WSI INDUSTRIES, INC. (Form: 8-K, Received: 05/10/2013 10:00:43)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported): May 8, 2013

	WSI Industries, Inc.
(Exact name of Registrant as Specified in its Charter)


	Minnesota
(State Or Other Jurisdiction Of Incorporation)

000-00619		41-0691607
(Commission File Number)		(I.R.S. Employer Identification No.)

213 Chelsea Road
Monticello, MN		55362
(Address Of Principal Executive Offices)		(Zip Code)




	(763) 295-9202
Registrant’s Telephone Number, Including Area Code

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Items under Sections 3 through 8 are not applicable and therefore omitted.

Item 1.01		Entry into a Material Definitive Agreement .

Item 2.03		Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

On May 8, 2013, WSI Industries, Inc. (the “Company”) amended and restated its Mortgage Agreement and Promissory Note and entered into a Loan Agreement with its bank. The Mortgage Agreement amendment provided for a total new principal amount of $4,200,000 and extended the term of the Agreement until May 8, 2018. The Promissory Note amended the interest rate to be 2.843% fixed for five years with monthly required payments of $22,964.39 under a twenty year amortization schedule. The Loan Agreement provided for certain restrictive covenants regarding a minimum net worth, a maximum ratio of debt to tangible net worth and a quarterly fixed charge coverage ratio.

The summary of these Agreements does not purport to be complete and is subject to and qualified in its entirety by reference to such documents, which are included as Exhibits 10.1 through 10.6 of Item 9.01 to this Form 8-K and are incorporated by reference into these Items 1.01 and 2.03.

Item 9.01		Financial Statements And Exhibits.

Exhibit No.		Description
10.1		Amended and Restated Real Estate Mortgage Security Agreement and Financing Statement dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A.

10.2		Amended and Restated Promissory Note dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A.

10.3		Loan Agreement dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A.

10.4		Assignment of Leases and Rents dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A.

10.5		Guaranty dated May 8, 2013 between WSI Rochester, Inc. and BMO Harris Bank N.A.

10.6		Guaranty dated May 8, 2013 between WSI Industries, Co. and BMO Harris Bank N.A.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

WSI INDUSTRIES, INC.

By: /s/ Benjamin T. Rashleger

Benjamin T. Rashleger

Chief Executive Officer

Date: May 10, 2013

EXHIBIT 10.1

THIS MORTGAGE CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, AND ALSO CONSTITUTES A FINANCING STATEMENT UNDER THE UNIFORM COMMERCIAL CODE.

THIS AMENDED AND RESTATED MORTGAGE SECURES ADDITIONAL INDEBTEDNESS IN THE AMOUNT OF $ 3,151,995.15 .

NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, ENFORCEMENT OF THIS MORTGAGE IS LIMITED TO A DEBT AMOUNT OF $4,200,000.00 UNDER CHAPTER 287 OF THE MINNESOTA STATUTES.

AMENDED AND RESTATED

REAL ESTATE MORTGAGE,SECURITY AGREEMENT

AND FINANCING STATEMENT

THIS AMENDED AND RESTATED REAL ESTATE MORTGAGE, SECURITY AGREEMENT AND FINANCING STATEMENT (this “Mortgage”) is made as of May 8, 2013, by WSI Industries, Inc., a Minnesota corporation (“Grantor”) in favor of BMO Harris Bank N.A., successor by merger to M&I Marshall & Ilsley Bank, a Wisconsin state banking corporation, and to Excel Bank Minnesota, a Minnesota banking corporation (“Lender”).

RECITALS

WHEREAS, to secure a promissory note made by Mortgagor in favor of Excel Bank Minnesota ("Excel"), dated May 3, 2004, in the original principal amount of $1,360,000.00 (the "Original Note"), Mortgagor made and delivered to Excel a Mortgage and Security Agreement and Fixture Financing Statement in the original principal amount of $1,360,000.00 dated as of May 3, 2004, recorded May 13, 2004 in the office of the County Recorder of Wright County, Minnesota as Document No. A-908906 (the "Original Mortgage"). The Original Mortgage encumbers the real property legally described on the attached Exhibit A (the "Premises"); and

WHEREAS, in connection with the recording of the Original Mortgage, mortgage registration tax in the amount of $3,128.00 was paid to the Wright County Treasurer on May 13, 2004, as evidenced by receipt number 750513; and

WHEREAS, the unpaid principal balance of the Original Note as of the date hereof is $1,048,004.85; and

WHEREAS, effective on or about August 1, 2007, Excel was acquired by M&I Marshall & Ilsley Bank by merger, a certified copy of which Certificate of Merger was recorded in the office of the County Recorder of Wright County, Minnesota on __________________, 2013, as Document No _________________; and

WHEREAS, effective on or about July 5, 2011, M&I Marshall & Ilsley Bank was acquired by Lender by merger, a certified copy of which Certificate of Merger was recorded in the office of the County Recorder of Wright County, Minnesota on December 20, 2011, as Document No A-1190661; and

WHEREAS, effective as of the date hereof, Mortgagee has agreed to advance additional funds to Mortgagee in the amount of $3,151,995.15, for a total new principal amount of $4,200,000.00 (the "Loan"), and to evidence the Loan Mortgagor has executed an Amended and Restated Note of even date herewith in the new original principal amount of $4,200,000.00 (the "Note"), which Note is to be secured by this Mortgage,); and

WHEREAS, to secure the Note, Mortgagor and Mortgagee by this Amended and Restated Mortgage desire to amend and restate in its entirety the Original Mortgage; and

WHEREAS, this Amended and Restated Mortgage secures additional indebtedness in the amount of $3,151,995.15 and the total principal amount secured by this Amended and Restated Mortgage is now $4,200,000.00 .

NOW, THEREFORE, Mortgagor and Mortgagee do hereby amend, and restate in its entirety the Original Mortgage (as defined above), as follows:

WITNESSETH:

Grantor has entered into a Loan Agreement (the “Loan Agreement”) with Lender as of the date first written above pursuant to which Lender has made a loan (the “Loan”) to Grantor evidenced by a $4,200,000.00 Amended and Restated Promissory Note (together with all modifications, extensions and renewals, the “Note”) payable to the order of Lender, all on the terms and conditions as are set forth in the Note. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Note or Loan Agreement, as applicable.

This is not homestead property.

NOW, THEREFORE, Grantor, to secure the payment of the Note in accordance with its terms and all increases, additions, extensions, modifications and renewals thereof, and all other sums which may become due from Grantor to Lender by virtue of the Loan Agreement, this Mortgage, the Note, the other security documents, and all other documents executed in connection with this transaction (collectively such documents are hereinafter referred to as the “Loan Documents”), including but not limited to any and all principal, interest (including but not limited to any sums of money held by Lender in an interest reserve established pursuant to the Loan Agreement), late charges, loan commissions, service charges, liquidated damages, expenses, advances due or incurred by Lender in connection with the Loan (regardless of whether any Loan proceeds have been disbursed) and all other obligations, liabilities and indebtedness of Borrower or Grantor to Lender (collectively, the “Indebtedness”), and to secure the performance of all covenants and agreements herein contained and in the Loan Documents by Borrower or Grantor to be performed, and in consideration of the sum of Ten and No/100 Dollars ($10.00) in hand paid by Lender and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Grantor, does hereby grant, bargain, sell, release and convey and assign to Lender, with power of sale, all right, title and interest which Grantor now has or may hereafter acquire in and to that tract or parcel of land (“Real Property”) legally described on Exhibit A attached hereto and incorporated herein by reference, together with all rights, interests and properties described as follows and all rights of estates, powers and privileges appurtenant thereto (all of which are collectively referred to herein as the “Property”):

I. All right, title and interest of Grantor, including any after-acquired title or reversion, now or at any time hereafter existing, in and to all highways, roads, ways, streets, avenues, alleys and other public thoroughfares, bordering on or adjacent to the Real Property or any part thereof, together with all right, title and interest of Grantor to the land lying within such highways, roads, ways, streets, avenues, alleys and other public thoroughfares, whether heretofore or hereafter vacated, and all strips and gores adjoining or within the Real Property or any part thereof;

II. All and singular the tenements, hereditaments, licenses, permits, consents, easements, appurtenances, passages, waters, water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant), water courses, riparian rights, air rights, oil, gas, minerals, coal or other substances underlying or relating to the Real Property, all timber to be cut, all as-extracted collateral (as defined in the Minnesota Uniform Commercial Code), other rights and privileges thereof or in any way now or at any time hereafter belonging to or in any way appertaining to the Real Property or any part thereof or to any property or right now or at any time hereafter comprising a part of the property and rights subject to this Mortgage; and all right, title and interest of Grantor, whether now or at any time hereafter existing, in all reversions and remainders to the Real Property and such other property or right;

III. All present and future oral and written leases, licenses and agreements for the use or occupancy of the whole or any part of the Property, including all amendments of, supplements to, and renewals and extensions thereof at any time made (all such leases, agreements, amendments, supplements, renewals and extensions being hereinafter referred to collectively as the “Leases”) together with all rents, earnings, income, issues, profits, royalties, revenues, insurance proceeds (including, but not limited to, any policy of insurance covering loss of income or rents for any cause) whether pursuant to any of the Leases or otherwise, and all other monetary benefits now existing or hereafter arising, derived or accrued from or belonging to the Property or such Leases, including any and all payments in lieu of rent, condemnation proceeds, damages, security deposits, rebates or refunds of impact fees, water or sewer connection fees, utility costs, taxes, assessments or other charges and all other sums due or to become due under and pursuant thereto (collectively, the “Rents”);

IV. All buildings and improvements (“Improvements”) of every kind and description now or hereafter located, erected or placed on the Real Property, or any part thereof, including, but not limited to, all structures, railroad spur tracks and sidings, plants, works and all materials intended for construction, and repairs of such Improvements now or hereafter erected thereon, all of which materials shall be deemed to be subject to this Mortgage immediately upon the delivery thereof to the Real Property, and all fixtures now or hereafter owned by Grantor, and attached to or contained in and used in connection with the Real Property, whether or not the same are or shall be attached to any building or buildings in any manner and, without any further act, all extensions, additions, betterments, substitutions and replacements to the foregoing, together with all plans and specifications for the Improvements;

V. All fixtures, furniture, furnishings, appliances, equipment, machinery and other personal property of every kind and description in which Grantor now has or at any time hereafter acquires an interest (“Personal Property”), whether now or at any time hereafter installed or located in, on or about or used in connection with the Real Property or any part thereof, or used in or necessary to the complete and proper planning, development, use, occupancy or operation thereof, including but not limited to all pumps, pipes, islands, underground storage tanks, computers which operate fueling systems, general intangibles, accounts, contract rights, electrification equipment and power lines, whether owned individually or jointly with others, all water supply, heating, lighting, cooling, refrigerating, humidifying, dehumidifying, plumbing, sprinkler protection, fire extinguishing, incinerating, waste removal, cleaning, air-conditioning, ventilating, communicating, water-heating, television antenna and electrical systems, and the machinery, appliances, fixtures and equipment pertaining thereto, all switchboards, engines, motors, tanks, pumps, conduits, ducts, compressors, elevators, escalators, shades, awnings, venetian blinds, screens, screen doors, storm doors and windows, stoves, ranges, dishwashers, waste disposal units, curtain rods and fixtures, washing machines, clothes dryers, floor coverings, partitions, condensing units, range hoods, fans, lawn equipment, speakers, electrical wiring, pipe, signs, all built-in equipment, whether any of the foregoing are single units or centrally controlled, and all renewals, replacements and substitutions thereof and additions thereto, it being understood that all of the fixtures, furnishings, appliances, equipment, machinery and other Personal Property hereinabove described shall be subject to the lien of this Mortgage as if covered and conveyed hereby by specific and apt descriptions;

VI. All awards and other compensation, whether heretofore, now or hereafter made, to the Grantor, its respective successors and assigns, for any taking by eminent domain, either permanent or temporary, of all or any part of the Real Property or any part thereof and all the properties and rights described in subsections I through V above or any part thereof or any easement or appurtenance thereof, including any awards for any changes of grade of streets, which said awards and compensation are hereby assigned to Lender; and

VII. All monies or other funds or sums at any time on deposit with Lender pursuant to the terms hereof or required by the terms of the Loan Agreement to be on deposit with Lender; and all contract rights, general intangibles, actions and rights of action, including without limitation intellectual property (including but not limited to trademarks, trade names, domain names, logos, goodwill, software, computer programs, marketing literature, and materials and symbols) related to the Real Property or the Improvements or the operation thereof; deposits for the benefit of Borrower (including but not limited to deposits with respect to utility services, and any deposits or reserves hereunder or under any other Loan Documents for taxes, insurance or otherwise); permits, licenses, franchises, certificates, development rights, commitments and rights for utilities and other rights and privileges obtained in connection with the Real Property or the Improvements; engineering, accounting, title, legal, and other technical or business data concerning the Real Property and Improvements or the operation thereof which are in the possession of Borrower or in which Borrower can otherwise grant a security interest; all unearned insurance premiums arising from or relating to the Real Property or any part thereof or the properties and rights described above in subsections I through VI or any part thereof; and all proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Real Property or any part thereof or the properties and rights described above in subsections I through VI or any part thereof.

Any reference herein to the “Property” shall be deemed to apply to the Real Property and all the properties and rights expressed in the foregoing seven (7) paragraphs, unless the context shall require otherwise. It is understood that the Real Property and all the properties and rights hereby granted, bargained, sold, mortgaged, conveyed and warranted are intended to be one unit and are hereby understood, agreed and declared to form a part and parcel of the Property and to be appropriated to the use of the Property, and shall for the purpose of this Mortgage, so far as permitted by law, be deemed to be real estate and covered by the lien of this Mortgage, and as to the balance of the properties and rights as aforesaid, this Mortgage is also deemed to be a Security Agreement for the purpose of creating a security interest in said properties and rights, which security interest Grantor hereby grants Lender as security for the payment of the Note and all other sums secured hereby.

In addition to the Note, this Mortgage secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statutes of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.

In addition to the Note, this Mortgage also secures all future advances made by Lender to Grantor whether or not the advances are made pursuant to a commitment. Specifically, without limitation, this Mortgage secures, in addition to the amounts specified in the Note, all future amounts Lender in its discretion may loan to Grantor, together with all interest thereon.

The obligations and Indebtedness secured hereby shall also include, without limitation, all obligations, indebtedness and liabilities of Borrower or Grantor to Lender arising pursuant to or in connection with any swap, collar, cap, future, forward or derivative transaction, including any involving, or settled by reference to, one or more interest rates, currencies, commodities, equity or debt instruments, any economic, financial or pricing index or basis, or any similar transaction, including any option with respect to any of these transactions and any combination of these transactions.

TO HAVE AND TO HOLD the Property unto the Lender and its successors and assigns forever.

AND GRANTOR COVENANTS, REPRESENTS AND WARRANTS that: (a) Grantor holds good and marketable title of record to the Property in fee simple, free and clear of all liens and encumbrances other than those set forth in Exhibit B attached hereto and incorporated by reference; and (b) Grantor has the full right, power, and authority, acting alone, to execute and deliver this Mortgage to Lender. Subject to the exception in the preceding sentence, Grantor warrants and will forever defend the title to the Property against the lawful claims of all persons. In the event any action or proceeding is commenced that questions Grantor’s title or the interest of Lender under this Mortgage, Grantor shall defend the action at Grantor’s expense. Grantor may be the nominal party in such proceeding, but Lender shall be entitled to participate in the proceeding and to be represented in the proceeding by counsel of Lender’s own choice. Grantor will deliver, or cause to be delivered, to Lender such instruments as Lender may request from time to time to permit such participation. Grantor covenants that Lender is subrogated to the lien of any mortgage or any other lien which is discharged, whether in whole or in part, by the proceeds of the Note. Grantor further warrants that the Property and Grantor’s use of the Property comply with all existing applicable laws, ordinances, and regulations of all governmental authorities having jurisdiction over the Property and Grantor.

PROVIDED, HOWEVER, that if the principal, interest and all other sums provided in the Note are paid and all other sums hereinafter provided for or secured hereby are paid, and if the Grantor properly performs all of the covenants herein contained, and Lender has no further obligation to make any advance of any Indebtedness to or on behalf of Grantor, then this Mortgage shall be released, at the cost of the Grantor, otherwise this Mortgage will remain in full force and effect.

IT IS FURTHER UNDERSTOOD AND AGREED THAT :

1. Payment and Performance . This Mortgage, including the assignment of Rents and the security interest in the Rents and Personal Property, is given to secure: (a) payment of the Indebtedness; and (b) performance of any and all obligations under the Note, the Loan Documents, and this Mortgage. Except as otherwise provided in this Mortgage, Grantor shall pay to Lender all amounts secured by this Mortgage as they become due and shall strictly perform all of Grantor’s obligations under this Mortgage.

2. Payment of Taxes . Grantor shall pay when due (and in all events prior to delinquency) all taxes, ad valorem and non ad valorem real property taxes, payroll taxes, sales and use taxes, personal property taxes, special taxes, assessments, water charges, sewer service charges levied against or on account of the Property or this Mortgage (collectively, “Taxes”), and shall pay when due all claims for work done on or for services rendered or material furnished to the Property. Grantor shall maintain the Property free of any liens having priority over or equal to the interest of Lender under this Mortgage, except for those liens specifically agreed to in writing by Lender.

Grantor shall upon demand furnish to Lender satisfactory evidence of payment of the Taxes and shall authorize the appropriate governmental official to deliver to Lender at any time a written statement of the Taxes against the Property.

Grantor shall notify Lender at least fifteen (15) days before any work (other than minor alterations for which Lender’s consent is not required hereunder) is commenced, any services are furnished, or any materials are supplied to the Property, if any construction or mechanic’s lien, materialmen’s lien, or other lien could be asserted on account of the work, services, or materials. Grantor will upon request of Lender deposit with Lender such amounts as deemed necessary by Lender to sufficiently complete the work in a good and workmanlike and lien free manner, which amounts will be disbursed by Lender in accordance with an escrow agreement or disbursing agreement to be entered into by Lender and Grantor prior to the commencement of such work.

3. Escrows and Reserves . Upon request of Lender and upon and after the occurrence of an Event of Default, Grantor will without further demand deposit with Lender, in addition to the required installments of principal and/or interest due under the terms of the Note, monthly until the Note is paid in full a sum equal to all Taxes next due on the Property (all as estimated by the Lender), divided by the number of months to elapse before one month prior to the date when such Taxes will become delinquent. Such deposits and escrow or reserve accounts: (1) shall accrue interest at Lender’s regular savings rates; (2) shall be used, subject to the provisions of this Section, for the payment of Taxes on the Property next due and payable when they become due; and (3) shall not be commingled with other funds of Lender and Lender shall establish a separate account for such deposits and escrow or reserve accounts. All such deposits and escrow and reserve accounts shall be applied by the Lender, provided no Event of Default has occurred and is continuing, to the payment of Taxes due on the Property. Payments shall be made in the fiscal year designated by Grantor, provided sufficient funds are available and such Taxes are not delinquent. If the sums so deposited are insufficient to pay any such amounts for any period when the same shall become due and payable, the Grantor shall on demand deposit such additional funds as may be necessary to pay such amounts in full. If the sums so deposited exceed the amount required to pay such amounts for any year, the excess shall be credited to a subsequent deposit or deposits required hereunder.

Lender may, at its option, without being required to do so, apply: (i) any monies at the time on deposit or in escrow or reserve accounts first pursuant to the foregoing provisions of this Section; and (ii) any deposits or escrow or reserve funds and any payments by Grantor, on any of Grantor’s obligations herein contained or obligations under the Note or Loan Agreement, in such order and manner as the Lender may elect. When the Indebtedness secured hereby has been fully paid, any remaining deposits or escrow or reserve funds shall be paid to Grantor or to the then owner or owners of the Property. Such deposits and escrow and reserve accounts are hereby pledged as additional security for the Indebtedness hereunder and shall be irrevocably applied by the Lender for the purposes for which made hereunder and shall not be subject to the direction or control of the Grantor; provided, however, that the Lender shall not be liable for any failure to apply to the payment of such amounts unless Grantor, provided no Event of Default has occurred and is continuing, shall have requested the Lender in writing to make application of such funds to the payment of the particular amounts for payment of which they were deposited, escrowed or reserved, accompanied by the bills for the same. Lender shall not be liable for any act or omission taken in good faith or pursuant to the instruction of any party, and shall be liable only for its gross negligence or willful misconduct.

Lender shall have the right to make any such payment for Taxes or other amounts for which funds are held in escrow or reserve hereunder unless any such amount is then being contested by Grantor in accordance with this Mortgage, in which event, as the case may be, Lender shall make such payment under protest in the manner prescribed by law or shall withhold such payment, provided, however, that the provisions of this Mortgage must be complied with by Grantor, as the case may be. In the event such contest shall or might result in interest penalty or other charges, Grantor shall likewise deposit monthly pro-rata the amount of any such interest, penalty or additional charge.

4. Effect of New Taxation or Changes in Law Regarding Taxation . If, by the laws of the United States of America, or of any state having jurisdiction over Grantor or the Property, any Tax or governmental charge of any character whatever is due or becomes due on account of this Mortgage or the Indebtedness secured hereby, except for income or franchise taxes of Lender, Grantor covenants and agrees to pay any such Tax or governmental charge of any character whatever in the manner required by any such law when the same shall become due. Grantor further covenants to hold harmless and agrees to indemnify the Lender, its successors or assigns, against any liability incurred by reason of the imposition of any such Tax or government charge on account of this Mortgage or the Indebtedness secured hereby. In the event of the enactment after this date of any law of the State in which the Property is located deducting from the value of land for the purpose of taxation any lien thereon, or imposing upon the Lender the payment of the whole or any part of the Taxes, charges or liens herein required to be paid by Grantor, or changing in any way the laws relating to the taxation of mortgages or debts secured by mortgages or the Lender’s interest in the Property, or the manner of collecting Taxes, so as to affect this Mortgage or the debt secured hereby or the holder thereof, then, and in any such event, the Grantor, upon demand by the Lender, shall pay such Taxes or liens or reimburse the Lender therefor; provided, however, that if in the opinion of counsel for the Lender: (a) it might be unlawful to require Grantor to make such payment; or (b) the making of such payment might result in the imposition of interest beyond the maximum amount permitted by law, then the Lender may elect, by notice in writing given to the Grantor, to declare all of the Indebtedness secured hereby to be and become due and payable thirty (30) days from the giving of such notice.

5. Environmental Warranties and Indemnification .

5.1. The following terms shall have the meanings hereafter ascribed to them:

5.1.1 “Environmental Laws” means all federal, state and local laws including statutes, regulations, ordinances and other governmental restrictions and requirements and common law relating to the presence, discharge or remediation of air pollutants, water pollutants or process wastewater or otherwise relating to the protection of human health, the environment, toxic or hazardous substances, pesticides, herbicides, fertilizer, mold, asbestos or radon, including, but not limited to, the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, regulations of the Environmental Protection Agency, regulations of the Nuclear Regulatory Agency, and regulations of any state department of natural resources or state environmental protection agency now or at any time hereafter in effect.

5.1.2 “Hazardous Materials” shall mean any oil, flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, hazardous wastes, toxic or contaminated substances or similar materials, including, without limitation, any substances which are “hazardous substances,” “hazardous wastes,” “hazardous materials,” “toxic substances,” “wastes,” “regulated substances,” “industrial solid wastes,” or “pollutants” under the Environmental Laws including, but not limited to, air pollutants, water pollutants, wastewater, pesticides, herbicides, fertilizer, mold, asbestos, radon or other health or environment threatening substances; provided, however, that “Hazardous Materials” shall not include commercially reasonable amounts of cleaning products used in the ordinary course of operation of the Property which are used and stored in accordance with all applicable Environmental Laws.

5.2 In order to induce Lender to make the Loan, Grantor represents and warrants to Lender the following:

5.2.1 To the best of Grantor’s knowledge after due inquiry, the Property is and has been operated and maintained in compliance with all applicable Environmental Laws.

5.2.2 Grantor has conducted or caused to be conducted appropriate inquiry into the current and previous uses of the Property in a manner consistent with good commercial or customary practice for purposes of meeting the standard for minimizing liability under CERCLA and other applicable Environmental Laws. Grantor has disclosed to Lender and provided Lender with true, correct and complete copies of the results of any and all reports, tests, studies and investigations commissioned by or on behalf of Grantor or otherwise within Grantor’s possession or control and relating to Hazardous Materials and the Property.

5.2.3 Grantor is not a party to any litigation or administrative proceeding and has not received written notice of any claim and, so far as is known by Grantor, there is no claim, litigation or administrative proceeding threatened against Grantor relating to the Property, which in either case asserts or alleges: (i) Grantor violated any Environmental Laws; (ii) Grantor is required to clean up or take remedial or other response action due to the disposal, discharge or other release of any Hazardous Materials, (iii) the Property is in violation of any Environmental Laws; or (iv) Grantor or any other person is required to contribute to the cost of any past, present or future cleanup or remedial or other response action which arises out of or is related to the disposal, discharge or other release of any Hazardous Materials.

5.2.4 With respect to the period during which Grantor owns or occupies the Property and, to the Grantor’s knowledge with respect to the time before Grantor owned or occupied the Property, no person or entity has caused or permitted materials to be generated, stored, treated, recycled or disposed of on, under or at the Property which materials, if known to be present, would require cleanup, removal or some other remedial action under Environmental Laws.

5.2.5 To Grantor’s knowledge, there are no conditions existing currently or that are likely to exist during the term of the Loan which would subject Grantor to damages, penalties, fines, injunctive relief or cleanup or other costs or expenses under any Environmental Laws or which would require cleanup, remedial action or other response pursuant to Environmental Laws.

5.2.6 Grantor is not subject to any judgment, decree, order or citation related to or arising out of any Environmental Laws and to Grantor’s knowledge, has not been named or listed as a potentially responsible party by any governmental body or agency in a matter arising under any Environmental Laws.

5.2.7 Grantor has timely obtained and is in compliance with all permits, licenses and approvals required under all Environmental Laws; all such permits, licenses, and approvals are in full force and effect and any fees and/or conditions for such permits, licenses and approvals have been paid and/or complied with.

5.2.8 To Grantor’s knowledge, no pesticides, herbicides, fertilizers or other materials have been used on, applied to or disposed of on the Property in violation of any Environmental Laws.

5.2.9 The use of the Property for its intended purpose will not result in a violation of any Environmental Laws.

5.3 While any part of the principal of or interest on the Loan remains unpaid, Grantor shall and shall cause all tenants of the Property:

5.3.1 Timely comply with all applicable Environmental Laws and all permits, licenses and approvals required under any Environmental Laws with respect to the Property; provided, however, that such compliance shall not be required so long as Grantor shall: (a) cause the validity or applicability thereof to be contested in good faith and with due diligence at no expense to Lender, by appropriate legal proceedings which shall have the effect of preventing the immediate enforcement of the same against Grantor, tenants of the Property, or the Property; and (b) pending the outcome of such legal proceedings, cause Lender to receive such reasonable security as may be requested by Lender to ensure compliance with all Environmental Laws and all potential interest and maximum penalties.

5.3.2 Provide Lender, immediately upon receipt, copies of any correspondence, notice, pleading, citation, indictment, complaint, order, decree or other document from any source asserting or alleging violation of any Environmental Law applicable to the Property by Grantor or any other person, or asserting or alleging a circumstance or condition which may require a financial contribution by Grantor or any tenant, lessee, licensee or occupant of the Property or a cleanup, remedial action or other response by or on the part of Grantor under Environmental Laws.

5.3.3 Advise Lender in writing as soon as Grantor becomes aware of any condition or circumstance which makes any of the representations or warranties contained herein incomplete or inaccurate.

5.3.4 Include in all Leases or other agreements for the use of all or any part of the Property a covenant from the tenant, lessee, licensee or occupant of the Property: (a) to not violate any Environmental Laws or permit the storage, disposal or discharge of any Hazardous Materials on the premises; and (b) to indemnify and hold the lessor and Lender harmless for, from and against all losses, costs, expenses (including reasonable attorneys’ fees) or damages of any kind arising from a breach of such covenant.

5.3.5 Promptly undertake and diligently pursue to completion any legally required remedial containment or cleanup action in the event of any release or discharge or threatened release or discharge of any Hazardous Materials on, upon, into or from the Property.

5.3.6 At all times, to maintain and retain complete and accurate records of all releases, discharges or other use, handling, storage, disposal or transport of any Hazardous Materials on, onto, into or from the Property, including without limitation, records of the quantity and type of any such substance disposed of on or off of the Property, as required by Environmental Laws, and to allow Lender and its representatives to examine and copy all such books and records.

5.3.7 Upon request of Lender and upon and upon and after the occurrence of an Event of Default, allow Lender and its representatives to enter the Property and perform an environmental assessment (including inspection and sampling) as Lender, in the exercise of its reasonable discretion and upon reasonable advance notice to Grantor, deems necessary to assess the condition of the Property and compliance with the provisions of this Mortgage. Grantor shall promptly reimburse Lender for its out-of-pocket expenses, including, e.g. consultant fees and expenses, incurred in connection with the performance of the environmental assessment.

5.3.8 If Grantor or any other person on behalf of or at the direction of Grantor undertakes any investigation or corrective action with respect to the Property including, without limitation, any response, removal, or other remedial action pursuant to any requirement of any Environmental Laws, Grantor shall obtain and deliver to Lender a written report, in form and substance acceptable to Lender, from a consultant acceptable to Lender, certifying that all required action has been properly taken and that, upon completion of said action, the Property is in compliance with all Environmental Laws.

5.4 Grantor hereby agrees to indemnify, defend and hold harmless Lender and each of its officers, directors, employees, agents, consultants, attorneys, invitees, contractors and their respective successors and assigns (individually, an “Indemnified Party”, and collectively, the “Indemnified Parties”) for, from and against any and all losses, liabilities, damages, fines, penalties, costs and expenses of every kind and character, including reasonable attorneys’ fees and court costs, incurred and expended by an Indemnified Party, and occasioned by or associated with any claims, demands, causes of action, suits and/or enforcement actions including, without limitation, any administrative or judicial proceedings and any remedial, removal or response actions ever asserted, threatened, instituted or requested by any person whatsoever arising out of or related to: (a) the breach of any representation, warranty or covenant of Grantor set forth in this Section; or (b) the failure of Grantor or any tenant, lessee, licensee or occupant of the Property or any employee, agent, consultant or contractor that provides services to or at the Property to perform any material covenant or obligation hereunder; or (c) the ownership, construction, occupancy, operation or use of the Property; unless caused by the bad faith or gross negligence of the Indemnified Party. The foregoing representations, warranties, covenants and agreements of this Section 5 shall be continuing covenants, representations and warranties for the benefit of the Indemnified Parties including, but not limited to, any purchaser at a foreclosure sale or trustee’s sale under this Mortgage, or any transferee of the interest of Lender. The provisions of this Section 5 shall be in addition to and not in limitation of the provisions of the remainder of this Mortgage, the Guaranty or the other Loan Documents, and any other obligations and liabilities which Grantor or Guarantor may have to Lender under applicable statutes or at common law and shall survive the satisfaction or release of this Mortgage, any foreclosure of this Mortgage, any acquisition of title to the Property by Lender or any party claiming by, through or under Lender by deed in lieu of foreclosure or otherwise, the term of the Mortgage and the Loan Documents, and the payment of the Note in full, and shall continue thereafter in full force and effect.

6. Grantor’s Covenants . The Grantor will not do or permit to be done to, in, upon or about any portion of the Property, anything that may in any manner impair the value thereof, or weaken, diminish or impair the security of this Mortgage. In furtherance of the foregoing:

6.1 Until the occurrence of an Event of Default, Grantor may: (a) remain in possession and control of the Property; (b) use, operate or manage the Property; and (c) collect the Rents from the Property.

6.2 Grantor shall maintain the Property in tenantable condition and promptly perform all repairs, replacements, and maintenance necessary to preserve its value.

6.3 Grantor shall not cause, conduct or permit any nuisance nor commit, permit, or suffer any stripping of or waste on or to the Property or any portion of the Property. Without limiting the generality of the foregoing, Grantor will not remove, or grant to any other party the right to remove, any timber, minerals (including oil and gas), coal, clay, scoria, soil, gravel or rock products without Lender’s prior written consent.

6.4 Grantor shall not demolish or remove any Improvements from the Real Property without Lender’s prior written consent. As a condition to the removal of any Improvements, Lender may require Grantor to make arrangements satisfactory to Lender to replace such Improvements with Improvements of at least equal value.

6.5 Grantor shall permit Lender to enter the Real Property at any time upon reasonable advance notice (except in the event of an emergency in which case no notice shall be required), during normal business hours (except in the event of an emergency in which case Lender may enter at any time), and in a manner that does not unreasonably interrupt Grantor’s use and enjoyment of the Real Property for the purpose of inspecting Grantor’s compliance with the terms and provisions of this Mortgage.

6.6 Grantor shall promptly comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the use or occupancy of the Property, including without limitation, the Americans With Disabilities Act. Grantor may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Grantor has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interest in the Property are not jeopardized. Lender may require Grantor to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

6.7 Grantor shall not to abandon or leave unattended the Property. Grantor shall do all other acts, in addition to those acts set forth above in this Section, which from the character and use of the Property are reasonably necessary to protect and preserve the Property.

6.8 Grantor shall promptly repair, restore or rebuild any buildings or other Improvements now or hereafter on the Property which may become damaged or be destroyed by any cause whatsoever (excluding minor inconsequential damage costing less than Ten Thousand Dollars ($10,000.00) to repair which does not materially impair the value or utility of the Improvements), so that upon completion of the repair, restoration and rebuilding of said buildings and Improvements there will not be any liens of any nature arising out of said repair, restoration and rebuilding, and the Property will have a commercial value at least as great as the commercial value of the Property prior to such damage or destruction.

6.9 Grantor shall not directly or indirectly, without Lender’s prior written consent, create, incur, permit to exist or assume any mortgage, pledge or other lien or claim for lien or encumbrance upon the Property or any part thereto other than: (a) the lien and security interest of Lender as created by this Mortgage and any other documents evidencing, securing or referring to the Note; and (b) the permitted liens, charges or encumbrances set forth in Exhibit B attached hereto (the “Permitted Encumbrances”). In the event of the creation, incurrence or existence of any such lien, claim for lien or encumbrance, Grantor shall cause the same to be satisfied or removed, or shall bond over the same to Lender’s satisfaction within ninety (90) days of the creation, incurrence or attachment thereof to the Property.

6.10 Except as provided in the Loan Agreement, Grantor shall not make any alterations to any part of the Property without the prior written consent of Lender

6.11 Grantor shall promptly notify Lender in writing of: (a) any loss or damage to any part of the Property that exceeds Fifty Thousand Dollars ($50,000.00) in any single instance; (b) any material change, whether contemplated, pending or final, in the assessment of any part of Property by taxing authorities or in the zoning classification; (c) the actual or threatened commencement of any proceedings under condemnation or eminent domain affecting any part of the Property, including those proceedings relating to severance and consequential damage and change in grade of streets, copies of any and all papers served in connection with any such proceedings to be delivered to Lender upon such service; and (d) any other action, whether contemplated (when known to Grantor), pending or final, by any public authority or otherwise, that could affect the value of any part of the Property.

6.12 Grantor shall not suffer or permit any change in the general nature of the occupancy of the Property, without the prior written consent of Lender.

6.13 Grantor shall not grant any easement or dedication, file or record any plat, condominium declaration or restriction, or initiate or acquiesce in any zoning reclassification or similar changes in applicable laws, rules and ordinances, without the prior written consent of Lender.

6.14 Grantor shall not make or permit any use of the Property that could with the passage of time result in the creation of any right of user, or any claim of adverse possession or easement on, to or against any part of the Property in favor of any person or the public.

6.15 Grantor shall maintain all operating, deposit and similar accounts relating to the Property and all escrow and reserve accounts required hereunder with Lender.

6.16 Grantor shall not enter into any Lease (or any binding letter of intent or binding term sheet with respect thereto) without obtaining the prior written consent of Lender, including, but not limited to, Lender’s approval of the proposed tenant, the proposed guarantor, if any, rental rate, tenant improvement allowance (if applicable), term, the form of the proposed Lease, and the financial statements of the proposed tenant and the proposed guarantor, if required by Lender.

7. Insurance . Grantor shall procure and maintain policies of the insurance with standard extended coverage endorsements on a replacement basis for the full insurable value covering all Improvements on the Real Property in an amount sufficient to avoid application of any coinsurance clause, and with a standard mortgagee clause in favor of Lender, and a standard Lender Loss Payee clause in favor of Lender. Grantor shall also procure and maintain comprehensive general liability insurance in such coverage amounts as Lender may request, but in any event in an amount of at least One Million Dollars ($1,000,000.00) per occurrence, Two Million Dollars ($2,000,000.00) aggregate, and Five Million Dollars ($5,000,000.00) umbrella policy, with Lender being named as additional insured in such liability insurance policies. Additionally, Grantor shall maintain such other insurance, including but not limited to hazard, business interruption and boiler insurance as Lender may require. Policies shall be written by such insurance companies and in such form as may be reasonably acceptable to Lender. Grantor shall deliver to Lender certificates of coverage from each insurer containing a stipulation that coverage will not be cancelled or diminished without a minimum of thirty (30) days’ prior written notice to Lender, that there will be no cancellation due to non-payment of premiums without a minimum of ten (10) days’ prior written notice to Lender, and not containing any disclaimer of the insurer’s liability for failure to give such notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. Should the Real Property be located in an area designated by the Director of the Federal Emergency Management Agency as a special flood hazard area, Grantor agrees to obtain and maintain Federal Flood Insurance, if available, for the full unpaid principal balance of the Loan and any prior liens on the Property securing the Loan, up to the maximum policy limits set under the National Flood Insurance Program, or as otherwise required by Lender, and to maintain such insurance for the term of the Loan.

Upon request of Lender, however, not more than once a year, Grantor shall furnish to Lender a report on each existing policy of insurance showing: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured, the then current replacement value of such property, and the manner of determining that value; and (e) the expiration date of the policy. Grantor shall, upon request of Lender, have an independent appraiser satisfactory to Lender determine the cash value replacement cost of the Property.

Unless Grantor provides Lender with evidence of the insurance coverage required hereunder at least thirty (30) days before the expiration of any existing policy or policies, with evidence of premium paid, Lender may purchase insurance at Grantor’s expense to protect Lender’s interests in the collateral. The insurance may, but need not, protect Grantor’s interests. The coverage that Lender purchases may not pay any claim that Grantor makes or any claim that is made against Grantor in connection with the collateral. Grantor may later cancel any insurance purchased by Lender, but only after providing Lender with evidence that Grantor has obtained insurance as required by their agreement. If Lender purchases insurance for the collateral, Grantor shall be responsible for the costs of that insurance, including interest and any other charges Lender may impose in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to Grantor’s total outstanding balance or obligation. The costs of the insurance purchased by Lender may be more than the cost of the insurance Grantor may be able to obtain on Grantor’s own.

8. Application of Proceeds of Insurance . Grantor shall promptly notify Lender of any loss or damage to the Property. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. Whether or not Lender’s security is impaired, Lender may, at Lender’s election, receive and retain the proceeds of any insurance and apply the proceeds to the reduction of the Indebtedness, payment of any lien affecting the Property, or the restoration and repair of the Property. If Lender elects to apply the proceeds to restoration and repair, Grantor shall repair or replace the damaged or destroyed Improvements in a manner satisfactory to Lender. Lender shall, upon satisfactory proof of such expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration if Grantor is not in default under this Mortgage. Any proceeds which have not been disbursed within one hundred eighty (180) days after their receipt and which Lender has not committed to the repair or restoration of the Property shall be used first to pay any amount owing to Lender under this Mortgage, then to pay accrued interest, and the remainder, if any, shall be applied to the principal balance of the Indebtedness. If Lender holds any proceeds after payment in full of the Indebtedness, such proceeds shall be paid to Grantor as Grantor’s interests may appear.

9. Condemnation . If any proceeding in condemnation is commenced, Grantor shall promptly notify Lender in writing, and Grantor shall promptly take such steps as may be necessary to defend the action and obtain the award. Grantor may be nominal party in such proceeding, but Lender shall be entitled to participate in the proceeding and to be represented in the proceeding by counsel of its own choice. Grantor will deliver or cause to be delivered to Lender such instruments and documentation as may be required by Lender from time to time to permit such participation. If all or any part of the Property is condemned by eminent domain proceedings or by any proceeding or purchase in lieu of condemnation, or if all or any part of the Property is sold in lieu of condemnation, Lender may at its election require that all or any portion of the net proceeds of the award or sale be applied to the Indebtedness or the repair or restoration of the Property. If Lender requires that all or any portion of the net proceeds of the award or sale be applied to the repair or restoration of the Property, and if the net proceeds of the award or sale are insufficient to cover the cost of rebuilding or restoration, Grantor shall pay such cost in excess of the net proceeds of the award before being entitled to any reimbursement out of such net proceeds. Any surplus which may remain out of such net proceeds after payment of such cost of rebuilding or restoration shall, at the option of Lender, be applied on account of the Indebtedness or be paid to any other party entitled thereto. In any event, so long as any portion of the Indebtedness remains unpaid, Grantor shall commence rebuilding or restoration of any remaining portion of the Property promptly after the taking and shall diligently pursue the same to completion. The net proceeds of the award or sale shall mean the award or sale after payment of all reasonable costs, expenses, and attorneys’ fees incurred by Lender in connection with the condemnation or sale in lieu of condemnation.

10. Disbursement of Insurance or Eminent Domain Proceeds . In addition to the provisions of Sections 8 and 9, the following provisions shall control the disbursement of insurance and condemnation proceeds:

10.1 Before commencing to repair, restore or rebuild following a condemnation action or deed in lieu thereof or damage to, or destruction of, all or a portion of the Property, whether by fire or other casualty or condemnation, Grantor shall obtain from Lender its approval of all site and building plans and specifications pertaining to such repair, restoration or rebuilding.

10.2 Prior to each payment or application of any insurance or condemnation proceeds to the repair or restoration of the Improvements upon the Property to the extent permitted in Section 8 or 9 above (which payment or application may be made, at Lender’s option, through an escrow with a title insurance company, the terms and conditions of which are satisfactory to Lender and the cost of which is to be borne by Grantor), Lender shall be entitled to be satisfied as to the following:

10.2.1 Either (A) such Improvements have been fully restored, or (B) the expenditure of money as may be received from such insurance proceeds or condemnation award will be sufficient to repair, restore or rebuild the Property, free and clear of all liens, claims and encumbrances, except the lien of this Mortgage and the Permitted Encumbrances under this Mortgage, or, in the event such insurance proceeds or condemnation award shall be insufficient to repair, restore and rebuild the Property, Grantor has deposited with Lender such amount of money which, together with the insurance proceeds or condemnation award, shall be sufficient to restore, repair and rebuild the Property; and

10.2.2 Prior to each disbursement of any such proceeds held by Lender in accordance with the terms of this Section for the cost of any repair, restoration or rebuilding, Lender shall be furnished with a statement of Lender’s architect (the cost of which shall be borne by Grantor), certifying the extent of the repair and restoration completed to the date thereof, and that such repairs, restoration, and rebuilding have been performed to date in conformity with the plans and specifications approved by Lender and all statutes, regulations or ordinances (including building and zoning ordinances) affecting the Property and all private restrictions binding on the Property; and Lender shall be furnished with appropriate evidence of payment for labor or materials furnished to the Property, and total or partial lien waivers substantiating such payments.

10.3 Prior to the payment or application of insurance proceeds to the repair, restoration or rebuilding of the Improvements upon the Property to the extent permitted in Section 8 above, there shall have been delivered to Lender the following:

10.3.1 A waiver of subrogation from any insurer with respect to Grantor or the then owner or other insured under the policy of insurance in question; and

10.3.2 Such plans and specifications, such payment and performance bonds and such insurance, in such amounts, issued by such company or companies and in such forms and substance, as are required by Lender.

10.4 In the event Grantor shall fail to restore, repair or rebuild the Improvements upon the Property within a time deemed satisfactory by Lender, then Lender, at its option, may commence and perform all necessary acts to restore, repair or rebuild the said Improvements for or on behalf of Grantor. In the event insurance proceeds or condemnation proceeds shall exceed the amount necessary to complete the repair, restoration or rebuilding of the Improvements upon the Property, such excess shall be applied on account of the Grantor’s obligation of unpaid principal balance of the Note irrespective of whether such balance is then due and payable.

10.5 In the event Grantor commences the repair or rebuilding of the Improvements located on the Property, but fails to comply with the conditions precedent to the payment or application of proceeds set forth in this Section 10, or Grantor shall fail to restore, repair or rebuild the Improvements upon the Property after receipt of insurance proceeds from Lender within a time reasonably deemed satisfactory by Lender, and if Lender does not restore, repair or rebuild the said Improvements as provided above, then such failure of Grantor shall constitute an Event of Default.

10.6 Grantor agrees to pay all costs and expenses incurred by Lender pursuant to the provisions of this Section, including, but not limited to legal fees and title insurance costs.

10.7 The maturity date of the Note shall not be deemed to be extended as the result of the application of the insurance or condemnation proceeds.

11. Imposition of Taxes, Fees and Charges by Governmental Authorities . Upon request by Lender, Grantor shall execute such documents in addition to this Mortgage and take such other actions as requested by Lender to perfect and continue Lender’s lien on the Real Property or any other Property. Grantor shall reimburse Lender for all taxes, as described below, together with all expenses incurred in recording, perfecting or continuing this Mortgage, including without limitation all taxes, fees, documentary stamps, and other charges for recording or registering this Mortgage. The following shall constitute taxes to which this Section applies: (1) a specific tax upon this type of Mortgage or upon all or any part of the Indebtedness secured by this Mortgage; (2) a specific tax on Grantor which Grantor is authorized or required to deduct from payments on the Indebtedness secured by this type of Mortgage; (3) a tax on this type of Mortgage chargeable against the Lender or the holder of the Note; (4) a specific tax on all or any portion of the Indebtedness or on payments of principal and interest made by Grantor; and (5) mortgage registry tax due pursuant to Minn. Stat. Chpt. 287. If any tax to which this Section applies is enacted subsequent to the date of this Mortgage, this event shall have the same effect as an Event of Default, and Lender may exercise any or all of its available remedies for an Event of Default as provided below unless Grantor either: (i) pays the tax before it becomes delinquent; or (ii) contests the tax as provided above in the Taxes and Liens Section and deposits with Lender cash or a sufficient corporate surety bond or other security satisfactory to Lender.

12. Hold Harmless . Grantor shall save the Lender harmless from and indemnify Lender for and against all loss, liability, damages, costs and expenses, including reasonable attorney’s fees, incurred by reason of any action, suit, proceeding, hearing, motion or application before any Court or administrative body in and to which Lender may be or become a party by reason hereof, including but not limited to condemnation, bankruptcy, probate and administrative proceedings, as well as any other of the foregoing wherein proof of claim is by law required to be filed or in which it becomes necessary to defend or uphold the terms of and the lien created by this Mortgage, unless caused by the malicious act or omission or gross negligence of Lender, and all money paid or expended by Lender in that regard, together with interest thereon from date of such payment at the Note Rate including the Default Rate Margin (as such terms are defined in the Note) shall be so much additional Indebtedness secured hereby and shall be immediately and without notice due and payable to Lender.

13. Lender’s Performance and Expenditures . If any action or proceeding is commenced that would materially affect Lender’s interest in the Property or if Grantor fails to comply with any provision of this Mortgage or any Loan Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Mortgage or any Loan Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all Taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Property and paying all costs for insuring, maintaining and preserving the Property. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will: (a) be payable on demand; (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either: (i) the term of any applicable insurance policy; or (ii) the remaining term of the Note; or (c) be treated as a balloon payment which will be due and payable upon the maturity of the Note. This Mortgage also secures payments of such amounts. Such rights shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default.

14. Lender’s Reliance in Making Payments . Lender, in making any payment herein and as hereby authorized: (a) relating to Taxes, may do so according to any bill, statement or estimate procured from the appropriate public office without inquiry into the validity or accuracy thereof; and (b) relating to any prior lien or title or claim thereof, may do so without inquiry as to the validity or amount of any such prior lien or title or claim which may be asserted; and (c) may do so whenever, in its sole judgment, such payment or payments shall seem necessary or desirable to protect the security created by this Mortgage; provided, however, that in connection with any such payment as aforesaid, Lender, at its option, may and is hereby authorized to obtain a continuation report of title prepared by a title insurance company, the expense of which shall be repayable by the Grantor upon demand and shall be secured hereby.

15. Acknowledgment by Grantor . Grantor, within fifteen (15) days after Lender’s request, shall furnish a written statement, duly acknowledged, of the amount due upon this Mortgage and whether any alleged offsets or defenses exist against the Indebtedness secured by this Mortgage.

16. Assignment of Rents and Leases . All right, title and interest of the Grantor in and to all present Leases affecting the Property, and including and together with: (a) any and all future Leases upon all or any part of the Property; (b) all of the Rents from or due or arising out of the Property; and (c) all deposits given as security for the faithful performance of each of such Leases and all guaranties of any or all of such Leases, are hereby assigned simultaneously herewith to the Lender as security for the payment of the Note. All Leases affecting the Property shall be submitted by the Grantor to the Lender for its approval prior to the execution thereof. All approved and executed Leases shall, at Lender’s option, be specifically assigned to Lender by instrument in form satisfactory to Lender. All or any such Leases shall be subordinate to this Mortgage. Grantor, as lessor under such Leases, shall comply with all material provisions in such Leases with which the lessor is required to comply, and shall faithfully and fully enforce all material terms and conditions of such Leases. If Grantor shall not comply with or enforce each such Lease, Lender may (without being required to), after ten (10) days prior written notice to Grantor, perform and enforce such Leases, and all amounts expended by Lender in connection therewith shall be immediately due Lender and shall be secured by the lien hereof. Grantor has on the date hereof executed and delivered to Lender an Assignment of Leases and Rents (“Assignment of Leases and Rents”), which Assignment is a document separate and distinct from this Mortgage, and is not secondary to, but is on a parity and of equal dignity with this Mortgage and the provisions herein are intended to, and shall be interpreted to, supplement the terms and provisions set forth in the Assignment of Leases and Rents. The foregoing assignment and all related provisions set forth in this Mortgage shall in no way limit the related provisions set forth in the Assignment of Leases and Rents.

17. Change in Ownership or Other Transfers . Lender may, at Lender’s option, declare immediately due and payable all sums secured by this Mortgage upon the sale, assignment or transfer, without Lender’s prior written consent (which may be withheld or conditioned in Lender’s sole and absolute discretion), of all or any part of the Real Property, or any interest in the Real Property. A “sale, assignment or transfer” means the conveyance of the Real Property or any right, title or interest in the Real Property; whether legal, beneficial or equitable; whether voluntary or involuntary; whether by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest (other than as approved in accordance with Section 6.16 hereof), lease-option contract, or by sale, assignment, or transfer of any beneficial interest in or to any land trust holding title to the Real Property, or by any other method of conveyance of an interest in the Real Property; provided , however , that any lease approved by Lender in accordance with Section 6.16 hereof shall not constitute a “sale, assignment or transfer” for purposes of this Section. In the event Lender’s consent is required for a sale, assignment or transfer hereunder and Grantor requests Lender to consent to a proposed sale, assignment or transfer, Grantor shall: (a) reimburse Lender, promptly upon request, for Lender’s reasonable attorneys’ fees incurred in reviewing the proposed request; and (b) pay to Lender, upon request, a reasonable processing fee determined by Lender at the time such request is made to compensate Lender for its time and consideration of reviewing the proposed transfer.

18. Grantor Delivery Obligations . In the event all or a part of the Premises are leased to a thrd party, then during the term of any third-party lease, Grantor agrees to furnish to Lender t least annually on or before January 31 of each year, and at any time upon Lender’s request, a current rent roll (including each tenant’s accurate name, notice/delivery address, and all relevant lease payment amounts) detailing the tenant and rental information effective as of the last day of the immediately preceding month, in form and detail reasonably acceptable to Lender. All rent rolls shall be certified as true and correct by Grantor and shall be prepared at Grantor’s expense. Notwithstanding the foregoing, Grantor shall not be required to deliver rent rolls in accordance with this Section for any period of time in which the Property is occupied by Grantor and no tenants occupy or have the right to occupy any portion of the Property for any portion of the then-current year or succeeding year(s).

19. Acceleration of Indebtedness Upon Default . Upon the occurrence of an Event of Default under any of the Loan Documents, the whole Indebtedness secured hereby shall, at the option of the Lender, and without notice, become immediately due and payable with reasonable attorneys’ fees, and thereupon, or at any time during the existence of any such default, Lender may proceed to foreclose this Mortgage as provided by law, anything hereinbefore or in the Note contained to the contrary notwithstanding and/or exercise any other right or remedy available to it under this Mortgage or the Note or any other document securing or evidencing the Indebtedness secured hereby.

20. Appointment of Receive r. Upon the occurrence of an Event of Default under any of the Loan Documents, Lender shall have the right to have a receiver appointed to take possession of all or any part of the Property and to collect the rents, issues, income and profits therefore, to care for and repair the Property, to improve the same when necessary or desirable, to lease and rent the Property or portions thereof (including Leases extending beyond the term of the receivership), and otherwise to use the Property and to exercise such other duties as may be fixed by the court. Such appointment may be made either before or after sale, without notice, without regard to the solvency or insolvency of the Grantor at the time of application for such receiver, without the requirement of posting of any bond or security and without regard to the then value of the Property or whether the same shall be then occupied as a homestead or not. Provided further, Grantor specifically agrees that the court may appoint a receiver without regard to the adequacy of Lender’s security or the solvency of Grantor or any guarantor of any of the Indebtedness and without regard to any other matters normally taken into account by courts in the discretionary appointment of receivers, it being the intention of Grantor hereby to authorize the appointment of a receiver whenever an Event of Default has occurred and Lender has requested the appointment of a receiver. Grantor hereby agrees and consents to the appointment of the particular person or firm (including an officer or employee of Lender) designated by Lender as receiver and hereby waives its rights to suggest or nominate any person or firm as receiver in opposition to that designated by Lender. The Lender hereunder or any holder of the Note may be appointed as such receiver, if permitted under applicable law. Such receiver shall have (i) power to collect the Rents from the Property during the pendency of such foreclosure suit and, during the full statutory period of redemption, whether there be redemption or not, as well as during any further times when Grantor, except for the intervention of such receiver, would be entitled to collect such Rents, and (ii) all other powers which may be necessary or are usual in such cases for the protection, possession, control, management and operation of the Property during the whole of said period. Any Rents (as defined herein and in the Assignment of Leases and Rents) shall be applied in accordance with applicable law and this Mortgage and the Assignment of Leases and Rents.

21. Other Remedies . Upon the occurrence of an Event of Default under any of the Loan Documents and at any time thereafter, Lender, at Lender’s option, may exercise any one or more of the following rights and remedies in addition to any other rights or remedies set forth in this Mortgage or otherwise provided by law:

21.1 With respect to all or any part of the Personal Property subject to the Uniform Commercial Code as adopted in the State of Minnesota (the “UCC”), Lender shall have all the rights and remedies of a secured party under the UCC.

21.2 Lender may obtain a judicial decree foreclosing Grantor’s interest in all or any part of the Property.

21.3 Foreclose this Mortgage by action or advertisement, pursuant to the statutes of the State of Minnesota in such case made and provided, power being expressly granted to sell the Property at public auction and convey the same to the purchaser in fee simple and, out of the proceeds arising from such sale, to pay all Indebtedness secured hereby with interest, and all legal costs and charges of such foreclosure and the maximum attorneys’ fees permitted by law, which costs, charges and fees the Grantor agrees to pay.

21.4 If permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Section.

21.5 If Grantor remains in possession of the Property after the Property is sold as provided above or Lender otherwise becomes entitle to possession of the Property upon default of Grantor, Grantor shall become a tenant at sufferance of Lender or the purchaser of the Property and shall either: (a) pay a reasonable rental for the use of the Property (as determined by Lender); or (2) vacate the Property immediately upon the demand of Lender.

21.6 To the extent permitted by applicable law, Grantor hereby waives any and all right to have the Property marshaled. In exercising its rights and remedies, Lender shall be free to sell all or any part of the Property together or separately, in one sale or by separate sales, and to execute and deliver to the purchasers of the Property deeds of conveyance in accordance with applicable law. Lender shall be entitled to bid at any public sale on all of any portion of the Property.

21.7 Lender shall give Grantor reasonable notice of the time and place of any public sale of the Personal Property or of the time after which any private sale or other intended disposition of the Personal Property is to be made. Grantor agrees that reasonable notice shall mean notice given at least ten (10) days before the time of the sale or disposition. Any sale of the Personal Property may be made in conjunction with any sale of the Real Property.

21.8 Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Mortgage, after Grantor’s failure to perform, shall not affect Lender’s right to declare an Event of Default and exercise its remedies. Nothing under this Mortgage or otherwise shall be construed so as to limit or restrict the rights and remedies available to Lender following an Event of Default or in any way to limit or restrict the rights and ability of Lender to proceed directly against Grantor and/or against any other co-maker, guarantor, surety or endorser and/or to proceed against any other collateral directly or indirectly securing the Indebtedness.

21.9 Lender may in the name, place and stead of Grantor and without becoming a mortgagee in possession: (i) enter upon, manage and operate the Property or retain the services of one or more independent contractors to manage and operate all or any part of the Property; (ii) make, enforce, modify and accept surrender of any Leases; (iii) obtain or evict tenants, collect, sue for, fix or modify any rents and enforce all rights of Grantor under any Leases; and (iv) perform any and all other acts that may be necessary or proper to protect the security of this Mortgage.

Without limiting the foregoing, Grantor does hereby grant and confer upon Lender the fullest rights and remedies available for foreclosure of this Mortgage by action or by advertisement pursuant to Minnesota Statutes Chapters 580, 581 and 582, as said statutes may be amended from time to time, and pursuant to other applicable Minnesota laws and statutes, as amended, governing and authorizing mortgage foreclosures by action and by advertisement including, but not limited to, a grant to Lender of the power of sale; and the power of sale granted Lender in this Mortgage shall include, without limitation, the power of sale required to permit, at Lender’s option, lawful foreclosure of this Mortgage by advertisement in accordance with the statutes then made and provided.

This Mortgage also constitutes an assignment of leases and rents within the meaning of Minnesota Statutes Sections 559.17 and 576.01, and is intended to comply fully with the provisions thereof, and to afford Lender, to the fullest extent allowed by law, the rights and remedies of a mortgage lender or secured lender under those statutes. In the event that Lender elects to exercise its remedies under said statutes, or any of said remedies, the terms and provisions of said statutes, as amended, governing the exercise of said remedies shall govern, control and take precedence over any contrary terms contained in this Mortgage or other Loan Documents.

The exercise by Lender of the statutory remedies referenced in this Section shall not constitute Lender a "mortgagee-in-possession" under Minnesota law, or give rise to any liability which might otherwise attach to Lender as a mortgagee-in-possession.

Anything in this Mortgage or other Loan Documents to the contrary notwithstanding, all Rents collected by Lender, its agent or a receiver under this Mortgage or the Assignment of Leases and Rents, if any, shall be held and applied as set forth in the Assignment of Leases.

22. Expenses . If Lender institutes any suit or action to enforce any of the terms of this Mortgage, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys’ fees at trial and upon any appeal. Whether or not any court action is involved, all reasonable expenses Lender incurs that in Lender’s opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become a part of the Indebtedness payable on demand and shall bear interest at the Note rate from the date of the expenditure until repaid. Expenses covered by this Section include, without limitation, however subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses whether or not there is a lawsuit, including attorneys’ fees and expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services, the cost of searching records, obtaining title reports (including foreclosure reports), surveyors’ reports, and appraisal fees and title insurance to the extent permitted by applicable law. Grantor also will pay any court costs, in addition to all other sums provided by law.

23. Maintenance of Property During Foreclosure . Upon and after the occurrence of an Event of Default, Grantor hereby authorizes and empowers Lender, its successors and assigns: (a) to pay all Taxes, that may have been or that thereafter during the period of redemption from the sale under such foreclosure may be levied or assessed upon any portion of the Property; (b) to keep the Improvements then existing upon the Property insured and to pay the premiums therefor as required hereunder during the period of redemption (if any) from the sale under such foreclosure; (c) to keep the Property in thorough repair as required hereunder during the period of redemption, if any, of the sale from such foreclosure; and (d) to enter the Property and allow its representatives to enter the Property and perform an environmental and/or property condition assessment (including inspections and sampling) to assess the condition of the Property and at Lender’s sole option, correct any conditions that Lender, in the exercise of its reasonable discretion deems necessary to comply with Environmental Laws and to keep the Property in thorough repair. Grantor assigns to Lender the right from time to time in the name of the owner of the Property to file and prosecute an appeal or other protest of valuation of the Property or the Taxes imposed upon the Property. Grantor hereby agrees to, ratifies and confirms any and all actions of Lender with respect to the Property taken under this Section.

24. Security Agreement and Financing Statement . This Mortgage is, pursuant to the UCC, a security agreement and financing statement with respect to that portion of the Property constituting fixtures and Personal Property. Grantor hereby authorizes Lender to execute and file financing statements and continuation statements without the signature of Grantor if Lender shall determine that such are necessary or advisable in order to perfect Lender’s security interest in such fixtures and Personal Property and hereby authorizes Lender to execute financing statements to further evidence and secure Lender’s interest in such fixtures and Personal Property and shall pay to Lender on demand any expenses incurred by Lender in connection with the preparation, execution and filing of such statements and any continuation statements that may be filed by Lender. Upon the occurrence of any Event of Default, Lender may, at its option, sell or otherwise dispose of such fixtures and Personal Property by public or private proceedings, separate from or together with the sale of the Property, in accordance with the provisions of the UCC, and Lender may with respect to such fixtures and Personal Property, exercise any other rights or remedies of a secured party under the UCC. Unless such fixtures and Personal Property are perishable or threaten to decline speedily in value or are of a type customarily sold on a recognized market, Lender shall give Grantor at least ten (10) days prior written notice of the time and place of any public sale of such fixtures or other intended disposition thereof. Upon occurrence of any Event of Default, the Lender reserves the option, pursuant to the appropriate provisions of the UCC to proceed with respect to such fixtures and Personal Property as part of the Property in accordance with its rights and remedies with respect to the Property, in which event the default provisions of the UCC shall not apply.

This Mortgage shall be deemed to be a fixture financing statement within the meaning of the UCC and for such purpose, the following information is given:

Name and address of Debtor:		WSI Industries, Inc. 213 Chelsea Road Monticello, MN 55362

Type of organization:		corporation

Jurisdiction of organization:		Minnesota

Organization ID No.:		K-680

Name and address of Secured Party:		BMO Harris Bank N.A. 50 South Sixth Street, Suite 1000 Minneapolis, MN 55402

Description of the types (or items) of property covered by this Financing Statement:		All Property and collateral described in the Granting Clauses I through VI above (or which Debtor has otherwise granted Lender a security interest in), which is subject to the UCC

Description of real estate to which the collateral is attached or upon which it is or will be located:		Those certain tracts of land, described on Exhibit A

Record owner of real estate to which the collateral is attached or upon which it is or will be located:		Grantor

Some of the above-described collateral is or is to become fixtures upon the above described real estate and this Mortgage is to be filed for record in the public real estate records of the county or counties in which the fixtures are, or are to be, located.

25. Full Performance; Satisfaction . If Grantor pays all the Indebtedness, including without limitation all future advances, when due, and otherwise performs all the obligations imposed upon Grantor under this Mortgage, Lender shall execute and deliver to Grantor a suitable satisfaction of this Mortgage and suitable statements of termination of any financing statement on file evidencing Lender’s security interest in the Rents and the Personal Property. Grantor will pay, if permitted by applicable law, any reasonable termination fee as determined by Lender from time to time.

26. No Waiver . Lender shall not be deemed to have waived any rights under this Mortgage unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Mortgage shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Mortgage. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Mortgage, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. The failure of the Lender to exercise its option for acceleration of maturity and/or foreclosure following an Event of Default or to exercise any other option granted to the Lender hereunder in any one or more instances, or the acceptance by Lender of partial payments hereunder shall not constitute a waiver of any such default, nor extend or affect the grace period, if any, but such option shall remain continuously in force. Acceleration of maturity once claimed hereunder by Lender may, at the option of Lender, be rescinded by written acknowledgment to that effect by the Lender, but the tender and acceptance of partial payments alone shall not in any way affect or rescind such acceleration of maturity, nor extend or affect the grace period, if any.

27. Cumulative Rights and Remedies . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Mortgage, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default and exercise its remedies. Nothing under this Mortgage or otherwise shall be construed so as to limit or restrict the rights and remedies available to Lender following an Event of Default or in any way to limit or restrict the rights and ability of Lender to proceed directly against Grantor and/or against any other co-maker, guarantor, surety or endorser and/or to proceed against any other collateral directly or indirectly securing the Indebtedness.

28. Survival of Representations and Warranties . All representations, warranties, and agreements made by Grantor in this Mortgage shall survive the execution and delivery of this Mortgage, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s Indebtedness shall be paid in full.

29. No Effect on Liability . In the event the Lender: (a) releases any part of the security described herein or any person liable for any Indebtedness secured hereby; (b) grants one or more renewals, modifications or extensions of the Note for any period or periods of time; (c) takes other or additional security for the payment thereof; or (d) waives or fails to exercise any right granted herein or in the Note, said act or omission shall not release the Grantor, subsequent purchasers of the Property or any part thereof, or makers, Guarantors or sureties of this Mortgage or of the Note, under any covenant of this Mortgage or of the Note or Loan Documents, nor preclude the Lender from exercising any rights, powers or privileges herein granted or intended to be granted in the event of any default then made or any subsequent default.

30. No Merger . There shall be no merger of the interest or estate created by this Mortgage with any other interest or estate in the Property at any time held by or for the benefit of Lender in any capacity, without the written consent of Lender.

31. Notices . All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, postage prepaid, or with Federal Express or a similar nationally known overnight delivery service, addressed as follows or to such address or other address as may be hereafter notified by the respective parties hereto:

Grantor:

WSI Industries, Inc.,

213 Chelsea Road

Monticello, MN 55362

Attention: Vice President/Chief Financial Officer

Lender:

BMO Harris Bank N.A.

50 South Sixth Street, Suite 1000

Minneapolis, MN 55402

Attention: Commercial Lending

With a copy to:

Robert D. Lucas, Esq.

Thomsen & Nybeck P.A .

3600 American Boulevard West, Suite 400

Bloomington, MN 55436

32. Governing Law . This Mortgage will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to its conflicts of law provisions This Mortgage has been accepted by Lender in the State of Minnesota.

33. Covenants Run with the Land . All the covenants hereof shall run with the land.

34. Time is of the Essence . Time is of the essence in the performance of this Mortgage specifically including, but not limited to, all of Grantor’s obligations to pay the Indebtedness and other monetary sums hereunder and pursuant to the Note.

35. Binding on Successors and Assigns . Subject to any limitations stated in this Mortgage on transfer of Grantor’s interest, this Mortgage shall be binding upon and inure to the benefit of the parties, their successors, assigns, heirs, administrators and executors. If ownership of the Property becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Mortgage and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Mortgage or liability under the Indebtedness.

36. Captions . The captions of various Sections of this Mortgage are for convenience only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions thereof.

37. Amendments . This Mortgage may not be amended or altered in any manner other than by a writing signed by the party sought to be charged or bound thereby.

38. Further Assurances – Recording and Filing . At any time, and from time to time, upon request of Lender, Grantor will make, executed and deliver, or will cause to be made, executed or delivered, to Lender or to Lender’s designee, and when requested by Lender, cause to be filed, recorded, refiled, or rerecorded, as the case may be, at such times and in such offices and places as Lender may deem appropriate, any and all such mortgages, deeds of trust, security deeds, security agreements, financing statements, continuation statements, instruments of further assurances, certificates, and other documents as may, in the sole opinion of Lender, be necessary or desirable in order to effectuate, complete, perfect, continue, or preserve: (a) Grantor’s obligations under the Note, this Mortgage, and the Loan Documents; and (b) the liens and security interests created by this Mortgage as first and prior liens on the Property, whether now owned or hereafter acquired by Grantor. Unless prohibited by law or Lender agrees to the contrary in writing, Grantor shall reimburse Lender for all costs and expenses incurred in connection with the matters referred to in this Section.

If Grantor fails to do any of the things referred to in this Section, Lender may do so for and in the name of Grantor and at Grantor’s expense. For such purposes, Grantor hereby irrevocably appoints Lender as Grantor’s attorney-in-fact for the purposes of making, executing, delivering, filing, recording, and doing all other things as may be necessary or desirable, in Lender’s sole opinion, to accomplish the matters referred to in this Section.

39. Lender’s Lien for Service Charges and Expenses . At all times, regardless of whether any Loan proceeds have been disbursed, this Mortgage secures (in addition to any Loan proceeds disbursed from time to time) the payment of any and all Loan commissions, service charges, liquidated damages, expenses, and advances due to or incurred by the Lender in connection with the Loan to be secured hereby.

40. Invalidity . If a court of competent jurisdiction finds any provision of this Mortgage to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Mortgage. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Mortgage shall not affect the legality, validity or enforceability of any other provision of this Mortgage.

41. Business Purposes . Grantor covenants and agrees that the Indebtedness secured by this Mortgage, and the proceeds of such Indebtedness, are for business purposes only.

42. Grantor’s Receipt . Grantor hereby acknowledges receipt of a true and correct copy of this instrument.

43. Books and Records to be Kept by Grantor . Grantor will keep accurate books and records in accordance with generally accepted accounting practices consistently applied in which full, true and correct entries shall be promptly made as to all operations on or relative to the Property, and will permit all such books or records to be inspected by the Lender and/or its duly authorized representatives at all times during reasonable business hours and if, and as often as, reasonably requested by the Lender, Grantor will make reports of operations in such form as the Lender prescribes, setting out full data as to the net revenues of the Property.

44. Maturity . The latest maturity date for any of the Indebtedness evidenced by any Loan Document secured by this Mortgage is May 8, 2018.

IN WITNESS WHEREOF, this Amended and Restated Real Estate Mortgage Security Agreement and Financing Statement has been executed and delivered at Minneapolis, Minnesota, on the day, month and year first above written.

GRANTOR:

WSI INDUSTRIES, INC., a Minnesota corporation

By:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

STATE OF MINNESOTA )

) ss.

COUNTY OF HENNEPIN )

On this ________ day of May, 2013 before me appeared Paul D. Sheely the Vice President/Chief Financial Officer of WSI Industries, Inc., a Minnesota corporation to me personally known to be the person described in and who executed the foregoing instrument and acknowledged that he executed the same on behalf of the corporation.

Notary Public

MORTGAGEE:

BMO HARRIS BANK N.A. , a national banking association, successor by merger to M&I Marshall & Ilsley Bank and to Excel Bank Minnesota

By: ___________________________

Name: ___________________________

Title: __________________________

STATE OF MINNESOTA )

) ss.

COUNTY OF HENNEPIN )

This instrument was acknowledged before me this day of May, 2013, by , the of BMO Harris Bank N.A., a national banking association, successor by merger to M&I Marshal & Ilsley Bank, and to Excel Bank Minnesota, on its behalf.

Notary Public

THIS INSTRUMENT DRAFTED BY:

Robert D. Lucas, Esq.

Thomsen & Nybeck, P.A.

3600 American Boulevard West, Suite 400

Bloomington, MN 55436

952-835-7000

EXHIBIT A

Legal Description

Lot 1, Block 1, Remmele Addition, Wright County, Minnesota

EXHIBIT B

Permitted Encumbrances

1.	Drainage and utility easements as shown on the recorded plat of Remmele Addition.

2.	Limitation of access to Interstate Highway 94 acquired by the State of Minnesota as evidenced by Final Certificate dated October 18, 1973, recorded November 7, 1973, in Book 258 of Deeds, Page 536.

3.	Communications and systems easement in favor of AT&T Communications of the Midwest, Inc., as contained in Grant dated September 1, 1989, recorded September 1, 1989, in Book 96 of Misc., Page 111.

4.	Slope easement in favor of the City of Monticello as contained in Agreement dated July 16, 1990, recorded July 16, 1990, in Book 98 of Misc., Page 160, as Document No. 476134.

EXHIBIT 10.2

AMENDED AND RESTATED

PROMISSORY NOTE

$4,200,000.00	Minneapolis, Minnesota
	May 8, 2013

FOR VALUE RECEIVED, WSI Industries, Inc., a Minnesota corporation, (the "Borrower") promises to pay to the order of BMO Harris Bank N.A., a national banking association, or any future holder hereof ("Lender"), the principal sum of Four Million Two Hundred Thousand and no/100 Dollars ($4,200,000.00), advanced pursuant to that certain Loan Agreement between Borrower and Lender of even date herewith ("Loan Agreement"), together with interest accruing from and after the date hereof on the unpaid principal balance from time to time outstanding at the interest rate set forth herein. Principal and interest due hereunder shall be paid in immediately available funds as follows:

1. Payment .

(a) Interest Rate . The Interest Rate applicable to this Note shall be a fixed rate of interest of Two and eight hundred forty-three/one-thousands percent (2.843%) per annum (the "Note Rate"). The Note Rate is not necessarily the lowest rate charged by Lender on loans at any given time. Under no circumstances will the Note Rate be more than the maximum rate allowed by applicable law.

(b) Time of Payments . Principal and interest shall be payable in consecutive monthly installments in the amount of Twenty-two Thousand Nine Hundred Sixty-four and thirty-nine/one hundredths Dollars ($22,964.39) on the eighth (8 th ) day of each month beginning on June 8, 2013.

2. Application of Payments . Unless otherwise determined by Lender in its sole discretion, all payments shall be applied first to interest, second to principal then due, third to late charges (including any Default Rate Margin as defined below), if any, and fourth to any escrow required under the Loan Documents, with the balance to be applied to principal then owing, provided however, that if any advance made by the Lender as the result of a default on the part of the Borrower under the terms of this Note or any instrument securing this Note is not repaid on demand, any monies received, at the option of the Lender, may first be applied to repay such advances, plus interest thereon at an interest rate equal to the sum of the Note Rate plus the Default Rate Margin, and the balance, if any, shall be applied in accordance with the provisions hereof. Any application of principal hereunder shall not reduce the periodic amounts due and payable as provided in this Note.

3. Interest Calculation . Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note shall be computed using this method. If any payment received is less than the amount of interest due through the effective date of receipt of such payment, Lender reserves the right to add any such deficiency to principal.

4. Payment Location . If Lender does not require automatic withdrawal of payments from Borrower's account as provided herein, all payments of principal and interest due hereunder shall be paid to Lender at 50 South Sixth Street, Suite 1000, Minneapolis, Minnesota 55402, Attention: Kevin D. Rohrer, or to such other person or at such other address as Lender may from time to time direct.

5. Maturity Date . The entire outstanding balance of principal, if not sooner paid, together with all accrued interest thereon, shall be due and payable on May 8, 2018.

6. Security Documents . In order to secure the principal of and interest due on this Note, an Amended and Restated Real Estate Mortgage, Security Agreement and Financing Statement ("Mortgage") and an Assignment of Leases and Rents "Assignment") of even date herewith have been executed by Borrower in favor of Lender (collectively, all of the foregoing, together with any and all other documents now or hereafter securing the Loan evidenced by this Note (the "Loan"), as any of the same may be amended, extended, restated or otherwise modified from time to time are referred to herein as the "Security Documents"). The Security Documents encumber certain real property and related improvements situated in Wright County, State of Minnesota (the "Property"). The terms, covenants, conditions and agreements contained in said Security Documents, as well as all other Loan Documents defined in that certain Loan Agreement by and between Borrower and Lender of even date hereof (the "Loan Agreement"), including but not limited to the certain Guaranties referred to in paragraph 7., below, are hereby made a part hereof to the same extent and effect as if the same were fully set forth herein.

7. Loan Agreement . The terms, covenants, conditions and agreements contained in the Note, the Mortgage, the Assignment and all other Loan Documents defined in that certain Loan Agreement (the "Loan Agreement") by and between Borrower, WSI Rochester, Inc. and WSI Industries, Co. ("Guarantors") and Lender of even date hereof, including but not limited to those certain Guaranties executed by Guarantors pursuant to which Guarantors agreed to guarantee Borrower's obligations under this Note and the other Loan Documents, are hereby made a part hereof to the same extent and effect as if the same were fully set forth herein.

8. Prepayment . This Note may be prepaid in whole or in part, in any amount at any time and from time to time upon payment of the applicable Lender Make-Whole Amount set forth below. All such prepayments shall be made upon not less than 30 bank business days prior notice to Lender and shall be accompanied by accrued interest on the amount prepaid through the date fixed for prepayment. All such prepayments shall be applied to the several installments due hereon in the inverse order of their maturities. If Borrower prepays any principal amount of the loan evidenced by this Note before its scheduled due date (whether as the result of acceleration, voluntary prepayment, or otherwise), Borrower hereby promises to pay to Lender a funding indemnity equal to the applicable Lender Make-Whole Amount. For purposes hereof, "Lender Make-Whole Amount" means, in connection with the prepayment of any portion of the loan evidenced by this Note, whether by acceleration or otherwise, the amount determined by the Lender, equal to the difference, if any (but not below zero), between (i) the discounted cash flow of the installments of principal that have been prepaid together with interest scheduled to accrue thereon as determined as of the date of the prepayment, minus (ii) the aggregate principal amount of the loan evidenced by this Note that has been prepaid. In determining the discounted cash flow, the discount rate to be applied shall be the U.S. Treasury Rate with a maturity similar to the weighted average life of the principal amount of the loan evidenced by this Note which is being prepaid. The discounted cash flow shall be calculated in accordance with accepted financial practice and on the same periodic basis as payments on the loan evidenced by this Note is payable. For purposes of this definition, "U.S. Treasury Rate" shall be determined by reference to the yields for U.S. Treasury Notes as indicated (currently on page "678" thereof) on the Telerate Access Service for actively traded U.S. Treasury Notes at approximately 10:00 A.M. (New York City time) on the bank business day preceding such date of prepayment or, if such yield shall not be reported as of such time or the yields reported as of such time are not ascertainable, then the "U.S. Treasury Rate" shall be determined by reference to the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two bank business days prior to such date of prepayment and which shall be the most recent weekly average yield on actively traded U.S. Treasury Notes adjusted to a constant maturity equal to the remaining weighted average life of the outstanding principal amount of the loan evidenced by this Note which is being prepaid. The Borrower hereby acknowledges and agrees that the Lender Make-Whole Amount due hereunder is secured by the collateral securing this Note.

9. [RESERVED] .

10. Default . A default under this Note shall occur if:

(a) there is a default in payment of any installment of principal and/or interest due hereunder or any payments due pursuant to the Loan Documents; or

(b) there is a default in the performance by Borrower, any Guarantor or any grantor of a mortgage, deed of trust, or other security in connection with this Note of any of the terms, conditions or provisions contained herein other than those identified in subsection (a) above, or contained in the Loan Documents (including, but not limited to, the Events of Default set forth in the Loan Agreement), or contained in any document executed and/or delivered by Borrower, any Guarantor, or any other individual or entity affiliated with Borrower and/or any Guarantor in connection herewith, or contained in any other agreement between Borrower and/or any Guarantor and Lender or between Borrower and/or any Guarantor and any other creditor; or

(i)

becomes insolvent or takes any action which constitutes an admission of inability to pay its debts as they mature;

(ii)

makes an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its assets;

(iii)

becomes the subject of an "order for relief" within the meaning of the United States Bankruptcy Code;

(iv)

files a petition in bankruptcy, or for reorganization, or to effect a plan or other arrangement with creditors;

(v)

is adjudged a bankrupt;

(vi)

files an answer to a creditor's petition, admitting the material allegations thereof, for an adjudication of bankruptcy or for reorganization or to effect a plan or other arrangement with creditors;

(vii)

applies to a court for the appointment of a receiver or a custodian for any of its assets or proceedings;

(viii)

has filed against it an involuntary petition pursuant to the United States Bankruptcy Code;

(ix)

has a receiver, trustee, custodian, liquidator or like officer appointed to take custody, control or possession of any property subject to any lien, encumbrance or security interest securing payment of this Note;

(x)

is dissolved or ceases to continue its business as a going concern;

(xi)

has filed against any collateral securing this Note any foreclosure or forfeiture proceedings, whether by judicial proceedings, self-help, repossession or otherwise, by any creditor of Borrower or any governmental entity;

(xii)

has filed against it a judgment which is not satisfied or "bonded over" within thirty (30) days after the entry thereof; or has issued against it any attachments or garnishments or the filing of any lien which is not discharged or "bonded over" within thirty (30) days after such issuance or filing; or

(d) any representation, certification or warranty made or provided by or on behalf of Borrower or any Guarantor to induce Lender to extend credit to Borrower hereunder, made or provided in the Loan Documents or made or provided in any document delivered to Lender in conjunction with this transaction is at anytime false, misleading or inaccurate, in any material respect; or

(e) upon the occurrence of a default under any of the Loan Documents (including, but not limited to, the Events of Default set forth in the Loan Agreement), a default under any agreement executed in connection with an interest rate swap or similar transaction between Borrower and Lender, or upon the occurrence of a default under any loan, extension of credit, security agreement, purchase or sale agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Loan Documents; or

(f) a material adverse change occurs in Borrower's or any Guarantor's financial condition, or Lender believes the prospect of payment or performance of this Note or the Guaranty is impaired, or Lender in good faith believes itself to be insecure;

(g) Borrower or any Guarantor shall be in default under any other agreement with Lender or with any other creditor (whether in connection with the Loan or otherwise) and any required notice shall have been given and any time in which to cure the default shall have elapsed. For purposes of this Section, the term "Like-Owned Affiliates" shall mean any Affiliate of Borrower that has the same ultimate owner(s), whether directly or indirectly, as Borrower as of the date of any such default. For purposes of this Section, the term "Affiliate" shall mean any person or entity that controls, is controlled by, or is under common control with, Borrower as of the date of any such default.

If Borrower fails to pay any installment of principal and/or interest when due or fails to make any other payments when due under this Note or the Loan Documents (including, but not limited to, any payments of real estate taxes or insurance required to be paid by Borrower), or if Borrower or any Guarantor fails to perform any other obligation under this Note or the Loan Documents or if Borrower, any of its Like-Owned Affiliates or any Guarantor shall otherwise be in default under this Note or the Loan Documents, and such failure is not cured within the cure period, if any, provided in this Section, then such failure shall constitute an "Event of Default" hereunder. If any default (other than: (i) a default in payment of principal and/or interest or any other payments required to be made under this Note or the Loan Documents including, but not limited to, any payments of real estate taxes or insurance; or (ii) a default which is an Event of Default under any of the Loan Documents for which a cure period has already been provided for under the applicable document), is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, such default may be cured if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within thirty (30) days or (2) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter Borrower continues to diligently pursue such cure and completes all reasonable and necessary steps sufficient to cure such default as soon as reasonably practical.

Upon the occurrence of an Event of Default, the entire unpaid principal balance plus accrued interest shall immediately become due and payable.

Upon the occurrence of an Event of Default, including failure to pay upon final maturity, the interest rate on this Note shall be increased by adding a 2.000 percentage point margin ("Default Rate Margin") to the Note Rate. The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no occurrence of an Event of Default. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.

11. Waivers . Borrower waives and renounces presentment, protest, demand and notice of dishonor and any and all lack of diligence or delay in collection or endorsement hereof, and expressly consents to any extension of time, release of any party liable for this obligation, release of any security which may have been or which may hereafter be granted in connection herewith, or any other indulgence or forbearance which may be made without notice to Borrower and without in any way affecting the liability of Borrower. In all circumstances, the indebtedness due hereunder shall be repaid without relief from any valuation or appraisement laws, which Borrower hereby waives.

12. Late Payments . If any installment of principal and/or interest due under this Note or any payment required under the Loan Documents is not fully paid within ten (10) days after the due date thereof, Borrower shall pay to Lender a late charge equal to five percent (5%) of such installment or payment, to compensate Lender for the extra cost of handling delinquent payments. Neither the requirement that such late charge be paid, nor the payment of the late charge, will be deemed to be a waiver of a default arising from the late payment. In addition, Borrower will pay a fee to Lender of Thirty Dollars ($30.00) if Borrower makes a payment on this Note and the check or preauthorized charge with which Borrower pays is later dishonored.

13. Maximum Interest Rate . Nothing contained herein nor any transaction related hereto shall be construed or shall so operate either presently or prospectively: (a) to require the payment of interest at a rate greater than is now lawful in such case to contract for, but shall require payment of interest only to the extent of such lawful rate; or (b) to require the payment or the doing of any act contrary to law; but if any clause or provision herein contained shall otherwise so operate to invalidate this Note and/or the transaction related hereto, in whole or in part, then only such clause(s) and provision(s) shall be held for naught as though not contained herein (or if allowed by applicable law, limited to the extent necessary to make such clause(s) or provision(s) enforceable, but then only to the extent such limited or modified enforcement is more beneficial to Lender than having such clause(s) or provision(s) deemed struck) and the remainder of this Note shall remain operative and in full force and effect.

If for any reason interest in excess of the amount as limited in the foregoing paragraph shall have been paid hereunder, whether by reason of acceleration or otherwise, then in that event any such excess interest shall constitute and be treated as a payment of principal hereunder and shall operate to reduce such principal by the amount of such excess, or if in excess of the then principal indebtedness, such excess shall be refunded.

14. General Provisions . The terms of this Note shall be binding upon Borrower, upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. Whenever used, the singular shall include the plural, the plural the singular, and the use of any gender shall include all genders. The rights and remedies of Lender as provided in this Note or any document securing this Note shall be cumulative and concurrent, and may be pursued singularly, successively or together against Borrower, the property described in the Security Documents or any document securing this Note or any other security for the debt evidenced by this Note, at the discretion of Lender. If any part of this Note cannot be enforced, this fact will not affect the rest of this Note. Lender may delay or forego enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless expressly stated in writing, no party who signs this Note, whether as maker, any Guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this Loan or release any party or any Guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties agree that Lender may modify this Loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. In the event of any inconsistencies between this Note and any of the Loan Documents, any loan commitment or term sheet issued by Lender in connection with the making of this Note, or other documents executed in connection with the making of this Note, the terms of this Note shall control. Capitalized terms used and not defined herein shall have the meanings given to them in the Loan Agreement.

15. Governing Law . This Note shall be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to conflicts of laws provisions. This Note has been accepted by Lender in the State of Minnesota.

16. Attorney's Fees . Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection, or to defend or enforce any of Lender's rights hereunder or under any document securing this Note, whether or not litigation is commenced, the undersigned shall pay to Lender (subject to any limits under applicable law) Lender's reasonable attorney's fees, together with all court costs and other expenses incurred or paid by Lender in connection therewith.

17. CHOICE OF VENUE . BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY BORROWER AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS NOTE OR THE LOAN DOCUMENTS SHALL BE LITIGATED IN THE DISTRICT COURT OF WRIGHT COUNTY, MINNESOTA, OR AT LENDER'S DISCRETION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA. BORROWER HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER IN SUCH COURT. BORROWER WAIVES ANY CLAIM THAT WRIGHT COUNTY, MINNESOTA OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE EXCLUSIVE CHOICE OF FORUM FOR BORROWER SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND BORROWER HEREBY WAIVES THE RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.

18. WAIVER OF JURY TRIAL . LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER.

19. Notices . Any notice or election required or permitted to be given or served by Lender or Borrower hereunder to the other party shall be given in accordance with the Loan Agreement.

20. Automatic Payments; Right of Setoff . Borrower hereby authorizes Lender automatically to deduct from Borrower's account the amount of any payment due under this Note. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reasons, Lender may voluntarily terminate such automatic payments. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or other account). This includes all accounts Borrower holds jointly with a third party and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this Section.

21. Amended and Restated Note . This Note amends and restates in its entirety that certain Promissory Note dated May 3, 2004, in the original principal amount of $1,360,000.00, made by Borrower in favor of Excel Bank Minnesota, predecessor in interest to Lender and is not in payment thereof.

IN WITNESS WHEREOF, the undersigned Borrower has executed this Note as of the date first above written.

BORROWER:

WSI Industries, Inc.

By:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

STATE OF MINNESOTA )

) SS

COUNTY OF )

On this __ day of May, 2013, before me appeared Paul D. Sheely, to me personally known, who, being by me duly sworn, did say that he is the Vice President/Chief Financial Officer of WSI Industries, Inc., a Minnesota corporation, and that said instrument was signed on behalf of said company by its authority, and said person acknowledged said instrument to be the free act and deed of said company.

In Testimony Whereof, I have hereunto set my hand and affixed my official seal the day and year first above written.

Name:

Notary Public, State of

My Commission Expires:

EXHIBIT 10.3

LOAN AGREEMENT

THIS LOAN AGREEMENT is made and entered into as of May 8, 2013, by and between BMO Harris Bank N.A., a national banking association (“Lender”), and WSI Industries, Inc., a Minnesota corporation (“Borrower”), and WSI Industries, Co., a Minnesota corporation and WSI Rochester, Inc., (jointly "Guarantors", or individually, a "Guarantor").

W I T N E S S E T H:

WHEREAS, Lender has agreed to make a loan to Borrower of up to $4,200,000.00 (which includes the amount currently outstanding on the Original Note, and which shall remain outstanding on and as a part of the Note, both as defined below) to finance the construction of the Project.

NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1. Definitions. The following definitions shall apply to this Loan Agreement:

1.1. Business Day . Business Day shall mean any day except a Saturday, Sunday or a day on which banks in Chicago, Illinois are authorized or required by law to close.

1.2. Collateral Security Documents . The Collateral Security Documents shall include the following documents, each of which shall be in form and substance acceptable to Lender and shall have been executed by Borrower or the Guarantors in favor of Lender and dated as of the date hereof unless otherwise noted:

1.2.1. Amended and Restated Real Estate Mortgage, Security Agreement and Financing Statement (“Mortgage”).

1.2.2. Assignment of Leases and Rents ("Assignment of Rents").

1.2.3. Guaranties executed by the Guarantors.

1.2.4. UCC Financing Statement (Fixture Filing).

1.2.5. The Collateral Security Documents shall also include all other documents and instruments, at any time executed by Borrower or any other individual or entity in favor of Lender, which expressly or impliedly evidence or secure the Loan.

1.3. Event of Default . The term “Event of Default” is defined in Section 7.1 hereof.

1.4. Guarantors . The Guarantors are WSI Industries Co., a Minnesota corporation, and WSI Rochester, Inc ., a Minnesota corporation.

1.5. Loan . The Loan is the existing mortgage loan which is being amended to the new $4,200,000.00 loan, which includes the current outstanding principal balance of the existing mortgage loan in the amount of $1,048,004.85, and the additional proceeds to be advanced in the amount of $3,151,995.18 which are to be used in accordance with this Loan Agreement.

1.6. Loan Documents . The Loan Documents shall include, but not be limited to, the Collateral Security Documents, the Note, , and this Loan Agreement.

1.7 Municipality. The Municipality is the City of Monticello, Minnesota

1.8 Note. The Note is the $4,200,000.00 Amended and Restated Promissory Note executed by Borrower in favor of Lender on a date even herewith.

1.9 Original Note . The Original Note is the existing that certain Promissory Note dated May 3, 2004 in the original principal amount of $1,360,000.00, with a current principal balance of $1,048,004.85, and which shall be amended and restated in its entirety by the Note.

1.10 Permitted Liens and Encumbrances . Permitted Liens and Encumbrances shall be those liens and encumbrances set forth on Exhibit B to the Mortgage.

1.11 Project . The Project is the construction and completion of a 47,945 square foot addition to Borrower's building including all fixtures, landscaping, parking areas, and other work necessary to render the Project usable and complete for its intended purposes, which Project shall be located at the Real Property and commonly known as 213 Chelsea Road, Monticello, Minnesota 55362.

1.12 Project Completion Escrow. The sum of $303,622.30, to be withheld from the proceeds of the Loan and to be deposited with the Title Insurance Company to be used for completion of landscaping, parking lot repaving and miscellaneous matters, to be held and disbursed pursuant to the terms of a separate agreement between the Borrower and the Title Insurance Company.

1.13 Real Property . The Real Property is the real property described on Exhibit A attached hereto .

1.14 Secured Assets . The Secured Assets shall mean all of the real and personal property of Borrower as described in the Mortgage.

1.15 Title Commitment. The Title Commitment shall be the title commitment referenced in Section 2.6 hereof.

1.16 Title Insurance Company . The Title Insurance Company shall be First American Title Insurance Company, as previously approved by Lender.

2. Conditions Precedent . This Loan Agreement shall become effective upon satisfaction of the conditions set forth in this Section.

2.1. Loan Documents . Borrower, Guarantors and all other applicable parties shall have executed and delivered each of the Loan Documents they are required to execute and deliver.

2.2. Borrower’s Organizational Documents . Borrower shall have furnished to Lender copies, certified to Lender by the Secretary of Borrower to be true and correct as of the date hereof, of the Articles of Incorporation and Bylaws of the Borrower, plus any amendments thereto, a Resolution authorizing the transaction and the execution and delivery of the applicable Loan Documents and a Certification and Incumbency Certificate. Borrower shall also deliver a satisfactory Good Standing Certificate for Borrower as issued by the Secretary of State for the State of Minnesota.

2.3. Guarantor’s Organizational Documents . Guarantors shall have furnished to Lender copies, certified to Lender by the Secretary of each Guarantor to be true and correct as of the date hereof, of the Articles of Incorporation and Bylaws of the Guarantors, plus any amendments thereto, a Resolution authorizing the transaction and the execution and delivery of the applicable Loan Documents and a Certification and Incumbency Certificate. Guarantors shall also deliver a satisfactory Good Standing Certificate for each Guarantor as issued by the Secretary of State for the State of Minnesota

2.4. [RESERVED]

2.5. Appraisal . Lender shall have received an appraisal, conducted by an appraiser acceptable to Lender who meets regulatory requirements, showing that the Project and the Real Property, as of the date of completion of construction pursuant of the Project, shall have a market value equal to at least $5,250,000.00. The appraisal must be in a form, content and substance acceptable to Lender, in its sole discretion, and shall meet Lender’s minimum appraisal standards and all regulatory requirements. Lender reserves the right, at such time(s) as Lender may deem necessary or desirable, to have the Project and the Real Property re-appraised including, but not limited to, upon any change in use thereof, upon any change in entitlements or anticipated entitlements (e.g. zoning or other land use approvals) to the Real Property, upon any change in easements or anticipated easements benefitting or burdening the Real Property during the term of the Loan, upon substantial completion of construction of the Project pursuant to the Plans and Specifications and in accordance with the terms of this Loan Agreement, and to exercise the remedies provided for in Section 9.2 hereof. Insurance . Borrower shall have furnished to Lender the policies, or certificates evidencing such policies, of insurance required in Section 5.4. of this Loan Agreement.

2.6. Title Insurance . Lender shall have obtained, at Borrower’s expense, a commitment for an ALTA form of loan policy of title insurance with “gap” coverage (if applicable in the State in which the Project is located) and such endorsements as reasonably required by Lender, issued by the Title Insurance Company, in form and content satisfactory to Lender, in its sole discretion, to the effect that the Title Insurance Company will issue its loan policy of title insurance in the amount of $4,200.000.00, insuring that Borrower owns fee simple title to the Real Property and insuring that the Mortgage constitutes a first and valid lien on the Real Property, subject only to the Permitted Liens and Encumbrances (and with the deletion of all standard title exceptions with so-called extended coverage). In connection therewith, Borrower shall have executed such owner’s affidavits and other affidavits and statements which may be required by the Title Insurance Company to issue the loan policy in the form required by this Section. The underwriter for which the Title Insurance Company is issuing the loan policy of title insurance described above shall have issued a closing protection letter for the benefit of Lender, in form and content reasonably acceptable to Lender, insuring the Title Insurance Company’s actions in closing the transactions contemplated by this Loan Agreement.

2.7. Loan Fee . Borrower shall have paid to Lender the sum of $0.00 as a loan fee, which fee shall be non-refundable to Borrower.

2.8. UCC Search . Lender shall have obtained, at Borrower’s expense, UCC Searches as deemed necessary or appropriate by Lender, certified by the Secretary of State of the State of Minnesota and Wright County, Minnesota, or issued by a reputable UCC lien search company acceptable to Lender in its sole and absolute discretion, which state that there are no liens or encumbrances affecting the Secured Assets (or, if there are liens or encumbrances affecting the Secured Assets, Lender shall have approved of the same).

2.9. Compliance with Laws . Borrower shall have provided Lender with satisfactory evidence (including, if required by Lender, an opinion of Borrower’s counsel) of compliance by the Real Property and the Project with respect to both present and contemplated future use, of all applicable laws, regulations, ordinances and codes, including, but not limited to, zoning and subdivision laws, regulations, ordinances and codes, and comprehensive land use plans, laws, regulations, ordinances and codes and evidence (including, if required by Lender, an opinion of Borrower’s counsel) that all entitlements and governmental approvals necessary for the design and construction of the Project in accordance with the Plans and Specifications have been obtained. All approvals shall be in continuous effect without lapse so as to permit the construction of the Project without the necessity of reapplying for or re-obtaining any such approvals.

2.10. [RESERVED] .

2.11. [RESERVED]

2.12. [RESERVED] .

2.13. Licenses, Permits and Approvals . Borrower shall have delivered to Lender, and Lender shall have the right to approve or disapprove, in its sole discretion, copies of all governmental and quasi-governmental approvals and permits required to operate the Project including, but not limited to, all building permits and certificates of occupancy issued by the Municipality, as requested by Lender.

2.14 [RESERVED] .

2.15 Utilities . Borrower shall have delivered to Lender evidence reasonably satisfactory to Lender that all utility services necessary for the development, construction and operation of the Project (including, but not limited to, sanitary sewer, water, electricity, gas and other similar utilities) are available to the Real Property in sufficient capacity to serve the Project and that Borrower will be permitted to directly connect the Project to all such utility services without unusual expense.

2.16 Survey . Borrower shall have furnished to Lender (or Lender shall have obtained, at Borrower’s expense) an ALTA "as-built" survey prepared according to the current ALTA/ACSM Minimum Standard Detail Requirements by a licensed surveyor satisfactory to Lender and certified to Lender and the Title Insurance Company, which shows (i) the as-built foundation of the Project, the existing improvements, driveways and fences, if any, on the Real Property; (ii) all easements and roads or right of ways and setback lines, if any, affecting the Real Property; (iii) the dimensions, boundaries and square footage of the Real Property; (iv) no encroachments by the Project and the existing improvements on the Real Property or by improvements located on the adjoining property exist; (v) whether or not the property appears on any U.S. Department of Housing and Urban Development Flood Insurance Boundary Map and, if so, further state the map number and whether or not the property appears in the “Flood Hazard” shown on the map; and (vi) such additional information that may be required by Lender, in its sole discretion (the “Survey Requirements”).

2.17 [RESERVED] .

2.18 [RESERVED].

2.19 [RESERVED] .

2.20 Leases . There are no current Leases to the Real Property. With respect to any Leases entered into after the date hereof, Borrower shall comply with the requirements of of the Mortgage.

2.21 [RESERVED]

3. [RESERVED]

4. Representations and Warranties . Borrower represents, warrants and certifies to Lender that:

4.1. Organizational Documents . Borrower and Guarantors shall at all times be duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Minnesota. Borrower is duly organized to transact business in all other States in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all States in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact business in which it is presently engaged or proposes to engage. Borrower maintains its principal office at 213 Chelsea Road, Monticello, MN 55362. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Project. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization, principal place of business, or Borrower’s name and pay all of Lender’s costs and expenses as a result thereof including, but not limited to, costs and expenses of correcting any UCC filings. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence.

4.2. Execution of Loan Documents . The Loan Documents have been duly executed and delivered by Borrower and the Guarantors, so that such documents constitute the legally enforceable obligations of Borrower and the Guarantors in accordance with their respective terms.

4.3. Financial Statements . All financial statements, information and other data furnished by Borrower and the Guarantors to Lender are complete and correct in all material respects and disclose all contingent obligations which are material individually or in the aggregate. Such financial statements accurately and fairly represent each applicable party’s financial condition and operating results as of such date and since such date there has been no material change in Borrower’s or any of the Guarantors’ financial condition or results of operations sufficient to materially impair the ability to repay the Loan.

4.4. Operation of Real Property and Project . Borrower has examined and is familiar with all easements, covenants, conditions, restrictions, reservations, building laws, regulations, zoning and land use ordinances, and federal, state and local requirements affecting the Project. The Project will at all times and in all respects conform to and comply with the requirements of such easements, covenants, conditions, restrictions, reservations, building laws, regulations, zoning and land use ordinances, and federal, state and local requirements. The present and proposed operation and use of the Real Property and the Project do not violate any applicable law, ordinance, code, rule, regulation, order or any restrictive covenant or any similar zoning or land use restriction binding on the Real Property or the Project. The Real Property is a legal parcel lawfully created in full compliance with all subdivision laws and ordinances. Borrower has no knowledge of any Native American or other archaeological ruins, discoveries or specimens existing on the Real Property.

4.5. Ownership of Real Property . As of the date hereof, and at all times thereafter until the Loan has been paid in full, Borrower will be the fee simple owner of the Real Property and Secured Assets, free and clear of all liens, encumbrances, claims, leases, rental agreements, occupancy agreements and other similar items except for the Permitted Liens and Encumbrances and the Leases.

4.6. No Default . Borrower is not now in default under any agreement to which it is a party, the effect of which would adversely affect performance by such parties of their obligations pursuant to the terms and provisions of the Loan Documents. Neither the execution and delivery of the Loan Documents nor any other document executed and delivered by Borrower in connection with the Loan, nor the consummation of the Loan, nor compliance with the terms and provisions thereof, violate any presently existing law, order, writ, injunction or decree of any court or governmental department, commission, board, bureau, agency or instrumentality or constitutes a default under any indenture, mortgage, deed of trust, agreement or contract of any kind to which such parties may be bound.

4.7. Utilities . All water, sewer, electric, telephone and drainage facilities and all other utilities required by law and by the normal operation of the Project have been installed to the boundary lines of the Real Property, are connected pursuant to valid permits, the cost of extending and connecting such utilities to the Real Property is stated in the Final Certified Construction Budget, and are adequate to fully comply with all requirements of law and to serve the Project for its intended use.

4.8. Access . All roads, easement areas and other modes of ingress and egress necessary for the full utilization of the Project have either been completed and Borrower has the legal right to use such roads, easement areas or modes of access; or any roads, easement areas or modes of access not so completed will be completed in accordance with the Plans and Specifications and sufficient funds are provided for in the Final Certified Construction Budget to complete such roads, easement areas or modes of access.

4.9. Leases . There are currently no Leases with respect to the Real Property.

4.10. No Legal Proceedings . There are no actions, suits or proceedings pending or threatened against Borrower, any Guarantor, the Secured Assets, the Project or the Real Property before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will adversely affect performance by Borrower or any Guarantor of their respective obligations pursuant to the provisions of the Loan Documents.

4.11. Insurance . Borrower has not received, and has no knowledge of any other party having received, any notice from any insurer of any defects or inadequacies in the Real Property or the Project which would adversely affect the insurability of the Real Property or the Project.

4.12. Liens and Encumbrances . Except for the Permitted Liens and Encumbrances, Borrower has not taken, suffered or permitted any action, the effect of which would be to establish or cause the inception or priority of any construction or materialman’s lien, statutory or otherwise, or other lien, charge or encumbrance upon the Real Property or the Secured Assets to be prior or superior to the liens and security interests of the Collateral Security Documents. No bill of sale, security agreement, financing statement or other instrument creating a security interest to secure the repayment of debt (except those in favor of Lender) has been executed by Borrower with respect to the Project or the Real Property.

4.13. Insolvency . Neither Borrower nor any of the Guarantors have filed any petition nor has any petition been filed against any such party in bankruptcy or insolvency or reorganization or for the appointment of a receiver or trustee or for the arrangement of debts, nor has any such party or the Real Property been the subject of such action, nor has such action been threatened by or against any such party and/or the Real Property. Neither Borrower nor any of the Guarantors are insolvent nor will they be rendered insolvent by the consummation of the Loan.

4.14. [RESERVED]

4.15. Approvals . Borrower has obtained all approvals from all governmental and quasi-governmental authorities and any applicable private party necessary or required for the construction and operation of the Project.

5. Covenants of Borrower . While this Loan Agreement is in effect, and until the Loan has been repaid in full, Borrower shall comply with the covenants set forth below:

5.1. [RESERVED] .

5.2. [RESERVED] .

5.3. Liens . Borrower shall not create or permit to be outstanding any mortgage, encumbrance or lien of any nature on the Real Property or the Secured Assets except the Permitted Liens and Encumbrances. In addition, Borrower shall: (i) cause all claims for labor done and materials and services furnished in connection with the Project to be fully paid and discharged in a timely manner; (ii) diligently file or procure the filing of a valid notice of completion of construction, or such comparable document as may be permitted under applicable lien laws; (iii) diligently file or procure the filing of a notice of cessation, or such comparable document as may be permitted under applicable lien laws, upon the happening of cessation of labor on the Project for a continuous period of thirty (30) days or more, and (iv) take all reasonable steps necessary to remove all claims of liens against the Project, the Real Property, or any part of the collateral or improvements, or any rights or interests appurtenant to the collateral or improvements on the Real Property. Upon Lender's request, Borrower shall make such demands or claims upon or against laborers, materialmen, subcontractors, or other persons who have furnished or claim to have furnished labor, services, or materials in connection with the Project, which demands or claims shall under the laws of the State of Minnesota require diligent assertions of lien claims upon penalty of loss or waiver thereof. If any lien is created, Borrower shall, within ten (10) days after the filing of any claim of lien that is disputed or contested by Borrower, cause such lien to be removed of record or provide Lender with a surety bond issued by a surety acceptable to Lender sufficient to release the claim of lien or deposit with Lender an amount satisfactory to Lender for the possibility that the contest will be unsuccessful. If Borrower fails to remove any lien on the collateral or the Project or provide a bond or deposit pursuant to this provision, Lender may pay such lien, or may contest the validity of the lien, and Borrower shall pay all costs and expenses of such contest, including Lender's reasonable attorneys' fees.

5.4. Insurance . Borrower shall at all times maintain in effect (or cause to be maintained in effect) and furnish Lender with insurance policies (or, if acceptable to Lender, certificates evidencing such policies) and proof of payment of premiums as follows:

5.4.1. General Insurance Requirements . Borrower shall maintain or cause to be maintained all insurance coverages as required pursuant to the Mortgage.

5.4.2. Flood Insurance . If any portion of the Real Property is located within a flood plain, Borrower shall maintain or cause to be maintained Flood Insurance in amounts acceptable to Lender in Lender’s discretion.

5.4.3. Worker’s Compensation . Borrower shall cause appropriate Worker’s Compensation coverage and Employer’s Liability insurance to be maintained in force at all times during the term of the Note, and upon request of Lender, shall furnish Lender evidence of same.

5.4.4. Construction Insurance . During the process of any construction, Borrower shall maintain policies of All Risk Builder’s Risk Completed Value insurance with all endorsements which are generally maintained by prudent real estate developers or real property owners covering the Project in at least the amount of the estimated cost to complete the Project, with lender loss payable and mortgagee endorsements in favor of Lender or its assigns.

5.4.5. Rent Loss Insurance . None.

5.4.6. Additional Insurance Requirements . The insurance maintained as required hereunder shall bear a standard noncontributory first mortgagee endorsement in favor of Lender or its assigns, shall name Lender as “Mortgagee” and “Lender Loss Payee”, and shall provide that all proceeds under such policies shall be paid to Lender and losses which apply solely to the Project shall be disbursed in accordance with the provisions of the Mortgage. All insurance policies shall be written by companies having a Best’s rating of “A” and a financial size category rating of Class X or larger. All insurance policies shall provide that they may not be cancelled without at least thirty (30) days written notice of intention to cancel given by the applicable insurance company to Lender.

5.5. Compliance with Laws . Borrower shall comply, and shall cause all tenants under the Leases, if any, to comply, with the requirements of all applicable environmental, health, safety and sanitation laws, rules, regulations and orders of regulatory and administrative authorities. Borrower will also comply, and shall cause all tenants under the Leases, if any, to comply, with all other laws, rules, regulations and orders which are applicable to the Real Property, the Project or Borrower including, but not limited to, those relating to the Americans With Disabilities Act and the Fair Housing Act. Borrower shall maintain all required licenses, permits and approvals with respect to the construction of the Improvements and the operation of the Project.

5.6. Prohibition Against Fundamental Changes . Borrower shall not enter into any transaction of merger, consolidation or amalgamation; liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business, Real Property, Secured Assets or any other assets; acquire by purchase or otherwise all or substantially all the business or assets of, or membership interests or other evidences of beneficial ownership of, any entity. Except as expressly permitted in the Mortgage, no interest of Borrower or any other form of beneficial ownership of Borrower may be sold, transferred or otherwise disposed of during the term of the Loan without the prior written consent of Lender, which consent may be withheld for any reason.

5.7. Expenses and Indemnification . Borrower shall pay upon demand to Lender all out-of-pocket expenses incurred by Lender and all reasonable: (i) title insurance fees; (ii) survey and other consultants’ fees and expenses; (iii) attorneys’ fees; (iv) filing fees and taxes; (v) inspection fees; (vi) insurance premiums (to the extent not paid directly by Borrower); (vii) engineer and other consultants’ fees; (viii) appraisal fees, and all other similar costs and expenses relating in any manner to the Loan and the enforcement of Lender’s rights and remedies pursuant to the Loan Documents. Lender is hereby authorized to make disbursements from the Loan proceeds to pay the amount set forth in the foregoing sentence. Borrower hereby agrees to hold and save Lender harmless and indemnify Lender for, from and against all claims, liabilities, damages, losses or expenses (including reasonable attorneys’ fees) of any kind incurred by Lender arising from or out of the use, occupancy, or possession of the Real Property or otherwise or in any matter related to this Loan or the enforcement of Lender’s rights and remedies pursuant to the Loan Documents.

5.8. Financial Covenants .

5.8.1 Minimum Net Worth . So long as the Note shall remain unpaid or the Bank shall have any Commitment hereunder, the Borrower will maintain, during and at the end of each fiscal quarter end, Net Worth at an amount not less than Eight Million Five Hundred Thousand and no/100 Dollars ($8,500,000.00). For purposes hereof, "Net Worth" means the aggregate of capital and surplus of the Borrower, all determined in accordance with generally accepted accounting principles.

5.8.2 Ratio of Debt to Tangible Net Worth . So long as the Note shall remain unpaid or the Bank shall have any Commitment hereunder, the ratio of the Borrower's Debt to Tangible Net Worth shall not exceed 2.25 to 1 measured at the end of each fiscal quarter end basis.

For purposes hereof, "Debt" means (i) all items of indebtedness or liability which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liabilities side of a balance sheet as at the date as of which Debt is to be determined and (ii) indebtedness secured by any mortgage, pledge, lien or security interest existing on property owned by the Person whose Debt is being determined, whether or not the indebtedness secured thereby shall have been assumed, and (iii) guaranties, endorsements (other than for purposes of collection in the ordinary course of business) and other contingent obligations in respect of, or to purchase or otherwise acquire indebtedness of others; and "Tangible Net Worth" of any Person means the excess of:

(a) the tangible assets of such Person, which, in accordance with generally accepted accounting principles, are tangible assets, after deducting adequate reserves in each case where, in accordance with generally accepted accounting principles, a reserve is proper, less

(b) all Debt of such Person;

provided, however, that (i) inventory shall be taken into account on the basis of the cost or current market value, whichever is lower, (ii) in no event shall there be included as such tangible assets patents, trademarks, trade names, copyrights, licenses, good will, deferred taxes, prepaid expenses, deferred charges or treasury stock or any securities or Debt of such Person or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against Federal income tax liabilities, (iii) securities included as such tangible assets shall be taken into account at their current market price or cost, whichever is lower, and (iv) any write-up in the book value of any assets shall not be taken into account.

5.8.3 Quarterly Fixed Charge Coverage Ratio . So long as the Note shall remain unpaid or the Lender shall have any Commitment hereunder, Borrower shall maintain a quarterly Fixed Charge Coverage Ratio, tested quarterly as of the end of each fiscal quarter of Borrower (based upon a fiscal year end of the last Sunday in August, and fiscal quarter ends on the last Sunday of each of November, February, May and August) for the most recently-ended four fiscal quarters of Borrower preceding each such testing date, of not less than 1.20 to 1 as of the end of each such testing period, beginning on fiscal quarter ended on the last Sunday of February in 2013, determined in accordance with generally recognized accounting principles consistently applied.

The term “Fixed Charge Coverage Ratio” means Borrower's earnings after taxes plus interest expense, plus taxes, plus depreciation plus amortization minus unfinanced capital expenditures (but excluding from unfinanced capital expenditures an amount of up to $600,000 contributed by Borrower to Borrower's 2012-2013 building expansion) minus dividends minus taxes paid in cash divided by scheduled principal and interest payments due on all Debt of the Borrower for such testing period...

5.9. Use of Proceeds . The proceeds of the Loan shall be used to reimburse Borrower for actual expenses incurred by or on behalf of Borrower for construction of the Project.

5.10. Financial Statements . The Borrower and Guarantors will deliver to Lender :

5.10.1 As soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Borrower and Guarantors, a copy of the financial statements of the Borrower and Guarantors audited by independent certified public accountants selected by the Borrower and Guarantors and acceptable to the Bank, which shall include the balance sheet of the Borrower and Guarantors as at the end of such fiscal year and the related statements of income, retained earnings and changes in financial position of the Borrower and Guarantors for the fiscal year then ended, all in reasonable detail and all prepared in accordance with generally accepted accounting principles applied on a consistent basis and accompanied by a certificate of said officer stating (i) that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements previously provided to Lender, and (ii) whether or not he has knowledge of the occurrence of any Event of Default hereunder or of any event not theretofore reported and remedies which with notice or lapse of time or both would constitute such an Event of Default and, if so, stating in reasonable detail the facts with respect thereto and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with requirements set forth in Sections 5.8 hereof.

5.10.2 As soon as available and in any event within forty-five (45) days after the end of each quarter, balance sheets of the Borrower and Guarantors as at the end of such quarter and related statements of earnings and retained earnings of the Borrower and Guarantors for such quarterly period and for the year to date, in reasonable detail and stating in comparative form the figures for the corresponding date and period in the previous year, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the account practices reflected in the annual financial statements referred to in Section 5.10.1 and certified by the chief financial officer of the Borrower and Guarantors; subject, however, to year-end audit adjustments, and accompanied by a certificate of said officer stating (i) that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 5.10.1, and (ii) whether or not he has knowledge of the occurrence of any Event of Default hereunder or of any event not theretofore reported and remedies which with notice or lapse of time or both would constitute such an Event of Default and, if so, stating in reasonable detail the facts with respect thereto and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower and Guarantors are in compliance with requirements set forth in Sections 5. 8.

5.10.3 As soon as possible after such occurrence, Borrower and Guarantors shall provide the Bank with notice of any amendment of their Articles of Incorporation or of any material change in the Borrower or Guarantor or its or their operations; and

5.10.4 Such other information respecting the financial condition and results of operations of the Borrower or any Guarantor as the Bank may from time to time reasonably request.

5.11. Leases . Borrower acknowledges and agrees that Borrower’s right to modify, amend, supplement, terminate or cancel any of the Leases, or enter into any new Leases, shall be governed by the Mortgage

5.12. [RESERVED] .

5.13 Operations . Borrower shall maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel, shall provide written notice to Lender of any change in executive and management personnel, and shall conduct its business affairs in a reasonable and prudent manner.

5.14 Notice of Defaults . Borrower will promptly notify Lender in writing of the occurrence of any default or Event of Default, specifying the nature and existence of such default or Event of Default and what action Borrower is taking or proposes to take with respect thereto. If any person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under this Loan Agreement or under any note, evidence of indebtedness, indenture or other obligation to which or with respect to which Borrower is a party or obligor, whether as principal or surety, and such default would permit the holder of such note or obligation or other evidence of indebtedness to accelerate the maturity thereof, which acceleration would have a material adverse effect on Borrower, Borrower shall forthwith give written notice thereof to Lender, describing the notice or action and the nature of the claimed default.

5.15 Notification of Claims Against Collateral . Borrower will, immediately upon becoming aware thereof, notify Lender in writing of any setoff, claims, withholdings or other defenses to which any of the collateral, or the rights of Lender with respect to the collateral, are subject.

5.16 Notice of Nonpayment . Borrower will immediately notify Lender in writing if Borrower receives any notice, whether oral or written, from any laborer, subcontractor or materialman to the effect that such laborer, subcontractor or materialman has not been paid when due for any labor or materials furnished in connection with the construction, renovation, repair or replacement of any Improvements located on, or any other work performed at, the Real Property.

5.17 Notice of Legal Proceedings . Borrower will give notice to Lender in writing within fifteen (15) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting the Real Property, the Project, the Secured Assets or Borrower or to which Borrower is or is to become a party involving an uninsured claim against Borrower that could reasonably be expected to have a materially adverse effect on Borrower and stating the nature and status of such litigation or proceedings. Borrower will give notice to Lender, in writing, in form and detail satisfactory to Lender, within ten (10) days of any judgment not covered by insurance, final or otherwise, against Borrower in an amount in excess of Fifty Thousand Dollars ($50,000.00).

5.18 Notice of Tenant Actions . Borrower will give written notice to Lender at least ten (10) days prior to the commencement of, and again on the date of, occupancy of the Improvements by any future tenant under a Lease, stating the name of the tenant, the date of occupancy, and the area so occupied. Borrower will also give written notice to Lender within ten (10) days after any tenant under a Lease vacates its premises (whether pursuant to the expiration of the term or otherwise), stating the name of the tenant, the date the premises were vacated, and the area so vacated. In addition, Borrower will give written notice to Lender within ten (10) days after any tenant under a Lease fails to take occupancy of its premises as provided in such Lease, and within ten (10) days after the occurrence of any default by tenant or Borrower/landlord under such Lease.

6. Letters of Credit . Lender shall not be required to issue any letters of Credit for the account of Borrower in connection with the Project.

7. Events of Default .

7.1. Any of the following events shall constitute an event of default (“Event of Default”) under this Loan Agreement:

7.1.1. Default Pursuant to Note . Borrower shall default in the payment of principal or interest due under the Note or any other payments due pursuant to the Loan Documents.

7.1.2. Default Pursuant to Loan Documents . Except for a default pursuant to Section 7.1.1 above, there shall be a failure in the performance or observance of any covenants or conditions required to be performed or observed by Borrower or any of the Guarantors, if applicable, under the terms of the Loan Documents, and such failure continues beyond any applicable cure period (if any).

7.1.3. Breaches . Any representation or warranty made by Borrower or any of the Guarantors, if applicable, in the Loan Documents or as part of the Loan or in any certificate or document furnished as part of the Loan shall prove untrue in any material respect on the date as of which they were made or as of the date on which they were to be effective; or any financial statement or financial information delivered pursuant to this Loan Agreement is false or misleading in any material respect as of the date thereof.

7.1.4. Insolvency . Either Borrower or any of the Guarantors, if applicable, shall admit in writing their inability to pay its debts or shall make an assignment for the benefit of its creditors; or shall be adjudicated a bankrupt; or shall file a voluntary petition in bankruptcy or to effect a plan or other arrangement with creditors, or to liquidate assets of either Borrower or any of the Guarantors, if applicable, under court supervision; or shall have applied for the appointment of a receiver, trustee or custodian for any of their assets; or a trustee, receiver or custodian shall have been appointed for any assets of Borrower or any of the Guarantors, if any

7.1.5. Damage to Real Property or Project . If the improvements on the Real Property or Secured Assets are, in the reasonable judgment of Lender, materially injured or destroyed and Borrower does not take prompt action to collect insurance proceeds and/or commence restoration.

7.1.6. Inspection of Real Property . If Lender is not permitted, at all reasonable times upon prior reasonable notice as required under the Mortgage, to enter and inspect the Real Property, Project and the Secured Assets.

7.1.7. Warrants and Attachments . Any warrant, attachment, execution or other writ shall be issued or levied upon the Real Property or the Secured Assets or any property, real or personal, owned by Borrower or any Guarantor (if applicable) and shall remain undischarged, unstayed or unbonded for a period in excess of sixty (60) days.

7.1.8. [RESERVED]

7.1.9. Material Contracts . If any contract, lease or agreement which is material to Borrower’s business is modified, amended or supplemented without Lender’s written consent or any of the Leases or any such contract, lease or agreement are terminated or a breach or an event of default occurs under the Leases or any such contract, lease or agreement.

7.1.10. [RESERVED].

7.1.11. Expiration of Permits or Approvals . If any building permit, license or similar approval of any governmental authority required in connection with the Project is not maintained in full force and effect or is canceled and not reinstated within thirty (30) days of such cancellation or if any notice of commencement required under applicable law, if any, is terminated or expires.

7.1.12 Default Under Other Obligations . Any material event or condition of default (however defined) by Borrower shall occur and the applicable cure period, if any, shall have expired, in any promissory note or any agreement between Borrower and the Lender, including but not limited to that certain Amended and Restated Promissory Note, and that certain Loan Agreement, both dated as of the same dated as of February 1, 2011, as amended, or any document or agreement executed in connection therewith.

7.2. Occurrence of an Event of Default . Upon the occurrence of an Event of Default and the continuance thereof beyond any applicable cure period, unless such Event of Default is subsequently waived in writing by Lender, Lender shall be entitled, at the option of Lender, to exercise any or all of the following rights and remedies

7.2.1. Suspend Disbursements . Lender may suspend its obligation to disburse any undisbursed proceeds of the Loan.

7.2.2. Accelerate Payments . Lender may declare the entire unpaid principal balance due pursuant to the Note to be immediately due and payable, together with accrued and unpaid interest, without further notice to or demand on Borrower. Notwithstanding the foregoing, if Borrower or any of the Guarantors, if any, becomes insolvent, makes an assignment for the benefit of its creditors, becomes the subject of an “order for relief” within the meaning of the U.S. Bankruptcy Code, files a petition in bankruptcy, or for reorganization, is adjudged bankrupt, has filed against them an involuntary petition pursuant to the U.S. Bankruptcy Code or has a receiver, trustee, custodian or a liquidator appointed to take control of any of their real or personal property, then the entire unpaid principal balance due pursuant to the Note and all accrued and unpaid interest thereon shall automatically and without the option of Lender become immediately due and payable.

7.2.3. [RESERVED] .

7.2.4. Other Remedies . Lender may exercise all enforcement remedies specified or permitted in the Collateral Security Documents or any remedy available to Lender at law or in equity.

7.3. [RESERVED]

7.4. Setoff . To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or other account). This includes all accounts Borrower, all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this Section.

8. Liability; Limitations; Indemnification .

8.1. [RESERVED] .

8.2. No Joint Venture . The relationship between Borrower and Lender created by this Loan Agreement is strictly a debtor and creditor relationship and not fiduciary in nature, nor is the relationship to be construed as creating any partnership or joint venture between Lender and Borrower or any contractor. Lender is not an agent or representative of Borrower. This Loan Agreement does not create a contractual relationship with and shall not be construed to benefit or bind Lender in any way or create any contractual duties by Lender to any contractor, subcontractor, materialman, laborer, or any other person. Borrower is exercising Borrower's own judgment with respect to Borrower's business. All information supplied to Lender is for Lender's protection only and no other party is entitled to rely on such information. There is no duty for Lender to review, inspect, supervise or inform Borrower of any matter with respect to Borrower's business. Lender and Borrower intend that Lender may reasonably rely on all information supplied by Borrower to Lender, together with all representations and warranties given by Borrower to Lender, without investigation or confirmation by Lender and that any investigation or failure to investigate will not diminish Lender's right to so rely.

8.3. Indemnification . Borrower agrees to indemnify, to defend and to save and hold Lender harmless for, from and against any and all claims, suits, obligations, damages, losses, costs and expenses (including, without limitation, Lender's attorneys' fees, as well as Lender's architect's and engineering fees), demands, liabilities, penalties, fines and forfeitures of any nature whatsoever that may be asserted against or incurred by Lender, its officers, directors, employees, and agents arising out of, relating to, or in any manner occasioned by this Loan Agreement and the exercise of the rights and remedies granted Lender under this, as well as by: (i) the ownership, use, operation, construction, renovation, demolition, preservation, management, repair, condition, or maintenance of any part of the Project; (ii) the exercise of any of Borrower's rights collaterally assigned and pledged to Lender hereunder; (iii) any failure of Borrower to perform any of its obligations hereunder; and/or (iv) any failure of Borrower to comply with the environmental and ERISA obligations, representations and warranties set forth herein. The foregoing indemnity provisions shall survive the cancellation of this Loan Agreement, the completion of the Project and the repayment of the Loan as to all matters arising or accruing prior to any such event and the foregoing indemnity shall survive in the event that Lender elects to exercise any of the remedies as provided under this Loan Agreement following default hereunder. Borrower's indemnity obligations under this Section shall not in any way be affected by the presence or absence of covering insurance, or by the amount of such insurance or by the failure or refusal of any insurance carrier to perform any obligation on its part under any insurance policy or policies affecting the Project and/or Borrower's business activities. Should any claim, action or proceeding be made or brought against Lender by reason of any event as to which Borrower's indemnification obligations apply, then, upon Lender's demand, Borrower, at its sole cost and expense, shall defend such claim, action or proceeding in Borrower's name, if necessary, by the attorneys for Borrower's insurance carrier (if such claim, action or proceeding is covered by insurance), or otherwise by such attorneys as Lender shall approve. Lender may also engage its own attorneys at its reasonable discretion to defend Borrower and to assist in its defense and Borrower agrees to pay the fees and disbursements of such attorneys.

9. Additional Matters.

9.1. Heirs, Assigns, Waiver, Etc . The provisions of this Loan Agreement shall inure to the benefit of and be binding upon Borrower and Lender, and their respective heirs, legal representatives, successors and assigns; provided, however, that this Loan Agreement and the Loan Documents may not be assigned by Borrower without the prior written consent of Lender, which consent may be withheld or conditioned in Lender’s sole and absolute discretion. No delay on the part of Lender in exercising any right, power or privilege shall operate as a waiver thereof. The rights and remedies of Lender specified in this Loan Agreement shall be in addition to and not exclusive of any other rights and remedies which Lender, by operation of law, would otherwise possess.

9.2. Appraisals; Decline Condition .

9.2.1 Right of Lender to Obtain Appraisal . In addition to any other right of Lender or any other appraisal requirement under the Loan Documents, Lender shall have the right to obtain an appraisal of the Real Property at any time during the term of the Loan: (a) if an Event of Default has occurred under the Loan Documents; (b) if any material damage or destruction of the Real Property or the Project has occurred; (c) if Lender determines, in its commercially reasonable discretion, that the security for the Loan has been physically or financially impaired in any material manner including, but not limited to, as a result of any change in the use of the Real Property, change in entitlements or anticipated entitlements (e.g., zoning or other land use approvals) to the Real Property, change in easements or anticipated easements benefitting or burdening the Real Property, or change in any major tenant or major tenant lease; (d) if such appraisal is required by the then-current banking laws or regulations. If Lender so elects to obtain an appraisal, Lender shall select and engage an appraiser (the “Appraiser”) who is licensed or certified to appraise real property in the State where the Real Property is located, and who, in Lender’s sole judgment, has the appropriate experience and level of competency to prepare an appraisal of the Real Property. The cost of such appraisal shall be borne by Borrower provided that Borrower shall not be required to pay for any such appraisal more than once in any twelve (12) month period. The appraisal shall be in a form, content and substance acceptable to Lender, in its sole discretion, and shall meet Lender’s minimum appraisal standards and all regulatory requirements. Borrower shall cooperate with Lender and the Appraiser by providing any requested information, documents and access to the Project. If Borrower fails to cooperate with Lender or the Appraiser, such event shall constitute an Event of Default hereunder and Lender shall be entitled to exercise all remedies available to it hereunder.

9.2.2 Decline in Property Value . In the event any such appraisal obtained pursuant to Section 9.2.1 above shall determine that the then outstanding principal balance of the Note, together with the undisbursed portion of the Loan which Lender may be obligated to disburse to Borrower in accordance with the Loan Documents, is greater than 80% of the market value of the Real Property as determined by the Appraiser (the “Decline Condition”), Lender may deliver written notice thereof to Borrower. If Borrower fails to cure the Decline Condition pursuant to Section 9.2.3 below, such Decline Condition shall constitute an Event of Default and Lender shall be entitled to exercise all remedies available to it hereunder.

9.2.3 Borrower’s Right to Cure - Repayment . Upon Borrower’s receipt of written notice of a Decline Condition, Borrower may, at its option, repay a portion of the principal amount of the Note then outstanding such that the ratio of: (a) the sum of the outstanding principal balance of the Note plus the amount of the Loan proceeds that remain undisbursed to (b) the appraised value of the Real Property (as determined by the Appraiser pursuant to this Section 9.2) is, after completion of such repayment, less than 80%. Such repayment shall be made to Lender, in cash or other immediately available funds, within sixty (60) days after Borrower receives written notice of the Decline Condition. Upon Borrower’s repayment in accordance with this Section, the Decline Condition shall be deemed to be cured and no Event of Default shall occur (however, it shall not prevent or constitute a waiver of the right of Lender to prosecute any future Event of Default based on a future Decline Condition or otherwise).

9.2.4 Borrower’s Right to Cure - Additional Collateral . In the alternative to Section 9.2.3 above, if permitted by Lender at the time of the occurrence of the Decline Condition, upon Borrower’s receipt of written notice of a Decline Condition, Borrower may, at its option, grant to Lender additional collateral security (whether in the form of the granting of a mortgage or deed of trust on additional real property owned by Borrower or otherwise) deemed acceptable to Lender, in its sole discretion, such that the ratio of: (a) the sum of the outstanding principal balance of the Note plus the amount of the Loan proceeds that remain undisbursed to (b) the appraised value of the Real Property (as determined by the Appraiser pursuant to this Section 9.2) plus the market value of such additional collateral security (as determined by Lender in its sole discretion) is, after the grant of such additional collateral security, less than 80%. Borrower acknowledges and agrees that Lender may permit or decline any additional collateral security in its sole discretion, and may impose requirements on the granting of such additional collateral security (e.g., an appraisal, title insurance, environmental site assessment and other due diligence items may be necessary prior to the granting of a mortgage or deed of trust on additional real property). Such grant shall be made to Lender, in a form acceptable to Lender in its sole discretion, within sixty (60) days after Borrower receives written notice of the Decline Condition (or, if Lender’s requirements for the granting of such additional collateral security cannot be completed within such sixty (60) day period, then within such period of time as Lender may determine is appropriate). Upon Borrower’s grant in accordance with this Section, the Decline Condition shall be deemed to be cured and no Event of Default shall occur (however, it shall not prevent or constitute a waiver of the right of Lender to prosecute any future Event of Default based on a future Decline Condition or otherwise).

9.3. USA Patriot Act . Lender hereby notifies Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Patriot Act”), Lender is required to obtain, verify and record information that identifies Borrower and its affiliated entities, if any, which information includes the name and address of Borrower and its affiliated entities, if any, and other information that will allow Lender to identify Borrower and its affiliated entities in accordance with the Patriot Act. Borrower hereby agrees to provide such information promptly upon request by Lender. In connection therewith, Borrower shall: (a) ensure that no person who owns a controlling interest in or otherwise controls Borrower or any affiliated entity is or shall be listed on the “Specially Designated Nationals and Blocked Person List” or other similar lists maintained by the Office of Foreign Assets Control (“OFAC”), the Department of the Treasury, or included in any Executive Orders; (b) not use or permit the use of the proceeds of the Loan to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto; and (c) comply, and cause each affiliated entity to comply, with all applicable Bank Secrecy Act laws and regulations, as amended.

9.4. Anti-Terrorism Laws . In addition to all other representations and warranties contained herein, Borrower hereby represents and warrants that:

9.4.1. Borrower is not in violation of any laws relating to terrorism or money laundering including, without limitation, Executive Order No. 13224 on Terrorist Financing effective September 23, 2001, and the Currency and Foreign Transactions Reporting Act of 1970, each as amended from time to time (collectively, “ Anti-Terrorism Laws”).

9.4.2. No action, proceeding, investigation, charge, claim, report or notice has been filed, commenced or threatened against Borrower alleging any violation of any Anti-Terrorism Law.

9.4.3. Borrower has no knowledge or notice of any fact, event, circumstance, situation, or condition which could reasonably be expected to result in: (A) any action, proceeding, investigation, charge, claim, report, or notice being filed, commenced, or threatened against it alleging any violation of, or failure to comply with, any Anti-Terrorism Law; or (B) the imposition of any civil or criminal penalty against Borrower for any failure to so comply. Borrower has provided Lender with sufficient information (including names, addresses and, where applicable, jurisdiction of formation or organization) to reasonably permit Lender to verify the foregoing representation.

9.4.4. Borrower does not: (A) conduct any business or engage in making or receiving any contribution of funds, goods or services to or for the benefit of any person who is in violation of any Anti-Terrorism Law; (B) deal in, or otherwise engage in any transactions relating to any property or interests in property blocked under any Anti-Terrorism Law; or (C) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any prohibition set forth in any Anti-Terrorism Law.

9.5. Hedging Instruments . The obligations and indebtedness under the Loan shall include, without limitation, all obligations, indebtedness and liabilities of Borrower to Lender arising pursuant to or in connection with any swap, collar, cap, future, forward or derivative transaction, including any involving, or settled by reference to, one or more interest rates, currencies, commodities, equity or debt instruments, any economic, financial or pricing index or basis, or any similar transaction, including any option with respect to any of these transactions and any combination of these transactions.

9.6. Survival of Representations and Warranties . Borrower understands and agrees that in extending Loan advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Loan Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Loan Agreement or the Loan Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan advances and delivery to Lender of the Loan Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan advance is made, and shall remain in full force and effect until such time as the Note shall be paid in full, or until this Loan Agreement shall be terminated in the manner provided above, whichever is the last to occur.

9.7. Execution and Amendment . This Loan Agreement may be executed in counterparts, all of which shall be taken to be one and the same instrument, for the same effect as if all parties hereto had executed the same signature page. This Loan Agreement may not be changed orally, but only by an agreement in writing signed by the parties hereto

9.8. Signs . [RESERVED].

9.9. Notices . All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, postage prepaid, or with Federal Express or a similar nationally known overnight delivery service, addressed as follows or to such address or other address as may be hereafter notified by the respective parties hereto:

Lender:

BMO Harris Bank N.A.

50 South Sixth Street, Suite 1000

Minneapolis, MN 55402

Attention: Commercial Lending

Telecopy No. (612) 904-8011

Borrower:

WSI Industries, Inc.

213 Chelsea Road

Monticello, MN 55362

Attention: Vice/President/Chief Financial Officer

Telecopy No. 763-295-9212

Guarantor:

WSI Rochester, Inc.

213 Chelsea Road

Monticello, MN 55362

Attention: Vice/President/Chief Financial Officer

Telecopy No. 763-295-9212

Guarantor:

WSI Industries, Co

213 Chelsea Road

Monticello, MN 55362

Attention: Vice/President/Chief Financial Officer

Telecopy No. 763-295-9212

9.10. Severability . Any provision of this Loan Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.

9.11. Estoppel Certificate . Borrower, within fifteen (15) days after written notice from Lender, will furnish Lender with an estoppel certificate as to the amount of Loan proceeds advanced pursuant to this Loan Agreement, stating that no offsets or defenses exist hereunder and stating such other matters as reasonably requested by Lender.

9.12. Headings . Section and subsection headings in this Loan Agreement are included herein for convenience only and shall not constitute a part of this Loan Agreement for any purpose.

9.13. Maintenance of Security Interest . Upon request, Borrower shall take any actions reasonably deemed advisable by Lender to preserve the collateral described in the Collateral Security Documents and/or to establish, determine the priority of, perfect, continue perfection, terminate and enforce Lender’s rights pursuant to the Collateral Security Documents. In furtherance thereof, if Borrower shall fail or refuse to take such action within a reasonable period of time as determined by the then existing circumstances (but in no event less than ten (10) days), Borrower hereby appoints Lender as its true and lawful attorney-in-fact to execute and deliver all documents necessary to preserve the collateral described in the Collateral Security Documents and/or to establish, determine the priority of, perfect, continue perfection, terminate and/or enforce Lender’s interest pursuant to the Collateral Security Documents.

9.14. No Right of Reliance . Lender may waive, refrain from enforcing or grant indulgences with respect to any covenant, condition or term hereof without the consent of any other person and no other person shall be entitled to require or rely upon the strict enforcement of Lender's right thereunder. Specifically, Lender shall have no responsibility whatsoever for the timely or workmanlike construction of the Project or any of the improvements within the Project or the protection of the Real Property.

9.15. Time of the Essence. The time provided for Borrower’s and each Guarantor’s performance of their respective covenants and agreements hereunder are of the essence of this Loan Agreement.

9.16. No Representations by Lender . Lender has no obligation in connection with the Project except to advance the proceeds of the Loan as herein provided, and Lender shall not be liable for the performance of any contractor, subcontractor, or supplier of materials, fixtures, equipment and any other personal property or for the quality of workmanship or the quality of such materials, fixtures, equipment and other personal property or for the failure to construct, complete, protect or insure the improvements, or for the payment of any costs or expenses incurred in connection therewith, or for the performance or nonperformance or delay in performance of any obligation of Borrower to Lender. Any inspection by Lender or Lender's consultant of the Project, approval of the Plans and Specifications or other activities in the nature thereof shall only be for the sole benefit of Lender and for the purpose of protecting the security of Lender, and the same shall in no way be construed as a representation on the part of Lender that there is compliance on the part of Borrower with the Plans and Specifications or that the construction of the improvements is free from faulty material, or defective workmanship. The fact that Lender or Lender's consultant makes such inspections shall not relieve Borrower from its duty to independently ascertain that the Project is being completed in accordance with the Plans and Specifications, and Borrower has no right to rely on any procedures required by Lender.

9.17. Immunity . Lender’s commitment to make advances hereunder shall not at any time be subject or liable to attachment or levy at the suit of any creditor of Borrower or any agent, contractor, subcontractor or supplier of Borrower. All rights of the construction contractors, subcontractors, laborers and suppliers of materials, fixtures, equipment and other personal property shall be and are subordinate and inferior to Lender's interest and lien under the terms of the Loan Documents and this Loan Agreement.

9.18. VENUE . BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY BORROWER AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS LOAN AGREEMENT OR THE LOAN DOCUMENTS SHALL BE LITIGATED IN THE DISTRICT COURT OF WRIGHT COUNTY, MINNESOTA, OR AT LENDER’S DISCRETION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA. BORROWER HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER IN SUCH COURT. BORROWER WAIVES ANY CLAIM THAT WRIGHT COUNTY, MINNESOTA, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE EXCLUSIVE CHOICE OF FORUM FOR BORROWER SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND BORROWER HEREBY WAIVES THE RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.

9.19. WAIVER OF TRIAL BY JURY . LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER.

9.20. Governing Law . This Loan Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to its conflicts of law provisions.

9.21. Governmental Regulation of Lender. Lender is subject to various governmental authorities and the laws, rules and regulations enacted, adopted and promulgated by them. To the extent that Lender's power and authority to perform the obligations on the part of Lender to be performed under this Loan Agreement, now or hereafter, may be limited or regulated thereby, Lender is hereby excused from such performance if such limitation or regulation prevents Lender's performance or if such limitation or regulation limits Lender's performance, Lender's obligations hereunder shall be modified to be consistent with such limitation or regulation.

9.22. Final Agreement . This Loan Agreement and the Loan Documents represent the final agreement between Lender and Borrower with respect to the transactions contemplated hereby. Without limiting the generality of the foregoing, the terms and provisions of this Loan Agreement, together with the Loan Documents, supersede any inconsistent term or condition of any loan commitment letter or term sheet provided to Borrower and any previous discussions, negotiations, correspondence and oral statements of any party hereto and their respective employees, agents or representatives; provided, however, that all obligations of Borrower under any such loan commitment letter or term sheet to pay any fees to Lender or to pay any costs and expenses relating to the Loan or the loan commitment shall survive the execution and delivery of this Loan Agreement and the Loan Documents. Any failure of Borrower to perform any such obligation shall constitute an Event of Default under the Loan Documents.

9.23. No Usury . In no event shall interest, including any charge or fee deemed to be interest, accrue or be payable hereon or on account of the indebtedness arising hereunder, under the Note or under any Loan Document in excess of the highest rate allowed by law for the time such indebtedness shall be outstanding and unpaid. If by reason of the acceleration of maturity of such indebtedness, or for any other reason, interest in excess of the highest rate allowed by law shall be charged or paid, any such excess shall be refunded to Borrower or other payoff together with interest thereon at the highest rate permitted by law at the time of such overcharge. Borrower agrees to accept such reimbursement or principal reduction in lieu of any other remedies it may have under applicable law.

9.24. Further Assurances . Borrower shall, from time to time, execute and deliver to Lender such additional documents and shall provide such additional information as Lender may reasonably request to carry out the terms of this Loan Agreement.

IN WITNESS WHEREOF, the undersigned have executed this Loan Agreement on the day, month and year first above written.

LENDER:

BMO HARRIS BANK N.A.

By:

Name:

Title:

BORROWER:

WSI INDUSTRIES, INC., a Minnesota corporation

By:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

GUARANTORS:

WSI ROCHESTER, INC., a Minnesota

corporation

By:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

WSI INDUSTRIES CO., a Minnesota corporation

By:

Name:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

EXHIBIT A

Legal Description

Lot 1, Block 1, Remmele Addition, Wright County, Minnesota

EXHIBIT 10.4

ASSIGNMENT OF LEASES AND RENTS

THIS ASSIGNMENT OF LEASES AND RENTS (this “Assignment”) is entered into as of May 8, 2013, by WSI Industries, Inc., a Minnesota corporation (“Grantor”), to BMO Harris Bank N.A. (“Lender”).

RECITALS:

A. Grantor is the owner of certain real property described in Exhibit A attached hereto (the “Property”). Lender has on this date entered into a Loan Agreement (the “Loan Agreement”) with Grantor pursuant to which Lender has agreed to loan to Grantor the sum of $4,200,000.00. Grantor has executed an Amended and Restated Promissory Note (the “Note”) dated as of the date hereof to evidence such indebtedness.

B. Concurrently with the execution of this Assignment, Grantor has also executed and delivered to Lender an Amended and Restated Real Estate Mortgage, Security Agreement and Financing Statement to secure payment of the Note and the other Indebtedness (as defined therein) (the “Mortgage”). This Assignment is given in addition to the Mortgage as further security for the performance of Grantor’s obligations under the Note, the Loan Agreement, and any other documents executed in connection therewith (the Note, Mortgage, Loan Agreement, this Assignment and all such other documents are collectively referred to herein as the “Loan Documents”), and is given as additional security for the same debt for which mortgage registry tax has been paid in connection with the recording of the Mortgage and is accordingly exempt from mortgage registry tax pursuant to Minn. Stat. §287.04.

ARTICLE I.

ASSIGNMENT

NOW, THEREFORE, in consideration of Lender making the above referenced loan and in order to secure payment of the Note in accordance with its terms and all increases, additions, extensions, modifications and renewals thereof, and all other sums payable under the Loan Documents and the performance and observance of all of the provisions hereof and of the Loan Documents, Grantor hereby irrevocably sells, transfers, assigns and sets over to the Lender all of the Grantor’s right, title and interest in, to and under any and all of the following described property, whether now or at any time hereafter existing:

(i) All present and future oral and written leases, licenses and agreements for the use or occupancy of the whole or any part of the Property, including all amendments of, supplements to, and renewals and extensions thereof at any time made (all such leases, agreements, amendments, supplements, renewals and extensions being hereinafter referred to collectively as the “Leases”) together with all rents, earnings, income, issues, profits, royalties, revenues, insurance proceeds (including, but not limited to, any policy of insurance covering loss of income or rents for any cause) whether pursuant to any of the Leases or otherwise, and all other monetary benefits now existing or hereafter arising, derived or accrued from or belonging to the Property or such Leases, including any and all payments in lieu of rent, condemnation proceeds, damages, security deposits, rebates or refunds of impact fees, water or sewer connection fees, utility costs, taxes, assessments or other charges and all other sums due or to become due under and pursuant thereto (collectively, the “Rents”);

(ii) All rights, powers, privileges, options and other benefits of Grantor as lessor under such Leases including, but not limited to, the following: (a) the immediate and continuing right to receive and collect all Rents; and (b) the right to make all waivers, agreements and settlements, to give and receive all notices, consents and releases, to take such action upon the happening of a default under any of the Leases, including the commencement, conduct and consummation of such legal proceedings as may be permitted under any provision of any of the Leases or by law, and to do any and all other things whatsoever which the Grantor is or may become entitled to do under any of the Leases;

(iii) All guaranties of the tenant’s performance under any of the Leases; and

(iv) Any award made to Grantor in any court proceeding involving any of the tenants in any bankruptcy, insolvency or reorganization proceedings in any state or Federal court.

TO HAVE AND TO HOLD unto the Lender, its successors and assigns forever; PROVIDED HOWEVER, that unless and until the occurrence of an Event of Default (as defined in the Loan Documents) shall occur, Grantor shall have the revocable right and license to collect, use and enjoy the Rents, issues, profits and any other sums payable under and by virtue of any of the Leases, but only as the same become due under the provisions of such Leases, and to enforce the covenants of each of the Leases.

ARTICLE II.

COVENANTS AND WARRANTIES

Grantor hereby covenants and warrants to Lender as follows:

2.1 Existing Leases . That there are currently no Leases affecting the Property.

2.2 Ownership and Right to Assign . Grantor is entitled to receive all Rents and other amounts due or to become due under the Leases free and clear of all rights, loans, liens, encumbrances, and claims. Grantor has the full right, power and authority, acting alone, to enter into this Assignment and to assign and convey the rights hereunder to Lender. All approved and executed Leases shall, at Lender’s option, be specifically assigned to Lender by instrument in form satisfactory to Lender.

2.3 Leases . With respect to any Leases hereafter entered into by Grantor and any renewals, extensions or expansions of any Leases currently in existence:

(a) That the sole ownership of the Landlord’s interest in such Lease shall be vested in Grantor;

(b) That Grantor has not, and shall not: (i) perform any act or execute any instrument which might hinder or delay Lender from fully exercising its rights under any term, covenant or condition of this Assignment; (ii) execute any assignment or pledge of Rents, income, or profits of any of the Leases except an assignment or pledge to Lender to further secure the Indebtedness secured hereby; (iii) accept any payment of any installment of Rent more than thirty (30) days before the due date thereof; (iv) enter into any Lease affecting the Property that does not require actual occupancy by the tenant thereunder; or (v) compromise any Rent or other amount due or to become due under any of the Leases or grant commissions, rebates or allowances to any tenant without prior written approval of Lender;

(c) That none of the Leases shall be materially altered, modified, amended, terminated, cancelled or surrendered or any term or condition thereof waived without the prior written approval of Lender;

(d) That Grantor will fulfill and perform each and every material covenant and condition of each of the Leases by the landlord thereunder and, at the sole cost and expense of Grantor, enforce (short of termination of any of the Leases) the performance and observance of each and every material covenant and condition to be performed and observed by the tenants under the Leases, and if Grantor shall not so comply with or so enforce such Lease, Lender may (without being required to), after ten (10) days’ prior written notice to Grantor, perform and enforce such Leases, in which case all amounts expended by Lender in connection therewith shall be immediately due Lender and shall be secured by this Assignment;

(e) That Grantor shall promptly inform Lender in writing of each notice received by Grantor claiming that a default on the part of the landlord has occurred under any of the Leases, and shall concurrently therewith send a complete copy of each such notice to Lender;

(f) That each of the Leases shall remain in full force and effect irrespective of any merger of the interest of any landlord and any tenant under any of the Leases;

(g) That, without Lender’s prior written consent in each case, Grantor will not suffer or permit any of the Leases to become subordinate to any lien other than the lien of the Mortgage, this Assignment and the permitted liens and encumbrances allowed under the Mortgage; and

(h) That Grantor will not enter into any new Lease except as permitted under the Mortgage.

ARTICLE III.

REMEDIES

3.1 Revocation of License . Grantor hereby covenants and agrees that if an Event of Default, as defined in the Loan Documents, shall occur, the right and license granted to Grantor above shall, at Lender’s option, be deemed automatically revoked and terminated.

3.2 Lender’s Options . Upon revocation of Grantor’s right and license granted above, Lender, at its option, may at any time, without regard to the adequacy of the security hereof or the solvency of Grantor, enforce its remedies hereunder by any one or more of the following methods: (i) the appointment of a receiver; (ii) Lender taking possession of the Property; (iii) the collection by Lender of any moneys payable under the Leases, purchase agreements or rental agreements directly from the parties obligated to make such payments; (iv) the obtaining of an injunction; and (v) any other method permitted by applicable law. This Assignment shall constitute a perfected, absolute and present assignment; provided, however, that Grantor shall have the right to collect the Rents and to retain, use and enjoy the same unless and until an Event of Default occurs hereunder. Receipt by Lender of all Rents shall not constitute a waiver of any right that Lender may enjoy under this Assignment or the Mortgage or under the laws of the State of Minnesota, nor shall the receipt and application thereof cure any Event of Default nor affect any foreclosure proceeding or any sale authorized pursuant to the Mortgage and the laws of the State of Minnesota. There shall be no merger of the leasehold estates created by the Leases with the fee estate of the Property without the prior written consent of Lender. Without limiting the foregoing, Lender, at its option, may at any time:

(a) personally or by its agents or attorneys (with or without taking possession of the Property) demand, collect, receive and sue for all Rents or other sums payable under the Leases and to exercise all rights and remedies of Grantor thereunder and to collect and receive all other Rents;

(b) to the extent permitted by applicable law, either personally or by its agents (including a receiver appointed pursuant to the terms of the Mortgage) or attorney, may enter into and upon all or any part of the Property and each and every part thereof, and may exclude the Grantor, its agents and servants wholly therefrom, and having and holding the same, may use, operate, manage and control the Property or any part thereof and conduct the business thereof either personally or by its superintendents, managers, agents, servants, attorneys or receivers, and upon every such entry and from time to time, Lender, at the expense of Grantor, may make all necessary or proper repairs, renewals, replacements, useful alterations, additions, betterments and improvements thereto and thereon as the Lender may deem advisable in its sole discretion, and Lender shall have the right to manage and operate the Property and to carry on the business thereof and exercise all rights and powers of Grantor with respect thereto either in the name of Grantor or otherwise as it shall deem best, including but not limited to reletting the Property, cancelling and modifying the Leases, evicting tenants, bringing or defending any suits in connection with the possession of the Property in its own name or the Grantor’s name, and rebuilding and restoring the improvements on the Property or making the same rentable, all as Lender deems proper in its sole discretion;

(c) All rents, profits, issues or income derived from the Property that are collected by Lender, its agent or a receiver shall be applied as follows:

(i) to payment of all reasonable fees of the receiver approved by the court;

(ii) to payment of all tenant security deposits then owing to tenants under any of the leases pursuant to the provisions of Minnesota Statutes § 504B.178;

(iii) to payment of all prior or current real estate taxes and special assessments with respect to the Property, or if the Mortgage requires periodic escrow payments for such taxes and assessments, to the escrow payments then due;

(iv) to payment of all premiums then due for the insurance required by the provisions of the Mortgage, or if the Mortgage requires periodic escrow payments for such premiums, to the escrow payments then due;

(v) to payment of expenses incurred for normal maintenance of the Property;

(vi) if received prior to any foreclosure sale of the Property, to Lender for payment of the Indebtedness, but no such payment made after acceleration of the Indebtedness shall affect such acceleration;

(vii) if received during or with respect to the period of redemption after a foreclosure sale of the Property:

(A) if the purchaser at the foreclosure sale is not Lender, first to Lender to the extent of any deficiency of the sale proceeds to repay the Indebtedness, second to the purchaser as a credit to the redemption price, but if the Property is not redeemed, then to the purchaser of the Property;

(B) if the purchaser at the foreclosure sale is Lender, to Lender to the extent of any deficiency of the sale proceeds to repay the Indebtedness and the balance to be retained by Lender as a credit to the redemption price, but if the Property is not redeemed, then to Lender whether or not any such deficiency exists.

3.3 Collection of Rents . Grantor hereby consents to and irrevocably authorizes and directs the tenants under the Leases and their successors in interest, upon demand and notice from the Lender stating that an Event of Default has occurred under the Loan Documents, to pay to Lender the Rents and other amounts due or to become due under the Leases and agrees that said tenants shall have the right to rely upon such demand and notice from Lender and shall pay such Rents and other amounts to Lender without any obligation or right to determine the actual existence of any such default or the Lender’s right to receive such Rents and amounts, notwithstanding any notice from or claim of Grantor to the contrary, and Grantor shall have no right or claim against such tenants for any such Rents or other amounts so paid by such tenants to Lender. Grantor agrees that it will at Lender’s request take such action as Lender may from time to time request to assist Lender in exercising any rights hereunder, including, without limitation, the joining at Lender’s request in a written direction to the tenants to pay Rents under the Leases to Lender as provided herein.

3.4 Lender’s Expenditures . If any action or proceeding is commenced that would materially affect Lender's interest in the Property or if Grantor fails to comply with any provision of this Assignment or any of the Loan Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Assignment or any of the Loan Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Rents due under the Leases or the Property and paying all costs for insuring, maintaining and preserving the Property. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the then applicable Note Rate (including the Default Rate Margin, as defined in the Note), from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness under the Note and secured hereby, shall accrue interest at the then applicable Note Rate (including the Default Rate Margin), and, at Lender's option, will: (a) be payable on demand; (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy; or (ii) the remaining term of the Note; or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. The Assignment also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon an Event of Default under any of the Loan Documents.

3.5 Independent Covenants . The remedies set forth in this Article III are independent of each other and are in addition to and independent of the other remedies set forth herein. Lender may exercise such remedies either independently or cumulatively. In addition, Lender shall have all other rights and remedies provided in the Loan Documents or by law.

3.6 Survival During Redemption Period . The rights and powers of Lender under this Assignment and the application of Rents under this Assignment shall continue until expiration of the redemption period from any foreclosure sale under the Mortgage, whether or not any deficiency remains after a foreclosure sale.

ARTICLE IV.

MISCELLANEOUS

4.1 No Waiver . Lender shall not be deemed to have waived any rights under this Assignment unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Assignment shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Assignment. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Assignment, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Neither the failure of Lender to avail itself of any of the terms, provisions and conditions of this Assignment for any period of time, or at any time or times nor Lender’s: (a) taking or releasing of other security; (b) releasing any party primarily or secondarily liable for any of the Indebtedness secured hereby; (c) granting extensions, renewals or indulgences with respect to such Indebtedness; or (d) applying or failing to apply any other security for such Indebtedness held by Lender to the satisfaction of such Indebtedness, shall be construed or deemed to be a waiver of any of its rights under the terms hereof; and Lender shall have full right, power and authority to enforce this Assignment or any of the terms, provisions or conditions hereof and exercise its powers hereunder at any time or times that it shall deem fit.

4.2 Remedies Not Exclusive . No remedy or right herein granted Lender shall be exclusive of any other right or remedy available to Lender under the Note, the Mortgage, or any of the other Loan Documents, or under applicable law.

4.3 No Liability . Lender shall not be obligated to perform or discharge any obligation or duty to be performed or discharged by Grantor under any of the Leases, and the Grantor hereby agrees to indemnify Lender for, and to save it harmless from and against, any and all liability in connection with, arising from or related to the Leases or this Assignment, including all costs, expenses and attorneys’ fees incurred in connection therewith, except for liabilities, costs, expenses and fees resulting from Lender’s gross negligence or malicious misconduct and this Assignment shall not place responsibility for the control, care, management or repair of the Property upon the Lender unless and until Lender actually takes possession of the Property and assumes such responsibility, or make the Lender responsible or liable for any negligence in the management, operation, upkeep, repair or control of the Property resulting in loss or injury or death to any tenant, licensee, employee or stranger until Lender actually takes possession of the Property or unless such loss or injury is caused by the malicious act or gross negligence of Lender or Lender’s employees, agents, successors or assigns.

4.4 Enforcement Expenses . If Lender institutes any suit or action to enforce any of the terms of this Assignment, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys' fees at trial and upon any appeal. Whether or not any court action is involved, all reasonable expenses Lender incurs that in Lender's opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become a part of the Indebtedness under the Note and secured hereby, payable on demand and shall bear interest at the then applicable Note Rate (including the Default Rate Margin) from the date of the expenditure until repaid. Expenses covered by this Section shall include, without limitation, however subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services, the cost of searching records, obtaining title reports (including foreclosure reports), surveyors' reports, and appraisal fees, and title insurance, to the extent permitted by applicable law. Grantor also will pay any court costs, in addition to all other sums provided by law.

4.5 Severability . If a court of competent jurisdiction finds any provision of this Assignment to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance and the offending provision shall be considered deleted from this Assignment. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Assignment shall not affect the legality, validity or enforceability of any other provision of this Assignment.

4.6 Binding On Successors and Assigns . This Assignment shall be assignable by Lender and all of the terms, provisions and conditions hereof will be applicable to and binding upon the parties hereto and all persons claiming under or through Grantor, including but not limited to their respective successors and assigns, personal representatives, heirs, administrators or executors, and the word “Grantor” when used herein shall include such persons and all persons liable for the payment of the Indebtedness under the Note and secured hereby, or any part thereof, whether or not such persons shall have executed the Note, the Mortgage, the Loan Agreement, or the Loan Documents or this Assignment. The word “Lender” as used herein shall include the successors and assigns of the Lender, and the holder or holders from time to time of the Note secured hereby.

4.7 Absolute Assignment . Notwithstanding any provision herein to the contrary, this Assignment is intended to be an absolute assignment from Grantor to Lender and not merely the passing of a security interest.

4.8 Amendment . This Assignment, together with the Loan Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Assignment. No alteration of or amendment to this Assignment shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

4.9 Notices . All notices to be sent pursuant to this Assignment shall be sent in accordance with the notice provision of the Mortgage to the respective addresses of Mortgagor (Grantor hereunder) and Mortgagee (Lender hereunder).

4.10 Governing Law . This Assignment will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to its conflicts of law provisions. This Assignment has been accepted by Lender in the State of Minnesota. This Assignment constitutes an assignment of leases and rents within the meaning of Minnesota Statutes Sections 559.17 and 576.01, and is intended to comply fully with the provisions thereof, and to afford Lender, to the fullest extent allowed by law, the rights and remedies of a mortgage lender or secured mortgagee under those Statutes. In the event that Lender elects to exercise its remedies under said Statutes, or any of said remedies, the terms and provisions of said Statutes, as amended, governing the exercise of said remedies shall govern, control and take precedence over any contrary terms contained in this Assignment or other Loan Documents.

4.11 No Merger . There shall be no merger of the interest or estate created by this Assignment with any other interest or estate in the Property at any time held by or for the benefit of Lender in any capacity.

4.12 Miscellaneous . This Assignment shall extend to and cover any and all extensions and renewals of existing and future Leases and to any and all present and future rights against guarantors of any such obligations and to any and all Rents collected under Leases or other rentals. This Assignment is given to facilitate payment and performance of the Loan Agreement, the Promissory Note, and other Loan Documents. Lender shall not be obligated to perform or discharge any obligation, duty or liability under any Lease or under or by reason of this Assignment, and Grantor shall and does hereby agree to indemnify and to hold Lender harmless for, from and against any liability, loss or damage that it might incur under any lease or under or by reason of this Assignment and from any claims and demands whatsoever that may be asserted against it by reason of any alleged obligations or undertakings on Lender’s part. Unless otherwise specified by Lender in writing, all existing and future Leases for the use or occupancy of all or any part of the Property shall be subordinate to the lien of this Assignment. Grantor hereby appoints Lender its attorney-in-fact, coupled with an interest, empowering Lender to subordinate any Leases to this Assignment. Grantor covenants and agrees that Grantor will, upon the request of Lender, execute and deliver to Lender such further instruments and do and perform such other acts and things as Lender may deem necessary or appropriate to make this Assignment and the various covenants of Grantor contained herein effective. In pursuance of this Assignment, and not in lieu hereof, Grantor shall on demand give Lender separate specific assignments of Rents and Leases, covering some or all of the Leases, the terms of such assignments being incorporated herein by reference. Lender is hereby authorized to notify all lessees and tenants of the Property of the existence of any and all such assignments. Grantor hereby authorizes and directs the lessees and tenants of the premises that, upon written notice from Lender, all payments required under said Leases and rental agreements or in any way respecting the same, shall be made directly to Lender as they become due. Grantor hereby relieves said purchasers, lessees and tenants from any liability to Grantor by reason of said payments being made to Lender. With or without exercising any other rights set forth in the Loan Documents, Lender is authorized to give such written notice to tenants at any time during the existence of an Event of Default hereunder or under any of the Loan Documents.

IN WITNESS WHEREOF, this Assignment has been duly executed by Grantor under seal and delivered as of the day and year first above written.

WSI INDUSTRIES, INC., a Minnesota corporation

By:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

STATE OF MINNESOTA )

) ss.

COUNTY OF HENNEPIN )

Notary Public

THIS INSTRUMENT DRAFTED BY:

Robert D. Lucas, Esq.

Thomsen & Nybeck, P.A.

3600 American Boulevard West, Suite 400

Bloomington, MN 55436

952-835-7000

EXHIBIT A

Legal Description

Lot 1, Block 1, Remmele Addition, Wright County, Minnesota

EXHIBIT 10.5

GUARANTY

THIS GUARANTY (this “Guaranty”), is made as May 8, 2013, by WSI Rochester, Inc., a Minnesota corporation, having an address of 213 Chelsea Road, Monticello, MN 55362 (hereinafter called the “Guarantor”) for the benefit of BMO Harris Bank N.A., a national banking association (hereinafter called the “Lender”).

W I T N E S S E T H:

WHEREAS, WSI Industries, Inc., a Minnesota corporation (the “Borrower”), desires to obtain a loan (the “Loan”) from Lender in the aggregate principal amount of Four Million Two Hundred Thousand and no/100 Dollars ($4,200,000.00), pursuant to the terms and conditions of that certain Loan Agreement (the “Loan Agreement”) entered into by and between Borrower and Lender as of the date hereof and which Loan shall be evidenced by a $4,200,000.00 Amended and Restated Promissory Note (the “Note”), and secured by an Amended and Restated Real Estate Mortgage, Security Agreement and Financing Statement dated as of the date hereof (the "Mortgage");

WHEREAS, Guarantor is a related entity to Borrower, is interested in the affairs of Borrower, and has determined it is in the interest of the undersigned that Lender make the Loan to Borrower;

WHEREAS, Lender has required as a condition of making such Loan that Guarantor executes this Guaranty as further security for payment of the Indebtedness (as hereinafter defined) and all of Borrower’s obligations under the Loan Agreement, Note and Mortgage, in manner and form as herein provided, and Guarantor, by reason of its relationship to Borrower and in order to induce Lender to make the Loan, has agreed to execute this Guaranty;

WHEREAS, the Note, Loan Agreement and Mortgage, and all documents executed in conjunction with the Note, Loan Agreement and Mortgage, as from time to time renewed, modified or extended, are hereinafter referred to as the “Loan Documents”; and

WHEREAS, Guarantor will directly benefit from the extension of credit from Lender to Borrower.

NOW, THEREFORE, in consideration of the extension of credit by Lender to Borrower, the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Guarantor agrees as follows:

1. Guaranty of Payment . For good and valuable consideration, Guarantor absolutely and unconditionally guarantees, jointly and severally with any and all other guarantors now or hereafter guarantying the Note, full and punctual payment and satisfaction of the Indebtedness of Borrower to Lender, and the performance and discharge of all Borrower's obligations under the Note and the Loan Documents. This is a guaranty of payment and performance and not of collection. Lender may enforce this Guaranty against Guarantor even when Lender has not commenced or exhausted Lender's remedies against Borrower or any other party obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness. Guarantor will make any payments to Lender or its order, on demand, in legal tender of the United States of America, in same-day funds, without set-off or deduction or counterclaim, and will otherwise perform Borrower's obligations under the Note and the Loan Documents. Under this Guaranty, Guarantor's liability is unlimited and Guarantor's obligations are continuing.

If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender's rights under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. Guarantor's liability will be Guarantor's aggregate liability under the terms of this Guaranty and any such other unterminated guaranties.

2. Definition of Indebtedness . The word “Indebtedness” as used in this Guaranty shall mean all of the principal amount outstanding from time to time and at any one or more times, accrued unpaid interest thereon, and all collection costs and legal expenses related thereto permitted by law, and attorneys' fees arising from any and all debts, liabilities and obligations of every nature or form, now existing or hereafter arising or acquired, that Borrower individually or collectively or interchangeably with others, owes or will owe Lender. "Indebtedness" includes, without limitation, loans, advances (including, but not limited to, protective advances made by Lender), debts, overdraft indebtedness, credit card indebtedness, lease obligations, liabilities and obligations under any interest rate protection agreements or foreign currency exchange agreements or commodity price protection agreements, other obligations and liabilities of Borrower, or any one or more of them, and any present or future judgments against Borrower, or any one or more of them, future advances, loans or transactions that renew, extend, modify, refinance, consolidate or substitute these debts, liabilities and obligations whether: voluntarily or involuntarily incurred; due or to become due by their terms or acceleration; absolute or contingent; liquidated or unliquidated; determined or undetermined; direct or indirect; primary or secondary in nature or arising from a guaranty or surety; secured or unsecured; joint or several or joint and several; evidenced by a negotiable or non-negotiable instrument or writing; originated by Lender or another or others; barred or unenforceable against Borrower for any reason whatsoever; for any transactions that may be voidable for any reason (such as infancy, insanity, ultra vires or otherwise); and originated then reduced or extinguished and then afterwards increased or reinstated. The definition of “Indebtedness” shall also include the amount of any payments made to Lender on behalf of Borrower (including payments resulting from liquidation of collateral) which are recovered from Lender by a trustee, receiver, creditor or other party pursuant to applicable Federal or state law (the “Surrendered Payments”). In the event that Lender makes any Surrendered Payments (including pursuant to a negotiated settlement), the Surrendered Payments shall immediately be reinstated as Indebtedness, regardless of whether Lender has surrendered or cancelled this Guaranty prior to returning the Surrendered Payments.

3. Continuing Guaranty . THIS IS A "CONTINUING GUARANTY" UNDER WHICH GUARANTOR AGREES TO GUARANTEE THE FULL AND PUNCTUAL PAYMENT, PERFORMANCE AND SATISFACTION OF THE INDEBTEDNESS OF BORROWER TO LENDER, NOW EXISTING OR HEREAFTER ARISING OR ACQUIRED, ON AN OPEN AND CONTINUING BASIS. ACCORDINGLY, ANY PAYMENTS MADE ON THE INDEBTEDNESS WILL NOT DISCHARGE OR DIMINISH GUARANTOR'S OBLIGATIONS AND LIABILITY UNDER THIS GUARANTY FOR ANY REMAINING AND SUCCEEDING INDEBTEDNESS EVEN WHEN ALL OR PART OF THE OUTSTANDING INDEBTEDNESS MAY BE A ZERO BALANCE FROM TIME TO TIME.

Guarantor agrees that the obligations of Guarantor hereunder shall be primary obligations, shall not be subject to any counterclaim, set-off, abatement, deferment or defense based upon any claim that Guarantor may have against Lender, Borrower, any other guarantor of the Indebtedness or any other person or entity, and shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by, any circumstance or condition (whether or not Guarantor shall have any knowledge thereof), including without limitation:

(a) any lack of validity or enforceability of the Indebtedness or any of the Loan Documents;

(b) any termination, amendment, modification or other change in the Indebtedness or any of the Loan Documents, including, without limitation, any modification of the interest rate(s) described therein;

(c) any furnishing, exchange, substitution or release of any collateral securing repayment of the Loan, or any failure to perfect any lien in such collateral;

(d) any failure, omission or delay on the part of Borrower, Guarantor, any other guarantor of the Indebtedness or Lender to conform or comply with any term of any of the Loan Documents or any failure of Lender to give notice of any Event of Default (as defined in the Loan Documents);

(e) any waiver, compromise, release, settlement or extension of time of payment or performance or observance of any of the obligations or agreements contained in any of the Loan Documents;

(f) any action or inaction by Lender under or in respect of any of the Loan Documents, any failure, lack of diligence, omission or delay on the part of Lender to enforce, assert or exercise any right, power or remedy conferred on it in any of the Loan Documents, or any other action or inaction on the part of Lender;

(g) any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshalling of assets and liabilities or similar events or proceedings with respect to Borrower, Guarantor or any other guarantor of the Indebtedness, as applicable, or any of their respective property or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding;

(h) any merger or consolidation of Borrower into or with any entity, or any sale, lease or transfer of any of the assets of Borrower, Guarantor or any other guarantor of the Indebtedness to any other person or entity;

(i) any change in the ownership of Borrower or any change in the relationship between Borrower, Guarantor or any other guarantor of the Indebtedness, or any termination of any such relationship;

(j) any release or discharge by operation of law of Borrower or any other guarantor of the Indebtedness from any obligation or agreement contained in any of the Loan Documents;

(k) any other occurrence, circumstance, happening or event, whether similar or dissimilar to the foregoing and whether foreseen or unforeseen, which otherwise might constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or which otherwise might limit recourse against Borrower or Guarantor; or

(l) any invalidity, irregularity or unenforceability in whole or in part (including with respect to any netting provision) of any interest rate swap, basis swap, forward rate, interest rate option, collar or corridor agreement or transaction or any similar transaction between Borrower and Lender or any confirmation, instrument or agreement required thereunder or related thereto, or any transaction entered into thereunder, or any limitation on the liability of Borrower thereunder or any limitation on the method or terms of payment thereunder which may now or hereafter be caused or imposed in any manner whatsoever.

4. Duration of Guaranty . This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all the Indebtedness incurred shall have been fully and finally paid and satisfied and all of Guarantor's other obligations under this Guaranty shall have been performed in full. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty.

5. Binding Nature; Successors and Assigns . Guarantor agrees that this Guaranty shall be a continuing guaranty and shall inure to the benefit of and may be enforced by Lender and any subsequent holder of the Note and/or successor in interest under the Loan Agreement and Loan Documents (Guarantor hereby consenting to any transfer of the Note, Loan Agreement, and/or Loan Documents without notice). This Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns. This Guaranty shall bind Guarantor's estate as to the Indebtedness created both before and after Guarantor's death or incapacity, regardless of Lender's actual notice of Guarantor's death.

6. Representations and Warranties . Guarantor represents and warrants to Lender that: (a) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (b) the making of the Loan by Lender to Borrower confers a real and substantial benefit to Guarantor and is fully supportive of and provides valuable consideration for the execution of this Guaranty; (c) Guarantor is interested in the affairs of Borrower and is thoroughly familiar with the business affairs, books, records, financial condition and operations of Borrower; (d) Guarantor has full power, right and authority to enter into this Guaranty, and this Guaranty has been duly executed and delivered by Guarantor and constitutes the legally enforceable obligation of Guarantor in accordance with its terms; (e) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (f) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (g) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is provided; (h) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (i) Guarantor has not filed any petition nor has any petition been filed against Guarantor in bankruptcy or insolvency or reorganization or for the appointment of a receiver or trustee or for the arrangement of debts, nor has Guarantor been the subject of such action, nor has such action been threatened by or against Guarantor, and Guarantor is not insolvent nor will Guarantor be rendered insolvent by the consummation of the Loan and execution of this Guaranty; (j) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (k) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; (l) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition; and (m) that if any interest rate swap, basis swap, forward rate, interest rate option, collar or corridor agreement or transaction or any similar transaction between Borrower and Lender shall at any time be in effect, (x) Guarantor has received and examined copies of each document relating to such transaction, the observance and performance of which by Borrower is hereby guaranteed; (y) Guarantor will benefit from Lender entering into each such agreement and any transactions thereunder with Borrower, and Guarantor has determined that the execution and delivery by Guarantor of this Guaranty are necessary and convenient to the conduct, promotion and attainment of the business of Guarantor; and (z) Lender has no duty to determine whether any such agreement or transaction will be or has been entered into by Borrower for purposes of hedging interest rate, currency exchange rate, or other risks arising in its businesses or affairs and not for purposes of speculation, or is otherwise inappropriate for Borrower. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor’s risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower or to monitor the performance of Borrower under the Loan Documents. It is the intention of the parties that Lender may rely completely on this Guaranty for its repayment of the Indebtedness whether or not Borrower is creditworthy and whether or not it would be prudent to make loans or advances to Borrower or to permit the same to remain outstanding.

7. Guarantor’s Authorizations . Guarantor authorizes Lender, without notice or demand and without lessening Guarantor's liability under this Guaranty, from time to time: (a) to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (b) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than the original loan term; (c) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (d) to release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) to determine how, when and what application of payments and credits shall be made on the Indebtedness; (f) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or mortgage, as Lender in its discretion may determine; (g) to sell, transfer, assign or grant participations in all or any part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part.

8. Waivers by Guarantor . Except as prohibited by applicable law, Guarantor waives any right to require Lender: (a) to continue lending money or to extend other credit to Borrower; (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (c) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (d) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (e) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (f) to pursue any other remedy within Lender's power; or (g) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever.

Guarantor also waives any relief available under valuation and appraisement laws and any and all rights or defenses based on suretyship or impairment of collateral including, but not limited to, any rights or defenses arising by reason of: (i) any "one action" or "anti-deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, either judicially or if permitted by applicable law by exercise of a power of sale; (ii) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness; (iii) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower's liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness; (iv) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness; (v) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced, there is outstanding Indebtedness which is not barred by any applicable statute of limitations; or (vi) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness. Without limiting the provisions of the last two (2) sentences of Section 2 above, if payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy or to any similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of the enforcement of this Guaranty.

Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both.

Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy.

9. Acknowledgments of Guarantor . Guarantor acknowledges and agrees that Lender has not made any representations or warranties with respect to, does not assume any responsibility to Guarantor for, and has no duty to provide information to Guarantor regarding, the collectability or enforceability of the Indebtedness or the financial condition of Borrower or any Guarantor. Guarantor has independently determined the collectability and enforceability of the Indebtedness and, until the Indebtedness is paid in full, will independently and without reliance on Lender continue to make such determinations. Guarantor agrees that Guarantor has read and fully understands the terms of this Guaranty, Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty, and the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless for, from and against all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this Section.

10. Subordination of Debts to Guarantor . Guarantor agrees that the Indebtedness, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty.

Notwithstanding any payment or performance by Guarantor pursuant to this Guaranty, Guarantor shall not be entitled to be subrogated to any rights of Lender against Borrower or any other guarantor of the Indebtedness prior to the time at which the Indebtedness is repaid in full and all periods under applicable bankruptcy law for the contest of any payment by Guarantor or Borrower as a preferential or fraudulent payment have expired, and Guarantor knowingly and with the advise of counsel waives and releases all rights and claims to indemnification, reimbursement and contribution Guarantor now has or at any time hereafter may have against Borrower or Borrower’s estate prior to the time at which the Indebtedness is repaid in full and all periods under applicable bankruptcy law for the contest of any payment by Guarantor or Borrower as a preferential or fraudulent payment have expired, including, without limitation, any rights which may allow Borrower, Borrower’s successors, a creditor of Borrower, or a trustee in bankruptcy of the Borrower to claim in bankruptcy or any other similar proceedings that any payment made by Borrower or Borrower’s successors and assigns to Lender was on behalf of or for the benefit of Guarantor and that such payment is recoverable by Borrower, a creditor or trustee in bankruptcy of Borrower as a preferential payment, fraudulent conveyance, payment of an insider or any other classification of payment which may otherwise be recoverable from Lender.

11. Setoff . To the extent permitted by applicable law, Lender reserves a right of setoff in all Guarantor's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Guarantor holds jointly with someone else and all accounts Guarantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Guarantor authorizes Lender, to the extent permitted by applicable law, to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the terms of this Guaranty.

12. Applicable Law . This Guaranty will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to its conflicts of law provisions.

13. CHOICE OF VENUE . GUARANTOR HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY GUARANTOR AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS GUARANTY OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN THE DISTRICT COURT OF HENNEPIN COUNTY, MINNESOTA, OR AT LENDER’S DISCRETION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA. GUARANTOR HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER IN SUCH COURT. GUARANTOR WAIVES ANY CLAIM THAT HENNEPIN COUNTY, MINNESOTA, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE EXCLUSIVE CHOICE OF FORUM FOR GUARANTOR SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND GUARANTOR HEREBY WAIVES THE RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.

14. WAIVER OF RIGHT TO JURY TRIAL . LENDER AND GUARANTOR HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR GUARANTOR AGAINST THE OTHER.

15. Fees Relating to Enforcement . Guarantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court.

16. Annual Financial Information . Guarantor agrees to furnish Lender Guarantor’s financial statements included as a part of the consolidated financial statement of the Borrower.

17. Remedy for Failure to Deliver Financial Statements . Upon any failure of Guarantor to deliver Guarantor’s periodic financial statements as required pursuant to Section 16 above, Lender shall have the option of imposing an administrative fee of Five Hundred Dollars ($500.00) for each such failure and for each entity for which such financial statements were required to be delivered. Lender shall notify Guarantor of Guarantor’s failure to deliver such financial statements and, if Guarantor does not cure such failure within thirty (30) days after receipt of such notice from Lender, Lender shall have the right to impose such fee by delivering written notice thereof to Guarantor. Within ten (10) days after receipt of such written notice, Guarantor shall pay the fee to Lender. Lender’s receipt of such fee in any instance shall not relieve Guarantor from its obligation to deliver the required financial statements, whether for the then-current period or any future period. A waiver by Lender of its right to impose such fee shall not constitute a waiver of Lender’s right to impose such fee upon any future failure of Guarantor to deliver the required financial statements.

18. No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

IN WITNESS WHEREOF, the undersigned Guarantor has executed and delivered this Guaranty to take effect as of the date first above written.

GUARANTOR:

WSI Rochester, Inc.

By:

Name: Paul D. Sheely

Title: Vice President/Chief Financial Officer

STATE OF MINNESOTA )

) SS

COUNTY OF )

On this __ day of May, 2013, before me appeared Paul D. Sheely, to me personally known, who, being by me duly sworn, did say that he/she is the Vice President/Chief Financial Officer of WSI Rochester, Inc., a Minnesota corporation, and that said instrument was signed on behalf of said company by its authority, and said person acknowledged said instrument to be the free act and deed of said company.

In Testimony Whereof, I have hereunto set my hand and affixed my official seal the day and year first above written.

Name:

Notary Public, State of

My Commission Expires:

EXHIBIT 10.6

GUARANTY

THIS GUARANTY (this “Guaranty”), is made as of May 8, 2013, by WSI Industries, Co., a Minnesota corporation, having an address of 213 Chelsea Road, Monticello, MN 55362 (hereinafter called the “Guarantor”) for the benefit of BMO Harris Bank N.A., a national banking association (hereinafter called the “Lender”).