KBS Strategic Opportunity REIT, Inc. (Form: 10-Q, Received: 05/11/2018 16:00:29)

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

x (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q

______________________________________________________

(Mark One)



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

For the quarterly period ended March 31, 2018



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

For the transition period from to

Commission file number 000-54382

______________________________________________________

KBS STRATEGIC OPPORTUNITY REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________________________________________



Maryland		26-3842535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
800 Newport Center Drive, Suite 700 Newport Beach, California		92660
(Address of Principal Executive Offices)		(Zip Code)

(949) 417-6500

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of May 4, 2018 , there were 64,745,585 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.

Table of Contents

KBS STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

March 31, 2018

INDEX



PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	2
		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2018 and 2017	3
		Consolidated Statements of Equity for the Year Ended December 31, 2017 and the Three Months Ended March 31, 2018 (unaudited)	4
		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and 2017	5
		Condensed Notes to Consolidated Financial Statements as of March 31, 2018 (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
	Item 4.	Controls and Procedures	47
PART II.	OTHER INFORMATION		48
	Item 1.	Legal Proceedings	48
	Item 1A.	Risk Factors	48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.	Defaults upon Senior Securities	49
	Item 4.	Mine Safety Disclosures	49
	Item 5.	Other Information	49
	Item 6.	Exhibits	50
SIGNATURES			51

Table of Contents


PART I.	FINANCIAL INFORMATION


Item 1.	Financial Statements

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	March 31, 2018			December 31, 2017
	(unaudited)
Assets
Real estate held for investment, net	$	768,514		$	532,867
Real estate equity securities	89,015			90,063
Real estate debt securities, net	17,858			17,751
Total real estate and real estate-related investments, net	875,387			640,681
Cash and cash equivalents	148,760			366,512
Restricted cash	11,453			10,670
Investments in unconsolidated joint ventures	52,813			55,577
Rents and other receivables, net	11,932			9,821
Above-market leases, net	3,801			131
Prepaid expenses and other assets	17,677			18,182
Total assets	$	1,121,823		$	1,101,574
Liabilities and equity
Notes and bonds payable, net	$	689,754		$	603,043
Accounts payable and accrued liabilities	15,123			16,686
Due to affiliate	47			26
Distribution payable	—			187,914
Below-market leases, net	4,379			2,843
Other liabilities	14,512			16,966
Redeemable common stock payable	—			8,595
Total liabilities	723,815			836,073
Commitments and contingencies (Note 14 )
Redeemable common stock	8,983			4,518
Equity
KBS Strategic Opportunity REIT, Inc. stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 64,745,413 and 52,053,817 shares issued and outstanding as of March 31, 2018 and December 31, 2017 , respectively	647			521
Additional paid-in capital	538,972			388,800
Cumulative distributions and net income	(152,551		)	(155,454		)
Accumulated other comprehensive income	—			25,146
Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity	387,068			259,013
Noncontrolling interests	1,957			1,970
Total equity	389,025			260,983
Total liabilities and equity	$	1,121,823		$	1,101,574

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)



	Three Months Ended March 31,
	2018			2017
Revenues:
Rental income	$	15,181		$	30,646
Tenant reimbursements	2,682			5,637
Other operating income	221			1,553
Interest income from real estate debt securities	501			160
Dividend income from real estate equity securities	1,051			—
Total revenues	19,636			37,996
Expenses:
Operating, maintenance, and management	5,487			10,908
Real estate taxes and insurance	2,339			4,737
Asset management fees to affiliate	1,825			2,748
General and administrative expenses	2,052			1,744
Foreign currency transaction loss , net	997			4,671
Depreciation and amortization	7,265			14,600
Interest expense	6,591			9,386
Total expenses	26,556			48,794
Other (loss) income:
Income from unconsolidated joint venture	53			1,869
Equity in loss of unconsolidated joint ventures	(2,378		)	(154		)
Other interest income	930			25
Unrealized loss on real estate equity securities	(16,011		)	—
Gain on sale of real estate	624			—
Total other (loss) income , net	(16,782		)	1,740
Net loss	(23,702		)	(9,058		)
Net loss (income) attributable to noncontrolling interests	21			(34		)
Net loss attributable to common stockholders	$	(23,681	)	$	(9,092	)
Net loss per common share, basic and diluted	$	(0.38	)	$	(0.16	)
Weighted-average number of common shares outstanding, basic and diluted	62,526,798			56,782,447

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Year Ended December 31, 2017 and the Three Months Ended March 31, 2018

(unaudited)

(dollars in thousands)




	Common Stock					Additional Paid-in Capital			Cumulative Distributions and Net Income			Accumulated Other Comprehensive Income			Total Stockholders' Equity			Noncontrolling Interests			Total Equity
	Shares		Amounts			Additional Paid-in Capital			Cumulative Distributions and Net Income			Accumulated Other Comprehensive Income			Total Stockholders' Equity			Noncontrolling Interests			Total Equity

Balance, December 31, 2016	56,775,767		$	568		$	455,373		$	(162,289	)	$	—		$	293,652		$	1,898		$	295,550
Net income (loss)	—		—			—			210,644			—			210,644			(64		)	210,580
Other comprehensive income	—		—			—			—			25,146			25,146			—			25,146
Issuance of common stock	585,192		6			8,660			—			—			8,666			—			8,666
Transfers to redeemable common stock	—		—			(498		)	—			—			(498		)	—			(498		)
Redemptions of common stock	(5,307,142	)	(53		)	(74,727		)	—			—			(74,780		)	—			(74,780		)
Distributions declared	—		—			—			(203,809		)	—			(203,809		)	—			(203,809		)
Other offering costs	—		—			(8		)	—			—			(8		)	—			(8		)
Noncontrolling interests contributions	—		—			—			—			—			—			158			158
Distributions to noncontrolling interests	—		—			—			—			—			—			(22		)	(22		)
Balance, December 31, 2017	52,053,817		$	521		$	388,800		$	(155,454	)	$	25,146		$	259,013		$	1,970		$	260,983
Cumulative effect adjustments to retained earnings	—		—			—			27,618			(25,146		)	2,472			—			2,472
Net loss	—		—			—			(23,681		)	—			(23,681		)	(21		)	(23,702		)
Issuance of common stock	41,681		1			478			—			—			479			—			479
Stock distribution issued	13,069,487		130			150,169			—			—			150,299			—			150,299
Transfers from redeemable common stock	—		—			4,130			—			—			4,130			—			4,130
Redemptions of common stock	(419,572	)	(5		)	(4,605		)	—			—			(4,610		)	—			(4,610		)
Distributions declared	—		—			—			(1,034		)	—			(1,034		)	—			(1,034		)
Noncontrolling interests contributions	—		—			—			—			—			—			8			8
Balance , March 31, 2018	64,745,413		$	647		$	538,972		$	(152,551	)	$	—		$	387,068		$	1,957		$	389,025

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Three Months Ended March 31,
	2018			2017
Cash Flows from Operating Activities:
Net loss	$	(23,702	)	$	(9,058	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Equity in loss of unconsolidated joint ventures	2,378			154
Depreciation and amortization	7,265			14,600
Unrealized loss on real estate equity securities	16,011			—
Gain on real estate	(624		)	—
Unrealized (gain) loss on interest rate caps	(31		)	57
Deferred rent	(745		)	(925		)
Bad debt recovery	(366		)	(36		)
Amortization of above- and below-market leases, net	(226		)	(894		)
Amortization of deferred financing costs	789			1,299
Interest accretion on real estate debt securities	(107		)	(69		)
Net amortization of discount and (premium) on bond and notes payable	14			11
Foreign currency transaction loss , net	997			4,671
Changes in assets and liabilities:
Rents and other receivables	(1,000		)	(340		)
Prepaid expenses and other assets	(1,900		)	(3,396		)
Accounts payable and accrued liabilities	(3,802		)	(3,767		)
Due from affiliate	—			(269		)
Due to affiliates	21			(28		)
Other liabilities	15			1,381
Net cash (used in) provided by operating activities	(5,013		)	3,391
Cash Flows from Investing Activities:
Acquisitions of real estate	(238,170		)	(82,235		)
Improvements to real estate	(5,039		)	(5,493		)
Proceeds from sales of real estate, net	2,542			—
Insurance proceeds received for property damages	—			744
Purchase of interest rate cap	—			(107		)
Distributions of capital from unconsolidated joint ventures	386			59,157
Investment in real estate securities	(14,963		)	—
Investment in real estate debt securities, net	—			(5,000		)
Funding of development obligations	(621		)	(159		)
Net cash used in investing activities	(255,865		)	(33,093		)
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable	89,000			87,405
Principal payments on notes and bonds payable	(857		)	(35,808		)
Payments of deferred financing costs	(1,227		)	(1,329		)
Payments to redeem common stock	(4,610		)	(3,681		)
Payments of prepaid other offering costs	(213		)	(140		)
Distributions paid	(38,170		)	(2,323		)
Noncontrolling interests contributions	8			1
Distributions to noncontrolling interests	—			(7		)
Net cash provided by financing activities	43,931			44,118
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(22		)	362
Net (decrease) increase in cash, cash equivalents and restricted cash	(216,969		)	14,778
Cash, cash equivalents and restricted cash, beginning of period	377,182			64,450
Cash, cash equivalents and restricted cash, end of period	$	160,213		$	79,228

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(unaudited)


1.	ORGANIZATION

KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, KBS Strategic Opportunity BVI issued one certificate containing 10,000 common shares with no par value to KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.

Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2017 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate, real estate-related debt securities and other real estate-related investments.

On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.

The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million . As of March 31, 2018 , the Company had sold 6,662,042 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $74.5 million . Also, as of March 31, 2018 , the Company had redeemed 11,867,335 shares for $156.4 million . As of March 31, 2018 , the Company had issued 13,069,487 shares of common stock in connection with the December 2017 special dividend. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million , respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.

On March 2, 2016, KBS Strategic Opportunity BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25% . On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25% . KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to KBS Strategic Opportunity BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments. The Operating Partnership owns all of the issued and outstanding equity of KBS Strategic Opportunity BVI. As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through KBS Strategic Opportunity BVI.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

As of March 31, 2018 , the Company consolidated six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties and three investments in undeveloped land with approximately 1,100 developable acres. The Company also owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and three investments in real estate equity securities.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017 , except for the Company’s adoption of the revenue recognition and financial instruments standards issued by the Financial Accounting Standards Board (“FASB”) effective on January 1, 2018. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the FASB Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 .

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, KBS Strategic Opportunity BVI and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Redeemable Common Stock

The Company has adopted a share redemption program that may enable stockholders to sell their shares to the Company in limited circumstances.

Pursuant to the share redemption program there are several limitations on the Company’s ability to redeem shares:


•	Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), the Company may not redeem shares until the stockholder has held the shares for one year.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

•

The Company may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that the Company redeems less than $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) in a given fiscal quarter, any remaining excess capacity to redeem shares in such fiscal quarter will be added to the Company’s capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during succeeding fiscal quarters. The last $1.0 million of net proceeds from the dividend reinvestment plan during the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence”. The share redemption plan also provides that, to the extent that in the last month of any calendar year the amount of redemption requests in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” is less than the $1.0 million reserved for such redemptions under the share redemption plan, any excess funds may be used to redeem shares not requested in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” during such month. The Company may increase or decrease this limit upon ten business days’ notice to stockholders. The Company’s board of directors may approve an increase in this limit to the extent that the Company has received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors.


•	During any calendar year, the Company may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.


•	The Company has no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

Effective December 30, 2016, pursuant to the tenth amended and restated share redemption program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence”, the price at which the Company began to redeem shares is 95% of the Company’s most recent estimated value per share as of the applicable redemption date. Upon the death, “qualifying disability” or “determination of incompetence” of a stockholder, the redemption price continued to be equal to the Company’s most recent estimated value per share.

The Company’s board of directors may amend, suspend or terminate the share redemption program with ten business days’ notice to its stockholders. The Company may provide this notice by including such information in a Current Report on Form 8-K or in the Company’s annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to its stockholders.

In anticipation of a self-tender offer in order to make liquidity available to stockholders in excess of that permitted under the share redemption program, on March 14, 2018 , the Company’s board of directors approved a temporary suspension of the share redemption program starting with the March 2018 redemption period, including any unsatisfied requests from prior redemption periods.In connection with its approval of the Self-Tender (defined below), the Company’s board of directors approved the reopening of the share redemption program for the June 2018 redemption period, meaning no redemptions have been or will be made in March , April or May 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). The Company has cancelled all outstanding redemption requests under the share redemption program and is not accepting any redemption requests under the share redemption program during the term of the Self-Tender.

On April 23, 2018 , the Company commenced a self-tender offer (the “Self-Tender”) for up to 8,234,217 shares at a price of $10.93 per share, or approximately $90 million of shares.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The Company records amounts that are redeemable under the share redemption program as redeemable common stock in its consolidated balance sheets because the shares will be mandatorily redeemable at the option of the holder and therefore their redemption will be outside the control of the Company. However, because the amounts that can be redeemed will be determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company presents the net proceeds from the current year and prior year DRP, net of current year redemptions, as redeemable common stock in its consolidated balance sheets.

The Company classifies as liabilities financial instruments that represent a mandatory obligation of the Company to redeem shares. The Company’s redeemable common shares are contingently redeemable at the option of the holder. When the Company determines it has a mandatory obligation to repurchase shares under the share redemption program, it will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.

The Company limits the dollar value of shares that may be redeemed under the program as described above. During the three months ended March 31, 2018 , the Company had redeemed $4.6 million of common stock, of which $4.4 million relates to delayed December 2017 redemptions. There were no unfulfilled redemption requests received in good order under the share redemption program as of March 31, 2018 as a result of the temporary suspension. The Company recorded $8.6 million of other liabilities on the Company’s balance sheet as of December 31, 2017 related to unfulfilled redemption requests received in good order under the share redemption program. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2017 , the Company has $8.5 million available for redemptions in the remainder of 2018 , including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations described above.

Revenue Recognition

Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s adoption. Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. The Company elected to apply this standard only to contracts that were not completed as of January 1, 2018.

Based on the Company’s evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. For the three months ended March 31, 2018 , tenant reimbursements for substantial services accounted for under ASU No. 2014-09 were $0.4 million , which was included in tenant reimbursements on the accompanying statements of operations.

Sale of Real Estate

Prior to January 1, 2018, gains on real estate sold were recognized using the full accrual method at closing when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. Gain on sales of real estate may have been deferred in whole or in part until the requirements for gain recognition had been met.

Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09. Under ASC 610-20, if the Company determines it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. As a result of the adoption of ASC 610-20 on January 1, 2018, the Company recorded a cumulative effect adjustment to increase retained earnings by $2.5 million to recognize the deferred gain from the sale of 102 developable acres at Park Highlands that closed on May 1, 2017, as control of the sold acres had transferred to the buyers at closing.

As of January 1, 2018 and March 31, 2018 , the Company had recorded contract liabilities of $1.7 million and $2.0 million , respectively, related to deferred proceeds received from the buyers of the Park Highlands land sales and another developer for the value of land that was contributed to a master association which is consolidated by the Company, which was included in other liabilities on the accompanying consolidated balance sheets.

Real Estate Equity Securities

The Company’s real estate equity securities are carried at their estimated fair value based on quoted market prices for the security, net of any discounts for restrictions on the sale of the security. Any discount for lack of marketability is estimated using an option pricing model. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis.

Prior to the Company’s adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, the Company classified its investments in real estate equity securities as available-for-sale and unrealized gains and losses were reported in accumulated other comprehensive income (loss). Upon the sale of a security, the previously recognized unrealized gain (loss) would be reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) recognized in earnings. Effective January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings. Upon adoption of ASU No. 2016-01 on January 1, 2018, the Company recorded a $25.1 million cumulative effect adjustment to retained earnings related to the unrealized gain on real estate equity securities previously reported in accumulated other comprehensive income prior to January 1, 2018.

Investment in Unconsolidated Joint Ventures

Equity Investment Without Readily Determinable Value

Prior to the adoption of ASU No. 2016-01 on January 1, 2018, the Company accounted for investments in unconsolidated joint venture entities in which the Company did not have the ability to exercise significant influence and had virtually no influence over partnership operating and financial policies using the cost method of accounting. Under the cost method, income distributions from the partnership were recognized in other income. Distributions that exceed the Company’s share of earnings were applied to reduce the carrying value of the Company’s investment and any capital contributions increased the carrying value of the Company’s investment. On a quarterly basis, the Company evaluated its cost method investment in an unconsolidated joint venture for other-than-temporary impairments. The fair value of a cost method investment was not estimated if there were no identified events or changes in circumstances that indicated a significant adverse effect on the fair value of the investment.

In accordance with ASU No. 2016-01, the Company may elect to measure an equity investment without a readily determinable value that does not qualify for the practical expedient to estimate fair value using the net asset value per share, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company elected to measure its investment in the NIP Joint Venture (defined in Note 12 ) in accordance with the above guidance, applying it prospectively, and as of January 1, 2018 and March 31, 2018 , recorded its investment in the NIP Joint Venture at a cost basis of $3.7 million and $3.3 million , respectively.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Segments

The Company has invested in non-performing loans, opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in non-performing loans, opportunistic real estate and other real estate‑related assets for capital appreciation. Traditional performance metrics of non-performing loans, opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views non-performing loans, opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from non-performing loans, opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three months ended March 31, 2018 and 2017 .

Distributions declared per share were $0.01597500 and $0.09246575 during the three months ended March 31, 2018 and 2017 , respectively.

Square Footage, Occupancy and Other Measures

Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Recently Issued Accounting Standards Updates

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires lessors to identify lease and non-lease components under their leasing arrangements and allocate the total consideration in the lease agreement to these lease and non-lease components based on their relative standalone selling prices. Non-lease components will be subject to the new revenue recognition standard upon the Company’s adoption of the new leasing standard on January 1, 2019. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In March 2018, the FASB affirmed a proposed amendment to the leases ASU, which would add a transition option to the new leases standard that would allow entities to apply the transition provisions of the new standard at its adoption date instead of the earliest comparative periods presented in its financial statements. The FASB also tentatively approved a practical expedient that would permit lessors to not separate lease and non-lease components if certain conditions are met. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements and, if adopted by the FASB, applying the transition option and electing the practical expedient of the proposed amendment.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale securities. An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures. For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.


3.	REAL ESTATE HELD FOR INVESTMENT

As of March 31, 2018 , the Company owned six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings and one retail property, encompassing, in the aggregate, approximately 3.7 million rentable square feet. As of March 31, 2018 , these properties were 77% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 97% occupied. The Company also owned three investments in undeveloped land with approximately 1,100 developable acres. The following table summarizes the Company’s real estate held for investment as of March 31, 2018 and December 31, 2017 , respectively (in thousands):



	March 31, 2018			December 31, 2017
Land	$	186,248		$	162,061
Buildings and improvements	592,503			388,144
Tenant origination and absorption costs	36,514			24,479
Total real estate, cost	815,265			574,684
Accumulated depreciation and amortization	(46,751		)	(41,817		)
Total real estate, net	$	768,514		$	532,867

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The following table provides summary information regarding the Company’s real estate held for investment as of March 31, 2018 (in thousands):



Property	Date Acquired or Foreclosed on	City	State	Property Type	Land		Building and Improvements		Tenant Origination and Absorption		Total Real Estate, at Cost		Accumulated Depreciation and Amortization			Total Real Estate, Net		Ownership %
Richardson Portfolio:
Palisades Central I	11/23/2011	Richardson	TX	Office	1,037		10,934		—		11,971		(2,330		)	9,641		90.0	%
Palisades Central II	11/23/2011	Richardson	TX	Office	810		18,742		—		19,552		(4,384		)	15,168		90.0	%
Greenway I	11/23/2011	Richardson	TX	Office	561		2,365		—		2,926		(894		)	2,032		90.0	%
Greenway III	11/23/2011	Richardson	TX	Office	702		4,109		559		5,370		(1,810		)	3,560		90.0	%
Undeveloped Land	11/23/2011	Richardson	TX	Undeveloped Land	3,134		—		—		3,134		—			3,134		90.0	%
Total Richardson Portfolio					6,244		36,150		559		42,953		(9,418		)	33,535
Park Highlands ⁽¹⁾	12/30/2011	North Las Vegas	NV	Undeveloped Land	34,017		—		—		34,017		—			34,017		⁽¹⁾
Burbank Collection	12/12/2012	Burbank	CA	Retail	4,175		12,536		725		17,436		(2,579		)	14,857		90.0	%
Park Centre	03/28/2013	Austin	TX	Office	3,251		26,507		—		29,758		(3,901		)	25,857		100.0	%
Central Building	07/10/2013	Seattle	WA	Office	7,015		27,282		1,241		35,538		(4,952		)	30,586		100.0	%
1180 Raymond	08/20/2013	Newark	NJ	Apartment	8,292		38,208		—		46,500		(5,630		)	40,870		100.0	%
Park Highlands II	12/10/2013	North Las Vegas	NV	Undeveloped Land	25,229		—		—		25,229		—			25,229		100.0	%
424 Bedford	01/31/2014	Brooklyn	NY	Apartment	8,860		25,752		—		34,612		(3,005		)	31,607		90.0	%
Richardson Land II	09/04/2014	Richardson	TX	Undeveloped Land	3,418		—		—		3,418		—			3,418		90.0	%
Westpark Portfolio	05/10/2016	Redmond	WA	Office/Flex/Industrial	36,085		91,212		6,825		134,122		(9,527		)	124,595		100.0	%
Crown Pointe	02/14/2017	Dunwoody	GA	Office	22,590		61,280		5,648		89,518		(4,765		)	84,753		100.0	%
125 John Carpenter	09/15/2017	Irving	TX	Office	2,755		74,286		8,861		85,902		(2,324		)	83,578		100.0	%
Marquette Plaza	03/01/2018	Minneapolis	MN	Office	10,387		71,384		4,493		86,264		(335		)	85,929		100.0	%
City Tower	03/06/2018	Orange	CA	Office	13,930		127,906		8,162		149,998		(315		)	149,683		100.0	%
					$	186,248	$	592,503	$	36,514	$	815,265	$	(46,751	)	$	768,514

_____________________

⁽¹⁾ On September 7, 2016, a subsidiary of the Company that owns a portion of Park Highlands, sold 820 units of 10% Class A non-voting preferred membership units for $0.8 million to accredited investors. The amount of the Class A non-voting preferred membership units raised, net of offering costs, is included in other liabilities on the accompanying consolidated balance sheets.

Operating Leases

Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2018 , the leases, excluding options to extend and apartment leases, which have terms that are generally one year or less, had remaining terms of up to 14.2 years with a weighted-average remaining term of 4.3 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $4.9 million and $4.3 million as of March 31, 2018 and December 31, 2017 , respectively.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

During the three months ended March 31, 2018 and 2017 , the Company recognized deferred rent from tenants of $0.7 million and $0.9 million , respectively, net of lease incentive amortization. As of March 31, 2018 and December 31, 2017 , the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $8.5 million and $7.7 million , respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $1.0 million and $0.9 million of unamortized lease incentives as of March 31, 2018 and December 31, 2017 , respectively.

As of March 31, 2018 , the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):



April 1, 2018 through December 31, 2018	$	43,020
2019	55,023
2020	48,408
2021	41,681
2022	33,530
Thereafter	102,493
	$	324,155

As of March 31, 2018 , the Company’s commercial real estate properties were leased to approximately 400 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentration (greater than 10% of annualized base rent) was as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Public Administration (Government)	9	$	6,496	10.6	%

_____________________

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2018 , adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

Geographic Concentration Risk

As of March 31, 2018 , the Company’s real estate investments in California , Washington and Texas represented 14.7% , 13.8% and 13.0% , respectively, of the Company’s total assets. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California , Washington and Texas real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Recent Acquisitions

Marquette Plaza

On March 1, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office property containing 522,656 rentable square feet located on 2.5 acres of land in Minneapolis, Minnesota (“Marquette Plaza”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of Marquette Plaza was $88.3 million plus $1.1 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $10.4 million to land, $71.4 million to building and improvements, $4.5 million to tenant origination and absorption costs, $3.7 million to above-market lease assets and $0.6 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 6.6 years for tenant origination and absorption costs, 11.7 years for above-market lease assets and 2.4 years for below-market lease liabilities.

City Tower

On March 6, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office building containing 431,007 rentable square feet located on approximately 4.9 acres of land in Orange, California (“City Tower”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of City Tower was $147.1 million plus $1.6 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $13.9 million to land, $127.9 million to building and improvements, $8.1 million to tenant origination and absorption costs and $1.2 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 5.2 years for tenant origination and absorption costs and 6.6 years for below-market lease liabilities.

Recent Real Estate Land Sale

On February 28, 2018, the Company sold approximately 26 developable acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $2.5 million , excluding closing costs. The purchasers are not affiliated with the Company or the Advisor. The Company recognized a gain on sale of $0.6 million related to the land sale, which is net of deferred profit of $0.3 million related to proceeds received from the purchaser for the value of land that was contributed to a master association which is consolidated by the Company.


4.	TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of March 31, 2018 and December 31, 2017 , the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	March 31, 2018			December 31, 2017			March 31, 2018			December 31, 2017			March 31, 2018			December 31, 2017
Cost	$	36,514		$	24,479		$	4,015		$	301		$	(5,320	)	$	(3,636	)
Accumulated Amortization	(7,365		)	(6,448		)	(214		)	(170		)	941			793
Net Amount	$	29,149		$	18,031		$	3,801		$	131		$	(4,379	)	$	(2,843	)

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three months ended March 31, 2018 and 2017 were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2018			2017			2018			2017			2018		2017
Amortization	$	(1,537	)	$	(2,943	)	$	(44	)	$	(89	)	$	270	$	983

Additionally, as of March 31, 2018 and December 31, 2017 , the Company had recorded tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $5.1 million and $5.3 million , respectively. During the three months ended March 31, 2018 and 2017 , the Company recorded amortization expense of $0.2 million and $0.3 million , respectively, related to tax abatement intangible assets.


5.	REAL ESTATE EQUITY SECURITIES

As of March 31, 2018 , the Company owned three investments in real estate equity securities. The following table sets forth the number of shares owned by the Company and the related carrying value of the shares as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018			December 31, 2017
Real Estate Equity Security	Number of Shares Owned	Total Carrying Value		Number of Shares Owned	Total Carrying Value
Whitestone REIT	3,768,189	$	39,151	3,603,189	$	51,922
Keppel-KBS US REIT	43,999,500	37,566		43,999,500	38,141
Franklin Street Properties Corp.	1,462,274	12,298		—	—
	49,229,963	$	89,015	47,602,689	$	90,063

During the three months ended March 31, 2018 , the Company purchased 165,000 shares of common stock of Whitestone REIT (NYSE Ticker: WSR) for an aggregate purchase price of $1.9 million and 1,462,274 shares of common stock of Franklin Street Properties Corp. (NYSE Ticker: FSP) for an aggregate purchase price of $13.1 million .

On November 8, 2017, the Company acquired 43,999,500 shares of common units of Keppel-KBS US REIT (SGX Ticker: CMOU) in connection with the sale of 11 properties to Keppel-KBS US REIT. The Company agreed not to sell, transfer or assign 21,999,750 units of the Keppel-KBS US REIT issued to the Company at closing of the transaction until May 8, 2018 and the remaining 21,999,750 units until November 8, 2018 (the “Unit Lockout Periods”). As of March 31, 2018 and December 31, 2017 , a lack of marketability discount of $1.2 million and $1.7 million , respectively, was recorded as a result of the Unit Lockout Periods.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The following summarizes the activity related to real estate equity securities for the three months ended March 31, 2018 (in thousands):



	Amortized Cost Basis		Unrealized Gains (Losses) ⁽¹⁾			Total
Real estate equity securities - December 31, 2017	$	64,917	$	25,146		$	90,063
Acquisition of real estate equity securities	14,799		—			14,799
Acquisition fee to affiliate and purchase commission	164		—			164
Unrealized change in market value of real estate equity securities	—		(16,011		)	(16,011		)
Real estate equity securities - March 31, 2018	$	79,880	$	9,135		$	89,015

_____________________

⁽¹⁾ As of December 31, 2017 , unrealized gain (losses) due to the change in market value of real estate equity securities was recorded to accumulated other comprehensive income. Effective January 1, 2018, upon the adoption of ASU No. 2016-01, unrealized gain (losses) on real estate equity securities are recorded in earnings on the accompanying consolidated statement of operations.

During the three months ended March 31, 2018 , the Company recognized $1.1 million of dividend income from real estate equity securities.


6.	REAL ESTATE DEBT SECURITIES

As of March 31, 2018 , the Company owned an investment in real estate debt securities. The Company’s investment in real estate debt securities is classified as held to maturity, as the Company has the intent and ability to hold its investment until maturity, and it is not more likely than not that the Company would be required to sell its investment before recovery of the Company’s amortized cost basis. The information for those real estate debt securities as of March 31, 2018 and December 31, 2017 is set forth below (in thousands):



Debt Securities Name	Dates Acquired	Debt Securities Type	Outstanding Principal Balance as of March 31, 2018 ⁽¹⁾		Book Value as of March 31, 2018 ⁽²⁾		Book Value as of December 31, 2017 ⁽²⁾		Contractual Interest Rate ⁽³⁾		Annualized Effective Interest Rate ⁽³⁾		Maturity Date
Battery Point Series B Preferred Units	10/28/2016 / 03/30/2017 / 05/12/2017	Series B Preferred Units	$	17,500	$	17,858	$	17,751	9.0	%	11.1	%	10/28/2019

_____________________

⁽¹⁾ Outstanding principal balance as of March 31, 2018 represents principal balance outstanding under the real estate debt securities.

⁽²⁾ Book value of the real estate debt securities represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.

⁽³⁾ Contractual interest rate is the stated interest rate on the face of the real estate securities. Annualized effective interest rate is calculated as the actual interest income recognized in 2018 , using the interest method, annualized (if applicable) and divided by the average amortized cost basis of the investment. The annualized effective interest rate and contractual interest rate presented are as of March 31, 2018 .

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The following summarizes the activity related to real estate debt securities for the three months ended March 31, 2018 (in thousands):



Real estate debt securities - December 31, 2017	$	17,751
Deferred interest receivable and interest accretion	96
Accretion of commitment fee, net of closing costs	11
Real estate debt securities - March 31, 2018	$	17,858

For the three months ended March 31, 2018 and 2017 , interest income from real estate debt securities consisted of the following (in thousands):



	For the Three Months Ended March 31,
	2018		2017
Contractual interest income	$	394	$	91
Interest accretion	96		44
Accretion of commitment fee, net of closing costs and acquisition fee	11		25
Interest income from real estate debt securities	$	501	$	160


7.	REAL ESTATE SALES

During the three months ended March 31, 2018 , the Company did not dispose of any real estate properties. During the year ended December 31, 2017, the Company disposed of 12 office properties. The operations of these properties and gain on sales are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to these properties for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018		2017
Revenues
Rental income	$	—	$	17,484
Tenant reimbursements and other operating income	—		4,855
Total revenues	$	—	$	22,339
Expenses
Operating, maintenance, and management	$	—	$	6,142
Real estate taxes and insurance	—		3,003
Asset management fees to affiliate	—		1,356
Depreciation and amortization	—		8,035
Interest expense	—		3,124
Total expenses	$	—	$	21,660

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)


8.	NOTES AND BONDS PAYABLE

As of March 31, 2018 and December 31, 2017 , the Company’s notes and bonds payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):



	Book Value as of March 31, 2018			Book Value as of December 31, 2017			Contractual Interest Rate as of March 31, 2018 ⁽¹⁾	Effective Interest Rate at March 31, 2018 ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾
Richardson Portfolio Mortgage Loan	$	36,735		$	36,886		One-Month LIBOR + 2.10%	3.77%	Principal & Interest	05/01/2018 ⁽³⁾
Portfolio Mortgage Loan ⁽⁴⁾	9,509			9,877			One-Month LIBOR + 2.25%	3.91%	Principal & Interest	07/01/2018
Burbank Collection Mortgage Loan	10,898			10,958			One-Month LIBOR + 2.35%	4.04%	Principal & Interest	09/30/2018
1180 Raymond Bond Payable	6,415			6,460			6.50%	6.50%	Principal & Interest	09/01/2036
Central Building Mortgage Loan	27,600			27,600			One-Month LIBOR + 1.75%	3.41%	Interest Only	11/13/2018
424 Bedford Mortgage Loan	24,138			24,282			3.91%	3.91%	Principal & Interest	10/01/2022
1180 Raymond Mortgage Loan	30,911			31,000			One-Month LIBOR + 2.25%	3.91%	Principal & Interest	12/01/2018
KBS SOR (BVI) Holdings, Ltd. Series A Debentures ⁽⁵⁾	277,795			278,801			4.25%	4.25%	⁽⁵⁾	03/01/2023
Westpark Portfolio Mortgage Loan	85,200			85,200			One-Month LIBOR + 2.50%	4.16%	Interest Only ⁽⁶⁾	07/01/2020
Crown Pointe Mortgage Loan	50,500			50,500			One-Month LIBOR + 2.60%	4.26%	Interest Only	02/13/2020
125 John Carpenter Mortgage Loan	50,130			50,130			⁽⁷⁾	3.42%	Interest Only	10/01/2022
City Tower Mortgage Loan	89,000			—			One-Month LIBOR + 1.55%	3.24%	Interest Only	03/05/2021
Total Notes and Bonds Payable principal outstanding	698,831			611,694
Net Premium/(Discount) on Notes and Bonds Payable ⁽⁸⁾	151			137
Deferred financing costs, net	(9,228		)	(8,788		)
Total Notes and Bonds Payable, net	$	689,754		$	603,043

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2018 . Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2018 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at March 31, 2018 , where applicable.

⁽²⁾ Represents the initial maturity date or the maturity date as extended as of March 31, 2018 ; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

⁽³⁾ Subsequent to March 31, 2018 , the maturity date of the Richardson Portfolio Mortgage Loan was extended to November 1, 2018.

⁽⁴⁾ The Portfolio Mortgage Loan is secured by Park Centre.

⁽⁵⁾ See “ – Israeli Bond Financing” below.

⁽⁶⁾ Represents the payment type required under the loan as of March 31, 2018 . Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.

⁽⁷⁾ The 125 John Carpenter Mortgage Loan bears interest at a floating rate of the greater of (a) 2.0% or (b) 175 basis points over one-month LIBOR.

⁽⁸⁾ Represents the unamortized premium/discount on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bonds payable.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

During the three months ended March 31, 2018 and 2017 , the Company incurred $6.6 million and $9.4 million , respectively, of interest expense. Included in interest expense for the three months ended March 31, 2018 and 2017 was $0.8 million and $1.3 million , respectively, of amortization of deferred financing costs. Additionally, during each of the three months ended March 31, 2018 and 2017 , the Company capitalized $0.6 million of interest related to its investments in undeveloped land.

As of March 31, 2018 and December 31, 2017 , the Company’s interest payable was $2.4 million and $5.1 million , respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of March 31, 2018 (in thousands):



April 1, 2018 through December 31, 2018	$	116,680
2019	57,448
2020	190,572
2021	145,438
2022	127,724
Thereafter	60,969
	$	698,831

The Company’s notes payable contain financial debt covenants. As of March 31, 2018 , the Company was in compliance with all of these debt covenants.

Israeli Bond Financing

On March 2, 2016, KBS Strategic Opportunity BVI, a wholly owned subsidiary of the Company, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25% . On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016 ) in both the institutional and public tenders at an annual interest rate of 4.25% . KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023. As of March 31, 2018 , the Company has one foreign currency option for an aggregate notional amount of $285.4 million to hedge its exposure to foreign currency exchange rate movements. See note 9 , “Derivative Instruments” for a further discussion on the Company’s foreign currency option.

The deed of trust that governs the terms of the Debentures contains various financial covenants. As of March 31, 2018 , the Company was in compliance with all of these financial debt covenants.

Recent Financing Transaction

City Tower Mortgage Loan

On March 6, 2018, in connection with the Company’s acquisition of City Tower, the Company, through an indirect wholly owned subsidiary (the “Owner”) entered into a term loan facility with Compass Bank, an unaffiliated lender, for borrowings up to $103.4 million , secured by City Tower (the “City Tower Mortgage Loan”). At closing, $89.0 million of the loan was funded and the remaining $14.4 million was available for future disbursements to be used for leasing commissions and capital expenditures, subject to certain terms and conditions contained in the loan documents.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The City Tower Mortgage Loan matures on March 5, 2021, with two one -year extension options, subject to certain terms and conditions contained in the loan documents, and bears interest at a floating rate of 155 basis points over one-month LIBOR. On April 2, 2018, the Owner entered into an interest rate cap that effectively limits one-month LIBOR on 75% of the loan amount, a notional amount of $77.5 million , at 3.50% effective April 2, 2018 through March 5, 2021. Monthly payments are interest only with the principal balance, all accrued and unpaid interest and all other sums due under the loan documents due at maturity. The Owner has the right to prepay all or a portion of the City Tower Mortgage Loan, subject to certain fees and conditions contained in the loan documents.

KBS SOR Properties, LLC, the Company’s wholly owned subsidiary, in connection with the City Tower Mortgage Loan, is providing a guaranty of (i) the payment of all actual costs, losses, damages, claims and expenses incurred by Compass Bank relating to the City Tower Mortgage Loan as a result of certain intentional actions or omissions of the Owner in violation of the loan documents, as further described in the guaranty; (ii) the payment of the principal balance and any interest or other sums outstanding under the City Tower Mortgage Loan in the event of certain bankruptcy, insolvency or related proceedings involving the Owner as described in the guaranty; and (iii) certain other amounts as described in the guaranty.


9 .	DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates and foreign currency exchange rate movements. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.

The Company enters into foreign currency options and foreign currency collars to mitigate its exposure to foreign currency exchange rate movements on its bonds payable outstanding denominated in Israeli new Shekels. A foreign currency collar consists of a purchased call option to buy and a sold put option to sell Israeli new Shekels. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. A foreign currency option consists of a call option to buy Israeli new Shekels.

As of March 31, 2018 , the Company had entered into a foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar as it has the right, but not the obligation, to purchase up to 970.2 million Israeli Shekels at the rate of ILS 3.4 per USD. The cost of the foreign currency option was $3.4 million . The following table summarizes the notional amount and other information related to the Company’s foreign currency option as of March 31, 2018 . The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):



Derivative Instrument	Notional Amount		Strike Price	Trade Date	Maturity Date
Derivative instrument not designated as hedging instrument
Foreign currency option	$	285,361	3.40 ILS-USD	08/03/2017	08/03/2018

The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

As of March 31, 2018 , the Company had entered into an interest rate cap, which was not designated as a hedging instrument. The following table summarizes the notional amount and other information related to the Company’s derivative instrument as of March 31, 2018 . The notional amount is an indication of the extent of the Company’s involvement in the instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):



Derivative Instrument	Effective Date	Maturity Date	Notional Value		Reference Rate
Interest rate cap	02/21/2017	02/13/2020	$	46,875	One-month LIBOR at 3.00%

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of March 31, 2018 and December 31, 2017 (dollars in thousands):



		March 31, 2018			December 31, 2017
Derivative Instruments	Balance Sheet Location	Number of Instruments	Fair Value		Number of Instruments	Fair Value
Derivative instruments not designated as hedging instruments
Interest rate cap	Prepaid expenses and other assets	1	$	45	1	$	14
Foreign currency option	Prepaid expenses and other assets	1	$	2,226	1	$	4,243

The change in fair value of foreign currency options and collars that are not designated as cash flow hedges are recorded as foreign currency transaction gains or losses in the accompanying consolidated statements of operations. During the three months ended March 31, 2018 , the Company recognized a $2.0 million loss related to the foreign currency option, which is shown net against $1.0 million of foreign currency transaction gain in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three months ended March 31, 2017 , the Company recognized an $11.1 million gain related to the foreign currency collars, which is shown net against $15.8 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three months ended March 31, 2018 , the Company recorded an unrealized gain of $31,000 on interest rate caps, which was included as an offset to interest expense on the accompanying consolidated statements of operations. During the three months ended March 31, 2017 , the Company recorded an unrealized loss of $57,000 on interest rate caps, which was included in interest expense on the accompanying consolidated statements of operations.


10.	FAIR VALUE DISCLOSURES

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

Cash and cash equivalents, restricted cash, rent and other receivables and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

Real estate equity securities : The Company’s Whitestone REIT and Franklin Street Properties Corp. real estate equity securities are presented at fair value on the accompanying consolidated balance sheet. The fair values of Whitestone REIT and Franklin Street Properties Corp. real estate equity securities were based on quoted prices in an active market on a major stock exchange. The Company classifies these inputs as Level 1 inputs. As of March 31, 2018 , the Company owned 43,999,500 shares of common units of Keppel-KBS US REIT. The fair value measurement of these shares is based on a quoted price in an active market, adjusted for the lack of marketability during the Unit Lockout Periods. The Company utilized inputs, all of which were deemed to be significant, including the quoted stock price, risk-free rate and expected volatility, in determining the value of the shares and the Company notes that the most significant input in its valuation model is the quoted price in an active market. However, as the valuation of the stock is adjusted for the lack of marketability using market-corroborated inputs, the Company categorizes the measurement of such securities as Level 2 inputs.

Real estate debt securities : The Company’s real estate debt securities are presented in the accompanying consolidated balance sheets at their amortized cost net of recorded loss reserves (if any) and not at fair value. The fair value of real estate debt securities was estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral dependent loans) and estimated yield requirements of institutional investors for real estate debt securities with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.

Notes and bonds payable: The fair values of the Company’s notes and bonds payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs. The Company’s bonds issued in Israel are publicly traded on the Tel-Aviv Stock Exchange. The Company used the quoted price as of March 31, 2018 for the fair value of its bonds issued in Israel. The Company classifies this input as a Level 1 input.

Derivative instruments : The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The fair value of interest rate caps (floors) are determined using the market standard methodology of discounting the future expected cash payments (receipts) which would occur if variable interest rates rise above (below) the strike rate of the caps (floors). The variable interest rates used in the calculation of projected payments (receipts) on the cap (floor) are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The fair value of foreign currency option is based on a Black-Scholes model tailored for currency derivatives.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of March 31, 2018 and December 31, 2017 , which carrying amounts do not approximate the fair values (in thousands):



	March 31, 2018						December 31, 2017
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial asset:
Real estate debt securities	$	17,500	$	17,858	$	17,446	$	17,500	$	17,751	$	17,386
Financial liabilities:
Notes and bond payable	$	421,036	$	417,968	$	423,892	$	332,893	$	330,727	$	335,212
KBS SOR (BVI) Holdings, Ltd. Series A Debentures	$	277,795	$	271,786	$	285,184	$	278,801	$	272,316	$	296,069

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

As of March 31, 2018 , the Company measured the following assets at fair value (in thousands):



			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Real estate equity securities	$	89,015	$	51,449	$	37,566	$	—
Asset derivative - interest rate cap	$	45	$	—	$	45	$	—
Asset derivative - foreign currency option	$	2,226	$	—	$	2,226	$	—


11.	RELATED PARTY TRANSACTIONS

The Advisory Agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments and the disposition of real estate and real estate-related investments (including the discounted payoff of non-performing loans) among other services, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. The Advisory Agreement may also entitle the Advisor to certain back-end cash flow participation fees. The Company also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with KBS Capital Markets Group LLC, the dealer manager for the Company’s initial public offering (the “Dealer Manager”), pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as, or previously served as, the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. In June 2017, the Company renewed its participation in the program, and the program is effective through June 30, 2018. As KBS REIT I was implementing its plan of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage.

During the three months ended March 31, 2018 and 2017 , no other business transactions occurred between the Company and these other KBS-sponsored programs.

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2018 and 2017 , respectively, and any related amounts payable as of March 31, 2018 and December 31, 2017 (in thousands):



	Incurred				Payable as of
	Three Months Ended March 31,				March 31, 2018		December 31, 2017
	2018		2017		March 31, 2018		December 31, 2017
Expensed
Asset management fees	1,825		2,748		$	—	$	—
Reimbursable operating expenses ⁽¹⁾	83		69		47		26
Capitalized
Acquisition fees on real estate	2,360		836		—		—
Acquisition fees on real estate equity securities	148		—		—		—
	$	4,416	$	3,653	$	47	$	26

_____________________

⁽¹⁾ The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $83,000 and $55,000 for the three months ended March 31, 2018 and 2017 , respectively, and were the only employee costs reimbursed under the Advisory Agreement during these periods. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company’s direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company.

During the three months ended March 31, 2017 , the Company recorded $0.3 million due from the Advisor related to a property insurance rebate and legal fees incurred in connection with certain strategic transactions for which the Advisor had agreed to reimburse the Company.

On November 8, 2017, the Company sold 11 properties to Keppel-KBS US REIT. Keppel-KBS US REIT is externally managed by a joint venture (the “Manager”) between (i) an entity in which Keith D. Hall, the Company’s Chief Executive Officer and a director, and Peter McMillan III, the Company’s President and Chairman of the board of directors, have an indirect ownership interest and (ii) Keppel Capital Holding Pte. Ltd., which is not affiliated with the Company. Keppel-KBS US REIT is expected to pay certain purchase and sale commissions and asset management fees to the Manager in exchange for the provision of certain management services.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)


12 .	INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of March 31, 2018 and December 31, 2017 , the Company’s investments in unconsolidated joint ventures were composed of the following (dollars in thousands):



				Investment Balance at
Joint Venture	Number of Properties	Location	Ownership %	March 31, 2018		December 31, 2017
NIP Joint Venture	4	Various	Less than 5.0%	$	3,288	$	3,674
110 William Joint Venture	1	New York, New York	60.0%	5,580		7,160
353 Sacramento Joint Venture	1	San Francisco, California	55.0%	43,945		44,743
				$	52,813	$	55,577

Investment in National Industrial Portfolio Joint Venture

On May 18, 2012, the Company, through an indirect wholly owned subsidiary, entered into a joint venture (the “NIP Joint Venture”) with OCM NIP JV Holdings, L.P. and HC KBS NIP JV, LLC (“HC-KBS”). The NIP Joint Venture has invested in a portfolio of industrial properties. The Company made an initial capital contribution of $8.0 million which represents less than a 5.0% ownership interest in the NIP Joint Venture as of March 31, 2018 . Prior to the Company’s adoption of ASU No. 2016-01 on January 1, 2018, the Company accounted for its investment in the NIP Joint Venture using the cost method of accounting. Effective January 1, 2018, the Company elected to measure its investment in the NIP Joint Venture, which is an equity investment without a readily determinable value, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

Prior to January 17, 2018, KBS REIT I, an affiliate of the Advisor, was a member of HC-KBS and had a participation interest in certain future potential profits generated by the NIP Joint Venture. However, KBS REIT I did not have any equity interest in the NIP Joint Venture. On January 17, 2018, KBS REIT I assigned its participation interest in the NIP Joint Venture to one of the other joint venture partners in the NIP Joint Venture. None of the other joint venture partners are affiliated with the Company or the Advisor.

As of March 31, 2018 and December 31, 2017 , the book value of the Company’s investment in the NIP Joint Venture was $3.3 million and $3.7 million , respectively. During the three months ended March 31, 2018 , the Company received a distribution of $0.4 million related to its investment in the NIP Joint Venture. The Company recognized $0.1 million of income distributions and $0.3 million of return of capital from the NIP Joint Venture. During the three months ended March 31, 2017 , the Company received a distribution of $2.9 million related to its investment in the NIP Joint Venture. The Company recognized $1.9 million of income distributions and $1.0 million of return of capital from the NIP Joint Venture.

Investment in 110 William Joint Venture

On December 23, 2013, the Company, through an indirect wholly owned subsidiary, entered into an agreement with SREF III 110 William JV, LLC (the “110 William JV Partner”) to form a joint venture (the “110 William Joint Venture”). On May 2, 2014, the 110 William Joint Venture acquired an office property containing 928,157 rentable square feet located on approximately 0.8 acres of land in New York, New York (“110 William Street”). Each of the Company and the 110 William JV Partner hold a 60% and 40% ownership interest in the 110 William Joint Venture, respectively.

The Company exercises significant influence over the operations, financial policies and decision making with respect to the 110 William Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 110 William Joint Venture under the equity method of accounting. Income, losses, contributions and distributions are generally allocated based on the members’ respective equity interests.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

As of March 31, 2018 and December 31, 2017 , the book value of the Company’s investment in the 110 William Joint Venture was $5.6 million and $7.2 million , respectively, which includes $1.5 million of unamortized acquisition fees and expenses incurred directly by the Company. During the three months ended March 31, 2017 , the 110 William Joint Venture made a $58.2 million return of capital distribution to the Company and a $38.8 million return of capital distribution to the 110 William JV Partner funded with proceeds from the 110 William refinancing.

Summarized financial information for the 110 William Joint Venture follows (in thousands):



	March 31, 2018		December 31, 2017
Assets:
Real estate assets, net of accumulated depreciation and amortization	$	244,180	$	248,269
Other assets	33,986		32,331
Total assets	$	278,166	$	280,600
Liabilities and equity:
Notes payable, net	$	262,393	$	260,108
Other liabilities	8,912		11,016
Partners’ capital	6,861		9,476
Total liabilities and equity	$	278,166	$	280,600



	Three Months Ended March 31,
	2018			2017
Revenues	$	9,809		$	8,392
Expenses:
Operating, maintenance, and management	2,466			2,396
Real estate taxes and insurance	1,635			1,617
Depreciation and amortization	4,219			3,232
Interest expense	4,117			1,400
Total expenses	12,437			8,645
Other income	13			14
Net loss	$	(2,615	)	$	(239	)
Company’s equity in loss of unconsolidated joint venture	$	(1,580	)	$	(154	)

Investment in 353 Sacramento Joint Venture

On July 6, 2017, the Company, through an indirect wholly owned subsidiary, entered into an agreement with the Migdal Members to form the 353 Sacramento Joint Venture. On July 6, 2017, the Company sold a 45% equity interest in an entity that owns 353 Sacramento to the Migdal Members. The sale resulted in 353 Sacramento being owned by the 353 Sacramento Joint Venture, in which the Company indirectly owns 55% of the equity interests and the Migdal Members indirectly own 45% in the aggregate of the equity interests.

The Company exercises significant influence over the operations, financial policies and decision making with respect to the 353 Sacramento Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 353 Sacramento Joint Venture under the equity method of accounting. Income, losses, contributions and distributions are generally allocated based on the members’ respective equity interests.

As of March 31, 2018 and December 31, 2017 , the book value of the Company’s investment in the 353 Sacramento Joint Venture was $43.9 million and $44.7 million , respectively.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Summarized financial information for the 353 Sacramento Joint Venture follows (in thousands):



	March 31, 2018		December 31, 2017
Assets:
Real estate assets, net of accumulated depreciation and amortization	$	169,761	$	171,066
Other assets	5,916		6,472
Total assets	$	175,677	$	177,538
Liabilities and equity:
Notes payable, net	$	91,204	$	89,423
Other liabilities	4,940		7,313
Partners’ capital	79,533		80,802
Total liabilities and equity	$	175,677	$	177,538



	For the Three Months Ended March 31, 2018
Revenues	$	2,669
Expenses:
Operating, maintenance, and management	878
Real estate taxes and insurance	612
Depreciation and amortization	1,450
Interest expense	1,239
Total expenses	4,179
Net loss	$	(1,510	)
Company’s equity in loss of unconsolidated joint venture	$	(798	)


13.	SUPPLEMENTAL CASH FLOW AND SIGNIFICANT NONCASH TRANSACTION DISCLOSURES

Supplemental cash flow and significant noncash transaction disclosures were as follows (in thousands):



	Three Months Ended March 31,
	2018		2017
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $ 650 and $564 for the three months ended March 31, 2018 and 2017 , respectively	$	8,460	$	10,390
Supplemental Disclosure of Significant Noncash Transactions:
Application of escrow deposits to acquisition of real estate	—		2,000
Increase in accrued improvements to real estate	2,302		7,858
Increase in redeemable common stock payable	—		677
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	479		2,924
Distributions paid to common stockholders through common stock issuances pursuant to the December 2017 special dividend	150,299		—

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)


14.	COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide these services, the Company will be required to obtain such services from other sources.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations as of March 31, 2018 . However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is a party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and the possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

Participation Fee Liability

Pursuant to the Advisory Agreement currently in effect with the Advisor, the Advisor is due a subordinated participation in the Company’s net cash flows (the “Incentive Fee”) if, after the stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to the share redemption program, and (ii) a 7.0% per year cumulative, noncompounded return on such net invested capital, the Advisor is entitled to receive 15.0% of the Company’s net cash flows, whether from continuing operations, net sale proceeds or otherwise. Net sales proceeds means the net cash proceeds realized by the Company after deduction of all expenses incurred in connection with a sale, including disposition fees paid to the Advisor. The 7.0% per year cumulative, noncompounded return on net invested capital is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 7.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 7.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 7.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of the stockholders to have received any minimum return in order for the Advisor to participate in the Company’s net cash flows. In fact, if the Advisor is entitled to participate in the Company’s net cash flows, the returns of the stockholders will differ, and some may be less than a 7.0% per year cumulative, noncompounded return. This fee is payable only if we are not listed on an exchange.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

On April 4, 2018, the Company’s stockholders approved the acceleration of the payment of such incentive compensation, subject to certain conditions. Such accelerated payment would require approval by a special committee of the Company’s board of directors in connection with the anticipated conversion of the Company into a net asset value REIT. The Advisor estimated the fair value of this liability to be as much as $34 million as of March 31, 2018 , based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties. The fair value of the Incentive Fee liability as of March 31, 2018 is based on the estimated fair values of the Company’s assets and liabilities as of that date and changes to the fair values of assets and liabilities could have a material impact to the Incentive Fee calculation. The Incentive Fee is not currently payable to the Advisor, as it remains subject to further approval by the special committee and the Company’s conversion to a perpetual-life NAV REIT, and there is no guarantee that it will ever be payable.


15 .	SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Probable Real Estate Acquisition

Eight & Nine Corporate Centre

On April 11, 2018 , the Company, through an indirect wholly owned subsidiary, entered into a purchase and sale agreement to purchase an office property consisting of two buildings containing an aggregate of 311,864 rentable square feet located on an aggregate of 27.6 acres of land in Franklin, Tennessee (“Eight & Nine Corporate Centre”). The seller is not affiliated with the Company or the Advisor. The contractual purchase price of Eight & Nine Corporate Centre is $73.0 million plus closing costs. Pursuant to the purchase and sale agreement, the Company would be obligated to purchase the property only after satisfactory completion of agreed upon closing conditions. There can be no assurance that the Company will complete the acquisition. In some circumstances, if the Company fails to complete the acquisition, it may forfeit up to $7.0 million of earnest money.

Eight & Nine Corporate Centre was built in 2007 and as of May 1, 2018 was approximately 82% leased to 15 tenants.

Self-Tender Offer

On April 23, 2018 , the Company commenced the Self-Tender for up to 8,234,217 shares at a price of $10.93 per share, or approximately $90 million of shares. Unless extended or withdrawn, the Self-Tender will expire at midnight Eastern Time on or about Friday, May 18, 2018 .

The Company is conducting the Self-Tender in order to make liquidity available to stockholders in excess of that permitted under its share redemption program (the “SRP”), which recently has been limited to $3 million per quarter for ordinary redemptions. In connection with its approval of the Self-Tender, the Company’s board of directors approved the reopening of the SRP for the June 2018 redemption period. Because of the Self-Tender, the SRP has been suspended since the March 2018 redemption period and will not reopen until the June 2018 redemption period, meaning no redemptions have been or will be made in March, April or May 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). The Company has cancelled all outstanding redemption requests under the SRP and is not accepting any redemption requests under the SRP during the term of the Self-Tender.

The Self-Tender price of $10.93 per share is 95% of the Company’s most recent estimated value per share and will be paid in cash, less any applicable withholding taxes and without interest, as further described in the offer to purchase and letter of transmittal filed with the SEC. The full details of the Self-Tender, including complete instructions on how to tender shares, is included in the offer to purchase, the letter of transmittal and other related materials, which the Company has made available to stockholders and filed with the SEC upon commencement of the Self-Tender.

If stockholders would like to submit a redemption request under the SRP, they may do so after the Self-Tender expires. Because the SRP has been suspended through May 31, 2018 , redemptions under the SRP are expected to resume on the last business day of June.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Strategic Opportunity REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Strategic Opportunity REIT, Inc., a Maryland corporation, and, as required by context, KBS Strategic Opportunity Limited Partnership, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Strategic Opportunity REIT, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•

We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our property investments could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, limiting our ability to pay distributions to our stockholders.


•	Our opportunistic investment strategy involves a higher risk of loss than would a strategy of investing in some other types of real estate and real estate-related investments.

•

We have paid distributions from financings and in the future we may not pay distributions solely from our cash flow from operations or gains from asset sales. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have less funds available for investment in loans, properties and other assets, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

•

All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. Fees paid to our advisor in connection with transactions involving the origination, acquisition and management of our investments are based on the cost of the investment, not on the quality of the investment or services rendered to us. This arrangement could influence our advisor to recommend riskier transactions to us.


•	We pay substantial fees to and expenses of our advisor and its affiliates. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase our stockholders’ risk of loss.

•

We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program, future funding obligations under any real estate loans receivable we acquire, the funding of capital expenditures on our real estate investments or the repayment of debt. If such funds are not available from the dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.


•	We have focused, and may continue to focus, our investments in non-performing real estate and real estate-related loans, real estate-related loans secured by non-stabilized assets and real estate-related securities, which involve more risk than investments in performing real estate and real estate-related assets

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “SEC”).

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview

We were formed on October 8, 2008 as a Maryland corporation, elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010 and intend to operate in such manner. KBS Capital Advisors LLC (“KBS Capital Advisors”) is our advisor. As our advisor, KBS Capital Advisors manages our day-to-day operations and our portfolio of investments. KBS Capital Advisors also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors. KBS Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. We have sought to invest in and manage a diverse portfolio of real estate‑related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments. We conduct our business primarily through our operating partnership, of which we are the sole general partner.

On January 8, 2009, we filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public, of which 100,000,000 shares were registered in our primary offering and 40,000,000 shares were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on November 14, 2012. We sold 56,584,976 shares of common stock in the primary offering for gross offering proceeds of $561.7 million . We continue to offer shares of common stock under the dividend reinvestment plan. As of March 31, 2018 , we had sold 6,662,042 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $74.5 million . Also as of March 31, 2018 , we had redeemed 11,867,335 of the shares sold in our offering for $156.4 million . As of March 31, 2018 , we had issued 13,069,487 shares of common stock in connection with the December 2017 special dividend. Additionally, on December 29, 2011 and October 23, 2012, we issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million , respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On March 2, 2016, KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), our wholly owned subsidiary, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016 ) in both the institutional and public tenders at an annual interest rate of 4.25%. KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

Market Outlook – Real Estate and Real Estate Finance Markets

Volatility in global financial markets and changing political environments can cause fluctuations in the performance of the U.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Increases in the cost of financing due to higher interest rates may cause difficulty in refinancing debt obligations prior to or at maturity or at terms as favorable as the terms of existing indebtedness. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources

Our principal demand for funds during the short and long-term is and will be for the acquisition of real estate and real estate-related investments, payment of operating expenses, capital expenditures and general and administrative expenses, payments under debt obligations, redemptions and purchases of our common stock and payments of distributions to stockholders. To date, we have had six primary sources of capital for meeting our cash requirements:


•	Proceeds from the primary portion of our initial public offering;


•	Proceeds from our dividend reinvestment plan;


•	Proceeds from our public bond offering in Israel;


•	Debt financing;


•	Proceeds from the sale of real estate and the repayment of real estate-related investments; and


•	Cash flow generated by our real estate and real estate-related investments.

We sold 56,584,976 shares of common stock in the primary portion of our initial public offering for gross offering proceeds of $561.7 million . We ceased offering shares in the primary portion of our initial public offering on November 14, 2012. We continue to offer shares of common stock under the dividend reinvestment plan. As of March 31, 2018 , we had sold 6,662,042 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $74.5 million . To date, we have invested all of the net proceeds from our initial public offering in real estate and real estate-related investments. We intend to use our cash on hand, proceeds from asset sales, proceeds from debt financing, cash flow generated by our real estate operations and real estate-related investments and proceeds from our dividend reinvestment plan as our primary sources of immediate and long-term liquidity.

Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures and corporate general and administrative expenses. Cash flow from operations from our real estate investments is primarily dependent upon the occupancy levels of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of March 31, 2018 , our office and retail properties were collectively 77% occupied and our apartment properties were collectively 97% occupied.

Investments in real estate debt securities generate cash flow in the form of interest income, which are reduced by loan service fees, asset management fees and corporate general and administrative expenses. Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As of March 31, 2018 , we had an investment in real estate debt securities outstanding with a total book value of $17.9 million and three investments in real estate equity securities outstanding with a total carrying value of $89.0 million .

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended March 31, 2018 did not exceed the charter-imposed limitation.

For the three months ended March 31, 2018 , our cash needs for capital expenditures, redemptions of common stock and debt servicing were met with proceeds from debt financing, proceeds from our dividend reinvestment plan and cash on hand. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments and cash on hand. As of March 31, 2018 , we had outstanding debt obligations in the aggregate principal amount of $698.8 million , with a weighted-average remaining term of 3.5 years. As of March 31, 2018 , we had a total of $172.7 million of debt obligations scheduled to mature within 12 months of that date. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates.

We have elected to be taxed as a REIT and intend to operate as a REIT. To maintain our qualification as a REIT, we are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Flows from Operating Activities

As of March 31, 2018 , we consolidated six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, three investments in undeveloped land with approximately 1,100 developable acres, and owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and three investments in real estate equity securities. During the three months ended March 31, 2018 , net cash used in operating activities was $5.0 million . We expect that our cash flows from operating activities will increase in future periods as a result of owning assets acquired during 2018 for an entire period, leasing additional space that is currently unoccupied and anticipated future acquisitions of real estate and real estate-related investments. However, our cash flows from operating activities may decrease to the extent that we dispose of additional assets.

Cash Flows from Investing Activities

Net cash used in investing activities was $255.9 million for the three months ended March 31, 2018 and primarily consisted of the following:


•	Acquisition of two office properties for $238.2 million ;


•	Investment in real estate securities of $15.0 million ;


•	Improvements to real estate of $5.0 million ;


•	Proceeds from the sale of 26 acres of undeveloped land of $2.5 million ;


•	Funding of development obligations of $0.6 million ; and


•	Proceeds from the NIP Joint Venture distribution of $0.4 million .

Cash Flows from Financing Activities

Net cash provided by financing activities was $43.9 million for the three months ended March 31, 2018 and consisted primarily of the following:


•	$86.9 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $89.0 million , partially offset by principal payments on notes and bonds payable of $0.9 million and payments of deferred financing costs of $1.2 million ;


•	$38.2 million of net cash distributions to stockholders, after giving effect to distributions reinvested by stockholders of $0.5 million ;


•	$4.6 million of cash used for redemptions of common stock; and


•	$0.2 million of payments made in connection with a potential offering.

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets; however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of March 31, 2018 , our borrowings and other liabilities were approximately 63% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

In March 2016, we, through a wholly-owned subsidiary, issued 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016 ) in 4.25% bonds to investors in Israel pursuant to a public offering registered in Israel. The bonds have a seven year term, with principal payable in five equal annual installments from 2019 to 2023. We have used a portion of the proceeds from the issuance of these bonds to make additional investments.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our advisor and our dealer manager. During our offering stage, these payments included payments to our dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to our dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. During our acquisition and development stage, we expect to continue to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us as well as for any dispositions of assets (including the discounted payoff of non-performing loans). In addition, an affiliate of our advisor, KBS Management Group, was formed to provide property management services with respect to certain properties owned by KBS-advised companies. In the future, we may engage KBS Management Group with respect to one or more of our properties to provide property management services. With respect to any such properties, we would expect to pay KBS Management Group a monthly fee equal to a percentage of the rent (to be determined on a property by property basis, consistent with current market rates).

The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee.

Among the fees payable to our advisor is an asset management fee. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment, inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan or other investment, plus the fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the sum of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property, and inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment, inclusive of our proportionate share of any fees and expenses related thereto.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2018 (in thousands):



			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2018		2019-2020		2021-2022		Thereafter
Outstanding debt obligations ⁽¹⁾	$	698,831	$	116,680	$	248,020	$	273,162	$	60,969
Interest payments on outstanding debt obligations ⁽²⁾	72,788		19,405		36,689		13,538		3,156

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts, maturity dates, foreign currency rates and interest rates in effect at March 31, 2018 . We incurred interest expense of $6.4 million , excluding amortization of deferred financing costs of $0.8 million and including interest capitalized of $0.6 million , for the three months ended March 31, 2018 .

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Participation Fee Liability

Pursuant to the advisory agreement currently in effect with our advisor, our advisor is due a subordinated participation in our net cash flows (the “Incentive Fee”) if, after the stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to the share redemption program, and (ii) a 7.0% per year cumulative, noncompounded return on such net invested capital, our advisor is entitled to receive 15.0% of our net cash flows, whether from continuing operations, net sale proceeds or otherwise. Net sales proceeds means the net cash proceeds we realized after deduction of all expenses incurred in connection with a sale, including disposition fees paid to our advisor. The 7.0% per year cumulative, noncompounded return on net invested capital is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 7.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 7.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 7.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of the stockholders to have received any minimum return in order for our advisor to participate in our net cash flows. In fact, if our advisor is entitled to participate in our net cash flows, the returns of the stockholders will differ, and some may be less than a 7.0% per year cumulative, noncompounded return. This fee is payable only if we are not listed on an exchange.

On April 4, 2018, our stockholders approved the acceleration of the payment of such incentive compensation, subject to certain conditions. Such accelerated payment would require approval by a special committee of our board of directors in connection with our anticipated conversion into a net asset value REIT. Our advisor estimated the fair value of this liability to be as much as $34 million as of March 31, 2018 , based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties. The fair value of the Incentive Fee liability as of March 31, 2018 is based on the estimated fair values of our assets and liabilities as of that date and changes to the fair values of assets and liabilities could have a material impact to the Incentive Fee calculation. The Incentive Fee is not currently payable to our advisor, as it remains subject to further approval by the special committee and our conversion to a perpetual-life NAV REIT, and there is no guarantee that it will ever be payable.

Results of Operations

Overview

As of March 31, 2017 , we owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, two investments in unconsolidated joint ventures and an investment in real estate debt securities. As of March 31, 2018 , we owned six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, three investments in undeveloped land with approximately 1,100 developable acres, three investments in unconsolidated joint ventures, an investment in real estate debt securities and three investments in real estate equity securities. Our results of operations for the three months ended March 31, 2018 may not be indicative of those in future periods due to acquisition and disposition activities. Additionally, the occupancy in our properties has not been stabilized. As of March 31, 2018 , our office and retail properties were collectively 77% occupied. However, due to the amount of near-term lease expirations, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our assets will increase, or that we will recognize a gain on the sale of our assets. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and acquiring additional assets but decrease due to disposition activity.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended March 31, 2018 versus the three months ended March 31, 2017

The following table provides summary information about our results of operations for the three months ended March 31, 2018 and 2017 (dollar amounts in thousands):



	Three Months Ended March 31,						Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/ Originations/ Dispositions ⁽¹⁾			$ Change Due to Investments Held Throughout Both Periods ⁽²⁾
	2018			2017			Increase (Decrease)			Percentage Change
Rental income	$	15,181		$	30,646		$	(15,465	)	(50	)%	$	(15,953	)	$	488
Tenant reimbursements	2,682			5,637			(2,955		)	(52	)%	(3,289		)	334
Other operating income	221			1,553			(1,332		)	(86	)%	(758		)	(574		)
Interest income from real estate debt securities	501			160			341			213	%	341			—
Dividend income from real estate equity securities	1,051			—			1,051			n/a		1,051			—
Operating, maintenance, and management costs	5,487			10,908			(5,421		)	(50	)%	(5,802		)	381
Real estate taxes and insurance	2,339			4,737			(2,398		)	(51	)%	(2,647		)	249
Asset management fees to affiliate	1,825			2,748			(923		)	(34	)%	(938		)	15
General and administrative expenses	2,052			1,744			308			18	%	n/a			n/a
Foreign currency transaction loss , net	997			4,671			(3,674		)	(79	)%	n/a			n/a
Depreciation and amortization	7,265			14,600			(7,335		)	(50	)%	(7,340		)	5
Interest expense	6,591			9,386			(2,795		)	(30	)%	n/a			n/a
Income from unconsolidated joint venture	53			1,869			(1,816		)	(97	)%	—			(1,816		)
Equity in loss of unconsolidated joint ventures	(2,378		)	(154		)	(2,224		)	1,444	%	(798		)	(1,426		)
Other interest income	930			25			905			3,620	%	n/a			n/a
Unrealized loss on real estate equity securities	(16,011		)	—			(16,011		)	n/a		(16,011		)	—
Gain on sale of real estate	624			—			624			n/a		624			—

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 related to real estate and real estate-related investments acquired, originated, repaid, disposed or deconsolidated on or after January 1, 2017 .

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

Rental income and tenant reimbursements decreased from $30.6 million and $5.6 million , respectively, for the three months ended March 31, 2017 to $15.2 million and $2.7 million , respectively, for the three months ended March 31, 2018 , primarily as a result of the sale of 11 properties to a newly formed real estate investment trust that was listed on the Singapore Stock Exchange (the “the Singapore Portfolio”) and 50 Congress Street, partially offset by properties acquired in 2018 , an increase in annualized base rent per square foot related to our properties held throughout both periods, an increase in occupancy related to our office and retail properties held throughout both periods and an increase in occupancy related to our apartment properties held throughout both periods. Annualized base rent per square foot increased from $17.82 as of March 31, 2017 to $18.55 as of March 31, 2018 related to properties (excluding apartments) held throughout both periods. The occupancy of our office and retail properties, collectively, held throughout both periods increased from 78% as of March 31, 2017 to 79% as of March 31, 2018 and the occupancy of our apartment properties, collectively, held throughout both periods increased from 92% as of March 31, 2017 to 97% as of March 31, 2018 . We expect rental income and tenant reimbursements to increase in future periods as a result of owning the properties acquired during 2018 for an entire period, leasing additional space and to the extent we acquire additional properties, but to decrease to the extent we dispose of properties.

Other operating income decreased from $1.6 million for the three months ended March 31, 2017 to $0.2 million for the three months ended March 31, 2018 primarily as a result of the sale of the Singapore Portfolio and 50 Congress Street and an award of $0.5 million for legal fees incurred at the Burbank Collection during the three months ended March 31, 2017 . We expect other operating income to increase in future periods as a result of owning the properties acquired during 2018 for an entire period, leasing additional space and parking rates and to the extent we acquire additional properties.

Interest income from real estate debt securities increased from $0.2 million for the three months ended March 31, 2017 to $0.5 million for the three months ended March 31, 2018 , as a result of additional real estate debt securities acquired. We expect interest income from real estate debt securities to remain consistent, but to decrease upon principal repayment or maturity.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Dividend income from real estate equity securities was $1.1 million for the three months ended March 31, 2018 as a result of real estate equity securities acquired. We expect dividend income from real estate equity securities to increase in future periods as a result of owning the real estate equity securities acquired in 2018 for an entire period.

Property operating costs and real estate taxes and insurance decreased from $10.9 million and $4.7 million , respectively, for the three months ended March 31, 2017 to $5.5 million and $2.3 million , respectively, for the three months ended March 31, 2018 , primarily as a result of the sale of the Singapore Portfolio and 50 Congress Street, partially offset by real estate investments made in 2018 . We expect property operating costs and real estate taxes and insurance to increase in future periods as a result of owning real estate acquired in 2018 for an entire period, future acquisitions of real estate, increasing occupancy of our real estate assets and inflation, but to decrease to the extent we dispose of properties.

Asset management fees decreased from $2.7 million for the three months ended March 31, 2017 to $1.8 million for the three months ended March 31, 2018 , primarily as a result of the sale of the Singapore Portfolio and 50 Congress Street. We expect asset management fees to increase in future periods as a result of owning real estate investments acquired in 2018 for an entire period, future acquisitions of real estate and capital expenditures, but to decrease to the extent we dispose of properties. All asset management fees incurred as of March 31, 2018 have been paid.

General and administrative expenses increased from $1.7 million for the three months ended March 31, 2017 to $2.1 million for the three months ended March 31, 2018 , primarily due to increased legal expenses incurred to evaluate certain strategic transactions. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.

We recognized $4.7 million and $1.0 million of foreign currency transaction loss, net, for the three months ended March 31, 2017 and 2018 , respectively, related to the issuance of Series A debentures in Israel. These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses based on changes in foreign currency exchange rates, but expect our exposure to be limited to the extent that we have entered into foreign currency options and foreign currency collars. As of March 31, 2018 , we had entered into one foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar. The foreign currency option expires in August 2018 and has an aggregate U.S. Dollar notional amount of $285.4 million. For the three months ended March 31, 2018 , the foreign currency transaction loss, net, consists of $1.0 million of foreign currency transaction gain , offset by a $2.0 million loss related to our foreign currency option.

Depreciation and amortization decreased from $14.6 million for the three months ended March 31, 2017 to $7.3 million for the three months ended March 31, 2018 , primarily as a result of the sale of the Singapore Portfolio and 50 Congress Street, partially offset by real estate investments made in 2018 . We expect depreciation and amortization to increase in future periods as a result of owning real estate acquired in 2018 for an entire period and future acquisitions of real estate properties, but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties.

Interest expense decreased from $9.4 million for the three months ended March 31, 2017 to $6.6 million for the three months ended March 31, 2018 , primarily as a result of the paydown of debt on disposed properties. Excluded from interest expense was $0.6 million of interest capitalized to our investments in undeveloped land during each of the three months ended March 31, 2018 and 2017 . Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives and will decrease to the extent we dispose of properties and paydown debt.

During the three months ended March 31, 2018 , we received a distribution of $0.4 million related to our investment in the NIP Joint Venture. We recognized $0.1 million of income distributions and $0.3 million of return of capital from the NIP Joint Venture. During the three months ended March 31, 2017 , we received a distribution of $2.9 million related to our investment in the NIP Joint Venture. We recognized $1.9 million of income distributions and $1.0 million of return of capital from the NIP Joint Venture.

Equity in loss of unconsolidated joint ventures increased from $0.2 million for the three months ended March 31, 2017 to $2.4 million for the three months ended March 31, 2018 , primarily as a result of the equity in loss related to the 110 William Joint Venture, primarily due to increased interest expense, and the equity in loss related to 353 Sacramento, which has been accounted for as an unconsolidated joint venture under the equity method of accounting beginning July 2017.

Other interest income increased from $25,000 for the three months ended March 31, 2017 to $0.9 million for the three months ended March 31, 2018 , primarily as a result of increased dividends from our investment in money market mutual funds with the net cash proceeds from the sale of properties in 2017 .

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Unrealized loss on real estate equity securities was $16.0 million during the three months ended March 31, 2018 , primarily as a result of decreases in share prices of our investments in real estate equity securities and the adoption of ASU 2016-01.

During the three months ended March 31, 2017 , we had no dispositions. During the three months ended March 31, 2018 , we sold 26 acres of undeveloped land that resulted in a gain on sale of $0.6 million , which is net of deferred profit of $0.3 million related to proceeds received from the purchaser for the value of land that was contributed to a master association that we consolidated.

Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses); adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Institute for Portfolio Alternatives (“IPA”) in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance, as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land.

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs, prior to our early adoption of ASU No. 2017-01 on January 1, 2017, from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, the amortization of discounts and closing costs, unrealized loss on real estate equity securities and mark to market foreign currency transaction adjustment are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

•

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

•

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate;

•

Amortization of discounts and closing costs. Discounts and closing costs related to debt investments are amortized over the term of the loan as an adjustment to interest income. This application results in income recognition that is different than the underlying contractual terms of the debt investments. We have excluded the amortization of discounts and closing costs related to our debt investments in our calculation of MFFO to more appropriately reflect the economic impact of our debt investments, as discounts will not be economically recognized until the loan is repaid and closing costs are essentially the same as acquisition fees and expenses on real estate (discussed below). We believe excluding these items provides investors with a useful supplemental metric that directly addresses core operating performance;

•

Unrealized losses on real estate equity securities. Upon our adoption of ASU No. 2016-01 on January 1, 2018, unrealized gains and losses on real estate securities are recognized in earnings. This is a non-cash mark-to-market adjustment which is included in net income which we have excluded in our calculation of MFFO to more appropriately reflect our ongoing operating performance, as these gains or losses will not be realized until the real estate equity securities are sold; and

•

Mark-to-market foreign currency transaction adjustments. The U.S. Dollar is our functional currency. Transactions denominated in currency other than our functional currency are recorded upon initial recognition at the exchange rate on the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are remeasured at each reporting date into the foreign currency at the exchange rate on that date. In addition, we have entered into foreign currency collars and foreign currency options that results in a foreign currency transaction adjustment. These amounts can increase or reduce net income. We exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis.

Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain of our investments in undeveloped land. We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net loss , FFO and MFFO.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the three months ended March 31, 2018 and 2017 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Three Months Ended March 31,
	2018			2017
Net loss attributable to common stockholders	$	(23,681	)	$	(9,092	)
Depreciation of real estate assets	4,118			8,507
Amortization of lease-related costs	3,147			6,093
Gain on sale of real estate ⁽¹⁾	(624		)	—
Adjustments for noncontrolling interests - consolidated entities ⁽²⁾	(121		)	(120		)
Adjustments for investments in unconsolidated entities ⁽³⁾	3,339			1,950
FFO attributable to common stockholders	(13,822		)	7,338
Straight-line rent and amortization of above- and below-market leases	(901		)	(1,819		)
Amortization of discounts and closing costs	(107		)	(69		)
Unrealized loss on real estate equity securities	16,011			—
Amortization of net premium/discount on bond and notes payable	14			11
Unrealized (gain) loss on interest rate caps	(31		)	57
Mark-to-market foreign currency transaction loss , net	997			4,671
Adjustments for noncontrolling interests - consolidated entities ⁽²⁾	3			(13		)
Adjustments for investments in unconsolidated entities ⁽³⁾	(656		)	(1,199		)
MFFO attributable to common stockholders	1,508			8,977
Other capitalized operating expenses ⁽⁴⁾	(746		)	(649		)
Adjusted MFFO attributable to common stockholders	$	762		$	8,328

_____________________

⁽¹⁾ Reflects an adjustment to eliminate gain on sale of undepreciated land.

⁽²⁾ Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO.

⁽³⁾ Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO for our equity investments in unconsolidated joint ventures.

⁽⁴⁾ Reflects real estate taxes, property insurance and financing costs that are capitalized with respect to certain of our investments in undeveloped land. During the periods in which we are incurring costs necessary to bring these investments to their intended use, certain normal recurring operating costs are capitalized in accordance with GAAP and not reflected in our net loss , FFO and MFFO.

FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we continue to lease up vacant space and acquire additional assets. We expect FFO, MFFO and Adjusted MFFO to decrease as a result of dispositions.

Distributions

Distributions declared, distributions paid and cash flows provided by operations were as follows for the first quarter of 2018 (in thousands, except per share amounts):



	Distribution Declared		Distributions Declared Per Share		Distributions Paid ⁽¹⁾						Cash Flows Used In Operations
Period	Distribution Declared		Distributions Declared Per Share		Cash		Reinvested		Total		Cash Flows Used In Operations
First Quarter 2018	$	1,034	$	0.016	$	38,170	$	479	$	38,649	$	(5,013	)

_____________________

⁽¹⁾ On December 7, 2017, our board of directors authorized a Special Dividend of $3.61 per share of common stock payable in either shares of our common stock or cash to, and at the election of, the stockholders of record as of December 7, 2017 (the “Record Date”). The Special Dividend was paid on January 17, 2018 to stockholders of record as of the close of business on the Record Date. If stockholders elected all cash, their election was subject to adjustment such that the aggregate amount of cash to be distributed by us was a maximum of 20% of the total Special Dividend (the “Maximum Cash Distribution”), with the remainder paid in shares of common stock. The aggregate amount of cash paid by us pursuant to the Special Dividend and the actual number of shares of common stock issued pursuant to the Special Dividend depended upon the number of stockholders that elected cash or stock and whether the Maximum Cash Distribution was met. Accordingly, on January 17, 2018, we paid $37.6 million in cash. We issued $150.3 million in common stock pursuant to the Special Dividend on January 17, 2018, which has been excluded from the distributions paid in the table.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

On March 8, 2018 , our board of directors authorized a distribution in the amount of $0.01597500 per share of common stock to stockholders of record as of the close of business on March 16, 2018 . We paid this distribution on March 21, 2018 and this was the only distribution declared during the first quarter of 2018 .

For the three months ended March 31, 2018 , we paid aggregate distributions of $38.6 million , including $38.2 million of distributions paid in cash and $0.5 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the three months ended March 31, 2018 was $23.7 million and our cash flows used in operations were $5.0 million . Our cumulative distributions paid and net income attributable to common stockholders from inception through March 31, 2018 were $159.3 million (which excludes the $150.3 million in common stock issued pursuant to the Special Dividend discussed above) and $129.4 million , respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with proceeds from debt financing of $18.7 million , proceeds from the dispositions of property of $51.3 million and cash provided by operations of $89.3 million . To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have fewer funds available for investment in real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC. There have been no significant changes to our policies during 2018 , except for our adoption of the revenue recognition and financial instruments standards issued by the Financial Accounting Standards Board effective on January 1, 2018.

Revenue Recognition

Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s adoption. Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. We elected to apply this standard only to contracts that were not completed as of January 1, 2018.

Based on our evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at our properties. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. For the three months ended March 31, 2018 , tenant reimbursements for substantial services accounted for under ASU No. 2014-09 were $0.4 million , which was included in tenant reimbursements on the accompanying statements of operations.

Sale of Real Estate

Prior to January 1, 2018, gains on real estate sold were recognized using the full accrual method at closing when collectibility of the sales price was reasonably assured, we were not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. Gain on sales of real estate may have been deferred in whole or in part until the requirements for gain recognition had been met.

Effective January 1, 2018, we adopted the guidance of ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, our sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09. Under ASC 610-20, if we determine it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. As a result of the adoption of ASC 610-20 on January 1, 2018, we recorded a cumulative effect adjustment to increase retained earnings by $2.5 million to recognize the deferred gain from the sale of 102 developable acres at Park Highlands that closed on May 1, 2017, as control of the sold acres had transferred to the buyers at closing.

Real Estate Equity Securities

Our real estate equity securities are carried at their estimated fair value based on quoted market prices for the security, net of any discounts for restrictions on the sale of the security. Any discount for lack of marketability is estimated using an option pricing model. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis.

Prior to our adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, we classified our investments in real estate equity securities as available-for-sale and unrealized gains and losses were reported in accumulated other comprehensive income (loss). Upon the sale of a security, the previously recognized unrealized gain (loss) would be reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) recognized in earnings. Effective January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings.

Investment in Unconsolidated Joint Ventures

Equity Investment Without Readily Determinable Value

Prior to the adoption of ASU No. 2016-01 on January 1, 2018, we accounted for investments in unconsolidated joint venture entities in which we did not have the ability to exercise significant influence and had virtually no influence over partnership operating and financial policies using the cost method of accounting. Under the cost method, income distributions from the partnership were recognized in other income. Distributions that exceed our share of earnings were applied to reduce the carrying value of our investment and any capital contributions increased the carrying value of our investment. On a quarterly basis, we evaluated our cost method investment in an unconsolidated joint venture for other-than-temporary impairments. The fair value of a cost method investment was not estimated if there were no identified events or changes in circumstances that indicated a significant adverse effect on the fair value of the investment.

In accordance with ASU No. 2016-01, we may elect to measure an equity investment without a readily determinable value that does not qualify for the practical expedient to estimate fair value using the net asset value per share, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We elected to measure our investment in the NIP Joint Venture in accordance with the above guidance, applying it prospectively.

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Probable Real Estate Acquisition

Eight & Nine Corporate Centre

On April 11, 2018 , we, through an indirect wholly owned subsidiary, entered into a purchase and sale agreement to purchase an office property consisting of two buildings containing an aggregate of 311,864 rentable square feet located on an aggregate of 27.6 acres of land in Franklin, Tennessee (“Eight & Nine Corporate Centre”). The seller is not affiliated with us or our advisor. The contractual purchase price of Eight & Nine Corporate Centre is $73.0 million plus closing costs. Pursuant to the purchase and sale agreement, we would be obligated to purchase the property only after satisfactory completion of agreed upon closing conditions. There can be no assurance that we will complete the acquisition. In some circumstances, if we fail to complete the acquisition, we may forfeit up to $7.0 million of earnest money.

Eight & Nine Corporate Centre was built in 2007 and as of May 1, 2018 was approximately 82% leased to 15 tenants.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Self-Tender Offer

On April 23, 2018 , we commenced a self-tender offer (the “Self-Tender”) for up to 8,234,217 shares at a price of $10.93 per share, or approximately $90 million of shares. Unless extended or withdrawn, the Self-Tender will expire at midnight Eastern Time on or about Friday, May 18, 2018 .

We are conducting the Self-Tender in order to make liquidity available to stockholders in excess of that permitted under its share redemption program (the “SRP”), which recently has been limited to $3 million per quarter for ordinary redemptions. In connection with its approval of the Self-Tender, our board of directors approved the reopening of the SRP for the June 2018 redemption period. Because of the Self-Tender, the SRP has been suspended since the March 2018 redemption period and will not reopen until the June 2018 redemption period, meaning no redemptions have been or will be made in March, April or May 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). We have cancelled all outstanding redemption requests under the SRP and are not accepting any redemption requests under the SRP during the term of the Self-Tender.

The Self-Tender price of $10.93 per share is 95% of our most recent estimated value per share and will be paid in cash, less any applicable withholding taxes and without interest, as further described in the offer to purchase and letter of transmittal filed with the SEC. The full details of the Self-Tender, including complete instructions on how to tender shares, is included in the offer to purchase, the letter of transmittal and other related materials, which we have made available to stockholders and filed with the SEC upon commencement of the Self-Tender.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity, fund distributions and to fund the refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans and the acquisition of real estate securities. We are also exposed to the effects of foreign currency changes in Israel with respect to the 4.25% bonds issued to investors in Israel in March 2016. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes and foreign currency changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. In order to limit the effects of changes in foreign currency on our operations, we may utilize a variety of foreign currency hedging strategies such as cross currency swaps, forward contracts, puts or calls. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments. Additionally, certain of these strategies may cause us to fund a margin account periodically to offset changes in foreign currency rates which may also reduce the funds available for payments to holders of our common stock.

As of March 31, 2018 , we had entered into one foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar. The foreign currency option expires in August 2018 and has an aggregate U.S. Dollar notional amount of $285.4 million . We have the right, but not the obligation, to purchase up to 970.2 million Israeli Shekels at the rate of ILS 3.4 per USD.

As of March 31, 2018 , we held 0.1 million Israeli new Shekels and 20.8 million Israeli new Shekels in cash and restricted cash, respectively. In addition, as of March 31, 2018 , we had bonds outstanding and the related interest payable in the amounts of 970.2 million Israeli new Shekels and 3.4 million Israeli new Shekels, respectively. Foreign currency exchange rate risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates. Based solely on the remeasurement for the three months ended March 31, 2018 , if foreign currency exchange rates were to increase or decrease by 10%, our net income would increase or decrease by approximately $24.8 million and $30.3 million for the same period, respectively. The foreign currency transaction income or loss as a result of the change in foreign currency exchange rates does not take into account any gains or losses on our foreign currency option as a result of such change, which would reduce our foreign currency exposure.

We borrow funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of March 31, 2018 , the fair value of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was $285.2 million and the outstanding principal balance was $277.8 million . As of March 31, 2018 , excluding the KBS SOR (BVI) Holdings, Ltd. Series A Debentures, the fair value of our fixed rate debt was $32.0 million and the outstanding principal balance of our fixed rate debt was $30.6 million . The fair value estimate of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was calculated using the quoted bond price as of March 31, 2018 on the Tel Aviv Stock Exchange of 102.66 Israeli new Shekels. The fair value estimate of our fixed rate debt was calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated as of March 31, 2018 . As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting changes in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on variable rate debt would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of March 31, 2018 , we were exposed to market risks related to fluctuations in interest rates on $390.5 million of variable rate debt outstanding. As of March 31, 2018 , we had entered into an interest rate cap with a notional amount of $46.9 million that effectively limits one-month LIBOR at 3.0% effective February 21, 2017 through February 13, 2020 . Based on interest rates as of March 31, 2018 , if interest rates were 100 basis points higher or lower during the 12 months ending March 31, 2019 , interest expense on our variable rate debt would increase or decrease, respectively, by $3.9 million .

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 3.	Quantitative and Qualitative Disclosures about Market Risk (continued)

The weighted-average interest rates of our fixed rate debt and variable rate debt as of March 31, 2018 were 4.3% and 3.7% , respectively. The interest rate and weighted-average interest rate represent the actual interest rate in effect as of March 31, 2018 (consisting of the contractual interest rate and the effect of contractual floor rates, if applicable), using interest rate indices as of March 31, 2018 where applicable.

We are exposed to financial market risk with respect to our real estate equity securities. Financial market risk is the risk that we will incur economic losses due to adverse changes in our real estate equity security prices. Our exposure to changes in real estate equity security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market prices of a real estate equity security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. In addition, amounts realized in the sale of a particular security may be affected by the relative quantity of the real estate equity security being sold. We do not currently engage in derivative or other hedging transactions to manage our real estate equity security price risk. As of March 31, 2018 , we owned real estate equity securities with a book value of $89.0 million . Based solely on the prices of real estate equity securities for the three months ended March 31, 2018 , if prices were to increase or decrease by 10%, our net income would increase or decrease, respectively, by approximately $9.0 million .

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 4.	Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents


PART II.	OTHER INFORMATION


Item 1.	Legal Proceedings

None.


Item 1A.	Risk Factors

In addition to the risk discussed below, please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC.

Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to our company, our directors, our officers or our employees (we note we currently have no employees). This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or employees, which may discourage meritorious claims from being asserted against us and our directors, officers and employees. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. We adopted this provision because we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements, and we believe the risk of a court declining to enforce this provision is remote, as the General Assembly of Maryland has specifically amended the Maryland General Corporation Law to authorize the adoption of such provisions.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds


a)	During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.


b)	Not applicable.


c)	We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

Pursuant to the share redemption program there are several limitations on our ability to redeem shares:


•	Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.


•	During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.


•	We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

•

We may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that we redeem less than $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) in a given fiscal quarter, any remaining excess capacity to redeem shares in such fiscal quarter will be added to our capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during succeeding fiscal quarters. The last $1.0 million of net proceeds from the dividend reinvestment plan during the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” with any excess funds being available to redeem shares not requested in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” during the December redemption date in the current year. We may increase or decrease this limit upon ten business days’ notice to stockholders. Our board of directors may approve an increase in this limit to the extent that we have received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors.

Table of Contents


PART II.	OTHER INFORMATION (CONTINUED)


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds (continued)

We may amend, suspend or terminate the program upon 10 business days’ notice to our stockholders. We may provide notice to our stockholders by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

In anticipation of a self-tender offer in order to make liquidity available to stockholders in excess of that permitted under the share redemption program, on March 14, 2018 , our board of directors approved a temporary suspension of the share redemption program starting with the March 2018 redemption period, including any unsatisfied requests from prior redemption periods.In connection with its approval of the Self-Tender (defined below), our board of directors approved the reopening of the share redemption program for the June 2018 redemption period, meaning no redemptions have been or will be made in March, April or May 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). We have cancelled all outstanding redemption requests under the share redemption program and are not accepting any redemption requests under the share redemption program during the term of the Self-Tender.

On April 23, 2018 , we commenced a self-tender offer (the “Self-Tender”) for up to 8,234,217 shares at a price of $10.93 per share, or approximately $90 million of shares.

During the three months ended March 31, 2018 , we fulfilled redemption requests eligible for redemption under our share redemption program and received in good order and funded redemptions under our share redemption program with the net proceeds from our dividend reinvestment plan and cash on hand. We redeemed shares pursuant to our share redemption program as follows:



Month	Total Number of Shares Redeemed	Average Price Paid Per Share ⁽¹⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2018	407,046	$	10.97	⁽²⁾
February 2018	12,526	$	11.50	⁽²⁾
March 2018	—	$	—	⁽²⁾
Total	419,572

_____________________

⁽¹⁾ On December 8, 2016, our board of directors adopted a tenth amended and restated share redemption program (the “Tenth Amended Share Redemption Program”). Pursuant to the Tenth Amended Share Redemption Program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence,” the price at which we will redeem shares is 95% of our most recent estimated value per share as of the applicable redemption date. The Tenth Amended Share Redemption Program was effective on December 30, 2016. The Tenth Amended Share Redemption Program was suspended from March 2018 through May 2018 , meaning no redemptions were made in March 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). We have cancelled all outstanding redemption requests under the share redemption program and are not accepting any redemption requests under the share redemption program during the term of the Self-Tender.

On December 7, 2017, our board of directors approved an estimated value per share of our common stock of $11.50. The change in the redemption price became effective for the January 2018 redemption date and is effective until the estimated value per share is updated. We expect to update our estimated value per share no later than December 2018. As a result of the Special Dividend paid in January 2018, our board of directors delayed the processing of redemptions that would otherwise occur on the last business day of December 2017 under the share redemption program until the last business day of January 2018. Any submission or withdrawal deadlines associated with such delayed redemptions were moved to their corresponding dates in January 2018. For purposes of all the volume and funding limitations under the share redemption program, such delayed redemptions and any other redemption requests received and processed in January are deemed to have occurred in December 2017 rather than January 2018.

⁽²⁾ We limit the dollar value of shares that may be redeemed under the program as described above. During the three months ended March 31, 2018 , we redeemed $4.6 million of common stock, of which $4.4 million relates to delayed December 2017 redemptions. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2017 , we have $8.5 million available for all redemptions in the remainder of 2018 , including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence” subject to the limitations described above.


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.


Item 5.	Other Information

None.

Table of Contents


PART II.	OTHER INFORMATION (CONTINUED)


Item 6.	Exhibits



Ex.		Description

3.1		Second Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed February 4, 2010

3.2		Second Amended and Restated Bylaws, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 17, 2016

4.1		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, Commission File No. 333-156633 filed February 25, 2009

4.2		Fifth Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2015

10.1		Purchase and Sale Agreement between DOF II City Tower LLC and KBS Capital Advisors LLC, dated January 17, 2018, incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-11/A, Commission File No. 333-214819, filed February 9, 2018

10.2		Assignment and Assumption of Purchase Agreement between KBS Capital Advisors LLC and KBS SOR City Tower, LLC, dated February 1, 2018, incorporated by reference to Exhibit 10.27 to the Company's Registration Statement on Form S-11/A, Commission File No. 333-214819, filed February 9, 2018

10.3		Loan Agreement by and among KBS SOR City Tower, LLC, BBVA Compass and the lenders party thereto, dated March 6, 2018

10.4		Deed of Trust, Security Agreement, Fixture Filing and Assignment of Leases and Rents by KBS SOR City Tower, LLC to Ben Hayes Riggs in favor of Compass Bank, dated March 6, 2018

10.5		Note by KBS SOR City Tower, LLC in favor of Compass Bank, dated March 6, 2018

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

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

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

99.1		Tenth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K filed December 15, 2016

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

Table of Contents

SIGNATURES

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 thereunto duly authorized.




		KBS STRATEGIC OPPORTUNITY REIT, INC.

Date:	May 11, 2018	By:	/S/ K EITH D. H ALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Date:	May 11, 2018	By:	/S/ J EFFREY K. W ALDVOGEL
			Jeffrey K. Waldvogel
			Chief Financial Officer, Treasurer and Secretary
			(principal financial officer)

Exhibit 10.3

LOAN AGREEMENT

Dated March 6, 2018

among

KBS SOR CITY TOWER, LLC,

as Borrower

BBVA COMPASS,

as Administrative Agent, Sole Lead Arranger and Sole Bookrunner

and

the Lenders party hereto

TABLE OF CONTENTS



			Page
ARTICLE I DEFINITIONS			6
	1.1	Defined Terms	6

ARTICLE II THE LOAN			21
	2.1	The Loan	21
	2.2	Repayment	22
	2.3	Interest	25

ARTICLE III GENERAL PROVISIONS CONCERNING THE LOAN			25
	3.1	Use of Proceeds	25
	3.2	Repayment Amounts	25
	3.3	Default Interest and Late Fees	25
	3.4	Computation of Interest and Fees; Determinations by Administrative Agent	26
	3.5	Payments	26
	3.6	Payment on Non-Business Days; Non-Payment Dates	27
	3.7	Inability to Determine Interest Rate; Ineffective Interest Rate	27
	3.8	Increased Cost and Reduced Return; Capital Adequacy	27
	3.9	Calculations	28
	3.10	insurance Premium and Tax Payments	29
	3.11	Cash Management	29

ARTICLE IV CONDITIONS OF LENDING			30
	4.1	Conditions Precedent to Making the Loan	30

ARTICLE V REPRESENTATIONS AND WARRANTIES			33
	5.1	Organization	33
	5.2	Authorization	33
	5.3	No Conflict	33
	5.4	Governmental Approval	33
	5.5	Validity	33
	5.6	Financial Matters	33
	5.7	Ownership	34
	5.8	No Other Ownership Interests	34
	5.9	Insurance	34
	5.10	Litigation	34



	5.11	Employee Benefit Plans	34
	5.12	Environmental Matters	34
	5.13	Title to Properties; Liens	35
	5.14	Payment of Taxes	35
	5.15	Governmental Regulation	35
	5.16	Governmental Approvals, Intellectual Property etc	35
	5.17	Labor Disputes	35
	5.18	Compliance	35
	5.19	Margin Stock	35
	5.20	Name and Organization	36
	5.21	Solvency	36
	5.22	Disclosure	36
	5.23	Subdivision; Streets; Utilities	36
	5.24	Single Purpose Entity	36
	5.25	Casualty	36
	5.26	No Material Adverse Change	36

ARTICLE VI COVENANTS			36
	6.1	Financial Information/Reporting	36
	6.2	Notices and Information	38
	6.3	Existence, Etc	39
	6.4	Payment of Obligations	39
	6.5	Maintenance of Properties	39
	6.6	Insurance	39
	6.7	Casualty/Condemnation	42
	6.8	Inspection	43
	6.9	Compliance with Laws, Etc.	43
	6.10	Books and Records	43
	6.11	Maintenance of Permits, Etc.	43
	6.12	Leasing Restrictions	44
	6.13	Defaults Under Leases	45
	6.14	Material Notices	45
	6.15	Required Repairs	45
	6.16	Use of Premises	45
	6.17	No Commingling of Funds/Accounts	46

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	6.18	Personal Property	46
	6.19	Appraisals	46
	6.20	Loss of Note	46
	6.21	Site Visits, Observations and Testing	46
	6.22	Single Purpose Entity	47
	6.23	Underground Storage Tank Removal and Remediation	48
	6.24	Hedging Contracts	49
	6.25	Guarantor Impairment	49
	6.26	Capital Improvements Reserve	49

ARTICLE VII NEGATIVE COVENANTS			50
	7.1	Liens, Etc.	50
	7.2	Debt	50
	7.3	Mezzanine Debt	50
	7.4	Borrower as Tenant	50
	7.5	Equity Payments, Etc.	50
	7.6	Fundamental Changes; Change in Control	50
	7.7	Loans, Investments, Contingent Liabilities	51
	7.8	Asset Sales	51
	7.9	Transactions with Affiliates	51
	7.10	Conduct of Business	51
	7.11	Fiscal Year	51
	7.12	Limitation on Other Restrictions on Amendment of the Loan Documents	51
	7.13	Limitations on Modifications of Certain Agreements and Instruments	51
	7.14	Property Management and Leasing Agreements	51

ARTICLE VIII EVENTS OF DEFAULT			52
	8.1	Events of Default	52
	8.2	Application of Funds	54

ARTICLE IX MISCELLANEOUS			55
	9.1	Amendments, Etc.	55
	9.2	No Implied WAiver; Remedies Cumulative	55
	9.3	Notices	55
	9.4	Expenses	57
	9.5	Indemnity	58
	9.6	Protective Advances	58

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	9.7	Assignments and Participations	58
	9.8	Entire Agreement	64
	9.9	Survival	64
	9.10	Counterparts	65
	9.11	Severability	65
	9.12	Headings	65
	9.13	Set-off	65
	9.14	Usury	65
	9.15	Confidential Information	66
	9.16	Binding Effect	67
	9.17	Governing Lay	67
	9.18	Waiver of Jury Trial	67
	9.19	Consent to Jurisdiction; Venue	67
	9.20	Customer Identification - USA Patriot Act Notice; OFAC	67
	9.21	Limitation of Liability	68
	9.22	Construction	68
	9.23	Status of Parties	69
	9.24	Credit Support Document	69
	9.25	Omitted	69
	9.26	Exculpation	69

ARTICLE X ADMINISTRATIVE AGENT			70
	10.1	Appointment	70
	10.2	Reliance on Administrative Agent	70
	10.3	Powers	70
	10.4	Disbursements	70
	10.5	Distribution and Apportionment of Payments	71
	10.6	Consents and Approval	75
	10.7	Agency Provisions Relating to Collateral	78
	10.8	Lender Actions Against Borrower or the Collateral	79
	10.9	Assignment and Participation to Borrower or Guarantor	79
	10.10	Ratable Sharing	79
	10.11	General Immunity	80
	10.12	No Responsibility for Loan, Recitals	80
	10.13	Action on Instructions of the Lenders	80

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10.14	Employment of Agents and Counsel	80
10.15	Reliance on Documents; Counsel	81
10.16	Administrative Agent's Reimbursement and Indemnification	81
10.17	Rights as a Lender	81
10.18	Lenders' Credit Decisions	82
10.19	Notice of Events of Default	82
10.20	Successor Administrative Agent	82
10.21	Evidence of Exemption from Withholding Taxes	83



EXHIBITS

Exhibit A		Form of Request for Extension
Exhibit B		Omitted
Exhibit C		Form of Compliance Certificate
Exhibit D		Form of Tenant Direction Notice
Exhibit E		Form of Assignment and Assumption Agreement
Exhibit F		Additional Advance/Reserve Release Conditions

SCHEDULES

Schedule 2.1		Commitments and Percentages
Schedule 5.7		Organizational Chart
Schedule 5.10		Litigation
Schedule 6.15		Required Repairs
Schedule 6.26		Required Capital Improvements

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LOAN AGREEMENT

THIS LOAN AGREEMENT , dated this 6 ^th day of March, 2018, among KBS SOR CITY TOWER, LLC , a Delaware limited liability company (“ Borrower ”), and COMPASS BANK , an Alabama banking corporation, and any successors appointed pursuant to this Agreement, as administrative agent (“ Administrative Agent ”) and in its capacity as the sole lead arranger and sole bookrunner (in such capacities, “ Sole Lead Arranger ” and “ Sole Bookrunner ,” respectively) and the lenders party hereto (each a “ Lender ”, and collectively, the “ Lenders ”). The parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I
DEFINITIONS

1.1 Defined Terms .

In addition to terms defined elsewhere in this Agreement, as used in this Agreement, the following terms have the following meanings:

“ Accounting Principles ”: As used herein and in any certificate or other document made or delivered pursuant hereto, accounting terms not defined in Section 1.1 , and accounting terms partly defined in Section 1.1 to the extent not defined, shall have the respective meanings given to them under GAAP. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and Borrower or Administrative Agent shall so request, Administrative Agent and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP; provided that , until so amended, such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein.

“ Additional Advance ”: Shall have the meaning set forth in Section 2.1(b) .

“ Adjusted Rent Concessions ”: Means (i) all free-rent periods or abatements (x) in excess of one month per year of Lease term, or (y) in excess of ten months of free rent, and (ii) all above-market amounts paid or foregone by Borrower directly to or on behalf of any tenant for the purpose of inducing such tenant to enter into a Lease, including, without limitation, tenant improvement allowances, moving expenses, and/or assumptions or buyouts of the tenant’s obligations under other leases as may be adjusted by Administrative Agent. The term “above-market” shall be understood to mean amounts in excess of those assumed in the then most recent Appraisal for the Premises, or, with respect to tenant improvement costs, such other amount as may be approved by Administrative Agent in its discretion. Administrative Agent shall have the right to adjust any concessions based, in part and as applicable, upon assumptions set forth in the then most current Appraisal for the Premises in question. All Adjusted Rent Concessions shall be amortized over the full Lease term with annual amortization only to be deducted for the purpose of determining Net Operating Income. (Example: Concessions in the form of above-market “tenant improvements” for a five (5) year lease term total $100,000; the annualized deduction in determining shall be $20,000).

“ Adjusted Rent Rate ”: Means the following percentages: If the tenant under the applicable Lease has not yet commenced paying rent, but will commence paying rent (i) in the first

calendar month immediately following the date of determination, then one hundred percent (100%) of the applicable tenant’s first year rent; (ii) in the second calendar month immediately following the date of determination, ninety-two percent (92%) of the applicable tenant’s first year rent; (iii) in the third month of the calendar quarter immediately following the date of determination, eighty-three percent (83%) of the applicable tenant’s first year rent; and (iv) thereafter as reasonably determined by Administrative Agent; in each case excluding any Adjusted Rent Concessions.

“ Affiliate ”: As applied to any Person (the “ Specified Person ”), any other Person directly or indirectly controlling, controlled by, or under common control with, the Specified Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling”, “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Specified Person, whether through the ownership of voting securities or by contract or otherwise.

“ Administrative Agent ”: Has the meaning set forth in the introductory paragraph hereof.

“ Agreement ”: This Loan Agreement, as amended, supplemented or modified from time to time.

“ Applicable Margin ”: 2.00% with respect to Base Rate Loans, and 1.55% with respect to LIBOR Loans.

“ Appraisal ”: A FIRREA conforming appraisal of the Premises, delivered at the sole cost and expense of Borrower, which appraisal must be satisfactory to Administrative Agent, in its sole and absolute discretion.

“ Assignment and Assumption ”: Has the meaning set forth in Section 9.7 hereof.

“ Assignment of Leases ”: That certain Assignment of Leases and Rents dated or effective of even date herewith executed by Borrower in favor of Administrative Agent, as it may be from time to time amended, modified, extended, renewed, substituted, and/or supplemented.

“ Bail-In Action ” shall mean the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.

“ Bail-In Legislation ” shall mean, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.

“ Base Rate ”: The interest rate per annum published in the New York edition of The Wall Street Journal from time to time as the “Prime Rate”. If The Wall Street Journal ceases to publish the “Prime Rate,” Administrative Agent shall select an alternate publication that publishes

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such “Prime Rate,” and if such “Prime Rates” are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, then Administrative Agent shall select a comparable interest rate index. The Prime Rate is a non-managed rate based upon prevailing prime rates quoted in The Wall Street Journal . If multiple prime rates are quoted in the table, then the highest prime rate will be the Prime Rate. Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. Any change in the Base Rate resulting from a change in the Prime Rate shall become effective on the effective date of such change in the Prime Rate.

“ Base Rate Loan ”: Any portion of the Loan bearing interest at a rate based upon the Base Rate.

“ Business Day ”: A day other than a Saturday, Sunday or a day on which Administrative Agent is closed; provided that, for the purposes of determining LIBOR, the term “Business Day” shall also exclude any day on which banks are not open for dealings in U.S. dollar deposits in the London interbank market.

“ Capex/Renovation Advances ”: Has the meaning set forth in Section 2.1(b)(ii) .

“ Capital Improvements Reserve ”: Has the meaning set forth in Section 6.26 .

“ Capital Lease ”: Any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with Accounting Principles, is or is required to be accounted for as a capital lease on the balance sheet of that Person.

“ Cash Sweep Collateral Release ”: Means (i) no Event of Default has occurred and is continuing, and (ii) either (a) that the Debt Service Coverage Ratio (excluding the Cash Sweep Credit) shall have been equal to or in excess of 1.35:1.00 for two (2) consecutive DSCR Test Periods, or (b) Borrower permanently repays (without the necessity of paying a Prepayment Premium) a portion of the Loan (which may include any Sweep Collateral then being held in the Clearing Account pursuant to Section 3.11 ) in an amount sufficient to have caused such Debt Service Coverage Ratio (excluding the Cash Sweep Credit) to have been satisfied as of the applicable test date.

“ Cash Sweep Credit ”: Means an assumed application of any Sweep Collateral then being held by Administrative Agent to a reduction in the outstanding principal amount of the Loan in connection with the calculation of the Debt Service Coverage Ratio.

“ Cash Sweep Cure ”: Means (i) the date of delivery of notice from Administrative Agent to Borrower that the Debt Service Coverage Ratio (including the Cash Sweep Credit) shall have been equal to or in excess of 5 basis points in excess of the applicable Debt Service Coverage Ratio indicated in the definition of Cash Sweep Trigger for two (2) consecutive DSCR Test Periods following delivery of notice from Administrative Agent that a Cash Sweep Period has commenced, and (ii) no Event of Default shall have occurred and be continuing. In connection with the satisfaction of the Debt Service Coverage Ratio in item (i) above, Borrower may, at its election, either (a) permanently repay (without the necessity of paying a Prepayment Premium) a portion of the Loan (which may include any Sweep Collateral then being held in the Clearing Account pursuant to Section 3.11 ) in an amount sufficient to have caused such Debt Service Coverage Ratio (excluding the Cash Sweep Credit) to have been satisfied as of the applicable test date or (b) deposit additional

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Sweep Collateral pursuant to Section 3.11 with Administrative Agent, in an amount sufficient to caused such Debt Service Coverage Ratio (including the Cash Sweep Credit) to have been satisfied as of the applicable test date.

“ Cash Sweep Period ”: The period commencing upon the date of delivery of notice from Administrative Agent to Borrower that a Cash Sweep Trigger has occurred and continuing until delivery of notice from Administrative Agent that a Cash Sweep Cure has occurred.

“ Cash Sweep Trigger ”: The occurrence of any of the following:

(a) when Administrative Agent has determined that, (x) commencing from and after June 30, 2019, the Debt Service Coverage Ratio (determined as of the last day of any calendar quarter) was less than 1.15:1.0 (the “ First Cash Sweep DSCR Covenant ”), (y) commencing from and after June 30, 2020, the Debt Service Coverage Ratio (determined as of the last day of any calendar quarter) was less than 1.25:1.0 (the “ Second Cash Sweep DSCR Covenant ”), or (z) commencing after (1) the Debt Service Coverage Ratio was not less than 1.45 for two consecutive calendar quarters and (2) Borrower either has completed the Required Capital Improvements or funded the Capital Improvements Reserve, pursuant to Section 6.26 hereof, the Debt Service Coverage Ratio (determined as of the last day of any calendar quarter) was less than 1.30:1.0 (the “ Third Cash Sweep DSCR Covenant ,” and together with the First Cash Sweep DSCR Covenant and the Second Cash Sweep DSCR Covenant, the “ Cash Sweep DSCR Covenant ”); for purposes of calculating the Debt Service Coverage Ratio for a Cash Sweep Trigger, Gross Receipts shall be deemed to include rent at the Adjusted Rent Rate; or

(b) the occurrence of an Event of Default.

“ Change in Control ”: Any one or more of the following:

(a) KBS Strategic Opportunity REIT, Inc. shall cease to (i) beneficially own and control, directly or indirectly, free and clear of any Lien (other than Administrative Agent’s Lien), at least 51% of the issued and outstanding Ownership Interests of Borrower (without regard to the occurrence of any contingency), or (ii) control the day-to-day decisions of Borrower and any direct or indirect managing member or general partner of Borrower;

(b) Other than with respect to the shareholders in Sponsor, any equity interest of Borrower is owned beneficially or of record by a Person whose business and moral reputation is not reasonably acceptable to Administrative Agent or with respect to whom Administrative Agent has a policy against conducting business or is prohibited by Law from doing so;

(c) Other than with respect to the shareholders in Sponsor, any transfer of Ownership Interests of Borrower (i) in excess of 20%, in the aggregate, to any Person and its Affiliates who does not, as of the Closing Date hold in excess of a 20% Ownership Interest in Borrower, without 30 days prior notice to and written approval of Administrative Agent and the Lenders (provided, however, that the indirect ownership interest of Borrower may be transferred to a new entity that is wholly-owned (directly or indirectly) by Sponsor to effect a corporate reorganization and such transfer shall not be deemed to be a “Change in Control” requiring advance

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notice to, or approval by, Administrative Agent), or (ii) in violation of the USA Patriot Act or other anti-terrorism or anti-money laundering Laws.

Notwithstanding the foregoing, Permitted Transfers are expressly excluded from this definition of Change in Control.

“ Change in Law ”: Means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any Law, rule, regulation or treaty, (b) any change in any Law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.

“ Clearing Account ”: Means an account established by Borrower with Administrative Agent.

“ Closing Date ”: The date of this Agreement.

“ Code ”: The Internal Revenue Code of 1986, as amended, and any successor statute or provision thereof.

“ Collateral ”: All property, assets, contracts, interests, and rights on or in which a Lien is granted to Administrative Agent pursuant to this Agreement or any of the other Security Documents.

“ Commitment ”: Means, as to any Lender, other than a Participant, the maximum dollar amount which such Lender has agreed to loan to Borrower, upon the terms and subject to the conditions of this Agreement, as set forth on Schedule 2.1 attached hereto, as amended from time-to-time in accordance with each transfer of all or a portion of the Loan.

“ Commodity Exchange Act ”: The Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended from time to time and any successor statute.

“ Compliance Certificate ”: A certificate in the form of Exhibit C .

“ Debt ”: As applied to any Person, (a) all indebtedness for borrowed money, (b) that portion of obligations with respect to Capital Leases which is properly classified as a liability on a balance sheet in conformity with Accounting Principles, (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (d) any obligation owed for all or any part of the deferred purchase price of property or services (other

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than trade accounts payable arising in the ordinary course of business for which payment is due and is made within 90 days or less), (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured has been assumed by that Person or is nonrecourse to the credit of that Person, (f) obligations in respect of letters of credit, (g) obligations under Hedging Contracts (the amount of which shall be determined by reference to the termination cost on the date of determination), and (h) guarantees of, or similar obligations with respect to, any of the foregoing of any other Person.

“ Debt Service Coverage Ratio ”: As of the end of any calendar quarter, the ratio of (a) the Net Operating Income of Borrower for the trailing three-month period annualized (the “ DSCR Test Period ”) immediately preceding said date of determination to (b) the greater of (i) actual debt service on the Loan Amount payable during the applicable DSCR Test Period multiplied by 4, and deemed interest on any unadvanced Capex/Renovation Advances that have not been terminated multiplied by 4, and (ii) deemed interest and principal payments on the outstanding principal amount of the Loan, for the applicable DSCR Test Period in an amount sufficient to fully amortize the Loan (including any unadvanced Capex/Renovation Advances that have not been terminated), over a 30-year period with interest equal to the greater of (x) the U.S. Treasury rate for 10 year obligations at the time of such calculation plus 2.5% and (y) 5.75%, all as calculated and adjusted by Administrative Agent, in its reasonable discretion (which determination shall be conclusive, absent manifest error).

“ Default Rate ”: Five percent (5%) above the rate which would otherwise be applicable to the Loan pursuant to Section 2.3 .

“ Defaulting Lender ”: Has the meaning set forth in Section 10.5(b) hereof.

“ Defaulting Lender’s Loan Interest ”: Has the meaning set forth in Section 10.5(b) hereof.

“ Dollars ” and “ $ ”: The lawful currency of the United States of America.

“ DSCR Test Period ”: Has the meaning set forth in the definition of Debt Service Coverage Ratio.

“ Eligible Assignee ”: Means any of (I) a commercial bank organized under the Laws of the United States or any State thereof or organized under the Laws of any other country which is a member of the Organization of Economic Cooperation and Development, or a political subdivision of any such country, and having (x) total assets in excess of $1,000,000,000 and (y) a combined capital and surplus of at least $250,000,000; (I) a life insurance company organized under the Laws of any State of the United States, or organized under the Laws of any country and licensed as a life insurer by any State within the United States and having admitted assets of at least $1,000,000,000; (I) a nationally recognized investment banking company or other financial institution in the business of making loans, or an Affiliate thereof (other than Borrower or Guarantor or an Affiliate of Borrower or Guarantor) organized under the Laws of any State of the United States, and licensed or qualified to conduct such business under the Laws of any such State and having (x) total assets of at least $1,000,000,000 and (y) a net worth of at least $250,000,000; (I) a fund that is engaged in making, purchasing, holding or investing in bank loans and similar extensions

- 11 -

of credit in the ordinary course of its business and having (x) total assets of at least $500,000,000 and (y) a net worth of at least $125,000,000; or (I) any Affiliate of Administrative Agent, any other Person into which, or with which, Administrative Agent is merged, consolidated or reorganized, or which is otherwise a successor to Administrative Agent by operation of law, or which acquires all or substantially all of the assets of Administrative Agent, any other Person which is a successor to the business operations of Administrative Agent and engages in substantially the same activities, or any Affiliate of any of the foregoing.

“ Employee Benefit Plan ”: Any employee benefit plan which is described in Section 3(3) of ERISA and which is maintained for employees of Borrower or any ERISA Affiliate of Borrower.

“ Entity ”: Any corporation, partnership, trust, limited liability company or other business entity.

“ Environment ”: All air, surface water, water, vapor, groundwater, drinking water supply or land, including land surface or subsurface, and all fish, wildlife, biota, and all other natural resources.

“ Environmental Indemnity ”: The Environmental Indemnification Agreement dated on or about the Closing Date, in form and substance satisfactory to Administrative Agent, executed and delivered by Borrower and Guarantor, on a joint and several basis, in favor of Administrative Agent, as amended, modified or supplemented from time to time.

“ Environmental Insurance ”: Has the meaning set forth in Section 6.6(g) .

“ Environmental Law ” and “ Environmental Laws ”: All federal, state, county and local environmental, land use, development, environmental quality, zoning, health, chemical use, safety and sanitation Laws, statutes, regulations, ordinances and codes relating to the protection of human health or the Environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Materials and the rules, regulations, policies, guidelines, interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto.

“ ERISA ”: The Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute.

“ ERISA Affiliate ”: As applied to any Person, any trade or business (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b), (c), (m), or (o) of the Code.

“ ERISA Event ”: Means (a) a “Reportable Event” described in Section 4043 of ERISA and the regulations issued thereunder (other than a “Reportable Event” not subject to the provision for 30 day notice to the Pension Benefit Guaranty Corporation under such regulations), or (b) the withdrawal of Borrower or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a “substantial employer” as defined in Section 4001(l) (2) or 4068(f) of ERISA,

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or (c) the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Code) or the failure to make by its due date a required installment under Section 412(m) of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; or (d) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA, or (e) the institution of proceedings to terminate a Pension Plan by the Pension Benefit Guaranty Corporation, or (f) the withdrawal of Borrower, any of its subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Borrower, any of its subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; or (g) the imposition of a lien pursuant to Section 412(n) of the Code.

“ EU Bail-In Legislation Schedule ” shall mean the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.

“ Event of Default ”: Has the meaning set forth in Section 8.1 .

“ Excluded Swap Obligation ”: With respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the guaranty of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap Obligation (or any guaranty thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the guaranty of such Guarantor or the grant of such security interest becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under an ISDA master agreement or other agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such guaranty or security interest is or becomes illegal.

“ Excluded Taxes ”: Means any of the following Taxes imposed on or with respect to Lenders or required to be withheld or deducted from a payment to any Lender, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Lender being organized under the Laws of, or having its principal office or its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) such Lender having some nexus with a taxing authority that is wholly unrelated to the Loan or any Loan Documents, (b) U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect an interest the Loan pursuant to a Law in effect (i) on the date hereof or (ii) on the date such Lender changes its lending office, except in each case to the extent that such Taxes were payable to such Lender immediately before it changed its lending office, (c) any U.S. federal withholding Taxes imposed under FATCA.

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“ FATCA ”: Means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 1471(b)(1) of the Code.

“ Fee Letter ”: Means the letter agreement, dated the date hereof, among Borrower, Administrative Agent, Sole Lead Arranger and Sole Bookrunner with respect to certain fees payable by Borrower in connection with the Loan, as the same may be modified or amended from time to time.

“ Funding Date ”: shall have the meaning set forth in Section 10.4 hereof.

“ GAAP ”: United States generally accepted accounting principles applied on a consistent basis.

“ Governmental Approval ”: Any approval, order, consent, authorization, certificate, license, permit or validation of, or exemption or other action by, or filing, recording or registration with, or notice to, any Governmental Authority.

“ Governmental Authority ”: The government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory board, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

“ Gross Receipts ”: As of any date of determination thereof, all actual, recurring revenue received by Borrower from the operation of the Premises during the applicable period immediately preceding said date of determination, including, without limitation, any and all rents received by Borrower and credit for rents at the Adjusted Rent Rate from tenants of the Premises in occupancy under binding leases, the terms of which have commenced, entered in compliance with the Loan Documents, but expressly excluding deposits, late fees, lease termination payments, delinquent recoveries and any non-recurring revenue and/or other revenue derived from any Lease (a) whose tenant is in bankruptcy or is the subject of any other insolvency proceeding, (b) which has expired and not been renewed, (c) whose tenant is in default under such Lease, beyond any applicable grace and/or cure period; (d) which is entered into by Borrower, as landlord, with any Guarantor, any Affiliate of Borrower or any Guarantor, or Borrower itself, as tenant; (e) which expires within three (3) months after the applicable DSCR Test Period; and (f) whose tenant has delivered a notice of termination to Borrower or Manager if such termination is to become effective within twelve (12) months after the applicable DSCR Test Period; provided , however , that prepaid rents and prepaid parking charges (if any) shall spread over the time period to which they pertain. Gross Receipts shall include an adjustment for vacancy equal to the greater of 10% and the actual vacancy percentage.

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“ Guarantor ”: KBS SOR Properties, LLC, and any other Persons who execute and deliver a guaranty after the Closing Date to Administrative Agent for the benefit of the Lenders hereunder.

“ Guaranty ”: That certain Guaranty Agreement dated on or about the Closing Date, executed and delivered by Guarantor (on a joint and several basis if more than one Guarantor), to Administrative Agent for the benefit of the Lenders, as amended, modified or supplemented from time to time.

“ Hazardous Materials ”: Means (a) Any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollution, contaminant, or any related material, raw material, substance, product, or by product of any substance specified in or regulated or otherwise affected by any Environmental Law, (b) any toxic chemical or other substance from or related to industrial, commercial, or institutional activities, (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil, and other petroleum products or compounds, polychlorinated biphenyls, radon gas, and urea formaldehyde, and (d) all other substances or waste of any nature regulated pursuant to any Environmental Law.

“ Hedge Pledge ”: A collateral assignment of any Hedging Contract to Administrative Agent for the benefit of the Lenders in form and substance reasonably satisfactory to Administrative Agent.

“ Hedging Contract ”: Any interest rate, currency, equity, credit or commodity swap, cap, floor or collar, spot or foreign currency exchange transaction, cross currency rate swap, currency option, any combination of, or option with respect to, any of the foregoing or similar transactions, for the purpose of hedging Borrower's exposure to fluctuations in interest rates, exchange rates, currency, stock, portfolio or loan valuations or commodity prices.

“ Improvements ”: Any and all buildings, structures and other improvements, existing and to be developed, built and constructed by Borrower on the Premises.

“ Indemnified Taxes ”: Means Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of Borrower or Guarantor under any Loan Document.

“ Interest Period ”: Initially, the period from the Closing Date up to but not including the first Payment Date, and thereafter, each period from a Payment Date up to but not including the immediately subsequent Payment Date.

“ Investor ”: Means any actual or potential purchaser, transferee, assignee, servicer, participant or investor in a Secondary Market Transaction.

“ ISDA Master Agreement ”: An ISDA Master Agreement, as in effect from time to time, including all schedules, confirmations and other documents delivered thereunder, pursuant to which Borrower, Administrative Agent, Lender or any Affiliate of any Lender may from time to time hereafter enter into interest rate hedging transactions.

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“ Law ” and “ Laws ”: Any Federal, state, or local law or laws (including common law), constitution, statute, treaty, convention, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority.

“ Lease ”: A lease for any portion of the Premises.

“ Lender Default Period ”: Has the meaning set forth in Section 10.5(b) hereof.

“ Lender Hedging Contract ”: Any Hedging Contract between any Borrower and any Lender or an Affiliate of any Lender.

“ Lender Reply Period ”: Has the meaning set forth in Section 10.6(d) hereof.

“ LIBOR ”: For each Interest Period, a rate per annum obtained by dividing (a) the London Interbank Offered Rate, as determined by ICE Benchmark Administration Limited (ICE) (or any successor or substitute therefor) for U.S. dollar deposits for a one-month period as obtained by Administrative Agent from Reuter's, Bloomberg or another commercially available source as may be designated by Lender from time to time, two (2) Business Days before the beginning of such Interest Period, by (b) a number equal to 1.00 minus the LIBOR Reserve Percentage. Notwithstanding the foregoing, LIBOR shall not in any event be less than 0.00%.

“ LIBOR Loan ”: Any portion of the Loan bearing interest at a rate based upon LIBOR.

“ LIBOR Reserve Percentage ”: For any day, the percentage, as determined in good faith by Lender, which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) representing the maximum reserve requirement (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to Eurocurrency funding (currently referred to as “Eurocurrency liabilities”) of a member bank in such System.

“ Lien ”: Any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest).

“ Loan ”: Has the meaning set forth in Section 2.1 .

“ Loan Documents ”: This Agreement, the Notes, the Security Documents, the Environmental Indemnity, the Guaranty, the Hedge Pledge (if any), and the Fee Letter executed in connection with the Loan, and each additional document, notice or certificate delivered to Administrative Agent by or on behalf of a Loan Party in connection with this Agreement, the credit extended hereunder, and/or the Collateral, together with all modifications, amendments, and restatements at any time made to any of the foregoing (but not any Hedging Contract).

“ Loan Party ”: Borrower and Guarantor and any other Affiliate of Borrower and/or Guarantor from time to time executing a Loan Document (other than Administrative Agent and the Lenders), and “Loan Parties” means all such Persons, collectively.

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“ Lockbox ”: A lockbox address established by Borrower with Administrative Agent.

“ Major Lease ”: Any Lease or affiliated Leases which, in the aggregate, are for more than 25,000 rentable square feet.

“ Management Agreement ”: Means that certain Real Estate Property Management Agreement, dated February 13, 2018 between Borrower and Manager for the management of the Premises.

“ Manager ”: Means Cushman & Wakefield U.S., Inc. or such other management company approved by Administrative Agent in accordance with Section 7.14 with whom Borrower enters into an agreement for the management of the Premises.

“ Material Adverse Effect ”: M eans (a) with respect to any Loan Party, a material adverse effect upon the condition (financial or otherwise), operations, performance, properties or prospects of such Loan Party that could reasonably be expected to impair, to a material extent, such Loan Party’s ability to perform its obligations under the Loan Documents; and (b) with respect to the Premises, a material adverse effect upon the physical condition of such Premises, or upon its operations, performance or prospects, that reduces the appraised value of the Premises to an amount that is less than eighty percent (80%) of the appraised value of the Premises as of the date hereof. The phrase “has a Material Adverse Effect” or “will result in a Material Adverse Effect” or words substantially similar thereto shall in all cases be intended to mean “has resulted, or will or could reasonably be anticipated to result, in a Material Adverse Effect”, and the phrase “has no (or does not have a) Material Adverse Effect” or “will not result in a Material Adverse Effect” or words substantially similar thereto shall in all cases be intended to mean “does not or will not or could not reasonably be anticipated to result in a Material Adverse Effect”.

“ Maturity Date ”: Means initially March 5, 2021, as such date may be extended pursuant to Section 2.2(d) or accelerated by Administrative Agent upon the occurrence of an Event of Default.

“ Mortgage ”: That certain Deed of Trust, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated or effective of even date herewith executed by Borrower in favor of Administrative Agent for the benefit of the Lenders, as it may be from time to time amended, modified, extended, renewed, substituted, and/or supplemented.

“ Multiemployer Plan ”: A “multiemployer plan” as defined in Section 3(37) of ERISA.

“ Net Operating Income ”: Means (a) Gross Receipts minus (b) Operating Expenses.

“ Non-Defaulting Lenders ”: Has the meaning set forth in Section 10.5(b) hereof.

“ Non-US Lender ”: Has the meaning set forth in Section 10.21(a) hereof.

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“ Notes ”: Has the meaning set forth in Section 2.1(c) .

“ Obligations ”: All obligations of every nature of the Loan Parties from time to time owed to Administrative Agent and/or the Lenders under the Loan Documents or under Lender Hedging Contracts, whether for principal interest, fees, expenses, indemnification, or otherwise, provided, that the Obligations of a Loan Party shall exclude any Excluded Swap Obligation with respect to such Loan Party.

“ Officer’s Certificate ”: A certificate signed by the Managing Member of Borrower.

“ Operating Account ”: Means a non-interest bearing depository account established and maintained by Borrower with Administrative Agent into which all Gross Receipts from the Premises will be deposited.

“ Operating Expenses ”: As of any date of determination thereof, all costs and expenses actually incurred and paid by Borrower to any third parties, whether or not related to Borrower, in the normal course of Borrower’s business and which directly relate to the leasing, operation and maintenance of the Premises, during the applicable period immediately preceding said date of determination, including, without limitation, (a) Real Estate Taxes; (b) insurance premiums; (c) utility costs; (d) advertising, legal and accounting fees; (e) repairs and maintenance; (f) a management fee equal to the greater of three percent (3%) of the annual Gross Receipts or the actual management fee for such period; (g) $0.20 per square foot per annum for capital expenditure reserves; and (h) adjustments for seasonality of operating expenses including, without limitation, tax and insurance payments and changes to occupancy; provided , however , that the payments of principal and interest required pursuant to this Agreement are specifically excluded from such calculation of Operating Expenses.

“ Ownership Interest ”: Means with respect to any Person, (a) any direct or indirect ownership or profit interests in, such Person, whether voting or non-voting, and including any partnership, membership or trust interests, (b) all securities or Debt convertible into or exchangeable for any of the foregoing, whether directly or indirectly, and (c) all warrants, options and other rights to purchase or acquire any of the foregoing, whether directly or indirectly.

“ Participant ”: Has the meaning set forth in Section 9.7(f) hereof.

“ Payment Date ”: The first Business Day of each month.

“ Pension Plan ”: Any Employee Benefit Plan other than a Multiemployer Plan which is subject to Section 412 of the Code or Section 302 of ERISA.

“ Percentage ”: Means as to any Lender, the ratio, expressed as a percentage, of (a) such Lender’s portion in dollars of the Loan (both funded and unfunded) as reflected in each Assignment and Assumption Agreement in which such Lender is the Eligible Assignee (but as reduced as to portions subsequently assigned by it to another Eligible Assignee) to (b) the Loan, as set forth on Schedule 2.1 , as amended from time-to-time in connection with each transfer of all or a portion of the Loan.

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“ Permits ”: Any permit, approval, authorization, license, certificate, variance, or permission required from a Governmental Authority under applicable Law.

“ Permitted Encumbrances ”: Means (a) liens for Taxes, assessments, or governmental charges not then due and payable and not then delinquent, (b) liens for Taxes, assessments, or governmental charges the validity of which are being contested in good faith by Borrower by appropriate proceedings and for which all required deposits or other security reasonably required by Administrative Agent in connection with such contest have been provided by Borrower, (c) liens created or contemplated by the Security Documents, (d) liens and exceptions in favor of or consented to in writing by Administrative Agent, including exceptions to the title described in the Title Commitment and consented to by Administrative Agent, (e) encroachments and areas of overlap shown on the survey of the Premises reviewed and approved by Administrative Agent in connection with the closing of the Loan, (f) mechanic’s liens, if bonded over by Borrower within forty-five (45) days, and (g) liens for Capital Lease obligations that do not exceed $100,000.00 in the aggregate.

“ Permitted Transfers ”:

(a) transfers (or the pledge or encumbrance) of equity interests or other interests in Guarantor, or in any of the direct or indirect owners of Guarantor (including, without limitation, KBS SOR (BVI) Holdings, Ltd., KBS Strategic Opportunity Limited Partnership, KBS Strategic Opportunity Holdings, LLC, or KBS Strategic Opportunity REIT, Inc.) provided that KBS Strategic Opportunity REIT, Inc. (or another entity approved by Administrative Agent and the Required Lenders), continues to own, either directly or indirectly, not less than a fifty-one percent (51%) ownership interest in, and control of, Borrower.

(b) (i) Guarantor, KBS SOR (BVI) Holdings, Ltd., KBS Strategic Opportunity Limited Partnership, KBS Strategic Opportunity REIT, Inc., and KBS Strategic Opportunity Holdings, LLC, shall each be permitted to execute guaranties and/or indemnity agreements for their respective subsidiaries; and (ii) KBS SOR (BVI) Holdings, Ltd., KBS Strategic Opportunity Limited Partnership, KBS Strategic Opportunity REIT, Inc., and any of the other parties owning interests in KBS SOR (BVI) Holdings, Ltd., direct or indirect, shall be permitted to obtain loans from, or incur indebtedness to third party lender (each a “ Secondary Loan ”) and pledge their respective interests (direct or indirect) in KBS SOR (BVI) Holdings, Ltd. and Guarantor, as security for any such Secondary Loan so long as (A) neither Borrower nor Borrower’s sole member’s membership interest are pledged to secure such Secondary Loan, and (B) any default under a Secondary Loan resulting in a foreclosure of the pledged interests and a transfer of such interest to the lender of the Secondary Loan shall be deemed an Event of Default under the Loan documents.

“ Person ”: An individual, Entity, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other Entity.

“ Post-Default Plan ”: Has the meaning set forth in Section 10.7(d) hereof.

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“ Premises ”: The Improvements, real property, and personal property described in the Mortgage as the “Mortgaged Premises”, including an office complex and related parking areas located on approximately 5.07 acres of land at 333 City Boulevard West, Orange, California (the “ Property ”).

“ Prepayment Premium ”: Has the meaning set forth in Section 2.2(b) .

“ Real Estate Taxes ”: Means annual real estate taxes, water and sewer rents, any special assessments, charges or claims and any other item which at any time may be or become a Lien upon the Premises prior to the lien of the Loan Documents.

“ Replacement Lender ”: Has the meaning set forth in Section 10.5(b) hereof.

“ Required Capital Improvements ”: Has the meaning set forth in Section 6.26 .

“ Required Lenders ”: Means the Lenders holding Percentages which aggregate at least sixty-six and two-thirds percent (66.67%), subject to Section 10.5(b)(ii) and Section 10.6(e) hereof, provided that at all times when two or more Lenders are party to this Agreement, the term “Required Lenders” shall in no event mean less than two Lenders.

“ Restoration ”: Has the meaning set forth in Section 6.7(a) .

“ Secondary Market Transaction ”: Means (i) any sale of this Agreement, the Security Instrument, the Notes and other Loan Documents to one or more investors as a whole loan, (ii) a syndication of all or portions of the Loan to be completed through Assignment and Assumption Agreements, (iii) a participation of the Debt to one or more investors, and/or (iv) any other sale or transfer of the Debt or any interest therein to one or more investors.

“ Security Documents ”: The Guaranty, the Mortgage, the Assignment of Leases, UCC-1 financing statements, and any other agreements granting or purporting to grant Lender a Lien to secure, or to guaranty the Obligations or subordinating other Debt to the Obligations.

“ Single Purpose Entity ”: Means any Entity that is in compliance with the requirements of Section 6.22 .

“ Sole Bookrunner ”: Has the meaning set forth in the introductory paragraph.

“ Sole Lead Arranger ”: Has the meaning set forth in the introductory paragraph.

“ Sponsor ”: Means KBS Strategic Opportunity REIT, Inc., a Maryland corporation.

“ Swap Obligation ”: With respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.

“ Sweep Collateral ”: Has the meaning set forth in Section 3.11 .

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“ Taxes ”: All present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“ Tenant Direction Notice ”: Means a notice in the form attached hereto as Exhibit D .

“ Title Commitment ”: Title commitment number 30005897-997-MAT-JV1 issued by the Title Company.

“ Title Company ”: Fidelity National Title Insurance Company subject to reinsurance by Commonwealth Land Title Insurance Company.

“ Transfer ”: Means any assignment, transfer, pledge or encumbrance.

“ Unfunded Defaulted Amount ”: Has the meaning set forth in Section 10.5(b)(vi) hereof.

“ Write-Down and Conversion Powers ” shall mean with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which writedown and conversion powers are described in the EU Bail-In Legislation Schedule.

ARTICLE II
THE LOAN

2.1 The Loan .

(a) The Commitment . Subject to and upon the terms and conditions set forth herein, each Lender severally, and not jointly, agrees to lend to Borrower such Lender’s Percentage of the Loan up to the amount of its Commitment for the purposes each Lender severally, and not jointly, agrees, on and subject to the terms and conditions hereinafter set forth, to make a commercial mortgage term loan (hereinafter, as it may be from time to time amended, modified, extended, renewed, substituted, and/or supplemented, referred to as the “ Loan ”) to Borrower on the Closing Date in an original principal amount of $103,350,000.00. Borrower may not re-borrow any principal amount repaid or prepaid on the Loan.

(b) Making the Loan . Upon satisfaction of the applicable conditions set forth in ARTICLE IV of this Agreement, Lenders will make an initial advance of $89,000,000.00 (the “ Initial Advance ”) to Borrower. The remaining balance of the Loan equal to $14,350.000.00 shall be advanced from time-to-time upon Borrower’s satisfaction of the conditions set forth in EXHIBIT F Section 1 and as described below (each, an “ Additional Advance ”):

(i) $11,100,000.00 (the “ Leasing Expense Holdback ”) shall be advanced upon the request of Borrower and upon the satisfaction by Borrower of the terms and conditions set forth in Sections 1 and 3 of EXHIBIT F ; and

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(ii) $3,250,000.00 (the “ Capex/Renovation Holdback ”) shall be advanced (each a “ Capex/Renovation Advance ”), upon request of Borrower and upon the satisfaction by Borrower of the terms and conditions set forth in Sections 1 and 4 of EXHIBIT F .

(c) Notes . The Loan made by the Lenders pursuant hereto shall be evidenced by one or more term loan promissory notes (as amended, modified, refinanced or restated from time to time, collectively the “ Notes ”), payable to the order of the Lenders and representing the obligation of Borrower to pay the unpaid principal amount of the Loan, with interest thereon as prescribed in Section 2.3 below.

(d) Loan Origination Fee . Upon execution of this Agreement, Borrower shall pay to Administrative Agent, Sole Lead Arranger and Sole Bookrunner for their own respective accounts the loan origination fees in the amounts specified in the Fee Letter; provided, that Administrative Agent, Sole Lead Arranger and Sole Bookrunner may designate a portion of such fees to be paid to the Lenders. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever. Borrower has previously paid a good faith deposit of $50,000.00 which will be credited towards the fees and disbursements due to Administrative Agent and/or the Lenders on the Closing Date.

(e) Loan Administration Fee . Borrower shall pay to Administrative Agent, for its sole account, the Loan Administration Fee in accordance with the Fee Letter. Borrower agrees that, once paid, the Loan Administration Fee or any part thereof payable hereunder shall not be refundable under any circumstances.

2.2 Repayment .

(a) Scheduled Repayment . On each Payment Date Borrower shall pay to Administrative Agent for the benefit of the Lenders the amount of accrued interest on the Loan through and including the date immediately prior to such Payment Date. Commencing with the first Payment Date during the extension period, and on each and every succeeding Payment Date thereafter during the term of the Loan, Borrower shall make monthly principal payments as determined by Lender from time-to-time, which shall be calculated to amortize the principal amount of the Loan outstanding as of such date of determination over a period of thirty (30) years at a constant interest rate of 5.75%.

(b) Prepayments . Any repayments of principal on or before the 6-month anniversary of the Closing Date will be subject to a prepayment premium (the “ Prepayment Premium ”) payable to Administrative Agent for the benefit of the Lenders, in an amount equal to 0.50% of the amount being repaid. The Prepayment Premium provided for herein shall be applicable to any prepayment of principal whatsoever and for whatsoever reason, including without limitation as a result of demand, acceleration upon default, foreclosure, sale of the Premises, or otherwise, notwithstanding whether caused by Administrative Agent and/or the Lenders, Borrower or any other Person or Entity, or during or as a result of any action taken in a judicial, bankruptcy, governmental, or any other legal proceeding; provided, however, notwithstanding the foregoing, no Prepayment Premium shall be due with respect to (i) the application of insurance proceeds or condemnation

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awards to the reduction of principal in accordance with Section 6.7 below, or (ii) in the event Borrower elects to permanently repay a portion of the Loan in order to effect a Cash Sweep Collateral Release or a Cash Sweep Cure. Any such repayment, whether in whole or in part, shall be accompanied by payment of all interest accrued under this Agreement to the date of repayment and all other amounts due and payable hereunder or under any of the other Loan Documents.

All Lender Hedging Contracts are independent agreements governed by the written provisions of such Hedging Contracts, which will remain in full force and effect, unaffected by any repayment, prepayment, acceleration, reduction, increase or change in the terms of this Agreement, except as otherwise expressly provided in such Hedging Contracts, and any payoff statement from Administrative Agent relating to this Agreement shall not apply to such Hedging Contracts except as otherwise expressly provided in such payoff statement.

(c) Payment at Maturity . Notwithstanding any term, condition, or provision of this Agreement or any other Loan Document to the contrary, the entire unpaid principal amount of the Loan, together with all accrued and unpaid interest thereon, and all fees, costs, expenses, and other amounts, if any, due and payable hereunder and under the other Loan Documents shall be due and payable on the Maturity Date;

(d) Extension of Maturity Date . Borrower shall have the right to extend the Maturity Date for one twelve-month period after which Borrower may extend the Maturity Date for a second twelve-month period, as such date may be accelerated upon the occurrence of an Event of Default in accordance with the terms hereof, upon satisfaction by Borrower of all of the following terms and conditions on or before each then occurring Maturity Date:

(i) Borrower shall provide to Administrative Agent written notice of Borrower’s intention to exercise such right at least sixty (60) but not more than one hundred twenty (120) days prior to the then occurring Maturity Date, said notice to be in the form set forth on Exhibit A attached hereto and made a part hereof. Borrower shall have the right to revoke the aforementioned notice of intent, provided that Borrower shall reimburse Administrative Agent and Lender’s for all of Administrative Agent’s and Lender’s actual reasonable, and out-of-pocket costs and expenses in connection with such revocation; and

(ii) On the date of the notice provided pursuant to clause (i) above, and on the then occurring Maturity Date, there shall not exist or be continuing any Event of Default;

(iii) As of the calendar quarter most recently ending prior to the then occurring Maturity Date, the Debt Service Coverage Ratio shall be not less than 1.45:1.0;

(iv) The Loan to Value Ratio (as defined below) does not exceed sixty-two percent and one-half (62.5%) as of the initial Maturity Date. For purposes hereof, “Loan to Value Ratio” means (i) the sum of any unfunded and available Loan commitments plus the unpaid principal amount of the Loan together with all accrued and unpaid interest thereon and all other amounts payable under any of the Loan Documents, as a percentage of (ii) the “as-is” fair market value of the Premises as of such date determined by Administrative Agent

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by reference to reasonably acceptable guides and indexes and/or Appraisals dated not more than sixty (60) days prior to the Maturity Date, with any Appraisal obtained by Administrative Agent for such purpose to be from an appraiser selected by Administrative Agent at Borrower’s sole cost and expense;

(v) Borrower shall have entered into a Hedging Contract through the Maturity Date, as extended, which meets the terms of Section 6.24 ;

(vi) Other than with respect to amounts for which Borrower has duly submitted a Request for Advance in accordance with the terms of Exhibit F prior to the then expiring Maturity Date, any unadvanced portion of (a) the Capex/Renovation Advances shall be permanently terminated as of the original Maturity Date and (b) the Leasing Expense Holdback shall be permanently terminated as of the first extended Maturity Date, and Borrower shall have no further rights to request any additional advances of the Loan; and

(vii) Borrower shall have paid to Administrative Agent for the benefit of the Lenders an extension fee in an amount equal to 0.20% of the outstanding principal of the Loan plus any unfunded and available Commitment for each extension (excluding any portion of the Commitment being cancelled pursuant to clause (vi) above).

In connection with the satisfaction of items (iii) and/or (iv) above, Borrower may, at its election, permanently repay a portion of the Loan by an amount sufficient to reduce the outstanding principal amount of the Loan, such that taking into consideration such repayment, such tests would have been satisfied as of the applicable test date. Any amounts so repaid may not be reborrowed.

(e) Casualty or Condemnation . If Borrower receives any recovery on insurance or condemnation award, all such insurance recovery or condemnation award shall be applied in accordance with the terms of Section 6.7 .

(f) Application of Repayments . Except as otherwise provided in Section 8.2 , all payments of interest and/or principal and prepayments of the Loan shall be applied by Administrative Agent (i) first, to the payment of any fees and costs due and owing to Administrative Agent under the Loan Documents, (ii) second, to interest then due and owing, including any interest at the Default Rate, and (iii) last, to reduce the principal amount of the Loan. All principal prepayments of the Loan shall be applied to the installments thereof (including any amount due on the Maturity Date) in the inverse order of maturity and no partial repayment shall alter or reduce or eliminate any payments otherwise due hereunder.

(g) Acknowledgement and Consent to Bail-In of EEA Financial Institutions . Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:

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(i) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and

(ii) the effects of any Bail-in Action on any such liability, including, if applicable:

(1) a reduction in full or in part or cancellation of any such liability;

(2) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or

(3) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.

2.3 Interest .

(a) Each LIBOR Loan shall bear interest at LIBOR plus the Applicable Margin.

(b) Each Base Rate Loan shall bear interest at the Base Rate plus the Applicable Margin.

(c) Subject to Sections 3.3 and 3.7 , Borrower shall have the right to elect (by written notice to the Lender) if the Loan (or any portion thereof) shall consist of a LIBOR Loan or a Base Rate Loan. If no such notice is received from Borrower, then Borrower shall be deemed to have elected that the Loan bear interest at LIBOR.

ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOAN

3.1 Use of Proceeds . The proceeds of the Loan hereunder shall be used by Borrower for financing a portion of Borrower’s costs in connection with its acquisition of the Premises.

3.2 Repayment Amounts . Except for repayments in full or as otherwise set forth in this Agreement, every repayment of the Loan shall be in a minimum principal amount of at least $100,000.00.

3.3 Default Interest and Late Fees .

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(a) Default Interest . Notwithstanding the rates of interest specified in Section 2.3 hereof and the payment dates specified in Section 2.2 hereof, effective immediately upon the occurrence of any Event of Default (whether or not Administrative Agent has accelerated payment of the outstanding principal balance of the Loan) and for as long thereafter as any such Event of Default shall be continuing, the principal balance of the Loan and, to the extent permitted by applicable Law, interest accrued thereon and any fees, indemnities and other amounts due hereunder or under any Loan Document, shall bear interest at the Default Rate. Borrower hereby acknowledges that: (i) such Default Rate is a material inducement to the Lenders to make the Loan available to Borrower, (ii) the Lenders would not have made the Loan available to Borrower in the absence of the agreement of Borrower to pay such Default Rate, (iii) such Default Rate represents compensation for increased risk to the Lenders that the Loan will not be repaid, and (iv) such Default Rate is not a penalty and represents a reasonable estimate of (1) the cost to the Lenders in allocating its resources (both personnel and financial) to the on-going review, monitoring, administration and collection of the Loan and (2) compensation to the Lenders for losses that are difficult to ascertain.

Further, notwithstanding the terms of Section 2.3 , if an Event of Default has occurred and is continuing, Administrative Agent, at its option, may refuse to permit Borrower to select LIBOR to thereafter apply to the Loan, and may convert the Loan to a Base Rate Loan following the expiration of the applicable Interest Period.

(b) Late Fee . Administrative Agent shall have the right to assess, and Borrower shall be required to pay for the benefit of the Lenders, a late fee if any principal, interest, or fees under this Agreement are not paid within ten (10) days after their due date, and in such a case, the late charge shall be in an amount equal to five percent (5%) of the amount not timely paid. Late fees shall not apply to the total principal amount of the Loan for failure to repay the Loan in full at the Maturity Date.

3.4 Computation of Interest and Fees; Determinations by Administrative Agent .

(a) Calculations . Interest and other fees shall be calculated on the basis of a 360 day year for the actual days elapsed. Any change in the interest rate resulting from a change in the Base Rate or LIBOR shall become effective on the day on which such change in the Base Rate or LIBOR, as applicable, shall become effective.

(b) Determination by Administrative Agent . Each determination of an interest rate, fee, or cost by Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on Borrower in the absence of manifest error.

3.5 Payments . Borrower shall make each payment of principal, interest, fees, indemnity, expenses, or other amount hereunder or under any Loan Document, without setoff or counterclaim, not later than 11:00 a.m., Pacific time, on the day when due in Dollars to Administrative Agent at the office of Administrative Agent designated from time to time in writing, in immediately available funds, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, and without setoff, counterclaim, withholding or other deduction of any kind. Any payment received by

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Administrative Agent after 11:00 a.m., Pacific time, on any day shall be deemed to have been received on the next succeeding Business Day.

3.6 Payment on Non-Business Days; Non-Payment Dates .

(a) Whenever any payment to be made hereunder or under the Notes shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time may be included in computing interest or fees, if any, in connection with such payment.

(b) Borrower shall, within ten (10) Business Days after notice, pay to Administrative Agent amounts determined in the good faith judgment of Administrative Agent, to compensate the Lenders for any cost of redeploying funds in connection with (i) any repayment (whether voluntary or involuntary) of any portion of any LIBOR Loan on a date other than a Payment Date, and (ii) the conversion (for any reason whatsoever, whether voluntary or involuntary) of any LIBOR Loan to a Base Rate Loan on any day other than a Payment Date. A certificate of any such amount furnished to Borrower by Administrative Agent shall be conclusive and binding in the absence of a demonstrable error. Borrower’s obligations under this Section 3.6 are in addition to Borrower’s obligations to pay any Prepayment Premium required hereunder.

3.7 Inability to Determine Interest Rate; Ineffective Interest Rate . If Administrative Agent shall have determined that (a) adequate and reasonable means do not exist for ascertaining LIBOR as set forth herein, (b) LIBOR does not adequately and fairly reflect the effective cost to Lenders of making or maintaining a LIBOR Loan, or (c) the making, maintenance or funding of a LIBOR Loan has been made impractical or unlawful, then, and in any such event, Administrative Agent may notify Borrower of such determination. As of such date as shall be specified in such notice, the Loan shall be converted to a Base Rate Loan, and all Loans shall thereafter be Base Rate Loans unless and until such circumstances shall no longer exist and Administrative Agent shall have revoked such notice. If an event described in Section 3.7(a) exists and Administrative Agent has determined that such event is unlikely to be temporary in nature, Administrative Agent, the Required Lenders and Borrower shall endeavor to establish an alternative interest rate methodology to LIBOR that gives due consideration to to then prevailing market conventions for determining a rate of interest rates for syndicated loans in the United States at such time, and shall enter into an amendment to this Agreement to reflect such alternate rate of interest and such other related changes to this Agreement as may be applicable. Notwithstanding anything to the contrary in this Section 3.7 , such amendment shall become effective upon Administrative Agent’s receipt of written consent to such amendment by the Required Lenders.

3.8 Increased Cost and Reduced Return; Capital Adequacy .

(a) If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement reflected in the definition of LIBOR);

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(ii) subject any Lender to any Indemnified Taxes; or

(iii) impose on any Lender or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or Loans made by any Lender;

and the result of any of the foregoing shall be to increase the cost to any Lender of making, converting to, continuing or maintaining any Loan or of maintaining its obligation to make the Loan, or to reduce the amount of any sum received or receivable by such Lender (whether of principal, interest or any other amount) then, upon request of Administrative Agent, Borrower will pay to Administrative Agent for the benefit of such Lender such additional amount or amounts as will reasonably compensate such Lender for such additional costs incurred or reduction suffered.

(b) If Administrative Agent determines that any Change in Law affecting any Lender or any lending office of any Lender regarding capital or liquidity requirements, has or would have the effect of reducing the rate of return on such Lender’s capital as a consequence of this Agreement to a level below that which such Lender could have achieved but for such Change in Law (taking into consideration such Lender’s policies with respect to capital adequacy), then from time to time, upon written demand therefor, Borrower will pay to Administrative Agent for the benefit of such Lender such additional amount or amounts as will reasonably compensate such Lender for any such reduction suffered.

(c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender as specified in paragraph (a) or (b) of this Section, and delivered to Borrower, shall be conclusive absent manifest error. Borrower shall pay Administrative Agent for the benefit of such Lender the amount shown as due on any such certificate within 10 Business Days after receipt thereof.

(d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation; provided that Borrower shall not be required to compensate such Lender pursuant to this Section for any increased costs incurred or reductions suffered more than six (6) months prior to the date that such Lender notifies Borrower of the Change in Law giving rise to such increased costs or reductions, and of such Lender’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).

3.9 Calculations . For purposes of calculating amounts payable by Borrower to any Lender under Section 3.8 , such Lender shall be deemed to have funded (without any obligation to do so) each LIBOR Loan by a matching deposit or other borrowing in the London interbank Eurodollar market for a comparable amount and for a comparable period of each such LIBOR Loan.

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3.10 Insurance Premium and Tax Payments . Commencing on the first Payment Date following the satisfaction of the conditions set forth in Section 2.1(a) of the Guaranty for termination of Guarantor’s obligation to guarantee the Principal Guaranty Amount (as defined in the Guaranty), upon the occurrence of an Event of Default, Borrower shall deposit with Administrative Agent a catch-up amount determined by Administrative Agent for real estate taxes and insurance premiums next becoming due and payable and, thereafter, on a monthly basis Borrower is required to deposit with Administrative Agent (or to such other Entity as Administrative Agent shall designate), monthly on each Payment Date, an amount equal to one-twelfth (1/12 ^th ) of (i) the annual premiums for the insurance policies required under this Agreement, and (ii) the annual Real Estate Taxes (collectively the “ Tax and Insurance Reserve ”); and on demand from time to time Borrower shall deposit with Administrative Agent, for the benefit of the Lenders, any additional sums necessary to pay such costs, all as reasonably estimated by Administrative Agent and set forth in a written notice provided to Borrower. The amounts so deposited shall be security for the payment of such costs and shall be used by Borrower in payment thereof so long as no Event of Default is continuing. No amount so deposited shall be deemed to be trust funds but may be commingled with general funds of Administrative Agent and no interest shall be payable thereon. If, pursuant to any provision of this Agreement or the Notes, the whole amount of the unpaid principal debt hereunder becomes due and payable, Administrative Agent shall have the right, in its sole discretion, to apply any amount so held, in such order and in such amounts as Administrative Agent may elect, against: (a) any amounts payable by Borrower hereunder or under the Loan Documents, and/or (b) accrued and unpaid interest under the Notes, and/or (c) the outstanding principal balance of the Notes. Borrower shall submit written requests for disbursements from the Tax and Insurance Reserve not less than twenty-one (21) days prior to the date Borrower desires such disbursement. Any such request for disbursement shall include bills or other evidence reasonably satisfactory to Administrative Agent of the amounts to be paid. Borrower shall provide to Administrative Agent evidence of payment of Real Estate Taxes not less than ten (10) Business Days prior to the same becoming due. Administrative Agent may engage, at Borrower’s expense (not to exceed $1,000 per annum), a service to monitor real property tax accounts affecting the Premises for the term of the Loan.

3.11 Cash Management . From and after the Closing Date Borrower shall direct all tenants, pursuant to a Tenant Direction Notice, to transmit rents directly to the Lockbox for deposit into the Clearing Account. Any rents received directly by Borrower or Manager shall be deposited into the Clearing Account within one (1) Business Day of receipt. Unless a Cash Sweep Period is continuing, funds deposited into the Clearing Account shall be swept on a daily basis into the Operating Account. Upon the occurrence of a Cash Sweep Period and until a Cash Sweep Cure has occurred, (i) a portion of the funds in the Clearing Account shall, provided no Event of Default has occurred and is continuing, be transferred (each an “ Operating Expense Transfer ”) to the Operating Account in amounts consistent with Administrative Agent-approved budgets or as otherwise approved by Administrative Agent in writing, which approval shall not be unreasonably withheld, conditioned, or delayed, (ii) any remaining funds shall be held as additional cash collateral (“ Sweep Collateral ”) for the Loan. Administrative Agent shall endeavor to complete such Operating Expense Transfers within five (5) Business Days following Borrower’s request and Administrative Agent’s approval of such transfer; provided, however, such transfers shall not be made more than once per calendar month. Following the occurrence of a Cash Sweep Period, upon the occurrence

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of a Cash Sweep Cure, funds deposited into the Clearing Account (excluding any existing Sweep Collateral) shall again be swept on a daily basis into the Operating Account. If a Cash Sweep Period has commenced and a Cash Sweep Cure has not occurred within 180 days after the commencement of such Cash Sweep Period, Borrower shall, within ten (10) Business Days thereafter, pay to Administrative Agent for the benefit of the Lenders, as a principal payment of the Loan, or deposit with Administrative Agent additional Sweep Collateral in an amount, which when added to the existing Sweep Collateral would be sufficient, if applied to the reduction in principal of the Loan, to have caused the Debt Service Coverage Ratio to be equal to or greater than 1.35:1.00 (for purpose of clarity, any such deposit shall not in itself constitute a Cash Sweep Cure and Borrower must satisfy the terms set forth in the definition of Cash Sweep Cure for such cure to be effective). The Sweep Collateral shall be held by Administrative Agent until such time as a Cash Sweep Collateral Release has occurred after which time Administrative Agent shall promptly disburse all Sweep Collateral then held by Administrative Agent to Borrower. If a Cash Sweep Period has commenced and thereafter a Cash Sweep Collateral Release has not occurred within 360 days after the commencement of such Cash Sweep Period, Borrower shall, within ten (10) Business Days thereafter, pay to Administrative Agent for the benefit of the Lenders, as a principal payment of the Loan, an amount, which when added to the existing Sweep Collateral would be sufficient, if applied to the reduction in principal of the Loan, to have caused the Debt Service Coverage Ratio to be equal to or greater than 1.35:1.00. Administrative Agent shall thereafter apply all Sweep Collateral in repayment of principal of the Loan.

ARTICLE IV
CONDITIONS OF LENDING

4.1 Conditions Precedent to Making the Loan . The obligation of the Lenders to make the Loan is subject to the satisfaction of the following conditions precedent:

(a) Loan Documents . Administrative Agent shall have received originals of all of the Loan Documents, in form and substance satisfactory to Administrative Agent, and executed by the applicable parties thereto with acknowledgements where applicable.

(b) Corporate Action . Administrative Agent shall have received the following, each dated the Closing Date:

(i) Copies of the Certificate of Formation, or other organizational documents of Borrower, certified as of a recent date by the Secretary of State of the state of organization and a good standing certificate (or equivalent) from such state;

(ii) Copies of (1) all governing documents of Borrower and Guarantor (including those of any Entity general partner, manager or managing member of Borrower and Guarantor), and (2) resolutions or consents of Borrower and Guarantor or other appropriate authorizing documents, in form and substance reasonably satisfactory to Lender, approving the Loan Documents and the making of the Loan hereunder, certified by the appropriate representatives thereof; and

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(iii) An incumbency certificate executed by the appropriate representatives of Borrower and Guarantor (including those of any Entity general partner, manager or managing member), certifying the names and signatures of the Persons authorized to sign the Loan Documents.

(c) Financial Matters . The Loan Parties shall have provided to Administrative Agent the financial statements and other information requested by Administrative Agent.

(d) Due Diligence and Other Closing Requirements . Administrative Agent shall have received and expressly approved:

(i) Evidence that all insurance required to be maintained pursuant to the Loan Documents has been obtained and is in effect;

(ii) A favorable opinion of counsel to Borrower and Guarantor, covering due formation, authorization, execution, enforceability and such other matters as Administrative Agent may reasonably request;

(iii) Uniform Commercial Code, tax, bankruptcy, litigation, Patriot Act and lien searches for those Persons and for all locations requested by Administrative Agent, together with lien termination documents satisfactory to Administrative Agent terminating all liens shown on such searches with respect to Borrower and/or the Premises that are not Permitted Encumbrances;

(iv) The Title Commitment with endorsements requested by Administrative Agent from the Title Company in an amount equal to the Loan, insuring the lien of the Mortgage free and clear of any defects and exceptions other than the Permitted Encumbrances, which shall be marked at closing or converted to a pro forma policy acceptable to Administrative Agent;

(v) A survey of the Premises showing any encroachments from or onto the Premises, discrepancies or conflicts in boundary lines, the location of all Improvements and all easements and rights of way affecting the Premises. Such survey shall be certified to Administrative Agent and the Title Company by a licensed surveyor or civil engineer and dated not more than thirty (30) days prior to the Closing Date, shall comply with the minimum detail requirements for land title surveys as jointly adopted by the American Land Title Association and American Congress on Surveying and Mapping and any applicable state level requirements and shall otherwise be acceptable to Administrative Agent as to both form and substance;

(vi) An Appraisal;

(vii) A Phase I report with respect to the Premises prepared by an independent environmental consultant acceptable to Administrative Agent with environmental insurance coverage acceptable to Administrative Agent, which report shall

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be addressed to Administrative Agent, for the benefit of the Lenders, or accompanied by a reliance letter addressed to Administrative Agent, for the benefit of the Lenders;

(viii) Evidence that the Premises conform with all zoning requirements;

(ix) Evidence of a certificate of occupancy and all Permits required for the occupancy and use of the Premises;

(x) A property condition report prepared by an independent property inspector regarding the condition of the Improvements acceptable to Administrative Agent, which report shall be addressed to Administrative Agent, for the benefit of the Lenders, or accompanied by a reliance letter addressed to Administrative Agent, for the benefit of the Lenders;

(xi) Complete, fully executed tenant estoppel certificates, each in a form approved by Administrative Agent, with respect to tenants leasing at least 75% of the leased square footage (calculated as of the Closing Date), including all tenants leasing in excess of 10,000 square feet at the Premises;

(xii) Complete, fully executed and compiled subordination, non-disturbance and attornment agreements, each in a form approved by Administrative Agent, with respect to all tenants leasing in excess of 10,000 square feet at the Premises, provided that no subordination, non-disturbance and attornment agreement shall be required if the leases for such tenants contains subordination and attornment provisions reasonably acceptable to Administrative Agent;

(xiii) Copies of all existing Leases and a current rent roll certified to Borrower’s knowledge;

(xiv) Evidence of Borrower’s required equity contribution to the Premises;

(xv) A flood zone certification identifying if any portion of the Improvements is at any time located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended, or any successor Law;

(xvi) A fully executed copy of the purchase agreement (including all schedules, exhibits, and all amendments thereto) pursuant to which the Borrower’s acquisition of the Premises is consummated, and all other material agreements, instruments and documents relating thereto; and

(xvii) Copies of reports in scope and substance reasonably acceptable to Administrative Agent assessing the Improvements tolerance for earthquake and seismic activity.

(e) Fees, Expenses, etc. All fees and other compensation, including, without limitation, Appraisal and similar costs and review fees, required to be paid to Administrative Agent pursuant hereto or pursuant to any other written agreement shall have been paid or received.

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(f) Operating Account and Clearing Account . Borrower shall have established the Lockbox, the Operating Account and the Clearing Account with Administrative Agent.

Notwithstanding anything stated to the contrary in this Article IV or elsewhere in this Agreement, the initial funding of the Loan and/or recordation of the Mortgage shall be deemed a confirmation by Administrative Agent and the Lenders that all conditions precedent to the funding of the Loan as set forth in this Article IV have been satisfied or waived for all purposes.

ARTICLE V
REPRESENTATIONS AND WARRANTIES

Borrower hereby represents and warrants to Administrative Agent and the Lenders as follows:

5.1 Organization . Each of the Loan Parties is duly organized, validly existing and in good standing under the Laws of the State of its incorporation or formation, and has all corporate/company/partnership, as applicable, requisite power and authority to own and operate its properties and to carry out its business. Each of the Loan Parties is duly qualified and in good standing in all jurisdictions where the nature of its business or the ownership of property requires such qualification.

5.2 Authorization . The execution, delivery and performance by the Loan Parties of the Loan Documents, and the acceptance by Borrower of the Loan hereunder are within the Loan Parties’ corporate/company/partnership powers, as applicable, and have been duly authorized by all necessary corporate/company/partnership action, as applicable.

5.3 No Conflict . The execution, delivery and performance by Borrower and Guarantor of the Loan Documents to which each is a party do not (a) violate the Loan Parties’ charter, by-Laws, partnership agreement, operating agreement or other organizational or governing documents, as applicable, (b) to Borrower’s knowledge, violate any Law applicable to the Loan Parties, or (c) to Borrower’s knowledge, result in a breach of or a default under, or result in or require the imposition of a Lien pursuant to any contract binding on the Loan Parties.

5.4 Governmental Approval . No approval by any Governmental Authority is required for the due execution, delivery and performance by the Loan Parties of the Loan Documents.

5.5 Validity . The Loan Documents are the binding obligations of the Loan Parties, as applicable, enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar Laws of general application and equitable principles relating to or affecting creditors’ rights.

5.6 Financial Matters . To Borrower’s actual knowledge, all information and financial and other data contained in financial statements and reports previously furnished by or on behalf of each Loan Party to Administrative Agent are true, correct and complete in all material respects as of the date of said statements and reports, fairly present the financial condition of each Loan Party, as applicable, at such dates and the results of its operations and cash flow for the

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respective periods ended on such dates, all in accordance with Accounting Principles. Since the date of the last financial statements previously furnished to Administrative Agent, there has been no Material Adverse Effect.

5.7 Ownership . Other than with respect to the shareholders of Sponsor, Schedule 5.7 sets forth the names of the record and beneficial owners of all Ownership Interests of Borrower and the interest thereof owned by each of them. All of such Ownership Interests are duly authorized, validly issued and are fully paid, unencumbered, are not pledged to any other party, and are nonassessable. Other than with respect to the shareholders of Sponsor, except as set forth on Schedule 5.7 , there are no voting arrangements, restrictions on transfer, pledges or other arrangements of Persons not set forth on Schedule 5.7 that pertain to the Ownership Interests of Borrower.

5.8 No Other Ownership Interests . Borrower does not have any ownership or other interest in any other Entity and has no obligation to make capital contributions to, or generally become liable for or on account of, the debts or liabilities of any other Person.

5.9 Insurance . The properties of Borrower are insured with financially sound and reputable insurance companies that are not Affiliates of Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in similar locations, and Borrower currently maintains the insurance required by Section 6.6 of this Agreement.

5.10 Litigation . To Borrower’s actual knowledge and except as set forth on Schedule 5.10 hereto, there is no pending or threatened action or proceeding affecting Borrower or any Guarantor before any Governmental Authority and none of the actions set forth on Schedule 5.10 , individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect.

5.11 Employee Benefit Plans . Borrower and each of its ERISA Affiliates is in compliance in all material respects with any applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans. No ERISA Event has occurred or is reasonably expected to occur with respect to any Pension Plan. Neither Borrower nor any of its ERISA Affiliates has contributed, or presently contributes, to any Multiemployer Plan as of the date of this Agreement. No assets of any Employee Benefit Plan will be used to repay or secure the Loan or be involved in any way with, and no “prohibited transaction” as defined in ERISA or the Code shall occur as a result of, the transactions contemplated by this Agreement.

5.12 Environmental Matters . The operations of Borrower and Guarantor comply in all material respects with all applicable Environmental Laws, and to Borrower’s knowledge, Borrower has obtained all environmental, health and safety Permits necessary for its operations and/or the operations of its tenants at the Premises, and to Borrower’s knowledge, all such Permits are in good standing, and to Borrower’s knowledge, Borrower and/or any applicable tenants of the Premises are in compliance with all terms and conditions of such Permits.

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5.13 Title to Properties; Liens . Each of Borrower and Guarantor has legal title to or valid leasehold interests in, as applicable, all of their respective properties and assets reflected in the most recent financial statements delivered by Borrower and Guarantor to Administrative Agent, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business. All such properties and assets are free and clear of Liens except with respect to any Debt indicated on such financial statements. As of the Closing Date, Borrower owns the Premises free and clear of any and all Liens, except for Permitted Encumbrances.

5.14 Payment of Taxes . All tax returns and reports of Borrower and Guarantor required to be filed by any of them have been timely filed, and all Taxes shown on such tax returns to be due and payable and all assessments, fees, and other governmental charges upon Borrower and Guarantor and upon their respective properties, assets, income, businesses, and franchises that are due and payable have been paid prior to the same becoming delinquent. Borrower knows of no proposed or pending special tax assessment against Borrower, any Guarantor or the Premises.

5.15 Governmental Regulation . Neither Borrower nor any Guarantor is subject to regulation under the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Debt or which may otherwise render all or any portion of the Obligations unenforceable.

5.16 Governmental Approvals, Intellectual Property etc. To Borrower’s actual knowledge (a) Borrower possesses all licenses, Permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, necessary for the operation of its business and the Premises, (b) no business or operations of Borrower or the Premises infringes any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person, and (c) there is no violation by any Person of any right of Borrower with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by Borrower or any Guarantor.

5.17 Labor Disputes . Borrower is not affected by any strike, lockout, or other labor dispute.

5.18 Compliance . To Borrower’s actual knowledge, Borrower is not in default in the performance of any agreement or instrument to which it is a party and the Premises complies in all material respects with applicable Law, including, without limitation, the Americans with Disabilities Act, as amended from time-to-time.

5.19 Margin Stock . Neither Borrower nor any Guarantor is engaged in, and does not have as one of its substantial activities, the business of extending or obtaining credit for the purpose of purchasing or carrying “margin stock” (as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System), and no proceeds of the Loan have been or will be used for such purpose or for the purpose of purchasing or carrying any shares of margin stock.

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5.20 Name and Organization . Borrower’s and Guarantor’s name as each appears herein is the same as in the official filings in the state of its organization. Borrower’s organization number is 6731543. Guarantor’s organization number is 4840084. Neither Borrower nor any Guarantor, nor any predecessor by merger or otherwise has, within the four-month period preceding the Closing Date, had a different name from the name of such Person listed on the signature pages of the Loan Documents.

5.21 Disclosure . No financial or other information, exhibit or report furnished to Administrative Agent by or on behalf of Borrower or any Guarantor contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which the same were made.

5.22 Subdivision; Streets; Utilities . To Borrower’s knowledge, the Premises (i) comply with all applicable Laws regulating subdivision and land development, (ii) may be leased or transferred without the approval of any Governmental Authority having jurisdiction to regulate or control subdivision or land development, and (iii) is assessed separately from all other lands for purposes of Real Estate Taxes. To Borrower’s knowledge, all streets necessary for the full utilization of the Premises for its intended purpose have been completed or the necessary rights-of-way therefor have been acquired by Borrower. To Borrower’s knowledge, all utility services necessary for the operation of the Premises for its intended purpose are available and connected to the Premises, including water supply and sanitary and storm sewer facilities and gas, electric and telephone facilities.

5.23 Single Purpose Entity . Borrower is, has been at all times since its formation, and will remain a Single Purpose Entity.

5.24 Casualty . The Premises is not subject to any unrepaired casualty or damage (whether or not covered by insurance).

5.25 No Material Adverse Change . Since the dates of the latest financial statements furnished to Administrative Agent, there has been no change in the condition, business, affairs, or prospects of Borrower, or the Premises that has resulted, or will or could reasonably be anticipated to result, in a Material Adverse Effect.

ARTICLE VI
COVENANTS

So long as any Obligation shall remain unpaid or the Lenders shall have any commitment hereunder, Borrower shall, unless Administrative Agent shall otherwise consent in writing:

6.1 Financial Information/Reporting . Furnish, or cause to be furnished, to Administrative Agent:

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(a) Annual Financial Statements .

(i) Within ninety (90) days after each calendar year-end, Borrower prepared statements of income, cash flows, and balance sheet for Borrower, and annual budget and cash flow projections for the Premises, all in detail reasonably acceptable to Administrative Agent and certified by an authorized representative of Borrower, as presenting fairly the financial position of Borrower in conformity with Accounting Principles (in all material respects) together with a Compliance Certificate with a calculation of the Debt Service Coverage Ratio calculated by Borrower and subsequently approved by Administrative Agent;

(ii) Within ninety (90) days after each calendar year-end, a current certified rent roll and copies of all newly executed leases, all in detail reasonably acceptable to Administrative Agent and certified by an authorized representative of Borrower; and

(iii) Within ninety (90) days after each calendar year-end, management prepared, in conformity with Accounting Principles (in all material respects), financial statements of Guarantor which shall include a global cash flow statement of all real estate in which Guarantor has an interest and a statement of contingent liabilities and any other information reasonably requested by Administrative Agent.

(b) Federal Tax Returns . Promptly upon request by Administrative Agent, complete, executed copies, of each Loan Party’s Federal income tax returns for such calendar year, together with any and all schedules and exhibits annexed thereto, if such Loan Party is required to file such tax returns.

(c) Quarterly Financial Statements . As soon as available, but in any event within forty-five (45) days after the close of each calendar quarter ending March 31, June 30 and September 30: (i) management prepared statements of income and cash flows, all in reasonable detail and certified by an authorized representative of each Loan Party, as applicable, as presenting fairly the financial position of each Loan Party, as applicable, as of the end of such calendar quarter and the results of its operations and cash flows for such calendar quarter, in conformity with Accounting Principles (in all material respects), (ii) a then current certified rent roll and copies of all newly executed leases together with a Compliance Certificate with a calculation of the Debt Service Coverage Ratio calculated by Borrower and subsequently approved by Administrative Agent.

(d) Insurance Premium and Real Estate Tax Bills . Bills and other requests for payment for insurance premiums and Real Estate Taxes as required by Section 3.10 .

(e) Guarantor Covenant Compliance . On the Closing Date and within forty-five (45) days after each calendar quarter end, but within ninety (90) days after each calendar year end, a certificate from an authorized officer of Guarantor evidencing Guarantor’s compliance with the net worth and liquid asset covenants required by the Guaranty.

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(f) Additional Information . Within five (5) Business Days after request by Administrative Agent, any other financial statements or financial reports with respect to the Loan Parties and/or the Premises as Administrative Agent may reasonably request from time to time.

(g) Environmental Insurance . Within 90 days after each calendar year-end, a loss run report in connection with claims under the Environmental Insurance, provided, however, that if at any time during any calendar year the aggregate amounts of claims under the Environmental Insurance exceeds $25,000,000, such report shall be furnished within 60 days after each calendar quarter end.

6.2 Notices and Information . Deliver to Administrative Agent in writing:

(a) promptly upon Borrower obtaining knowledge (i) of any condition or event which constitutes an Event of Default, (ii) that any Person has given any notice to Borrower or taken any other action with respect to a claimed cross-default of the type referred to in Section 8.1(f) of this Agreement, (iii) of the institution of, or any adverse development in, any litigation involving an alleged liability (including possible forfeiture of property) of Borrower greater than $250,000.00 in the aggregate, (iv) of any material casualty to its assets resulting in a loss in excess of $250,000.00 in the aggregate, or (v) of a condition or events that could reasonably be expected to cause a Material Adverse Effect, an Officer’s Certificate and/or other detailed written explanation acceptable to Administrative Agent specifying the nature and period of existence of any such condition or event, and the action Borrower is taking with respect thereto;

(b) promptly upon Borrower becoming aware of the occurrence of or forthcoming occurrence of any (i) ERISA Event, or (ii) “prohibited transaction,” as such term is defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA, in connection with any Employee Benefit Plan or any trust created thereunder, an Officer’s Certificate specifying the nature thereof, the action Borrower is taking with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation with respect thereto;

(c) with reasonable promptness copies of (i) all notices received by Borrower or any of its ERISA Affiliates of the Pension Benefit Guaranty Corporation’s intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan; (ii) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Borrower or any of its ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; and (iii) all notices received by Borrower or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA;

(d) promptly, and in any event within five (5) Business Days after receipt thereof by Borrower, a copy of any notice, summons, citation, directive, letter or other form of communication from any Governmental Authority, or within five (5) Business Days of Borrower obtaining knowledge of, the release of any Hazardous Materials onto, into or from the Premises, any action or omission on the part of Borrower in connection with any substance defined as toxic or hazardous by any applicable Environmental Law, or concerning the filing of a Lien under any Environmental Law upon, against or in connection with Borrower or any of its leased or owned

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real or personal property, in connection with a Hazardous Materials Superfund or a Post-Closure Liability Fund as maintained pursuant to Section 9507 of the Code;

(e) within five (5) Business Days after receipt thereof by Borrower, copies of all material notices (as set forth and described in Section 6.13 below); and

(f) within five (5) Business Days after request by Administrative Agent, such other reasonable information and data with respect to any Loan Party.

6.3 Existence, Etc. At all times preserve and keep in full force and effect its Entity existence, and all rights, franchises and licenses material to its business.

6.4 Payment of Obligations . Pay and discharge, prior to the same becoming delinquent, all of its obligations and liabilities, including (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings diligently conducted with all required security or bonding provided by Borrower which has the effect of preventing the collection of such Taxes so contested and also of preventing the sale or forfeiture of the Premises or any part thereof or any interest therein and adequate reserves in accordance with Accounting Principles are being maintained by Borrower, (b) all lawful claims which, if unpaid, would by Law become a Lien upon the Premises, and (c) all Debt of Borrower, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Debt. Borrower shall provide to Administrative Agent, prior to the date on which interest or penalties would accrue thereon, a copy of each invoice or notice of obligations in the nature of Real Estate Taxes, together with evidence satisfactory to Administrative Agent of the payment of such obligations.

6.5 Maintenance of Properties . Maintain or cause to be maintained in good repair, working order and condition all material properties used or useful in the business of Borrower, including, without limitation, the Premises, and from time to time will make or cause to be made all appropriate renewals and replacements thereof. Borrower shall not abandon the Premises, commit or allow waste to occur, or remove, materially alter, discontinue the use of, sell, transfer, assign, hypothecate, or otherwise dispose of any part of the Premises without the prior express written consent of Administrative Agent, except for replacements, substitutions, additions, modifications, and improvements in the ordinary course of business, which, in any event shall not materially impair the structural integrity, operating efficiency or value of the Premises; provided , however , that Administrative Agent’s consent shall be required for any such actions the cost of which, individually or in the aggregate, exceeds three percent (3%) of the Loan in any calendar year. All alterations, replacements, renewals, or additions made pursuant to this Section 6.5 shall automatically become and constitute a part of the Premises and shall be covered by the lien of the Mortgage. Borrower shall not do, and shall not permit to be done, any act which may in any way impair the security of the Mortgage.

6.6 Insurance . Maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by entities engaged in similar business and similarly situated

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to Borrower, of such types and in such amounts as are customarily carried under similar circumstances by such other businesses, including, without limitation, the following:

(a) Commercial general liability insurance insuring against claims of liability of Borrower arising out of, occasioned by or resulting from any accident or otherwise resulting in, on or about the Premises and the adjoining streets, sidewalks and passageways, in a minimum amount of $1,000,000 for each occurrence for bodily injury including death, personal injury, and property damage, and $2,000,000 in the aggregate for each covered occurrence (including, without limitation, blanket contractual liability insurance, and products liability, if applicable), which amounts shall be increased, from time to time, to reflect what a reasonably prudent owner or lessee of buildings or improvements similar in type and locality to that of the Premises would carry;

(b) (1) With respect to the Premises, during any periods of construction Borrower shall provide “Special Form” Builders Risk Insurance (non-reporting form), including earthquake (if the Premises in the future is considered to be in a higher risk seismic zone (presently zones 3 and 4) and subject to Administrative Agent’s then current policies requiring earthquake insurance), and “The Replacement Cost” endorsement, written on a completed value basis in an amount not less than the total value of the improvements under construction without deduction for physical depreciation and (2) with respect to the Premises at all other times, Borrower shall provide “Special Form” Insurance, including windstorm and named storm, earthquake, terrorism and “The Replacement Cost” endorsement, in an amount not less than the total value of the Improvements, without deduction for physical depreciation, to be written on a no coinsurance form or containing an agreed amount endorsement with respect to the Improvements and personal property at the Property waiving all co-insurance provisions; containing an “Ordinance or Law Coverage” endorsement if any of the Improvements or the use of the Property shall at any time constitute legal non-conforming structures or uses, resulting from operation of law and the cost of demolition and the increased cost of construction in amounts as required by Administrative Agent;

(c) If the Premises are required to be insured pursuant to the Flood Disaster Protection Act of 1973 or the National Flood Insurance Act of 1968, and the regulations promulgated thereunder (as determined by Administrative Agent from time-to-time), flood insurance in an amount not less than the maximum available by NFIP (or $500,000) with a deductible no greater than $10,000 plus excess flood insurance in amount equal to sum of (1) the insurable value of the first floor of the improvements located in the SFHA as determined by Administrative Agent and (2) 12 months of Business Interruption/Loss of Rents as determined by Administrative Agent, whichever amount is less;

(d) Business income insurance sufficient to pay, during the period of interruption or loss (but in no event for a period less than eighteen (18) months and a twelve (12) month extended period of indemnity), (1) the normal Operating Expenses of the Premises and (2) the debt service required by this Agreement;

(e) Boiler and machinery insurance covering pressure vessels, air tanks, boilers, machinery, pressure piping, heating, air conditioning and elevator equipment, provided that the Premises contains equipment of such nature;

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(f) Excess/Umbrella Liability Insurance on a “follow form” basis with a minimum limit of liability of at least $100,000,000 for the Premises; and

(g) Borrower shall maintain Pollution & Remediation Legal Liability Insurance (the “ Environmental Insurance ”) with liability limits of $25,000,000 for each pollution condition and $50,000,000 aggregate liability with all claims subject to retention of $50,000 for each pollution condition, provided that the Environmental Insurance shall at all times have at least $25,000,000 of aggregate liability coverage available with respects to which claims have not yet been made. Pollution & Remediation Legal Liability Insurance shall be acceptable to Administrative Agent and shall name or include Administrative Agent for the benefit of the Lenders as an additional insured. The obligation of Borrower to maintain the Environmental Insurance shall survive any foreclosure, deed-in-lieu of foreclosure, or similar proceedings by or through which Administrative Agent, the Lenders or any of their affiliates, nominees, successors, or assigns or any other Person bidding at a foreclosure sale may obtain title to the Premises or any portion thereof, and shall continue until such time as no legal action can be successfully brought against Administrative Agent or any Lender due to applicable statutes of limitation or repose. Notwithstanding the foregoing, Borrower shall have no liability to indemnify Administrative Agent and the Lenders under this section for any damages resulting from Hazardous Materials that Borrower can conclusively prove were first introduced or released in, on or under the Premises after the date title to the Premises was transferred pursuant to any foreclosure or deed-in-lieu of foreclosure.

Each insurance policy required under this Section 6.6 :

(i) shall be written by insurance companies authorized or licensed to conduct business in the state or commonwealth where the Premises is located and having an Alfred M. Best Company, Inc. rating of “A” or higher and a financial size category of X or better,

(ii) shall be on such forms and written by such companies as shall be reasonably approved by Administrative Agent,

(iii) providing insurance against loss or damage to property shall be written or endorsed so as to (1) contain a standard mortgagee or secured party endorsement, as the case may be, or its equivalent, naming Administrative Agent as mortgagee and lender loss payee, as its interests may appear, and (2) make all losses payable directly to Administrative Agent without contribution,

(iv) providing commercial general liability coverage shall be written and endorsed so as to name or include Administrative Agent as an additional insured, as its interests may appear,

(v) shall contain a provision to the effect that such policy shall not be cancelled, altered or in any way limited in coverage or reduced in amount unless Administrative Agent is notified in writing at least thirty (30) days prior to such change, except for non-payment of premium in which case ten (10) days’ notice will be given,

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(vi) except for flood insurance, if applicable, written under the Federal flood insurance program, shall contain an endorsement or agreement by the insurer that any loss shall be payable to Administrative Agent, as its interests may appear, in accordance with the terms of such policy notwithstanding any act or negligence of Borrower which might otherwise result in forfeiture of said insurance and the further agreement of the insurer waiving all rights of setoff, counterclaim, deduction or subrogation against Borrower (so as not to interfere with Administrative Agent’s rights), and

(vii) the coverage required by Section 6.6(b)(2) above may be in the form of a blanket policy; provided, however, that, in the event that any such coverage is provided in the form of a blanket policy, Borrower hereby acknowledges and agrees that failure to pay any portion of the premium therefor which is not allocable to the Premises or by any other action not relating to the Premises which would otherwise permit the issuer thereof to cancel the coverage thereof, will result in Administrative Agent requiring the Premises to be insured by a separate, single-property policy. Such blanket policy must properly identify and fully protect the Premises as if a separate policy were issued for 100% of replacement cost at the time of loss and otherwise meet all of Administrative Agent’s applicable insurance requirements set forth in this Section 6.6 .

Borrower shall not take out any separate or additional insurance with respect to the Premises which is contributing in the event of loss unless it is properly compatible with all of the requirements of this Section 6.6 . Borrower shall give Administrative Agent prompt notice of any lapse in the insurance required by this Section 6.6 and at least thirty (30) days prior to the expiration of any such policy, Borrower shall furnish evidence satisfactory to Administrative Agent that such policy has been renewed or replaced or is no longer required by this Section 6.6 ; provided, however, if Borrower fails to provide such evidence, Administrative Agent shall notify Borrower of such failure and Borrower shall have five (5) Business Days to furnish such evidence to Administrative Agent. Borrower shall deliver to Administrative Agent a certified copy of each policy required herein within thirty (30) days after its effective date. In addition, unless Borrower is making payments to Administrative Agent pursuant to Section 3.10 above, Borrower shall provide to Administrative Agent, on or before the due date thereof, copies of each invoice or notice of premiums due on any such insurance policies and evidence satisfactory to Administrative Agent of the payment thereof.

6.7 Casualty/Condemnation . (a) If an insured casualty or condemnation occurs where (i) in the reasonable judgment of Administrative Agent, (x) the Premises can be restored in a manner that results in the Loan to Value Ratio not exceeding sixty-five percent (65%) and, (y) rents payable under Leases that are either not cancelable due to such casualty or, if cancelable, the tenants thereunder have delivered written notice that they have waived such termination right, are sufficient to achieve a Debt Service Coverage Ratio of not less than 1.45:1.00, (ii) in the reasonable judgment of Administrative Agent, the Premises can be restored within twelve (12) months thereafter, and at least six (6) months before the scheduled Maturity Date, and prior to the expiration of the rental or business interruption insurance with respect thereto, to substantially the same condition and economic value and viability immediately prior to such casualty or condemnation; (iii) the amount of insurance proceeds or condemnation award received by Borrower shall be sufficient, in Administrative Agent’s reasonable judgment, to pay the cost of such restoration, and,

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if not, Borrower shall have deposited with Administrative Agent the amount of any shortfall; and (iv) no Event of Default shall have occurred and be then continuing, then any insurance proceeds or condemnation award, as applicable (after reimbursement of any expenses incurred by Administrative Agent in connection therewith), shall be applied to reimburse Borrower for the cost of restoring, repairing, replacing or rebuilding the Premises (the “ Restoration ”), in the manner and pursuant to procedures and documentation reasonably required by Administrative Agent. Borrower shall promptly commence and diligently prosecute any such Restoration. Upon completion of a Restoration, if any insurance proceeds or condemnation awards, as applicable, then being held by Administrative Agent are not necessary to pay the costs of such Restoration, so long as no Event of Default has occurred and is continuing, Borrower shall have the right to request disbursements of such excess proceeds from time to time to pay operating expenses with respect to the Premises. In addition, if no Cash Sweep Period exists for two consecutive DSCR Test Periods following the completion of such Restoration, Administrative Agent shall promptly disburse all such exceeds proceeds to Borrower.

(b) If an insured casualty or condemnation occurs and Administrative Agent is not obligated to disburse the insurance proceeds and/or condemnation award, as applicable for the Restoration of the Premises, then Administrative Agent may, in its absolute and sole discretion, apply all such insurance proceeds and/or condemnation awards against the principal balance, any interest due and owing and other sums due and owing under this Agreement, the Note and the other Loan Documents, in such order as Administrative Agent shall determine.

6.8 Inspection . On no less than twenty-four (24) hours’ prior notice, permit any authorized representatives designated by Administrative Agent and/or any Lender at the expense of Administrative Agent and such Lender, as applicable, to visit and inspect the Premises (subject to the rights of tenants under their leases) and any of the other properties of Borrower, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers, members, employees, representatives, and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested; provided that when an Event of Default exists, the foregoing shall be at the expense of Borrower.

6.9 Compliance with Laws, Etc. Exercise all commercially reasonable due diligence in order to comply with the requirements of all applicable Laws, including, without limitation, all Environmental Laws in all material respects.

6.10 Books and Records . Maintain proper records and accounts of all financial transactions and matters involving the assets and business of Borrower.

6.11 Maintenance of Permits, Etc. (a) Maintain in full force and effect all Permits, franchises, authorizations and other rights necessary for the operation of Borrower’s business and the Premises, and (b) notify Administrative Agent in writing, promptly after learning thereof, of the suspension, cancellation, revocation or discontinuance of or of any pending or threatened action or proceeding seeking to suspend, cancel, revoke or discontinue any of the foregoing.

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6.12 Leasing Restrictions . Not, without the prior express written consent of Administrative Agent, not to be unreasonably withheld, conditioned or delayed, (i) enter into any Major Leases, (ii) modify the form of a Major Lease previously approved by Administrative Agent (other than modifications to address customary lease modifications in the existing local market for similar properties that do not otherwise require Administrative Agent’s consent hereunder), (iii) modify, amend or terminate any Major Lease modify any Lease that will result in such Lease constituting a Major Lease, (iv) accept any rental payment more than thirty (30) days in advance of its due date or (v) enter into any ground lease of all or a substantial portion of the Premises. Any lease termination payments (i) in excess of $250,000 or (ii) during a Cash Sweep Period, shall be delivered to Administrative Agent (with any lease termination payments to be deposited into the Clearing Account and applied in accordance with the terms of this Agreement), on behalf of the Lenders, to be held as additional collateral for the Loan. Provided no Event of Default has occurred and is continuing, Borrower shall be permitted to request disbursements of any lease termination payments then being held by Administrative Agent to pay tenant improvement costs and leasing commission in connection with securing a replacement tenant for the applicable space. All Leases must contain an automatic attornment provision whereby upon a foreclosure, the tenant automatically shall recognize the successor owner as landlord and such tenant shall have no right to terminate its Lease upon such foreclosure. If Borrower enters into any new Lease or any modification or renewal of any existing Lease, at Administrative Agent’s request, Borrower shall cause the tenant thereunder to execute a subordination and attornment agreement in form and substance satisfactory to Administrative Agent unless such lease contains attornment provisions reasonably acceptable to Administrative Agent. Borrower shall provide Administrative Agent with copies of the fully executed Leases promptly following their execution. Notwithstanding the foregoing, so long as no Event of Default exists, Borrower may, without Administrative Agent’s prior written consent, enter into any Lease that is not a Major Lease so long as: (A) such Lease is on the form previously approved by Administrative Agent (subject to modifications to address customary lease modifications in the existing local market for similar properties that do not otherwise require Administrative Agent’s consent hereunder); (B) the tenant improvement costs relating to such Lease to be paid by Borrower are comparable to improvements made for other tenants engaged in a similar business; and (C) such Lease is not a “master lease” (i.e., a Lease which is entered into by Borrower, as landlord, with any Guarantor, any Affiliate of Borrower or any Guarantor, or Borrower itself, as tenant). Prior to seeking Administrative Agent’s consent to any proposed Major Lease, Borrower shall deliver to Administrative Agent (1) a term sheet for any such proposed Major Lease containing the applicable information reasonably approved by Borrower and Administrative Agent, (2) any reasonable information relating to the prospective tenant (to the extent such information is in Borrower’s possession and subject to Administrative Agent’s execution of a confidentiality agreement in form and substance reasonably acceptable to Administrative Agent, Borrower and the applicable prospective tenant) requested by Administrative Agent, including financial and credit information of prospective tenant; and an (3) executed letter of intent. To the extent Administrative Agent’s approval of a proposed Major Lease or termination, modification or amendment to a Major Lease is required under this Section and Administrative Agent fails to provide written notice of disapproval of such proposed Lease, together with reasonably detailed identification of the disapproved terms and corresponding alternative approved terms within five (5) Business Days after receipt of such notice, then Borrower shall submit a second written request for approval by first-class certified or registered United States mail, postage prepaid, return receipt

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requested, by nationally-recognized overnight courier, or by personal delivery, in all cases with charges prepaid, which second request shall contain (i) the following notice in bold-face capital letters in 14-point font or larger: “RESPONSE REQUIRED WITHIN TWO (2) BUSINESS DAYS OF RECEIPT. FAILURE TO DISAPPROVE THE SAME SHALL BE DEEMED APPROVAL IF NOT DISAPPROVED IN WRITING” and (ii) attach the initial request for approval. In the event that Administrative Agent fails to provide written notice of disapproval within two (2) Business Days of receipt of such second notice, together with reasonably detailed identification of the disapproved terms and corresponding alternative approved terms to such proposed Leases and any proposed modifications or amendments to any Lease, Administrative Agent’s approval and consent shall be deemed to have been granted. All Leases in excess of 50,000 square feet shall require approval of the Required Lenders and all requests for approval of proposed Leases in excess of 50,000 square feet shall be delivered simultaneously to Administrative Agent and the Lenders. Administrative Agent shall notify Borrower of the contact information for each Lender promptly upon Borrower request to facilitate obtaining such Lender’s approval. Notwithstanding the above, Borrower shall remit to Administrative Agent a copy of each new Lease together with any financial information received by Borrower with respect to such tenant.

6.13 Defaults Under Leases . Not suffer or permit (i) any breach or default to occur beyond any applicable notice and cure periods in any of Borrower’s obligations under any Major Leases, (ii) any Lease termination by reason of any failure of Borrower to meet any requirement of any Major Lease, including those with respect to any time limitation within which any of Borrower’s work is to be done or the space is to be available for occupancy by the tenant. Borrower shall notify Administrative Agent promptly in writing in accordance with Section 6.2 upon a default, beyond any applicable notice and cure period, under a Major Lease (other than, if applicable, a residential tenant or a tenant of a self-storage unit at the Premises).

6.14 Material Notices . Provide Administrative Agent with copies of all material notices received by Borrower from any: tenant (except for tenants under residential Leases), Governmental Authority or insurance company within five (5) Business Days after such notice is received. In addition, Borrower shall promptly provide Administrative Agent with written notice of any litigation, arbitration, or other proceeding or governmental investigation pending or threatened in writing against Borrower or the Premises. Notwithstanding the foregoing, Borrower shall not be obligated to provide Administrative Agent with written notice in respect of personal injury litigation against Borrower or the Premises if the amount claimed is less than $250,000.00, as long as the maximum liability under any such litigation is covered in its entirety by liability insurance maintained by Borrower and the insurance carrier has not refused the tender of defense or coverage.

6.15 Required Repairs . Complete the repairs noted on Schedule 6.15 within the time frames noted thereon unless such schedule is marked “N/A”.

6.16 Use of Premises . Unless required by applicable Law, not permit changes in (i) the use of the Premises, (ii) the plat of subdivision, or (iii) zoning classification, without, in each instance, Administrative Agent’s prior written consent.

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6.17 No Commingling of Funds/Accounts .

(a) Not commingle the funds related to the Premises with funds from any other property or Person.

(b) Establish any accounts other than the accounts specifically permitted herein, which accounts shall be maintained with Administrative Agent.

6.18 Personal Property . Maintain all of Borrower’s personal property, fixtures, attachments and equipment delivered upon, attached to, used or required to be used in connection with the operation of the Premises (collectively, the “ Personal Property ”) at the Premises and shall keep the same free and clear of all liens, encumbrances and security interests. Borrower shall not, without the prior written consent of Administrative Agent, sell, assign, transfer, encumber, remove or permit to be removed from the Premises any of the Personal Property; provided, however, that so long as no Event of Default has occurred and is continuing, Borrower may sell or otherwise dispose of the Personal Property when obsolete, worn out, inadequate, unserviceable or unnecessary for use in the operation of the Premises, but, if material to the operation of the Premises, only upon replacing the same with other Personal Property of substantially similar value and utility to the Personal Property that is disposed.

6.19 Appraisals . Cooperate with Administrative Agent in connection with Administrative Agent obtaining new or updated Appraisals of the Premises from time to time. Borrower shall pay for any such Appraisal if (a) an Event of Default exists, (b) the Appraisal is ordered following the occurrence of a casualty or condemnation of the Premises, (c) the Appraisal is the first Appraisal obtained by Administrative Agent during any calendar year, (d) the Appraisal is obtained to comply with any Laws or regulatory requests any Lender’s policy promulgated to comply therewith (but not more often than once in any calendar year in connection with this clause (d)), or (e) the Appraisal is obtained in connection with any extension of the Maturity Date.

6.20 Loss of Note s. Upon notice from Lender of the loss, theft, or destruction of the Notes and upon delivery of an affidavit of lost note and an indemnity regarding the same to Borrower, make and deliver a new note in exact form and substance of the then to be superseded Notes. In the event such lost, stolen or destroyed Note is subsequently located by Lender, such Lender shall promptly mark it as “CANCELLED AND VOID” and shall promptly return it to Borrower.

6.21 Site Visits, Observation and Testing . Permit Administrative Agent and the Lenders and their agents and representatives, upon notice to Borrower (but without having to provide notice in the event of an emergency or following the occurrence of an Event of Default hereunder), at any reasonable time, to enter and visit the Premises (subject to the rights of tenants under their Leases) for the purpose of performing appraisals, observing the Premises, taking and removing soil or groundwater samples (if an Event of Default has occurred and is continuing and Administrative Agent, after consultation with an environmental engineer, reasonably believes there exist Hazardous Materials at the Premises in violation of any Environmental Laws), obtaining property condition reports, and conducting tests on any part of the Premises. However, Administrative Agent and the Lenders have no duty to visit or observe the Premises or to conduct tests, and no site visit, observation or testing by Administrative Agent or the Lenders, their agents or representatives shall impose any

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liability on any of Administrative Agent or the Lenders, their agents or representatives except to the extent of such party’s gross negligence or willful misconduct. Neither Borrower nor any other party is entitled to rely on any site visit, observation or testing by any of Administrative Agent or the Lenders, their agents or representatives. None of Administrative Agent, the Lenders, or their agents or its representatives owe any duty of care to protect Borrower or any other party against, or to inform Borrower or any other party of any other adverse condition affecting the Premises. Administrative Agent and the Lenders shall make reasonable efforts to avoid interfering in any material respect with Borrower’s use of the Premises in exercising any rights provided in this Section 6.21 .

6.22 Single Purpose Entity . At all times prior to the Closing Date and shall hereafter comply with the following single purpose entity covenants:

(a) Omitted.

(b) Borrower shall maintain correct and complete financial statements, accounts, books and records and other entity documents separate from those of any Affiliate of Borrower or of any Equity Holder or any other Person. Borrower’s financial statements shall substantially comply with Accounting Principles (or such other accounting methods as are acceptable to Administrative Agent).

(d) Borrower shall hold itself out to the public under Borrower’s own name and as a separate and distinct entity and not as a department, division or otherwise of any Affiliate of Borrower or of any Equity Holder.

(e) Borrower shall observe all customary formalities regarding the existence of Borrower, including holding meetings and maintaining current and accurate minute books separate from those of any Affiliate of Borrower or of any Equity Holder.

(f) Borrower shall hold title to its assets in its own name and act solely in its own name and through its own duly authorized officers, agents and/or sole members. No Affiliate of Borrower or of any Equity Holder shall be appointed or act as agent of Borrower, other than as a property manager or leasing agent with respect to the Premises.

(g) Investments shall be made in the name of Borrower directly by Borrower or on its behalf by brokers engaged and paid by Borrower.

(h) Except as required by Administrative Agent, Borrower shall not guarantee, pledge or assume or hold itself out or permit itself to be held out as having guaranteed, pledged or assumed any liabilities or obligations of any Equity Holder or any Affiliate of Borrower, nor shall it make any loan, except as permitted in the Loan Documents.

(i) Borrower is solvent and shall undertake commercially reasonable efforts to remain solvent; provided , however , that nothing in this section (i) shall require any Equity Holder

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(except in connection with any guarantees granted in connection with the Loan) to provide additional capital to Borrower.

(j) Assets of Borrower shall be separately identified, maintained and segregated. Borrower’s assets shall at all times be held by or on behalf of Borrower and if held on behalf of Borrower by another Person, shall at all times be kept identifiable (in accordance with customary usages) as assets owned by Borrower. This restriction requires, among other things, that (A) funds of Borrower shall be deposited or invested in Borrower’s name, (B) funds of Borrower shall not be commingled with the funds of any Affiliate of Borrower or of any Equity Holder, (C) Borrower shall maintain all accounts in its own name and with its own tax identification number, separate from those of any Affiliate of Borrower or of any Equity Holder, and (D) funds of Borrower shall be used only for the business of Borrower.

(k) Borrower shall maintain its assets in such a manner that it is not costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate of Borrower or of any Equity Holder.

(l) Borrower shall pay or cause to be paid its own liabilities and expenses of any kind, including but not limited to salaries of its employees, only out of its own separate funds and assets.

(m) Borrower shall at all times undertake commercially reasonable efforts to be adequately capitalized to engage in the transactions contemplated at its formation; provided , however , that nothing in this Section 6.22(m) shall require any Equity Holder (except in connection with any guarantees granted in connection with the Loan) to provide additional capital to Borrower.

(n) All data and records (including computer records) used by Borrower or any Affiliate of Borrower in the collection and administration of any loan shall reflect Borrower’s ownership interest therein.

(o) No funds of Borrower shall be invested in securities issued by, nor shall Borrower acquire the indebtedness or obligation of, an Affiliate of Borrower or of an Equity Holder.

(p) Borrower shall maintain an arm’s length relationship with each of its Affiliates and may enter into contracts or transact business with its Affiliates only on commercially reasonable terms that are no less favorable to Borrower than is obtainable in the market from a Person that is not an Affiliate of Borrower or of any Equity Holder.

(q) Borrower shall correct any misunderstanding that is known by Borrower regarding its name or separate identity.

6.23 Underground Storage Tank Removal and Remediation . The Phase I has identified the existence of an underground storage tank (“ UST ”) at the Premises. Borrower shall remove the UST in accordance with applicable regulations and obtain all necessary approvals by applicable Governmental Authorities within 120 days after the Closing Date. If the UST has been removed and Borrower has completed any necessary remediation associated with the UST, but has

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not yet obtained the necessary approvals, then such 120 day period shall be extended so long as Borrower is diligently pursuing the necessary governmental approvals and is otherwise complying with any requirements by applicable Governmental Authorities in connection with the removal of the UST. Failure to comply with the requirements of this Section 6.23 shall constitute an Event of Default.

6.24 Hedging Contracts.

(a) Within thirty (30) days after the Closing Date, Borrower shall hedge LIBOR for the term of the Loan by maintaining one or more Hedging Contracts in an aggregate notional amount equal to seventy-five percent (75%) of the Loan that caps LIBOR at a rate not to exceed three and one-half percent (3.5%), that is coterminous with the initial Maturity Date and that is otherwise upon terms and subject to such conditions reasonably acceptable to Administrative Agent. If the counterparty to a Hedging Contract is not Administrative Agent or an Administrative Agent Affiliate (a “ Third-Party Hedge Provider ”) such Third-Party Hedge Provider shall have a long term, unsecured and unsubordinated debt rating of at least A- by S&P and A3 by Moody’s. In the event of any downgrade, withdrawal or qualification of the rating of such Third-Party Hedge Provider below A- by S&P or A3 by Moody’s, Borrower shall replace the Hedging Contract then in effect with an Lender Hedging Contract or with a Hedging Contract from a Third-Party Hedge Provider meeting the above ratings’ requirements not later than fifteen (15) Business Days after learning of such downgrade, withdrawal or qualification.

(b) Any Lender Hedging Contract shall be secured by the Security Documents. Any Hedging Contract with a Third-Party Hedge Provider shall not have recourse to Borrower and shall not be secured by the Security Documents.

(c) Borrower’s interest in any Hedging Contract shall be collaterally assigned to Administrative Agent for the benefit of the Lenders pursuant to documentation reasonably satisfactory to Administrative Agent and the counterparty thereto shall execute an acknowledgment of such assignment, which acknowledgment shall include an agreement to (i) pay directly into the Operating Account all sums payable pursuant to such Hedging Contract and (ii) provide Administrative Agent with the ability to cure any Borrower defaults under such Hedging Contract, and shall otherwise be reasonably satisfactory to Administrative Agent in form and substance.

6.25 Guarantor Impairment . Promptly notify Administrative Agent of any death, incarceration, declaration of incompetency, bankruptcy filing or dissolution of any Guarantor.

6.26 Capital Improvements Reserve . Borrower shall (i) complete all capital improvements indicated on Schedule 6.26 (the “ Required Capital Improvements ”), and (ii) shall expend at least $6,500,000.00 on capital improvements at the Premises. Borrower shall have the right to satisfy the requirements set forth in clause (i) and (ii) above, by depositing with Administrative Agent a reserve (the “ Capital Improvements Reserve ”) in an amount equal to the sum of (x) the cost to complete any Required Capital Improvements that have not yet been completed, as reasonably determined by Administrative Agent, plus (y) if Borrower has not expended at least $6,500,000.00 on capital improvements at the Premises as of such date, the difference between such amount and the amount actually expended by Borrower on capital improvements at the Premises

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(less any amounts deposited pursuant to (i) above). Provided that no Event of Default has occurred and is continuing, funds in the Capital Improvement Reserve shall be released to Borrower as the remaining Required Capital Improvements are completed and upon satisfaction by Borrower of the terms and conditions set forth in Section 1 and Section 4 of Exhibit F, provided, however, that paragraph 11 of Section 1 (regarding receipt by Lender of a date down endorsement from the Title Company) shall not be required for releases for Required Capital Improvements

ARTICLE VII
NEGATIVE COVENANTS

So long as any Obligation shall remain unpaid or the Lenders shall have any Commitment hereunder, Borrower shall not, without the prior written consent of Administrative Agent:

7.1 Liens, Etc. Directly or indirectly create, incur, assume, or permit to exist any Lien upon or with respect to any of its assets or properties, including the Premises, whether now owned or hereafter acquired (other than the Permitted Encumbrances).

7.2 Debt . Create, incur, assume, or permit to exist any Debt (excluding any Hedging Contract required under this Agreement or the other Loan Documents), except for (a) Debt owed to the Lenders and (b) Debt in the ordinary course of business that is not secured by the Premises, but not to exceed in the aggregate one percent (1%) of the Loan amount.

7.3 Mezzanine Debt . Permit any direct or indirect ownership interest in Borrower to be pledged as security for any Debt except as permitted in the definition of Change in Control.

7.4 Borrower as Tenant . Create, incur, assume, or permit to exist any obligations for the payment of rent for any property under leases or agreements to lease (other than Capital Leases).

7.5 Equity Payments, Etc. Declare or pay any dividends or distributions, allow the purchase or otherwise sell for value any of its Ownership Interests, or make any distribution of assets to any of the holders of its Ownership Interests as such, except that, so long as no Event of Default or Cash Sweep Period exists, Borrower may declare and deliver dividends and make distributions of excess cash flow to the owners of Borrower.

7.6 Fundamental Changes; Change in Control . (a) change its, or permit any Entity Guarantor, to change its structure, name, location or jurisdiction, or organizational number, (b) alter the nature or character of its business as presently conducted, (c) consolidate with, merge with, or acquire all or substantially all of the Ownership Interests of any Entity, (d) institute any change in the management structure of Borrower without the prior express written consent of Administrative Agent, (e) liquidate, windup, or dissolve, or allow any Entity Guarantor to liquidate, windup, or dissolve, (f) create any subsidiary, or (g) permit a Change in Control to occur. Notwithstanding the foregoing, Permitted Transfers shall not be prohibited and are expressly permitted hereunder, provided, however, that Transfers that are not expressly prohibited shall be

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conditioned upon Borrower’s ability to, after giving effect to the transfer in question, (i) remake the representations contained in Section 5.11 and Section 9.20 and (ii) continue to comply with the covenants contained Section 9.20 . Upon request from Administrative Agent, Borrower shall promptly provide Administrative Agent a revised version of the organizational chart attached hereto as Schedule 5.7 (as such chart may be updated from-time-to-time) reflecting any changes to such organizational chart as a result of any equity transfer consummated in accordance with these requirements.

7.7 Loans, Investments, Contingent Liabilities . Make or permit to remain outstanding any loan or advance to, or guarantee, induce or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase or acquire any stock, obligations or securities of or any other interest in, or make any capital contribution to, any other Person, except that Borrower may endorse negotiable instruments for deposit or collection or similar transactions in the ordinary course of business.

7.8 Asset Sales . Except for Transfers, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, the Premises or all or any other part of its business, properties, or assets except in the ordinary course of its business, whether now owned or hereafter acquired.

7.9 Transactions with Affiliates . Enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of Borrower on terms that are less favorable to Borrower than those that might be obtained at the time from Persons who are not such an Affiliate.

7.10 Conduct of Business . Engage in any business other than (a) the businesses engaged in by Borrower on the Closing Date and similar or directly related businesses and (b) such other lines of business as may be consented to by Administrative Agent in writing.

7.11 Fiscal Year . Change Borrower’s fiscal year.

7.12 Limitation on Other Restrictions on Amendment of the Loan Documents . Enter into, or become subject to any agreement or instrument that would prohibit or require the consent of any Person to any amendment, modification or supplement to any of the Loan Documents.

7.13 Limitations on Modifications of Certain Agreements and Instruments . Amend, modify or supplement its charter or governing documents.

7.14 Property Management and Leasing Agreements . Enter into any property management or leasing agency agreement with respect to the Premises unless each such agreement (a) shall be expressly subordinate or made subordinate to the Mortgage, (b) shall have been reasonably approved in writing by Administrative Agent prior to its execution and delivery by Borrower, (c) shall be assigned to Administrative Agent, (d) shall be terminable without cause by Borrower upon not more than thirty (30) days’ notice, and in the case of the foregoing clauses (a)

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and (c) , upon documentation acceptable to Administrative Agent. Administrative Agent hereby approves Manager as the manager of the Premises, and further pre-approves CBRE, Inc., Transwestern, Hines, Cushman & Wakefield as replacement for Manager. Borrower shall not change said Manager or modify, amend, terminate or cancel any management or leasing contracts without the prior written approval of Administrative Agent, which approval shall not be unreasonably withheld, conditioned or delayed.

ARTICLE VIII
EVENTS OF DEFAULT

8.1 Events of Default . If any of the following events (hereinafter each such event being referred to as an “ Event of Default ”) shall occur and be continuing:

(a) Borrower shall fail to pay, when due, any amount of principal of the Loan, any interest on the Loan, or any fee hereunder, or any other amount payable hereunder or under any other Loan Document; or

(b) Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 7.2 , 7.3 , 7.6 , or 7.8 of this Agreement; or

(c) Borrower breaches its obligations under (i) Sections 6.1 and such breach is not cured within five (5) Business Days after written notice to Borrower from Administrative Agent, or (ii) Section 6.6 ; or

(d) Any Loan Party shall fail to perform or observe any term, covenant or agreement contained in this Agreement or any other Loan Document other than those referred to in Sections 8.1(a), (b) or (c) above and any such failure shall remain unremedied for thirty (30) days after notice from Administrative Agent; provided , however , that if such non-monetary default is susceptible of cure but cannot reasonably be cured within such 30-day period, and Borrower (or Guarantor, if applicable) shall have commenced to cure such default within such 30-day period and thereafter diligently and expeditiously proceeds to cure the same, such 30-day period shall be extended for an additional period of time as is reasonably necessary for Borrower (or Guarantor, if applicable) in the exercise of due diligence to cure such default, such additional period not to exceed ninety (90) days; or

(e) Any representation or warranty made by any Loan Party in any Loan Document shall prove to have been false or incorrect in any material respect when made or deemed made; or

(f) (i) Any Loan Party shall commence any case, proceeding or other action (A) under any existing or future Law, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or shall make a general assignment for the benefit of its creditors; or (ii) there shall be

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commenced against any Loan Party any case, proceeding, or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed or undischarged for a period of sixty (60) days; or

(g) Omitted; or

(h) One or more judgments, attachments or decrees shall be entered against Borrower in excess of $3,000,000 or any Guarantor in excess of $20,000,000 and all such judgments, attachments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or

(i) There shall occur one or more ERISA Events that might reasonably be expected to result in liability of any Loan Party or any of their respective ERISA Affiliates during the term of this Agreement; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), which exceeds the amount set forth in the financial statements delivered pursuant to Section 6.1 of this Agreement and such benefit liabilities remains unfunded for ten (10) Business Days after Administrative Agent’s delivery of written notice to Borrower; or

(j) Any guaranty relating to the Loan, for any reason other than satisfaction in full of all Obligations or reduction of the Payment Guaranty in accordance with the provisions of the Guaranty and Section 6.26 of this Agreement, ceases to be in full force and effect or is declared null and void, or any Guarantor denies that it has any further liability under such guaranty or gives notice to such effect or any Guarantor breaches any financial covenant in such Guarantor’s Guaranty; or

(k) Any Security Document shall cease to be in full force and effect or any Lien created by or purported to be created by the Security Documents ceases to be valid, enforceable and perfected first priority liens except to the extent expressly permitted by the Loan Documents and such failure shall continue for ten (10) Business Days after Administrative Agent’s delivery of written notice to Borrower; or

(l) Omitted;

(m) A Change in Control shall occur; or

(n) Seizure (except for seizures which, after prior notice to Administrative Agent, are being contested in good faith by Borrower by appropriate proceedings and for which a final non-appealable decision has not been rendered) or foreclosure of any of the properties or assets of Borrower pursuant to process of law or by respect of legal self-help; or

(o) The conveyance or lease of any of the air development rights with respect to the Premises without the prior express written consent of Administrative Agent (Borrower hereby agreeing that such sale or Lease shall conclusively impair the security interest of the Mortgage); or

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(p) A default, after any applicable notice and cure period, shall have occurred under any Hedging Contract required hereunder; or

(q) A default shall have occurred beyond any notice and cure period under any other Loan Document; or

(r) A default shall have occurred beyond any notice and cure period under any Major Lease; or

(s) There shall have occurred a material default under the Management Agreement, which continues after any notice and/or cure period provided for therein.

THEN,

(i) upon the occurrence of any Event of Default described in Section 8.1(f) above, the Loan, together with all accrued interest thereon, and all other Obligations under this Agreement, the Notes, and the other Loan Documents shall automatically become due and payable and upon any other Event of Default, Administrative Agent may, upon notice to Borrower, declare the Loan, together with all accrued interest thereon, and all other Obligations under this Agreement, the Notes, and the other Loan Documents to be due and payable, whereupon the same shall immediately become due and payable;

(ii) Administrative Agent may exercise the remedies available to it and the Lenders hereunder and under the other Loan Documents and at law and in equity; and

(iii) Administrative Agent may apply on account of the Obligations any unexpended monies still retained by Administrative Agent that were paid by Borrower to Administrative Agent: (A) for the payment of, or as security for the payment of Real Estate Taxes, assessments or other governmental charges, insurance premiums, or any other charges or (B) to secure the performance of some act by Borrower.

8.2 Application of Funds . After the exercise of remedies under Section 8.1 above, any amounts received on account of the Obligations shall be applied by Administrative Agent in the following order of priority:

(i) First, to the payment of all fees, costs and expenses (including reasonable attorneys’ fees and expenses, and expressly including any and all post-judgment collection costs and expenses ) incurred by Administrative Agent and/or its agents or representatives arising under this Loan Agreement and any of the other Loan Documents, including, those arising in connection with the realization of such payments or proceeds;

(ii) Second, to the payment in full of all accrued interest and other sums, if any, due and owing under the Note and the other Loan Documents; and

(iii) Third, to the payment in full of all outstanding principal, if any, due and owing under the Notes;

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(iv) Fourth, to the payment of any other amounts due and payable pursuant to the Loan Documents and any Additional Interest (as defined in the Mortgage);

(v) Fifth, amounts to be held in reserve by Administrative Agent for future payment of Real Estate Taxes, insurance premiums and other Operating Expenses (as determined by Administrative Agent in its sole discretion); and

(vi) Last, the balance, if any, of such payments, proceeds, or amounts to Borrower, or, if otherwise determined by a court of competent jurisdiction, to any Person who may be entitled thereto.

ARTICLE IX
MISCELLANEOUS

9.1 Amendments, Etc. No amendment to or waiver of any term, covenant, condition or requirement of this Agreement shall in any event be effective unless specifically evidenced in a writing signed by or on behalf of Administrative Agent. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

9.2 No Implied Waiver; Remedies Cumulative . No delay or failure of Administrative Agent in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of Administrative Agent and the Lenders under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement, at law, or otherwise.

9.3 Notices .

(a) All notices and other communications (collectively, “notices”) under this Agreement shall be in writing, except as otherwise expressly permitted herein, and shall be sent by first-class certified or registered United States mail, postage prepaid, return receipt requested, by nationally-recognized overnight courier, or by personal delivery, in all cases with charges prepaid, to the following address, unless and until a party shall have notified the other party hereto of a substitute address:

If to Borrower:

KBS SOR City Tower, LLC

c/o KBS Capital Advisors LLC

800 Newport Center Drive, Suite 700

Newport Beach, California 92660

Attn: Shep Wainwright, Senior Vice President

Email: swainwright@kbs.com

and to:

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KBS SOR City Tower, LLC

c/o KBS Capital Advisors LLC

800 Newport Center Drive, Suite 700

Newport Beach, California 92660

Attn: Todd Smith, Vice President, Controller

REIT Corporate Account

Email: tsmith@kbs.com

and to:

KBS SOR City Tower, LLC

c/o KBS Capital Advisors LLC

800 Newport Center Drive, Suite 700

Newport Beach, California 92660

Attn: Kimberley Smith, Senior Vice President,

Director of Property Management

Email: ksmith@kbs.com

With a copy to:

Sheppard Mullin Richter & Hampton LLP

650 Town Center Drive, 4 ^th Floor

Costa Mesa, CA 92626

Attn: Scott A. Morehouse, Esq.

Email: smorehouse@sheppardmullin.com

If to Guarantor:

KBS SOR City Tower, LLC

c/o KBS Capital Advisors LLC

800 Newport Center Drive, Suite 700

Newport Beach, California 92660

Attn: Shep Wainwright, Senior Vice President

Email: swainwright@kbs.com

and to:

KBS SOR City Tower, LLC

c/o KBS Capital Advisors LLC

800 Newport Center Drive, Suite 700

Newport Beach, California 92660

Attn: Todd Smith, Vice President, Controller

REIT Corporate Account

Email: tsmith@kbs.com

and to:

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KBS SOR City Tower, LLC

c/o KBS Capital Advisors LLC

800 Newport Center Drive, Suite 700

Newport Beach, CA 92660

Attn: Bryce Lin, Director of Finance and Reporting

Email: blin@kbs.com

With a copy to:

Sheppard Mullin Richter & Hampton LLP

650 Town Center Drive, 4 ^th Floor

Costa Mesa, California 92626

Attn: Scott A. Morehouse, Esq.

Email: smorehouse@sheppardmullin.com

If to Administrative Agent:

Compass Bank

2020 Main Street, Suite 950

Irvine, California 92614

Attention: Gabe Potyondy, Managing Director

With a copy to:

Compass Bank

8333 Douglas Avenue, 5 ^th Floor

Dallas, Texas 75225

Attn: Danielle Farnham, Senior Vice President

With a copy to:

Ballard Spahr LLP
1675 Broadway, 19 ^th Floor
New York, New York 10019-5820
Attention: Jeffrey S. Page, Esq.

(b) Any properly given notice shall be deemed given or made upon the earliest of: (i) if delivered by hand or by overnight courier, one Business Day after delivery to such hand or overnight courier; or (ii) if delivered by mail, three Business Days after deposit in the mail; provided that notices to Administrative Agent pursuant to ARTICLE II shall not be effective until actually received by Administrative Agent. Administrative Agent may rely on any notice (whether or not made in a manner contemplated by this Agreement) purportedly made by or on behalf of Borrower, and Administrative Agent shall have no duty to verify the identity or authority of the Person giving such notice.

9.4 Expenses . Borrower agrees to pay upon demand all reasonable costs and expenses (including reasonable fees and expenses of outside counsel, auditors, appraisers and other

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professional, accounting and consulting costs, and during the continuance of an Event of Default, a reasonable estimate of the allocated costs of in-house counsel and staff, and costs associated with recording and filing any Security Document, searching liens against the Premises, and any and all post-judgment collection costs and expenses) which Administrative Agent may incur from time to time in connection with the preparation, amendment, modification, enforcement or restructuring or preservation of rights or remedies under, this Agreement. Upon request by Borrower, Administrative Agent shall provide evidence of such costs and expenses.

9.5 Indemnity . Borrower shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless Administrative Agent and the Lenders, and their shareholders, officers, directors, employees and agents of Administrative Agent and the Lenders (collectively, the “ Indemnified Parties ”) from and against any and all losses imposed upon or incurred by or asserted against any Indemnified Parties and directly or indirectly arising out of or in any way relating to any one or more of the following: (a) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Premises or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (b) any use, nonuse or condition in, on or about the Premises or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (c) performance of any labor or services or the furnishing of any materials or other property in respect of the Premises or any part thereof; (d) any failure of the Premises to be in compliance with any applicable Laws; (e) any and all claims and demands whatsoever which may be asserted against the Indemnified Parties by reason of any alleged obligations or undertakings on their part to perform or discharge any of the terms, covenants or agreements contained in any lease, management agreement or any other agreement for services with respect to the Premises to which Borrower is a party; and (f) the payment of any commission, charge or brokerage fee to anyone (other than a broker or other agent retained by Administrative Agent) which may be payable in connection with the funding of the Loan evidenced by the Notes and secured by the Mortgage, except to the extent any such loss is the result of the fraud, gross negligence or willful misconduct of such Indemnified Party.

9.6 Protective Advances . Administrative Agent shall have the right, with notice to Borrower to the extent practicable and so long as no Event of Default is continuing, to take such action as Administrative Agent deems reasonably necessary to preserve and protect its interest in the Premises, including, without limitation, obtaining insurance coverage as required hereunder, and all expenses incurred by Administrative Agent and/or the Lenders in connection with such action or in obtaining such insurance shall be secured by the Mortgage and paid by Borrower to Administrative Agent and/or the Lenders, as applicable, upon demand and, until paid, shall bear interest at the Default Rate.

9.7 Assignments and Participations.

(a) No Lender may sell, assign, transfer, pledge, mortgage or hypothecate its rights or obligations (including, without limitation, its Commitment) under this Agreement or any of the other Loan Documents except as expressly permitted under this Section 9.7 . Each Lender shall have the right to assign or transfer its rights and obligations arising under this Agreement and any of its rights and security hereunder and under the other Loan Documents, in whole or in part,

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subject to the receipt of the prior written consent of the Administrative Agent, provided that Administrative Agent shall be required to remain the administrative agent under the Loan provided that no Event of Default has occurred and is continuing and Administrative Agent has not elected to discontinue administering real estate loans in the State of California (subject to the Required Lenders’ right to remove Administrative Agent if Administrative Agent is grossly negligent or commits willful misconduct). In addition to obtaining the consent of the Administrative Agent, the consent of Borrower (such consent not to be unreasonably withheld or delayed) shall be required to the extent any Lender shall assign or transfer its rights and obligations arising under this Agreement and any of its rights and security hereunder and under the other Loan Documents, in whole or in part, unless an Event of Default has occurred and is continuing at the time of such assignment. If Borrower’s consent to an assignment or transfer is required under this Section 9.7 and Borrower fails to provide written notice of disapproval of such assignment or transfer within five (5) Business Days after receipt of such notice, then Administrative Agent shall submit a second written request for approval by first-class certified or registered United States mail, postage prepaid, return receipt requested, by nationally-recognized overnight courier, or by personal delivery, in all cases with charges prepaid, which second request shall contain (i) the following notice in bold-face capital letters in 14-point font or larger: “RESPONSE REQUIRED WITHIN TWO (2) BUSINESS DAYS OF RECEIPT. FAILURE TO DISAPPROVE THE SAME SHALL BE DEEMED APPROVAL IF NOT DISAPPROVED IN WRITING” and (ii) attach the initial request for approval. In the event that Borrower fails to provide written notice of disapproval within two (2) Business Days of receipt of such second notice, Borrower’s approval and consent shall be deemed to have been granted. With respect to any such assignment permitted under the terms of this Section 9.7 , such assignment shall be further subject to the following conditions, that (i) the parties to each such assignment shall execute and exchange an assignment and assumption agreement (“ Assignment and Assumption ”) in substantially the form of Exhibit E attached hereto, (ii) each such assignment or transfer shall be of all of such Lender’s rights and obligations to the extent of the Percentage so assigned, (iii) each assignment or transfer is made upon at least fifteen (15) days prior written notice to Administrative Agent, (iv) each assignment or transfer is consented to by Administrative Agent, such consent not to be unreasonably withheld, conditioned or delayed if the proposed assignee or transferee is an Eligible Assignee and has provided to Administrative Agent such documents and/or information as Administrative Agent shall reasonably request in connection with such assignment or transfer. Upon such execution and exchange and if such Assignment and Assumption Agreement has been properly completed and consented to if required herein upon the effective date specified in the applicable Assignment and Assumption Agreement, (A) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it and assumed by it pursuant to such Assignment and Assumption Agreement, have the rights and obligations of a Lender hereunder and under the other Loan Documents, and Borrower hereby agrees that all of the rights and remedies of an assignee in connection with the interest so assigned shall be enforceable against Borrower by Administrative Agent on behalf of such assignee with the same force and effect and to the same extent as the same would have been enforceable but for such assignment, and (B) the assignor thereunder shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Assumption Agreement, relinquish its rights and be released from all of its obligations hereunder and thereunder. Notwithstanding anything to the contrary contained herein, no Lender shall be permitted to assign all or any portion of its rights or obligations under this Agreement and the other Loan Documents

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to Borrower or any Affiliate of Borrower. All the rights and remedies of Borrower in connection with the interest so assigned shall be enforceable against such Eligible Assignee. In connection with any such assignment, the transferor Lender shall pay to Administrative Agent an administrative fee for processing such assignment in the amount of $4,500, which shall be fully earned and shall be due and payable upon the effectiveness of any such assignment. Any partial assignment of a Lender’s portion of the Loan shall be in an amount at least equal to $5,000,000. Any assignment or transfer under this Section 9.7 shall be at no cost, expense or liability to Borrower for Administrative Agent’s or any Lender’s costs and expenses (other than (x) de minimis costs or expenses of Administrative Agent and (y) any costs incurred by Borrower).

(b) If at any time an assignment by the Administrative Agent of its interest in the Loan results in Administrative Agent holding less than 33 1/3% of the Commitment, then Borrower shall have the right within fifteen (15) Business Days after such assignment, to notify and require that Administrative Agent resign as administrative agent and a success administrative agent shall be appointed in accordance with the terms of Article X .

(c) Promptly upon receipt of a fully executed and completed Assignment and Assumption Agreement, Administrative Agent shall record the information contained therein in its records and Administrative Agent shall promptly deliver a copy thereof to Borrower (provided that neither the Administrative Agent nor the Lender shall be liable for any failure to give such notice).

(d) Administrative Agent shall maintain a copy of each Assignment and Assumption Agreement delivered to and accepted by it and shall record in its records the name and address of such Lender and the Commitment of, and Percentage of the Loan owing to, such Lender from time to time. Borrower, Administrative Agent, and the Lenders may treat each entity whose name is so recorded as a Lender hereunder for all purposes of this Agreement.

(e) Anything in this Agreement to the contrary notwithstanding, and without the need to comply with any of the formal or procedural requirements of this Agreement, including this Section, each Lender may at any time and from time to time pledge and assign all or any portion of its rights under all or any of the Loan Documents to a Federal Reserve Bank or any Federal Home Loan Bank and such pledge shall be enforceable in accordance with the terms thereof.

(f) Anything in this Agreement to the contrary notwithstanding, any Lender may assign all or any portion of its rights and obligations under this Agreement to another branch bank or Affiliate of such Lender without first obtaining the approval of Administrative Agent or Borrower, provided that (A) such Lender remains liable hereunder unless Administrative Agent shall otherwise agree, (B) at the time of such assignment such Lender is not in default under its obligations hereunder, (C) such Lender gives Administrative Agent at least fifteen (15) days prior written notice of any such assignment, and (D) the parties to such assignment execute and deliver to Administrative Agent an Assignment and Assumption Agreement.

(g) Each Lender shall have the right, without the consent of Borrower or Administrative Agent, to sell participations to one or more other Person (each, a “ Participant ”) in or to all or a portion of its rights and obligations hereunder and under the other Loan Documents; provided, however, that (i) such Lender’s obligations under this Agreement (including without

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limitation its Commitment to Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of its obligations hereunder, (iii) Borrower, Administrative Agent and other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and with regard to any and all payments to be made under this Agreement, and (iv) the holder of any such participation interest shall not be entitled to voting rights under this Agreement or the other Loan Documents. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement, provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in Section 10.6(b) hereof. Any partial participation of a Lender’s portion of the Loan shall be in an amount at least equal to $5,000,000. Any Lender’s efforts to sell a participation in the Loan shall be at no cost, expense or liability to Borrower for Administrative Agent’s or any Lender’s costs and expenses (other than (x) de minimis costs or expenses of Administrative Agent and (y) any costs incurred by Borrower).

(h) Borrower acknowledges and agrees that, subject to Section 9.15 hereof, Administrative Agent and/or a Lender may provide to any prospective Eligible Assignee, prospective Participant or prospective pledgees originals or copies of this Agreement, any other Loan Document and any other documents, instruments, certificates, opinions, insurance policies, letters of credit, reports, requisitions and other materials and information of every nature or description, and may communicate all oral information, at any time submitted by or on behalf of Borrower or Guarantor or received by Administrative Agent or such Lender in connection with the Loan or with respect to Borrower or Guarantor and such recipients shall be subject to confidentiality terms in accordance with Section 9.15 . In order to facilitate assignments, transfers or grants of participation interests to an Eligible Assignee or a Participant, Borrower shall execute such further documents, instruments or agreements as Administrative Agent may request, including, without limitation, one or more new or replacement promissory notes, dated as of the effective date of an Assignment and Assumption Agreement, after giving effect to such Assignment and Assumption Agreement, in exchange for the surrender from Administrative Agent to Borrower of the then outstanding promissory Notes, marked “Replaced” or “Substituted”, unless the original of such Notes is required to be maintained by Administrative Agent under applicable law; provided, however, that Borrower shall not be required to execute any document or agreement which would decrease its rights, or increase its obligations, relative to those set forth in this Agreement or any of the other Loan Documents (including financial obligations, personal recourse, representations and warranties and reporting requirements). In addition, Borrower agrees to cooperate with Administrative Agent and each Lender in the exercise of such Lenders’ rights pursuant to this Section 9.7 , including providing such information and documentation regarding Borrower as Administrative Agent, Lender or any potential Eligible Assignee or Participant may reasonably request and to meet with potential Eligible Assignees and/or Participants; provided, however, that under no circumstances shall Borrower or any of its affiliates be obligated to execute any certificates or similar documents or provide any representations or warranties confirming the accuracy of any information or otherwise.

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(i) Omitted.

(j) No Eligible Assignee of any rights and obligations under this Agreement shall be permitted to subassign such rights and obligations and no Participant in any rights and obligations under this Agreement shall be permitted to sell subparticipations of such rights and obligations without the express written consent of Administrative Agent.

(k) Secondary Market Transaction . Borrower acknowledges that Administrative Agent may effectuate a Secondary Market Transaction. Borrower shall cooperate in good faith with Administrative Agent in effecting any such Secondary Market Transaction and shall cooperate in good faith to implement all requirements imposed by any Investor involved therein, including, without limitation, all structural or other changes to Borrower and/or the Debt, and modifications to any Loan Documents; provided , however , that Borrower shall not be required to modify any Loan Documents if such modification would (A) increase the interest rate payable under the Notes, (B) shorten the period until the stated maturity of the Notes, (C) modify the amortization of principal of the Notes, or (D) modify any other material term of the Debt. Borrower shall provide such information and documents relating to Borrower, any Guarantor, the Premises and any tenants as Administrative Agent may reasonably request in connection with such Secondary Market Transaction, provided, however, that Borrower’s failure to provide such information shall not constitute a default hereunder if Borrower is unable to obtain such information after exercising commercially reasonable efforts to obtain the same. Borrower shall make available to Administrative Agent all information concerning its business and operations that Administrative Agent may reasonably request. Subject to the provisions of Section 9.15 , Administrative Agent shall be permitted to share all information provided in connection with the Loan with the Investors, investment banking firms, accounting firms, law firms and other third-party firms involved with the Loan Documents or the applicable Secondary Market Transaction. It is understood that the information provided to Administrative Agent in connection with the Loan may ultimately be incorporated into the offering documents for the Secondary Market Transaction and thus potential Investors may also see some or all of the information with respect to the Loan, the Premises, Borrower and the owners of Borrower; provided, however, that such recipients shall be subject to confidentiality terms in accordance with Section 9.15 . Borrower irrevocably waives any and all rights it may have under any applicable laws (including, without limitation, any right of privacy) to prohibit such disclosure. Administrative Agent and all of the aforesaid third-party advisors and professional firms shall be entitled to rely on the information supplied by, or on behalf of, Borrower. Borrower shall take all actions as Administrative Agent may reasonably request to assist Administrative Agent in its Secondary Market Transaction effort. Without limiting the generality of the foregoing, Borrower shall, at the request of Administrative Agent (a) facilitate the review of the Loan and the Premises by any prospective lender; (b) assist Administrative Agent and otherwise cooperate with Administrative Agent in the preparation of information offering materials (which assistance may include reviewing and commenting on drafts of such information materials and drafting portions thereof); (c) deliver updated information on Borrower and the Premises; (d) make representatives of Borrower available at reasonable times and upon reasonable notice to meet with prospective lenders at tours of the Premises and bank meetings, which meeting shall take place at the Premises or at Borrower’s offices; (e) facilitate direct contact between the senior management and advisors of Borrower and any prospective lender, which meeting shall take place at Borrower’s

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offices; and (f) provide Administrative Agent with all information reasonably deemed necessary by it to complete the syndication successfully; provided, however, that under no circumstances shall Borrower or any of its affiliates be obligated to execute any certificates or similar documents or provide any representations or warranties confirming the accuracy of any information or otherwise.

(l) Component Notes . Administrative Agent, without in any way limiting Administrative Agent’s other rights hereunder, in its sole and absolute discretion, shall have the right at any time to require Borrower to execute and deliver “component” notes (which may include senior and junior notes), which notes may be paid in such order of priority as may be designated by Administrative Agent, provided that (a) the aggregate principal amount of such “component” notes shall equal the outstanding principal balance of the Loan immediately prior to the creation of such “component” notes, (b) the weighted average interest rate of all such “component” notes shall on the date created equal the interest rate which was applicable to the Loan immediately prior to the creation of such “component” notes, (c) the debt service payments on all such “component” notes shall on the date created equal the debt service payment which was due under the Loan immediately prior to the creation of such component notes and (d) the other terms and provisions of each of the “component” notes shall be identical in substance and substantially similar in form to the Loan Documents. Borrower shall cooperate with all reasonable requests of Administrative Agent in order to establish the “component” notes and shall execute and deliver such documents as shall reasonably be required by Administrative Agent in connection therewith, all in form and substance reasonably satisfactory to Administrative Agent, including, without limitation, the severance of security documents if requested. It shall be an Event of Default if Borrower fails to comply with any of the terms, covenants or conditions of this Section 9.7(k) after the expiration of ten (10) Business Days after notice thereof.

(m) Meetings with Administrative Agent . Upon reasonable notice to Borrower, Borrower shall make executives of Borrower available at reasonable times to meet with Administrative Agent to review and discuss the status of the Loan and the Premises.

(n) Anything herein to the contrary notwithstanding, neither the Sole Lead Arranger nor the Sole Bookrunner listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as Administrative Agent or a Lender hereunder.

(o) In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), Borrower acknowledges and agrees that: (i) (A) the arranging and other services regarding this Agreement provided by Administrative Agent, Sole Lead Arranger or Sole Bookrunner are arm’s-length commercial transactions between Borrower, on the one hand, and Administrative Agent, Sole Lead Arranger or Sole Bookrunner, on the other hand, (B) Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) Borrower is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents; (ii) (A) Administrative Agent, Sole Lead Arranger and Sole Bookrunner each is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for Borrower or any of its Affiliates,

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or any other Person and (B) neither Administrative Agent, nor Sole Lead Arranger, nor Sole Bookrunner has any obligation to Borrower or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; and (iii) Administrative Agent, Sole Lead Arranger and Sole Bookrunner and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of Borrower and its Affiliates, and neither Administrative Agent, nor Sole Lead Arranger, nor Sole Bookrunner has any obligation to disclose any of such interests to Borrower or any of its Affiliates. To the fullest extent permitted by law, Borrower hereby waives and releases any claims that it may have against Administrative Agent, Sole Lead Arranger and Sole Bookrunner with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.

(p) Administrative Agent, acting solely for this purpose as an agent of Borrower, shall maintain at one of its offices in the United States a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts (and stated interest) of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive absent manifest error, and Borrower, Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice..

(q) Each Lender that sells a participation shall, acting solely for this purpose as an agent of Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents (the “ Participant Register ”); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participant’s interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register..

9.8 Entire Agreement . This Agreement, together with the Exhibits and the Schedules hereto, and the other Loan Documents, constitute the entire agreement of the parties hereto and thereto with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements.

9.9 Survival . All representations and warranties of the Loan Parties contained in or made in connection with the Loan Documents shall not be waived by the execution and delivery

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the Loan Documents, any investigation by or knowledge of Administrative Agent or any Lender, any extension of credit, or any other event or circumstance whatsoever.

9.10 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all such executed counterparts shall constitute but one and the same agreement.

9.11 Severability . In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

9.12 Headings . Section headings in this Agreement are included for convenience of reference only and shall not be given any substantive effect.

9.13 Set-off . During any time that an Event of Default exists and is continuing, Administrative Agent and the Lenders and their Affiliates are hereby authorized at any time and from time to time, to the fullest extent permitted by applicable Law, to set-off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held by Administrative Agent or any Lender or any such Affiliate, to or for the credit or the account of Borrower against any and all of the Obligations now or hereafter existing under any Loan Document. Borrower hereby grants to Administrative Agent a security interest in all deposits and accounts maintained with, and all other assets of Borrower in the possession of, Administrative Agent and its Affiliates. The rights of Administrative Agent and the Lenders under this Section 9.13 are in addition to other rights and remedies (including other rights of set-off) which Administrative Agent and the Lenders may have. Borrower agrees that, to the fullest extent permitted by Law, any Affiliates of Administrative Agent and the Lenders, and any holder of a participation in any obligation of Borrower under this Agreement, shall have the same rights of setoff as Administrative Agent and the Lenders as provided in this Section 9.13 regardless of whether such Affiliate or participant otherwise would be deemed a creditor of Borrower. Administrative Agent agrees to notify Borrower promptly after any such set-off and application; provided that the failure to give such notice shall not affect the validity of such set-off and application.

9.14 Usury . The parties hereto intend to conform to all applicable Laws limiting the maximum rate of interest that may be charged or collected by the Lenders from Borrower. Accordingly, notwithstanding any other provision hereof to the contrary, Borrower shall not be required to make any payment to or for the account of the Lenders, and the Lenders shall refund any payment made by Borrower, to the extent that such requirement or such failure to refund would violate or conflict with mandatory and non-waivable provisions of applicable Law limiting the maximum amount of interest which may be charged or collected by the Lenders from Borrower. To the fullest extent permitted by Law, in any action, suit or proceeding pertaining to this Agreement, the burden of proof, by clear and convincing evidence, shall be on Borrower to demonstrate that this Section 9.14 applies to limit any obligation of Borrower under the Loan Documents or to require the Lenders to make any refund, or claiming that the Loan Documents conflict with any applicable Law limiting the maximum rate of interest that may be charged or collected by the Lenders from Borrower, as to each element of such claim.

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9.15 Confidential Information . Administrative Agent and the Lenders agree to maintain the confidentiality of the Information (as defined below), except that the Information may be disclosed (a) to their Affiliates (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent required or requested by any regulatory authority purporting to have jurisdiction over Administrative Agent and/or the Lenders (including any self-regulatory authority, such as the National Association of Insurance Commissioners); (c) to the extent required by applicable Laws or regulations or by any subpoena or similar legal process; (d) to any other party hereto; (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section 9.15 , to (i) any assignee of or participant in, or any prospective assignee of or participant in, any of its rights and obligations under this Agreement, or (ii) any actual or prospective party (or its Affiliates) to any Hedging Contract or other transaction under which payments are to be made by reference to Borrower and its obligations, this Agreement or payments hereunder; (g) with the consent of Borrower; or (i) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section 9.15 , or (y) becomes available to Administrative Agent or any Lender or any of their Affiliates on a nonconfidential basis from a source other than Borrower. In addition, Administrative Agent and the Lenders may disclose the existence of this Agreement and information about this Agreement, but excluding Guarantor’s financial information, to market data collectors, similar service providers to the lending industry and service providers to Administrative Agent or any Lender in connection with the administration of this Agreement and the other Loan Documents.

For purposes of this Section, “ Information ” means all information received from Borrower, Guarantor or any of their Affiliates, other than any such information that is available to Administrative Agent or any Lender on a non-confidential basis prior to disclosure by the Borrower, Guarantor or any of their Affiliates to Administrative Agent and/or any Lender; provided that, in the case of Information received after the date hereof, such Information is clearly identified at the time of delivery as confidential. Any Person required to maintain the Information in confidence, as provided in this Section, shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

Notwithstanding the foregoing or anything to the contrary set forth in the Loan Documents, nothing herein shall impair Borrower’s (or Borrower’s Affiliate’s) right to disclose information relating to the Loan (a) to any due diligence representatives and/or consultants that are engaged by, work for, or are acting on behalf of any securities dealers and/or broker dealers evaluating Borrower or its Affiliates, (b) in connection with any filings (including any amendment or supplement to any S11 filing) with governmental agencies (including the United States Securities and Exchange Commission) by any REIT holding an interest (direct or indirect) in Borrower, (c) to any broker/dealer in Borrower’s or any REIT’s broker/dealer network and any of the REIT’s or Borrower’s investors, or (d) in connection with Borrower’s or any direct or indirect owner of Borrower’s tax structuring and/or tax preparation.

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9.16 Binding Effect . This Agreement shall be binding upon and inure to the benefit of Borrower, Administrative Agent and the Lenders and their respective successors and permitted assigns, except that Borrower shall have no right to assign its rights hereunder or any interest herein without the prior written consent of Administrative Agent.

9.17 Governing Law . THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF CALIFORNIA WITHOUT GIVING EFFECT TO CHOICE OF LAW PRINCIPLES THAT WOULD IMPOSE THE LAWS OF ANOTHER JURISDICTION.

9.18 Waiver of Jury Trial . EACH OF THE PARTIES TO THIS AGREEMENT HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED HEREBY.

9.19 Consent to Jurisdiction; Venue . All judicial proceedings brought against any Loan Party with respect to this Agreement and the Loan Documents may be brought in any state or federal court of competent jurisdiction sitting in Orange, California, and by execution and delivery of this Agreement, Borrower accepts for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Borrower irrevocably waives any right it may have to assert the doctrine of forum non conveniens or to object to venue to the extent any proceeding is brought in accordance with this Section 9.19 .

9.20 Customer Identification – USA Patriot Act Notice; OFAC . Administrative Agent hereby notifies Borrower that pursuant to the requirements of the Patriot Act and Administrative Agent’s policies and practices, Administrative Agent is required to obtain, verify and record certain information and documentation that identifies Borrower, which information includes the name and address of Borrower and such other information that will allow Administrative Agent to identify Borrower in accordance with the Patriot Act. Borrower represents and covenants that it is not and will not become a Person (a “ Prohibited Person ”) listed on the Specially Designated Nationals and Blocked Persons Lists maintained by the Office of Foreign Assets Control (“ OFAC ”) or otherwise subject to any other prohibitions or restriction imposed by any Laws administered by OFAC (collectively the “ OFAC Rules ”). Borrower represents (provided that Borrower does not make any representations regarding the shareholders of Sponsor) and covenants that it also (a) is not and will not become owned or controlled by a Prohibited Person, (b) is not acting and will not act for or on behalf of a Prohibited Person, (c) is not otherwise associated with and will not become associated with a Prohibited Person, (d) is not providing and will not provide any material, financial or technological support for or financial or other service to or in support of acts of terrorism or a Prohibited Person. Borrower shall immediately notify Administrative Agent if Borrower has knowledge that any Guarantor or any member or beneficial owner of Borrower or any Guarantor is or becomes a Prohibited Person or (i) is indicted on or (ii) arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Borrower will not enter into

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any Lease or any other transaction or undertake any activities related to the Loan in violation of anti-money laundering Laws. Borrower shall (A) not use or permit the use of any proceeds of the Loan in any way that will violate either the OFAC Rules or any anti-money laundering Laws or anti-terrorism Laws, (B) comply and cause all of its subsidiaries to comply with applicable OFAC Rules, anti-terrorism Laws and anti-money laundering Laws, (C) provide information as Administrative Agent and/or the Lenders may require from time to time to permit Administrative Agent and the Lenders to satisfy their obligations under the OFAC Rules, anti-terrorism Laws and/or the anti-money laundering Laws and (D) not 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 of the foregoing. Borrower shall immediately notify Administrative Agent if any tenant becomes a Prohibited Person or (1) is convicted of, (2) pleads nolo contendere to, (3) is indicted on, or (4) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering.

9.21 Limitation of Liability .

(a) TO THE FULLEST EXTENT PERMITTED BY LAW, NO CLAIM MAY BE MADE BY BORROWER AGAINST ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE, DIRECTOR, OFFICER, EMPLOYEE, ATTORNEY OR AGENT THEREOF FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION OR EVENT IN CONNECTION WITH ANY OF THE FOREGOING (WHETHER BASED ON BREACH OF CONTRACT, TORT OR ANY OTHER THEORY OF LIABILITY); AND BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST .

(b) TO THE FULLEST EXTENT PERMITTED BY LAW, NO CLAIM MAY BE MADE BY ADMINISTRATIVE AGENT OR ANY LENDER AGAINST BORROWER OR ANY OF THE EXCULPATED PARTIES FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION OR EVENT IN CONNECTION WITH ANY OF THE FOREGOING (WHETHER BASED ON BREACH OF CONTRACT, TORT OR ANY OTHER THEORY OF LIABILITY), AND ADMINISTRATIVE AGENT AND EACH LENDER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST .

9.22 Construction . The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any other Loan Document or any amendments, Schedules or Exhibits hereto.

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Whenever pursuant to this Agreement or the other Loan Documents (a) Administrative Agent or a Lender exercises any right given to it to approve or disapprove, (b) any arrangement must be satisfactory to Administrative Agent or a Lender, or (c) any other decision or determination is to be made by Administrative Agent or a Lender, the decision to approve or disapprove all decisions that arrangements or terms are satisfactory or not satisfactory, and all other decisions and determinations made by Administrative Agent or a Lender, shall be in such party’s reasonable and good faith discretion, except as may be otherwise expressly and specifically provided herein.

9.23 Status of Parties . The relationship between the Lenders and Borrower is solely that of lender and borrower. None of Administrative Agent or any Lender has any fiduciary or other special relationship with or duty to Borrower and none is created by the Loan Documents. Nothing contained in the Loan Documents, and no action taken or omitted pursuant to the Loan Documents, is intended or shall be construed to create any partnership, joint venture, association, or special relationship between Borrower, Administrative Agent and the Lenders or in any way make Administrative Agent or the Lenders a co-principal with Borrower with reference to the Premises or otherwise. In no event shall Administrative Agent’s or the Lenders’ rights and interests under the Loan Documents be construed to give Administrative Agent or the Lenders the right to control, or be deemed to indicate that Administrative Agent or the Lenders are in control of, the business, properties, management or operations of Borrower.

9.24 Credit Support Document . This Agreement is intended to act (a) as a “Credit Support Document” (as such term is defined in any ISDA Master Agreement entered into with Administrative Agent or an Affiliate of Administrative Agent and Borrower in connection with the Loan), and is hereby made a part of the “Schedule” (as such term is defined in such ISDA Master Agreement) of such ISDA Master Agreement, which ISDA Master Agreement shall include the Schedules thereto and all “Confirmations” (as such term is defined in such ISDA Master Agreement) exchanged between the parties confirming transactions thereunder, and (b) as a “transfer” under a swap agreement made by or to a swap participant, in connection with a swap agreement, within the meaning of Section 546(g) of the Federal Bankruptcy Code, as amended and modified from time to time.

9.25 Omitted .

9.26 Exculpation . Notwithstanding anything to the contrary contained in this Agreement, no personal liability shall be asserted, sought or obtained by Administrative Agent and/or any Lender under this Agreement against (i) any Affiliate of Borrower, (ii) any Person owning, directly or indirectly, any legal or beneficial interest in Borrower or any Affiliate of Borrower, or (iii) any direct or indirect partner, member, principal, officer, beneficiary, trustee, advisor, shareholder, investor, beneficial interest holder, director, employee or agent of Borrower or any of the Persons described in clauses (i) and (ii) above (collectively, the “Exculpated Parties”), and none of the Exculpated Parties shall have any personal liability in respect of obligations Borrower under this Agreement. Nothing in this Section 9.26 shall be deemed (x) a waiver of the obligations of Borrower under this Agreement or any of the other Loan Documents to which it is a party, or to release Borrower from any personal liability pursuant to, or from any of its respective obligations under, this Agreement or any of the other Loan Documents to which it is a party or (y) a waiver of

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the obligations of Guarantor under the Guaranty or any of the Loan Documents to which it is a party, or to release Guarantor from any personal liability pursuant to, or from any of its respective obligations under, the Guaranty or any of the other Loan Documents to which it is a party.

ARTICLE X
ADMINISTRATIVE AGENT

10.1 Appointment . Compass Bank, an Alabama banking corporation, is hereby appointed as Administrative Agent hereunder and under each other Loan Document, and each Lender originally named herein or who hereafter becomes a Lender hereunder hereby irrevocably authorizes Administrative Agent to act as administrative agent for the Lenders and to take such actions as the Lenders are obligated or entitled to take under the provisions of this Agreement and the other Loan Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. In addition, Administrative Agent shall have the power to issue and is hereby authorized by the Lenders to issue all of the Lenders’ consents and approvals and waivers hereunder. Administrative Agent agrees to act in substantially the same manner that it would act in dealing with a loan held for its own account. Administrative Agent shall not have a fiduciary relationship with respect to any Lender by reason of this Agreement or any other Loan Document. In performing its functions and duties under this Agreement, Administrative Agent shall act solely as administrative agent of the Lenders and does not assume, and shall not be deemed to have assumed, any obligations toward or relationship of agency or trust with or for Borrower.

10.2 Reliance on Administrative Agent . All acts of and communications by Administrative Agent, as administrative agent for the Lenders, shall be deemed legally conclusive and binding; and Borrower or any third party (including any court) shall rely on any and all communications or acts of Administrative Agent with respect to the exercise of any rights or the granting of any consent, waiver or approval on behalf of the Lenders in all circumstances where an action by a Lender is required or permitted pursuant to this Agreement or the provisions of any other Loan Document or by applicable laws without the right or necessity of making any inquiry of such Lender as to the authority of Administrative Agent with respect to such matter. In no event shall any of the foregoing limit the rights or obligations of any Lender with respect to any other Lender pursuant to this Article X .

10.3 Powers . Administrative Agent shall have and may exercise all powers that the Lenders have under the Loan Documents and shall exercise such powers on behalf of the Lenders. All rights of action (including the right to file proof of claims) under this Agreement or any of the other Loan Documents may be enforced by the Administrative Agent without the possession of the Notes or the production thereof in any trial or other proceedings relating thereto. Any such suit or proceeding instituted by Administrative Agent shall be brought in its name as administrative agent for the Lenders without the necessity of joining the Lenders as plaintiff or defendant. Subject to the provisions of Section 10.5 hereof, any recovery of judgment shall be for the pro rata benefit of the Lenders.

10.4 Disbursements . At least two (2) Business Days (by 11:00 A.M. New York time) prior to the date an Additional Advance is to be made (such date being referred to herein as a “ Funding Date ”), Administrative Agent shall notify each Lender of the amount requested by

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Borrower, the amount approved by Administrative Agent, the portion of the proposed disbursement to be funded by each Lender and the Funding Date. Each Lender shall make available to Administrative Agent (or the funding bank or entity designated by Administrative Agent), the amount of such Lender’s Percentage of each Additional Advance in immediately available funds not later than 11:00 A.M. (New York time) on the Funding Date. Unless Administrative Agent shall have been notified by a Lender prior to the Funding Date with respect to any Additional Advance that such Lender does not intend to make available to Administrative Agent such Lender’s Percentage of such Additional Advance, Administrative Agent may assume that each Lender has made such amount available to Administrative Agent and Administrative Agent, in its sole and absolute discretion, may, but shall not be obligated to, make available to Borrower a corresponding amount. If such corresponding amount is not in fact made available to Administrative Agent on or prior to the applicable Funding Date, the Lender who has not funded its Percentage of such Additional Advance agrees to pay and Borrower agrees to repay to Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is paid or repaid to Administrative Agent, at (a) in the case of a Lender, the Default Rate, and (b) in the case of Borrower, the interest rate applicable at the time to a disbursement made on such Funding Date. If such Lender shall pay to Administrative Agent such corresponding amount, such amount so paid shall constitute such Lender’s Additional Advance, and if both such Lender and Borrower shall have paid and repaid, respectively, such corresponding amount, Administrative Agent shall promptly return to Borrower such corresponding amount in same day funds. Requests by Administrative Agent for funding by the Lenders of Additional Advances will be made by facsimile or by e-mail. Nothing in this Section 10.4 shall be deemed to relieve any Lender of its obligation hereunder to make its Percentage of any Additional Advance on any Funding Date, nor shall any Lender be responsible for the failure of any other Lender to perform its obligations to make any Additional Advance hereunder, and the Commitment of any Lender shall not be increased or decreased as a result of the failure by any other Lender to perform its obligation to make any Additional Advances hereunder.

10.5 Distribution and Apportionment of Payments . § Subject to Section 10.5(b) hereof, payments actually received by Administrative Agent for the account of the Lenders shall be paid to them promptly after receipt thereof by Administrative Agent, but in any event within one (1) Business Day of receipt, provided that if any such payments are not distributed to the Lenders within one (1) Business Day after Administrative Agent’s receipt thereof, Administrative Agent shall pay to such Lenders interest thereon, at a rate equal to the overnight cost of funds at which federal funds are made available to Administrative Agent (such interest rate to change automatically effective as of the date of each change in the overnight cost of federal funds) until such funds are paid in immediately available funds to such Lenders. For purposes of this Section 10.5 , funds shall be deemed received by Administrative Agent on the date actually received if such funds are received by Administrative Agent not later than 11:00 A.M. (Houston, Texas time) and shall be deemed received on the next succeeding Business Day if such funds are actually received by Administrative Agent after 11:00 A.M. (Houston, Texas time). All payments of principal and interest in respect of the Loan, all payments of the fees payable to Lender described in this Agreement (except any fees payable pursuant to the Fee Letter, which fees shall be payable solely to the parties indicated therein), and all payments in respect of any other obligations of Borrower under the Loan Documents shall be allocated among those Lenders as are entitled thereto, in proportion of their respective Percentages

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or otherwise as provided herein or in the other Loan Documents, as the case may be. Administrative Agent shall distribute to each Lender at its primary address as a Lender may request in writing, such funds as it may be entitled to receive, provided that Administrative Agent shall in no event be bound to inquire into or determine the validity, scope or priority of any interest or entitlement of any Lender and may suspend all payments and seek appropriate relief (including instructions from the Required Lenders, or all the Lenders, as applicable, or an action in the nature of interpleader) in the event of any doubt or dispute as to any apportionment or distribution contemplated hereby. The order of priority herein is set forth solely to determine the rights and priorities of the Lenders as among themselves and may at any time or from time to time be changed by the Lenders as they may elect, in writing, without necessity of notice to or consent of or approval by Borrower.

(a) If any (but less than all) of the Lenders default (each such Lender, a “ Defaulting Lender ” and each such default, a “ Lender Default Event ”) in funding its percentage of an Additional Advance or paying any other sum payable by it under this Article X on or before the time required herein (such sum is referred to as the “ Lender Default Amount ”), then, in addition to the rights and remedies that may be available to the other Lenders (“ Non-Defaulting Lenders ”) and Borrower at law and in equity:

(i) Administrative Agent, or any other Lender which under the terms of this Agreement is entitled to reimbursement from the Defaulting Lender for all or any portion of the Lender Default Amount, may collect from the Defaulting Lender the Lender Default Amount plus interest thereon at the Default Rate for the period commencing on the date of the Lender Default Event and continuing through and including the date on which the Defaulting Lender repays the Lender Default Amount and interest thereon at the Default Rate and all accrued and unpaid interest thereon in full (the “ Lender Default Period ”);

(ii) Administrative Agent shall provide a notice to Borrower and each Non-Defaulting Lender of each Lender Default Event, which notice shall indicate the amount of the specific Lender Default Amount. From the date of the Lender Default Event until a Defaulting Lender ceases to be a Defaulting Lender, the Defaulting Lender’s right to participate in the administration of the Loan and the Loan Documents, including any rights to vote upon, approve of, consent to or direct any action of Administrative Agent or the Lenders shall be suspended and such rights shall not be reinstated unless and until such Lender ceases to be a Defaulting Lender (and all decisions which are subject to receiving a vote of the required percentage of the Lenders, shall be approved if voted in favor of by the required percentage of the Non-Defaulting Lenders); provided , however , that if Administrative Agent is a Defaulting Lender, Administrative Agent shall continue to serve as Administrative Agent, unless Required Lenders vote to remove and replace Administrative Agent, which removal shall become effective only at such time as Borrower has received (A) written notice thereof, and (B) an executed, recordable instrument pursuant to which the replacement agent assumes the obligations of Administrative Agent under the Loan Documents. A Defaulting Lender shall cease to be a Defaulting Lender only if the Defaulting Lender pays, in full, the Lender Default Amount plus interest thereon at the Default Rate for the Lender Default Period within ten (10) days of the notice specified in the first sentence of this Section 10.5(b)(ii) . The parties acknowledge that more than one

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Lender Default Period may be in effect at any time with respect to any Lender and also with respect to more than one Lender at any one time;

(iii) it shall be a condition precedent to each Non-Defaulting Lender’s obligation to fund its Additional Advance that either one or more Non-Defaulting Lenders or a Replacement Lender fund the Lender Default Amount, and accordingly no Lender shall be deemed a Defaulting Lender on the basis of having refused to fund its Additional Advance if such condition precedent is not satisfied. Any or all of the Non-Defaulting Lenders shall be entitled (but shall not be obligated) to fund the Lender Default Amount, and subject to Section 10.5(b)(vi) hereof, collect interest at the Default Rate from amounts otherwise payable to the Defaulting Lender for the Lender Default Period. If more than one Non-Defaulting Lender elects to fund the Lender Default Amount, the Lender Default Amount shall be apportioned among the electing Non-Defaulting Lenders in the proportion that the amount of the Commitment of each such electing Non-Defaulting Lender bears to the total Commitments of all electing Non-Defaulting Lenders. The actual funding by either one or more Non-Defaulting Lenders or a Replacement Lender of the Lender Default Amount shall not terminate the Lender Default Period with respect to the Defaulting Lender nor relieve the Defaulting Lender of its obligation to pay interest at the Default Rate or other amounts as otherwise provided herein;

(iv) Administrative Agent shall not transfer to a Defaulting Lender any payments made by or on behalf of Borrower to Administrative Agent for the Defaulting Lender’s benefit; nor shall a Defaulting Lender be entitled to share in any payments hereunder or under any Notes until all Lender Default Amounts, plus interest thereon at the Default Rate for the Lender Default Period, have been paid in full. In the event the Lender Default Amount is funded by one or more Non-Defaulting Lenders pursuant to Section 10.5(b)(iii) hereof, the Defaulting Lender’s entire interest in the Loan (including, without limitation, the amount of the prior advances made by such Defaulting Lender prior to the Lender Default Event, the Loan Documents and proceeds thereof (the “ Defaulting Lender’s Loan Interest ”) shall be subordinated to any Lender Default Amount funded by any Non-Defaulting Lenders pursuant to Section 10.5(b)(iii) hereof, plus interest which may be due in accordance with Section 10.5(b)(iii) hereof at the Default Rate (to be applied pari passu among the Non-Defaulting Lenders funding the Lender Default Amount), without necessity for executing any further documents;

(v) to achieve such subordination, Administrative Agent shall pay from any payments made by or on behalf of Borrower to Administrative Agent for the Defaulting Lender’s benefit which would otherwise be payable to the Defaulting Lender first to those Non-Defaulting Lenders that have elected to fund the Lender Default Amount, interest on the principal amount of the Lender Default Amount at the Default Rate, then to those Non-Defaulting Lenders that have elected to fund the Lender Default Amount, the principal of the Lender Default Amount until paid in full, such payments to be paid pari passu to the Non-Defaulting Lenders until the Lender Default Amount and all interest thereon at the Default Rate has been repaid;

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(vi) if, twenty (20) days after a Defaulting Lender’s default, there remains any unfunded Lender Default Amount which has not been funded by the Non-Defaulting Lenders or the Defaulting Lender (the “ Unfunded Defaulted Amount ”), then a portion of the Defaulting Lender’s interest in the Loan and the Loan Documents and the proceeds thereof equal to the amount of the Unfunded Defaulted Amount (together with interest thereon at the rate applicable to the Lender Default Amount from time to time pursuant to the Loan Documents) shall be subordinated to the interests of the Non-Defaulting Lenders in all of the indebtedness evidenced and secured by the Loan Documents unless and until such Unfunded Defaulted Amount is funded by the Defaulting Lender;

(vii) if a Lender remains a Defaulting Lender for twenty (20) days, and no other Lender or Lenders have funded all amounts not theretofore funded by the Defaulting Lender, then Administrative Agent and Borrower shall each have the right to designate a replacement institutional lender (“ Replacement Lender ”) satisfactory to Administrative Agent, which Replacement Lender shall agree to fund all amounts not theretofore funded by the Defaulting Lender and agrees to assume all obligations thereafter to be performed by the Defaulting Lender and upon approval by Administrative Agent such Replacement Lender shall be an Eligible Assignee and the Defaulting Lender shall promptly enter into an Assignment and Assumption Agreement with such Replacement Lender as contemplated by Section 9.7 of this Agreement. For the purposes of clarification, the existence of a Replacement Lender shall not be (and shall not be deemed to be) a cure by a Defaulting Lender of the Lender Default Event and the existence of a Replacement Lender shall not release the Defaulting Lender from any of the obligations of such Defaulting Lender set forth herein, to the extent such Replacement Lender does not fully and completely satisfy such obligations;

(viii) the provisions of this Section 10.5 shall apply notwithstanding any instruction of Borrower as to its desired application of payments; and

(ix) Administrative Agent shall be entitled to bring an action or suit against such Defaulting Lender in a court of competent jurisdiction to recover the Lender Default Amount, plus interest thereon at the Default Rate and, to the extent such recovery would not fully compensate the Lenders for the Defaulting Lender’s breach of this Agreement, to collect damages. In addition, the Defaulting Lender shall indemnify, defend and hold Administrative Agent and each of the other Lenders harmless from and against any and all claims, actions, liabilities, damages, costs and expenses (including attorneys’ fees and expenses), plus interest thereon at the Default Rate, for funds advanced by Administrative Agent or any other Lender on account of the Defaulting Lender or any other damages such entities may sustain or incur by reason of or as a direct consequence of the Defaulting Lender’s failure or refusal to abide by its obligations under this Agreement.

(b) Each Lender severally represents and warrants as of the date such Lender becomes a Lender here under that it is entitled to receive payments hereunder and under the other Loan Documents without the withholding of any tax. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender

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that, as of such date, such Lender is not incorporated under the laws of the United States of America, or a state thereof, Lender agrees that it will deliver to Administrative Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement and its Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver Administrative Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be requested by Administrative Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and its Notes without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. Upon Borrower’s written request, each applicable Lender shall deliver to Borrower copies of the documents referenced above regarding tax withholding.

10.6 Consents and Approval.

(a) Each of the following shall require the approval or consent of the Required Lenders:

(i) declaring the principal amount due under the Notes to be immediately due and payable following an Event of Default or any recession of any such acceleration;

(ii) approval of the exercise of rights and remedies under the Loan Documents following an Event of Default (except emergency remedies that Administrative Agent determines in good faith are necessary to protect the Collateral and the Lenders’ interests in the Loan and the Collateral);

(iii) appointment of a successor Administrative Agent;

(iv) approval of Post-Default Plan and related matters;

(v) waiver of any of the covenants set forth in Article VII hereof;

(vi) consent to Borrower incurring additional debt beyond what is permitted in Section 7.2 hereof; and

(vii) except as referred to in Section 10.6(b) hereof, approval of any amendment or modification of this Agreement or any of the other Loan Documents, or issuance of any waiver of any material provision of this Agreement or any of the other Loan Documents.

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(b) Each of the following shall require the approval or consent of all of the Lenders (in each case, except as otherwise provided in this Agreement):

(i) extension of the Maturity Date (other than in accordance with the terms of the Loan Documents) or forgiveness of all or any portion of the principal amount due under the Notes or any accrued interest thereon, or any waiver or other amendment of this Agreement or the other Loan Documents which would reduce the underlying interest rate or the rate at which fees are calculated or forgive any loan fee or any other amount due under this Agreement, or extend the time of payment of any principal, interest or fees;

(ii) amend the percentage specified in the definition of Required Lenders or otherwise change the definition of Required Lenders;

(iii) increase of the principal amount of the Loan (except in connection with advances to protect and preserve the value of the Collateral and the Lenders’ interest in the Collateral and the Loan);

(iv) release of any lien on any material collateral other than in accordance with the Loan Documents (except after payment in full of the Loan);

(v) amendment of the provisions of this Article X ;

(vi) issuance of a consent to subordinate liens against the Premises;

(vii) subordination of the Mortgage to any other lien or encumbrance except in connection with normal and customary access easements on, under, over and across the Premises, and utility easements located in, on over, under, across and through the Premises for the installation and maintenance of underground potable water lines, sanitary sewer lines, electric lines, storm sewer pipes, cable and telephone lines and other utility lines and facilities necessary for providing such utility services to the Premises or other properties;

(viii) amend the definition of Eligible Assignee in any manner which would or might permit Borrower, Guarantor or any Affiliate of Borrower or Guarantor to be a Lender hereunder;

(ix) release of any obligations of any Guarantor or any claims against any Guarantor other than in accordance with the Loan Documents (except after payment in full of the Loan).

(c) In addition to the required consents or approvals referred to in Sections 10.6(a) and 10.6(b) hereof, Administrative Agent may at any time request instructions from the Required Lenders with respect to any actions or approvals which, by the terms of this Agreement or of any of the Loan Documents, Administrative Agent is permitted or required to take or to grant without instructions from any Lenders, and if such instructions are promptly requested, Administrative Agent shall be absolutely entitled to refrain from taking any action or to withhold

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any approval and shall not be under any liability whatsoever for refraining from taking any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from the Required Lenders. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Administrative Agent as a result of Administrative Agent acting or refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of the Required Lenders or, where applicable, all Lenders. Administrative Agent shall promptly notify each Lender at any time that the Required Lenders have instructed Administrative Agent to act or refrain from acting pursuant hereto.

(d) Each Lender authorizes and directs Administrative Agent to enter into the Loan Documents for the benefit of the Lenders. Each Lender agrees that any action taken by Administrative Agent, at the direction or with the consent of the Required Lenders in accordance with the provisions of this Agreement or any other Loan Document, and the exercise by Administrative Agent at the direction or with the consent of the Required Lenders of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all Lenders, except for actions specifically requiring the approval of all Lenders. All communications from Administrative Agent to the Lenders requesting Lenders’ determination, consent, approval or disapproval shall be given in writing to each Lender. Each Lender shall reply promptly, but in any event within ten (10) Business Days after receipt of the request therefor from Administrative Agent (the “ Lender Reply Period ”). Unless a Lender shall give written notice to Administrative Agent that it objects to the recommendation or determination of Administrative Agent (together with a written explanation of the reasons behind such objection) within the Lender Reply Period, such Lender shall be deemed to have approved of or consented to such recommendation or determination. With respect to decisions requiring the approval of the Required Lenders or all Lenders, Administrative Agent shall submit its recommendation or determination for approval of or consent to such recommendation or determination to all Lenders and upon receiving the required approval or consent shall follow the course of action or determination recommended to the Lenders by Administrative Agent or such other course of action recommended by the Required Lenders, and each non-responding Lender shall be deemed to have concurred with such recommended course of action.

(e) Notwithstanding anything to the contrary set forth in this Agreement or any other Loan Document, with respect to any decisions to be made by Administrative Agent, Lender or Required Lenders in connection with any action or inaction relating to letters of credit issued or to be issued by any Lender to Administrative Agent in connection with the Loan, including any decision whether or not to draw thereupon, such issuing Lender’s consent or approval shall not be necessary even where unanimous Lender approval otherwise would be required hereunder, and Required Lenders shall mean the required aggregate Percentage of the remaining Lenders (i.e., other than the issuing Lender).

(f) If, in connection with any proposed amendment, modification, termination, waiver, or consent with respect to any provisions hereof as contemplated by this Section 10.6 that requires the consent of a greater percentage of the Lenders than the Required Lenders, the consent of the Required Lenders shall have been obtained but the consent of a Lender whose consent is required shall not have been obtained (each a “ Non-Consenting Lender ”), then Borrower may, at

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its sole expense and effort, upon notice to such Lender and Administrative Agent, require such Lender to assign and delegate, without recourse, all its interests, rights and obligations under this Agreement to an Eligible Assignee that shall assume such obligations; provided that (A) Borrower shall have received the prior written consent of Administrative Agent, which consent shall not be unreasonably withheld or delayed, (B) such Lender shall have received payment of an amount equal to the outstanding principal of its disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or Borrower, and (C) such Eligible Assignee shall consent at the time of such assignment to each matter in respect of which such Non-Consenting Lender did not consent. Each Lender agrees that, if it becomes a Non-Consenting Lender and is being replaced in accordance with this Section 10.6(f) , it shall execute and deliver to Administrative Agent an Assignment and Assumption Agreement to evidence such assignment and shall deliver to Administrative Agent any Notes previously delivered to such Non-Consenting Lender. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling Borrower to require such assignment and delegation cease to apply.

10.7 Agency Provisions Relating to Collateral.

(a) Administrative Agent is hereby authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, at any time and from time to time, to take any action with respect to any collateral for the Loan or any Loan Document which may be necessary to preserve and maintain such collateral or to perfect and maintain perfected the liens upon such collateral granted pursuant to this Agreement and the other Loan Documents.

(b) Except as provided in this Agreement, Administrative Agent shall have no obligation whatsoever to any Lender or to any other Person to assure that any collateral exists or is owned by Borrower or is cared for, protected or insured or has been encumbered or that the liens granted herein or in any of the other Loan Documents or pursuant hereto or thereto have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority.

(c) Should Administrative Agent commence any proceeding or in any way seek to enforce Administrative Agent’s or the Lenders’ rights or remedies under the Loan Documents, irrespective of whether as a result thereof Administrative Agent shall acquire title to any collateral, each Lender, upon demand therefor from time to time, shall contribute its share (based on its Percentage) of the costs and/or expenses of any such enforcement or acquisition, including fees of receivers or trustees, court costs, title company charges, filing and recording fees, appraisers’ fees and fees and expenses of attorneys to the extent not otherwise reimbursed by Borrower. Without limiting the generality of the foregoing, each Lender shall contribute its share (based on its Percentage) of all costs and expenses incurred by Administrative Agent (including attorneys’ fees and expenses) if Administrative Agent employs counsel for advice or other representation (whether or not any suit has been or shall be filed) with respect to any collateral for the Loan or any part thereof, or any of the Loan Documents, or the attempt to enforce any security interest or lien on any collateral, or to enforce any rights of Administrative Agent or the Lenders or any of Borrower’s

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or any other party’s obligations under any of the Loan Documents, but not with respect to any dispute between any Administrative Agent and any other Lender(s). It is understood and agreed that in the event Administrative Agent determines it is necessary to engage counsel for Lender from and after the occurrence of a Default or Event of Default, said counsel shall be selected by Administrative Agent and written notice of such selection, together with a copy of such counsel’s engagement letter and fee estimate, shall be delivered to the Lenders.

(d) If all or any portion of the collateral for the Loan is acquired by Administrative Agent as the result of the exercise of any remedies hereunder or under any other Loan Document, or is retained in satisfaction of all or any part of Borrower’s obligations under the Loan Documents, title to any such collateral or any portion thereof shall be held in the name of one or more nominees or subsidiaries of the Lenders. Administrative Agent shall prepare a recommended course of action for such collateral (the “ Post-Default Plan ”), which shall be subject to the approval of the Required Lenders. Administrative Agent shall administer the collateral in accordance with the Post-Default Plan, and upon demand therefor from time to time, each Lender will contribute its share (based on its Percentage) of all costs and expenses incurred by Administrative Agent pursuant to the Post-Default Plan, including any operating losses and all necessary operating reserves. To the extent there is net operating income from such collateral, Administrative Agent shall, in accordance with the Post-Default Plan, determine the amount and timing of distributions to Lenders. All such distributions shall be made to Lenders in accordance with their respective Percentages. In no event shall the provisions of this subsection or the Post-Default Plan require any Administrative Agent or any Lender to take an action which would cause such Lender to be in violation of any applicable regulatory requirements.

10.8 Lender Actions Against Borrower or the Collateral . Each Lender agrees that it will not take any action, nor institute any actions or proceedings, against Borrower, Guarantor, or any other Person hereunder or under any other Loan Documents with respect to exercising claims against Borrower or rights in any collateral without the consent of the Required Lenders. Each Lender consents to the jurisdiction selected by Administrative Agent to enforce the rights and remedies of Administrative Agent and Lenders hereunder.

10.9 Assignment and Participation to Borrower or Guarantor . No Lender shall be permitted to assign or sell all or any portion of its rights and obligations under this Agreement to Borrower, Guarantor or any Affiliate of Borrower or Guarantor.

10.10 Ratable Sharing . Subject to Sections 10.4 and 10.5 hereof, the Lenders agree among themselves that (a) with respect to all amounts received by them which are applicable to the payment of the Loan (except any fees paid pursuant to the Fee Letter, which fees shall be payable solely to the parties indicated therein), equitable adjustment will be made so that, in effect, all such amounts will be shared among them ratably in accordance with their Percentages, whether received by voluntary payment, by the exercise of the right of set-off or banker’s lien, by counterclaim or cross action or by the enforcement of any or all of the Loan Documents or any collateral, and (b) if any of them shall by voluntary payment or by the exercise of any right of counterclaim, set-off, banker’s lien or otherwise, receive payment of a proportion of the aggregate amount of the Loan held by it which is greater than its Percentage of the payments on account of the Loan, the one receiving such excess payment shall purchase, without recourse or warranty, an

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undivided interest and participation (which it shall be deemed to have done simultaneously upon the receipt of such payment) in such obligations owed to the others so that all such recoveries with respect to such obligations shall be applied ratably in accordance with their Percentages; provided, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to that party to the extent necessary to adjust for such recovery, but without interest except to the extent the purchasing party is required to pay interest in connection with such recovery. Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of Borrower in the amount of such participation.

10.11 General Immunity . Neither Administrative Agent nor any of its directors, officers, agents or employees shall be liable to Borrower or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. In the absence of gross negligence, Administrative Agent shall not be liable for any apportionment or distribution of payments made by it in good faith pursuant to Section 10.5 hereof, and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Lender to whom payment was due, but not made, shall be to recover from the recipients of such payments any payment in excess of the amount to which they are determined to have been entitled.

10.12 No Responsibility for Loan, Recitals . Neither Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any use of the Loan; (b) the performance or observance of any of the covenants or agreements of any party to any Loan Document; (c) the satisfaction of any condition specified in this Agreement, except receipt of items purporting to be the items required to be delivered to any Administrative Agent; or (d) the validity, effectiveness or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith, provided that the foregoing shall not release any Administrative Agent from liability for its gross negligence or willful misconduct.

10.13 Action on Instructions of the Lenders . Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by all the Lenders (or the Required Lenders, if such action may be directed hereunder by the Required Lenders), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of Lenders. Each Lender, severally to the extent of its Percentage, hereby agrees to indemnify Administrative Agent against and hold it harmless from any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action, provided that the foregoing shall not release Administrative Agent from liability for its gross negligence or willful misconduct.

10.14 Employment of Agents and Counsel . Administrative Agent may undertake any of its duties as Administrative Agent hereunder and under any other Loan Document by or

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through employees, agents, and attorneys-in-fact and shall not be liable to the Lenders, except as to money or securities received by them or their authorized agents, for the default or misconduct of any such agents or attorneys-in-fact. Administrative Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document.

10.15 Reliance on Documents; Counsel . Administrative Agent shall be entitled to rely upon any notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and, in respect to legal matters, upon the opinion of counsel selected by Administrative Agent, which counsel may be an employee of Administrative Agent, provided that the foregoing shall not release Administrative Agent from liability for its gross negligence or willful misconduct. Any such counsel shall be deemed to be acting on behalf of the Lenders in assisting Administrative Agent with respect to the Loan, but shall not be precluded from also representing Administrative Agent in any matter in which the interests of Administrative Agent and the other Lenders may differ.

10.16 Administrative Agent’s Reimbursement and Indemnification . The Lenders agree to reimburse and indemnify Administrative Agent ratably (a) for any amounts (excluding principal and interest on the Loan and loan fees) not reimbursed by Borrower for which Administrative Agent is entitled to reimbursement under the Loan Documents, and (b) for any other expenses incurred by Administrative Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents, if not paid by Borrower; provided , however , that except in the case of an emergency or other situation where Administrative Agent determines that prompt action is needed to protect the interests of the Lenders, Administrative Agent shall obtain the approval of the Required Lenders (i) to undertake any course of action which in Administrative Agent’s judgment is likely to result in unreimbursable expenses in excess of $3,000,000 or (ii) to continue a course of action if at any time unreimbursable expenses resulting therefrom actually exceed $3,000,000, (iii) for any expenses incurred by Administrative Agent on behalf of the Lenders which may be necessary or desirable to preserve and maintain collateral or to perfect and maintain perfected the liens upon the collateral granted pursuant to this Agreement and the other Loan Documents, if not paid by Borrower, (iv) for any amounts and other expenses incurred by Administrative Agent on behalf of the Lenders in connection with any default by any Lender hereunder or under the other Loan Documents, if not paid by such Lender, and (v) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against such Administrative Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of Administrative Agent.

10.17 Rights as a Lender . With respect to its Commitment, if any, Administrative Agent shall have the same rights, powers and obligations hereunder and under any other Loan Document as any Lender and may exercise such rights and powers as though it were not an Administrative Agent, and the term “Lender” or “Lenders” shall, unless the context otherwise

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indicates, include Administrative Agent in its individual capacities. Borrower and each Lender acknowledge and agree that Administrative Agent, the Lenders and/or their respective Affiliates may accept deposits from, lend money to, hold other investments in, and generally engage in any kind of trust, debt, equity or other transaction or have other relationships, in addition to those contemplated by this Agreement or any other Loan Document, with Borrower or any of its Affiliates in which Borrower or such Affiliate is not restricted hereby from engaging with any other Person.

10.18 Lenders’ Credit Decisions . Each Lender acknowledges that it has, independently and without reliance upon Administrative Agent or any other Lender and based on the financial statements and other information prepared by Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents.

10.19 Notice of Events of Default . Should Administrative Agent receive any written notice of the occurrence of a Default or Event of Default, or should Administrative Agent send Borrower a notice of Default or Event of Default, Administrative Agent shall promptly give notice thereof to each other Lender.

10.20 Successor Administrative Agent.

(a) Administrative Agent may resign from the performance of all its functions and duties hereunder at any time, by giving at least thirty (30) days prior written notice to Lenders and Borrower. Such resignation shall take effect on the date set forth in such notice or as otherwise provided below. Such resignation by Administrative Agent as administrative agent shall not affect its obligations hereunder, if any, as a Lender. Additionally, if Administrative Agent is grossly negligent or commits willful misconduct, the Required Lenders may remove Administrative Agent from its role as administrative agent for the Lenders, without affecting Administrative Agent’s rights or obligations as a Lender.

(b) Upon resignation by or replacement of Administrative Agent, or any successor Administrative Agent, the Required Lenders shall appoint a successor Administrative Agent. If no successor Administrative Agent (who shall be one of the Lenders) shall have been so appointed by the Required Lenders, and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent’s giving notice of resignation, then the retiring Administrative Agent shall appoint a successor Administrative Agent on or prior to Administrative Agent’s resignation. Upon the acceptance of any appointment as an Administrative Agent hereunder by a successor Administrative Agent, Administrative Agent’s resignation shall become effective and such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of Administrative Agent and Administrative Agent upon the recordation of a written designation and acceptance, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents other than its liability, if any, for duties and obligations accrued prior to its retirement. After any retiring Administrative Agent’s resignation hereunder as an Administrative Agent, the provisions of this

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Article X shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as an Administrative Agent hereunder and under the other Loan Documents. The new Administrative Agent shall promptly deliver to Borrower a copy of the designation and acceptance.

(c) Notwithstanding anything contained in this Section 10.20 to the contrary, Borrower shall have the right to reasonably approve a successor/replacement Administrative Agent, unless (i) an Event of Default exists and is continuing, (ii) successor/replacement Administrative Agent is an Eligible Assignee or (iii) successor/replacement Administrative Agent is a Lender.

10.21 Evidence of Exemption from Withholding of Taxes.

(a) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this Subsection 10.21 , a “ Non-US Lender ”) shall deliver to Administrative Agent and to Borrower, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof) or on or prior to the date of the Assignment and Assumption Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Borrower or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form W-8BEN or W-8ECI (or any successor forms) properly completed and duly executed by such Non-US Lender, or (2) in the case of a Non-US Lender claiming exemption from United States federal withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of “portfolio interest”, a Form W-8BEN, and a certificate of such Non-US Lender certifying that such Non-US Lender is not (A) a “bank” for purposes of Section 881(c) of the Internal Revenue Code, (B) a ten-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of Borrower, or (C) a controlled foreign corporation related to Borrower (within the meaning of Section 864(d)(4) of the Internal Revenue Code), in the case of each of (1) and (2) together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Non-US Lender is not subject to United States withholding tax with respect to any payments to such Non-US Lender of interest payable under any of the Loan Documents.

(b) Each Non-US Lender, to the extent it does not act or ceases to act for its own account with respect to any portion of any sums paid or payable to such Lender under any of the Loan Documents (for example, in the case of a typical participation by such Lender), shall deliver to Administrative Agent and to Borrower, on or prior to the Closing Date (in the case of each Non-US Lender listed on the signature pages hereof), on or prior to the date of the Assignment and Assumption Agreement pursuant to which it becomes a Lender (in the case of each other Non-US Lender), or on such later date when such Non-US Lender ceases to act for its own account with respect to any portion of any such sums paid or payable, and at such other times as may be necessary in the determination of Borrower or Administrative Agent (each in the reasonable exercise of its discretion), (A) two original copies of the forms or statements required to be provided by such Non-US Lender under this Section 10.21(c) , properly completed and duly executed by such Non-US Lender, to establish the portion of any such sums paid or payable with respect to which such Non-

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US Lender acts for its own account that is not subject to United States withholding tax, and (B) two original copies of Internal Revenue Service Form W‑8IMY (or any successor forms) properly completed and duly executed by such Non-US Lender, together with any information, if any, such Non-US Lender chooses to transmit with such form, and any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder, to establish that such Non-US Lender is not acting for its own account with respect to a portion of any such sums payable to such Non-US Lender.

(c) Each Non-US Lender hereby agrees, from time to time after the initial delivery by such Non-US Lender of such forms, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence so delivered obsolete or inaccurate in any material respect or if, by virtue of a Change in Law or regulations, such forms are no longer valid evidence of a Person’s exemption from withholding tax which is reasonably satisfactory to Borrower, that such Non-US Lender shall promptly (1) deliver to Administrative Agent and to Borrower two original copies of renewals, amendments or additional or successor forms, properly completed and duly executed by such Non-US Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Non-US Lender is not subject to United States withholding tax with respect to payments to such Non-US Lender under the Loan Documents and, if applicable, that such Non-US Lender does not act for its own account with respect to any portion of any such payments, or (2) notify Administrative Agent and Borrower of its inability to deliver any such forms, certificates or other evidence.

(d) Borrower shall not be required to pay any additional amount to any Non-US Lender under Section 3.8 hereof if (A) such Non-US Lender shall have failed to satisfy the requirements of paragraphs (a) , (b) or (c) of this Section 10.21 or (B) with respect to Indemnified Taxes imposed by any jurisdiction other than the United States or any state or other political subdivision thereof, such Non-U.S. Lender shall have failed to satisfy its obligations hereunder (including without limitation by providing to Borrower any forms, certificates or other evidence establishing such Non-U.S. Lender’s entitlement to an exemption from or a reduced rate of any such Indemnified Taxes, but only if providing any such forms, certificates or other evidence is consistent with applicable laws and regulations and can be done without material cost or legal or regulatory disadvantage to such Non-U.S. Lender; provided that if such Non-US Lender shall have satisfied the requirements of Section 10.21(a) hereof on the date such Non-US Lender became a Lender and, as a result of any Change in Law, such Non-US Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Non-US Lender is not subject to withholding or subject to a reduced rate of withholding, nothing in this Section 10.21(d) shall relieve Borrower of its obligation to pay additional amounts as set forth in Section 3.8 with respect to any portion of any Indemnified Taxes with respect to which such Non-U.S. Lender is no longer able to provide forms, certificates or other evidence establishing such exemption or reduction in the rate of withholding.

[ Remainder of page intentionally left blank: Signature page follows ]

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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

BORROWER:

KBS SOR CITY TOWER, LLC ,

a Delaware limited liability company

By: KBS SOR ACQUISITION XXXII, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR PROPERTIES, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR (BVI) HOLDINGS, LTD.,

a British Virgin Islands company limited by shares,

its sole member

By: KBS STRATEGIC OPPORTUNITY LIMITED PARTNERSHIP,

a Delaware limited partnership,

its sole shareholder

By: KBS STRATEGIC OPPORTUNITY REIT, INC.,

a Maryland corporation,

its sole general partner

By: /s/ Jeffrey K. Waldvogel

Jeffrey K. Waldvogel,

Chief Financial Officer

[ Loan Agreement – Borrower Signature Page ]

ADMINISTRATIVE AGENT:

COMPASS BANK, an Alabama banking corporation

By: /s/ Gabe Potyondy

Name: Gabe Potyondy

Title: Managing Director

LENDERS:

COMPASS BANK, an Alabama banking corporation

By: /s/ Gabe Potyondy

Name: Gabe Potyondy

Title: Managing Director

[ Loan Agreement – Lender Signature Page ]

LENDERS:

[_______]

By:

Name:

Title:

[ Loan Agreement – Lender Signature Page ]

EXHIBIT A

Form of Request for Extension

Date: ____________________

To: Compass Bank (“ Administrative Agent ”)

2020 Main Street, Suite 950

Irvine, California 92614

Attention: Gabe Potyondy

From: KBS SOR City Tower, LLC (“ Borrower ”)

Re: $103,350,000.00 Loan made by the Lenders to Borrower (the “ Loan ”) pursuant to that certain Loan Agreement (the “ Loan Agreement ”) and other loan documents dated March 6, 2018 (the “ Loan Documents ”).

The undersigned hereby requests that you extend the Maturity Date of the Loan to ______________, 20__, pursuant to the terms, conditions, and provisions of the Loan Agreement.

Borrower hereby represents and warrants that (i) the Loan Documents remain in full force and effect, (ii) no Event of Default exists, and (iii) Borrower has satisfied all conditions precedent to obtaining the extension of the original Maturity Date requested hereby.

The undersigned agrees to execute any other documents as may be reasonably required by Administrative Agent in order to implement or clarify the terms of this extension or to preserve or maintain the security previously granted in connection with the Loan.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

Pursuant to the terms of the Loan Agreement, enclosed is the extension fee in the amount of $_____________________.

KBS SOR City Tower, LLC ,

a Delaware limited liability company

By: KBS SOR ACQUISITION XXXII, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR PROPERTIES, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR (BVI) HOLDINGS, LTD.,

a British Virgin Islands company limited by shares,

its sole member

By: KBS STRATEGIC OPPORTUNITY LIMITED PARTNERSHIP,

a Delaware limited partnership,

its sole shareholder

By: KBS STRATEGIC OPPORTUNITY REIT, INC.,

a Maryland corporation,

its sole general partner

By: _____________________________

Jeffrey K. Waldvogel,

Chief Financial Officer

[ Loan Agreement – Lender Signature Page ]

EXHIBIT B

Omitted

EXHIBIT C

Form of Compliance Certificate

Financial Statement Date: , ____

To: Compass Bank

Ladies and Gentlemen:

Reference is made to that certain Loan Agreement, dated March 6 , 20 18 (as amended, modified, supplemented, extended, renewed or replaced from time to time, the “ Loan Agreement ;” the terms defined therein being used herein as therein defined), among KBS SOR City Tower, LLC (“ Borrower ”) and Compass Bank (“ Administrative Agent ”).

The undersigned, hereby certifies as of the date hereof that he/she is the [_____________] of Borrower, and that, as such, he/she is authorized to execute and deliver this Compliance Certificate to Administrative Agent on the behalf of Borrower, and that:

1. The financial statements of Borrower required by the Loan Agreement and delivered in connection herewith fairly present the financial condition, results of operations and cash flows of Borrower in accordance with Accounting Principles as at such date and for such period, subject only to normal year-end audit adjustments and the absence of footnotes.

2. [select one:]

[to the knowledge of the undersigned, during the period covered by such financial statements Borrower performed and observed each covenant and condition of the Loan Documents applicable to it, and no Event of Default occurred.]

--or--

[to the best knowledge of the undersigned, during the period covered by such financial statements Borrower breached the following covenants, and/or conditions the attached list of Events of Default occurred.]

3. The financial covenant analyses and information set forth on Schedule 1 attached hereto are true and accurate on and as of the date of this Compliance Certificate.

IN WITNESS WHEREOF, the undersigned has executed this Compliance Certificate as of

, .

BORROWER:

KBS SOR CITY TOWER, LLC ,

a Delaware limited liability company

By: KBS SOR ACQUISITION XXXII, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR PROPERTIES, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR (BVI) HOLDINGS, LTD.,

a British Virgin Islands company limited by shares,

its sole member

By: KBS STRATEGIC OPPORTUNITY LIMITED PARTNERSHIP,

a Delaware limited partnership,

its sole shareholder

By: KBS STRATEGIC OPPORTUNITY REIT, INC.,

a Maryland corporation,

its sole general partner

By: _____________________________

Jeffrey K. Waldvogel,

Chief Financial Officer

SCHEDULE 1
to the Compliance Certificate

See attached.

EXHIBIT D

Form of Tenant Direction Notice

[ BORROWER LETTERHEAD ]

[__________], 20__

[ Tenants under Leases ]


Re:	Lease dated __________ between ______________ as Landlord, and

______________, as Tenant, concerning premises known as ____________________ ___________________________________.

Gentlemen:

This letter shall constitute notice to you that the undersigned has granted a lien and security interest in the captioned lease and all rents, additional rent and all other monetary obligations to landlord thereunder (collectively, “ Rent ”) in favor of COMPASS BANK, an Alabama banking corporation, as administrative agent (“ Administrative Agent ”), to secure certain of the undersigned’s obligations to Administrative Agent. The undersigned hereby irrevocably instructs and authorizes you to disregard any and all previous notices sent to you in connection with rent and hereafter to deliver all rent to the following address:

Compass Bank

[Insert lockbox address]

Account Name:

Clearing Account

Account No.:

ABA#

The instructions set forth herein are irrevocable and are not subject to modification in any manner, except that Administrative Agent, or any successor lender so identified by Administrative Agent, may by written notice to you rescind the instructions contained herein.

Sincerely,

By:

ACKNOWLEDGMENT AND AGREEMENT

The undersigned acknowledges notice of the lien and security interest of Administrative Agent and hereby confirms that the undersigned has received no notice of any other pledge or assignment of the Rent and will honor the above instructions.

[Tenant]

By:
Name:
Title:

Dated as of: ________________ ____, 20___

EXHIBIT E

FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT

THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this “ Agreement ”), is dated as of this ___ day of ___________, 201_, and is made between (“ Assignor ”) and ____________________________________ (“ Assignee ”).

PRELIMINARY STATEMENT

Assignor is a party to that certain Loan Agreement dated as of [_____________, 201_] (as the same may be amended, supplemented, restated or otherwise modified from time to time shall be referred to herein as the “ Loan Agreement ”), among Borrower, the Lenders party thereto and [_______________________________] as Administrative Agent for the Lenders, pursuant to which Lenders agreed to make a loan of up to [_________________________] AND 00/100 DOLLARS ($[_____________]) (the “ Loan ”) as more particularly described therein. All capitalized terms not otherwise defined herein shall have the meaning set forth in the Loan Agreement, unless the context otherwise requires.

AGREEMENT

Assignor and Assignee, in consideration of the matters described in the foregoing Preliminary Statement, which are incorporated herein, and in consideration of the mutual covenants and agreements and provisions herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, do hereby covenant and agree as follows:

1. Assignment and Assumption . Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor, an undivided interest in and to the Loan and the Loan Documents and Assignor’s rights and obligations thereunder, which interest shall equal [____ percent (____%)] of the Loan, such that after giving effect to this assignment the Assignee shall hold [____ percent (____%)] of the Loan and a commitment to fund the Loan in the maximum amount of [$__________], together with the outstanding rights and obligations under the Loan Agreement and the other Loan Documents in connection with such Loan. In consideration of such assignment by Assignor and the assumption by Assignee, on the date hereof (a) Assignee shall pay to Assignor such amounts as are specified in any written agreement or exchange of letters between them, and (b) Assignee shall pay to Administrative Agent an assignment processing fee of [$__________].

2. Rights and Obligations . After giving effect to the assignment and assumption contained in Section 1 hereof, (a) Assignee shall have the rights and obligations of a Lender under the Loan Documents with respect to the rights and obligations assigned to the Assignee hereunder, and (b) Assignor shall relinquish its rights and be released from its obligations under the Loan Documents with respect to the rights and obligations assigned to Assignee hereunder; provided , however , that Assignor shall retain all of its rights to indemnification under the Loan Documents for any events, acts or omissions occurring before the effective date hereof. Except as Assignor

and Assignee may otherwise agree on and after the effective date hereof, the Assignee shall be entitled to receive from Administrative Agent all payments of principal, interest, LIBOR breakage amounts, and fees payable pursuant to and in accordance with the Loan Documents with respect to the interest assigned hereby, accruing and payable on and after the date hereof.

3. Representations of the Assignor; Limitations on the Assignor’s Liability . Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim. It is understood and agreed that the assignment and assumption hereunder is made without recourse to Assignor and that Assignor makes no other representations or warranties of any kind to Assignee. Neither Assignor nor any of its respective officers, directors, employees, agents or attorneys shall be responsible for (a) the due execution (other than by Assignor), legality, validity, enforceability, genuineness, sufficiency or collectability of any of the Loan Documents, including documents granting the Assignor and the Lenders a security interest in assets of Borrower or Guarantor, (b) any representation, warranty or statement made in or in connection with any of the Loan Documents, (c) the financial condition or creditworthiness of Borrower, (d) the performance of or compliance with any of the terms or provisions of any of the Loan Documents, (e) inspecting any of the property, books or records of Borrower, (f) the validity, enforceability, perfection, priority, condition, value or sufficiency of any collateral securing or purporting to secure the Loan, or (g) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loan or the Loan Documents.

4. Representations and Covenants of the Assignee . Assignee (a) confirms that it has received a copy of the Loan Agreement, together with copies of such financial statements, Loan Documents and other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement, (b) agrees that it will, independently and without reliance upon Assignor, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (c) appoints and authorizes Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto, subject to the provisions of Article X of the Loan Agreement, (d) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender, (e) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are “plan assets” as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be “plan assets” under ERISA, and (f) if Assignee is organized under the laws of a jurisdiction outside of the United States of America, it has attached hereto completed and signed copies of Internal Revenue Service Forms 1001 and 4224 and any forms that may be required by the United States Internal Revenue Service in order to certify Assignee’s exemption from United States withholding taxes with respect to all payments to be made to Assignee under the Loan Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty.

5. Indemnity . Assignee agrees to indemnify and hold the Assignor harmless against any and all losses, costs and expenses (including reasonable attorneys’ fees) and liabilities incurred

by Assignor in connection with or arising in any manner from Assignee’s non-performance of the obligations assumed under this Agreement.

6. Governing Law . This Agreement shall be governed by laws of [____________], without regard to laws that would impose the laws of another jurisdiction.

7. Notices . Notices shall be given under this Agreement in the manner set forth in the Loan Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be (a) the addresses set forth in the Loan Agreement with respect to the Assignor, and (b) the following address with respect to Assignee:

[______________________

_______________________

_______________________]

Facsimile:[______________]

Telephone:[_____________]

Attention: [______________]

with a copy to:

[______________________

_______________________

_______________________]

Facsimile:[______________]

Telephone:[_____________]

Attention: [______________]

8. Counterparts . This Agreement may be executed in one or more counterparts, each of which may be executed by one or more parties hereto, but all of which, when taken together, shall constitute a single agreement.

9. Conflicts . This Agreement embodies the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings between the parties hereto relating to the subject matter hereof. In the event of any conflict between the terms of this Agreement and any such other written agreement, the terms of such other agreement shall be controlling.

10. Successors and Assigns . This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. Assignee may not assign, grant participation interests or transfer any of its rights or obligations under this Agreement except in full compliance with the terms and provisions of the Loan Agreement.

11. New Notes . On or promptly after the date hereof, Borrower, Administrative Agent, Assignor and Assignee shall make appropriate arrangements so that a new Notes executed by Borrower, dated as of the effective date of this Agreement, after giving effect to this Agreement, is issued to Assignee, in exchange for the surrender by Assignor to Borrower of the outstanding Notes, marked “Canceled”.

12. Wiring Instructions . All payments to Administrative Agent in respect of advances of the Loan shall be made by wire transfer of immediately available funds in accordance with the provisions of the Loan Agreement and sent to the account set forth on Exhibit A hereto and made a part hereof, or to such other account as Administrative Agent shall designate in writing to Assignee. All payments to Assignee shall be made by wire transfer of immediately available funds in accordance with the provisions of the Loan Agreement and sent to the account set forth on Exhibit B hereto and made a part hereof, or to such other account as Assignee shall designate in writing to Administrative Agent.

[No Further Text on this Page; Signature Page Follows]

IN WITNESS WHEREOF , the parties hereto have executed this Agreement by their duly authorized officers as of the date first above written.

ASSIGNOR:

[___________________]
(as agent for [________________])

By:

Name:

Title:

[ASSIGNEE]

By:

Name:

Title:

ACKNOWLEDGED

AND ACCEPTED:

COMPASS BANK, as Administrative Agent

By:_______________________

Name:

Title:

SCHEDULE 2.1

COMMITMENT AND PERCENTAGE AMOUNTS



Lender	Commitment	Percentage
Compass Bank	$103,350,000	100%
Total	$103,350,000	100%

SCHEDULE 5.7

Organizational Chart

SCHEDULE 5.10

Litigation

SCHEDULE 6.15

Required Repairs

SCHEDULE 6.26

Required Capital Improvements

EXHIBIT F

Additional Advance/Reserve Release Conditions

Section 1 - Conditions to all Additional Advances

Section 2 - Omitted

Section 3 - Approved Leasing Expense Advances

Section 4 - Capex/Renovation Advances

Section 5 - Capital Improvements Reserve Releases


Section 1.	GENERAL CONDITIONS

Each advance of the Loan following the Initial Advance and releases from the Capital Improvement Reserve shall be subject to Administrative Agent’s receipt, review, approval and/or confirmation of the following:


1.	Borrower shall have submitted to Administrative Agent a Request for Advance/release in the form of Exhibit F-1 attached hereto.


2.	No Event of Default has occurred and is continuing.


3.	Each Additional Advance shall be secured by the Loan Documents, subject only to Permitted Encumbrances, as evidenced by a title insurance endorsement reasonably satisfactory to Administrative Agent.


4.	Borrower shall have paid all of Administrative Agent’s costs and expenses in connection with such advance/release.


5.	The representations made by Borrower in Section 5.26 continue to be true and correct.


6.	Administrative Agent shall have no obligation to make (a) any Additional Advance or a release from the Capital Improvement Reserve for less than $250,000.00, except for the final Additional Advance/release or (b) Additional Advances/releases more often than once in any calendar.


7.	Each request for Additional Advance/release shall be submitted to Administrative Agent at least ten (10) Business Days prior to the expected date of such Additional Advance.

Each Additional Advance/release shall be deposited into the Operating Account or, at Administrative Agent’s option, disbursed through an escrow satisfactory to Administrative Agent or, after the occurrence and during the continuance of an Event of Default, disbursed directly to the contractor or other party entitled to receipt of the same, and shall be used for payment of the costs specifically set forth in the

applicable request for Additional Advance/release approved by Administrative Agent in writing.

Each request for and acceptance of an Additional Advance/release shall be deemed to constitute, as of the date of such request or acceptance, a statement that (i) the budget for the work to be completed with the Additional Advances/releases shall not have increased, and (ii) all representations and warranties contained in the Loan documents are true and correct in all material respects except to the extent of changes in facts which do not constitute an Event of Default.

10.

If Administrative Agent so elects, Administrative Agent may condition any advance hereunder upon the inspection of the Premises by Administrative Agent, its construction consultant or other representative to confirm that any repairs or improvements for which such advance has been requested have been completed in accordance with the terms hereof, and Borrower shall be responsible for the reasonable cost of any such inspection.

11.

With respect to Additional Advances and not reserve releases, Administrative Agent shall have received, in form and substance satisfactory to it, a date down endorsement from the Title Company that issued the title insurance policy accepted by Administrative Agent in connection with this Agreement (the “ Title Insurance Policy ”), effective as of the date of such requested Additional Advance, indicating that since the preceding Additional Advance (or, in the case of the first Additional Advance after the date hereof, since the issuance of the Title Insurance Policy) there has been no lien, encumbrance or other matter not theretofore approved by Administrative Agent in writing, together with other evidence satisfactory to Administrative Agent no mechanics’ liens have been filed and remain filed with respect to the Premises (except to the extent permitted herein) and insuring the lien and priority of the Mortgage in an amount equal to the Initial Advance plus each Additional Advance made subsequent to the date hereof pursuant to this Exhibit F , including the requested Additional Advance. The cost of all such endorsements and any title continuations associated therewith shall be paid by Borrower. If any intervening mechanics’ liens are filed against the Premises, the Lenders shall not be obligated to make the requested Additional Advance unless and until Borrower shall have caused such liens to be discharged of record or caused the Title Company to provide affirmative coverage over such liens in a manner (and based upon facts and circumstances) acceptable to Administrative Agent in its sole absolute discretion


Section 2.	OMITTED


Section 3.	APPROVED LEASING EXPENSE ADVANCES

Additional Advances shall be made from the Leasing Expense Holdback as set forth below:

A. Advances for Tenant Improvements . Additional Advances for tenant improvements approved by Administrative Agent (“ Tenant Expense Holdback ”) shall be made subject to the following terms and conditions;


1.	The tenant under such Lease shall have taken occupancy and accepted the leased premises without offset, credit or defense, except as otherwise agreed to by Administrative Agent, as evidenced by a tenant estoppel certificate executed by such tenant, addressed to Administrative Agent, in form satisfactory to Administrative Agent and the term under such Lease has commenced; and

Borrower shall have furnished Administrative Agent with (x) a true and correct copy of the final or temporary, as applicable, certificate of occupancy for the improvements relating to such tenant expenses, and (y) with respect to tenant improvements constructed by Borrower, final lien waivers executed by each contractor, subcontractor and materialmen supplying labor or materials in connection with contracts/subcontracts. Provided that a Cash Sweep Period does not exist, Borrower may request a portion of the Additional Advances (“ Spec Suite Advances ”) for tenant improvements for suites (“ Spec Suites ”) at the Premise that are not subject to Leases. The aggregate amount of Spec Suite Advances outstanding at any time shall not, without Administrative Agent’s consent (in its sole discretion), exceed the lesser of (x) $2,000,000 and (y) an amount equal to 20% of the unadvanced Leasing Expense Holdback (the “ Maximum Spec Suite Advances ”). If at any time Borrower enters into Leases, in accordance with the terms of this Agreement, for Spec Suites that were improved with Spec Suite Advances, the amount of such Spec Suite Advances applied to improve such Spec Suites shall be subtracted from the Maximum Spec Suite Advances. For example, if $2,000,000 of Spec Suite Advances have been made Borrower will not have the ability to request any additional Spec Suite Advances unless and until all or a portion of the Spec Suites are leased. If Borrower subsequently leases a Spec Suite on which Borrower expended $100,000 of Spec Suite Advances on tenant improvements, Borrower would then have the ability to request additional Spec Suite Advances of up to $100,000.

B. Advances for Leasing Commissions . Upon the request of Borrower, Additional Advances shall be made to pay leasing commissions in accordance with written leasing commission agreements approved in writing by Administrative Agent and providing for leasing commissions and terms comparable to existing local market terms and conditions; provided , however , that Administrative Agent shall not make Additional Advances for more than one-half (1/2) of the leasing commission at the time the relevant Lease is executed. The remaining portion of any leasing commission shall be advanced only after (a) the tenant under the Lease has taken occupancy, has accepted the leased premises and is paying rent under the Lease, without offset, credit or defense, as evidenced by a tenant estoppel certificate executed by such tenant or an Officer’s Certificate, addressed to Administrative Agent, in form satisfactory to Administrative Agent and (b) the brokers to whom such commissions are payable have acknowledged that the advance, when paid to the brokers, will constitute payment in full of all commissions due with respect to the Lease and have agreed to release Administrative Agent, Borrower and the Premises from any claim for any commissions due with respect to such Lease. Borrower may use a portion of the Additional Advances

for leasing commissions for speculative suites on such terms, and in such an amount, as determined by Administrative Agent, in its sole discretion. Additional Advances for tenant improvements and leasing commissions shall be cancelled as of the first extended Maturity Date.


Section 4.	CAPEX/RENOVATION ADVANCES

Additional Advances from the Capex/Renovation Holdback shall be made as set forth below:


1.	Lender shall reimburse Borrower with such Additional Advances in an amount equal to 50% of the expenses paid by Borrower.

Prior to any request for a Capex/Renovation Advance, Borrower shall have submitted for Administrative Agent’s reasonable approval (a) a description of the work to be completed, (b) the plans and specifications for such work, if applicable, which plans and specifications may not be changed without Administrative Agent’s prior written consent (not to be unreasonably withheld, conditioned or delayed), (c) a construction schedule, and (d) if requested by Administrative Agent, copies of each contract or subcontract as requested by Administrative Agent.


3.	All work shall have been completed to the reasonable satisfaction of Administrative Agent and Borrower shall have expended an amount equal to the requested CapEx/Renovation Advance.


4.	Lender shall not be obligated to make Additional Advances from the Capex/Reserve Holdback after the initial Maturity Date.

Section 5. CAPITAL IMPROVEMENTS RESERVE RELEASES

Releases shall be made from the Capital Improvements Reserve for Required Capital Improvement expenses on the following terms and conditions:


1.	Such releases shall be made in reimbursement for expenses paid by Borrower.

Prior to any request for Capital Improvements Reserve releases, Borrower shall have submitted for Administrative Agent’s reasonable approval (a) a description of the improvements to be constructed, (b) the plans and specifications for such improvements, if applicable, which plans and specifications may not be changed without Administrative Agent’s prior written consent, (c) a construction schedule, and (d) if requested by Administrative Agent, copies of each contract or subcontract as requested by Administrative Agent.


3.	All Required Capital Improvements shall have been completed to the reasonable satisfaction of Administrative Agent and Borrower shall have expended an amount equal to the Capital Improvements Reserve on capital improvements at the Premises.

Exhibit F-1

Form of Request for Additional Advance/Release

Compass Bank
2020 Main Street, Suite 950

Irvine, California 92614

Attention: Gabe Potyondy

Re: KBS SOR City Tower, LLC (“ Borrower ”)

Loan #_______________ (“ Loan ”)

Ladies and Gentlemen:

Pursuant to the terms of that certain Loan Agreement dated as of March 6, 2018 (the “ Loan Agreement ”), Borrower hereby submits a request for [an Additional Advance][release from the Capital Improvement Reserve] in the amount of $[______________]. Capitalized terms have the same meanings as in the Loan Agreement.

This request for advance/release (“ Request ”) shall be deemed to confirm the items set forth in Sections 1 and __ of Exhibit F of the Loan Agreement have been and remain satisfied on the date hereof.

[If for Required Capital Improvements and/or Tenant Improvements, complete the following chart and attach copies of invoices, bills paid affidavits and lien waivers relating to the costs to be paid.]



ITEM	TOTAL AMOUNT INCURRED LESS PRIOR DISBURSEMENTS
1)
2)
Total Additional Advance

[No further text on this page.]

This request for Additional Advance/release is submitted as of _______________, 20__.

BORROWER:

KBS SOR CITY TOWER, LLC ,

a Delaware limited liability company

By: KBS SOR ACQUISITION XXXII, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR PROPERTIES, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR (BVI) HOLDINGS, LTD.,

a British Virgin Islands company limited by shares,

its sole member

By: KBS STRATEGIC OPPORTUNITY LIMITED PARTNERSHIP,

a Delaware limited partnership,

its sole shareholder

By: KBS STRATEGIC OPPORTUNITY REIT, INC.,

a Maryland corporation,

its sole general partner

By: _____________________________

Jeffrey K. Waldvogel,

Chief Financial Officer

Exhibit 10.4

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

Ballard Spahr LLP
1735 Market Street, 51 ^st Floor

Philadelphia, Pennsylvania 19103

Attention: Jeremy R. Teaberry, Esq.

SEND TAX NOTICES TO:

INSTRUCTIONS TO RECORDER:
Index this document as (1) a deed of trust; (2) an assignment
of leases and rents; (3) a security agreement; and (4) a fixture filing

DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING AND
ASSIGNMENT OF LEASES AND RENTS

KBS SOR CITY TOWER, LLC ,
as Trustor

BEN HAYES RIGGS ,
as Trustee

For the Benefit of

COMPASS BANK ,
as Beneficiary

Dated: March 6, 2018

DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING AND

ASSIGNMENT OF LEASES AND RENTS

THIS DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING AND ASSIGNMENT OF LEASES AND RENTS (as it may be from time to time amended, modified, extended, substituted, and/or supplemented, the “ Mortgage ”) is made this 6 ^th day of March, 2018, by KBS SOR CITY TOWER , a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware, having an office at c/o KBS Capital Advisors LLC, 800 Newport Center Drive, Suite 700, Newport Beach, California 92660 (“ Trustor ”), to BEN HAYES RIGGS , having an address at P.O. Box 4444, Houston, Texas 77210 (“ Trustee ”), as Trustee, for the benefit of COMPASS BANK , an Alabama banking corporation, as Administrative Agent for the Lenders, having an office at 2020 Main Street, Suite 950, Irvine, California 92614, its successors and assigns (“ Beneficiary ”).

W I T N E S S E T H :

WHEREAS , Beneficiary, as Administrative Agent and a Lender and certain other Lenders have agreed to make available to Trustor a commercial mortgage loan in a maximum principal amount of One Hundred Three Million Three Hundred Fifty Thousand and No/100 Dollars ($103,350,000.00) (hereinafter, as it may be from time to time amended, modified, extended, substituted, and/or supplemented, referred to as the “ Loan ”); and

WHEREAS , the Loan is evidenced by that certain Loan Agreement dated the date hereof, executed by Trustor, as borrower, in favor of Beneficiary, as Administrative Agent and a Lender, and the other Lenders party thereto, in the principal amount of $103,350,000.00 (hereinafter, as it may be from time to time amended, modified, extended, renewed, substituted, and/or supplemented, referred to as the “ Loan Agreement ”); and

WHEREAS , capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement; and

WHEREAS , this Mortgage is given and made by Trustor to Beneficiary, for the benefit of the Lenders, as security for (i) the repayment of the indebtedness of Trustor evidenced by the Note, (ii) the repayment of any amounts, as additional interest (“ Additional Interest ”), owed by Trustor under any Administrative Agent Hedging Contract, and (iii) the performance of the terms, conditions, and covenants of Trustor set forth in the Loan Agreement, this Mortgage, and all of the other Loan Documents.

NOW, THEREFORE , in order to induce the Lenders to make the Loan available to Trustor and to secure the payment of the indebtedness of Trustor owed to the Lenders, as evidenced by the Note, and to secure the performance by Trustor of all of its other obligations and covenants pursuant to the terms, conditions, and provisions of the Loan Documents and any Administrative Agent Hedging Contract, this Mortgage, and all of the other Loan Documents, and to assure the payment of all other indebtedness, monetary obligations, liabilities, and duties of any kind of Trustor, direct or indirect, absolute or contingent, joint or several, due or not due, liquidated or not liquidated, arising under the Note, this Mortgage, any Administrative Agent Hedging Contract or any of the

other Loan Documents, Trustor has hereby irrevocably mortgaged, given, granted, released, assigned, transferred, bargained, sold, conveyed and set over unto Trustee, in trust for the benefit of Beneficiary, and by these presents does hereby irrevocably mortgage, give, grant, release, assign, transfer, bargain, sell, convey and set over unto Trustee, in trust for the benefit of Beneficiary, its successors and assigns forever, WITH THE POWER OF SALE , the following described property and rights (collectively, the “ Mortgaged Premises ”):

ALL that certain property consisting of approximately 5.07 + acres of land together with all improvements situated thereon, including, without limitation an office complex and related parking areas consisting of a single parcel of land located at 333 City Boulevard West, City of Orange, County of Orange, State of California, as more particularly described on Schedule “A” attached hereto and made a part hereof (the “ Premises ”); and

TOGETHER with all and singular tenements, hereditaments, buildings, improvements, rights-of-way, privileges, liberties, air rights, easements, Trustor’s rights as declarant under any restrictive covenants, riparian rights, waters, watercourses, mineral, oil and gas rights and appurtenances thereunto belonging, or in any wise appertaining and the reversion and remainder and remainders, rents, income, issues, and profits thereof; and

TOGETHER with all rights, title, and interests of Trustor, now owned or hereafter acquired, in and to any streets, the land lying in the bed of any streets, roads or avenues, opened or proposed, in front of, adjoining or abutting the Premises to the center line thereof, and all strips and gores within or adjoining the Premises, easements and rights-of-way, public or private, all sidewalks and alleys, now or hereafter used in connection with the Premises or abutting the Premises; and

TOGETHER with any and all agreements, now or hereafter in existence providing for or relating to the construction, alteration, maintenance, repair, operation, franchising, or management of the Premises or any part thereof, as well as the plans and specifications therefor, and all copies thereof (together with the right to amend or terminate the same or waive the provisions of the foregoing) and any amendments, renewals and replacements thereof; to the extent permitted by the relevant authorities, all licenses, permits, approvals and other entitlements for the ownership, construction, maintenance, operation, use and occupancy of the Premises or any part thereof and any amendments, renewals and replacements thereof; all of Trustor’s rights, title, and interests in and to all warranties and guaranties from contractors, subcontractors, suppliers and manufacturers to the maximum extent permissible relating to the Premises or any part thereof; all bonds and insurance policies covering or affecting the Premises or any part thereof; and

TOGETHER with any and all personal property of Trustor, including the following, all whether now owned or hereafter acquired or arising and wherever located: (i) accounts; (ii) securities entitlements, securities accounts, commodity accounts, commodity contracts and investment property; (iii) deposit accounts; (iv) instruments (including promissory notes); (v) documents (including warehouse receipts); (vi) chattel paper (including electronic chattel paper and tangible chattel paper); (vii) inventory, including raw materials, work in process, or materials used or consumed in Trustor’s business, items held for sale or lease or furnished or to be furnished under contracts of service, sale or lease, goods that are returned, reclaimed or repossessed; (viii) goods of every nature, including stock-in-trade, goods on consignment, standing timber that is to be cut

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and removed under a conveyance or contract for sale, the unborn young of animals, crops grown, growing, or to be grown, manufactured homes, computer programs embedded in such goods and farm products; (ix) equipment, including machinery, vehicles and furniture; (x) fixtures; (xi) agricultural liens; (xii) as-extracted collateral; (xiii) letter of credit rights; (xiv) general intangibles, of every kind and description, including payment intangibles, software, computer information, source codes, object codes, records and data, all existing and future customer lists, choses in action, claims (including claims for indemnification or breach of warranty), books, records, patents and patent applications, copyrights, trademarks, tradenames, tradestyles, trademark applications, goodwill, blueprints, drawings, designs and plans, trade secrets, contracts, licenses, license agreements, formulae, tax and any other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies; (xv) all property of Trustor now or hereafter in Beneficiary’s possession or in transit to or from, or under the custody or control of, Beneficiary, or any affiliate thereof; (xvi) all cash and cash equivalents thereof; and (xvii) all cash and noncash proceeds (including insurance proceeds) of all of the foregoing property, all products thereof and all additions and accessions thereto, substitutions therefor and replacements thereof; and

TOGETHER with any and all awards, damages, payments and other compensation, and any and all claims therefor and rights thereto, with respect to the Premises which result or may result from any injury to or decrease in value of the Premises, whether by virtue of the exercise of the power of eminent domain or otherwise, or any damage, injury or destruction in any manner caused to the improvements thereon, or any part thereof;

TOGETHER with all now existing or hereafter arising leases and other agreements or arrangements heretofore or hereafter entered into affecting the use, enjoyment or occupancy of, or the conduct of any activity upon or in, the Mortgaged Premises, including any extensions, renewals, modifications or amendments thereof (collectively, the “ Leases ”) whether Trustor is lessor or tenant under such Leases; and all rents, rent equivalents, moneys payable as damages (including payments by reason of the rejection of a Lease in a bankruptcy proceeding or in lieu of rent or rent equivalents), royalties (including all oil and gas or other mineral royalties and bonuses), income, fees, receivables, receipts, revenues, proceeds of rental and business interruption insurance, deposits (including security, utility and other deposits), accounts, cash, issues, profits, charges for services rendered, and other consideration of whatever form or nature received by or paid to or for the account of or benefit of Trustor or its agents or employees from any and all sources arising from or attributable to the Mortgaged Premises, including all receivables, customer obligations, installment payment obligations and other obligations now existing or hereafter arising or created out of the sale, lease, sublease, license, concession or other grant of the right of the use and occupancy of the Mortgaged Premises, or rendering of services by Trustor or any of its agents or employees, and proceeds, if any, from business interruption or other loss of income insurance (collectively, the “ Rents ”), together with all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Obligations; and all rights and claims against any tenant/lessee (“ Tenant ”) or landlord/lessor (“ Landlord ”) under such Leases; and

TOGETHER with all the estate, right, title, interest, property, possession, claim, and demand whatsoever of Trustor, as well in law as in equity, of, in and to the same and every part and parcel thereof with the appurtenances.

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TO HAVE AND TO HOLD the above granted Mortgaged Premises unto Beneficiary, its successors and assigns, to its and their proper use, benefit and behalf forever.

PROVIDED THAT if Trustor shall well and truly pay, or there shall otherwise be paid to Beneficiary, the indebtedness evidenced by the Note and all other obligations payable under the other Loan Documents and all obligations payable under any Administrative Agent Hedging Contract, and Trustor shall well and truly abide by and comply with each and every covenant and condition set forth herein, in the Note and in all of the other Loan Documents according to the tenor and effect thereof, then these presents and the lien and interest hereby transferred and assigned shall cease, terminate and be void and Beneficiary shall release the Mortgaged Premises and renounce any other rights granted to it herein and shall execute, at the request of Trustor, a release of this Mortgage and any other instrument to that effect deemed necessary or desirable and further this Mortgage shall be cancelled and surrendered.

ARTICLE I
TRUSTOR REPRESENTS, WARRANTS, COVENANTS, AND AGREES WITH BENEFICIARY AS FOLLOWS:

1.1 Definitions . In this Mortgage, all words and terms not expressly defined herein shall have the respective meanings and be construed herein as provided for or defined in the Loan Agreement. Any reference to a provision of the Loan Agreement shall be deemed to incorporate that provision as a part hereof in the same manner and with the same effect as if the same were fully set forth herein.

1.2 Interpretation and Construction . All words, terms and provisions of the Loan Agreement shall be applied to this Mortgage in the same manner as applied therein to the Loan Agreement.

1.3 Beneficiaries . Nothing herein expressed or implied is intended or shall be construed to confer upon, or to give to, any person other than Trustor, Beneficiary and the Lenders any right, remedy or claim under or by reason hereof. All covenants, stipulations and agreements herein contained by and on behalf of Trustor shall be for the sole and exclusive benefit of Beneficiary and the Lenders, their successors and/or assigns.

1.4 Indebtedness . Trustor shall pay the indebtedness evidenced by the Note and secured by this Mortgage and the other Loan Documents at the time and in the manner provided for the payment of the same in the Loan Agreement.

1.5 No Credit for Taxes Paid . Trustor shall not be entitled to any credit against payments due hereunder by reason of the payment of any taxes, assessments, water or sewer rent, or other governmental charges levied against the Mortgaged Premises.

1.6 General Representations and Warranties . Trustor is seized of and holds an indefeasible estate in fee simple in and to the Mortgaged Premises and hereby warrants to Beneficiary the title to the Mortgaged Premises free and clear of all liens, claims and interests. Trustor hereby covenants that Trustor (i) shall preserve such title and the validity and priority of

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the lien of this Mortgage and shall forever warrant and defend the same to Beneficiary against all lawful claims whatsoever and the claims of all Persons whomsoever claiming or threatening to claim the same or any part thereof and (ii) shall make, execute, acknowledge and deliver all such further or other deeds, documents, instruments, or assurances, and cause to be done all such further acts as may at any time hereafter be reasonably required by Beneficiary to protect fully the lien of this Mortgage.

1.7 Insurance . Trustor shall obtain, or cause to be obtained, and shall maintain or cause to be maintained, at all times throughout the term of this Mortgage, insurance on the Mortgaged Premises in such amounts and in such manner and against such loss, damage and liability, including liability to third parties, as is required pursuant to Section 6.6 of the Loan Agreement. Beneficiary shall have the absolute right to force place any or all of such insurance. The cost of such force placed insurance shall be paid immediately by Trustor, shall be secured by this Mortgage and the other Loan Documents, and, if not paid immediately by Trustor, shall bear interest at the Default Rate.

1.8 Declaration of No Offset . Trustor hereby represents to Beneficiary that Trustor has no knowledge of any offsets, counterclaims, or defenses to the principal indebtedness secured hereby, or to any part thereof, or the interest thereon, either at law or in equity. Trustor shall, upon request, furnish a duly acknowledged written statement in form satisfactory to Beneficiary stating either that Trustor knows of no such offsets or defenses or if such offsets or defenses are alleged to exist, the nature and extent thereof and, in either case, such statements shall set forth the amount due hereunder.

1.9 No Additional Liens on Fixtures . Except as expressly permitted by Section 6.18 of the Loan Agreement, Trustor shall not (i) remove or suffer to be removed from the Mortgaged Premises any fixtures owned by Trustor (as the term “fixtures” is defined by the Uniform Commercial Code in the State of California, as amended and/or modified from time to time) presently or in the future to be incorporated into, installed in, annexed, or affixed to the Mortgaged Premises (unless such fixtures have been replaced with similar fixtures of equal or greater utility or value); or (ii) execute or cause to be executed any security interest upon any such fixtures, additions to, substitutions, or replacements thereof, or upon any fixtures in the future to be installed in, annexed or affixed to the Mortgaged Premises, without the prior express written consent of Beneficiary.

1.10 Performances . Trustor shall perform and abide by the terms and covenants contained herein and the terms and covenants contained in the Loan Agreement and the other Loan Documents, all of which are made a part hereof as though set forth herein at length.

1.11 Waiver . The acceptance by Beneficiary of any payments hereunder, upon the occurrence of an “Event of Default” (as such term is defined in Article II of this Mortgage), and so long as said Event of Default has not been waived by Beneficiary, or the failure of Beneficiary in any one or more instances to insist upon strict performance by Trustor of any terms and covenants of this Mortgage or to exercise any option or election herein conferred, shall not be deemed to be a waiver or relinquishment for the future of any such terms, covenants, elections, or options.

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1.12 Law Governing; Consent to Jurisdiction . WITH RESPECT TO MATTERS RELATING TO THE CREATION, PERFECTION AND PROCEDURES RELATING TO THE ENFORCEMENT OF THIS MORTGAGE, THIS MORTGAGE SHALL BE GOVERNED BY, AND BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED (WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF THAT WOULD APPLY THE LAWS OF ANOTHER JURISDICTION), IT BEING UNDERSTOOD THAT, EXCEPT AS EXPRESSLY SET FORTH ABOVE IN THIS PARAGRAPH AND TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF THAT WOULD APPLY THE LAWS OF ANOTHER JURISDICTION) SHALL GOVERN ALL MATTERS RELATING TO THIS MORTGAGE AND THE OTHER LOAN DOCUMENTS AND ALL OF THE INDEBTEDNESS OR OBLIGATIONS ARISING HEREUNDER OR THEREUNDER. ALL PROVISIONS OF THE LOAN AGREEMENT INCORPORATED HEREIN BY REFERENCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, AS SET FORTH IN THE GOVERNING LAW PROVISION OF THE LOAN AGREEMENT .

1.13 ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST TRUSTOR OR BENEFICIARY ARISING OUT OF OR RELATING TO THIS MORTGAGE MAY, AT BENEFICIARY’S OPTION, BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE STATE OF CALIFORNIA, AND TRUSTOR HEREBY WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND TRUSTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING.

1.14 Modifications in Writing . The terms of this Mortgage may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.

1.15 Uniform Commercial Code Security Agreement .

(a) Personal Property Security Agreement . This Mortgage constitutes a security agreement under the California Uniform Commercial Code, as amended and/or modified from time to time (hereafter the “ Code ”), and Trustor hereby grants to Beneficiary a security interest in all now existing or hereafter acquired (i) furniture, fixtures, and equipment and all other machinery, appliances, furnishings, tools and building materials of Trustor now owned or hereafter acquired by Trustor, located on or to be located on, installed or to be installed in or on the Premises and used or to be used in the management or operation of the Premises including, without limitation, any and all substitutions, replacements, additions, and accessions thereto; (ii) deposits, advance payments, security deposits, in connection with the Premises; (iii) reports, appraisals, drawings, plans, blueprints, studies, certificates of occupancy, building permits, grading permits, surveys and specifications relating to all or part of the Premises; (iv) condemnation claims, condemnation proceeds, property claims, insurance policies, insurance claims, insurance proceeds, real property

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tax refund claims; (v) general intangibles, payment intangibles, accounts, deposit accounts, documents, instruments, chattel paper together with any and all cash and non-cash proceeds thereof.

(b) Filing . Trustor hereby authorizes Beneficiary to file and refile any financing statements, continuation statements, or other security agreements that Beneficiary may require from time to time to confirm the lien of this Mortgage with respect to such property. Trustor agrees that Beneficiary (i) may file this Mortgage, or a reproduction thereof, in the real estate records or other appropriate index, as a financing statement for any of the items of Collateral specified in Section 1.15(a) above which is or may be part of the Premises; and (ii) may file a Financing Statement for any item of Collateral specified in Section 1.15(a) above which is not part of the Premises. Any reproduction of this Mortgage or of any other security agreement or financing statement shall be sufficient as a financing statement. Trustor agrees to execute and deliver to Beneficiary, upon Beneficiary’s request, any financing statements, as well as extensions, renewals and amendments thereof, and reproductions to this Mortgage in such form as Beneficiary may require to perfect a security interest with respect to all or part of the Collateral. Trustor shall pay all costs of filing of such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all costs and expenses of any record searches for financing statements Beneficiary may reasonably require.

(c) Power of Attorney . Without limiting the foregoing, Trustor hereby irrevocably constitutes and appoints Beneficiary with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority (coupled with interest) in the place and stead of Trustor and in the name of Trustor or in Beneficiary’s own name, for Beneficiary to execute, deliver, and file such instruments for and on behalf of Trustor, to the extent Trustor’s authorization above is not sufficient and Trustor fails or refuses promptly to execute such documents.

(d) Survival of Provisions . Notwithstanding any release of any or all of that property included in the Mortgaged Premises which is deemed to be “real property”, and proceedings to foreclose this Mortgage or its satisfaction of record, the terms hereof shall survive as a security agreement with respect to the security interest created hereby and referred to above until the repayment or satisfaction in full of the obligations of Trustor as are now or hereafter secured hereby.

(e) Rights and Additional Remedies of Beneficiary under Uniform Commercial Code . Without limiting any of the foregoing provisions, during the continuance of an Event of Default, Beneficiary shall have the following additional rights and remedies with respect to the Collateral. Beneficiary shall have all the rights and remedies of a secured party under the Code and under any other applicable law, and, at Beneficiary’s option, shall also have the right to invoke any or all of the remedies provided in this Mortgage with respect to the Collateral, and in exercising any of such remedies, Beneficiary may proceed against the items of real property and any items of Collateral separately or together and in any order whatsoever, without in any way affecting the availability of Beneficiary’s remedies under the Code or of the remedies provided in this Mortgage.

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1.16 No Assignment . Except as permitted by the express terms of the Loan Agreement, this Mortgage shall not be assigned by Trustor without the prior express written consent of Beneficiary.

1.17 Date of Mortgage . The date of this Mortgage shall be for identification purposes only and shall not be construed to imply that this Mortgage was executed on any date other than the date of the acknowledgments of the parties hereto. This Mortgage shall become effective upon its delivery.

1.18 Taxes . Trustor shall prepare and timely file all Federal, state and local tax returns required to be filed by Trustor and promptly pay and discharge, or cause to be paid and discharged, all taxes, assessments, municipal or governmental rates, charges, impositions, liens and water and sewer rents or any part thereof, heretofore or hereafter imposed upon Trustor or in respect of the Mortgaged Premises before the same shall become in default, as well as all lawful claims which if unpaid might become a lien or charge upon Trustor, the Mortgaged Premises, or any part thereof and any and all insurance premiums, costs, and other expenses with respect to the types and amounts of insurance required to be maintained by Trustor pursuant to the Loan Agreement (“ Property Taxes and Charges ”), except for those Property Taxes and Charges then being diligently contested in good faith by Trustor in accordance with the terms of the Loan Agreement.

1.19 Compliance with Laws . Trustor hereby agrees to comply with all Laws which are now or may hereafter be applicable to the Mortgaged Premises within such time as may be required by law. As of the date hereof, Trustor has not received any notice from any Governmental Authority that the Mortgaged Premises is in violation of any such law, rule, regulation, or ordinance. Trustor hereby covenants and agrees that, if such a notice is received by Trustor, whether directly or from any tenant in the Mortgaged Premises, at any time during the existence of this Mortgage, Trustor shall promptly notify Beneficiary in writing as to the nature and the extent of such claimed violation and shall further provide Beneficiary a copy of such notice.

1.20 Indemnification . Trustor hereby agrees to and does hereby indemnify, protect, defend and save harmless Beneficiary and the Lenders, and their directors, officers, employees, agents, attorneys, and shareholders (collectively, the “ Indemnified Parties ” and individually, an “ Indemnified Party ”) from and against any and all losses, liabilities, damages, liens, expenses, charges, costs, penalties, fines, injunctions, suits, claims, judgments or demands, of any kind or nature (including, without limitation, legal counsel fees incurred in investigating or defending such claim) (collectively, “ Losses ”, and individually a “ Loss ”), suffered by any Indemnified Party and caused by, relating to, arising out of, resulting from, or in any way connected with this Mortgage and the transactions contemplated herein, including, without limitation, disputes between any architect, general contractor, subcontractor, materialman or supplier, or on account of any act or omission to act by Beneficiary or any Lender in connection with this Mortgage, except to the extent any such Losses are the result of such Indemnified Party’s fraud, gross negligence or willful misconduct. In case any action shall be brought against the Indemnified Parties, Trustor shall (upon being notified by Beneficiary in writing) assume the defense thereof including, without limitation, (1) the employment of counsel selected by Trustor and reasonably satisfactory to Beneficiary, (2) the payment of all costs and expenses related thereto, and (3) the right to negotiate

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and consent to settlement. The Indemnified Parties shall have the right to employ separate counsel in any such action and to participate in the defense thereof. Trustor shall not settle any such action without Beneficiary’s consent (not to be unreasonably withheld, conditioned or delayed) and Beneficiary shall not be liable for any settlement of any such action effected without Trustor’s consent, but if settled with Trustor’s consent, or if there be a final judgment rendered for the claimant in any such action, Trustor hereby agrees to indemnify and save harmless the applicable Indemnified Party from and against any loss or liability by reason of such settlement or judgment, except to the extent such loss is the result of such Indemnified Party’s fraud, gross negligence or willful misconduct. The provisions of this Section 1.20 shall survive the repayment of the Loan and the termination of the Loan Documents including, without limitation, the termination or release of this Mortgage. Notwithstanding the foregoing, Trustor shall be released from its indemnification obligations hereunder upon the earlier of (i) the date on which Administrative Agent or a Lender (or the transferee of Administrative Agent or a Lender) acquires title or control of the Mortgaged Premises (whether at foreclosure, sale, conveyance in lieu of foreclosure or similar transfer), and (ii) the second (2nd) anniversary of Trustor’s repayment in full of the Loan and the termination of the Loan Documents including, without limitation, the termination or release of this Mortgage.

1.21 Absolute Assignment of Rents and Leases .

(a) Absolute Assignment . Trustor hereby absolutely assigns and sets over to Beneficiary all of the Leases and Rents. Any such assignment of Rents shall be for the purpose of making the payment of the indebtedness secured by this Mortgage and, so long as there shall exist no Event of Default, there is reserved to Trustor a license to collect as they become due, but not prior to accrual, all Rents and to retain, use and enjoy the same and to apply Rents, all as more specifically provided for and required under the Loan Agreement and/or this Mortgage. During the continuance of an Event of Default, such license granted to Trustor shall be immediately revoked without further demand or notice from Beneficiary, and Beneficiary is hereby empowered to enter upon and take possession of the Mortgaged Premises for the purpose of collecting the Rents and to let the Mortgaged Premises or any part thereof, and to apply the same as provided in the Loan Agreement. This assignment and grant shall continue in effect until this Mortgage is paid in full and discharged of record. Trustor shall comply with the terms of the Loan Agreement regarding the handling of Rents and, upon a breach of any such terms, Trustor shall vacate and surrender the possession of the Mortgaged Premises to Beneficiary or to a duly appointed receiver. If Trustor does not so vacate and surrender the Mortgaged Premises, then Trustor may be evicted by summary proceedings.

(b) No Mortgagee in Possession . Neither the assignment of Leases and Rents contained in this Section nor any action taken by Beneficiary to collect the Rents shall be deemed to make Beneficiary a mortgagee-in-possession of the Premises or shall be deemed to render Beneficiary directly or indirectly liable or responsible for (i) the use, control, condition, care, operation, occupancy, management, repair, or leasing of the Premises; (ii) the production of Rents from the Premises; or (iii) the performance or observance of any or all of Trustor’s duties, obligations, representations, or warranties under any Leases or other agreements relating to the Rents. Beneficiary shall have no responsibility or liability of any kind for any failure or delay by Beneficiary in enforcing any of the terms or conditions of this Section 1.21.

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(c) Applications of Rents Prior to Revocation of License . Trustor shall apply the Rents to the payment of all reasonable and necessary operating costs and expenses of the Premises, installment payments due in connection with the Loan and any future advances, payment of impositions, and a reasonable reserve for future reasonable and necessary expenses, repairs and replacements relating to the Premises before using the Rents for any other purpose which does not directly benefit the Premises.

(d) Notices to Tenants . Upon revocation of the license described in Section 1.21(a) above, Trustor irrevocably authorizes and directs all Tenants under the Leases to comply with any notice or demand by Beneficiary for payment to Beneficiary of any Rents or for the performance of any of the Tenant’s other respective obligations under the Leases, regardless of any conflicting demand by Trustor or notice by Trustor to any Tenant that Beneficiary’s demand is invalid or wrongful. No Tenant shall have any duty to inquire as to whether any default by Trustor has occurred under the Loan Documents in connection with any notice or demand by Beneficiary under this Section.

1.22 Advances . During the continuance of an Event of Default, and so long as said Event of Default has not been waived by Beneficiary, Beneficiary may, at its sole option, remedy such Event of Default, and all payments made by Beneficiary to remedy any such Event of Default by Trustor (including, without limitation, reasonable attorneys’ fees) and the total of any payment or payments due from Trustor to the Lenders which are in default, together with interest thereon at the Default Rate (such interest to be calculated from the date of such advance to the date of payment thereof by Trustor), shall be added to the indebtedness secured by this Mortgage until paid, and Trustor hereby covenants to repay the same to Beneficiary on the next interest payment date under the Note. Any such sums and the interest thereon shall be a lien on the Mortgaged Premises prior to any other Lien attaching to or accruing subsequent to the lien of this Mortgage.

1.23 Permitted Encumbrances . At no time throughout the term of this Mortgage shall Trustor create, incur, assume, or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, encumbrance, attachment, levy, distraint, or other judicial process and burdens of any kind or nature on or with respect to any of the Mortgaged Premises without the prior express written consent of Beneficiary, except for Permitted Encumbrances.

1.24 Utilities . To Trustor’s knowledge, Trustor hereby represents and warrants that (i) the Mortgaged Premises is served by all required public and/or private utilities, including, without limitation, gas, electric, water, sewer, and telephone or (ii) all required utilities, including, without limitation, gas, electric, water, sewer, and telephone, are available to the Mortgaged Premises.

1.25 Security and Priority of Advances . This Mortgage secures future advances. Beneficiary and/or the Lenders may make additional advances from time to time hereafter and each such advance shall be secured hereby as if made on the date hereof. Trustor and Beneficiary hereby acknowledge, agree and intend that all advances under the Note and Loan Agreement, including, without limitation future advances whenever hereafter made, shall be a lien from and of identical priority as the time this Mortgage is recorded. This Mortgage also secures, and the Note and Loan Agreement evidence, the obligation of Trustor to repay, (i) all advances made after the date hereof

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with respect to the Mortgaged Premises for the payment of real estate taxes, water and sewer rents, assessments, maintenance charges, insurance premiums or costs incurred for the protection of the Mortgaged Premises and the lien of this Mortgage, (ii) all costs and expenses incurred by Beneficiary and/or the Lenders by reason of an Event of Default hereunder, (iii) all advances made by Beneficiary and/or the Lenders to enable completion of construction of improvements to the Mortgaged Premises, (iv) all advances made to pay mechanics lien claimants and stop notice claimants whether or not any related construction is completed, and (v) Additional Interest. This Mortgage shall constitute a lien on the Mortgaged Premises from the time this Mortgage is recorded of record for, among other things, all such advances and expenses, plus interest thereon, regardless of the time when such advances are made or such expenses are incurred.

ARTICLE II
EVENTS OF DEFAULT.

2.1 Defaults . For purposes of this Mortgage, “Event of Default” shall mean (i) any default, breach of any covenant, term or condition hereunder, that continues beyond any applicable notice and cure period, and/or, (ii) the occurrence of any Event of Default under any other Loan Document.

ARTICLE III
IF ANY EVENT OF DEFAULT SHALL HAVE OCCURRED AND IS CONTINUING ON THE PART OF TRUSTOR, BENEFICIARY MAY TAKE ANY OR ALL OF THE FOLLOWING ACTIONS, AT THE SAME OR AT DIFFERENT TIMES:

3.1 Acceleration . Beneficiary may declare the entire amount of the principal, together with accrued and unpaid interest and other moneys due under this Mortgage and/or the Note, immediately due and payable, and accordingly accelerate payment thereof notwithstanding contrary terms of payment stated therein, without presentment, demand or notice of any kind, all of which are expressly waived, notwithstanding anything to the contrary contained in this Mortgage and/or the Note.

3.2 Possession . Beneficiary may (i) enter upon and take possession of the Mortgaged Premises (subject to the rights of tenants under leases), (ii) lease and let the Mortgaged Premises, (iii) receive all the rents, income, issues and profits thereof which are overdue, due or to become due, and apply the same, after payment of all necessary charges and expenses, on account of the indebtedness secured by this Mortgage. Beneficiary is given and granted full power and authority to do any act or thing which Trustor or successors or assigns of Trustor who may then own the Mortgaged Premises might or could do in connection with the management and operation of the Mortgaged Premises. This covenant becomes effective either with or without any action brought to foreclose this Mortgage and without applying for the appointment of a receiver of such rents, if any. Should said rents or any part thereof be assigned without the consent of the holder of this Mortgage, then this Mortgage shall at the option of the holder hereof become due and payable immediately, anything herein contained to the contrary notwithstanding.

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3.3 Judicial Foreclosure .

(a) Beneficiary may institute an action of foreclosure, or take other action as the law may allow, at law or in equity, for the enforcement of this Mortgage and proceed thereon to final judgment and execution of the entire unpaid principal balance of the Loan including costs of suit, interest and reasonable attorney’s fees. In case of any sale of the Premises by judicial proceedings, the Premises may be sold in one parcel or in such parcels, manner or order as Beneficiary in its sole and absolute discretion may elect. Beneficiary shall not be required to marshall any portion of the Premises. The failure to make any tenants parties defendant to a foreclosure proceeding shall not be asserted by Trustor as a defense in any proceeding instituted by Beneficiary to collect the obligations secured hereby or any deficiency remaining unpaid after the foreclosure sale of the Premises.

(b) Trustor acknowledges that the power of sale granted in this Mortgage may be exercised or directed by Beneficiary without prior judicial hearing and hereby appoints Beneficiary as Trustor’s agent and attorney-in-fact to exercise such power of sale in the name and on behalf of Trustor. In the event Beneficiary invokes the power of sale:

(i) Trustor hereby authorizes and empowers Beneficiary to take possession of the Premises (subject to the rights of tenants under leases), or any part thereof, and hereby grants to Beneficiary a power of sale and authorizes and empowers Beneficiary to sell (or, in the case of the default of any purchaser, to resell) the Premises or any part thereof, in compliance with applicable law, including compliance with any and all notice and timing requirements for such sale;

(ii) Beneficiary may sell and dispose of the Premises at public auction, at the usual place for conducting sales at the courthouse in the county where all or any part of the Premises is located, to the highest bidder for cash, first advertising the time, terms and place of such sale by publishing a notice of sale and by sending written notice to Trustor prior to the date of the proposed foreclosure sale to the extent required under applicable California law, all other notice being waived by Trustor; and Beneficiary may thereupon execute and deliver to the purchaser a sufficient instrument of conveyance of the Premises, which may contain recitals as to the happening of the Event of Default upon which the execution of the power of sale granted by this Section 3.3 depends. The recitals in the instrument of conveyance shall be presumptive evidence that Beneficiary duly complied with all preliminary acts prerequisite to the sale and instrument of conveyance. Trustor constitutes and appoints Beneficiary as Trustor’s agent and attorney-in-fact to make such recitals, sale and conveyance;

(iii) the power and agency granted in this Section 3.3 are coupled with an interest, are irrevocable by death or otherwise, and are in addition to the remedies for collection of the Indebtedness as provided by law. Trustor ratifies all of Beneficiary’s acts, as such attorney-in-fact, and Trustor agrees that such recitals shall be binding and conclusive upon Trustor and that the conveyance to be made by Beneficiary (and in the event of a deed in lieu of foreclosure, then as to such conveyance) shall be effectual to bar all right, title and interest, equity of redemption, including all statutory redemption, homestead, dower, curtsey, and all other exemptions of Trustor, or its successors in interest, in and to the Premises; and

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(iv) the Premises may be sold in one (1) parcel and as an entirety, or in such parcels, manner or order as Beneficiary, in its discretion, may elect, and one (1) or more exercises of the powers granted in this Section 3.3 shall not extinguish or exhaust the power unless the entire Premises is sold or the Indebtedness is paid in full, and Beneficiary shall collect the proceeds of such sale, applying such proceeds as provided in this Section 3.3. In the event of a deficiency, Trustor shall immediately on demand from Beneficiary pay such deficiency to Beneficiary, subject to the provisions of the Note limiting Trustor’s personal liability for payment of the Indebtedness. Trustor waives all rights, claims, and defenses with respect to Beneficiary’s ability to obtain a deficiency judgment. Trustor acknowledges that Beneficiary may bid for and purchase the Premises at any foreclosure sale and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price.

(c) If the Premises is sold pursuant to this Section 3.3, Trustor, or any person holding possession of the Premises through Trustor, shall surrender possession of the Premises to the purchaser at such sale on demand. If possession is not surrendered on demand, Trustor or such person shall be a tenant holding over and may be dispossessed in accordance with California law.

(d) To the fullest extent permitted by law, Trustor agrees that Trustor will not at any time insist upon, plead, claim or take the benefit or advantage of any present or future law providing for any appraisement, valuation, stay, extension or redemption, homestead, moratorium, reinstatement, marshaling or forbearance, and Trustor, for Trustor, Trustor’s heirs, devisees, representatives, successors and assigns, and for any and all persons ever claiming any interest in the Mortgaged Premises, to the fullest extent permitted by law, waives and releases all rights of redemption, valuation, appraisement, stay of execution, reinstatement (including all rights under California law), notice of intention to mature or declare due the whole of the Indebtedness, and all rights to a marshaling of assets of Trustor, including the Premises.

(e) This Mortgage secures future advances.

(f) Beneficiary’s acceptance, if any, of an assumption of the obligations of this Mortgage and the Note, and the release of Trustor pursuant to the Loan Agreement, shall not constitute a novation and shall not affect the priority of the lien created by this Mortgage.

(g) Trustor expressly (a) acknowledges the right to accelerate the indebtedness evidenced by the Note and the power of attorney given herein to grantee to sell the Premises by nonjudicial foreclosure upon and during the continuance of an Event of Default by Trustor without any judicial hearing and without any notice and (b) waives any and all rights which Trustor may have under the Constitution of the United States (including the Fifth and Fourteenth amendments thereof), the various provisions of the constitutions for the several states, or by reason of any other applicable law, to notice and to judicial hearing prior to the exercise by Beneficiary of any right or remedy herein provided to Beneficiary, provided that nothing contained herein shall be deemed to diminish or impair any rights of the Trustor to receive notices (including notices of Events of Default) to the extent that such notices are required by the Loan Documents or under applicable laws.

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(h) The interest of Beneficiary under this Mortgage and the liability and obligation of Trustor for the Indebtedness arise from a commercial transaction, not from a consumer transaction. Accordingly, Trustor waives any and all rights which Trustor may have to notice (other than as may be expressly provided for herein) prior to seizure by Beneficiary of any interest in personal property of Trustor which constitutes part of the Premises, whether such seizure is by writ of possession or otherwise.

(i) In all events where Trustor may be obligated to pay all reasonable costs, expenses and attorneys’ fees incurred by Beneficiary in connection with this Mortgage and the Loan Documents, “all reasonable costs, expenses and attorneys’ fees” or words of similar import shall in all events mean reasonable attorneys’ fees, actually incurred. Upon request by Trustor, Beneficiary shall provide evidence of such costs and expenses.

3.4 Foreclosure By Power of Sale .

(a) Declaration and Notice of Default . Beneficiary shall have the right (i) to cause the Mortgaged Premises to be sold under the power of sale contained in this Mortgage in any manner permitted by applicable law; and (ii) to deliver to Trustee a written declaration of default and demand for sale and a written notice of default and election to cause the Mortgaged Premises to be sold, which notice the Trustee or Beneficiary shall cause to be recorded as required by law. Upon the expiration of such period of time after the recordation of such notice of default and election to sell and the giving of such notice of sale as may then be required by law, and without the necessity of any demand on Trustor, Trustee, at the time and place specified in the notice of sale, shall sell the Mortgaged Premises at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale.

(b) Postponements; Multiple Parcels . To the extent permitted by law, Trustee may, and upon request of Beneficiary shall, from time to time, postpone any sale hereunder by public announcement at the time and place noticed for such sale or may, in its discretion, give a new notice of sale. If the Mortgaged Premises consists of several lots, parcels or items of property, Beneficiary shall have the exclusive right (i) to designate the order in which such lots, parcels or items shall be offered for sale or sold; and (ii) to elect to sell such lots, parcels or items through a single sale, through two or more successive sales, or in any other manner Beneficiary determines to be in its best interest. Any Person, including Trustor, Trustee and Beneficiary, may purchase at any sale under this Mortgage, and Beneficiary shall have the right to purchase at any such sale by crediting upon the bid price the amount of all or any part of the Obligations. If Beneficiary determines to sell the Mortgaged Premises in more than one sale, Beneficiary may, at its option, cause such sales of the Mortgaged Premises to be conducted simultaneously or successively, on the same day or on such different days or times and in such order as Beneficiary may determine, and no such sale shall terminate or otherwise affect the lien of this Mortgage on any part of the Mortgaged Premises that has not been sold until all Obligations have been paid in full.

(c) Costs of Sale; Deed to Purchaser . Trustor shall pay all costs, fees, and expenses of all sales of the Mortgaged Premises under this Mortgage, including the costs, fees, and expenses (including attorneys’ fees) of Trustee and Beneficiary, together with interest thereon at the interest rate applicable to principal under the Note or, with respect to Trustee, the maximum

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rate permitted by law to be charged by Trustee. Upon any sale under the power of sale contained in this Mortgage, Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied. The recitals in any such deed or deeds of any matter or facts, including the existence of any default by Trustor, the giving of notice of default and notice of sale, and other facts affecting the regularity or validity of such sale or sales, shall be conclusive proof of the truth of such facts and matters, and any such deed or deeds shall be conclusive against all Persons as to such facts and matters recited therein. A sale of less than all of the Mortgaged Premises or any defective or irregular sale under this Mortgage shall not exhaust, impair or otherwise affect the power of sale contained in this Mortgage, and subsequent sales of the Mortgaged Premises may be made under this Mortgage until all Obligations have been satisfied or until the entire Mortgaged Premises has been sold without defect or irregularity. If Beneficiary elects to cause the Mortgaged Premises to be sold under the power of sale contained in this Mortgage, Beneficiary shall deposit with the Trustee this Mortgage, the Note, and such receipts and evidence of such other Obligations as Trustee may reasonably require.

3.5 Application of Sale Proceeds. Trustee shall apply the proceeds of the sale or sales conducted by Trustee in the following order of priority: (a) first, to payment of all expenses of such sale or sales and all costs, expenses, fees, and liabilities of Trustee and this trust, including attorneys’ fees, costs of a trustee’s sale guaranty, costs of other evidence of title, and Trustee’s fees in connection with such sale or sales; (b) second, to all amounts advanced by Trustee or Beneficiary under any of the terms of this Mortgage which have not then been repaid, together with interest thereon at the rate applicable to principal under the Note or, with respect to Trustee, the maximum rate permitted by law to be charged by Trustee; (c) third, to the payment of all other Obligations in such order and amounts as Beneficiary determines; and (d) the remainder, if any, to the Person or Persons legally entitled thereto

3.6 Appointment of Receiver . Beneficiary may have a receiver of the rents, income, issues and profits of the Mortgaged Premises appointed without the necessity of proving either the depreciation or the inadequacy of the value of the security or the insolvency of Trustor or any Person who may be legally or equitably liable to pay moneys secured hereby, and Trustor and each such Person waive such proof and consent to the appointment of a receiver.

3.7 Fair Rental Payments . If Trustor or any subsequent owner is occupying the Mortgaged Premises or any part thereof, it is hereby agreed that said occupants shall pay such reasonable rental monthly in advance as Beneficiary shall demand for the Mortgaged Premises or the part so occupied, and for the use of personal property covered by this Mortgage or any chattel mortgage.

3.8 Excess Monies . Beneficiary may apply on account of the unpaid indebtedness evidenced by the Note (including any unpaid accrued interest) owed to Beneficiary and/or the Lenders after a foreclosure sale of the Mortgaged Premises, whether or not a deficiency action shall have been instituted, any unexpended monies still retained by Beneficiary that were paid by Trustor to Beneficiary (i) for the payment of, or as security for the payment of taxes,

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assessments, municipal or governmental rates, charges, impositions, liens, water or sewer rents, or insurance premiums, if any, or (ii) in order to secure the performance of some act by Trustor.

3.9 Remedies at Law or Equity . Beneficiary may take any of the remedies otherwise available to it as a matter of law or equity.

ARTICLE IV
MISCELLANEOUS:

4.1 Cumulative Rights . The rights and remedies herein expressed to be vested in or conferred upon Beneficiary shall be cumulative and shall be in addition to, and not in substitution for or derogation of the rights and remedies conferred by any applicable law. The failure, at any one or more times, of Beneficiary to assert the right to declare the principal indebtedness due or the granting of any extension or extensions of time of payment of the Loan either to the maker or to any other Person, the taking of other or additional security for the payment thereof, or releasing of any security, or changing any of the terms of this Mortgage, the Note, or any other obligation secured by or arising under this Mortgage, or the waiver of or failure to exercise any right under any covenant or stipulation herein contained shall not in any way affect this Mortgage nor the rights of Beneficiary hereunder nor operate as a release from any personal liability upon the Note or other obligation secured by or arising under this Mortgage, nor under any covenant or stipulation therein contained, nor under any agreement assuming the payment of said Note or obligations.

4.2 Application of Proceeds . (a) All payments and proceeds received under Article III of this Mortgage during the continuance of an Event of Default shall be applied in accordance with the terms of the Loan Agreement.

If the amount of the proceeds received from the sale or other disposition of the Mortgaged Premises shall be insufficient to satisfy in full the Obligations, then Trustor and the Guarantors, to the extent provided in the Guaranty, if any, shall remain and be liable for any such deficiency.

4.3 Waiver of Defaults . Beneficiary may, subject to the terms of the Loan Agreement, by express written notice to Trustor, waive any Event of Default hereunder and its consequences and rescind any acceleration or maturity of principal. In every case of any such waiver or rescission, in accordance with the preceding sentence, Beneficiary shall be bound thereby.

4.4 Payment of Attorneys’ Fees and Expenses . Upon the occurrence of an Event of Default, as a result of which Beneficiary and/or the Lenders shall employ attorneys or incur other expenses for the collection of the payments due or to become due or the enforcement or performance or observance of any obligation or agreement on the part of Trustor contained herein, Trustor shall, on written demand, pay to Beneficiary, the reasonable fees actually incurred of such attorneys and such other reasonable expenses so incurred by Beneficiary and the Lenders (expressly including any and all post-judgment collection costs and expenses). Upon request by Trustor, Beneficiary shall provide evidence of such costs and expenses.

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4.5 No Additional Waiver Implied by One Waiver . In the event any agreement contained in this Mortgage should be breached by Trustor and thereafter waived by Beneficiary, such waiver shall be limited to the actual breach so waived and shall not be deemed to waive any other breach hereunder.

4.6 WAIVER OF JURY TRIAL . TRUSTOR AND BENEFICIARY HEREBY WAIVE ANY AND ALL RIGHTS THAT THEY MAY NOW OR HEREAFTER HAVE, POSSESS AND ENJOY UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN TRUSTOR AND BENEFICIARY OR THEIR RESPECTIVE SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY CONNECTED WITH THIS MORTGAGE. IT IS INTENDED THAT SAID WAIVER OF JURY TRIAL SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDING. TRUSTOR AND BENEFICIARY HEREBY RECOGNIZE THAT ANY DISPUTE ARISING IN CONNECTION WITH THE LOAN, IS LIKELY TO BE COMPLEX AND CONSEQUENTLY THEY WISH TO STREAMLINE AND MINIMIZE THE COST OF THE DISPUTE RESOLUTION PROCESS BY AGREEING TO WAIVE THEIR RIGHTS TO A JURY TRIAL.

4.7 Notices . All notices, payments, requests, reports, information or demands which any party hereto may desire or may be required to give to any other party hereunder, shall be in writing and delivered in accordance with the terms of the Loan Agreement.

4.8 Successors and Assigns . All of the terms, covenants, provisions, and conditions herein contained shall be for the benefit of, apply to, and bind the successors and assigns of Trustor, Beneficiary and the Lenders, and are intended and shall be held to be real covenants running with the land, and the term “Trustor” shall also include any and all subsequent owners and successors in title to the Mortgaged Premises, and the term “Beneficiary” shall include all of Beneficiary’s successors and assigns.

4.9 Gender . When such interpretation is appropriate, any word denoting gender used herein shall include all persons, natural or artificial, and words used in the singular shall include the plural.

4.10 Reference to the Loan Agreement . This Mortgage is the “Mortgage” referred to in the Loan Agreement and is subject to all the terms and provisions of the Loan Agreement. Should any provision of the Loan Agreement be inconsistent or contrary to the provisions of this Mortgage, the provisions of the Loan Agreement shall control.

4.11 Changes in the Mortgage . Trustor, Beneficiary and the Lenders may agree to change the interest rates and/or the Maturity Dates of the Note or other term or terms of this Mortgage or of the obligations secured by this Mortgage, and no such changes shall affect the validity or priority of this Mortgage.

4.12 Credit Support Document . This Mortgage is intended to act (a) as a “Credit Support Document” (as such term is defined in any Administrative Agent Hedging Contract), with

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respect to Trustor’s obligations under any Administrative Agent Hedging Contract, and is hereby made a part of the “Schedule” (as such term is defined in any Administrative Agent Hedging Contract) of any Administrative Agent Hedging Contract entered into by Trustor in connection with the Loan, which Master Agreement shall include the Schedules thereto and all “Confirmations” (as such term is defined in the Administrative Agent Hedging Contract) exchanged between the parties confirming transactions thereunder, and (b) as a “transfer” under a swap agreement made by or to a swap participant, in connection with a swap agreement, within the meaning of Section 546(g) of the Bankruptcy Code.

4.13 Exculpation . Notwithstanding anything to the contrary contained in this Mortgage, no personal liability shall be asserted, sought or obtained by Administrative Agent and/or any Lender under this Mortgage against (i) any Affiliate of Borrower, (ii) any Person owning, directly or indirectly, any legal or beneficial interest in Borrower or any Affiliate of Borrower, or (iii) any direct or indirect partner, member, principal, officer, beneficiary, trustee, advisor, shareholder, investor, beneficial interest holder, director, employee or agent of Borrower or any of the Persons described in clauses (i) and (ii) above (collectively, the “ Exculpated Parties ”), and none of the Exculpated Parties shall have any personal liability in respect of obligations Borrower under this Mortgage. Nothing in this paragraph shall be deemed (x) a waiver of the obligations of Borrower under this Mortgage or any of the other Loan Documents to which it is a party, or to release Borrower from any personal liability pursuant to, or from any of its respective obligations under, this Mortgage or any of the other Loan Documents to which it is a party or (y) a waiver of the obligations of Guarantor under the Guaranty or any of the Loan Documents to which it is a party, or to release Guarantor from any personal liability pursuant to, or from any of its respective obligations under, the Guaranty or any of the other Loan Documents to which it is a party.

4.14 State-Specific Provisions . In the event of any conflict between the provisions of this Section 4.14 and any other provision herein, then the provisions of this Section 4.14 shall control.

(a) Other Remedies . Beneficiary shall have such other rights and remedies as are available under any statute or at law or in equity generally, including without limitation California Code of Civil Procedure Sections 736, 726.5 and 564(c) and California Civil Code Section 2929.5, and the delineation of certain remedies in this Mortgage shall not be deemed in limitation of any such other rights and remedies.

(b) Waiver of Lien . In accordance with California Code of Civil Procedure Section 726.5, Beneficiary may waive its lien against the Premises, to the extent any part of it is found to be environmentally impaired, and may exercise all rights and remedies of an unsecured creditor against Trustor and all of Trustor’s assets and property for the recovery of any deficiency, including, without limitation, seeking an attachment order under California Code of Civil Procedure Section 483.010. No such waiver shall be final or binding on Beneficiary until a final money judgment is obtained against Trustor. As between Beneficiary and Trustor, for purposes of Section 726.5, Trustor shall have the burden of proving that the release or threatened release was not knowingly or negligently caused or contributed to, or knowingly or willfully permitted or acquiesced to by Trustor or any related party (or any affiliate or agent of Trustor or any related party) and that

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Trustor made written disclosure of any contamination to Beneficiary or that Beneficiary otherwise obtained actual knowledge of such contamination prior to the making of the Loan. Notwithstanding anything to the contrary contained in this Mortgage or the other Loan Documents, Trustor shall be fully and personally liable for all judgments and awards entered against Trustor pursuant to Section 726.5 and shall not be limited to the original principal amount of the obligations secured by this Mortgage. For purposes of Section 726.5, the acts, knowledge and notice of each “726.5 Party” shall be attributed to and be deemed to have been performed by the party or parties then obligated on and liable for payment of the Note. As used herein, “726.5 Party” shall mean Trustor, any successor owner to Trustor of all or any portion of the Premises, any related party of Trustor or any such successor and any affiliate or agent of Trustor, any such successor or any such related party.

(c) Action on Environmental Provisions . Without limiting any of the remedies provided in the Loan Documents, Trustor agrees that any representations, warranties or obligations of Trustor concerning the presence or use of Hazardous Materials on the Premises or Trustor’s compliance with or liability under any Hazardous Materials Law are “environmental provisions” (as defined in California Code of Civil Procedure Section 736(f)(2)) made by Trustor relating to the Premises, and that Trustor’s failure to comply with, or breach of warranty under, any such environmental provision is a breach of contract such that Beneficiary shall have the remedies provided under California Code of Civil Procedure Section 736 for the recovery of damages and for the enforcement of such environmental provisions. Trustor’s obligation to pay costs, damages or liabilities incurred by Beneficiary but not permitted to be recovered pursuant to Section 736 shall not be secured by this Mortgage, irrespective of whether such amounts are included at any time for purposes of calculating the amount outstanding under the Note. Nothing provided in this Mortgage shall prevent Beneficiary from enforcing the Environmental Indemnity Agreement to recover costs, damages or liabilities not permitted to be recovered under Section 736. Notwithstanding any other provision of the Loan Documents, Beneficiary shall not be obligated to apply any amounts received at any time, whether from Trustor, any surety of Trustor’s obligations, any purchaser of the Premises at a foreclosure sale or any other source, to repay costs, damages or liabilities incurred by Beneficiary which arise out of the breach of any environmental provision and Beneficiary shall be free to apply any such amounts received so as to maximize the amount available to be recovered under any action being maintained or to be maintained pursuant to Section 736. Trustor waives any rights it may have, including the rights granted under California Civil Code Section 1479, to direct the application of payments made under the loan evidenced by the Note. Trustor and Beneficiary agree that: (a) this Section is intended as Beneficiary’s written request for information (and Trustor’s response) concerning the environmental condition of the real property security as required by California Code of Civil Procedure §726.5; and (b) each provision in this Section (together with any indemnity applicable to a breach of any such provision) with respect to the environmental condition of the real property security is intended by Beneficiary and Trustor to be an “environmental provision” for purposes of California Code of Civil Procedure §736, and as such it is expressly understood that Trustor’s duty to indemnify Beneficiary hereunder shall survive: (a) any judicial or non-judicial foreclosure under the Mortgage, or transfer of the Premises in lieu thereof, (b) the release and reconveyance or cancellation of the Mortgage; and (c) the satisfaction of all of Trustor’s obligation under the Loan Documents.

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(d) Fixture Filing . This Mortgage constitutes a fixture filing as defined in the California Uniform Commercial Code, as amended or recodified from time to time. This Mortgage is to be recorded in the real estate records of the County in which the Premises is located and covers goods, which are, or are to become, fixtures.

(e) Request for Notices . Pursuant to California Civil Code Section 2924b, Trustor hereby requests that a copy of any notice of default and a copy of any notice of sale given pursuant to this Mortgage be mailed to Trustor at the address set forth in the preamble of this Mortgage above.

(f) Border Zone Property . Trustor represents and warrants that the Premises has not been designated as Border Zone Property under the provisions of California Health and Safety Code, Sections 25220 et seq. and there has been no occurrence or condition on any real property adjoining or in the vicinity of the Premises that could cause the Premises or any part thereof to be designated as Border Zone Property.

(g) California Insurance Provisions . Beneficiary has disclosed and hereby discloses to Trustor in writing that under Section 2955.5 of the California Civil Code:

“No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.”

4.15 Trustee, Successor Trustee, Substitution of Trustee.

(a) Trust Irrevocable; Acceptance by Trustee . The trust created by this Mortgage is irrevocable by Trustor. Trustee accepts this trust when this Mortgage, duly executed and acknowledged, is recorded in the county in which the Premises is located as provided by law. Trustee is not obligated to notify any party of a pending sale under any other deed of trust or of any action or proceeding in which Trustor, Beneficiary or the Trustee shall be a party unless brought by the Trustee.

(b) No Liability on Trustee . Trustee shall not be liable for any error of judgment or act done by Trustee, or be otherwise responsible or accountable under any circumstances whatsoever, except if the result of Trustee’s gross negligence or willful misconduct. Trustee shall not be personally liable in case of entry by Trustee or anyone acting by virtue of the powers herein granted Trustee upon the Mortgaged Premises for debts contracted or liability or damages or damages incurred in the management or operation of the Mortgaged Premises. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by Trustee hereunder or believed by Trustee to be genuine. Trustee shall be entitled to reimbursement for actual expenses incurred by Trustee in the performance of Trustee’s duties hereunder and to reasonable compensation for such of Trustee’s services hereunder as shall be rendered. Trustor will, from time to time, reimburse Trustee for and save and hold Trustee harmless from and against any and all loss, cost, liability, damage and reasonable expense whatsoever

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incurred by Trustee in the performance of Trustee’s duties. All monies received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other monies (except to the extent required by law) and Trustee shall be under no liability for interest on any monies received by Trustee hereunder. Trustee may resign by giving of notice of such resignation in writing to Beneficiary.

(c) Substitution of Trustee . Beneficiary, at its option, shall have the right from time to time to appoint a successor trustee to any trustee appointed under this Mortgage by Beneficiary’s execution and acknowledgment of a written instrument which is recorded in the office of the recorder of each county in which the Premises is located. The recordation of such an instrument in accordance with this Section shall constitute conclusive proof of the proper substitution of a successor trustee under this Mortgage. Upon recordation of such an instrument, the successor trustee shall succeed to all the title, power and duties granted to the Trustee under this Mortgage and by applicable law without conveyance of the Premises. Notwithstanding anything to the contrary herein, any trustee that has been replaced shall cease to act shall duly assign, transfer, and deliver any of the property and monies held by such replaced trustee to the successor trustee so appointed in its or his place. Such instrument shall contain the name of the original lender, trustee and trustor named in this Mortgage, the book and page or other recording information for this Mortgage, and the name and address of the successor trustee. If a notice of default has been recorded prior to the recordation of a substitution of trustee, the power of substitution shall not be exercised by Beneficiary until the costs, fees and expenses of the acting trustee have been paid in full and the acting trustee has endorsed acknowledgment of receipt of such amounts on the instrument substituting the successor trustee. Without limiting the terms of this Section, Beneficiary shall have the right from time to time to substitute a successor to any trustee appointed under this Mortgage in accordance with any statutory or other procedure allowed by law for such substitution.

4.16 Security Title. Whenever in this Mortgage or the Loan Documents the term “Lien” or “lien” is used in the context of real estate, such term shall be deemed to include “security title”, and whenever the words “creating a lien” or words of similar import are used in this Mortgage or the Loan Documents, such words shall be deemed to include “conveying security title to” such of real estate as the context and/or California law may require or desire for the enforceability thereof. The use of the word mortgage or other similar nomenclature shall not affect the previous sentence.

TRUSTOR HEREBY DECLARES THAT TRUSTOR HAS READ THIS MORTGAGE, HAS RECEIVED A COMPLETELY FILLED IN COPY OF IT WITHOUT CHARGE THEREFOR, AND HAS SIGNED THIS MORTGAGE AS OF THE DATE AT THE TOP OF THE FIRST PAGE.

[Remainder of Page Intentionally Left Blank; Signature Page Follows]

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IN WITNESS WHEREOF , Trustor has caused this Mortgage to be duly executed, witnessed, and delivered by its authorized officer, all as of the day and year first above written.

TRUSTOR:

KBS SOR CITY TOWER, LLC ,

a Delaware limited liability company

By: KBS SOR ACQUISITION XXXII, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR PROPERTIES, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR (BVI) HOLDINGS, LTD.,

a British Virgin Islands company limited by shares,

its sole member

By: KBS STRATEGIC OPPORTUNITY LIMITED PARTNERSHIP,

a Delaware limited partnership,

its sole shareholder

By: KBS STRATEGIC OPPORTUNITY REIT, INC.,

a Maryland corporation,

its sole general partner

By: /s/ Jeffrey K. Waldvogel

Jeffrey K. Waldvogel,

Chief Financial Officer

[Deed of Trust – Signature Page]

A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document.

State of California

County of Orange

On March 2, 2018 before me, Teresa Fakalata, Notary Public (here insert name and title of officer), personally appeared , who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is /are subscribed to the within instrument and acknowledged to me that he /she/they executed the same in his /her/their authorized capacity(ies), and that by his /her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature /s/ Teresa Fakalata (Seal)

[Deed of Trust – Acknowledgment]

SCHEDULE “A”

ALL OF THAT LAND, TOGETHER WITH ALL IMPROVEMENTS THEREON AND ALL APPURTENANCES THERETO, LOCATED IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS:

PARCEL A:

PARCEL 1 AS SHOWN ON EXHIBIT "B" OF THE LOT LINE ADJUSTMENT NO.LL 97-4, AS EVIDENCED BY THE DOCUMENT RECORDED OCTOBER 15, 1997 AS INSTRUMENT NO. 1997-515999 OF OFFICIAL RECORDS, MORE PARTICULARLY DESCRIBED AS FOLLOWS:

BEING ALL OF PARCEL 1 AND A PORTION OF PARCEL 2 OF PARCEL MAP NO.86-411 IN THE CITY OF ORANGE AS SHOWN BY MAP ON FILE IN BOOK 240 OF PARCEL MAPS, PAGES 39 AND 40 THEREOF, RECORDS OF ORANGE COUNTY, CALIFORNIA DESCRIBED AS FOLLOWS:

BEGINNING AT THE SOUTHERLY TERMINUS OF THE MOST WESTERLY OF SAID PARCEL 1, PARCEL MAP NO. 86-411; THE FOLLOWING FOURTEEN (14) COURSES CONTINUE ALONG THE WESTERLY, NORTHERLY, EASTERLY AND SOUTHERLY LINE OF SAID PARCEL 1:

THENCE NORTH 00° 00' 00" EAST, A DISTANCE OF 352.95 FEET;

THENCE NORTHERLY ON A TANGENT CURVE CONCAVE EASTERLY, HAVING A RADIUS OF 215.25 FEET, THROUGH AN ANGLE OF 11° 02' 38", AN ARC LENGTH OF 41.49 FEET;

THENCE NORTHERLY AND EASTERLY ON A CURVE CONCAVE SOUTHEASTERLY, HAVING A RADIUS OF 107.25 FEET, THROUGH AN ANGLE OF 67° 54' 44", AN ARC LENGTH OF 127.12' (THE INITIAL RADIAL LINE BEARS NORTH 78° 57' 22" WEST);

THENCE EASTERLY ON A CURVE CONCAVE SOUTHERLY, HAVING A RADIUS OF 215.25 FEET, THROUGH AN ANGLE OF 11° 02' 38" AN ARC LENGTH OF 41.49 FEET (THE INITIAL RADIAL LINE BEARS NORTH 11° 02' 38" WEST);

THENCE SOUTH 90° 00' 00" EAST, A DISTANCE OF 99.30 FEET;

THENCE EASTERLY ON A TANGENT CURVE CONCAVE SOUTHERLY, HAVING A RADIUS OF 45.50 FEET, THROUGH AN ANGLE OF 18° 26' 47", AN ARC LENGTH OF 14.65 FEET;

THENCE SOUTH 71° 33' 13" EAST, A DISTANCE OF 16.58 FEET;

THENCE EASTERLY ON A TANGENT CURVE CONCAVE NORTHERLY, HAVING A RADIUS OF 47.00 FEET, THROUGH AN ANGLE OF 18° 26' 47" AN ARC LENGTH OF 15.13 FEET;

THENCE SOUTH 90° 00' 00" EAST, A DISTANCE OF 55.00 FEET;

THENCE SOUTHEASTERLY ON A TANGENT CURVE CONCAVE SOUTHWESTERLY, HAVING A RADIUS OF 31.25 FEET, THROUGH AN ANGLE OF 69° 47' 37", AN ARC LENGTH OF 38.07 FEET;

THENCE SOUTHEASTERLY ON A CURVE CONCAVE NORTHEASTERLY, HAVING A RADIUS OF 453.17 FEET, THROUGH AN ANGLE OF 12° 46' 37", AN ARC LENGTH OF 101.06 FEET (THE INITIAL RADIAL LINE BEARS SOUTH 69° 47' 37" WEST);

THENCE SOUTH 32° 59' 00" EAST, A DISTANCE OF 242.94 FEET TO THE SOUTHEASTERLY CORNER OF SAID PARCEL 1;

THENCE NORTH 90° 00' 00" WEST, A DISTANCE OF 121.09 FEET;

THENCE SOUTH 00° 00' 00" WEST, A DISTANCE OF 39.35 FEET;

THENCE LEAVING SAID EASTERLY LINE OF SAID PARCEL 1 SOUTH 90° 00' 00" EAST, A DISTANCE OF 10.00 FEET;

THENCE SOUTH 00° 00' 00" WEST, A DISTANCE OF 26.41 FEET;

THENCE SOUTHEASTERLY ON A NON-TANGENT CURVE CONCAVE EASTERLY, HAVING A RADIUS OF 64.00 FEET, THROUGH AN ANGLE OF 13° 29' 09", AN ARC LENGTH OF 15.06 FEET (THE INITIAL RADIAL LINE BEARS SOUTH 75° 06' 55" WEST);

THENCE SOUTH 28° 22' 14" EAST, A DISTANCE OF 9.96 FEET;

THENCE SOUTHERLY ON A TANGENT CURVE CONCAVE WESTERLY, HAVING A RADIUS OF 196.00 FEET, THROUGH AN ANGLE OF 28° 22' 14", AN ARC LENGTH OF 97.01 FEET;

THENCE SOUTH 00° 00' 42" EAST, A DISTANCE OF 40.96 FEET TO THE SOUTHERLY LINE OF SAID PARCEL 2, PARCEL MAP NO. 86-411;

THENCE NORTHWESTERLY ALONG SAID SOUTHERLY LINE OF PARCEL 2 AND THE SOUTHERLY LINE OF SAID PARCEL 1, ON A NON-TANGENT CURVE CONCAVE

SOUTHERLY, HAVING A RADIUS OF 281.75 FEET, THROUGH AN ANGLE OF 27° 56' 08", AN ARC LENGTH OF 137.37 FEET (THE INITIAL RADIAL LINE BEARS NORTH 27° 56' 08" EAST);

THE FOLLOWING TWO (2) COURSES CONTINUE ALONG SAID SOUTHERLY OF PARCEL 1, PARCEL MAP NO. 86-411:

THENCE NORTH 90° 00' 00" WEST, A DISTANCE OF 295.46 FEET;

THENCE NORTHWESTERLY ON A TANGENT CURVE, CONCAVE NORTHEASTERLY HAVING A RADIUS OF 31.25 FEET, THROUGH AN ANGLE OF 90° 00' 00", AN ARC LENGTH OF 49.09 FEET TO THE POINT OF BEGINNING.

THE ABOVE DESCRIBED PARCEL OF LAND CONTAINS 5.07 ACRES, MORE OR LESS.

PARCEL B:

INTENTIONALLY DELETED

PARCEL C:

A NONEXCLUSIVE EASEMENT FOR PEDESTRIAN AND VEHICULAR INGRESS, EGRESS, ACCESS, CIRCULATION AND SURFACE DRAINAGE OVER THE REAL PROPERTY DESCRIBED IN THAT CERTAIN ROADWAY EASEMENT AGREEMENT RECORDED APRIL 10, 1997 AS INSTRUMENT NO. 19970165666 OF OFFICIAL RECORDS OF ORANGE COUNTY, STATE OF CALIFORNIA.

APN: 231-061-50

Exhibit 10.5

NOTE



$103,350,000.00	March 6, 2018

FOR VALUE RECEIVED , KBS SOR CITY TOWER, LLC , a Delaware limited liability company (hereinafter referred to as the “ Borrower ”), promises to pay to the order of COMPASS BANK , an Alabama banking corporation (hereinafter referred to as the “ Lender ”) on the Maturity Date or such earlier dates as are provided for in the Loan Agreement (defined below) the principal amount of One Hundred Three Million Three Hundred Fifty Thousand and No/100 Dollars ($103,350,000.00).

Borrower also promises to pay (i) interest on the unpaid principal amount hereof from the date hereof until paid at the rates and at the times determined in accordance with the provisions of the Loan Agreement and (ii) Additional Interest (as defined in the Mortgage), and all other amounts due and payable pursuant to the Loan Agreement (defined below).

All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of COMPASS BANK , an Alabama banking corporation (hereinafter referred to as the “ Administrative Agent ”) described in the Loan Agreement.

This Note is one of the “Notes” referred to in, and is entitled to the benefits of, that certain Loan Agreement dated March 6, 2018 (hereinafter, as it may be from time to time amended, modified, extended, renewed, substituted, and/or supplemented, referred to as the “ Loan Agreement ”) executed by and between Borrower and Administrative Agent and the Lenders party thereto, which among other things provides for the acceleration of the maturity hereof upon the occurrence of certain events and for repayments in certain circumstances and upon certain terms and conditions. Defined terms used but not expressly defined herein shall have the same meanings when used herein as set forth in the Loan Agreement.

Borrower hereby expressly waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Loan Agreement, and an action for amounts due hereunder or thereunder shall immediately accrue.

Administrative Agent, Lender and Borrower intend to conform to all applicable laws limiting the maximum rate of interest that may be charged or collected by Administrative Agent (on behalf of the Lenders) from Borrower. Accordingly, notwithstanding any other provision hereof, Borrower shall not be required to make any payment to or for the account of Administrative Agent, and Administrative Agent shall refund any payment made by Borrower, to the extent that such requirement or such failure to refund would violate or conflict with mandatory and nonwaivable provisions of applicable law limiting the maximum amount of interest which may be charged or collected by Administrative Agent from Borrower. In any action, suit or proceeding pertaining to this Note, the burden of proof, by clear and convincing evidence, shall be on Borrower to demonstrate that this Paragraph applies to limit any obligation of Borrower under this Note or to require Administrative Agent to make any refund, or claiming that this Note conflicts with any applicable

law limiting the maximum rate of interest that may be charged or collected by Administrative Agent from Borrower, as to each element of such claim.

This Note shall be governed by, and construed in accordance with, the laws of the State of California without giving effect to its choice of law principles that would impose the laws of another jurisdiction.

Notwithstanding anything to the contrary contained in this Note, no personal liability shall be asserted, sought or obtained by Administrative Agent and/or any Lender under this Note against (i) any Affiliate of Borrower, (ii) any Person owning, directly or indirectly, any legal or beneficial interest in Borrower or any Affiliate of Borrower, or (iii) any direct or indirect partner, member, principal, officer, beneficiary, trustee, advisor, shareholder, investor, beneficial interest holder, director, employee or agent of Borrower or any of the Persons described in clauses (i) and (ii) above (collectively, the “ Exculpated Parties ”), and none of the Exculpated Parties shall have any personal liability in respect of obligations Borrower under this Note. Nothing in this paragraph shall be deemed (x) a waiver of the obligations of Borrower under this Note or any of the other Loan Documents to which it is a party, or to release Borrower from any personal liability pursuant to, or from any of its respective obligations under, this Note or any of the other Loan Documents to which it is a party or (y) a waiver of the obligations of Guarantor under the Guaranty or any of the Loan Documents to which it is a party, or to release Guarantor from any personal liability pursuant to, or from any of its respective obligations under, the Guaranty or any of the other Loan Documents to which it is a party.

[Remainder of Page Intentionally Left Blank; Signature Page Follows]

- 2 -

- 3 -

IN WITNESS WHEREOF , Borrower has caused this Note to be executed and delivered by its duly authorized officer as of the date and the place first above written , with the intent to be legally bound hereby .

BORROWER:

KBS SOR CITY TOWER, LLC ,

a Delaware limited liability company

By: KBS SOR ACQUISITION XXXII, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR PROPERTIES, LLC,

a Delaware limited liability company,

its sole member

By: KBS SOR (BVI) HOLDINGS, LTD.,

a British Virgin Islands company limited by shares,

its sole member

By: KBS STRATEGIC OPPORTUNITY LIMITED PARTNERSHIP,

a Delaware limited partnership,

its sole shareholder

By: KBS STRATEGIC OPPORTUNITY REIT, INC.,

a Maryland corporation,

its sole general partner

By: /s/ Jeffrey K. Waldvogel

Jeffrey K. Waldvogel,

Chief Financial Officer

[Note – Signature Page]



A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document.

State of California	)
County of Orange	)

On March 2, 2018 , before me, Teresa Fakalata , a Notary Public, personally appeared Jeffrey K. Waldvogel , who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is /are subscribed to the within instrument and acknowledged to me that he /she/they executed the same in his /her/their authorized capacity(ies), and that by his /her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature /s/ Teresa Fakalata

[Note – Acknowledgment]

Exhibit 31.1

Certification of Chief Executive Officer pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Keith D. Hall, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of KBS Strategic Opportunity REIT, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	May 11, 2018	By:	/S / K EITH D. H ALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Exhibit 31.2

Certification of Chief Financial Officer pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Jeffrey K. Waldvogel, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of KBS Strategic Opportunity REIT, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	May 11, 2018	By:	/S/ J EFFREY K. W ALDVOGEL
			Jeffrey K. Waldvogel
			Chief Financial Officer
			(principal financial officer)

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350,

as Adopted pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of KBS Strategic Opportunity REIT, Inc. (the “Registrant”) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Keith D. Hall, Chief Executive Officer and Director of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:


1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.



Date:	May 11, 2018	By:	/ S / K EITH D. H ALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Exhibit 32.2

Certification pursuant to 18 U.S.C. Section 1350,

as Adopted pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of KBS Strategic Opportunity REIT, Inc. (the “Registrant”) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jeffrey K. Waldvogel, the Chief Financial Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:


1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.



Date:	May 11, 2018	By:	/S/ J EFFREY K. W ALDVOGEL
			Jeffrey K. Waldvogel
			Chief Financial Officer
			(principal financial officer)