set forth in §15.2, to freeze, block or segregate any such deposits, balances and other sums so that the Borrower may not access, control or draw upon the same.

          §15.4 Additional Rights . The rights of the Agent, the Lenders and each affiliate of Administrative Agent and each of the Lenders under this §15 are in addition to, and not in limitation of, other rights and remedies, including other rights of set off, which the Agent or any Lender may have.

          §16. THE AGENT .

          §16.1. Authorization . (a) The Agent is authorized to take such action on behalf of each of the Lenders and to exercise all such powers as are hereunder and under any of the other Loan Documents and any related documents delegated to the Agent, together with such powers as are reasonably incident thereto, provided that no duties or responsibilities not expressly assumed herein or therein shall be implied to have been assumed by the Agent. The relationship between the Agent and the Lenders is and shall be that of agent and principal only, and nothing contained in this Agreement or any of the other Loan Documents shall be construed to constitute the Agent as a trustee or fiduciary for any Lender.

                    (b) The Borrower, without further inquiry or investigation, shall, and is hereby authorized by the Lenders to, assume that all actions taken by the Agent hereunder and in connection with or under the Loan Documents are duly authorized by the Lenders. The Lenders shall notify Borrower of any successor to Agent by a writing signed by Majority Lenders, which successor shall be reasonably acceptable to the Borrower so long as no Default or Event of Default has occurred and is continuing. The Borrower acknowledges that any lender that acquires KeyBank is acceptable as a successor to the Agent.

          §16.2. Employees and Agents . The Agent may exercise its powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Agreement and the other Loan Documents. The Agent may utilize the services of such Persons as the Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Borrower.

          §16.3. No Liability . Neither the Agent, nor any of its shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any agent or employee thereof, shall be liable for any waiver, consent or approval given or any action

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taken, or omitted to be taken, in good faith by it or them hereunder or under any of the other Loan Documents, or in connection herewith or therewith, or be responsible for the consequences of any oversight or error of judgment whatsoever, except that the Agent may be liable for losses due to its willful misconduct or gross negligence, as finally determined by a court of competent jurisdiction.

          §16.4. No Representations . The Agent shall not be responsible for the execution or validity or enforceability of this Agreement, the Notes or any of the other Loan Documents or for the validity, enforceability or collectibility of any such amounts owing with respect to the Notes, or for any recitals or statements, warranties or representations made herein or in any of the other Loan Documents or in any certificate or instrument hereafter furnished to it by or on behalf of the Trust or the Borrower or any of their respective Subsidiaries, or be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements in this Agreement or the other Loan Documents. The Agent shall not be bound to ascertain whether any notice, consent, waiver or request delivered to it by the Borrower or the Trust or any holder of any of the Notes shall have been duly authorized or is true, accurate and complete. The Agent has not made nor does it now make any representations or warranties, express or implied, nor does it assume any liability to the Lenders, with respect to the credit worthiness or financial condition of the Borrower or any of its Subsidiaries or the Trust or any of the Subsidiaries or any tenant under a Lease or any other entity. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender, and based upon such information and documents as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.

          §16.5. Payments .

                    (a) A payment by the Borrower to the Agent hereunder or any of the other Loan Documents for the account of any Lender shall constitute a payment to such Lender. The Agent agrees to distribute to each Lender such Lender’s pro rata share of payments received by the Agent for the accounts of all the Lenders, as provided herein or in any of the other Loan Documents. All such payments shall be made on the date received, if before 1:00 p.m., and if after 1:00 p.m., on the next Business Day. If payment is not made on the day received, the funds shall be invested by the Agent in overnight obligations, and interest thereon paid pro rata to the Lenders.

                    (b) If in the reasonable opinion of the Agent the distribution of any amount received by it in such capacity hereunder, under the Notes or under any of the other Loan Documents might involve it in material liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction, provided that the Agent shall invest any such undistributed amounts in overnight obligations on behalf of the Lenders and interest thereon shall be paid pro rata to the Lenders. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Agent is to be repaid, each Person to whom any

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such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court.

                    (c) Notwithstanding anything to the contrary contained in this Agreement or any of the other Loan Documents, any Lender that fails to adjust promptly such Lender’s outstanding principal and its pro rata Commitment Percentage as provided in §2.1, shall be deemed delinquent (a “Delinquent Lender”) and shall be deemed a Delinquent Lender until such time as such delinquency is satisfied. A Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Borrower, whether on account of outstanding Loans, interest, fees or otherwise, to the remaining nondelinquent Lenders for application to, and reduction of, their respective pro rata shares of all outstanding Loans. The Delinquent Lender hereby authorizes the Agent to distribute such payments to the nondelinquent Lenders in proportion to their respective pro rata shares of all outstanding Loans. If not previously satisfied directly by the Delinquent Lender, a Delinquent Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans of the nondelinquent Lenders, the Lenders’ respective pro rata shares of all outstanding Loans have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency.

          §16.6. Holders of Notes . The Agent may deem and treat the payee of any Notes as the absolute owner thereof for all purposes hereof until it shall have been furnished in writing with a different name by such payee or by a subsequent holder, assignee or transferee.

          §16.7. Indemnity . The Lenders ratably and severally agree hereby to indemnify and hold harmless the Agent and its Affiliates from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including any expenses for which the Agent has not been reimbursed by the Borrower as required by §17), and liabilities of every nature and character arising out of or related to this Agreement, the Notes, or any of the other Loan Documents or the transactions contemplated or evidenced hereby or thereby, or the Agent’s actions taken hereunder or thereunder, except to the extent that any of the same shall be directly caused by the Agent’s willful misconduct or gross negligence, as finally determined by a court of competent jurisdiction.

          §16.8. Agent as Lender . In its individual capacity as a Lender, KeyBank shall have the same obligations and the same rights, powers and privileges in respect to its Commitment and the Term Loan made by it, and as the holder of any of the Notes, as it would have were it not also the Agent.

          §16.9. Notification of Defaults and Events of Default . Each Lender hereby agrees that, upon learning of the existence of a Default or an Event of Default, it shall (to the extent notice has not previously been provided) promptly notify the Agent thereof.

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The Agent hereby agrees that upon receipt of any notice under this §16.9 it shall promptly notify the other Lenders of the existence of such Default or Event of Default.

          §16.10. Duties in Case of Enforcement . In the case one or more Events of Default have occurred and shall be continuing, and whether or not acceleration of the Obligations shall have occurred, the Agent shall, at the request, or may, upon the consent, of the Majority Lenders, and provided that the Lenders have given to the Agent such additional indemnities and assurances against expenses and liabilities as the Agent may reasonably request, proceed to enforce the provisions of this Loan Agreement and the other Loan Documents and the exercise of any other legal or equitable rights or remedies as it may have hereunder or under any other Loan Document or otherwise by virtue of applicable law, or to refrain from so acting if similarly requested by the Majority Lenders. The Agent shall be fully protected in so acting or refraining from acting upon the instruction of the Majority Lenders, and such instruction shall be binding upon all the Lenders. The Majority Lenders may direct the Agent in writing as to the method and the extent of any such foreclosure, sale or other disposition or the exercise of any other right or remedy, the Lenders hereby agreeing to severally indemnify and hold the Agent harmless from all costs and liabilities incurred in respect of all actions taken or omitted in accordance with such direction, provided that the Agent need not comply with any such direction to the extent that the Agent reasonably believes the Agent’s compliance with such direction to be unlawful or commercially unreasonable in any applicable jurisdiction. The Agent may, in its discretion but without obligation, in the absence of direction from the Majority Lenders, take such interim actions as it believes reasonably necessary to preserve the rights of the Lenders hereunder, including but not limited to petitioning a court for injunctive relief or appointment of a receiver. Each of the Lenders acknowledges and agrees that no individual Lender may separately enforce or exercise any of the provisions of any of the Loan Documents, including without limitation the Notes, other than through the Agent. The Agent shall advise the Lenders of all such action taken by the Agent.

          §16.11. Successor Agent . KeyBank, or any successor Agent, may resign as Agent at any time by giving at least thirty (30) days prior written notice thereof to the Lenders and to the Borrower. Any such resignation shall be effective upon appointment and acceptance of a successor Agent, as hereinafter provided. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Agent, which is a Lender under this Agreement, provided that so long as no Default or Event of Default has occurred and is continuing the Borrower shall have the right to approve any successor Agent, which approval shall not be unreasonably withheld. If, in the case of a resignation by the Agent, no successor Agent shall have been so appointed by the Majority Lenders and approved by the Borrower, and shall have accepted such appointment, within thirty (30) days after the retiring Agent’s giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint any one of the other Lenders as a successor Agent. The Borrower acknowledges that any lender that acquires KeyBank is acceptable as a successor Agent. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested

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with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from all further duties and obligations as Agent under this Agreement. After any Agent’s resignation hereunder as Agent, the provisions of this §16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. The Agent may be removed at the direction of the Majority Lenders in the event of a final judicial determination (in which the Agent had an opportunity to be heard) by a court of competent jurisdiction that the Agent had acted in a grossly negligent manner or in willful misconduct.

          §16.12. Notices . Any notices or other information required hereunder to be provided to the Agent (with copies to the Agent for each Lender) shall be forwarded by the Agent to each of the Lenders promptly.

          §16.13. Reserved .

          §17. EXPENSES . The Borrower agrees to pay (a) the reasonable costs of producing and reproducing this Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) the reasonable fees, expenses and disbursements of the Agent’s outside counsel or any local counsel to the Agent incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (c) the fees, expenses and disbursements of the Agent incurred by the Agent in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including, without limitation, the costs incurred by the Agent in connection with its inspection of the Project, and, without double-counting amounts under clause (b) above, the fees and disbursements of the Agent’s counsel in preparing the documentation, (d) all, if any, title insurance premiums, appraisal fees, engineer’s, inspector’s and surveyor’s fees, (e) the fees, costs, expenses and disbursements of the Agent and its Affiliates incurred in connection with the syndication and/or participations of the Loans (whether occurring before or after the closing hereunder), including, without limitation, reasonable legal fees, travel costs, costs of preparing syndication materials and photocopying costs, (f) all reasonable expenses (including reasonable attorneys’ fees and costs, which attorneys may be employees of any Lender or the Agent, and the fees and costs of engineers, appraisers, surveyors, investment bankers, or other experts retained by any Lender or the Agent in connection with any such enforcement proceedings) incurred by any Lender or the Agent in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrower or any of its Subsidiaries or the Trust or the administration thereof after the occurrence and during the continuance of a Default or Event of Default (including, without limitation, expenses incurred in any restructuring and/or “workout” of the Loans), and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to any Lender’s or the Agent’s relationship with the Borrower or any of its Subsidiaries or the Trust, (g) all reasonable fees, expenses and disbursements of the Agent incurred in connection with UCC searches and filings, UCC terminations or mortgage discharges, and the like, and (h) all costs

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incurred by the Agent in the future in connection with its inspection of the Project. The covenants of this §17 shall survive the repayment of the amounts owing under the Notes and this Agreement and the termination of this Agreement and the obligations of the Lenders hereunder.

          §18. INDEMNIFICATION . The Borrower agrees to indemnify and hold harmless the Agent and each of the Lenders and the shareholders, directors, agents, officers, subsidiaries and affiliates of the Agent and each of the Lenders from and against any and all claims, actions and suits, whether groundless or otherwise, and from and against any and all liabilities, losses (including amounts, if any, owing to any Lender pursuant to §§4.4, 4.5, 4.6 and 4.8), settlement payments, obligations, damages and expenses of every nature and character in connection therewith, arising out of this Agreement or any of the other Loan Documents or the transactions contemplated hereby or thereby or which otherwise arise in connection with the financing, including, without limitation, (a) any actual or proposed use by the Borrower or any of its Subsidiaries of the proceeds of any of the Loans, (b) the Borrower or any of its Subsidiaries entering into or performing this Agreement or any of the other Loan Documents, or (c) pursuant to §8.16, in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding, provided , however , that the Borrower shall not be obligated under this §18 to indemnify any Person for liabilities arising from such Person’s own gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction. In litigation, or the preparation therefor, the Borrower shall be entitled to select counsel reasonably acceptable to the Majority Lenders, and the Agent (as approved by the Majority Lenders) shall be entitled to select their own supervisory counsel, and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses of each such counsel. If and to the extent that the obligations of the Borrower under this §18 are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The provisions of this §18 shall survive the repayment of the amounts owing under the Notes and this Agreement and the termination of this Agreement and the obligations of the Lenders hereunder and shall continue in full force and effect as long as the possibility of any such claim, action, cause of action or suit exists.

          §19. SURVIVAL OF COVENANTS, ETC . All covenants, agreements, representations and warranties made herein, in the Notes, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrower or any of its Subsidiaries or the Trust pursuant hereto shall be deemed to have been relied upon by the Lenders and the Agent, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Lenders of any of the Loans, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Agreement or the Notes or any of the other Loan Documents remains outstanding. The indemnification obligations of the Borrower provided herein and in the other Loan Documents shall survive the full repayment of amounts due and the

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termination of the obligations of the Lenders hereunder and thereunder to the extent provided herein and therein. All statements contained in any certificate or other paper delivered to any Lender or the Agent at any time by or on behalf of the Borrower or any of its Subsidiaries or the Trust pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower or such Subsidiary or the Trust hereunder.

          §20. ASSIGNMENT; PARTICIPATIONS; ETC.

          §20.1. Conditions to Assignment by Lenders . Except as provided herein, each Lender may assign to one or more Eligible Assignees (or to any other financial institution approved by the Agent) all or a portion (in a minimum amount of $1,000,000) of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment Percentage and Commitment and the same portion of the Loans at the time owing to it, the Notes held by it); provided that (a) the Agent and, other than during an Event of Default, the Borrower each shall have the right to approve any Eligible Assignee (or such other financial institution), which approval, in the case of an Eligible Assignee, shall not be unreasonably withheld or delayed, (b) subject to the provisions of §2.7, each Lender shall have at all times an amount of its Commitment of not less than $1,000,000 unless otherwise consented to by the Agent and (c) the parties to such assignment shall execute and deliver to the Agent, for recording in the Register (as hereinafter defined), an assignment and assumption, substantially in the form of Exhibit D hereto (an “Assignment and Assumption”), together with any Notes subject to such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Assumption, which effective date shall be at least two (2) Business Days after the execution thereof unless otherwise agreed or accepted by the Agent ( provided that any assignee has assumed the obligation to fund any outstanding Libor Rate Loans), (i) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Assumption, have the rights and obligations of a Lender hereunder and thereunder, and (ii) the assigning Lender shall, to the extent provided in such assignment and upon payment to the Agent of the registration fee referred to in §20.3, be released from its obligations under this Agreement. Any such Assignment and Assumption shall run to the benefit of the Borrower and a copy of any such Assignment and Assumption shall be delivered by the Assignor to the Borrower.

          Notwithstanding the provisions of subclause (a) of the preceding paragraph, any Lender may, without the consent of the Borrower, make an assignment otherwise permitted hereunder to (x) another Lender, and (y) an Affiliate of such Lender, provided that such Affiliate is an Eligible Assignee (unless otherwise approved by the Agent).

          §20.2. Certain Representations and Warranties; Limitations; Covenants . By executing and delivering an Assignment and Assumption, the parties to the assignment thereunder confirm to and agree with each other and the other parties hereto as follows: (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning

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Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto; (b) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower and its Subsidiaries or the Trust or any other Person primarily or secondarily liable in respect of any of the Obligations, or the performance or observance by the Borrower and its Subsidiaries or the Trust or any other Person primarily or secondarily liable in respect of any of the Obligations of any of their obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (c) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in §7.4 and §8.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Assumption; (d) such assignee will, independently and without reliance upon the assigning Lender, the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (e) such assignee represents and warrants that it is an Eligible Assignee (unless otherwise approved by the Agent); (f) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; (g) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender; and (h) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Assumption.

          §20.3. Register . The Agent shall maintain a copy of each Assignment and Assumption delivered to it and a register or similar list (the “Register”) for the recordation of the names and addresses of the Lenders and the Commitment Percentages of, and principal amount of the Loans owing to, the Lenders from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and the Lenders at any reasonable time and from time to time upon reasonable prior notice. Upon each such recordation, the assigning Lender agrees to pay to the Agent a registration fee in the sum of $3,500 and all legal fees and expenses incurred by the Agent in connection with such assignment.

          §20.4. New Notes . Upon its receipt of an Assignment and Assumption executed by the parties to such assignment, together with each Note subject to such assignment, the Agent shall (a) record the information contained therein in the Register, and (b) give prompt notice thereof to the Borrower and the Lenders (other than the assigning Lender). Unless done simultaneously with the Assignment and Assumption, within three (3)

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Business Days after receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for each surrendered Note, a new Note to the order of such Eligible Assignee in an amount equal to the amount assumed by such Eligible Assignee pursuant to such Assignment and Assumption and, if the assigning Lender has retained some portion of its obligations hereunder, a new Note and other Note, if applicable, to the order of the assigning Lender in an amount equal to the amount retained by it hereunder. Such new Notes shall provide that they are replacements for the surrendered Notes, shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the effective date of such Assignment and Assumption and shall otherwise be in substantially the form of the assigned Notes. The surrendered Notes shall be canceled and returned to the Borrower.

          §20.5. Participations . Each Lender may sell participations to one or more lending institutions or other entities in all or a portion of such Lender’s rights and obligations under this Agreement and the other Loan Documents; provided that (a) each such participation shall be in an amount of not less than $1,000,000, (b) any such sale or participation shall not affect the rights and duties of the selling Lender hereunder to the Borrower and the Agent and the Lender shall continue to exercise all approvals, disapprovals and other functions of a Lender, (c) the only rights granted to the participant pursuant to such participation arrangements with respect to waivers, amendments or modifications of, or approvals under, the Loan Documents shall be the rights to approve waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the Commitment of such Lender as it relates to such participant, reduce the amount of any fees to which such participant is entitled or extend any regularly scheduled payment date for principal or interest, and (d) no participant shall have the right to grant further participations or assign its rights, obligations or interests under such participation to other Persons without the prior written consent of the Agent, which consent shall not be unreasonably withheld.

          §20.6. Pledge by Lender . Notwithstanding any other provision of this Agreement, any Lender at no cost to the Borrower may at any time pledge all or any portion of its interest and rights under this Agreement (including all or any portion of its Notes) to any of the twelve Federal Reserve Banks organized under §4 of the Federal Reserve Act, 12 U.S.C. §341. No such pledge or the enforcement thereof shall release the pledgor Lender from its obligations hereunder or under any of the other Loan Documents.

          §20.7. No Assignment by Borrower . The Borrower shall not assign or transfer any of its rights or obligations under any of the Loan Documents without prior Unanimous Lender Approval.

          §20.8. Disclosure . The Borrower agrees that, in addition to disclosures made in accordance with standard banking practices, any Lender may disclose information obtained by such Lender pursuant to this Agreement to assignees or participants and potential assignees or participants hereunder.

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          §20.9. Syndication . The Borrower acknowledges that the Agent intends, and shall have the right, by itself or through its Affiliates, to syndicate or enter into co-lending arrangements with respect to the Term Loan and the Total Commitment. The Agent, in cooperation with the Borrower, will manage all aspects of the syndication, including the selection of co-lenders, the determination of when the Agent will approach potential co-lenders and the final allocations among co-lenders. Each of the Borrower and the Trust agrees to assist the Agent actively in achieving a timely syndication that is reasonably satisfactory to the Agent, such assistance to include, among other things, (a) direct contact during the syndication between the Borrower’s and the Trust’s senior officers, representatives and advisors, on the one hand, and prospective co-lenders, on the other hand at such times and places as the Agent may reasonably request, (b) providing to the Agent all financial and other information with respect to the Borrower and the Trust and the transactions contemplated hereby that the Agent may reasonably request, including but not limited to financial projections relating to the foregoing, and (c) assistance in the preparation of a confidential information memorandum and other marketing materials to be used in connection with the syndication, and the Borrower and the Trust agree to cooperate with the Agent’s and its Affiliate’s syndication and/or co-lending efforts, such cooperation to include, without limitation, the provision of information reasonably requested by potential syndicate members. The Agent shall be entitled with the consent of the Borrower (which shall not be unreasonably withheld or delayed), to change the structure or terms of the Term Loan if the Agent determines that such changes are advisable in order to ensure a successful syndication or an optimal credit structure for the Term Loan, provided the Total Commitment will not be reduced. In addition, the Borrower and the Trust agree that, prior to and during the syndication of the Total Commitment (which for purposes hereof shall be deemed to be completed ninety (90) days after the Closing Date), the Borrower nor the Trust will permit any offering, placement or arrangement of any competing issues of debt securities or commercial bank facilities of the Borrower, the Trust and any of their Subsidiaries, unless approved by the Agent.

          §21. NOTICES, ETC . Except as otherwise expressly provided in this Agreement, all notices and other communications made or required to be given pursuant to this Agreement or the Notes shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by facsimile and confirmed by delivery via courier or postal service, addressed as follows:

                  (a) if to the Borrower or the Trust, at 2600 South Gessner, Suite 500, Houston TX 77063, attention James C. Mastandrea (facsimile: (713) 465-8847), with a copy to General Counsel, or to such other address for notice as the Borrower or the Trust shall have last furnished in writing to the Agent;

                  (b) if to the Agent, to KeyBank National Association, 1200 Abernathy Road NE, Suite 1550, Atlanta, Georgia 30328, attention Meredith Hall, Vice President

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(facsimile: (770) 510-2195), with a copy to Douglas Novitch, KeyBank National Association, 127 Public Square, Cleveland, OH 44114, or such other address for notice as the Agent shall have last furnished in writing to the Borrower, with a copy to Pamela M. MacKenzie, Esq., Goulston & Storrs, 400 Atlantic Avenue, Boston, Massachusetts 02110-3333 (facsimile: (617) 574-7615), or at such other address for notice as the Agent shall last have furnished in writing to the Person giving the notice; and

                  (c) if to any Lender, at such Lender’s address set forth on Schedule 2 hereto, or such other address for notice as such Lender shall have last furnished in writing to the Person giving the notice.

Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier, or facsimile to the party to which it is directed, at the time of the receipt thereof by such party or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof.

          §22. WHITESTONE OP AS AGENT FOR THE BORROWER. The Borrower (other than Whitestone OP) hereby appoints Whitestone OP as its agent with respect to the receiving and giving of any notices, requests, instructions, reports, certificates (including, without limitation, compliance certificates), schedules, revisions, financial statements or any other written or oral communications hereunder. The Agent and each Lender is hereby entitled to rely on any communications given or transmitted by Whitestone OP as if such communication were given or transmitted by each and every Borrower; provided however , that any communication given or transmitted by any Borrower other than Whitestone OP shall be binding with respect to such Borrower. Any communication given or transmitted by the Agent or any Lender to Whitestone OP shall be deemed given and transmitted to each and every Borrower.

          §23. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE. THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SUCH STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH OF THE BORROWER AND ITS SUBSIDIARIES AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK, THE STATE OF OHIO, THE STATE OF GEORGIA OR ANY OTHER COURT HAVING JURISDICTION OVER THE BORROWER AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER OR ITS SUBSIDIARIES BY MAIL AT THE ADDRESS SPECIFIED IN §21. THE BORROWER AND ITS SUBSIDIARIES HEREBY WAIVE ANY OBJECTION THAT ANY OF THEM MAY NOW OR

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HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.

          §24. HEADINGS. The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof.

          §25. COUNTERPARTS. This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought.

          §26. ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in §28.

          §27. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS. EXCEPT TO THE EXTENT EXPRESSLY PROHIBITED BY LAW, THE BORROWER AND ITS SUBSIDIARIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT TO THE EXTENT EXPRESSLY PROHIBITED BY LAW, THE BORROWER AND ITS SUBSIDIARIES HEREBY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OF THE BORROWER AND ITS SUBSIDIARIES (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY LENDER OR THE AGENT HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH LENDER OR THE AGENT WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (B) ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH THEY ARE PARTIES BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.

          §28. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly provided in this Agreement, any consent or approval required or permitted by this Agreement may be given, and any term of this Agreement or of any of the other Loan

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Documents may be amended, and the performance or observance by the Borrower or the Trust or any of their respective Subsidiaries of any terms of this Agreement or the other Loan Documents or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Majority Lenders.

          Notwithstanding the foregoing, Unanimous Lender Approval shall be required for any amendment, modification or waiver of this Agreement that:

                    (a) reduces or forgives any principal of the Term Loan or any interest thereon (including any general waiver of interest “breakage” costs) or any fees due any Lender hereunder, or permits any prepayment not otherwise permitted hereunder; or

                    (b) changes the unpaid principal amount of the Term Loan, reduces the rate of interest applicable to the Term Loan, or reduces any fee payable to the Lenders hereunder; or

                    (c) changes the date fixed for any payment of principal of or interest on the Term Loan (including, without limitation, any extension of the Maturity Date) or any fees payable hereunder (including, without limitation, the waiver of any monetary Event of Default); or

                    (d) changes the amount of any Lender’s Commitment (other than pursuant to an assignment permitted under §20.1) or increases the amount of the Total Commitment except as permitted hereunder; or

                    (e) modifies any provision herein or in any other Loan Document which by the terms thereof expressly requires Unanimous Lender Approval; or

                    (f) changes the definitions of Majority Lenders or Unanimous Lender Approval; or

                    (g) releases the Guaranty.

          No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Agent or the Lenders or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial to such right or any other rights of the Agent or the Lenders. No notice to or demand upon the Borrower shall entitle the Borrower to other or further notice or demand in similar or other circumstances.

          Notwithstanding the foregoing, in the event that the Borrower requests any consent, waiver or approval under this Agreement or any other Loan Document, or an amendment or modification hereof or thereof, and one or more Lenders determine not to consent or agree to such consent, waiver, approval, amendment or modification, then the

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Lender then acting as Agent hereunder shall have the right to purchase the Commitment of such non-consenting Lender(s) at a purchase price equal to the then outstanding amount of principal, interest and fees then owing to such Lender(s) by the Borrower hereunder, and such non-consenting Lender(s) shall immediately upon request, sell and assign its Commitment and all of its other right, title and interest in the Loans and other Obligations to the Lender then acting as Agent pursuant to an Assignment and Assumption (provided that the selling Lender(s) shall not be responsible to pay any assignment fee in connection therewith).

           §29. SEVERABILITY . The provisions of this Agreement are severable, and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction.

           §30. INTEREST RATE LIMITATION . Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively, the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this §30 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Rate to the date of repayment, shall have been received by such Lender.

(Remainder of page intentionally left blank)

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          IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as a sealed instrument as of the date first set forth above.

 

 

 

 

 

KEYBANK NATIONAL ASSOCIATION ,

 

Individually and as Administrative Agent

 

 

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

Title:

 

 

 

 

 

WHITESTONE REIT OPERATING PARTNERSHIP, L.P.

 

 

 

 

 

By:

Whitestone REIT, a Maryland real estate

 

 

investment trust, its sole general partner

 

 

 

 

 

By:

 

 

 

 

 

 

 

James C. Mastandrea, President

 

 

 

 

 

WHITESTONE PIMA NORTE LLC

 

 

 

 

 

By:

Whitestone REIT Operating Partnership, L.P.,

 

 

a Delaware limited partnership, its sole member

 

 

 

 

 

 

By:

Whitestone REIT, a Maryland real estate

 

 

 

investment trust, its sole general partner

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

James C. Mastandrea, President

Signature Page to Term Loan Agreement


 

 

 

 

 

 

 

WHITESTONE REIT OPERATING PARTNERSHIP III LP

 

 

 

By: 

Whitestone REIT Operating Partnership III GP LLC,
a Texas limited liability company, its sole general partner

 

 

 

 

 

By:

Whitestone REIT Operating Partnership, L.P.,
a Delaware limited partnership, its sole member

 

 

 

 

 

 

By: 

Whitestone REIT, a Maryland real estate investment trust, its sole member

 

 

 

 

 

 

 

 

 

By: 

 

 

 

 

 

 

 

 

 

 

James C. Mastandrea, President

 

 

 

 

 

 

 

 

 

WHITESTONE REIT OPERATING PARTNERSHIP III GP LLC

 

 

 

 

 

By:

Whitestone REIT Operating Partnership, L.P.,
a Delaware limited partnership, its sole member

 

 

 

 

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole member

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

James C. Mastandrea, President

 

 

 

 

 

HARTMAN REIT OPERATING PARTNERSHIP III LP LTD

 

 

 

 

 

By:

Whitestone REIT Operating Partnership III GP LLC,
a Texas limited liability company, its sole general partner

 

 

 

 

 

By:

Whitestone REIT Operating Partnership, L.P.,
a Delaware limited partnership, its sole member

 

 

 

 

 

 

By:

Whitestone REIT, a Maryland real estate investment trust, its sole general partner

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

James C. Mastandrea, President

Signature Page to Term Loan Agreement


Exhibit 31.1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

 

 

 

 

I, James C. Mastandrea, Chairman and Chief Executive Officer of the Registrant, certify that:

 

 

 

1.

I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2007 of Whitestone REIT;

 

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

 

 

4.

The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

 

 

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

b)

Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

c)

Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

 

 

 

5.

The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

 

Dated this 31st day of March, 2007.


 

 

 

 

/s/ James C. Mastandrea

 

 

 

 

 

James C. Mastandrea, Chairman and Chief Executive Officer

 



Exhibit 31.2

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

 

 

 

 

I, David K. Holeman, Chief Financial Officer of the Registrant, certify that:

 

 

 

1.

I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2007 of Whitestone REIT.

 

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

 

 

4.

The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

 

 

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

b)

Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

c)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

 

 

 

5.

The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

 

Dated this 31st day of March, 2007.


 

 

 

 

/s/ David K. Holeman

 

 

 

 

 

David K. Holeman, Chief Financial Officer

 



Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Whitestone REIT (the “Company”) on Form 10-K for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James C. Mastandrea, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

/s/ James C. Mastandrea

 

 

 

 

 

James C. Mastandrea

 

 

Chairman and Chief Executive Officer

Dated this 31st day of March, 2008


Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Whitestone REIT (the “Company”) on Form 10-K for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David K. Holeman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

/s/ David K. Holeman

 

 

 

 

 

David K. Holeman

 

 

Chief Financial Officer

Dated this 31st day of March, 2008